6 Mastering the Maze: A Comprehensive Guide to the Norms for Special Situation Funds"

Key Takeaways:

- SSFs must maintain a minimum corpus of ₹100 crore.

- Minimum investment thresholds are set at ₹10 crore for general investors, ₹5 crore for accredited investors, and ₹25 lakh for employees or directors of the SSF or its manager.

- SSFs intending to act as resolution applicants under the Insolvency and Bankruptcy Code, 2016 must comply with the eligibility requirements outlined therein.

- Stressed loans acquired by SSFs are subject to a minimum lock-in period of six months, except in cases of recovery from the borrower.

- SSFs acquiring stressed loans must adhere to the same due diligence requirements for investors as those mandated for Asset Reconstruction Companies by the Reserve Bank of India.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has established a comprehensive set of norms to govern the operations of Special Situation Funds (SSFs), a unique category of Alternative Investment Funds (AIFs) designed to invest in distressed assets and facilitate resolution processes under the Insolvency and Bankruptcy Code, 2016.

Minimum Corpus Requirement:

As per SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2022/009 dated January 27, 2022, each scheme of an SSF must maintain a minimum corpus of ₹100 crore. This requirement ensures that SSFs have sufficient financial resources to undertake their specialized investment activities.

Investment Thresholds:

The circular further stipulates minimum investment thresholds for different categories of investors. General investors must commit a minimum of ₹10 crore, while accredited investors are required to invest at least ₹5 crore. For employees or directors of the SSF or its manager, the minimum investment threshold is set at ₹25 lakh.

Eligibility for Resolution Applicants:

SSFs intending to act as resolution applicants under the Insolvency and Bankruptcy Code, 2016 must ensure compliance with the eligibility requirements outlined in the code. This provision aims to maintain the integrity of the resolution process and ensure that SSFs have the necessary qualifications to undertake such responsibilities.

Lock-in Period for Stressed Loan Acquisitions:

The circular addresses the acquisition of stressed loans by SSFs in accordance with Clause 58 of the Master Direction - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021. Any investments made by SSFs in stressed loans acquired under this provision are subject to a minimum lock-in period of six months. However, this lock-in period does not apply in cases where the SSF recovers the stressed loan from the borrower.

Due Diligence Obligations for Investors:

SSFs acquiring stressed loans under the RBI Master Direction must comply with the same initial and continuous due diligence requirements for their investors as those mandated for investors in Asset Reconstruction Companies by the Reserve Bank of India. This measure ensures that SSFs maintain rigorous investor screening processes, aligning with industry best practices.

The norms outlined by SEBI provide a robust regulatory framework for SSFs, enabling them to navigate the complex landscape of distressed asset investments and resolution processes effectively. By adhering to these guidelines, SSFs can contribute to the efficient resolution of stressed assets while maintaining transparency and accountability in their operations.

FAQs

Q1: What is the rationale behind the minimum corpus requirement for SSFs?

A1: The minimum corpus requirement of ₹100 crore is designed to ensure that SSFs have sufficient financial resources to undertake their specialized investment activities, which often involve complex and capital-intensive transactions related to distressed assets.

Q2: Why are there different minimum investment thresholds for different categories of investors?

A2: The varying minimum investment thresholds reflect the diverse risk profiles and investment capacities of different investor categories. Higher thresholds for general investors and lower thresholds for accredited investors and employees/directors of the SSF or its manager aim to strike a balance between accessibility and risk management.

Q3: What is the significance of the lock-in period for stressed loan acquisitions?

A3: The lock-in period of six months for stressed loan acquisitions under the RBI Master Direction is intended to promote long-term investment strategies and discourage speculative trading in distressed assets. It also aligns with the broader objective of facilitating the resolution of stressed assets through patient and committed investment approaches.

Q4: Why do SSFs need to comply with due diligence requirements for investors similar to those mandated for Asset Reconstruction Companies?

A4: Aligning the due diligence requirements for SSF investors with those of Asset Reconstruction Companies ensures a consistent and rigorous approach to investor screening. This measure aims to maintain the integrity of the investment process and mitigate potential risks associated with distressed asset investments.

Key Precedents:

1. SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2022/009 dated January 27, 2022:

This circular established the norms for Special Situation Funds, including the minimum corpus requirement, investment thresholds, and eligibility criteria for acting as resolution applicants under the Insolvency and Bankruptcy Code, 2016.

2. Master Direction - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021:

The circular refers to Clause 58 of this RBI Master Direction, which governs the acquisition of stressed loans by SSFs. The lock-in period and due diligence requirements for investors are derived from this directive.

3. Insolvency and Bankruptcy Code, 2016:

The circular acknowledges the role of SSFs as potential resolution applicants under this code and mandates compliance with the eligibility requirements outlined therein.

The norms for Special Situation Funds, as outlined in the SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2022/009 dated January 27, 2022, draw upon and align with existing regulatory frameworks, such as the RBI Master Direction and the Insolvency and Bankruptcy Code, 2016. This integration ensures a cohesive and comprehensive approach to governing the operations of SSFs within the broader financial ecosystem.

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Here's AIF Master Circular's verbatim chapter 6.

Chapter 6 - Norms for Special Situation Funds (SSF){24}

6.1. Each scheme of SSF shall have a corpus of at least one hundred crore rupees.

6.2. SSF shall accept an investment of value not less than ten crore rupees from an investor. In case of an accredited investor, the SSF shall accept an investment of value not less than five crore rupees. 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 twenty-five lakh rupees.

6.3. SSF intending to act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 shall ensure compliance with the eligibility requirement provided thereunder.

6.4. Further, in respect of SSF acquiring stressed loan in terms of Clause 58 of the Master Direction - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘RBI Master Direction’), the following is specified:

6.4.1. SSF may acquire stressed loan in terms of clause 58 of RBI Master Direction upon inclusion of SSF in the respective Annex of the RBI Master Direction.

6.4.2. Stressed loan acquired by SSF in terms of clause 58 of the RBI Master Direction 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 the borrower.

6.4.3. SSF acquiring stressed loans in terms of the RBI Master Direction shall comply with the same initial and continuous due diligence requirements for its investors, as those mandated by RBI for investors in Asset Reconstruction Companies.

Note:-

{24}SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2022/009 dated Jan 27, 2022