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SEBI’s Proposal for Reforms in SSF for Resolution of Stressed Loans

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SEBI has released a consultation paper proposing modifications to the regulatory framework governing Special Situation Funds (SSFs), a subset of Category I Alternative Investment Funds (AIFs). The objective is to enable SSFs to acquire stressed loans in accordance with the Reserve Bank of India (RBI) (Transfer of Loan Exposures) Directions, 2021 (“RBI Master Directions”). In January 2022, SEBI had introduced SSFs specifically to invest in special situation assets including stressed loans. Each SSF scheme is required to have a minimum corpus of Rs. 100cr.

According to Regulation 19I(3) of SEBI (AIF) Regulations, 2012, “special situation fund” refers to a Category I AIF that invests in special situation assets based on its investment objectives and can act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (IBC). Accordingly, SSFs were allowed to acquire stressed loans in accordance with Clause 58 of the RBI Master Directions, once included in the Annexure of the RBI Master Directions. Such acquired stressed loans are subject to a minimum lock-in period of six months, exempted in cases of recovering the loan from the borrower. To include SSF in RBI Master Directions by Reserve Bank of India (RBI), who is the principal regulator for sale and purchase of stressed loans in India, SEBI must establish a framework in consultation with the Central Bank. Accordingly, SEBI submitted its draft of the regulatory framework for SSFs to purchase stressed loans to Reserve Bank of India (RBI), which then responded with its requirements for the framework.

The consultation paper by the market regulator proposes amendments to the definition of special situation assets, eligibility of investors in SSFs in terms of Section 29A of IBC, restrictions with regard to investment in connected entities, minimum holding period and subsequent transfer of loans, monitoring of SSFs and supervision of SSFs.  

From a practical perspective, SEBI-registered SSFs are poised to enter the distressed loan market, which is dominated by Asset Reconstruction Companies (ARCs), banks, and finance firms. The proposed move could reshape the stressed asset landscape by attracting foreign capital, given the more flexible regulations and lower capital requirements for AIFs compared to entities regulated by the Reserve Bank of India (RBI). This shift may lead to increased competition, potentially making it challenging for RBI-regulated ARCs to sustain their business model. The introduction of SSFs into this sector is expected to bring in more distressed capital, but concerns about regulatory asymmetry between ARCs and AIFs need addressing for a level playing field.

The SEBI consultation paper is enclosed below and can also be accessed at SEBI website.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

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