Reserve Bank of India (Asset Reconstruction Companies) Directions, 2025

Introduction

On November 28, 2025, the Reserve Bank of India (“RBI”) issued the RBI (Asset Reconstruction Companies) Directions, 2025, exercising statutory authority under Sections 3, 9, 10, 12 and 12A of the SARFESI Act, 2002. These Directions consolidate governance standards, financial discipline and market conduct norms for Asset Reconstruction Companies (“ARCs”), representing a major shift in regulatory framework for ARCs involved in stressed-asset resolution.

I. Enhanced Capitalization and Operational Framework

These Directions imposed higher capitalization thresholds, requiring ARCs to maintain a minimum Net Owned Fund of ₹300 crore on an ongoing basis, with an increase from earlier ₹100 crore. The existing ARC’s have been granted a compliance window until March 31, 2026, after which market realignment and consolidation are anticipated. ARCs assuming the role of Resolution Applicants under the IBC, 2016, must meet a higher ₹1,000 crore threshold, given the complex nature of corporate restructuring.

The Directions restrict ARCs to functions of securitisation and asset reconstruction, with surplus fund deployment confined to Government securities and highly rated instruments. ARCs are prohibited from raising public deposits and speculative investments, reflecting the regulator’s determination to prevent mission creep and maintain focus on stressed asset resolution.

The Directions mandate a Board-approved Financial Asset Acquisition Policy ensuring transparent price discovery and avoidance of conflicts of interest. The framework prohibits bilateral acquisitions from sponsor banks, addressing long-standing concerns about potential conflicts. ARCs are now required to prepare time-bound realisation plans, with a five-year cap on resolution which can be extended up to eight years with Board approval. This prevents ARCs from functioning as static asset holders while allowing extra room for unusually complex recoveries.

II. Governance, Securitization and Prudential Norms

The Directions introduce comprehensive governance reforms, requiring at least half of the directors to be independent and requiring that the Board chairperson be an independent director. The framework mandates that directors, CEOs, and sponsors meet stringent fit-and-proper standards, with ongoing compliance monitoring. There is an enforcement of an age limit of 70 years for directors and 15-year tenure for Managing Directors (“MD”). The framework expressly bars investors from FATF non-compliant countries from acquiring control in ARCs, intended to protect the sector from money-laundering vulnerabilities.

ARCs are under strict regulatory oversight for issuance of Security Receipts (“SRs”). SRs may be issued only through trust frameworks to Qualified Buyers. ARCs must mandatorily invest in every SR class they issue, aligning interests and curbing moral hazard. The Directions introduce a Recovery Rating model with SRs rated within six months and reviewed semi-annually. Offer documents must contain granular information including resolution strategies, valuation methodology and risk factors. Quarterly investor reporting enhances transparency.

The Directions mandate a 15% of capital adequacy ratio based on risk-weighted assets, placing ARC capital requirements well above typical global benchmarks. The framework adopts a conservative approach to loss absorption, outlining 10% provision for sub-standard accounts, almost full provisioning for doubtful accounts and compulsory write-off for loss accounts. The financial statements must conform with Indian Accounting Standards, with deviations clearly disclosed. The Directions require maintenance of an Impairment Reserve where provisions fall short, preventing income overstatement.

III. Borrower Protection and Fair Practices

The Directions lay down stringent conditions for ARCs to take over management control under defined circumstances, which includes siphoning of funds, fraudulent practices, or sustained default despite the borrower’s financial capacity. Any change in control or management must be examined by an Independent Advisory Committee, with communication of 60-day notice to the borrower. The settlement proposals require the Committee to examine accounts above ₹1 crore, and approval of the Director with detailed reasoning. Debt-to-equity conversion shareholding is capped at 26% to prevent ARCs from directly running companies.

A comprehensive Fair Practices Code mandates transparent processes, timely security release, recovery agent conducts standards, and grievance mechanisms. A groundbreaking provision mandates the release of property documents within 30 days of repayment; failure to comply triggers a penalty of ₹5,000 for each day of delay. These provisions balance creditor rights with protection against abusive practices.

IV. India’s Imperative for Enhanced ARC Regulation

India’s banking sector has grappled with significant non-performing asset challenges over the past decade. At its peak in fiscal year 2018, gross NPAs reached 11.5 % of total advances. While improved, the absolute quantum remains substantial. The banking system’s gross NPAs exceed ₹10 lakh crore, representing a significant drag on credit creation and economic growth. ARCs provide banks crucial exit routes from stressed assets, enabling redeployment of capital and management bandwidth toward productive lending.

