SBI and Ministry of Finance plan priority status for AIF to revive stalled real estate projects

State Bank of India (SBI) and the Ministry of Finance (MoF) are exploring a legal framework where the proposed Alternative Investment Fund (AIF) for reviving stalled real estate projects will have the first charge on assets and cash flow of entities receiving funding.

Changes may have to be Introduced in the Insolvency and Bankruptcy Code, 2016 (IBC) in order to incorporate the concept of seniority of lenders which is currently not adequately recognized in the IBC in its present form. According to sources, the Finance Ministry has referred the matter to the Law Ministry.

SBI – the country’s largest lender and its arm SBI Capital Market are playing a key role in setting up the fund, and are reaching out to other banks and financial institutions to participate in the AIF — a regulatory parlance for privately pooled vehicles such as venture capital, private equity, and real estate funds.

Thus, SBI would be able to invest a maximum Rs. 2,500 crore in the fund — requiring other institutions to join the proposed Rs. 25,000-crore fund in which the government will contribute Rs. 10,000 crore. Giving the AIF a senior status among lenders could make it easier for other banks to invest in it.

Under the plan, while lending to a company the fund will lay down that its seniority of charge should be part of the Inter-creditor agreement. If the company fails to revive and later ends up being declared as insolvent, the CoC will have to recognize the senior-most charge it has among all lenders. If the company is already undergoing insolvency under the IBC, the CoC will have to approach the AIF and accept the seniority of charge.

Currently, IBC provides for raising of interim finance by the Resolution Professional after seeking approval from the CoC.