Reserve Bank of India (RBI) in its recent guidelines released last week has commenced an overhaul of the asset reconstruction company (ARC) framework. This was also recommended by an RBI panel with Mr Sudarshan Sen as Chairman. A summary of the key recommendations is provided below.
Date of Enforcement of new ARC framework
ARCs that currently do not comply with the guidelines prescribedv are required to comply with these guidelines within six months from the date of this circular i.e. April 10, 2023.
Net Owned Fund
The minimum Net Owned Fund has been increased to ₹300 crores on an ongoing basis from the existing requirement of ₹100 crores. Consequently, any ARC obtaining the certificate of registration on or after the date of this circular shall not commence the business of securitisation or asset reconstruction without having a minimum NOF of ₹300 crores. The following glide path is provided for the existing ARCs to achieve the minimum required NOF of ₹300 crores:
Current Minimum NOF
By March 31, 2024
By March 31, 2026
Prior Approval for Change of Sponsor
ARCs are already required to obtain prior approval from the Reserve Bank of India for a change in shareholding on account of the transfer of shares. In addition to these requirements, any change in the sponsor/s of an ARC due to fresh issuance of shares shall also require prior approval of RBI from April 2023 onwards.
Management remuneration norms for Good Governance
In order to ensure that management remunerations/incentives charged by ARCs are reasonable and transparent, the following additional measures shall be adopted:
(i) Any management remuneration/ incentives charged towards the asset reconstruction or securitisation activity shall come only from the recovery effected from the underlying financial assets; and
(ii) The Board-approved policy shall indicate the quantitative cap/ limit on the management remuneration/ incentives under various scenarios, any deviation from which shall require approval of the Board.
This is in line with norms already made applicable to banks and insurance companies as per Financial Stability Forum (FSF) Principles for Sound Compensation Practices dated April 02, 2009, to redress deficiencies in compensation practices that contributed to the global financial crisis that began in 2007.
ARC as Resolution Applicant under IBC
ARCs have gained the right to act as resolution applicants under the Insolvency & Bankruptcy Code but with conditions. At present, there are only 3 out of 28 ARCs that have met the guidelines and are qualified as resolution applicants. The ARCs qualified as resolution applicants are Edelweiss Asset Reconstruction Company, JM Financial Asset Reconstruction Company and Asset Reconstruction Co India Ltd (ARCIL). The newly introduced guidelines could attract a large number of investors and increase the number of bidders for assets under IBC and recovery amounts. Previously ARCs were not allowed to begin or carry any other business other than that of security construction or the business referred to in Section 10(1) of the SARFAESI Act without prior approval of RBI. Currently, it is decided that Section 10(2) of the SARFAESI Act permits ARC to act as a resolution applicant under IBC which is not allowed in the SARFAESI act.
Part II of this article shall cover RBIs new corporate governance norms for ARCs.
The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.
For further queries or details you may contact:
Mr Anuroop Omkar,
Partner, AK & Partners