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The Reserve Bank of India issued the Fair Practices Code for Asset Reconstruction Companies (ARC) on July 16, 2020. It stated that these entities must follow transparent and non-discriminatory practices in the acquisition of the assets.
Asset Reconstruction Companies are a special type of financial institution that specializes in the business of acquiring non-performing assets and stressed assets from the bank and financial institutions and reconstruct them. The ARCs are registered under RBI and regulated under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.
As we know that the business of ARCs involves frequent dealing with the borrowers of loans; therefore, they must be led by principles of fairness in their dealings with the borrowers. Hence the main objective of this Fair Practices Code for ARCs is to ensure the highest standard of transparency and fairness in dealing with stakeholders. It has prescribed the minimum regulatory expectation, while every ARCs board is free to enhance its scope and coverage.
The guidelines issued by RBI in that respect states that the ARC must follow transparent and non-discriminatory practices in the acquisition of assets. It further states that the ARC must maintain arm’s length distance in the pursuit of transparency.
With a view to increasing transparency in the sale of secured assets, the following guidelines have been laid down by the RBI:
As we specified in the third point of the above-mentioned segment that the spirit of section 29 A of Insolvency and Bankruptcy Code, 2016, may be followed in dealing with prospective buyers.
It may be noted that Section 29 A of IBC provides the lists of person who are not eligible to be the resolution applicant or a buyer of assets in a liquidation sale. The reference made by the RBI here could be to disallow persons like un-discharged insolvents, wilful defaulters, etc. from buying assets.
The RBI has strictly warned the ARCs to not resort to harassment of the debtor in the matters of recovery of the loan.
The following things have been notified in this regard:
The ARCs that are looking to outsource any of their activity are required to put in place an outsourcing policy which is approved by the board and which incorporates the criteria for selection of such activities and service providers, delegation of authority depending on risks and materiality as well as systems to monitor and review the operations of these activities/service providers.
ARCs are required to ensure that outsourcing arrangements don’t diminish its ability to fulfill its obligations to customers and RBI and also doesn’t impede the effective supervision by RBI.
The following guidelines have been issued with respect to Grievance Redressal:
The guidelines mention that the ARCs must keep the information strictly confidential, which is acquired in the course of business and must not disclose it to anyone.
However, there are certain exceptions to this:
Read our article:What are the Challenges Faced by ARC in Case of NPAs