Vol 21 (2024) - Issue 3

Article preview

SEBI’s Intervention in the RBI’s Domain: The Liquidity Downpour of Alternative Investment Funds

Synopsis
The growth of Alternative Investment Funds (AIFs) as an asset class in India has been significant in the last few years. The well-capitalised investor base has led to liquidity being offered by AIFs to be relatively less costly than the Basel-III bound Banking Sector. With an increase in demand, the use of AIFs by regulated lenders for evergreening of loans through its tranching based priority distribution model has also increased. As a response to this, the Securities and Exchange Board of India has halted this model and suggested the prorata model of distribution to be followed. This essay, while recognising the need to address the heightened regulatory arbitrage in the form of evergreening, highlights how the withdrawal of priority distribution model could be a misdirected move. I argue that the withdrawal of the priority distribution model would constraint the varied risk-appetites of limited partners and consequently, a reduction in the funding liquidity of AIFs. To avoid this, this essay argues that a more efficient approach that preserves market liquidity and averts possible liquidity crises in the future could be intervention from the Reserve Bank of India rather than the Securities and Exchange Board of India. This essay draws on the framework of AIF investments in Asset Reconstruction Companies to propose a model grounded in transparency and explicit restrictions.