Special Situation Asset
An 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.
In plain language
A special situation fund is a Category I AIF that invests only in special situation assets, and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016. So the whole character of the fund depends on one question: what counts as a special situation asset?
The answer is a closed list, and every item on it is a form of distress. The loan has gone bad, or the company has defaulted, or it is in insolvency, or an asset reconstruction company has already taken over its debts.
The policy reason, in the workbook's words, is that special situation funds "can play a vital role to decrease the impact of bad loans on banks". Defining the assets tightly is what lets SEBI relax other rules for SSFs — the investment concentration norm in a single investee company, and the restriction on investing in listed securities — without those relaxations leaking into ordinary funds.
How it works
The list, as stated in Chapter 4 (section 4.1.13):
| Special situation asset | Additional condition | |
|---|---|---|
| a | Stressed loans available for acquisition under Clause 58 of the RBI (Transfer of Loan Exposure) Directions, 2021, or as part of a resolution plan approved under the IBC, or under any other RBI or Government policy | — |
| b | Security receipts issued by an ARC registered with the RBI | — |
| c | Securities of investee companies whose stressed loans are available for acquisition under the RBI Master Direction or an IBC resolution plan | — |
| d | Securities of investee companies against whose borrowings security receipts have been issued by an ARC, or whose borrowings are under corporate insolvency resolution under the IBC | Credit rating of such borrowings downgraded to "D" or equivalent |
| e | Securities of investee companies that have disclosed defaults on interest or principal on loans from banks, FIs, NBFCs or on debt securities, under the ICDR Regulations 2018, with the default continuing for at least ninety calendar days | Rating of such loans and debt securities downgraded to "D" or equivalent |
What follows for the fund.
- An SSF invests only in these assets.
- If it acquires stressed loans under Clause 58, it must first be included in the relevant Annex of the RBI Master Direction; the loans carry a minimum 6-month lock-in (not applicable on recovery from the borrower); and it must meet the same initial and continuous investor due diligence the RBI requires of investors in an ARC.
- Under Clause 58 (per the workbook's footnote), permitted entities and ARCs acquire stressed loans as part of a resolution plan under the RBI Prudential Framework for Resolution of Stressed Assets, 2019, resulting in an exit of all lenders.
Context elsewhere in the workbook. Chapter 6 notes that special situation funds, along with real estate and infrastructure funds, may provide financing against security receipts, REIT units and InvIT units — "securitised debt instruments". Chapter 2 records stressed asset auctions under the IBC among the new opportunities that grew the domestic AIF market.
A worked example
Illustrative figures. Meridian Special Situations Fund I screens six opportunities.
| Opportunity | Facts | Special situation asset? |
|---|---|---|
| Rs 240 crore loan to a steel company, offered by a bank consortium under Clause 58 | Stressed loan available for acquisition | Yes — limb (a) |
| Security receipts issued by an RBI-registered ARC | — | Yes — limb (b) |
| Equity of a cement company whose loans are being sold under an approved IBC resolution plan | Stressed loans available for acquisition | Yes — limb (c) |
| NCDs of an auto-parts maker under corporate insolvency resolution, rated "D" | Under CIRP, rated "D" | Yes — limb (d) |
| Shares of a listed textile company that disclosed an interest default 60 days ago, rated "D" | Default continuing, but under 90 days | Not yet — limb (e) needs at least ninety calendar days |
| Bonds of a profitable, "AA"-rated power company trading at a discount | No stress, no default | No |
The textile company becomes eligible 30 days later if the default is still continuing.
The fund buys the steel loan at 62 paise in the rupee — Rs 148.8 crore. It is locked in for six months; but if the borrower repays part of it in month four, the lock-in does not prevent recovery from the borrower.
Why NISM asks about it
Chapter 2 (Alternative Investment Funds in India) lists special situation assets with the SSF definition at 2.3.5, and Chapter 4 (Regulatory Framework — Indian Context) restates the list with rating conditions and the Clause 58 conditions at 4.1.13. Expect questions that give a set of assets and ask which qualify — especially the ninety-calendar-day default test and the "D" rating condition.
Common exam traps
- Ninety calendar days of continuing default — counted from the occurrence of the default, and calendar days, not working days.
- The "D" rating condition attaches to limbs (d) and (e) in Chapter 4, not to stressed loans or security receipts.
- The two chapters word the list differently. Chapter 2 describes limb (a) as stressed loans "acquired by ARCs or entities permitted by RBI, as part of a Resolution Plan approved through RBI (Prudential Framework for Resolution of Stressed Assets) Directions" or an IBC resolution plan, and omits the "D" rating condition on limbs (d) and (e). Chapter 4 refers instead to loans "available for acquisition in terms of Clause 58" of the 2021 Transfer of Loan Exposure Directions, and adds the rating condition. Use the Chapter 4 wording as the fuller statement.
- The 6-month lock-in applies to stressed loans acquired under Clause 58, not to every special situation asset, and not where the loan is recovered from the borrower.
- Security receipts must be issued by an ARC registered with the RBI.
- A discounted bond is not a special situation asset just because it is cheap. The list is about distress, not price.
Where this is taught
- Series XIX-A · Chapter 4: Regulatory Framework - Indian Contextintroduced here
- Series XIX-D · Chapter 9: Investment Strategiesintroduced here
Related terms
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Category I AIFThe AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
- Break-up Value ApproachAn asset-based valuation that measures what a company would fetch if it were shut down on the valuation date and sold in pieces — liquidation value of assets less settlement value of debt.
- Security ReceiptsA 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.
- 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.
- Insolvency ResolutionThe IBC 2016 process of helping a heavily indebted company turn around or be acquired through auction — an investment opportunity for private debt and distressed-asset funds.