Exempt selectively sovereign funds, RBI

The Centre is seeking carve-outs on merits from provisioning rules for banks and NBFCs to curb evergreening of loans through alternative investment funds (AIF). Last year, RBI closed a loophole in the discovery of dodgy loans by pulling bank lending out of investment pools that also feed the same borrowers. This was a genuine regulatory concern, voiced by Sebi, given the ballooning flow of capital through AIFs. RBI's directive to banks and NBFCs to liquidate their investments in AIFs that invest in their debtor companies is informed by previous instances of evergreening bad loans through shadow lending. The central bank moved with alacrity on Sebi's findings that AIFs were being structured for such purposes.

But some solution has to be arrived at for funds GoI uses to direct venture capital into select areas, such as startups, small enterprises and stressed housing projects. This exemption is justified. But a blanket waiver would open up the field to foreign sovereign funds as well. The accommodation is warranted by the fact that the sovereign funds the Centre wants exempted provide a structure to ring-fence investment against political spending of the kind we see plenty of. The lack of transparency in operations of foreign sovereign funds doesn't allow this accommodation to be extended for all. Since a category-specific carve-out is against the regulatory intent of the tighter rules, exemptions will have to be made by RBI in specific cases.

RBI has also eased some of the new provisioning rules for bank and NBFC investments in AIFs. Lenders are now required to provide only for the amount the AIF has invested in a debtor company. Equity shares of the debtor company have been excluded from the provisioning requirements. The central bank also exempted lenders investing in AIFs through intermediaries such as fund of funds and mutual funds. The additional relaxation on merits for funds operated by the Centre addresses similar concerns over the new rules choking capital flow.