MUMBAI - India's markets regulator on Friday proposed that alternative investment funds (AIFs) can pledge the shares of the underlying infrastructure companies to help these companies in borrowing from banks, according to a discussion paper on the regulator's website.

A discussion paper is the first step taken by Securities and Exchange Board of India (SEBI) to change the rules for market intermediaries and listed companies.

Presently AIFs can not engage in any leverage activity, meaning neither they can borrow nor pledge shares of the companies they invest in, due to the possibility of AIF investors losing their money in case the investee company defaults on its loans secured against the pledged shares.

According to SEBI this bar on creating pledges on investee company shares could result in banks and other lenders being reluctant to extend financial support to infrastructure projects.

"Allowing AIFs to create encumbrance on their equity investments in infrastructure sector companies for the purpose of project finance is essential for infrastructure development," the regulator said.

SEBI has invited comments on its proposal from market participants till 23 Feb.

(Reporting by Jayshree P Upadhyay; editing by David Evans)