RECALIBRATING BLENDED FINANCE: THE INDIAN REGULATORY FRAMEWORK AND THE IFSCA SHIFT

Blended finance has emerged as a critical mechanism for mobilising private capital towards development-oriented and high-risk sectors, particularly in emerging economies such as India. By combining concessional capital with commercial investment, it seeks to address structural market failures, including information asymmetry, lack of credit access, and the underfunding of socially significant sectors such as MSMEs, climate infrastructure, and women-led enterprises. Despite its growing relevance, the Indian regulatory framework governing blended finance remains fragmented, with no single comprehensive legal regime addressing its structure and implementation. This paper examines the legal and regulatory landscape applicable to blended finance in India, highlighting the role of multiple frameworks, including the RBI directions and SEBI (Alternative Investment Funds) Regulations, 2012. It focuses particularly on two key regulatory mechanisms — RBI’s co-lending and default loss guarantee framework, and the AIF regime — which operationalise risk-sharing and capital pooling but also impose structural limitations on differentiated risk allocation. The paper further analyses recent developments introduced by the International Financial Services Centres Authority (IFSCA), which proposes permitting differential distribution rights within fund structures to better accommodate blended finance models. While this marks a significant shift towards greater flexibility, it also raises questions regarding regulatory consistency and safeguards against misuse. The paper concludes that although India is moving towards enabling blended finance, achieving an optimal balance between flexibility and regulatory oversight remains essential for scaling such structures effectively.

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