The Reserve Bank of India may create a carve-out for strategically important funds from the restrictions imposed by the evergreening circular issued in December.

This may include 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”, said a person in the know.

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Cap on exposure

Equity funds are expected to see some leeway but not much relaxation may be granted to debt funds. A cap on the exposure of an NBFC into an AIF may also be introduced.

Evergreening through equity is not common even in the ₹30,000 crore of evergreening detected by the regulators, according to experts. Most of the banks’ investment is in equity funds, not private credit funds as banks have strong debt investment franchises. When private credit AIFs invest, they usually invest by way of non-convertible debentures, which is the equivalent to borrowing from a bank and then lending it further.

“The inclusion of equity funds was surprising and there is a need for a carve-out with adequate safeguards. There may be reliance placed on the SEBI ease of doing business circular, which provides for an exclusion of affected entities from investing in the AIF,” said an industry official.

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This would help in situations wherein a regulated entity has exposure to the AIF and then with a portfolio company, the official said. If the AIF makes a subsequent investment in the portfolio company, the regulated entity may be excluded from participating in that subsequent investment by the AIF.

An email sent to RBI did not get a response.

Under the banks’ prudential norms, banks cannot invest more than 10 per cent of the AIF’s corpus without RBI approval. So, there is an inherent diversification which is applicable.

“With this 10 per cent, the scope of evergreening is low. So, banks should be exempted from the evergreening circular, irrespective of whether the funds are debt or equity. Also, these restrictions should not apply to subsidiaries of banks which may themselves be regulated by other regulators such as SEBI and IRDAI, subject to those regulatory conditions,” said Divaspati Singh, Partner, Khaitan & Co.

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Singh believes that the RBI circular should be applicable only if banks invest more than 10 per cent in AIFs, which anyways requires specific RBI approval. “Only NBFCs should be brought under the circular. Currently NBFCs have no cap to invest in AIFs and the RBI can mandate a cap of 10 per cent or higher on these as well. Otherwise, it will be a death knell to banking participation in AIFs,” he said.

Credit funds

Private credit funds are dependent on investment from banks. Under the new rule, if a bank invests in a credit fund and also lends to the portfolio company of that same AIF, it will have to make 100 per cent provision. Many banks will take the easy way out and cease to invest in credit funds, if the current rules remain applicable, said experts.

“A carve-out is important, but it should be drafted carefully,” said Vinod Joseph, Partner, ELP. “It’s more likely that evergreening could happen with credit funds than with equity funds, but you can’t say it’s always the case.”