Inclusion of Special Situation Funds Proposed Under SARFAESI

The Union Government is considering significant amendments to the SARFAESI Act, 2002, with the objective of strengthening India’s loan recovery architecture and accelerating resolution of stressed assets. A key proposal under examination is the inclusion of Special Situation Funds (SSFs) within the statutory definition of eligible “financial institutions.”

The SARFAESI Act presently provides an enabling framework for banks and notified financial institutions to recover dues exceeding INR 1 lakh by enforcing security interests in secured assets of borrowers or guarantors without court or tribunal intervention, subject to procedural safeguards. It has historically been a central instrument in addressing rising non-performing assets (NPAs) and reinforcing credit discipline.

However, despite the growth of India’s secondary distressed-debt market, statutory enforcement powers remain largely confined to banks and traditional financial institutions. This has created a structural gap when stressed loans are transferred to investment vehicles that lack direct enforcement authority.

SSFs, regulated as Category I Alternative Investment Funds by the Securities and Exchange Board of India, specialise in acquiring distressed assets, stressed loans, and companies requiring restructuring. These funds typically pursue value through corporate turnarounds, financial distress situations, mergers, insolvency proceedings, and other special situations.

Despite their growing role in the stressed-asset ecosystem, SSFs are not presently recognised as eligible entities under SARFAESI and must depend on indirect enforcement structures, security trustees, or continued bank participation to exercise recovery and enforcement rights over secured assets.

To address this gap, the proposed amendment seeks to bring SSFs within the ambit of Section 2(1)(m) of the Act, thereby enabling SEBI-regulated SSFs to independently initiate recovery and enforcement actions under SARFAESI. The move is understood to have regulatory backing from the Reserve Bank of India, reflecting policy recognition of the increasing role of non-bank capital in credit resolution.

Separately, the government is examining procedural tightening under Section 13(3A) of SARFAESI. While borrowers presently have the right to raise objections against demand notices issued under Section 13(2), the law does not prescribe a specific timeline. The proposed amendment would introduce a 30-day limit for submission of representations from receipt of the demand notice.

Additional reforms reportedly under consideration include restricting borrowers from transferring or disposing of secured assets once recovery proceedings are initiated and permitting lenders to withdraw recovery proceedings without borrower consent as part of efforts to harmonise recovery laws and reduce litigation-induced delays.

These measures are also linked to concerns over mounting caseloads before Debt Recovery Tribunals, which are experiencing annual inflows significantly exceeding disposal rates. The reforms aim to reduce procedural bottlenecks and discourage strategic delays by defaulting borrowers.

Taken together, the proposed amendments indicate a broader effort to modernise SARFAESI in line with evolving market structures. If notified, they could materially impact stressed-asset acquisition strategies, enforcement structuring, and risk assessment for institutional investors active in India’s alternative investment and distressed debt space, while signalling a stricter enforcement environment for wilful defaulters.