 "RBI")
Piramal Enterprises Ltd (PEL) and IIFL Finance have informed the exchanges that they have started making provisions after the Reserve Bank of India (RBI) came out with norms on lenders’ exposure in alternative investment funds (AIF).
Piramal Enterprises (PEL) and IIFL Finance have announced that they are making provisions in response to the Reserve Bank of India’s (RBI) new norms on lenders’ exposure to alternative investment funds (AIFs).
PEL, which holds a non-banking financial company (NBFC) licence and is the parent of Piramal Capital & Housing Finance, has decided to adjust its Rs 3,164 crore exposure to AIFs in its financial statements through capital funds or provisions.
Of total Rs 3,817 crore investments by PEL and Piramal Capital & Housing Finance in AIF units, only Rs 653 crore are in funds with no exposure to debtor companies. Of the remaining, “Rs 1,737 crore worth of downstream investments have been made by the AIF into three entities that are (or were in the past 12 months) debtor companies of PEL (consolidated),” PEL said in an exchange filing on Thursday.
IIFL Finance, too, disclosed to exchanges that its subsidiary, IIFL Home Finance, holds investments of Rs 161 crore under the priority distribution model, which will require a 100 per cent deduction from its capital if not liquidated. The firm also reported that its AIF investments, totalling Rs 909.81 crore, do not include any downstream investments to which it has loan or investment exposure. It also has Rs 3.28 crore of outstanding debt exposure in downstream firms, of a total Rs 21.37 crore investments in its IIFL Fintech fund.
Shares of IIFL Finance closed at Rs 595.6 apiece on the BSE, down by over 3.5 per cent on Thursday. Shares of PEL closed in the red at Rs 882 apiece, despite recovering from the day’s lows.
While disclosures from other financial institutions are awaited, a report by IIFL Securities indicates that over 61 per cent of total investments by Indiabulls Housing Finance are in AIFs, which constitute only 5.3 per cent of its total loans. The report also estimates that Edelweiss has 11.4 per cent of total investments in AIFs, and the latter accounts for around 4.4 per cent of its total loans. According to the report, banks have negligible exposure to these investments.
Queries sent to Indiabulls, Edelweiss Financials, Sundaram Alternates, and NABARD remained unanswered until the time of going to the press.
On Tuesday, the RBI restricted banks and financial institutions from investing in AIFs where there is any downstream link or exposure to a debtor firm. If a bank or an NBFC has lent to the debtor firm in the past 12 months, it cannot invest in an AIF investing in the same company. The RBI directed them to liquidate such assets within 30 days or keep 100 per cent provisions for the same if the timeline is missed.
With this loophole now plugged, IIFL Securities expects some stressed accounts to be recognised as non-performing assets (NPAs) in the coming quarters and potential mark-to-market losses for lenders as they liquidate these investments within the 30-day timeline.
According to sources, members of the Indian Private Equity and Venture Capital Association (IVCA) — an industry body for AIFs -- convened a meeting on Wednesday to discuss their submissions on the RBI directive.
At a recent IVCA conference, an official of the Securities and Exchange Board of India (Sebi) urged the industry to adhere to more transparent data disclosures. The market regulator has also mandated valuation norms for AIFs to obtain more information on the underlying assets.
Industry experts said that the RBI advisory, which imposes a blanket restriction on financial institutions with downstream links, will significantly impact inflows into AIFs and reduce the investable pool for AIFs. “In terms of banks/AIFs dealing with these restrictions, the possibility of banks/NBFCs routing their investments through their group companies cannot be ruled out as there appears to be no specific restriction on routing the investment through group companies,” said Siddharth Srivastava, Partner, Khaitan & Co.
Another industry official said that investments may be routed through family offices and trusts as the co-investment approach has been rising.
As of June 2023, AIFs raised an investment commitment of Rs 8.44 trillion across three categories, with the highest commitment coming for category II at Rs 6.96 trillion. As of June, AIFs made a total of Rs 3.5 trillion investments, shows the data from the market regulator.
The RBI advisory followed concerns on evergreening of loans through AIFs — a pooled investment vehicle that invests in assets like real estate, startups, private equity, SMEs, and venture debt. The market regulator had shared the data on the possible circumventions of the financial sector norms to the RBI.
