Registration Requirements for Alternative Investment Funds (AIF) Introduction Pooled investment...
The Securities and Exchange Board of India (SEBI) in its recently held board meeting on 28th December, 2021 introduced Special Situations Fund as a new sub-category of Category I Alternative Investment Funds (AIFs) under SEBI (AIF) Regulations, 2012 (Amendment Regulations). After this Board meeting, SEBI has notified SEBI (AIF) (Amendment) Regulations, 2022 on 24th January 2022 which introduced Chapter III-B – Special Situations Fund under SEBI (AIF) Regulations, 2012 (SEBI Regulations) which will govern Special Situations Fund. This action by SEBI has come in the wake of increased efforts from the government’s end to rescue those businesses who are under deep financial distress.
A special situations fund adopts an investment strategy wherein it attempts to take advantage of a special situation that has arisen in the market which has the possibility of increase in the value of an asset in the near future.
A special situation arises when an investor senses an investment opportunity beforehand which has the probability to appreciate in value in the near future and accordingly makes an investment decision in this direction. Special Situation schemes focus on investing in such opportunities. Generally, such schemes invest in equities.
The Amendment Regulations have categorized Special Situations Fund as a new category under Category – I Alternative Investment Fund (AIF). These Special Situations Funds will invest only in the special situation assets in accordance with their investment objectives and they may also act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (IBC). Following are the changes that have been introduced through the Amendment Regulations:
Registration of a Special Situations Fund
For an applicant to apply as a Special Situations Fund, the applicant needs to register according to the conditions set out in the provisions of Chapter II of AIF Regulations. This chapter II deals with the Special Situations Funds and the schemes launched by them.
Eligibility criteria under IBC for a Special Situations Fund
In order to act as a resolution applicant, a Special Situations Fund need to fulfil the eligibility criteria and the required compliances for a resolution applicant listed under the IBC which in turn will allow the Special Situations Fund to participate in the resolution process given under the IBC.
Investment in Special Situation Assets only
According to the Amendment Regulations, the Special Situations Funds are permitted to invest only in ‘special situation assets’ which includes the following:
As far as the Special Situations Funds acquiring stressed loan under Clause 58 of the Transfer of Loan directions, the circular mentions the following:
Requirements for investment in Special Situations Fund
According to the Amendment Regulations, SEBI has mandated that every Special Situations Fund scheme must have a corpus of minimum 100 crore rupees. The Special Situations Funds are not allowed to take investments from any other AIFs other than a Special Situations Fund. The minimum amount of investment that an investor can make in a Special Situations Fund is 10 crore Rupees and in case of accredited investors the minimum investment is 5 crore rupees. In case the employees or directors of the Special Situations Fund or the employees or the directors of the manager of the funds, the minimum amount of investment that is required is Rupees 2.5 crores.
Flexibilities provided at the time of Investment
The framework for the Special Situations Fund was recommended by Alternative Investment Policy Advisory Committee (AIPAC). While recommending, AIPAC analysed Regulation 15(1)(c) and 16(1)(a) of the AIF Regulations. Regulation 15(1)(c) restricts an AIF to invest not more than 25% of its of its investible funds in any one company or another AIF. Regulation 16(1)(a) on the other hand mandates the sub-categories of Category I AIFs to invest a minimum of 75% of the investible funds in unlisted securities of investee companies. AIPAC felt that the above mentioned compliances will not be feasible for the Special Situations Fund since they do not have pre-defined strategies for different assets. They need to acquire such stressed assets to revive the company. Therefore, relaxations and flexibilities were provided to the Special Situations Funds wherein Regulation 15(1)(a) will not apply to them and they will not be subjected to invest a specified portion of their investible funds in unlisted securities.
Keeping in mind the abovementioned factors, SEBI has relaxed the investment conditions that are provided under Regulation 15(1)(c) and Regulation 16(1)(a) of the AIF Regulations for Special Situations Funds.
Restrictions on the investments made by Special Situations Fund
The Special Situations Funds have been restricted from making investments in the following areas:
The amendments introduced by Special Situations Funds by SEBI is yet another alternate structure for the fund managers and investors to pool in their resources to turn around stressed businesses. This will not only help the businesses who are under the Insolvency proceedings but also outside of it because now the investors and fund managers will bring in specialized pooled vehicles which will have expertise in turning around the stressed assets. They will, in turn, invest in distressed assets much before the companies commit actual financial default. This will eventually increase the success rate of rescuing stressed businesses because such rescues will be conducted outside the purview of judicial or regulatory supervision and not get delayed unnecessarily.
Read our Article:SEBI amends rules of Alternative Investment Fund