India’s growth story often highlights innovation, capital formation, and rising valuations. Yet beneath the surface, another transformation is bolstering financial resilience — restoring distressed assets. Recovering value from failing or stagnant businesses is not just a damage-control exercise but a catalyst for future growth and, in many ways, akin to nation-building. At the centre of this effort are Special Situation Funds (SSFs), which identify, acquire, and revive troubled assets, returning them to productive use.
Registered with SEBI as Alternative Investment Funds (AIFs), SSFs acquire distressed exposures or investments, resolve these assets through legal processes and operational improvements, and exit once value has been restored — often with substantial returns. Unlike traditional investors, SSFs bring specialised expertise, legal acumen, and patient, long-term capital, which play a critical role in ensuring stability and fostering the growth of the financial system.
Need for Specialised Intervention
In any expanding economy, some friction is inevitable: businesses falter, debts turn sour, and certain industries lose momentum — or at times, the economy itself faces headwinds, as during COVID-19. The banking system is now healthier, with the GNPA ratio of scheduled commercial banks falling to a multi-decade low of 2.3% as of March 2025. Yet unlocking capital from stressed assets requires more than macroeconomic recovery or a sound legal framework. The Insolvency and Bankruptcy Code (IBC), 2016, provides the foundation for asset resolution, but success also depends on deep sectoral expertise and long-horizon capital.
Recognising this, SEBI in January 2022 created SSFs as a distinct sub-category of Category I AIFs, empowering them to participate in restructurings and engage in IBC proceedings. While SEBI has also allowed SSFs to purchase stressed loans, it has sought the RBI’s approval to include AIFs/SSFs as a new category of transferee. This reform transformed isolated fixes into a regulated investment strategy and gave long-term investors a formal role in resolution — including acting as resolution applicants under the IBC.
Turning Distress into Opportunity
What sets SSFs apart from other investment vehicles is their ability to find opportunities where others see challenges. These funds step in when traditional lenders retreat, intervening when resolution seems distant but still possible. In doing so, SSFs help businesses survive, preserve jobs, restore asset worth, and enable financial institutions to clean up their balance sheets. This strengthens economic stability and signals to investors that India can both create and recover economic output efficiently.
The market for stressed asset resolution is significant, particularly in infrastructure, manufacturing, real estate, and logistics, where inefficiencies, legal hurdles, or funding gaps keep assets idle. As of March 31, 2025, over 8,300 companies have entered the IBC process, with 1,190 resolution plans approved. With regulatory support and rising investor interest, conditions are ripe for SSFs to lead the next wave of asset resolution at scale.
According to a recent EY report, India’s private credit market recorded nearly USD 9 billion in transactions in the first half of 2025 — over 50% growth year-on-year. Activity was strongest in infrastructure, real estate, and healthcare, with a rising number of large-ticket deals above USD 100 million. This momentum signals a deepening appetite for bespoke capital and creates exactly the kind of environment where SSFs can demonstrate their value.
Rise of Investor Confidence in SSFs
Discipline is built into the SSF design. SEBI’s framework sets high entry thresholds — ₹10 crore minimum per investor and ₹100 crore minimum scheme size — ensuring only well-capitalised investors participate. SSFs may also act as resolution applicants under the IBC, aligning capital with control and allowing investors to implement turnaround plans directly rather than remain passive financiers. This reduces delays and suits cases where decisive action drives outcomes.
Buying troubled assets at a discount and restoring them to profitability is finding favour among the wealthy — both for returns and social impact. According to Knight Frank’s Wealth Report 2024, the number of UHNIs in India is projected to grow by 50% by 2028, expanding the capital pool for such opportunities.
Meanwhile, Indian family offices have been steadily increasing their allocations to private credit — from negligible levels a few years ago to mid-single digits today — with expectations of doubling over the next three to five years. This growing domestic pool of capital complements global inflows, ensuring that SSFs have a strong and diversified investor base to draw from.
Policy changes are also making transactions more efficient. In April 2025, the RBI issued a draft framework to enable securitisation of stressed assets, including retail and personal loans. This will allow lenders to bundle such loans into standardised securities and sell them to investors, replacing one-off negotiations. Standardisation enables SSFs to apply consistent underwriting across similar pools, facilitating faster, larger-scale capital deployment.
From Niche Strategy to Economic Backbone
India needs not just new capital but intelligent redeployment of capital trapped in unproductive assets — a role where SSFs can be transformative. Their success hinges on strong governance in sourcing, valuing, and monitoring deals. Under the IBC, provisions such as Section 29A’s ineligibility norms and clearer beneficial ownership disclosures help reduce litigation risks and protect recovery values, enhancing SSFs’ effectiveness in turning around underperforming businesses.
Seen in this light, SSFs are not opportunistic investors but long-term partners in nation-building. When banks, NBFCs, investors, and policymakers work in concert, these funds can unlock trapped potential and strengthen financial stability. That requires banks and NBFCs to recognise stress earlier, price it realistically, and use IBC and securitisation without stigma. Investors should approach special situations as disciplined allocations that build both returns and resilience. The ongoing efforts of policymakers to shorten resolution timelines are a valuable step toward preserving capital and safeguarding employment.
Looking ahead, industry surveys suggest that India’s private credit investments could surpass USD 10 billion within the next year. With real estate and infrastructure leading both demand and risk appetite, SSFs are poised to evolve from a niche strategy into a systemic force — proving that capital in India can solve complex problems as effectively as it funds straightforward growth.
The author is the CEO of Areion Asset Management.
Disclaimer: Business Today provides market and personal news for informational purposes only and should not be construed as investment advice. All mutual fund investments are subject to market risks. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.