MUMBAI: Sebi-registered special situation funds, a type of alternative investment fund (AIF), will be permitted to purchase and sell distressed loans – an arena dominated by asset reconstruction companies, banks, and finance companies.
This proposed development has the potential to reshape the stressed asset landscape by bringing in foreign capital, given that AIFs operate without stringent capital requirements and are subject to more relaxed regulations compared to entities regulated by RBI.
On Tuesday, Sebi issued draft regulations paving the way for SSFs to buy and sell bad loans. While foreign funds are expected to enter this space, they may negotiate for higher discounts, recognising that investors in these funds are high-risk takers and willing to accept capital losses.
The opening up of the bad loan market for Sebi-regulated stressed asset funds (SSFs) will have another implication. Asset reconstruction companies – RBI-regulated entities that buy bad loans from banks – will find it more difficult to sustain their model as they face competition from foreign funds.
RBI had opened the doors for SSFs to invest in its regulations two years ago, but this was subject to Sebi coming out with a regulatory framework for them. In the absence of regulations, SSFs participated in the distressed loan business through ARCs. Once Sebi’s final guidelines are in place, they can do business on their own.
“The entry of Special Situations Funds will bring in more distressed capital and will help broaden the marketplace. However, regulatory asymmetry between ARCs and AIFs must be addressed to usher in a level playing field…,” said Hari Hara Mishra, CEO, Association of ARCs in India.
This proposed development has the potential to reshape the stressed asset landscape by bringing in foreign capital, given that AIFs operate without stringent capital requirements and are subject to more relaxed regulations compared to entities regulated by RBI.
On Tuesday, Sebi issued draft regulations paving the way for SSFs to buy and sell bad loans. While foreign funds are expected to enter this space, they may negotiate for higher discounts, recognising that investors in these funds are high-risk takers and willing to accept capital losses.
The opening up of the bad loan market for Sebi-regulated stressed asset funds (SSFs) will have another implication. Asset reconstruction companies – RBI-regulated entities that buy bad loans from banks – will find it more difficult to sustain their model as they face competition from foreign funds.
RBI had opened the doors for SSFs to invest in its regulations two years ago, but this was subject to Sebi coming out with a regulatory framework for them. In the absence of regulations, SSFs participated in the distressed loan business through ARCs. Once Sebi’s final guidelines are in place, they can do business on their own.
“The entry of Special Situations Funds will bring in more distressed capital and will help broaden the marketplace. However, regulatory asymmetry between ARCs and AIFs must be addressed to usher in a level playing field…,” said Hari Hara Mishra, CEO, Association of ARCs in India.