Markets regulator Securities and Exchange Board of India (SEBI) has expanded the pool of potential investors in distressed assets by permitting non-banking financial companies (NBFCs), including housing finance companies (HFCs), to invest in security receipts (SRs) issued by Asset Reconstruction Companies (ARCs). The move aims to attract more investors into the bad loans market, increasing liquidity in the distressed assets space.
According to a gazette notification released on February 28, SEBI clarified, “All NBFCs including HFCs regulated by the Reserve Bank of India (RBI) are hereby specified as qualified buyers for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.”
Asset Reconstruction Companies primarily purchase bad loans from banks and financial institutions at discounted prices after appropriate haircuts. These ARCs subsequently issue SRs to qualified buyers, recovering value from these distressed assets over time.
“NBFCs including HFCs will have to ensure that the defaulting promoters or their related parties do not directly or indirectly gain access to secured assets through security receipts,” SEBI emphasized, adding that these entities must also adhere to any further regulations stipulated by RBI from time to time.
This regulatory update underlines SEBI's intent to strengthen the distressed asset resolution framework, encourage responsible participation from NBFCs and HFCs, and secure greater financial stability in India's credit markets.
According to a gazette notification released on February 28, SEBI clarified, “All NBFCs including HFCs regulated by the Reserve Bank of India (RBI) are hereby specified as qualified buyers for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.”
Boosting Liquidity in Distressed Asset Market
By broadening the eligibility criteria, SEBI has significantly enhanced the capacity for investment in the distressed asset market. Previously, only specific entities were permitted to invest in SRs. This policy shift is expected to infuse fresh liquidity and facilitate the resolution of non-performing assets (NPAs).Asset Reconstruction Companies primarily purchase bad loans from banks and financial institutions at discounted prices after appropriate haircuts. These ARCs subsequently issue SRs to qualified buyers, recovering value from these distressed assets over time.
Safeguards Against Defaulting Promoters
To prevent misuse of this provision, SEBI introduced specific safeguards. NBFCs and HFCs investing in SRs must ensure that defaulting promoters or their associated parties do not regain control or indirect access to the secured assets through these instruments.“NBFCs including HFCs will have to ensure that the defaulting promoters or their related parties do not directly or indirectly gain access to secured assets through security receipts,” SEBI emphasized, adding that these entities must also adhere to any further regulations stipulated by RBI from time to time.
This regulatory update underlines SEBI's intent to strengthen the distressed asset resolution framework, encourage responsible participation from NBFCs and HFCs, and secure greater financial stability in India's credit markets.