What is Alternative Investement Funds (AIFs) ?

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 Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect funds from investors to invest in:

  • Private equity
  • Venture capital
  • Real estate
  • Infrastructure
  • Distressed assets

They are regulated by SEBI and categorized into three types:

Category

Description

Category I

Invests in startups, SMEs, infrastructure, social ventures

Category II

Includes private equity funds, debt funds

Category III

Hedge funds, complex trading strategies

🧾 RBI (Investment in AIF) Directions, 2025

Issued on July 29, 2025, effective from January 1, 2026 (or earlier if voluntarily adopted by Regulated Entities - REs).

✅ Applicability

Applies to Regulated Entities (REs) such as:

  • Commercial Banks
  • NBFCs
  • Co-operative Banks
  • All-India Financial Institutions
  • Housing Finance Companies

📊 Investment Caps

  • Per RE Limit: Max 10% of the AIF scheme’s corpus
  • Aggregate RE Limit: Max 20% (all REs combined)

This ensures no single RE or group dominates a fund’s ownership.

🧮 Provisioning Norms for Downstream Exposure

Scenario

Provisioning Requirement

Investment ≤ 5% of AIF corpus

No provisioning

Investment > 5% and AIF has downstream debt to RE’s borrower

100% provision on RE’s proportional share

Investment in subordinated units

Deducted from Tier-1/Tier-2 capital

Investment in equity instruments (shares, CCPS, CCDs)

Exempt from provisioning

⚖️ Equity vs Debt Distinction

  • Debt exposures: Risky, subject to provisioning
  • Equity-type instruments: Exempt from provisioning
  • Aligns with SEBI’s classification and supports startup/long-term capital investments

🧱 Capital Adequacy Implications

  • Subordinated units in AIFs with priority distribution (e.g., waterfall models) are treated as first-loss positions
  • Must be deducted from regulatory capital, in line with Basel norms

🛡️ Transitional Relief & Exemptions

  • Existing investments with prior RBI approval are exempt from new caps
  • Outstanding commitments as of the effective date can follow either the old or new framework
  • RBI may exempt certain AIFs in consultation with the Government

📚 Comparison with Previous Frameworks

The 2025 Directions replace:

  • RBI Circular (Dec 2023)
  • Clarification (Mar 2024)

The new framework is more risk-based, flexible, and aligned with global standards

Location: India

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