Sebi's New Move to Boost Liquidity in Distressed Debt Market

In a significant policy shift, the Securities and Exchange Board of India (Sebi) has relaxed the norms for investment in security receipts issued by asset reconstruction companies (ARCs). This strategic move, announced by Sebi's outgoing chief Madhabi Puri Buch on her last day in office, February 28, aims to inject much-needed liquidity into the distressed debt market by allowing smaller non-banking financial companies (NBFCs) and housing finance companies (HFCs) to invest in these financial instruments.

Expanding the Market Beyond Traditional Investors

Previously, the investment in security receipts was restricted to larger financial institutions, including deposit-taking NBFCs, systemically important non-deposit-taking NBFCs, infrastructure finance companies, and asset finance firms. However, Sebi's latest notification has broadened the scope, enabling a wider range of investors to participate in the distressed debt market. This change is expected to offer smaller NBFCs and HFCs, which are often squeezed for margins, an alternative investment class with potentially higher income yields.

Safeguards and Future Prospects

While the move is aimed at revitalizing the distressed debt market, Sebi has also introduced safeguards to prevent defaulting promoters from reclaiming assets. Additionally, the Reserve Bank of India (RBI) may impose further compliance measures to ensure the stability and integrity of the financial system. The decision follows recommendations from a committee led by Sudarshan Sen, formed by the RBI in 2021 to review ARC regulations, which advocated for expanding eligibility to all NBFCs and HFCs, among other investors.

Experts like Hari Hara Mishra, CEO of the Association of ARCs in India, view this as a positive step towards diversifying investment options for smaller financial entities. However, they also stress the importance of greater transparency regarding ARC performance, particularly in terms of historical recoveries, to ensure informed decision-making by potential investors.