Special Situation Fund

When a company stops paying its lenders, somebody has to be willing to buy the debt. Banks want it off their books; most funds are not allowed to hold it. SEBI created the special situation fund to be that buyer.

The workbook is explicit about the policy reason: SSFs can play a vital role in reducing the impact of bad loans on banks. In exchange for taking that job, an SSF is exempted from the investment concentration norm that caps how much of a Category I AIF can sit in one investee company, and is permitted to invest its investable funds in either listed or unlisted securities of that company.

It can also step forward as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 — that is, bid to take over the distressed company itself, provided it meets the IBC's own eligibility requirements.

What counts as a special situation asset is a closed list:

1. 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.
2. Security receipts issued by an ARC registered with the RBI.
3. Securities of investee companies whose stressed loans are available for acquisition under the RBI Master Direction or a resolution plan under the IBC.
4. Securities of investee companies against whose borrowings an ARC has issued security receipts, or whose borrowings are under corporate insolvency resolution — with the credit rating of those borrowings downgraded to "D" or equivalent.
5. Securities of investee companies that have disclosed defaults on interest or principal to banks, financial institutions, NBFCs or on debt securities under the ICDR Regulations, where the default has continued for at least ninety calendar days — again with the rating downgraded to "D" or equivalent.

The money side:

• Each scheme of an SSF must have a minimum corpus of Rs 100 crore.
• Minimum investment per investor is Rs 10 crore, falling to Rs 5 crore for an accredited investor and to Rs 25 lakh for employees or directors of the SSF or of its investment manager.
• An SSF may not accept investment from any other AIF except another special situation fund.
• It may not invest in its associates, in units of any other AIF except an SSF, or in units of SSFs managed or sponsored by its own manager, sponsor, or their associates.

If it buys stressed loans under Clause 58: the SSF must first be included in the relevant Annex of the RBI Master Direction; the loans carry a minimum six-month lock-in, which does not apply where the loan is recovered from the borrower; and the fund must meet the same initial and continuous investor due-diligence requirements the RBI imposes on investors in an ARC.

Meridian Special Situations Fund I raises a scheme of Rs 900 crore, comfortably above the Rs 100 crore floor.

The fund buys a Rs 240 crore stressed loan to a steel company from a consortium of banks at 62 paise in the rupee, Rs 148.8 crore. Because the general 25% single-investee concentration cap for Category I AIFs does not bind an SSF, that single position is 16.5% of the Rs 900 crore scheme and would be permissible even if it were far larger.

The loan is locked in for six months from acquisition. Four months later the borrower repays Rs 60 crore out of an asset sale — the lock-in does not bite on a recovery from the borrower, so the fund keeps the cash.

At month 14 the IBC process concludes and the fund, having qualified under Section 29A of the Code, takes the company over as resolution applicant at an implied enterprise value of Rs 310 crore. Against Rs 148.8 crore deployed and Rs 60 crore already recovered, the position has done its job.

Chapter 2 defines the fund and the special situation assets at 2.3.5; Chapter 4 sets out the full dispensation at 4.1.13. This is a numbers section and the paper treats it as one: expect the Rs 100 crore scheme corpus, the Rs 10 crore / Rs 5 crore / Rs 25 lakh investor minimums, the 90-day default period, the "D" rating downgrade, the six-month lock-in on stressed loans, and the two exemptions — from the concentration norm, and permission to hold listed as well as unlisted securities.

• Rs 100 crore is the minimum corpus per scheme, not per fund — and it is not the Rs 20 crore that applies to AIF schemes generally.
• An SSF may take money from another SSF and from nothing else in the AIF world. A Category II AIF or a fund of funds cannot invest in it.
• The ninety days is calendar days of continuing default, counted after the default occurs — not ninety days from the reporting date.
• Chapter 2 and Chapter 4 list the special situation assets slightly differently. The Chapter 4 list adds the requirement that the credit rating of the relevant borrowings or debt securities be downgraded to "D" or equivalent for limbs (d) and (e); the Chapter 2 list at 2.3.5 does not mention it. Learn the Chapter 4 version, which is the fuller statement, and do not be thrown if a question omits the rating condition.
• Acting as a resolution applicant is permitted, not automatic. The SSF must separately satisfy the IBC's eligibility requirements.
• The six-month lock-in attaches to stressed loans acquired under Clause 58, not to every asset the fund holds.