RBI Panel Calls For Allowing ARCs As Resolution Applicants Under IBC
An RBI panel recommends allowing asset reconstruction firms to participate as resolution applicants under the IBC.
A committee of the Reserve Bank of India has recommended allowing asset reconstruction companies to participate as resolution applicants under the Insolvency and Bankruptcy Code.
"Expertise acquired through IBC in resolving borrower insolvency will help ARCs in maximising recovery of dues," the committee to review ARCs said.
In its report, the committee has recommended that ARCs may be allowed to participate as resolution applicants only in their role as security receipt trustees or through alternative investment funds promoted by them.
"Acquisition of assets in the books of ARCs may lead to conflict of interest as ARCs may prefer to focus more on the resolution of assets held in their own books compared to the assets for which they may be acting as the manager," the report said.
As trustees of security receipts, an ARC is only a manager of funds invested by external investors into stressed asset situations. The committee has also called for a principal business requirement, when ARCs act as resolution applicants through the alternative investment fund route. Assets acquired through this route should not exceed the assets under management acquired through issuance of security receipts at any time, the committee said.
The issue of allowing ARCs to participate in insolvency resolution has been a long-standing one, with the regulator holding that the current regulations don't allow ARCs to directly control equity in stressed firms. UV Asset Reconstruction Co.'s successful resolution plan for Aircel Ltd. was blocked by the RBI owing to this regulation.
The six-member committee, formed in April, was headed by Sudarshan Sen, former executive director of the RBI. The committee was formed to review extant guidelines governing the ARC sector. A review of the role of ARCs in resolution of stressed assets under the insolvency law was part of the terms of reference for the committee.
Among the group's other key recommendations are:
Threshold for an investor to be recognised as sponsor of an ARC should be raised to 20% from the existing 10%.
ARCs should be allowed to sponsor SEBI-registered AIFs with the objective of using these entities as an additional vehicle for facilitating restructuring or recovery of the debt acquired by them.
ARCs should be allowed to acquire assets from financial sector entities other banks, non-bank lenders and other ARCs. The RBI may consider inclusion of AIFs, foreign portfolio investors, asset management companies and retail investors.
Sale to ARCs should be added as an option in all resolution plans by banks for loan assets worth Rs 100 crore and above.
For loan exposures worth more than Rs 500 crore put up for sale to ARCs, at least two bank-approved external valuers must carry out valuation exercise to find liquidation value and fair market value. For loan exposures worth between Rs 100-500 crore, at least one bank-approved valuer must conduct the exercise.
In cases where lenders representing 66% of the debt have an offer from an ARC, it should be mandated for the remaining lenders and the offer must be implemented within 60 days. For lenders who do not conform to this rule, a 100% provisioning requirement must be mandated.
In case where ARCs have acquired 66% of the loan exposure, a two-year moratorium on proceedings against the borrower by other authorities should be introduced. Similarly, government and statutory dues must be deferred in such cases.
Equity acquired by a lender in a stressed account should be eligible for sale to ARCs.
(Corrects an earlier version that misquoted the panel on the conflict of interest when an ARC acquires assets.)