Evergreening of liabilities
Also written Evergreening of loans · Evergreening of stressed loans
Using AIF money to let an investee repay debts owed to the fund's manager, sponsor or their associates, or to hide a lender's stressed loans — prohibited, and a trigger for specific due diligence.
In plain language
A loan goes bad. The lender does not want to show it as bad. So money is routed to the borrower from somewhere else, the borrower uses it to repay the lender, and on paper the loan is performing. The problem has not gone away; it has been evergreened — kept looking green.
An AIF can be the "somewhere else". The workbook deals with two versions:
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Manager or sponsor evergreening. If the manager or sponsor subscribes to a junior class of units, the AIF's investment in a company must not be used, directly or indirectly, to repay obligations owed to the manager, sponsor or their associates. The workbook calls this evergreening of liabilities or loans, and says it is prohibited and unethical.
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Lender evergreening through the AIF route. Banks, NBFCs and other RBI-regulated entities could use an AIF to keep stressed loans looking healthy and get around RBI norms on income recognition, asset classification, provisioning and restructuring. SEBI requires specific due diligence to stop this.
How it works
Junior classes (section 15.11.1). Investors normally have pro-rata and pari-passu rights. But certain entities may subscribe to a junior or subordinate class that accepts lesser returns or bears excess losses: the manager or sponsor, multilateral or bilateral development financial institutions, State Industrial Development Corporations, and entities owned or controlled by central, state or foreign governments. Where the manager or sponsor takes the junior class, the anti-evergreening condition applies. The workbook dates this framework to amendments effective November 18, 2024.
RBI-regulated entities (section 15.17, Table 15.2). Specific due diligence, per implementation standards formulated by the Standard Setting Forum, is required before making investments where the scheme's:
- manager or sponsor is regulated by RBI; or
- investors are RBI-regulated and:
- individually or with their group contribute more than 25% of the corpus; or
- are an associate of the manager or sponsor; or
- have majority or veto power over decisions of the scheme's investment committee.
If an investor is itself an AIF, an offshore fund or a GIFT City fund, the check is done on a look-through basis.
Outcome. If an investment does not meet the standards, it is not made, or the investor is excluded from it with disclosure in the PPM. And the manager must ensure no RBI-regulated entity gains indirect exposure through the AIF to an investee it could not hold directly.
Due diligence also covers existing investments; failures are reported to the custodian.
A worked example
The entities and amounts are illustrative; the thresholds and consequences are the workbook's.
An NBFC has lent Rs 50 crore to Company Z, which is struggling to pay. The NBFC commits Rs 40 crore to a new AIF scheme with a corpus of Rs 100 crore.
Is due diligence triggered?
NBFC share of corpus = 40 ÷ 100 = 40% → more than 25%
Yes. The NBFC is RBI-regulated and contributes more than 25%, so specific due diligence must be completed before any investment.
The proposed deal. The scheme plans to invest Rs 45 crore in Company Z. Z would use the money to repay the NBFC.
Without the rule, the NBFC's books would show a performing Rs 50 crore loan, while its own Rs 40 crore — 40% of the scheme — has in effect gone back into Z through the AIF, in the form of unlisted equity it may not be permitted to hold directly.
The diligence flags the round-trip. The manager's options under the workbook are to not make the investment in Z, or to exclude the NBFC from it and disclose that in the PPM. Either way, the Rs 45 crore does not flow through.
The other version. If instead the manager had taken a junior class of units and Z owed money to the manager's associate, the scheme's investment in Z could not be used to repay that associate at all.
Why NISM asks about it
Chapter 15, section 15.11.1 (Pro-rata and Pari-passu Rights of Investors), names evergreening of liabilities or loans as prohibited and unethical where the manager or sponsor holds junior units; section 15.17 (Specific due diligence of investors and investments of AIFs) and Table 15.2, Part III, set out the RBI-regulated-entity checks. Chapter 15 carries 10% weight. Expect the more-than-25% trigger, the list of entities allowed to take junior classes, and the two possible outcomes when diligence fails.
Common exam traps
- The investor threshold is more than 25% of corpus for RBI-regulated investors. The QIB and QB checks in the same table use more than 50%. Do not swap them.
- Associates of the manager or sponsor and investors with majority or veto power in the investment committee trigger the check at any size.
- Look-through applies when the investor is another AIF, an offshore fund or a GIFT City fund.
- Due diligence comes before the investment.
- If standards are not met, the investment is not made or the investor is excluded — not "made with extra disclosure".
- Evergreening is prohibited, not merely disclosed.
- The junior-class condition is about repaying the manager, sponsor or their associates, not any lender.
Where this is taught
- Series XIX-C · Chapter 17: Regulatory Frameworkintroduced here
- Series XIX-E · Chapter 15: Regulatory Frameworkintroduced here
- Series XIX-D · Chapter 14: Regulatory Frameworkintroduced here
Related terms
- Fit and proper personThe character and record test in Schedule II of the SEBI (Intermediaries) Regulations, 2008 that an AIF's applicant, sponsor and manager must satisfy for registration and must keep satisfying afterwards.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- Ultimate Beneficial OwnerThe natural person who ultimately owns or controls a non-individual investor — over 25% of a company, over 15% of a partnership, or 15% or more of a trust's benefits — whose identity a mutual fund must verify.
- Priority Distribution ModelA structure in which one class of investors bears more loss than its pro-rata share because another class has priority in distribution — no Category III AIF scheme may adopt it.
- Pari-passu rightsThe rule that differential rights offered to select AIF investors must not harm others: no liability to other investors, no control, no change to others' rights, and full disclosure in the PPM.
- Junior or subordinate class of unitsAIF units that accept lesser returns or share excess losses compared with pro-rata rights — open only to the manager or sponsor, DFIs, State Industrial Development Corporations and government-owned entities.