The Indian Venture and Alternate Capital Association (IVCA) lobby group has approached the government, concerned that the measure will impact the flow of funds to the startup sector, ET reported on Friday. The RBI had been keeping a close watch on these practices for the past several months and clamped down after investments rose sharply, said a person familiar with the details.
“We have an open mind if the industry flags any genuine difficulty,” he added. The latest stringent rules follow concerns over instances where AIFs, including private credit funds, were used for ever greening lending to mask bad loans in the financial system. The RBI said a regulated entity (bank or NBFC) should not invest in any scheme of AIFs that has downstream investments, directly or indirectly, in a company that has already borrowed funds from the regulated entity.
The bank or NBFC has to exit from that AIF within 30 days of the latter making such an investment. If such investments exist, they have to be liquidated within 30 days of the circular, the RBI said. In case banks or NBFCs are not able to liquidate such investments within 30 days, they would have to make 100% provision on such investments. The person said the objective of the measures was to plug a loophole that existed and if any concrete difficulty is highlighted, it would be examined. “There was a growing worry around the practice that was essentially leading to ever-greening of loans,” he said.
“There were also concerns of opacity around investments in AIFs.” The RBI had to act given the sharp growth seen in this form of lending, the person said. The move led to a sharp reaction in the stock market with several NBFCs dropping. A government official said the issue relates both to regulated and unregulated entities and is being examined in terms of impact on both segments.
