RBI Issues Revised Directions on Investment in Alternative Investment Funds (AIFs) – 2025

Posted On - 7 October, 2025 • By - Asha Kiran Sharma

Introduction

The Reserve Bank of India (RBI) has issued the Reserve Bank of India (Investment in Alternative Investment Funds) Directions[1], 2025, introducing an updated regulatory framework governing investments by RBI-regulated entities (REs) in Alternative Investment Funds (AIFs).

These revised Directions align with the Securities and Exchange Board of India’s (SEBI) evolving regulatory standards on investor protection, due diligence, and transparency within the AIF ecosystem. The move follows extensive stakeholder consultations and aims to strengthen prudential norms while fostering responsible institutional participation in India’s growing alternative investment landscape.

Scope of Applicability

The Directions apply to all RBI-regulated entities investing in AIFs, including:

  • Commercial banks (universal, small finance, local area, and regional rural banks)
  • Co-operative banks (primary urban, state, and central)
  • All-India financial institutions
  • Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs)

Understanding Alternative Investment Funds (AIFs)

AIFs are privately pooled investment vehicles registered with SEBI that invest in non-traditional asset classes such as startups, infrastructure projects, private equity, venture capital, and hedge funds. They cater primarily to institutional and high-net-worth investors seeking diversification beyond public markets. The sector has become a significant driver of private capital formation and innovation financing in India’s evolving financial ecosystem.

Key Regulatory Highlights

1. Investment Limits

  • Per Entity Cap: No single regulated entity may invest more than 10% of the corpus of any AIF scheme.
  • Aggregate Cap: The collective investments by all regulated entities in a single AIF scheme shall not exceed 20% of its total corpus.

These limits are designed to prevent excessive institutional concentration and mitigate systemic exposure to specific funds or sectors.

2. Provisioning for Indirect Exposure

Where an RE invests more than 5% in an AIF scheme that holds downstream (non-equity) exposure to the RE’s own debtor company, the RE must create a 100% provision for its proportionate exposure through the AIF.
 This provisioning requirement is capped by the RE’s direct exposure to that debtor, ensuring transparency and containment of credit risk transmission through indirect investment structures.

3. Capital Treatment of Subordinated Units

Investments in subordinated units of AIFs must be fully deducted from the RE’s capital funds proportionately from Tier 1 and Tier 2 capital, where applicable. This reflects the higher loss-absorption potential and elevated risk associated with subordinated instruments.

4. Governance and Policy Requirements

All regulated entities are required to ensure that their internal investment policies explicitly cover AIF-related exposures.
 These policies must align with applicable laws, RBI’s prudential norms, and internal risk management frameworks, ensuring consistent oversight and compliance at both entity and group levels.

Transition Provisions and Exemptions

  • Grandfathering of Existing Investments: Investments or commitments made under the earlier 2016 Master Directions are exempt from the new 10% and 20% exposure limits.
  • Regulatory Discretion: The RBI, in consultation with the Government of India, may exempt specific AIFs from certain provisions of the 2025 Directions, barring core governance requirements.
  • Legacy Commitments: Investments executed or committed prior to the effective date shall continue to be governed by the earlier regulatory framework. Entities must, however, ensure full compliance under one regime – mixed compliance between old and new frameworks will not be permitted.

Conclusion

The RBI (Investment in AIF) Directions, 2025 mark a significant step toward enhancing prudential discipline and transparency in the alternative investment space. By tightening exposure limits, defining provisioning standards, and refining capital treatment norms, the RBI seeks to mitigate contagion risks while enabling regulated entities to participate responsibly in India’s rapidly maturing AIF ecosystem.

Regulated entities should proactively review and update their internal investment policies, governance procedures, and capital adequacy assessments in line with these Directions. Early alignment will ensure a smoother transition and reinforce institutional resilience as the regulatory landscape continues to evolve.

[1] https://m.rbi.org.in//Scripts/NotificationUser.aspx?Id=12886&Mode=0