AIF industry: At risk of death by a thousand circulars

Alternative investment funds generate value but have been dealt a harsh blow by over-regulation

- T.V. MOHANDAS PAI

Everybody loves a good fight; a clash of equals can be an engaging test of skills if fair play is assured. But nobody likes an unequal show of naked power against an enfeebled opponent. The year-long regulatory rumble against India's alternate investment fund (AIF) industry is a textbook example of regulatory excess. The industry is at risk of suffering a slow death by a thousand circulars, starting with those issued by the Reserve Bank of India (RBI).

As a creation of Parliament, RBI ought to be answerable to lawmakers. But it seems to have weaponized its autonomy and seems accountable only to itself. It has gone against the spirit of liberalization to become excessively prescriptive, with fintech firms and AIFs at the receiving end.

In December 2023, RBI released 'Investment in AIFs,' an innocuously titled circular. It was akin to curing dandruff by decapitation. To resolve the issue of some AIFs being used by RBI-regulated entities (REs) to evergreen loans, the regulator placed an effective ban on banks and non-bank finance companies (NBFCs) investing in AIFs with exposure to REs' debtor companies. If an AIF portfolio company had even a mere fixed deposit-backed credit card from a bank, the latter would need to write off its AIF investment. Over ₹12,000 crore has been written off by banks and NBFCs. The government-sponsored SWAMIH Fund, meant for affordable housing, is stuck because of this.

The AIF industry protested, but RBI did not relent. A small group that got a meeting with it was told that the chapter was closed.