On 24th January 2022, the Securities and Exchange Board of India (“SEBI“/ “Board“) published the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2022 (“AIF Regulations Amendment 2022“/ “Regulations“)1 to be read together with SEBI Circular dated January 27, 2022 (“Circular“)2 through which SEBI introduced the Special Situation Funds (“SSFs”) for investment in stressed assets.
The Regulations provide a framework for a new category of AIFs viz., SSFs by amending Regulation 3 and Regulation 12 of the Principal Regulations. Further, Chapter–III-B has also been inserted which inter alia specifies various definitions, the applicability, registration process, and investment norms relating to SSFs.
Last year in its board meeting held on 28 December 2021, SEBI decided to introduce SSFs as a new sub-category under Category I AIF, which shall invest only in ‘special situation asset’/ ‘stressed assets‘ and the same was made effective by way of amending the existing Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“Principal Regulations”). In a press release after the said board meeting, SEBI stated that SSFs can invest in stressed assets such as stressed loans available for acquisition in terms of Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“RBI Master Directions”)3, or as part of a resolution plan approved under the Insolvency and Bankruptcy Code, 2016. Stressed assets have been defined to inter-alia include stressed loans available for acquisition, security receipts issued by asset reconstruction companies and securities of companies in distress.
Vide the Circular, SEBI has specified the following provisions/ features in relation to SSFs:
- SSFs will be exempted from investment concentration norm in a single investee company and there will be no restriction on investing their investible funds in unlisted or listed securities of the investee company.
- Further, minimum investment by an investor shall be Rs 10,00,00,000/- (Rupees Ten crores only) and Rs. 5,00,00,000/- (Rupees Five crores only) in case of an accredited investor, and the minimum corpus shall be of Rs 100,00,00,000/- (Rupees One Hundred crores only).
- Further, in case of investors who are employees or directors of the SSF or employees or directors of the manager of the SSF, the minimum value of investment shall be Rs. 25,00,000/- (Rupees Twenty-five lakhs only).
- The Circular also provides that in case a SSF is intending to act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016, then it shall ensure compliance with the eligibility requirement provided thereunder.
- Further, in respect of SSFs acquiring stressed loans in terms of Clause 58 of the RBI Master Directions, the following has been specified:
- SSFs may acquire stressed loans upon inclusion of SSFs in the respective annexure of the RBI Master Directions.
- Stressed loans acquired by SSFs shall be subject to a minimum lock-in period of six months. The lock in period shall not be applicable in case of recovery of the stressed loan from a borrower.
- SSFs acquiring stressed loans shall comply with the same initial and continuous due diligence requirements for its investors, as those mandated by Reserve Bank of India for investors in Asset Reconstruction Companies.
Amendments in the Principal Regulations:
- Special Situation Funds have found their place under Category I Alternative Investment Fund defined under clause (a) of sub-regulation (4) of Regulation 3 of the Principal Regulations which shall mean a Category 1 Alternative Investment Fund that invests in special situation assets in accordance with its investment objectives and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016.
- A proviso has been added after sub-clause 3 of Regulation 12 in the following manner-
- “Provided that the requirements under sub-regulation (2) and (3) shall not apply to large value fund for accredited investors.”
- The rationale of the Board behind this insertion is that pursuant to sub-regulation (1) of Regulation 12 of the Principal Regulations, the AIF can file the memorandum directly with the Board and shall not be required to comply with the requirements of sub-regulation (2) and (3) of Regulation 12 of the Principal Regulations.
- As per the amendment, a new chapter III-B has also been notified on Special Situation Funds. The said Chapter III-B provides for the definitions of ‘resolution applicant’, ‘special situation asset’ and ‘special situation fund’ vide Regulation 19I (Definitions) of the Regulations.
- The term “resolution applicant” shall have the same meaning as assigned to it under the Insolvency and Bankruptcy Code, 2016.
- The definition of “special situation asset” includes:
- stressed loan available for acquisition in terms of Clause 58 of the RBI Master Directions 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;
- security receipts issued by an Asset Reconstruction Company registered with the Reserve Bank of India;
- securities of investee companies;
- Any other asset as may be specified by the Board from time to time.
- Under Regulation 19J (Applicability), the provisions of this Chapter III-B shall apply to Special Situation Funds and schemes launched by such special situation funds.
- Under Regulation 19K (Registration), an applicant may apply for registration as a special situation fund in accordance with the provisions of Chapter II of Principal Regulations.
- Regulation 19L provides for Investment in SSFs and it states as follows:
- Each scheme of a special situation fund shall have a corpus as may be specified by the Board.
- The special situation fund shall accept from an investor, an investment of such value as may be specified by the Board.
- The special situation fund shall not accept investments from any other Alternative Investment Fund other than a special situation fund.
- Under Regulation 19M (Investment by SSF), Special situation funds shall invest only in special situation assets and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016; Provided that the special situation fund shall not invest in:
- its associates; or
- the units of any other Alternative Investment Fund other than the units of a special situation fund; or
- units of special situation funds managed or sponsored by its manager, sponsor or associates of its manager or sponsor.
- The said Regulations have also paved a way for the SSFs for making an application for Grant of Certificate of Registration as Alternative Investment Fund by adding “Category I Alternative Investment Fund – Special Situation Fund” under sub-clause (e) of clause 1 of Form A of the First Schedule of the Principal Regulations.
In conclusion, Special Situation Funds shall invest only in special situation assets and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016. The main aim of this amendment is to introduce the concept of Special Situation Funds as a new Category I AIF along with other Category I AIFs. It appears that this amendment assumes significance against the backdrop of continuing efforts to address the issue of monetizing the stressed assets in the economic system and provides added avenues for redressal of stressed companies.
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