However, India’s ARC sector has struggled since its establishment in 2002, with recovery rates consistently hovering around 15–20 % of acquisition value, whereas ARCs recover about 30- 40% in developed distressed-asset markets. This underperformance arises from different factors: inadequate capitalization preventing pursuit of effective resolution strategies, governance deficits with sponsor banks exercising undue influence creating conflicts of interest, opaque transactions lacking market discipline, and delayed resolutions with assets remaining unresolved indefinitely. Several ARCs operated more as holding vehicles than active reconstructors, defeating the sector’s purpose.

The enhanced NOF requirements address capitalization directly. ARCs with stronger capital bases are positioned to undertake restructuring strategies which include working capital infusion, technology upgrades and market expansions; options largely inaccessible to entities with limited capital. The ₹300 crore threshold ensures ARCs possess financial credibility to negotiate effectively with stakeholders and sustain operations through extended resolution periods. The ₹1,000 crore threshold for IBC Resolution Applicants recognizes that corporate insolvency resolution demands significantly greater financial capacity to implement resolution plans involving operational takeover and business turnaround.

Governance reforms address structural weaknesses that undermine ARC effectiveness. Independent chairpersons and majority independent boards mitigate sponsor influence and ensure decisions prioritize asset recovery over sponsor interests. Fit-and-proper criteria with ongoing monitoring prevent unsuitable persons from controlling critical financial sector entities. The prohibition on investments from FATF non-compliant jurisdictions protects India’s financial system integrity and international reputation, a growing concern as India integrates with global markets.

The time-bound resolution framework addresses the sector’s tendency toward indefinite asset warehousing. The five-to-eight-year timeline creates accountability and urgency while providing flexibility for genuinely complex cases. Such time-bound requirements deter ARCs from retaining assets indefinitely, thereby reinforcing their function as temporary facilitators of asset resolution and reintegration into productive economic activity.

Another key concern is addressed through strengthened investor protection measures. Security Receipts represent innovative but complex instruments backed by uncertain cash flows from distressed assets. Retail and institutional investors require robust disclosure and valuation frameworks to make informed decisions. The Recovery Rating model provides standardized metrics enabling comparative evaluation across ARCs and asset pools. Mandatory ARC investment in issued SRs aligns interests, ensuring ARCs bear meaningful downside risk alongside investors. Quarterly reporting and NAV declarations create transparency essential for investor confidence and secondary market development.

Fair practices provisions address legitimate borrower concerns about recovery process conduct. While ARCs possess statutory enforcement powers under SARFAESI, these powers must be exercised responsibly. Requirements for 60-day notice before management takeover, Independent Advisory Committee scrutiny of settlements, and financial penalties for delayed document release balance creditor rights with borrower protections. Recovery agents conduct standards to prevent harassment and intimidation that undermine rule of law. These provisions recognize that borrowers in financial distress retain fundamental rights deserving regulatory protection. The Directions align India’s framework with international jurisdictions such as South Korea’s KAMCO, Malaysia’s Danaharta, and US distressed debt markets.

Looking forward, the enhanced NOF requirements may pose implementation challenges for smaller ARCs by March 2026, possibly triggering consolidation in the industry. While consolidation may reduce entity count, it should improve average entity quality and capacity. The resolution timeline may prove challenging for infrastructure or manufacturing sector assets requiring extended turnaround periods, necessitating judicious use of Board-approved extensions. The effectiveness of the framework rests on nurturing liquid secondary markets for Security Receipts. To ensure adequate qualified buyer depth will demand coordinated engagement from regulators, large institutions, and market infrastructure facilitators.

Conclusion

The RBI’s Master Directions mark a transition from compliance-oriented regulation to comprehensive systemic governance. By addressing governance gaps, enhancing capital requirements, mandating transparent operations and protecting stakeholder interests, the Directions aim to create an ARC sector capable of contributing meaningfully to India’s stressed asset resolution architecture. As India progresses toward a five trillion-dollar economy, efficient stressed asset resolution becomes increasingly critical for maintaining financial sector health and supporting sustained credit growth. The March 2026 compliance deadline will test the framework’s effectiveness, potentially reshaping the sector’s landscape. The real test of success lies beyond compliance, in measurable improvements in recovery outcomes, timeliness of resolutions, and the robustness of the financial system which are crucial to the Indian economy.