Issues with AIFs in India
- October 18, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Issues with AIFs in India
Subject :Economy
Section: Capital market
AIF Investigations by SEBI:
- SEBI and RBI are investigating around a dozen cases of alternate investment funds (AIFs) allegedly being used to circumvent regulations.
- AIFs are under scrutiny for potential misuse, including the practice of “evergreening” stressed loans.
Misuse Cases and Evergreening Loans:
- SEBI has identified cases amounting to ₹15,000-20,000 crore where AIFs were misused to circumvent rules of financial regulators, including the RBI.
- Instances of non-bank lenders using AIFs to repurchase stressed loans to prevent them from turning bad have been reported, which is seen as “classic evergreening.”
Other Investigated Cases:
- AIFs have been reportedly used to bypass foreign investment caps in certain sectors.
- Some cases involving the evasion of insolvency regulations through AIFs are also under investigation.
SEBI’s Measures and Circulars:
- SEBI has asked AIFs to report both assets and liabilities through India’s depositories.
- The regulatory authority has proposed measures to stop priority payouts to investors in credit funds, which have been put on hold following industry resistance.
About AIFs:
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, AIFs refer to privately pooled investment funds, either from Indian or foreign sources, in the form of a trust, company, body corporate, or Limited Liability Partnership (LLP).
AIFs do not include funds covered under SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999, or any other regulations of the Board regulating fund management activities.
Categories of AIFs:
AIFs are classified into three categories based on their investment focus and activities.
Category I:
- Category I AIFs primarily invest in start-ups, small and medium-sized enterprises (SMEs), or sectors deemed economically and socially viable by the government.
Category II:
- Category II AIFs include private equity funds or debt funds that do not receive any specific incentives or concessions from the government or any other regulator.
Category III:
- Category III AIFs encompass hedge funds or funds aimed at making short-term returns, along with open-ended funds that do not receive any specific incentives or concessions from the government or any other regulator.
About Evergreening of Loans:
Evergreening of loans refers to the practice where banks or lenders provide additional funds or take other measures to artificially sustain a loan that is not being repaid as scheduled.
The primary objective is to avoid classifying the loan as a non-performing asset (NPA) which could necessitate setting aside more provisions for potential losses.
Purpose of Evergreening:
Evergreening is a temporary measure employed by banks to maintain the appearance of a performing asset, thereby safeguarding their profitability and financial stability.
Risk Associated:
While evergreening loans may temporarily alleviate the stress on a bank’s balance sheet, it can conceal the true extent of non-performing assets and potentially lead to a more significant financial crisis if not addressed effectively.
Classic Evergreening
Instances of non-bank lenders selling stressed loans to AIFs partially set up by the lender itself, with the fresh funds being used to repay the original debt to prevent the loans from turning bad, is “classic evergreening”.
Definition of Non-Performing Asset (NPA):
NPA refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest.
Categories of Non-Performing Assets:
Sub-standard Assets:
Sub-standard assets are those classified as NPAs for a period less than or equal to 12 months.
Doubtful Assets:
Doubtful assets are those that have been non-performing for a period exceeding 12 months.
Loss Assets:
Loss assets are considered uncollectible, with little or no hope of recovery, and require complete write-off from the bank’s books.