Officials from the department of economic affairs, department for promotion of industry and internal trade (DPIIT), MSME ministry, the Reserve Bank of India (RBI) and banks will attend the meeting, the people said on the condition of anonymity.

The government stepped in because apart from AIFs from private firms, several AIFs have been floated by central government ministries and state governments to pool funds from state-owned banks. The central bank’s 19 December circular asked lenders to sell their investments in AIFs linked to their debtor companies, in a bid to prevent evergreening, rattling the entire sector.

For AIFs, the matter gains urgency as funds need to submit annual audits on their private placement memorandums to markets regulator Sebi at the end of each financial year. This requires AIFs to submit details of their private placements each year, including potential defaults. The implications of being labelled a defaulter in an AIF are immense as it could jeopardize an investor’s (in this case, a bank’s) existing investments, the two people said on the condition of anonymity.

Further, most banks also require one or two weeks to respond to capital calls and may find it hard to meet capital-call timelines by the end of March, they added.

A finance ministry spokesperson did not respond to queries.

Mint reported in February that nearly 100 private equity and venture capital funds have been impacted by top banks rejecting capital calls citing the RBI circular.

According to the first person cited above, no one realistically believes that any fund manager will label a large bank, let alone a state-owned bank, as a defaulter, bringing into question how the AIFs will categorize these commitments as defaults within the current Sebi framework.

The ‘defaulting investor’ clause in various fund PPMs (private placement memorandums) is meant to be a deterrent to any investor who may contemplate a default in drawdowns to AIFs.

While this differs from AIF to AIF, normal inclusions in such a provision allow AIFs to hold back units of defaulting investors, impose a penalty at a particular rate of interest, take legal action against the defaulting investors, pause all distributions to such investors, and also force transfer of the units to third parties.

“AIF managers do have some degree of discretion (on who they can label as a defaulter) in their application, but will need to justify the same to other Investors in the AIFs,” said Siddarth Pai, executive council member of the PE/VC industry body Indian Venture and Alternate Venture Capital Association.

“Auditors may ask for these justifications and may report the same in their audit report. Many funds may not have a regulatory bar as a means of excusal from the defaulting provisions and would need to modify their fund documents for the same. As the financial year comes to a close, clarity is urgently needed on this matter,” Pai added.

There is expectation that RBI might allow for a carve-out for certain funds, but it may need to be clearly defined, the people cited above added.

Under an AIF structure, vehicles of investments are pooled from limited partners (LPs) or investors in these funds, to invest further in capital seeking startups and firms.

The RBI circular has widespread implications because several central government ministries and departments have floated thematic and sector-specific funds of funds to help meet the capital needs of companies in those sectors.

Even states such as Karnataka, Gujarat and Maharashtra have their own AIFs to support specific industries and startups, and most of them rely on government banks, who are key limited partners.

Mint reported last week on how several top banks including State Bank of India, HDFC Bank and Axis Bank have walked back on capital commitments made to private equity and venture capital funds to avoid falling foul of RBI’s circular on AIFs.

PE and VC funds raise significant amounts from domestic banks through AIFs, which they invest in companies across sectors. Once a fund manager finalizes an investment, a capital call is made—a request to draw down the promised money.