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Open in new tab RBI bars lenders’ investments in AIFs investing in their borrowers
– Team Finserv | finserv@vinodkothari.com
The Reserve Bank of India on 19th December 2023 issued a notification imposing a bar on all regulated entities (REs) with respect to their investments in AIFs. Highlights of the notification are as below –
What has the RBI done?
- Prohibited all regulated entities (REs), including banks, cooperative banks, NBFCs and All India Financial Institutions from making investments in Alternative Investment funds (AIFs), if the AIF has made any investment into a “debtor company”.
- Debtor company means a company in which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months
- The bar applies immediately, that is, effective 19th Dec 2023. No further investments to be made.
- If investments already exist, the RE shall exit within 30 days, that is, by 18th Jan 2024
- Further, if an RE has made an investment in an AIF, and the AIF invests in a debtor company, the RE shall make an exit within 30 days.
- Investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ subject to full deduction from RE’s capital funds.
SEBI’s standard approach, standardising valuation for AIFs
Dayita Kanodia | Executive, finserv@vinodkothari.com
So far, valuation of securities in terms of an Alternative Investment Fund (‘AIF’) was carried out in accordance with Regulation 23 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’).
Regulation 23 provided AIFs with flexibility in adoption of valuation techniques or methodology for valuation of investment portfolios and the AIF managers were required to merely provide a description of the valuation procedure and of the methodology for valuing assets.. Also, the modalities relating to valuation of investment portfolio of the AIFs were not disclosed in the PPMs at the time of submission to SEBI and also were not reported to SEBI subsequently.
On January 06, 2023, SEBI issued a consultation paper on ‘Standardised approach to valuation of investment portfolio of Alternative Investment Funds’ (‘Consultation Paper on Valuation by AIFs’) which discussed the need for a standardised approach to valuation methodology along with other issues. SEBI had also conducted a survey of 150 managers of different categories of AIFs to understand, inter alia, the present valuation practices being followed.
Subsequently, vide an amendment dated June 21, 2023 SEBI has provided for a standardised approach with respect to the valuation of investment portfolio of AIFs. This standardised approach not only provides for the manner of valuation of AIF investments but also states the responsibility of the manager of an AIF with regard to this valuation in line with the Consultation Paper on Valuation by AIFs.
This article discusses the recent amendment in detail, including the provisions which have been put in place in the event of any material change in the methodology and approach for valuation of investments of schemes of AIFs.
Read more →Comparison between NBFC-ICC, CIC and AIF
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Special Situation Funds: Funds into asset reconstruction business
Aanchal Kaur Nagpal (Assistant Manager) | Parth Ved (Executive)
Introduction
The intent behind asset reconstruction is not merely concerned with realisation of bad loans but also ‘reconstruction’, that is, to try and resurrect bad loans or bad borrowers into good ones. This almost always leads us to one name i.e. Asset Reconstruction Companies (‘ARCs’). Today, financial institutions are eager to sell their non-performing assets to clean-up their books while stressed companies find ways to get access to capital to anchor themselves. The Indian financial sector is known to be laden financial entities struggling to survive with their mammoth stressed assets. The COVID-19 pandemic has only added fuel to the fire. As at September, 2021, GNPA of banks was at INR 4,53,145 crore and that of the top 30 NBFCs, including HFCs stood at around INR 84,000 crore. Out of these loans, In 2019-20, the amount recovered as per cent of the amount involved under IBC was 45.5 per cent, followed by 26.7 per cent for ARCs. While the amount recovered through ARCs as per cent of amount involved was significantly higher in the initial years of their inception, in the recent years, it has dipped below 30 per cent except for a spurt in 2017-18.
Securities and Exchange Board of India (‘SEBI’) on January 24, 2022[1] along with its circular dated January 27, 2022[2], has further widened the NPA market to a specifically dedicated class of AIFs called Special Situation Funds (‘SSFs’), that shall exclusively invest in the distressed asset market. The intent behind the same is to use these cash-filled alternative funds to supplement ARCs in acquiring such stressed assets and aid banks and other financial institutions to release critical money choked up in such assets. AIFs are currently already permitted to invest in security receipts of ARCs and/ or invest in securities of distressed companies, however, SSFs will be additionally permitted to even acquire stressed loans. These SSFs also have been granted additional exemptions/ benefits over and above regular AIFs to facilitate stressed asset resolution.
This article attempts to cover the adoption of the concept of SSF from the global markets, and the characteristics of this peculiar kind of investing. Read more →
AIF Second Amendment Regulations, 2021 – Regulated Steps towards Liberalised Investment
-Megha Mittal (mittal@vinodkothari.com)
Amidst the various concerns addressed in the Board Meeting dated 25th March, 2021,[1] the Securities and Exchange of Board of India (‘SEBI’) extensively dealt with several issues identified with respect to Alternative Investment Funds (‘AIFs’), inter-alia a green signal to AIFs for investing in units of other AIFs; ambiguity regarding the scope of the term ‘start-up’; and the need for a code of conduct laying down guiding principles on accountability of AIFs, their managers and personnel, towards the various stakeholders including investors, investee companies and regulators.
Thus, with a view to target the issues in consideration, the Board proposed that the following amendments be introduced in the SEBI (Alternative Investment Funds) Regulation, 2012 (‘AIF Regulations’/ ‘Principal Regulations’)[2] –
- provide a framework for Alternative Investment Funds (AIFs) to invest simultaneously in units of other AIFs and directly in securities of investee companies;
- provide a definition of ‘start-up’ as provided by Government of India and to clarify the criteria for investment by Angel Funds in start-ups
- prescribe a Code of Conduct for AIFs, key management personnel of AIFs, trustee, trustee company, directors of the trustee company, designated partners or directors of AIFs, as the case may be, Managers of AIFs and their key management personnel and members of Investment Committees and bring clarity in the responsibilities cast on members of Investment Committees; and
- remove the negative list from the definition of venture capital undertaking.
The aforesaid proposals, put to the fore in view of the suggestions and requests received from several stakeholder groups like the domestic AIFs, global investors, and the regulatory bodies, have now been notified vide notification dated 5th May, 2021, via the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2021[3] (‘Amendment Regulations’). A key takeaway from the Amendment Regulations is the flexibility granted w.r.t. indirect investments by AIFs for investment in units of another AIF, however with some riders and possible gaps, as discussed below.
Below we summarise and discuss the amendments introduced vide the Amendment Regulations, and analyse its impact