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Comments from Ritesh Kumar, Partner, M&A Tax and Regulatory Services, BDO India

Quote 1 - Implications of balancing transparency with market sensitivity in financial transactions.

The aforesaid instructions come with a stated background that it has come to the notice of The RBI when certain transactions of regulated entities involving investments into AIFs raise regulatory concerns and that those transactions have entailed substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs. What needs to be understood from The RBI is whether regulated entities will be required to furnish a list of their customers/ customers which AIF is evaluating to the AIFs on a periodic basis such that the AIF is in a position to ensure that they do not invest into these debtor companies? Should the data exchange be permitted and are there sny other risks associated with it? What if a regulated entity is listed on Indian stock exchanges, will this information be classified as ‘unpublished price sensitive information’? For example, if Bank A was to confirm that Listed Company X has been approved credit from Bank A and thereby the AIF was prohibited from investing, would this information received by the AIF manager classify as ‘unpublished price sensitive information’? These instructions needs further calibration.

Quote 2 - Impact on Banks' AIF Investments

The Directive has made it prohibitive for banks and other regulated entities to invest into AIFs. While we recognize that some AIFs and regulated entities may have misused the current framework by engaging in evergreening of loans so that the default in loan repayment does not turn it into a non-performing asset (NPA) requiring the entities to make higher provisions, a broad-brushed based prohibition is likely to do more harm than good to the funds industry at large. The harsh implementation timeline of 30 days adds to the chaos created by this instruction given that units of AIFs are not fully liquid. Besides, the 30-day window will create a buyers’ market which will very lead to banks having to incur actual losses in disposing their investments. Assuming the banks were to create a provision for such debt investments, there is a chance that this will impact the financial results of the bank and in case of listed entities, impact market capitalisation.

Quote 3 - Banks' AIF Investments

Banks have been an active source of investments into Indian AIFs and what this instruction does is it penalises them for making investments into AIFs dehors of the bonafides of such investment. This instruction also overlooks the essential fact that no one Limited Partner is in a position to decide or control the management of the AIF and that the fund managers (along with an Investment Committee, in some cases) take the investment decisions. The instruction appears to overlook the independence of the investment manager and presumes a malafide intent by default.

Quote 4

The RBI might have improved the situation by consulting SEBI before implementing such a strict guideline. Today, the AIF regulations allow the fund manager of an AIF to exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such an investor in the investment opportunity will lead to the scheme of the AIF being in violation of applicable law or regulation or will result in a material adverse effect on the scheme of the AIF. A simpler approach for The RBI could have been to want regulated entities to refrain from investing in opportunities involving companies that are debtors of the bank.

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