On Monday, the Reserve Bank of India (RBI) formed a committee to assess the position of asset reconstruction companies (ARCs) in stressed debt resolution, and to study their business model. The panel is expected to submit its report three months after its initial meeting. The six-member panel is led by former RBI executive director Sudarshan Sen and includes Vishakha Mulye, executive director of ICICI Bank, P N Prasad, former deputy managing director of State Bank of India, Rohit Prasad, professor of economics at Management Development Institute, Gurugram, Abizer Diwanji, partner at Ernst and Young, and chartered accountant R Anand.
ARCs are companies that buy bad loans from banks and try to salvage value by seeking buyers for security or selling the company. In February, the government announced that public sector banks would establish a national ARC to purchase bad loans from banks and assist them in cleaning up their accounts. Banks had chosen to create their own ARCs because the valuation of assets proved to be a stumbling block in selling them to established ARCs. The committee will evaluate the current legal and regulatory system and make recommendations to increase the effectiveness of ARCs. It will also review their role in stressed asset resolution under the Insolvency and Bankruptcy Code (IBC), and suggest means to improve liquidity and trading of security receipts.
Lenders offer stressed loans to ARCs at a discount, either in cash or a combination of cash and security receipts. These receipts are redeemable until the ARC has recovered the loan. On 7 April, the RBI declared its intention to review the operation of ARCs as part of its announcements following the monetary policy committee (MPC) decision. “Asset restoration firms play a critical role in the resolution of stressed properties. Their capacity, however, has yet to be fully realised,” RBI governor Shaktikanta Das said, adding that a panel would conduct a thorough review of ARC operations and recommend steps to allow them to meet the financial sector’s growing demands. The central bank’s concerns seem to have arisen from the fact that current regulations do not allow ARCs to participate as equity buyers in stressed companies.
Last year, RBI had rejected a resolution proposal submitted by UV Asset Reconstruction Co. Ltd for the acquisition of Aircel properties, citing that it did not comply with the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act. The UV ARC resolution strategy called for the ARC to own 76% of the company in the first five years, with financial creditors having the remainder. Following that, the ARC association and lenders, including SBI, sought clarity from the RBI on ARC’s participation in IBC resolution plans.
On September 26, last year, the central bank agreed not to sanction ARCs’ bankruptcy restructuring proposals, but they could instead purchase the debt of stressed accounts from banks and engage as creditors under the IBC. The panel’s mandate includes a review of the current legal and regulatory system applicable to ARCs and the recommendation of steps to increase ARC effectiveness.
