In order to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, The Securities and Exchange Board of India ("SEBI') has vide its notification dated 24 January 2022 amended the SEBI (Alternative Investment Funds) Regulations, 2012. ("AIF Amendment Regulations"). Under the AIF Amendment Regulations, SEBI has introduced the concept of Special Situation Funds ("SSFS"). Subsequently, SEBI issued the circular dated 27 January 2022 ("Circular")1 in order to provide clarity to the SSF framework.
The AIF Amendment has introduced a new Chapter III-B for governing SSF. This Chapter shall be applicable to special situation funds and schemes launched by SSFS2. The following concepts and amendments introduced by SEBI under the AIF Amendment Regulations:
- Definition of SSF: SSF have been categorized as Category-I Alternative Investment Fund ("AIF"). SSFS will invest only in special situation assets in accordance with its investment objectives and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 20163 ("IB Code").
Special situation asset is defined4 to include the following:
(a) Stressed loan available for acquisition in terms of Clause 58 of Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 as amended from time to time or as part of a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 or in terms of any other policy of the Reserve Bank of India or Government of India issued in this regard from time to time;
(b) Security receipts issued by an Asset Reconstruction Company registered with the Reserve Bank of India;
(c) Securities of investee companies:
(i) 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 IB Code or in terms of any other policy of the Reserve Bank of India or Government of India issued in this regard from time to time;
(ii) against whose borrowings, security receipts have been issued by an Asset Reconstruction Company registered with the Reserve Bank of India;
(iii) whose borrowings are subject to corporate insolvency resolution process under Chapter II of the IB Code;
(iv) who have disclosed all the defaults relating to the payment of interest/ repayment of principal amount on loans from banks / financial institutions/ Systemically Important Non-Deposit taking Non-Banking Financial Companies/ Deposit taking Non-Banking Financial Companies and /or listed or unlisted debt securities in terms of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and such payment default is continuing for a period of at least ninety calendar days after the occurrence of such default:
Provided that in case of sub-clauses (iii) and (iv), the credit rating of the financial instruments or credit instruments or borrowings of the company has been downgraded to "D" or equivalent;
(d) Any other assets as may be specified by SEBI.
- Registration: In order to act as an SSF, an applicant may apply for registration in accordance with the provisions of Chapter II of the AIF Regulations, 20125.
- Investment by SSF: As per the AIF Regulation, SSF shall invest only in special situation assets and may act as a resolution applicant under the IB Code.
The SSF is not allowed to invest in (i) its associates, (ii) the units of any other Alternative Investment Fund other than the units of a special situation fund; or (iii) units of SSF managed or sponsored by its manager, sponsor or associates of its manager or sponsor6.
- Investment in SSF: The Circular specifies the following conditions for investment in SSF7:
(a) Each scheme of SSF shall have a corpus of at least one hundred crore rupees.
(b) SSF shall accept an investment of value not less than ten crore rupees from an investor. In case of an accredited investor, the SSF shall accept an investment of value not less than five crore rupees. Further, in case of investors who are employees or directors of the SSF or employees or directors of the of the manager of the SSF, the minimum value of investment shall be twenty-five lakh rupees.
(c) SSF intending to act as a resolution applicant under the IB Code shall ensure compliance with the eligibility requirement provided under Insolvency Law.
- SSF acquiring stressed loan: In respect of SSF acquiring stressed loan in terms of Clause 58 of the Master Direction –Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 ('RBI Master Direction') the following is specified in the Circular8:
- SSF can acquire stressed loans in terms of terms of Clause 58 of the RBI Master Direction upon inclusion of SSF in the respective Annex of the Master Direction.
- Stressed loan acquired by SSF in terms of Clause 58 of the RBI Master Direction shall be subject to minimum lock-in period of 6 (six) months. However, the lock-in period shall be inapplicable in case of recovery of stressed loan from the borrower;
- SSF acquiring stressed loans in terms of the Direction shall comply with the same initial and continuous due diligence requirements for its investors, as those mandated by RBI for investors in Asset Reconstruction Companies.
Comments: In order to rescue stressed businesses and to protect the interests of investors, the Government of India is making increased efforts to provide methods to rescue businesses under financial distress. We believe that this is a good step towards the intended goal, and the AIF Amendment Regulations will benefit in the rescue of businesses and stressed assets before the occurrence of any actual financial default.
1 SEBI CIRCULAR: SEBI/HO/IMDI/DF6/P/CIR/2022/009.
2 Chapter III-B Regulation 19J (1) of the AIF Amendment Regulation.
3 Chapter III-B Regulation 19I (3) of the AIF Amendment Regulation.
4 Chapter III-B Regulation 19 I (2) of the AIF Amendment Regulation.
5 Chapter III-B Regulation 19 K of the AIF Amendment Regulation.
6 Chapter III-B Regulation 19 M of the AIF Amendment Regulation.
7 Paragraph 2 of the Circular.
8 Paragraph 3 of the Circular.
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