Special Situation Funds should not be used to circumvent Section 29A of IBC: Sebi
The Securities and Exchange Board of India (SEBI) has proposed stricter due diligence requirements for investors in Special Situation Funds (SSFs). The proposed amendments are aimed at ensuring that SSFs are not used to circumvent the disqualification provisions under Section 29A of the Insolvency and Bankruptcy Code (IBC).
Current requirements
Under the current regulations, SSFs are required to comply with the same due diligence requirements for their investors as those mandated by RBI for investors in Asset Reconstruction Companies (ARCs). However, SEBI has proposed to amend the regulations to specifically require SSFs to verify that none of their investors are disqualified under Section 29A of the IBC.
Rationale for the Proposed Amendments
SEBI has stated that the proposed amendments are necessary to prevent SSFs from being used to channel funds to investors who are disqualified from participating in the resolution of stressed assets under the IBC. Section 29A of the IBC disqualifies certain individuals and entities from participating in the resolution of stressed assets, including those who have been convicted of fraud or other financial crimes.
It must be noted that special situation funds were introduced in 2022 as a new sub-category of Category I AIFs which will invest in special situation assets including stressed loans.
Other key proposed amendments
- Definition of ‘Special Situation Asset’: The definition of ‘special situation asset’ will be amended to include securities of investee companies whose stressed loans are acquired in terms of Clause 58 of the RBI Master Directions.
- Restrictions with Regard to Investment in Connected Entities: SSFs will not be allowed to invest in their ‘related parties’, wherein related party shall have the same meaning as given in the Companies Act, 2013.
- Minimum Holding Period and Subsequent Transfer of Loans: SSFs will be required to hold stressed loans acquired in terms of Clause 58 of the RBI Master Directions for a minimum period of six months. After the lock-in period, SSFs will only be permitted to sell the loans to entities enlisted in the Annex of RBI Master Directions.
- Monitoring of SSFs: SSFs will be required to submit information to a trade reporting platform notified by RBI, as may be specified by SEBI in consultation with RBI from time to time. SSFs will also submit to RBI any information as may be required by RBI.
- Supervision of SSFs: SSFs will be subject to a dedicated supervisory framework as may be specified by SEBI, in consultation with RBI, from time to time.
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