Cracking the code: RBI’s new playbook for investments by Regulated Entities in Alternative Investment Funds

The RBI (Investment in AIF) Directions, 2025 (“Directions”), issued on July 29, 2025, are the latest in a series of regulatory interventions aimed at curbing risks associated with investments by regulated entities (“REs”) in Alternative Investment Funds (“AIFs”). These directions follow earlier circulars (“Old Circulars”) which restricted REs from investing in AIFs that, directly or indirectly, invest in their own debtor companies.

A key concern underlying these moves has been the potential use of AIF structures for evergreening of loans and masking true credit risk. Simultaneously, SEBI has also acted, most notably through its circular dated November 23, 2022, which curtailed the use of the priority distribution model, and a circular dated December 13, 2024, which permitted certain investors to subscribe to junior/ subordinate classes of units.

Against this backdrop, this article presents a concise comparison of the key differences between the provisions of the Directions and the Old Circulars.

The Directions are applicable to the following REs: 

• Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)

• Primary (Urban) Co-operative Banks/ State Co-operative Banks/ Central Co-operative Banks

• All-India Financial Institutions (“AIFIs”)

• NBFCs (including Housing Finance Companies)

Since investments by REs were made in AIFs under the framework of the Old Circulars, the Directions seek to clarify the applicability of the old and new regulatory regime based on the funding status and timing of the commitment made by the RE in the AIF. The Directions establish a three-tier framework for determining which regulatory regime applies, as outlined below:

The Directions represent a significant evolution in the regulatory framework governing investments by banks, NBFCs, and other financial institutions in AIFs.

One notable implication of the Directions is the imposition of a cap whereby REs collectively cannot invest more than 20% of the AIF’s corpus. This creates a practical urgency for REs looking to participate in AIFs, as they may need to move quickly before the available headroom is exhausted. Simultaneously, AIFs are likely to become more selective in onboarding REs, given that only a limited portion of their total corpus can be allocated to such investors. This may trigger greater competition amongst REs for participation in high-quality AIFs and push fund managers to rethink investor mix and fundraising timelines.

The Directions also provide a pragmatic roadmap to transition to the new regime based on the funding status and timing of commitments of the RE in the AIF, thereby avoiding disruptive implementation. The phased implementation approach beginning January 1, 2026 (or earlier if adopted by REs) provides sufficient time for REs to align their investment strategies with the new requirements.

About the authors: Leelavathi Naidu is a Senior Partner, Harsh Dilip Kothari is a Partner and Siddhanth Sharma is an Associate at IC RegFin Legal.

This article has been created for informational purposes only. Neither IC RegFin Legal Partners LLP nor any of its partners, associates or allied professionals shall be responsible / liable for any interpretational issues, incompleteness / inaccuracy of the information contained herein. This article is intended for non-commercial use and for the general consumption of the reader and should not be considered as legal advice or legal opinion of any form and may not be relied upon by any person for such purpose.

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