The 2012 AIF regulations had categorised the funds into two groups. AIF-I, which covered venture capital funds, funds of small and medium businesses and infra funds, where the government may want to provide some policy concessions; and AIF-II — PE and credit funds. These funds were growing steadily and since the new regulations in 2012, nearly Rs 1 lakh crore of money was pooled into AIFs, which makes them significant. The mutual funds pool is Rs 6-7 lakh crore.
IVCA has been working with various authorities, including the RBI. ‘‘When this came we were very happy because, for one year banks had stopped investing in PE and credit funds, which they have been investing for the past 20 years,’’ says Srinivasan.
From the industry perspective, this is good news as there are many credit funds such as Trifecta Capital, Innoven Capital besides PE firms like KKR that do a lot of debt funding. Credit funds take high-risk exposure to mid-size companies, which banks are unwilling to take.
The 2016 RBI’s master risk circular said banks could invest up to 10 per cent in AIF-I. In the pre-2012 regime, banks were investing in all kinds of venture capital funds, as there was no categorisation. In 2012, when the Securities and Exchange Board of India (Sebi) came up with AIF regulations, it categorised funds into AIF I and AIF-II, but banks continued to invest, mainly in AIF-II. When the 2016 circular came out, they put a pause in their investments.
Many banks such as Bank of Baroda had made commitments to credit funds, but stopped investment because of policy ambiguity. The PE industry clarified with the RBI, “since you have not mentioned AIF-II, does it mean banks can’t invest in them or is it ambiguous.”
The RBI clarification comes following a representation by the industry and others, including the Narayan Murthy-led Sebi’s Alternative Investment Advisory Committee. But, how much capital can PEs expect banks to invest? ‘‘In a four-year cycle, on average, banks should be investing around Rs 10,000 crore,’’ says Srinivasan.
AIF-II pool attracts both dollars and rupees. Banks are not the only investors. AIFs attract high net-worth individuals (HNIs), insurance companies and foreign flows. Now, banks are also going to invest in incremental news, says a fund manager. ‘‘These things can happen, but it is important to note how quickly it is sorted out. These are systematic changes to make the industry more effective,’’ says Srinivasan.