SEBI's latest move will boost investments in bad loan sector
What's the story
The Securities and Exchange Board of India (SEBI) has approved all non-banking financial companies (NBFCs), including housing finance companies (HFCs), to invest in security receipts issued by Asset Reconstruction Companies (ARCs).
The strategic move is aimed at boosting investments in the bad loan sector.
It also widens the scope of entities eligible to acquire security receipts from ARCs, increasing liquidity in the distressed asset market.
Investment expansion
SEBI's approval expands potential investors for security receipts
ARCs are set up to purchase bad loans from banks and financial institutions after suitable haircuts, and issue security receipts (SRs).
In a gazette notification dated February 28, SEBI said, "All NBFCs including HFCs regulated by the Reserve Bank of India (RBI) are hereby specified as qualified buyers for the purposes of SARFAESI Act."
This move greatly widens the investor base for SRs issued by ARCs.
Safeguards
Defaulting promoters can't reclaim secured assets
SEBI has also put safeguards in place to prevent defaulting promoters from reclaiming secured assets through SRs.
As per SEBI, "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."
Further, these companies must adhere to other conditions as prescribed by RBI from time to time.