The Securities and Exchange Board of India (SEBI) on Tuesday issued guidelines directing investors in alternative investment funds (AIFs) to exercise due diligence to prevent circumvention of regulations and ever-greening of loans.
AIFs, their managers and key personnel are required to conduct the due diligence for investments by entities regulated by the Reserve Bank of India (RBI), investments from countries sharing land borders with India and those availing of benefits of qualified institutional buyer (QIB) status.

If the scheme includes RBI-regulated entities, additional checks are necessary to ensure compliance with norms, SEBI said. If the due diligence is not passed, the investor may be excluded from the investment or the investment will not proceed.
The markets regulator has directed AIF managers to submit a report by April 7, 2025, on the due diligence. If investments do not satisfy these requirements, they must report on the status of existing investments to custodians before deadline.

AIFs are required to avoid facilitating ever-greening of stressed loans or assets for RBI-regulated entities, adhering to RBI’s norms for income recognition, asset classification, provisioning and restructuring.

Last year, the RBI had restricted banks and financial institutions from investing in AIFs where there is an exposure to a firm to which they have already lent to, in order to address evergreening on loans. The regulator had asked banks and NBFCs to make 100% provisions for the entire investment in such AIF schemes. However, the central bank later provided some reliefs.

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SEBI said due diligence is necessary for investments from countries sharing land borders with India, in line with the foreign exchange management rules. If any investor or group of investors contributes 50% or more to the AIF’s scheme, detailed due diligence is required.

Further, to curb misuse of the QIB route, the regulator has specified checks to prevent AIFs from facilitating QIB benefits to investors who would otherwise be ineligible for QIB status on their own.

The move is aimed at ensuring that AIFs are conducting thorough due diligence to maintain transparency and compliance with SEBI, RBI, and other relevant regulations.