Mumbai: The markets regulator’s proposal to permit the sale of receipts issued by asset reconstruction companies (ARCs) on exchanges as one of the means to resolve the problem of bad loans in the banking system has been delayed as the Reserve Bank of India has reservations about the type of investors who can be allowed to buy these instruments, two people directly aware of the matter said. 

“The board of the markets regulator (Securities and Exchange Board of India) had approved the proposal in its board meeting in December but the norms for selling these assets on exchanges have not yet been notified owing to lack of clarity from RBI," said the first of the two people. 

A committee set up by Sebi has made these suggestions, and the regulator’s board meeting on 28 December approved them, according to the agenda published on Sebi’s website.

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The norms, according to Sebi, would involve a private placement, rather than a public issue, to start trading in securities receipts issued by ARCs. Only certain “qualified buyers" would have been permitted to trade in them, and the minimum lot size would be 10 lakh.

“The intention is to allow only informed investors to trade in these securities," Sebi had said in its agenda papers.

“It is the definition of qualified buyer that has not been finalized which is leading to a delay in notifying these norms," said the second of the two people cited above.

Based on the panel’s recommendation, the regulator had decided to use its inclusive definition of qualified institutional buyers as subscribers such as an Alternative Investment Fund.

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AIFs would be allowed in the first stage and this would be extenced in the second stage to include wealthy individuals.

“RBI has some reservations on it. RBI has defined ‘qualified buyer’ under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) as financial institutions, banks, insurance companies, mutual funds, or any category of non-institutional investors as may be specified by the central bank," said the second of the two people cited above. 

Both regulators do not want retail investors to buy these risky assets. “Insurance firms and mutual funds do deal with retail money so the qualified buyer definition for these products needs to be amended accordingly," the first person said. 

Listing of securities receipts was first proposed in the Union budget last year to improve liquidity in the securitization industry and help speed up the resolution of stressed assets in the banking system. 

Sebi then formed a committee with representatives from the central bank, stock exchanges, credit rating agencies and ARCs to study the matter.

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