Context:

• The Reserve Bank of India (RBI) has revised the draft guidelines for investments by Regulated Entities (REs) in Alternative Investment Funds (AIFs). The objective is to enhance oversight and prevent potential misuse.

Investment Limit:

• A Regulated Entity (RE) can invest a maximum of 10% of the total corpus of any single AIF scheme.
• All REs combined cannot invest more than 15% in total in any single AIF scheme.

Provisions and Conditions:

• If an RE invests more than 5% in an AIF scheme, and that scheme has invested in a company through debt, where the RE itself is a lender, then the RE must make a 100% provision for its outstanding loan to that company.
• Less than 5% investment: If an RE's investment in an AIF scheme is less than 5%, no additional restrictions will apply.
• AIFs with Strategic Objectives: Some AIFs with strategic objectives may be exempted from these rules after consultation with the government.

Background:

• In December 2023, the RBI had restricted REs from investing in AIFs that had invested in their own borrowers, aiming to prevent practices like "Evergreening."
• In March 2024, these rules were partially relaxed under certain conditions.
• The current draft guidelines further clarify these restrictions and ensure greater transparency and control over investments.

Alternative Investment Fund (AIF)

• An AIF is a privately pooled investment fund that collects funds from investors and invests them according to a pre-defined policy.

Regulation:

• AIFs are regulated by the Securities and Exchange Board of India (SEBI) since 2012.
• These funds are primarily for investments that do not fall under traditional mutual funds or direct equity.

Categories of AIF:

Category-I AIF:

• Invests in start-ups, Small and Medium Enterprises (SMEs), social ventures, infrastructure sectors, etc.
• Examples: Venture Capital Funds, Social Venture Funds.

Category-II AIF:

• Does not borrow debt and invests in equity or debt of unlisted companies.
• Examples: Private Equity Funds, Debt Funds.

Category-III AIF:

• Makes strategic investments for short-term gains, like hedge funds. It often uses leverage.
• Examples: Hedge Funds.

Reserve Bank of India (RBI)

• Establishment: April 1, 1935
• Headquarters: Mumbai, Maharashtra
• Current Governor: Sanjay Malhotra (as of current knowledge, please note this information might change with time)
• Recommendation for Establishment: Hilton Young Commission
• The Reserve Bank of India was initially a privately owned institution.
• From 1935 to 1947, it also served as the central bank for Burma (now Myanmar) and Pakistan.
• Nationalization: January 1, 1949
• Nationalization Act: Reserve Bank (Transfer to Public Ownership) Act, 1948
• Prime Minister at that time: Pandit Jawaharlal Nehru

Key Functions:

• Currency Issuance: RBI issues all currency notes except for the ₹1 note (which is issued by the Ministry of Finance).
• Monetary Policy: Determines interest rates (Repo, Reverse Repo, etc.).
• Banking Regulation: Regulates all commercial banks and financial institutions.
• Banker to Government: Manages transactions for both central and state governments.
• Foreign Exchange Management: Manages India's foreign exchange reserves.
• Developmental Functions: Promotes digitization, financial education, and inclusion.