Sebi proposes changes in Special Situation Funds to facilitate acquisition of stressed assets
Sebi proposes changes in Special Situation Funds to facilitate acquisition of stressed assets
In a comprehensive consultation paper, the regulatory authority has proposed a nuanced delineation of ‘special situation assets’ (SSAs) along with corresponding eligibility criteria for investors within the framework of insolvency law.
This initiative seeks to establish a robust foundation for Special Situation Funds (SSFs) by addressing key aspects such as the nature and identification of SSAs, the insolvency law framework dictating investor eligibility, limitations on investments in entities with direct connections, prescribed minimum holding periods, and regulations pertaining to subsequent transfers of loans.
The proposed definition of ‘special situation assets’ aims to encapsulate a diverse range of financial instruments or assets that exhibit unique characteristics warranting specialized treatment within the ambit of SSFs. This delineation serves as a crucial starting point for the development of a structured and effective regulatory framework.
Eligibility criteria for investors are intricately linked to insolvency laws, ensuring alignment with established legal frameworks governing financial distress. This inclusion underscores the regulator’s commitment to maintaining a balance between encouraging investor participation in SSFs and upholding the integrity of insolvency proceedings.
In addressing the intricacies of connected entities, the consultation paper introduces restrictions on investments to mitigate potential conflicts of interest and promote transparency. By imposing limitations on such transactions, the regulatory framework aims to prevent undue influence or biased decision-making, safeguarding the overall integrity of SSFs.
The stipulated minimum holding period serves as a protective measure, intending to discourage short-term speculative activities and promote a more long-term, strategic approach among investors in SSFs. This temporal constraint contributes to the overall stability and sustainability of the funds.
Furthermore, the consultation paper outlines regulations governing the subsequent transfer of loans within SSFs, ensuring that such transactions adhere to specified guidelines. This measure aims to prevent any unwarranted risks associated with the transfer of financial instruments and contributes to the overall risk management framework of SSFs.
In facilitating Special Situation Funds (SSFs) to effectively acquire stressed loans, the regulatory proposal advocates for the inclusion of these funds in a designated annexure overseen by the Reserve Bank of India (RBI) specifically addressing the transfer of loan exposure. This strategic integration aims to provide a formalized platform within the regulatory framework, streamlining and overseeing the acquisition process for stressed loans by SSFs.
To bolster the integrity of SSFs and align with the principles of the Insolvency and Bankruptcy Code (IBC), the regulatory framework emphasizes a stringent criterion. SSFs are precluded from investing in or acquiring special situation assets if any of their investors are disqualified under the IBC regulations concerning such assets. This careful alignment with IBC rules ensures that investors associated with SSFs adhere to the established norms governing special situation assets, contributing to the overall prudence and legality of investment activities within the fund.
Additionally, the regulatory proposal underscores the importance of preventing conflicts of interest and maintaining transparency within SSFs. In this vein, SSFs are discouraged from investing in entities categorized as their ‘related parties.’ This preventative measure serves to mitigate potential biases, undue influence, or preferential treatment that may arise when dealing with connected entities, thereby safeguarding the fair and equitable functioning of SSFs.
By enforcing these provisions, the regulatory framework seeks to create a conducive environment for SSFs to engage in the acquisition of stressed loans, ensuring that such activities are conducted within the bounds of regulatory compliance and ethical business practices. The collaborative effort between SSFs, the RBI annexure, and the adherence to IBC rules collectively contribute to a well-defined and monitored landscape for the acquisition of stressed assets, fostering financial stability and integrity within the broader economic framework.
The proposed regulatory framework for Special Situation Funds (SSFs) advocates for enhanced transparency and oversight through the mandatory submission of information to a trade reporting platform designated by the Reserve Bank of India (RBI). This reporting requirement encompasses comprehensive details related to investments in stressed loans, including specifics about units issued, changes in unit holdings by investors over time, implemented resolution strategies, and the recoveries achieved.
The consultation paper further recommends specific financial thresholds for SSFs to ensure their robustness and effectiveness. Each scheme under an SSF is proposed to have a minimum corpus of at least one hundred crore rupees. This sizable corpus is envisioned to provide the necessary financial strength and resilience to undertake substantial investments in stressed assets, contributing to the overall stability and viability of the fund.
In delineating the investment criteria, the proposed framework outlines that SSFs should accept a minimum investment of ₹10 crore from investors, emphasizing a substantial commitment from participants. For accredited investors, a category that typically represents sophisticated and financially capable entities, the minimum investment requirement is set at ₹5 crore, reflecting a recognition of their enhanced investment capacity and risk appetite.
To address potential conflicts of interest and maintain ethical investment practices, the framework establishes specific criteria for employees or directors associated with the SSF. In such cases, the minimum investment value is set at twenty-five lakh rupees, acknowledging the affiliation of these investors with the SSF or its manager.
These stipulations collectively aim to instill a sense of financial robustness, transparency, and responsible investment practices within the SSF framework. The reporting requirements to the RBI’s designated platform ensure that pertinent information is readily available for regulatory scrutiny, contributing to the broader goal of fostering a well-regulated and accountable environment for SSFs and their stakeholders.
In January 2022, the Securities and Exchange Board of India (SEBI), the country’s market regulator, unveiled a comprehensive framework for Special Situation Funds (SSFs), a novel sub-category under Category I Alternative Investment Funds (AIFs). This innovative regulatory move comes in response to the formidable challenges posed by stressed loans within the Indian financial system. The intricate nature of stressed assets has necessitated a proactive approach, prompting SEBI to explore the potential of AIFs as a vital source of risk capital. The primary objective is to augment the ongoing efforts of Asset Reconstruction Companies (ARCs) in addressing the complexities associated with stressed loans.
SEBI’s recognition of the need for significant capital infusion in banks, non-banking financial companies (NBFCs), and other financial entities underscores the urgency and importance of finding effective solutions to the challenges posed by stressed assets. By introducing SSFs as a specialized sub-category under Category I AIF, the regulator aims to create a dedicated avenue for deploying risk capital in a manner that complements the endeavors of ARCs. This strategic alignment is poised to contribute to the resolution of stressed loans, thereby fostering financial stability and recovery within the broader economic landscape.
In a transparent and consultative approach, SEBI has invited public comments on the proposed framework until December 27. This inclusive step allows for input and perspectives from various stakeholders, ensuring that the regulatory framework is well-informed and reflective of the diverse considerations in the financial sector. Moreover, the collaborative nature of the proposal is underscored by SEBI’s prior consultations with the Reserve Bank of India (RBI), the principal regulator overseeing the sale and purchase of stressed loans in the country. This collaborative effort signifies a coordinated approach among regulatory bodies to address the multifaceted challenges posed by stressed assets in the Indian financial system.
In essence, the introduction of the SSF framework represents a proactive and collaborative response to the pressing issues associated with stressed loans. The solicitation of public comments further reinforces SEBI’s commitment to inclusive and transparent regulatory practices, ensuring that the final framework is well-grounded and responsive to the evolving dynamics of the financial landscape.
