The RBI has amended the Master Directions on Financial Services provided by Banks. This is a significant move permitting Banks to invest in Category II Alternative Investment Funds.
As of June 30, 2017, Alternative Investment Funds (AIFs) had raised the cumulative figure of Rs. 48, 129 crores, against aggregate capital commitments of Rs 96,000 crores. The AIF industry is thus growing at an exponential rate, raising monies from domestic and offshore investors.
Unfortunately, however, the Indian AIF industry, lags behind its western counterparts in terms of participation by domestic pools of capital. In western countries, long term or patient capital, such as pension funds, contributes nearly 40% of the capital raised by AIFs. In the Indian context, restrictions prescribed by sector regulators have inhibited fund managers from raising capital from the domestic financial services sector.
Hence, it was no surprise that one of the key themes in the 2016 reports of the Alternative Investment Policy Advisory Committee (AIPAC), chaired by Mr Narayan Murthy, was “unlocking domestic pools of capital”. The committee’s recommendation was premised on the argument that the domestic capital pools – pensions, insurance, domestic financial institutions, banks, and charitable institutions – need access to appropriate investment opportunities to earn risk-adjusted returns.