RBI Stringent AIF Exposure Rules: Single Entity Cap at 10%, Collective Limit Set at 20%

The Reserve Bank of India (RBI) has issued stringent new rules under its “Investment in AIF Directions, 2025”, capping investments by banks, NBFCs, and other regulated entities (REs) in Alternative Investment Funds (AIFs). These guidelines will come into force from January 1, 2026, though institutions may adopt them earlier. 

Key Provisions

• Individual Cap: No single RE can invest more than 10% of an AIF scheme’s corpus. 
• Aggregate Limit: Combined investments by all REs in a scheme are limited to 20% of its corpus. 
• Provisioning Rule: If an RE invests over 5% and the AIF has downstream debt exposure in a company that is a borrower of the same RE, then 100% provision must be made against proportional exposure. 
• Subordinated Units: Investments via subordinated units must be fully deducted from Tier‑1 and Tier‑2 capital. 
• Equity Exemption: Exposure via equity instruments (shares) is excluded from provisioning norms. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Regulatory Background

These rules replace earlier restrictions introduced in December 2023 (which barred RE investment in AIFs linked to their borrowers) and partial relief issued in March 2024 (which allowed limited participation subject to full provisioning). 

The final framework offers a balanced and risk‑based approach: raising the overall exposure cap to 20%, introducing a 5% safe threshold, distinguishing between equity and debt exposure, and clarifying treatment of subordinated units. 

Impact and Industry View

RBI’s objective is to prevent practices like the evergreening of loans via AIF investments, where funds are indirectly used to finance stressed borrowers of the same institution. By controlling concentration risk, the framework strengthens financial discipline. 

Industry experts acknowledge the shift. Sudhir Chandi of Resurgent India remarked that the rules align RBI’s framework with SEBI’s due diligence norms, ensuring regulatory coherence. 

AIF managers have urged regulators to reconsider investment caps, warning that low thresholds may constrain long-term capital inflows and harm growth strategies. Dialogue between stakeholders and the RBI continues. Sensex, Nifty recovered as investors believe the recent Trump announcement of a 25% tariff is a negotiating tactic, and that any final tariff imposition may be lower than initially stated.

Conclusion

Starting January 2026, RBI’s updated AIF directions place clear exposure limits: 10% per entity and 20% in aggregate, backed by comprehensive provisioning rules. The framework seeks to mitigate indirect credit risks while allowing regulated entities to participate in private capital markets under tighter oversight.