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RBI issues Directions for Regulated Entities on Investments In AIF July 29, 2025
Published in: Investment Funds
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Reserve Bank of India (“RBI”), vide its notification dated July 29, 2025, has issued the RBI (Investment in Alternative Investment Funds) Directions, 2025 (“AIF Directions”) by repealing its erstwhile circulars on Investments in Alternative Investment Funds (“AIFs”) dated December 19, 2023 and March 27, 2024, respectively (collectively referred to as the “AIF Circulars”). The AIF Directions, effective from January 1, 2026 (or an earlier date as determined by the RE in accordance with its internal policy), outline the regulatory guidelines governing investments by Regulated Entities (“REs”) in AIFs. Additionally, it mandates REs to ensure that their investment policies include suitable provisions for investments in an AIF scheme, in compliance with applicable laws and regulations.
The key highlights of the AIF Directions include:
(a) Applicability: The AIF Directions apply to REs, including commercial banks (such as small finance banks, local area banks, and regional rural banks), co-operative banks (comprising primary urban, state, and central co-operative banks), all-India financial institutions, and NBFCs, including housing finance companies, making investments in units of AIF schemes.
(b) Investment Limits: Individual REs are barred from contributing to more than 10% of the AIF scheme’s corpus, with collective contribution by all REs being capped at 20% of such corpus. However, these investment limits will not apply in case outstanding investments or commitments are made by a RE with prior approval from RBI under RBI’s “Master Direction – RBI (Financial Services provided by Banks) Directions, 2016”.
(c) Provisioning Requirements: If a RE invests more than 5% in an AIF scheme corpus, which also has downstream investment (excluding equity instruments) in RE’s debtor company, the RE must make a 100% provision for its proportionate investment in the debtor company, subject to a maximum of the direct loan and/ or investment exposure to that debtor. Additionally, if RE’s contribution in an AIF scheme is in the form of subordinated units, it shall deduct the entire investment from its capital funds, proportionately from both tier-1 and tier-2 capital, as applicable.
(d) Exemptions: RBI may, in consultation with the Government of India, exempt certain AIFs from the scope of the AIF Circulars and the AIF Directions, except for the requirement mandating REs to have in place appropriate investment policies governing its investments in an AIF scheme.
(e) Repeal clause: Post January 1, 2026, any new commitments by REs for contribution to an AIF scheme, must comply with the AIF Directions. However, outstanding investments by REs in an AIF scheme (as on the date of issuance of the AIF Directions i.e., July 29, 2025), wherein it has fully honoured its commitment, will continue to be governed by the AIF Circulars. Furthermore, for ongoing investments or commitments made in an AIF scheme before January 1, 2026, REs may choose to follow the provisions of either the AIF Circulars or the AIF Directions, in its entirety.
To read the AIF Directions click here
For any clarification, please write to:
Mr. Yatin Narang
Partner
[email protected]
