Sebi: Sebi nods means distressed asset funds can buy bad debt directly from banks

Mumbai: India has recognized Special Situation Funds that invest in distressed assets under the Alternative Investment Fund (AIF) category, potentially attracting billions of dollars from home and abroad to these high-risk opportunities. yield.

Monday’s approval from the Securities and Exchange Board of India (Sebi) means these funds can now bid directly to buy distressed assets from banks, potentially increasing demand and value for those assets.

“It will definitely open the tap for big funds to flow into the distressed asset space in India,” said Srini Sriniwasan, managing director of Kotak Investment Advisors, the alternative investment arm of Kotak Mahindra Group which also runs a billion dollar special situation. funds.

“Many large funds were reluctant to participate in the space because there were restrictions on participation through an asset reconstruction company as they were not allowed to inject additional capital directly into the company. sick,” Sriniwasan explained. “It has been taken care of with this notification. It’s a big step forward and could potentially help banks get better prices for troubled accounts.”

The Sebi circular classified these special situations funds in category 1, which includes infrastructure funds, venture capital funds, social venture capital funds and SME funds, making them a separate category. within the upper level. Until now, these funds for special situations were not classified in any separate category.

Sriniwasan said allowing these funds to buy NPAs directly from banks will contribute to better price discovery for banks and speed up the cleanup of bad debts. Until now, these funds had to partner with an asset reconstruction company registered with the Reserve Bank of India (RBI) for the business of buying and selling loans and had special collection powers like the use of SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement Act).

Sebi’s move follows a central bank notification in September that allowed regulated entities to buy and sell bad debt, provided they had permission from their own regulators. The Sebi notification specifically allows such funds to invest only in special circumstances assets and to act as resolution seekers under the Insolvency and Bankruptcy Code 2016. In addition, it will allow such funds to buy bad debt directly from the new National Asset Reconstruction Company Ltd. (NARCL), giving them a leg up on asset reconstruction companies.

With the move, deep-pocketed funds in developed markets could consider buying distressed loans in a bid to recover or restructure. However, asset reconstruction companies still have special recovery powers through the use of SARFAESI.

“Special situation funds registered under the new AIF guidelines now play a more proactive role in the distressed asset ecosystem. However, ARCs have a well-established resolution framework,” said Hari Hara Mishra, Director, UV ARC Ltd. “They can issue negotiable securities.

Sriniwasan said Sebi’s move will increase competition for a slice of the bad debt market. “For banks, it just means better prices. They can expect better and higher offers, which is good for bad debt resolution,” he said.

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