Three people aware of the matter told ET that the Securities and Exchange Board of India (Sebi) has given its recommendations on SSFs to the Reserve Bank of India (RBI) and the Finance Ministry in the form of a letter.
“If Special Situation Funds are accorded the status of secured creditors, it will enable them with a higher say in any insolvency resolution plan,” said Sriram Krishnan, managing director, Deutsche Bank India. SSFs will then be potentially more comfortable while betting on distressed assets as they will be prioritised in terms of return of dues in case the company goes down. Also, they could likely have voting rights, another key positive,” he said.
SSFs are funds that pool money from institutions and ultra-wealthy individuals and invest in stressed assets. They are registered as Alternative Investment Funds (AIFs) with Sebi.
Giving secured creditor status will allow the SSFs to participate more actively in the resolution processes. It also gives them the power to vote on various resolutions of a stressed company – on a par with other creditors such as banks. To give them secured creditor status, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) needs to be amended.
“Encouraging special situation funds will help expand investor base and aid in stressed asset resolution,” said Amit Agarwal, head, Edelweiss Special Situations Strategy. “If SSFs are further allowed to acquire debt outside the bankruptcy process in normal course through the assignment of debt, it could lead to a larger market size for stressed asset sales.”
The law is regulated by both the government and the banking regulator, experts say.
Emails to Sebi, the Finance Ministry and RBI remained unanswered.
Besides SSFs, asset reconstruction companies (ARCs) also operate as financial investors for stressed assets. However, ARCs are already considered ‘secured creditors’ under the law and can buy stressed assets more freely. Market participants say there is a growing clamour among SSFs to be treated on a par with ARCs and other institutions buying stressed assets.
The development is part of Sebi’s plans to create a favourable regulatory environment for SSFs. Sebi earlier asked its internal advisory committee to propose easier rules for SSFs.
In the board meeting dated December 28, 2021, Sebi passed several of the recommendations given by its advisory committee. Sebi created a special sub-category under Category I AIFs for funds that look to invest exclusively in such stressed assets.
These funds were exempted from having to adhere to investment concentration norms. Curbs on investment limits on unlisted securities also eased.
“Some of the crucial recommendations given by Sebi’s committee were beyond the regulatory domain of Sebi and hence the regulator decided to give its recommendations to the relevant regulators,” said a person with direct knowledge of the matter. “Apart from secured creditor status, Sebi has also given suggestions on matters such as taxation of these funds and monitoring of their investments.”
