Introduction of SSFs : A game changer for Indian Insolvency Regime

INTRODUCTION

On January 27, 2022 , Securities and Exchange Board of India (SEBI) released a circular notifying the salient features of SSFs which are a class of AIFs to exclusively deal with distressed asset market with the motive to help the financial institutions release the money stuck in the stressed assets by reducing the load of ARCs in acquiring such stressed assets and facilitating the process. The circular mentions that the schemes of SSF have a corpus of at least One Hundred Crore rupees and if it intends to act as a resolution applicant, it shall comply with the eligibility requirements as specified under the Insolvency and Bankruptcy Code, 2016. Moreover, it may acquire stressed loan in terms of Clause 58 of the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“RBI Master Direction”)

Security Exchange of India[Image Source: Freepic]

UNLOCKING INVESTMENT IN DISTRESSED DEBT MARKET

Countries around the world has been recognizing the concept of investing in SSFs for a while now, especially USA. Special situation investing means investing during a specific occurrence/event which can be during the time of distress, delisting, merger, liquidity issues etc. Distress debt investing is one such branch of special situation investing and is also called Vulture Investing denoting the investors/vultures who specifically aim for investing in distressed debts and securities to buy them at extremely low prices in the secondary market and utilize several means to obtain a price higher than the purchase amount from these assets.

The Indian financial system has been suffering due to its persistent bad debt problem as many financial institutions are readily selling their Non-Performing Assets creating a system with financial institutions not able to deal with their stressed assets. A greater amount of bad debt necessitates a greater provision, which locks up more capital in the financial system. This limits loan availability and hinders economic expansion. Banks and other financial institutions were initially limited to selling their stressed loans to ARCs in order to solve this issue.

This is when the Indian financial market felt the need to introduce the Special Situation Funds as they can now sell to SSFs as well. Transferring troubled loans to ARCs and SSFs would free up capital that has been held locked in the banking sector and increase the availability of credit. SSFs basically are the funds collected from various institutions and affluent individuals to be invested in the stressed assets to help with the resolution process. It is registered with SEBI as Alternative Investment Funds (AIFs) but its introduction fixed one major issue with the framework of AIFs as SSFs can participate in secondary market which wasn’t the case prior to its introduction. AIFs had a limited role in secondary market for corporate loans even though it played an important role in equity markets. With the new regulations being introduced, SSFs as a sub category of AIFs is allowed to participate in the secondary market to give out loans to the institutions struggling with mounting debt.

Though there is a catch within the new framework as firstly, it only allowed SSFs to come into play after the default stage. In order to create an efficient system to deal with the distressed debt market in India, SSFs must be given open access in the secondary market i.e. it should be allowed to participate in pre-default stage, providing an opportunity to the firms to discharge stressed assets to SSFs even before they default. This would lead in reducing the collective load of the problems on financial institutions during restructuring or insolvency. The involvement of ‘Vultures’ in the pre-default stage in America proved to be beneficial in dealing with the distressed debt market. Secondly, unlike SSFs, ARCs have been accorded the tag of ‘secured creditors’ which allows more freedom in terms of buying stressed assets. The market size for stressed asset sales might increase if SSFs are given more freedom to acquire debt through the assignment of debt in the regular course of business rather than through bankruptcy. It will help expand the investor pool and assist stressed asset resolution in a more proficient manner.

Moreover, regardless of whether a default has occurred or not, Indian lenders and investors should have complete freedom to sell their loans or bonds in the secondary market at the best price feasible in order to reduce risks of future insolvency or restructuring. SSFs must be given seamless access to the entire secondary market for investment and non-investment corporate debt in order to achieve this result.

Banks had historically originated loans and retained them until they were repaid. With the development of syndicated lending, lending shifted from involving a single lender to a group of lenders. Demand for secondary trading also grew as primary syndication market volumes rose, enabling risk, liquidity and portfolio management. Thus it can be said that the secondary market for corporate loans would have more liquidity if SSFs were permitted to buy investment-grade loans.

The secondary loan market has now been far from a novel concept in global financial markets. These markets maintain liquidity when many non-bank investors like private equity funds, insurance firms, etc. are able to participate. Consequently, allowing SSFs access to the secondary market in India as well would be consistent with the global trend.

CONCLUSION

As SEBI introduce a new player to the Indian insolvency system, it should be considered an indicator of the beginning of a new age for the distressed debt market in India. The expansion of “vulture funds” and the distressed debt market in India would undoubtedly benefit from SSFs’ increased presence in secondary markets during the pre-default stage. It will be prominent to see how SEBI and the insolvency regime would cooperate to let SSFs establish themselves in the secondary market. With the launch of SSFs, distressed debt investing in India will enter the contemporary era. SSFs must be permitted full involvement in the whole secondary market for corporate debt, not only the post-default phase, in order to reach its full potential.

Author: Chitrangda Saini IIIrd Year, B.A., LL.B., A Student of  National Law University Odisha, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

 

 

 

Leave a Reply

Categories

Archives

  • October 2024
  • September 2024
  • August 2024
  • July 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • February 2011
  • January 2011
  • December 2010
  • September 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010