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Special Situation Funds: Funds into asset reconstruction business

Aanchal Kaur Nagpal (Assistant Manager) | Parth Ved (Executive)

finserv@vinodkothari.com

Introduction

The intent behind asset reconstruction is not merely concerned with realisation of bad loans but also ‘reconstruction’, that is, to try and resurrect bad loans or bad borrowers into good ones. This almost always leads us to one name i.e. Asset Reconstruction Companies (‘ARCs’). Today, financial institutions are eager to sell their non-performing assets to clean-up their books while stressed companies find ways to get access to capital to anchor themselves. The Indian financial sector is known to be laden financial entities struggling to survive with their mammoth stressed assets. The COVID-19 pandemic has only added fuel to the fire. As at September, 2021, GNPA of banks was at INR 4,53,145 crore and that of the top 30 NBFCs, including HFCs stood at around INR 84,000 crore. Out of these loans, In 2019-20, the amount recovered as per cent of the amount involved under IBC was 45.5 per cent, followed by 26.7 per cent for ARCs. While the amount recovered through ARCs as per cent of amount involved was significantly higher in the initial years of their inception, in the recent years, it has dipped below 30 per cent except for a spurt in 2017-18.

Securities and Exchange Board of India (‘SEBI’) on January 24, 2022[1] along with its circular dated January 27, 2022[2], has further widened the NPA market to a specifically dedicated class of AIFs called Special Situation Funds (‘SSFs’), that shall exclusively invest in the distressed asset market. The intent behind the same is to use these cash-filled alternative funds to supplement ARCs in acquiring such stressed assets and aid banks and other financial institutions to release critical money choked up in such assets. AIFs are currently already permitted to invest in security receipts of ARCs and/ or invest in securities of distressed companies, however, SSFs will be additionally permitted to even acquire stressed loans. These SSFs also have been granted additional exemptions/ benefits over and above regular AIFs to facilitate stressed asset resolution.

This article attempts to cover the adoption of the concept of SSF from the global markets, and the characteristics of this peculiar kind of investing. Read more