Sources with knowledge of the developments said that the fund created as an Alternate Investment Fund (AIF) will have a superior charge on both securities and the cash flows in a project in which it invests.
Changes will be required in the regulatory framework, before the Rs. 25,000 crore fund announced by the government for providing last mile funding to stressed real estate projects, reaches the ones that are already undergoing resolution proceedings in the various benches of the National Company Law Tribunal (NCLT).
While the industry has given a thumbs-up to the expansion of the scope of these funds to include even those real estate projects which have been classified as non-performing assets or are in NCLT, changes in the regulations may be needed. According to legal experts, as of now the insolvency and bankruptcy code (IBC) does not have a provision for a last mile funding. Siddharth Shah, partner, Khaitan & Co told FE that under the NCLT proceedings the distribution waterfall is pre-defined. Therefore, creating a senior secured interest in those matters will require consent of the committee of creditors.
“In such a case, committee of creditors, and the fund (as an investor) will have to come to an arrangement, that such funds will be in the larger interest of the lenders, and that it will ensure the asset value in projects is preserved. In that case, they (CoC) can potentially create seniority within the creditors for the fund,” said Shah.
Sources with knowledge of the developments said that the fund created as an Alternate Investment Fund (AIF) will have a superior charge on both securities and the cash flows in a project in which it invests. It is understood that the government is in talks with regulatory authorities to see what kind of modifications would be required in the present regulatory framework to facilitate this funding. “As of now there are issues. It is work-in-progress for enabling provisions that are required to make the necessary changes,” said a source.
SBI Cap is understood to be considering 10-15 real estate projects for this funding which are neither declared NPAs as of now nor are under NCLT. It will identify the qualifying projects after doing the financial analysis including external due diligence, sources said. An e-mail seeking response from SBI Capital remained unanswered till the time of going to press.
However, Divyanshu Pandey, partner, J Sagar Associates, said that if the last mile funding is availed as interim finance by companies undergoing insolvency resolution, then the providers of such interim finance do not have to worry. The current regulations under the IBC provide highest priority in terms of payout to interim finance and the insolvency resolution process cost, he said.
“Interim finance has to be paid prior to anyone else, including operational creditors or the existing financial creditors of the company. However, devil lies in detail and it needs to be seen what conditions are prescribed for the AIF to make such investments,” Pandey said.
The Union Cabinet last week had approved setting up of a Rs. 10,000 crore AIF to be infused by the government, and the fund will seek matching contributions from banks, Life Insurance Corporation and others to generate a total corpus of around Rs. 25,000 crore. This follows the announcement made by finance minister Nirmala Sitharaman in September about creation of a special window for affordable and middle-income housing that will provide last mile funding for the projects which are stressed.