RBI Update - Reserve Bank of India (Investment in AIF) Directions, 2025

Please find the following update under RBI The Reserve Bank of India (Investment in AIF) Directions, 2025, have been issued to revise and consolidate the regulatory framework governing investments by Regulated Entities (REs) in Alternative Investment Funds (AIFs). These Directions supersede the earlier circulars dated December 19, 2023, and March 27, 2024, and have been issued under the powers conferred by various provisions of the Banking Regulation Act, 1949, the RBI Act, 1934, and the National Housing Bank Act, 1987. They aim to align the regulatory landscape with industry feedback and SEBI’s due diligence norms related to AIF investors and investments. These Directions shall come into effect from January 1, 2026, or any earlier date as may be adopted by an RE in accordance with its internal policy.

These Directions apply to investments in AIF schemes made by a wide range of regulated financial entities, namely, commercial banks (including small finance banks, local area banks, and regional rural banks), co-operative banks (urban, state, and central), all-India financial institutions, and non-banking financial companies (including housing finance companies). All such REs must ensure that their investment policies specifically include provisions to govern investments in AIFs, in line with applicable legal and regulatory requirements.

Key definitions under the Directions include the term “debtor company,” which refers to any company to which an RE currently has or had loan or investment exposure (excluding equity instruments) in the preceding twelve months. Equity instruments are defined to include equity shares, compulsorily convertible preference shares (CCPS), and compulsorily convertible debentures (CCDs).

The Directions place limits on investments by REs in AIFs. An individual RE cannot contribute more than 10% of the total corpus of an AIF scheme, and the collective contribution by all REs in an AIF scheme must not exceed 20% of the scheme’s corpus. Further, if a RE contributes more than 5% of an AIF’s corpus and the AIF makes downstream investments (excluding equity instruments) in a debtor company of the RE, then the RE must make a 100% provision against its proportionate investment in the debtor company, subject to a cap equal to the RE’s direct loan or investment exposure to that debtor company. In cases where the RE’s contribution is made through subordinated units of an AIF, the entire investment must be deducted