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RBI Norms to Strengthen ARC (Asset Reconstruction Company)

The RBI on December 6, 2019, has issued notification for  Asset  Reconstruction  Companies restricting them from acquiring financial assets on a bilateral basis from there sponsor firms, lenders or subscribers, and to the group entity belonging to ARC. 

However, the RBI has stated that they may participate in auctions of the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and the prices are determined by market forces.

Asset Reconstruction Company India (ARCIL) which is sponsored by State Bank of India, ICICI Bank, Punjab National Bank, and IDBI Bank will be affected the most by this restriction. Other ARC’s sponsored by prominent Foreign Investors are Edelweiss ARC, JM  Financial ARC, and Phoenix ARC, which is promoted by the Kotak group.

Basic key points issued in the circular:

(i) Restrictions  have  been  imposed  on  acquiring  financial  assets  from  the  following  on a bilateral  basis:

  • a bank/ financial institution which is the sponsor of the ARC;
  • a bank/ financial institution which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its operations;
  • an entity in the group to which the ARC belongs.

(ii) However, the  ARC’S  have  been  permitted  to  participate in  auctions  of  the Financial  Assets  provided  such  auctions are  conducted  in:

  • a  transparent  manner
  •  on  arm’s length basis and
  • the prices are determined by market forces.

RBI had permitted  ARC’S to acquire financial assets from other  ARC’s on meeting certain conditions as per the amendment made in the  SARFAESI  Act, 2002 (Securitisation and  Reconstruction of  Financial  Assets and  Enforcement of  Securities  Interest  Act) in  June.  However, the  RBI  has made  it  clear  that  the  transaction  of  ARC’S  with  other  ARC’S can  be  done  on  meeting  certain  conditions:

  • Transactions  have  to  be  settled  on a cash  basis  only
  •   The selling ARC will utilize the proceeds for the redemption of underlying security receipts.
  •    The date of redemption of security receipts would not extend beyond eight years from the date of acquisition by the first ARC.
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This new rule prevents the lender from selling to ARC’S without going through the bidding process.  “The regulation is intended to bring in more transparency in the process of asset sales to ARC, from its lenders, investors and group entities and ring-fence the transactions from conflict of interest,”  said Hari  Hara Mishra, Director, UV Asset  Reconstruction.

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