RBI’s 15% Rule: Reigniting Institutional Capital for Indian Venture Funds

RBI’s 15% Rule: Reigniting Institutional Capital for Indian Venture Funds

By: Varun Chikhale | LvlUp Venture Scout

The Reserve Bank of India (RBI) has proposed allowing regulated entities, primarily banks and non-banking financial companies (NBFCs),  to invest up to 15% in Alternative Investment Funds (AIFs). The move follows months of industry uncertainty after the RBI’s December 2023 circular that directed such institutions to halt fresh AIF investments and make full provisioning for existing exposures. The earlier directive came amid concerns about evergreening of loans through AIF structures, where some financial institutions were indirectly financing stressed borrowers.

Under the new proposal, regulated entities may now participate in AIFs within the 15% ceiling, signalling a partial rollback of the previous restrictions. This shift aligns with Securities Exchange Board of India’s (SEBI) recent due diligence guidelines for AIF investments, which tightened transparency norms and addressed regulatory concerns around fund extensions and investor disclosures.

Category I AIFs, which primarily include venture capital funds, have been instrumental in mobilising domestic capital for early-stage startups. They channel investments from Indian high-net-worth individuals and institutions into innovation-focused sectors, fostering rupee-denominated venture financing. Allowing banks and NBFCs to reinvest in such vehicles strengthens the rupee capital formation that underpins India’s startup ecosystem.

The reform reflects a balancing act between prudential regulation and capital market deepening. By capping exposure at 15%, the RBI aims to contain systemic risk while reopening a key funding source for domestic venture funds. As of March 31, 2025, the AIF industry stood at roughly ₹13.5 lakh crore in commitments, with ambitions to reach ₹30 lakh crore by 2030.

While the cap remains conservative, the move marks an incremental but meaningful step in integrating institutional capital into India’s alternative investment landscape, a necessary foundation for long-term venture growth and financial stability.

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