By Peter Bergman (MoneyAmped.com)
The markets regulator and Central Bank of India are conducting investigations into approximately twelve instances of switch investment vehicles (AIFs) suspected of being utilized to bypass regulations. These investigations involve various allegations, including the practice of “evergreening” stressed loans. This information has been shared by three sources who possess firsthand knowledge of the substance.
The inquiries may result in heightened revelations and enhanced examination for a type of investment encompassing private credit funds, which have attracted substantial amounts of capital from affluent individuals and institutions worldwide due to their adaptable nature and lenient regulatory framework.
Alternative Investment Funds Have Been Misused
The detection of multiple instances by the Securities and Exchange Board of India (SEBI) about the misuse of Alternative Investment Funds (AIFs) in the range of 150 billion to 200 billion Indian rupees ($1.8 billion to $2.4 billion) has come to light. These cases involve the circumvention of regulatory frameworks established by various financial authorities, including the Reserve Bank of India (RBI), as reported by a reliable source.
The sources have chosen to remain anonymous due to their lack of authorization to engage with the media. The responses from SEBI and RBI regarding the requests for comment still need to be received.
In contrast to the substantial sum of 8.4 trillion rupees under the management of AIFs, it is noteworthy that the instances of detected misuse, although relatively modest, hold significance, as indicated by the second source.
The ongoing investigations encompass situations wherein non-bank lenders have sold distressed loans to Alternative Investment Funds (AIFs) that the same lender partially establishes. The infusion of new funds into these AIFs is subsequently utilized to repay the initial debt, thereby averting the loans from deteriorating into non-performing assets. A reliable secondary source has provided this information.
According to the source, the practice above can be categorized as “classic evergreening.”
The first and third sources have reported initiating inquiries into these cases by the central bank. If such occurrences of misuse of Artificial Intelligence Frameworks (AIFs) are substantiated, potential consequences may include the imposition of penalties or restrictions on business operations, particularly in severe circumstances.
Investigations Into the Circumvention of Legislation Continue
According to information provided by the first and third sources, it has been observed that in various ongoing investigations, the utilization of AIFs has been employed to circumvent imposed limitations on foreign investment within specific sectors. Studies are underway regarding instances in which insolvency regulations are being avoided through utilizing Alternative Investment Funds (AIFs).
At a recent conference in Mumbai, SEBI whole time member Ananth Narayan highlighted the identification of multiple instances where AIF structures have been employed to bypass existing regulatory frameworks. Such cases can elicit concern despite our desire for the industry’s expansion.
As per the circular issued in June, the market regulator has mandated Alternative Investment Funds (AIFs) to submit comprehensive reports encompassing their assets and liabilities through India’s share depositories, effective from the conclusion of the current month.
Furthermore, the industry must take proactive measures to self-regulate and establish a comprehensive code of conduct for all its members.
The proposal to cease priority payouts to investors in credit funds, introduced in June, has been temporarily suspended due to resistance from the industry, as reported by the sources above.
Priority payouts refer to a financial arrangement wherein investment is divided into distinct senior and junior tranches; each assigned a specific risk and priority in payout.
