Sebi proposes changes in Special Situation Funds to facilitate acquisition of stressed assets
Nov 28, 2023
Sebi Tuesday proposed to amend the regulatory framework for a category of Alternative Investment Funds, called the Special Situation Funds, to facilitate the acquisition of stressed loans and support the resolution of stressed assets in the Indian financial system
The Securities and Exchange Board of India (Sebi) Tuesday proposed to amend the regulatory framework for a category of Alternative Investment Funds (AIF), called the Special Situation Funds (SSFs), to facilitate the acquisition of stressed loans and support the resolution of stressed assets in the Indian financial system.
In a consultation paper, the market regulator suggested a definition of 'special situation assets', eligibility of investors in SSFs in terms of Insolvency law, restrictions concerning investment in connected entities, minimum holding period, subsequent transfer of loans, monitoring and supervision of such SSFs.
To enable SSFs to acquire stressed loans, these funds need to be part of an RBI annexure pertaining to the transfer of loan exposure. SSFs should not invest in or acquire a special situation asset if any of its investors is disqualified under the IBC rule about such special situation assets. Further, special situation funds should not invest in its 'related parties'.
The Sebi consultation paper proposes that SSFs should transfer or sell stressed loans, only to the entities enlisted in the RBI annexure. SSFs who have acquired stressed loans should be subject to a dedicated supervisory framework.
It has been suggested that SSFs should submit information in respect of all investments in stressed loans to a trade reporting platform notified by RBI. This information includes details of units issued, details of investors subsequent changes in unit holdings, resolution strategies implemented, and recoveries effected.
The consultation paper also suggested that each scheme of SSF should have a corpus of at least one hundred crore rupees. It should accept an investment of value not less than ₹10 crore from an investor. In the case of an accredited investor, the SSF should accept an investment of value not less than ₹5 crore. Further, in the case of investors who are employees or directors of the SSF or employees or directors of the manager of the SSF, the minimum value of investment shall be twenty-five lakh rupees.
In January 2022, the market regulator introduced the framework for Special Situation that will invest only in stressed assets. SSFs were introduced as a sub-category under Category I AIF. "The challenges of stressed loans faced by the Indian financial system requiring significant capital infusion in Banks, Non-Banking Financial Companies (NBFCs), etc., necessitated exploring AIFs as a potential source of risk capital to supplement the efforts of Asset Reconstruction Companies ('ARCs') in the resolution of stressed loans, " Sebi said.
The market regulator has sought comments from the public till December 27. The proposal has been floated after consultations with the Reserve Bank of India (RBI), which is the principal regulator for the sale and purchase of stressed loans in India.
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