RBI's Revised Framework for Regulated-Entity and Foreign Investment in AIFs — What Changed and How It Affects Fundraising

The regulatory development actually reshaping AIF fundraising this cycle isn't a headline FVCI overhaul — it's RBI's new caps on how much banks and NBFCs can put into a single fund. Here's what changed and what it means for a manager building an LP base.

The Real Story: RBI's New Caps on Regulated-Entity Investment in AIFs

Effective January 1, 2026 (or earlier, at each institution's own discretion), RBI's revised Directions on investment by Regulated Entities — banks and, for the first time, Non-Banking Financial Companies — in AIFs impose two linked thresholds: an individual Regulated Entity's investment in a single AIF scheme is capped at 10% of that scheme's corpus, and the cumulative investment from all Regulated Entities into a single AIF scheme cannot exceed 20% of the scheme's corpus. This is a meaningful widening from the earlier regime, which applied primarily to banks; bringing NBFCs squarely within scope changes the calculus for any fund that has relied on NBFC capital as a significant LP base.

Why RBI Did This — The Evergreening Concern

The policy driver behind these caps is explicit: RBI has been concerned about AIFs being used as a channel through which a bank or NBFC indirectly extends credit to, or refinances, a stressed borrower it cannot support directly on its own book — commonly described as "evergreening" of loans through the AIF route. The concentration caps are designed to prevent any single regulated lender from having outsized influence over (or hidden exposure through) a fund's investment decisions, particularly where that fund's portfolio companies overlap with the RE's existing borrower base.

A Genuine Carve-Out Worth Noting

One relief in the final Directions, compared to an earlier draft circular: equity instruments — including compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs) — are excluded from the downstream-investment restrictions that specifically target AIF exposure to stressed borrower companies. This was an industry-requested clarification, and it meaningfully narrows the practical bite of the rule for funds whose downstream exposure is genuinely equity-style rather than disguised debt refinancing.

What This Means for Fund Structuring and LP Onboarding

For a fund actively fundraising from banks or NBFCs as anchor or cornerstone investors, the caps mean concentration planning now has to happen at the term-sheet stage, not after the fact — a single large NBFC commitment that would have cleared easily under the old bank-only regime may now bump against the 10%/20% thresholds once other regulated-entity LPs are added to the cap table. Managers should build RE-investor concentration checks into their fundraising pipeline tracking from the first close onward, rather than discovering a breach only when reconciling the final LP register.

The FPI Side — A Related but Distinct Liberalisation

Separately, RBI's June 2026 amendments to the FPI investment framework for Government Securities removed several longstanding concentration and short-term investment restrictions under the General Route and expanded the Fully Accessible Route. This liberalisation is aimed at India's sovereign debt market rather than AIF fundraising directly, but it is relevant background for any AIF (particularly debt-focused Category II funds) that counts FPIs among its LP base or co-invests alongside FPI capital in Indian debt markets. A distinct, comprehensive overhaul specifically targeting the FVCI framework was not identified in the course of preparing this article — managers relying on FVCI-route foreign venture capital should verify the current FVCI-specific regulatory position directly with RBI/FEMA sources rather than assume it has changed in step with the RE-in-AIF and FPI developments discussed here.

Getting the Concentration Math Right From the Start

The RE investment caps are exactly the kind of rule that's easy to overlook during an enthusiastic first close and expensive to unwind later. We help AIF Managers model regulated-entity concentration limits into their fundraising strategy from day one, and verify the current FEMA/RBI position on FPI and FVCI participation before finalising LP documentation.

This article reflects publicly available regulatory reporting as understood at the time of writing and should not be relied on as a substitute for verifying current RBI Directions directly. This does not constitute regulatory advice specific to any fund's fundraising.

CA Anuj Desai