The Alternative Investment Fund (AIF) industry in India is likely to see a surge in capital flow after the central bank allowed banks to invest in private equity and credit funds.
The Reserve Bank of India (RBI), in a circular late Monday, permitted banks to invest up to 10% of the paid-up capital or unit capital in a category I or category II AIF. It, however, said banks cannot invest in category III AIFs.
According to capital markets regulator Securities and Exchange Board of India’s AIF norms, category I includes venture capital funds, infrastructure funds and social venture funds. Category II includes private equity funds and credit funds while category III includes hedge funds and PIPE funds, or those that make private investments in public equities.
Earlier, a bank’s investment was restricted only to category I AIFs. Category II funds lacked clarity on whether they could take capital from banks. The confusion stemmed from a 2016 circular that said banks can give up to 10% of the fund size to category I AIFs, without mentioning category II AIFs.
“Banks are now free to write cheques wherever they believe is appropriate and meritocratic to category II AIFs,” said Gopal Srinivasan, chairman of the industry body Indian Private Equity and Venture Capital Association (IVCA). “This is a very big breakthrough for the industry.”
Srinivasan said the previous circular was unclear. “Did it mean banks could not give money to category II AIFs or that there is no limit for them? So banks took a safe position saying they cannot do what is not mentioned,” he said.
Banks are among the primary and institutional sources of capital for funds — VC, PE, infrastructure, real estate and credit – so the clarification was important. Many banks, especially state-run lenders, do have Limited Partner (LP) commitment to institutions such as Small Industries Development Bank of India (SIDBI) that figure under category I AIF.
“The RBI’s clarification on category II AIFs will enhance availability of growth capital – in the form of equity and debt – to Indian companies,” said Jayaroopa Jeyabarathi, principal at Patamar Capital (formerly Unitus Impact). “Access to capital is one of the biggest challenges faced by businesses. Increasing domestic sources of capital will help boost growth and create jobs.”
The relaxation of the norms is likely to give a boost to many first-time fund managers who have been struggling to raise funds, even as a lot of dry powder has piled up with a big chunk flowing from high net-worth individuals (HNIs).
PE and VC funds registered with SEBI added Rs 6,460 crore(around $1 billion) in fresh dry powder in the April-June quarter to take the total pile to Rs 51,877 crore, according to VCCircle estimates.
Srinivasan, who is also chairman of private equity firm TVS Capital, said that the Alternative Investment Policy Advisory Committee chaired by Infosys Ltd co-founder NR Narayan Murthy had discussed this issue with the RBI several times.
The RBI’s move is also expected to expand the domestic LP base, which is small and includes few large corporate houses.
However, Sanjeev Krishan, deals and private equity leader at consulting firm PwC India sought to temper the euphoria. “I see this more as an enabling regulation for now as banks would be averse to investing in funds. It will be a while before banks loosen their purse strings,” said Krishan.
Bank investment in REITs, InvITs
The RBI also said that banks can make an investment of more than 10% of the unit capital of a Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT).
However, it said that a bank’s investment will be subject to the overall ceiling of 20% of its net worth permitted for direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposure to AIFs.
Capital markets regulator SEBI had, in August 2014, notified regulations for setting up InvITs and REIT to give the cash-strapped infrastructure and real estate sectors an additional channel to raise capital.
Earlier this month, SEBI relaxed its regulations to boost investor participation in REITs and InvITs. The new measures included allowing REITs to raise debt, besides allowing wider categories of investors to participate in such instruments and having a single asset under a trust, similar to an InvIT.
See the story on VCCircle.