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 andthe 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. 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.