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Review Of Regulatory Framework For Asset Reconstruction Companies(ARCs)

By - Jayanth Ravi on July 25, 2023

ARCs are critical in the management of bank and financial institutions distressed financial assets. Given their vital role, it was thought necessary to assess their functioning and operational architecture.

Measures to Enhance Governance of ARCs

  • Chair and Board Meetings: The Chair of the Board shall be an independent director. Meetings of the Board shall be presided over by an independent director in the absence of the Chair of the Board. The quorum for Board Meetings shall be one-third of the Board's total strength or three directors, whichever is greater. Furthermore, at least half of the directors present at Board Meetings must be independent directors.
  • Tenure of Managing Director (MD)/ Chief Executive Officer (CEO) and Whole-time Directors (WTDs): Tenure of an MD/CEO or WTD shall not exceed five years at a time, and the individual shall be eligible for reappointment. However, no incumbent shall hold the position of MD/CEO or WTD for more than fifteen years in a row. Following that, the individual will be available for reappointment as MD/CEO or WTD in the same ARC if the Board deems it essential and beneficial, subject to meeting additional conditions. During the three-year cooling period, the individual may not be nominated to or linked with the ARC in any position, directly or indirectly. The ARCs must implement proper succession planning measures.

Settlement of Dues Payable by the Borrowers under One-time Settlement

  1. Under previous guidelines, each ARC was required to develop a Board-approved policy outlining the broad parameters for settling debts owed by borrowers, and the Board was authorised to delegate powers to a committee comprised of any director and/or any functionaries of the ARC for making decisions on proposals for settlement of dues.
  2. Payment to the borrower will be made only after the proposal has been reviewed by an Independent Advisory Committee (IAC), which will be made up of individuals with technical, financial, and legal backgrounds. IAC shall make recommendations to the ARC about the settlement of dues with the borrower after assessing the borrower's financial position, the time period available for recovering the dues from the borrower, the borrower's estimated earnings and cash flows, and other relevant factors.
  3. The Board of Directors, which shall include at least two independent directors, shall deliberate on IAC's recommendations and consider the various options available for debt recovery before deciding whether the option of debt settlement with the borrower is the best option available under the current circumstances, and the decision, along with a detailed rationale, shall be specifically recorded in the Board meeting minutes.
  4. Settlement with the borrower should take place only after all conceivable efforts to recover the debt have been exhausted and there are no further chances of retrieving the loan.
  5. In general, the Net Present Value (NPV) of the settlement amount should not be less than the realisable value of the securities. If there is a considerable difference between the valuation of securities reported at the time of financial asset purchase and the realisable value evaluated at the time of settlement, the reasons for the difference must be recorded.
  6. Preferably, the settlement money should be paid in one lump sum. If the borrower is unable to pay the entire amount in one lump sum, IAC will give precise suggestions regarding the minimal upfront lump-sum payment and maximum payback duration.
  7. Based on the aforementioned framework, ARCs must develop a Board-approved policy.
  8. Instructions given under paragraph 2(B)4 of the circular DNBS.(PD).CC.No.37/ SCRC/ 26.03.001/ 2013-2014 dated March 19, 2014 on 'Buyback of assets from ARCs by defaulters and acquisition of assets by ARCs from sponsor banks' are hereby withdrawn, and ARCs must comply with Section 29A of the Insolvency and Bankruptcy Code, 2016 when dealing with prospective buyers.

Minimum Net Owned Fund (NOF) Requirement

The minimum NOF (as required by paragraph 4 of the circular DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17 dated April 28, 2017, on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- Section 3(1)(b) - Requirement of NOF for ARCs) is hereby increased to 300 crores on an ongoing basis, from the existing requirement of 100 crores. As a result, any ARC that obtains a certificate of registration on or after the date of this circular may not begin the business of securitisation or asset reconstruction unless it has a minimum NOF of 300 crore.

Allowing ARCs to act as Resolution Applicants under Insolvency and Bankruptcy Code, 2016 (IBC)

Without the prior consent of the Reserve Bank of India, ARCs are currently not permitted to initiate or carry on any business other than securitisation or asset reconstruction, or the activities referred to in Section 10(1) of the SARFAESI Act. It has now been resolved, pursuant to Section 10(2) of the SARFAESI Act, to allow ARCs to engage in activities as a Resolution Applicant (RA) under IBC that are not expressly permitted by the SARFAESI Act. The following conditions will apply to this permission:

  • The ARC has a minimum NOF of ₹1,000 crore.
  • The ARC shall have a Board-approved policy for taking on the role of RA, which may include, among other things, the scope of activities, internal limits for sectoral exposures, and so on.
  • To make decisions on proposals for submission of resolution plans under the IBC, a committee comprised of a majority of independent directors must be formed.
  • The ARC shall investigate the feasibility of putting together a panel of sector-specific management firms/individuals with experience operating firms/companies who could be considered for managing the firms/companies if necessary.
  • In the case of a specialised corporate insolvency resolution process (CIRP), the ARCs shall not have any major influence or control over the corporate debtor after five years from the date of the Adjudicating Authority's approval of the resolution plan under IBC. In the event that this criterion is not met, the ARCs will be barred from submitting any new resolution plans under the IBC, whether as a resolution applicant or a resolution co-applicant.
  • In addition to the existing disclosure requirements, the ARC must make additional disclosures in the financial statements regarding assets acquired under IBC. These would comprise the type and value of assets acquired under IBC, the sector-wise allocation depending on the corporate debtor's operations, and so on.
  • In their financial statements, the ARC must reveal the execution status of the resolution plans approved by the Adjudicating Authority on a quarterly basis.

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