SEBI Proposes Changes in Provisions w.r.t Special Situation Funds to Facilitate Acquisition of Stressed Loans

Consultation Paper, Dated 28.11.2023

The Securities Exchange Board of India (SEBI) has released a Consultation Paper on changes in the regulatory framework for Special Situation Funds, a sub-category of Category I Alternative Investment Funds, necessary to facilitate Special Situation Funds to acquire stressed loans in terms of Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021.

In terms of Regulation 19I of AIF Regulations, ‘Special Situation Assets’, inter alia, include securities of investee companies, whose stressed loans are available for acquisition in terms of Clause 58 of the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 or as part of a resolution plan approved under the IBC, 2016 or in terms of any other policy of the RBI or Government of India issued in this regard from time to time.

However, it was felt that a stressed loan under Section 58 of RBI Master Directions cannot be said to be ‘available’ for acquisition since the visibility of the stressed loan for acquisition occurs only after the lenders agree to the resolution plan submitted by the borrower.

The term ‘available for acquisition’ relies on the assumption that at a certain point of time, the stressed loans eligible for transfer in terms of Clause 58 of RBI Master Directions shall be visible to the SSFs.

Consequently, it has been proposed that ‘special situation asset’, inter alia, includes securities of investee companies, whose stressed loans are acquired in terms of Clause 58 of RBI Master Directions. Also, SSFs having prior investment in securities of stressed companies shall not be disqualified/barred from acquiring stressed loans of the said companies.

Further, it has also been proposed that AIF Regulations may be suitably amended to specify that SSFs shall not invest in or acquire a special situation asset if any of its investors is disqualified in terms of Section 29A of IBC in relation to such special situation asset.

Also, Regulation 19M(1) of AIF Regulations would be suitably amended to specify that ‘Special Situation Funds’ shall not invest in its ‘related parties’, the related party shall have the same meaning as given in the Companies Act, 2013. Various other proposals have also been made in the present consultation paper.

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