SEBI Mulls Changes to Special Situation Funds to Aid AIFs to Buy Stressed Assets

The market regulator, the Securities and Exchange Board of India (SEBI), has proposed amends to enable the acquisition of stressed loans by Alternative Investment Funds (AIFs) as per the rules set by the Reserve Bank of India (RBI).

In January 2022, the markets regulator introduced the framework for Special Situation Funds (SSFs) that will invest only in stressed assets.

The SSFs were introduced as a sub-category under Category-I AIF. The challenges of stressed loans faced by the Indian financial system requiring considerable capital infusion in banks and Non-Banking Financial Companies (NBFCs) 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 stated.

However, to enable SSFs to acquire stressed loans, these funds had to be first included in the master directions issued by the central bank. The RBI had communicated to SEBI a list of requirements in the framework, including SSFs in its master directions.

The RBI requirements included are the definition of Special Situation Assets, eligibility of investors in SSFs in terms of Section 29A of the Insolvency and Bankruptcy Code (IBC), 2016, restrictions with regard to investment in connected entities, and minimum holding period.

In a bid to address the issues raised by the RBI, SEBI has put forward a consultation paper to finalise the requirements communicated by the central bank on November 28, 2023.

The SEBI consultation paper puts forward that SSFs should transfer or sell stressed loans only to the entities enlisted in the RBI annexure. SSFs who have acquired stressed loans are mandated to be subject to a dedicated supervisory framework.

The market regulator has sought comments on the consultation paper till December 27, 2023. The proposal has been floated after consultations with the RBI, which is the principal regulator for the sale and purchase of stressed loans in the country.

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