SEBI amends the AIF Regulations to pave way for introduction of Special Situation Funds

SEBI has enacted the “Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2022”, vide a notification dated 24 January 2022, to amend the AIF regulations, which inter alia provides for a framework for Special Situation Funds (“SSFs”) as a new sub-category of Category I AIF. SSFs will invest only in “special situation assets” (stressed assets/loans/NPAs).

The amendment is viewed as part of the continuous and consistent efforts of the government to address the issue of the large number of stressed loans and NPAs plaguing the banking system. Further, it will act as an alternative mode for investment in stressed companies, apart from the traditional ARC route. The ability of AIFs to invest in loans is a welcome step and may prove to be significant. As per experts, the exemption of SSFs from the investment limit in a single investee company and no restriction on investing in listed and unlisted securities of an investee company, will provide more leeway to investors to manager their investments and help bring more domestic investors into play.

Key highlights:

1.   The requirement of filing of placement memorandum through a merchant banker, has been done away with for large value funds with accredited investors.

2.   Under sub-categories of Category I AIF, a new category called Special Situation Funds has been introduced and Chapter IIIB has been inserted to provide a framework for the same.

3.   “Special Situation Fund” has been defined as a Category I AIF that invests in special situation assets in accordance with its investment objectives. It is also stated that a SSF may act as a resolution applicant under the IBC, 2016.

4.   “Special Situation Asset” includes

(i)        stressed loans available for acquisition in terms of Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“RBI Master Direction”) or as part of a resolution plan approved under the IBC, 2016;

(ii)       security receipts issued by Asset Reconstruction Companies (ARC);

(iii)      securities of investee companies;

(a)        whose stressed loans are available for acquisition in terms of the RBI Master Direction or as part of a resolution plan approved under the IBC, 2016;

(b)        against whose borrowings, security receipts have been issued by ARCs;

(c)        whose borrowings are subject to corporate insolvency resolution process under IBC, 2016;

(d)        who have disclosed all defaults relating to payment of interest/repayment of principal amount on loans from banks/financial institutions/NBFCs and/or listed or unlisted debt securities in terms of SEBI (ICDR) Regulations and such payment default is continuing for a period of at least ninety calendar days after the occurrence of such default;

(iv)     any other asset as may be prescribed by SEBI from time to time.

5.   Following are the conditions attached to SSFs:

(i)        SSF is exempt from the investment concentration limit (25% of investible funds; and in case of large value funds for accredited investors, 50% of investible funds) in a single investee company. Further, there is no restriction of investing investible funds in listed and unlisted securities of an investee company.

(ii)       Each scheme of SSF shall have a corpus of minimum 100 (hundred) crore rupees. Minimum investment from an investor shall be ten (10) crore rupees. In case of an accredited investor, minimum investment shall be 5 (five) crore rupees. For investors who are employees or directors of the SSF or employees or directors of the manager of the SSF, minimum investment shall be 25 (twenty-five) lakh rupees. This is higher than the minimum investment requirement for other categories of AIFs (1 crore) and Angel Funds (25 lakhs).

(iii)      SSF cannot accept investment from any other AIF other than a SSF.

(iv)     SSF shall invest only in special situation assets and may act as a resolution applicant under IBC, 2016.

(v)       SSF cannot invest in: (a) its associates; (b) units of any other AIF other than the units of a SSF; (c) units of SSFs managed or sponsored by its manager, sponsor or associates of its manager or sponsor

(vi)     SSF may acquire stressed loan in terms of Clause 58 of the RBI Master Director upon its inclusion in the respective annex of the RBI Master Direction.

(vii)    Stressed loan acquired in point

(vi) above shall be subject to a minimum lock-in period of 6 (six) months. However, the lock-in will not apply in case of recovery of the stressed loan from the borrower.

(viii)   Initial and continuous due diligence requirements mandated by the RBI for investors in ARCs will also be applicable to SSFs when acquiring stressed loans in terms of the RBI Master Direction.

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