Sebi proposes amendment to Special Situations Fund to allow AIFs to buy stressed assets

In December 2021, the Securities and Exchange Board of India (Sebi) introduced SSF as a new sub-category of AIF-I which would invest in special situation assets including stressed loans

The market regulator has proposed to amend the regulatory framework for a category of Alternative Investment Funds, called the Special Situation Funds (SSFs), so that the SSFs can acquire stressed loans, according to a consultation paper floated on November 28.

This will be mean the amendment of AIF Regulations.

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The consultation paper said that, with stressed loans in the Indian financial system, AIFs were considered as a potential source of risk capital to supplement the efforts of Asset Reconstruction Companies (ARCs). This would also free up capital in banks and non-banking financial corporations, and so on.

Therefore, in December 2021, the Securities and Exchange Board of India (Sebi) introduced SSF as a new sub-category of AIF-I which would invest in special situation assets including stressed loans. SSF were allowed to acquire stressed loan in terms of Clause 58 of RBI Master Directions, upon inclusion of SSF in the Annex of RBI Master Directions.

But to be included in the Annex of RBI Master Circular, the central bank said that Sebi must put in place a regulatory framework for this in consultation with the central bank.

Therefore, Sebi forwarded its draft of the regulatory framework to enable SSFs to buy stressed loans to RBI, and the central bank reverted with their requirements in the framework.

Among the RBI requirements are definition of 'special situation assets'; eligibility of investors in SSFs in terms of Section 29A of Insolvency and Bankruptcy Code, 2016; restrictions with regard to investment in connected entities; and minimum holding period.

Therefore, the consultation paper has asked for a feedback on these, as drafted by Sebi.

The comments have to be sent in by December 27, 2023.