Regulatory updates

Regulated Entities (REs)² Regulated entities, for the purpose of this circular, include all commercial banks (including small finance banks, local area banks and regional rural banks), all primary (urban) co-operative banks/state co-operative banks/ central co-operative banks, all-India financial institutions and all non-banking financial companies (including housing finance companies) make investments in units of Alternative Investment Funds (AIFs), as part of their regular investment operations. However, RBI observed certain transactions that raised regulatory concerns. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs³ To give an example, an RE has extended a loan to a debtor (A Ltd.). The same RE invests in AIFs which further invests or subscribes to the instruments of A Ltd.. Thus A Ltd. obtained funds from AIFs and could use it to pay back the REs, which would result in evergreening of loans extended by the REs..

In order to address these concerns, RBI, vide a notification dated 19 December 2023 has prescribed certain important guidelines. These mainly pertain to:

• Downstream investments: REs should not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company⁵ The debtor company of the RE, for this purpose, would mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months. of the RE
• Liquidation of investments and provisioning requirements: If an AIF scheme, in which the RE is already an investor, makes a downstream investment in any such debtor company, then the RE must liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF. In case REs are not able to liquidate their investments within the aforementioned time limit, then they would be required to make 100 per cent provision on such investments
• Investment by REs in the subordinated units of an AIF scheme with ‘priority distribution model’: RBI has specified that the investment done by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ should be subject to full deduction from RE’s capital funds.

Effective date: The above guidelines are applicable with immediate effect, i.e., 19 December 2023.

To access the text of the notification, please click here

On 11 April 2023, RBI had issued the Framework for acceptance of Green Deposits (the framework). The framework is effective from 1 June 2023 and aims to direct the flow of funds to sustainable projects and initiatives, protect the interest of the depositors as well as address greenwashing concerns.

Recently, RBI issued certain FAQs for ease of implementation of the said framework. Some of the important issues addressed by the FAQs include:

• Scope of the framework: The framework is applicable only in respect of the green deposits raised by Regulated Entities (REs) on or after 1 June 2023⁵ It has been clarified that it is not mandatory for REs to raise green deposits, however, in case REs intend to raise green deposits from their customers, they should follow the framework prescribed.. Further, it is not permissible for the REs to finance green activities/projects first and raise green deposits thereafter.
• Investment of unallocated proceeds of green deposits: As per the framework, unallocated proceeds of green deposits can be invested in liquid instruments with maturity up to one year. In this regard, RBI has clarified that:

• Liquid instruments refer to the ‘Level 1 High Quality Liquid Assets’ as per the RBI guidelines,
• REs can temporarily park proceeds of green deposits, pending allocation towards green activities/projects, in liquid instruments with maximum maturity up to one year (to be specified under the financing framework), and
• The framework does not specify any penalty for non-allocation of proceeds towards green activities/projects. However, it would be subject to supervisory review.

• Interest on green deposits: REs are not permitted to offer differential interest rate on green deposits. Further, there is no restriction on premature withdrawal of green deposits. Further, such premature withdrawal would not have any bearing on activities/projects undertaken using the proceeds of the green deposits.
• Eligibility criteria for external review and impact assessment: The FAQs state that REs can engage with any appropriate and reputed domestic/international agency for external review, third-party verification/assurance and impact assessment.
• Foreign banks: It has been specified that foreign banks can have a common global policy for green deposits raised in India after 1 June 2023.
• Denomination of green deposits: The FAQs clarify that green deposits can be denominated in Indian Rupees only.

To access the text of the FAQs, please click here