Alternative investment funds affected by Reserve Bank of India's latest circular will seek further clarifications from the regulator.
The central bank on Tuesday barred banks and non-bank lenders from investing in AIFs which have downstream investments into debtor firms. According to the RBI's definition, debtor firms are those which have either borrowed or received investments from the same banks or NBFCs in the last 12 months.
In cases where such investments have already been made, lenders must unwind their investments within 30 days. If they fail to do so, they must set aside 100% provisions against such investments, the RBI said.
The move is aimed at controlling evergreening of loans through the AIF investment route.
The regulator should come out with some clarifications, Eshwar Karra, chief executive officer at Kotak Special Situations Fund, told NDTV Profit in an interview.
The clarification should be that only to the extent that funds from the AIF are used to repay existing debt should be fully provided for by the lenders. In the current structure, the circular will require all funds invested by lenders to AIFs be either unwound or provided for.
According to Karra, Category 2 AIFs will most likely be hit due to these norms, since they tend to have lender participation. The banking regulator's 30 day deadline will be a "big challenge" Karra said.
"Understand that most of them (regulated entities) are sponsors to these AIFs. Sponsor commitment is mandatory. It could range anywhere between 5-25% of the corpus of the AIF. Because he is putting in that money, you are able to raise the balance," he said.
If the sponsors are required to pull out their capital within 30 days, the AIF would collapse, Karra warned. NDTV Profit previously reported that AIF deals worth over Rs 20,000 crore will be affected by the RBI circular.
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