RBI (Investment in AIF Directions), 2025

On July 29, 2025, RBI released "Investment in AIF Directions, 2025"—applicable to NBFCs and other Regulated Entities (REs). A closer legal look reveals a strong regulatory intent: curb indirect evergreening and tighten capital discipline.

Key highlights:

1️⃣ 10% Cap per RE & 20% Collective Cap across all REs in an AIF scheme. 2️⃣ If an RE contributes >5% to an AIF that makes non-equity investments in RE’s own debtor company, RE must make 100% provision to the extent of its proportionate indirect exposure. 3️⃣ If an RE subscribes to subordinated units of an AIF, the investment must be entirely deducted from capital funds (Tier-1 & Tier-2).

🔍 Legal and compliance teams at NBFCs must now revisit:
- Their AIF investment approval matrices;
- Existing exposures vis-à-vis related-party/indirect lending;
- Tier-1 capital impact under the revised approach.

This is not just a compliance update — it’s a strategic recalibration of how structured exposure via AIFs is viewed.

However, here are few open questions:
1️⃣ Whether exposure will be measured on a look-through basis or proportionate NAV? 2️⃣ Should exposure in group entity also count as exposure in debtor entity? 3️⃣ Will provisioning rule apply retrospectively to existing AIF exposures? 4️⃣How far do we go down the chain for indirect exposure? Does a feeder fund model trigger the provisioning? 5️⃣For the purpose of ascertaining “subordinated unit”, will side letters be relevant? Will it be based on actual cash flow waterfall or terms of investor agreement?

RBI has sent a strong signal but let’s see how jurisprudence or future guidance evolves.

For a detailed comparison of Category II vs Category III AIFs, see the next blog.