On July 29, 2025, the Reserve Bank of India (“RBI”) issued the Reserve Bank of India (Investment in AIF) Directions, 2025 (“REs Investment Directions”), replacing its earlier circulars dated December 19, 2023, and March 27, 2024, prescribing the regulatory guidelines in respect of investment by the regulated entities of the Reserve Bank (“RE(s)”) in Alternative Investment Funds (“AIF(s)”). These Directions aim to strengthen governance, risk controls, and provisioning norms for investments by REs in AIFs, in light of the evolving regulatory architecture around investments by or via AIF schemes, as being notified by Securities and Exchange Board of India (“SEBI”) from time to time.
IMPLEMENTATION:
REs Investment Directions shall mandatorily come into effect from January 1, 2026 (“Effective Date”), however, an RE may opt to implement such REs Investment Directions prior to the Effective Date, in accordance with its internal policies.
SCOPE AND APPLICABILITY:
REs Investment Directions are applicable to the following regulated entities:
- Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks);
- Co-operative Banks (Urban, State, Central);
- All-India Financial Institutions; and
- Non-Banking Financial Companies, including Housing Finance Companies.
KEY TAKEAWAYS FROM RES INVESTMENT DIRECTIONS:
RBI via REs Investment Directions has now penned down certain guidelines which are imperative to be complied by an RE while making investing via an AIF route, to ensure that any investment being made by RE is in alignment with public interest and in conformity the guidelines of SEBI. Set out below are the key takeaways on the changes intended to be brought upon by RBI through the said REs Investment Directions:
Investment Limits:
RBI has introduced the outer limits for the investments to be made by an RE through an AIF route, which inter alia states that:
- No RE can individually contribute more than 10% (ten percent) of the corpus of an AIF scheme.
- Aggregate contributions by the REs shall not be capped at 20% (twenty percent) of the corpus of an AIF scheme.
The above limits have been set out with the aims to prevent over-concentration and systemic risk within the AIF ecosystem by REs.
Provisioning Requirement:
In addition to the above, RBI has also provided for the provisioning requirements, to be adhered by the concerned REs, wherein, the subsequent investment is via an AIF scheme in the Debtor Company (defined below) of an RE, which are as follows:
- If a RE contributes more than 5% (five percent) in an AIF scheme that has downstream debt investments (excluding Equity Instruments) into RE’s own Debtor Company(ies), it must make 100% provision on its proportionate exposure, which shall be capped to the RE’s direct exposure (either via debt provided by the RE to its Debtor Companies and/or the investment exposure) in such Debtor Companies.
- If RE’s contribution is in the form of subordinated units, then the entire investment must be deducted from its capital funds (Tier 1 and Tier 2 proportionately), where applicable.
For the purpose of the above, under the REs Investment Directions, RBI has now clarified as to who shall fall within the ambit of the term ‘Debtor Company’ and what shall constitute as ‘Equity Instruments’. The proposed definitions are reproduced below, for ease of reference:
“Debtor Company(ies)” is defined to mean any company to which the RE has or previously granted loan or had an investment exposure in the nature of a debt, within the preceding 12 (twelve) months.
“Equity Instruments” are referred to as equity shares, compulsorily convertible preference shares and compulsorily convertible debentures.
EXEMPTIONS AND TRANSITION PROVISIONS:
Grandfathering Clause:
Investments made prior to the effective date under commitments approved by RBI (under Master Direction-Reserve Bank of India (Financial Services provided by Banks) Directions, 2016) are exempt from the new investment limits proposed under REs Investment Directions, as mentioned in Paragraph (D)(1) above.
Regulatory Discretion:
RBI may exempt specific AIFs from these Directions in consultation with the Government of India, excluding the general policy requirement to have suitable provisions governing its investment in AIF scheme, complaint with the extant law and regulations, which shall remain applicable for all the RE’s.
Transition Path:
- Existing investments where REs have fulfilled their commitments will continue to be governed by the earlier circulars governing the investment in AIFs by the RE(s).
- For new or ongoing commitments entered prior to the Effective Date, REs can choose to follow either the previous issued circulars or the new REs Investment Directions but they must adopt the chosen regime to its fullest extent.
LEGAL AND MARKET IMPLICATIONS:
The REs Investment Directions represent a calibrated shift toward enhanced prudential safeguards. By ringfencing REs exposures from indirect downstream credit to connected parties and requiring provisioning or capital deductions, RBI is signaling a tougher stance on regulatory arbitrage through AIF platforms.
From a legal and compliance perspective, REs shall consider revising their internal investment policies to align with the REs Investment Directions, to ensure carful and diligent monitoring of their AIF investments to strengthen their investment avenues and avoid unwarranted exposures, particularly around downstream debt exposures. As the regulatory focus sharpens on connected lending and systemic risk, stakeholders including AIF managers and institutional investors must re-evaluate their fund structures, exposure mapping, and compliance readiness.
CONCLUSION:
The REs Investment Directions are a significant step in curbing indirect credit exposures through fund structures and ensuring better alignment with SEBI norms. All stakeholders should prepare for tighter supervision, increased provisioning burden, and the end of soft-touch regulation in the AIF-REs investment nexus.
