SEBI Introduces Special Situation Funds: Opens doors for acquisition of stressed loans without ARC intermediation

One of the biggest challenges faced by offshore funds wanting to invest in bad loans in India was necessary intermediation by a third party Asset Reconstruction Company (ARC). In most cases, the structure involved the ARC sponsoring and managing an asset reconstruction trust (ART), which acquired such bad loans from the funds received by the issue of security receipts. Setting up an in- house ARC wasn’t feasible in most cases due to high regulatory requirements such as capital adequacy norms – most likely driven by the regulatory intent that ARCs should rather act as asset managers for ARTs than manage assets on their own books. ARCs and SR holders were also not always aligned on the governance and enforcement mechanics of the loans acquired. Offshore investors therefore pressed for a regime that allowed them to invest without the need for intermediation by an ARC.

Key Takeaways:
  • Special Situation Funds (SSF) have been launched Category – 1 AIF for sophisticated investors 
  • Offshore investors no longer have to rely on an Asset Reconstruction Company / Asset Reconstruction Trust framework to invest in stressed assets
  • 25% diversification requirement not applicable to SSF
  • Ability to buy loans directly, not restricted to ‘securities’
  • Edge over ARTs – allowed to act as resolution applicants in IBC, acquire uncapped equity of stressed borrowers, and no FPI registration required to invest

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