The Securities and Exchange Board of India (‘SEBI’), in a Board Meeting on December 28, 2021 has, inter alia approved amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) to introduce a new sub-category of Category I Alternative Investment Funds, namely Special Situation Funds (‘SSFs’), which will invest only in ‘stressed assets’.
The Press Release for the Board Meeting (‘Press Release’) notes that ‘stressed assets’ will include the following:
i. stressed loans available for acquisition in terms of the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘RBI Directions’) or as part of a resolution plan approved under Insolvency and Bankruptcy Code, 2016;
ii. security receipts issued by Asset Reconstruction Companies (‘ARC’);
iii. securities of ‘companies in distress’; and
iv. any other asset/security as may be prescribed by SEBI from time to time.
The Press Release also notes that SEBI has approved additional features of the regulatory framework for SSFs, including the following:
i. exemptions from the investment concentration norm in a single investee company;
ii. no restriction on investing investible funds in unlisted and listed securities of the investee company;
iii. minimum investment of INR 10 crore by an investor and INR 5 crore by an accredited investor;
iv. minimum corpus of INR 100 crore; and
v. initial and continuous due diligence requirements mandated by the Reserve Bank of India for investors in ARCs will also be applicable to SSFs while acquiring stressed loans pursuant to the RBI Directions, which mandate periodical valuation in terms of net asset value, asset classification, etc.
These amendments will introduce a much-needed alternative route for investment in stressed companies in India beyond the ARC route, which while effective, was proving commercially restrictive. In particular, the ability for Alternative Investment Funds to invest in loans is a significant and welcome change and is the key game changer for offshore investors in Indian stressed assets.