Security Receipts
Also written Security Receipt · SRs · Security Receipts (SRs)
A receipt issued by a SEBI-registered Asset Reconstruction Company against stressed loans it has acquired — one of the defined "special situation assets" a Special Situation Fund is permitted to invest in.
In plain language
Sometimes a bank's loan turns bad and the borrower stops paying. One way to fix this is to sell the loan to an Asset Reconstruction Company (ARC). An ARC is registered with the Reserve Bank of India.
The ARC pays the bank and takes over the bad loan. In exchange, it issues Security Receipts. These are instruments that give the holder a share in whatever the ARC later recovers from that stressed asset.
A Category I Special Situation Fund is allowed to buy Security Receipts. That is because Security Receipts are one of the assets the AIF Regulations name as a "special situation asset" — the reason this fund type exists at all.
How it works
The workbook's definition of special situation assets lists Security Receipts as its own category, distinct from the stressed loans themselves: stressed loans available for acquisition under RBI's framework or an approved IBC resolution plan; Security Receipts issued by an ARC registered with the RBI; securities of companies whose stressed loans are available for acquisition; and securities of companies against whose borrowings Security Receipts have been issued or which are undergoing corporate insolvency resolution, where the credit rating has been downgraded to "D" or equivalent.
Each scheme of a Special Situation Fund investing in these assets — including Security Receipts — must have a minimum corpus of Rs 100 crore, a distinctly higher floor than the general AIF minimum, reflecting the scale and complexity of stressed-asset investing.
A worked example
Meridian Special Situations Fund, a Category I AIF with a corpus of Rs 150 crore (above the Rs 100 crore floor required for this fund type), buys Rs 20 crore of Security Receipts issued by an RBI-registered ARC against a pool of stressed loans originally owed by a mid-sized steel manufacturer.
The underlying company's debt had been downgraded to "D" after a payment default that continued for more than 90 calendar days, which is why it qualified as a special situation asset in the first place. The ARC had already acquired the loan from the original lending banks and issued Security Receipts to investors — including Meridian — representing their share in whatever the ARC eventually recovers from the stressed borrower, whether through restructuring, sale of the underlying business, or liquidation.
Meridian's return on its Rs 20 crore investment in these Security Receipts depends entirely on the ARC's success in recovering value from the underlying stressed company — a genuinely different risk profile from a conventional debt or equity investment, which is exactly why Special Situation Funds are carved out as their own Category I sub-type with their own, higher corpus floor.
Why NISM asks about it
Chapter 2 (Alternative Investment Funds in India), section 2.3.5 (Special Situation Fund), and Chapter 4, section 4.1.13 (Special Dispensation for Special Situation Funds), both define Security Receipts as a listed special situation asset, with Chapter 4 additionally carrying the Rs 100 crore minimum corpus figure specific to this fund type. Expect Security Receipts tested as one item in the special situation asset list, and the "D or equivalent" credit rating and 90-calendar-day default period tested as the qualifying thresholds for the related asset categories.
Common exam traps
- Security Receipts are issued by the ARC, not by the original stressed borrower. The investor's claim runs against the ARC's recovery from the underlying asset, structured through the receipt, not a direct claim on the defaulting company's balance sheet.
- Rs 100 crore is the minimum corpus for a Special Situation Fund scheme specifically — a materially higher floor than the general Rs 20 crore figure that applies to Category III AIF schemes discussed elsewhere in this series.
- "D or equivalent" credit rating and a continuing 90-calendar-day default are the qualifying tests for related special situation assets — securities of companies whose borrowings have triggered Security Receipts, or which are in insolvency resolution, need this rating and default duration to qualify.
- Do not confuse Security Receipts (an ARC's recovery instrument against stressed assets) with ordinary securitised debt instruments, which package performing or near-performing receivables rather than already-defaulted loans.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Special Situation FundA sub-category of Category I AIF that invests only in special situation assets — stressed loans, security receipts and the securities of defaulting companies — and may act as a resolution applicant under the IBC.
- Dual CategoryStructures whose underlying assets are illiquid but whose instruments are liquid — listed or redeemable with restrictions — such as REIT and InvIT units and security receipts.
- Securitised Debt InstrumentA tradable security created by pooling loans or other receivables in a special purpose vehicle and repackaging the cash flows into instruments that pay a pre-determined periodic income.
- Distressed debt financingLending to a company that is stretched for cash but still a going concern — refinancing to clear dues and cut leverage, at a higher cost than a performing borrower would pay.
- Special Situation AssetAn asset a special situation fund may invest in: stressed loans, ARC security receipts, and securities of companies whose loans are stressed, under IBC resolution or in continuing default.
- Pari Passu ChargeOne common charge created over the same pool of security in favour of several lenders who all want the same level of charge, so none of them can be paid ahead of the others out of that security.
- Priority of ClaimsThe order in which a borrower's money reaches its providers: secured debt by seniority of charge, then unsecured debt in full, then preference capital, and only then equity.
- SecuritiesFinancial instruments — shares, bonds, derivatives, mutual fund units, government securities and more — issued to raise funds, as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956.