RBI has relaxed its earlier norms on alternate investment funds, which required lenders to make full provisions for their investments in AIFs if the fund invested in a company that the bank lent to.

Under the revised norms, provisioning is required only for the portion of the bank or finance company's investment in the AIF scheme that is further invested in the debtor company, and not the entire investment in the AIF scheme as required earlier. Also, investment by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not affected.

The RBI had requested in December 2023 that banks fully supply funds for investing in AIFs, which then invested in businesses to which the banks had extended loans. The regulations were designed to stop "evergreening," a dishonest practice in which lenders give borrowers additional money to repay loans in installments so as to avoid having to classify them as bad loans

Only investments in listed firms are eligible for the exclusion of equity shares from the definition of downstream investments. The investments made by venture capital and private equity in the form of mandatory convertible securities like CCDs and CCPS are not taken into consideration. In order to keep REs involved in their funds, the industry is discussing whether or not to convert all of its hybrid secured to equity, according to Siddarth Pai, co-chair of the Indian Venture and Alternate Capital Association.