Sebi proposes changes in regulatory framework for Special Situation Funds

On Tuesday, November 28, the Securities and Exchange Board of India (Sebi) proposed changes to the regulatory framework for Special Situation Funds (SSFs) to facilitate the acquisition of stressed loans. SSFs are a sub-category of Alternative Investment Funds (AIFs).

Representative image

Definition of Special Situation Assets

In a consultation paper, Sebi 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.

Eligibility of Investors

To enable SSFs to acquire stressed loans, these funds need to be part of a Reserve Bank of India (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 Insolvency and Bankruptcy Code (IBC) rule about such special situation assets. Further, special situation funds should not invest in their related parties.

Transfer or Sale of Stressed Loans

It has been proposed 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.

Reporting Requirements

It has been suggested that SSFs should submit information regarding 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.

Rationale for the Proposed Changes

In January 2022, Sebi introduced the framework for Special Situation Funds 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.

Seeking Public Comments

Sebi has sought comments from the public on the consultation paper till December 27. The proposals have 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.

The proposed changes to the regulatory framework for SSFs aim to facilitate the acquisition of stressed loans and support the resolution of stressed assets in the Indian financial system. Sebi's efforts to create a conducive regulatory environment for SSFs are expected to attract investment and promote the development of a robust market for stressed assets.