Some industry officials said Sebi’s proposal could be a breather for banks and non-banking financial companies (NBFCs), as they may be excluded from making an investment in a debtor firm. However, legal players are of the opinion that this rule will require more clarity from the Reserve Bank of India (RBI).
“AIFs may now be required to either excuse the investors whose contribution towards an investment may cause circumvention of any regulations, or refrain from making that investment entirely. However, the diligence obligation imposed on the AIF manager to determine the excusal for each deal specifically is impractical and onerous,” said Nandini Pathak, leader, investment funds practice, Nishith Desai Associates.
“Managers or their personnel are not equipped to carry out diligence on potential circumvention of the law and should not be made liable if the circumvention is by the investor. Further, this excusal mechanism will not resolve the issues created by the RBI circular, which prohibits regulated entities from becoming an investor in AIFs with a common downstream link to begin with,” she said.
Vinod Joseph, partner, Economic Laws Practice, said, “The RBI does not have any authority over AIFs and the December 19 notification applies to entities regulated by the RBI. Hence, Sebi has now included evergreening of loans as one of the grounds for AIFs to exclude investors.”
However, there could be challenges in giving the discretion to an AIF manager to exclude certain investors.
Curtailing Evergreening
- Sebi identified investments worth Rs 30,000 crore in circumvention of regulations
- RBI in Dec restricted financial institutions from investing in AIFs with link to debtor firms
- Several private lenders like HDFC Bank, ICICI Bank, Kotak Mahindra Bank have made provisions for such exposure
- Sebi’s fresh proposal tries to address concerns around over-regulation hindering legitimate investments
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