Defaulting promoters cannot misuse ‘special situation funds’ to surreptitiously buy into their companies to retain control. Market regulator Securities and Board of India (Sebi) on Tuesday proposed that if the investment in the special situation fund (SSF) is by a defaulter, then the fund should not invest in a company where the investor is also a promoter or a shareholder.
This was proposed by Sebi in a consultation paper on changes in the regulatory framework for special situation funds (SSF).
SSF are funds that acquire distressed loans and Sebi classifies them as subcategory of Alternate Investment Funds.
Sebi stated “The AIF regulations to specify that SSFs shall not invest in or acquire a special situation asset if any of its investors is disqualified in terms of Section 29A of IBC (Insolvency and Bankruptcy Code) in relation to such special situation asset.”
Section 29A of IBC bars defaulting promoters or their relatives from acquiring their own company or any other company unless they repay their entire unpaid debt. The Sebi’s move is to prevent defaulting promoters from regaining control over their companies by acquiring assets at a steep discount from banks using the AIF route, said a senior bank official.
Sebi is also aiming to tighter control over the operations of SSF and have thus suggested that SSF shares data and be monitored by them and the Reserve Bank of India. The data sharing would include information on investors, manager/sponsors, assets invested and financing. “Suitable enabling clauses to enable RBI to call information directly from SSFs, if required, may also be incorporated,” it said.
SSFs shall submit information to a trade reporting platform notified by RBI. “SSFs shall also submit to RBI any information as may be required by RBI,” Sebi suggested.
“The concern relating to economic interest getting transferred to a person disqualified in terms of Section 29A of IBC may exist for SSFs investing in all special situation assets, and may not be limited to SSFs acquiring stressed loans. Thus, it is felt appropriate that the due diligence requirement in terms of Section 29A of IBC may be mandated on all SSFs, irrespective of the type of special situation asset they invest in,” the consultation paper said.
At present, AIF can not invest in associates and Sebi said that this safeguard was introduced to address the concern of possible round-tripping of funds in terms of SSFs acquiring stressed loans from their associates.
Associates are limited liability partnership or a body corporate which holds 15% equity share capital or partnership interest.
