Reserve Bank of India Issued Revised Directions on Investment in Alternative Investment Funds (AIFs)- 2025

Posted On - 29 August, 2025 • By - King Stubb & Kasiva

Introduction

[1]The Reserve Bank of India (“RBI”) has issued the Reserve Bank of India (Investment in AIF) Directions, 2025. SEBI brings in Amended Norms on Investment by RBI-regulated entities (“RE”) in AIF. These Directions pertain to the revised regulatory guidelines for investments by RBI- REs in Alternative Investment Funds (“AIFs”).

In line with Securities and Exchange Board of India (“SEBI”) regulations on investor due diligence, investment practices within AIFs, this amendment comes following extensive industry feedback.

Who Does This Affect?

These Directions shall be applicable for investment in units of AIFs by the following regulated entities.

  • These include commercial banks (universal and small finance banks, local area banks), regional rural banks, as well as cooperative or scheduled state cooperative banks.
  • Primary (Urban), State, and Central Co-operative Banks
  • All-India Financial Institutions
  • Non-Banking Financial Companies (including Housing Finance Companies)

What Are Alternative Investment Funds (AIFs)?

AIFs are privately pooled investment vehicles under the SEBI that invest in non-traditional asset classes such as startups, infrastructure, private equity, and hedge funds. Since this form the institutional and high-net-worth investor base wanting to explore non-public markets as an alternate path.

Key Highlights from the 2025 Directions

1. Limits of Investment

  1. Per Re Separate Entity Limit: No Single RE Can Invest More Than 10% Of an AIF Scheme.
  2. Aggregate RE Limit: Total investments by all REs in an AIF scheme shall not exceed 20% of the total corpus.
  3. Aggregate RE Limit: Collective investments by all REs in an AIF scheme should not exceed 20% of the total corpus.
  4. These caps are introduced to prevent excessive concentration of institutional investments in any single AIF scheme.

2. Provisioning for Indirect Exposure

If an RE invests more than 5% in an AIF scheme that has downstream investments (excluding equity) in an RE’s debtor company, the RE must make a 100% provision for its proportionate exposure to that debtor company via the AIF. The provisioning is capped by the RE’s direct exposure to the debtor company.

3. Subordinated Unit’s Capital Treatment:

Investments in subordinated units of AIFs has to be fully deducted from the RE’s capital funds, proportionally from both Tier-1 and Tier-2 capital, where applicable. This reflects the higher risk profile of subordinated units.

4. General Investment and Policy Requirements:

REs should ensure their investment policies explicitly address investments in AIF schemes and should comply with relevant laws and regulatory standards.

5. Transition Provisions & Exemptions

  • Investments and commitments made under RBI’s prior approval as per the 2016 Master Directions are exempt from the new 10% and 20% exposure limits.
  • RBI, in consultation with the Government of India, exempt specific AIFs from certain provisions of these Directions (except the general governance requirements).
  • Existing investments are fully honoured before the issuance of these Directions will continue to be governed by the earlier circulars.
  • For investments based on commitments made before the effective date, REs must fully comply with either the old circulars or the new Directions mixed compliance is not permitted.

Conclusion

Reserve Bank of India (Investment in AIF) Directions, 2025, Respecting Prudential investment and risk management practices for Regulated Entities carrying on activities with AIFs. The regulatory constraints in the form of investment limits, provisioning mandates, and capital adjustments are imposed to maintain stability amongst Financial Institutions whilst facilitating robust growth within the Indian Alternative Investment ecosystem by the RBI.

All regulated entities should begin to review their internal policies and update these as necessary to be compliant with the Directions by the effective date. This, in turn, will ease the transition and make it easier to comply with regulatory requirements.

[1] Date of Issue: July 29, 2025

Effective Date: January 1, 2026 (or earlier, as per regulated entity’s policy)