Strategically Important AIFs

Context:

The Reserve Bank of India may relax the restriction imposed by the evergreening circular issued in December for some strategically important AIFs.

The relaxations may come for: NIIF funds, SIDBI Fund of Funds, SBICap Venture’s Self Reliant India Fund (SRI) and SWAMIH Investment Fund (SIF) and any new funds that the government may launch in the future or considered as “strategically important”
Equity funds are more likely to see the relaxation than the debt funds.
A cap on the exposure of an NBFC into an AIF may also be introduced: At present, there is No Cap to invest in AIF by an NBFCs and the RBI can mandate a cap of 10 per cent or higher

These are the Alternate Investment Funds which are either instituted by the Government Of India for encouraging investments in specific sectors infrastructure requirements like National Investment and Infrastructure Fund or which are being subscribed and recognised by the government and its entities.

It basically means issuing new loans to help a stressed or delinquent borrower to repay their old loans.
- The AIF route: The regulated lenders substituted their direct loan exposure to borrowers with indirect exposure through investments in AIFs with downstream investments in the same borrowers which led to,
  - Mounting Bad Debts: Artificial prolonging the life of such debts will pose a significant threat to financial stability and transparency.
  - Wilful neglect:It will lead to delayed recognition of losses and will jeopardize the overall health of balance sheets.
  - Conflict of interest: Short-term benefits were prioritized over long-term financial stability.

About: These are privately pooled investment vehicles that invest in alternative asset classes that are different from the Traditional sources like the Fixed Deposits, stocks etc.
Who invest: HNIs (High net worth individuals) and institutions invest in the AIFs as the investment amount is substantially higher.
Regulated by: AIFs are regulated by the SEBI through the SEBI (Alternative Investment Funds) Regulations, 2012
- They can be set up as a trust, a company, a limited liability partnership, or a corporate body.
Types: It is further divided into 3 categories
- Category I AIF: This category of AIF invests in start-ups, early-stage ventures, social ventures etc.
  - Examples: Venture capital funds (Including Angel Funds), SME Funds, Social Venture Fund, Infrastructure funds
- Category II AIF: These are the AIFs that do not fall under categories I and III. They do not use leverage or debts other than to cover their day-to-day operational expenses.
  - Examples: Private Equity Funds, Debt Funds, Fund of Funds
- Category III AIF: These AIFs use complex trading strategies in their investment. It may use leverage or debt for investment in listed or unlisted derivatives.
  - Examples: Private Investment in Public Equity Fund (PIPE), Hedge fund

Also Read: RBI Extends PCA Framework To Government-owned NBFCs

News source: The HIndu Business line

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