RBI sets up committee to review ARC regulations2 min read . Updated: 19 Apr 2021, 07:28 PM IST
- The committee will submit its report within three months from the date of its first meeting
MUMBAI : The Reserve Bank of India (RBI) on Monday constituted a committee that would examine the role of asset reconstruction companies (ARCs) in stressed debt resolution and review their business model.
It will submit its report within three months from the date of its first meeting.
Headed by former RBI executive director Sudarshan Sen, the six-member committee will include Vishakha Mulye, executive director, ICICI Bank; P N Prasad, former deputy managing director, State Bank of India (SBI); Rohit Prasad, professor of economics, Management Development Institute (MDI), Gurgaon; Abizer Diwanji, partner, Ernst & Young; and R Anand, a chartered accountant.
The committee will review of existing legal and regulatory framework applicable to ARCs and recommend measures to improve efficacy of ARCs. It will also review of role of ARCs in stressed asset resolution under Insolvency & Bankruptcy Code (IBC) and suggest means of improving liquidity in and trading of security receipts. Lenders sell stressed loans to ARCs at a discount, either in exchange of cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers the specific loan.
The central bank had announced its intent to review the working of ARCs on 7 April, as part of its announcements following the monetary policy committee (MPC) decision.
“Asset reconstruction companies play an important role in the resolution of stressed assets. Their potential however is yet to be fully realized," RBI governor Shaktikanta Das had said, adding that a committee will undertake a comprehensive review of the working of ARCs and recommend measures to enable them meet the growing requirements of the financial sector.
RBI’s concerns of unrealized potential seem to have stemmed from the fact that extant regulations are not conducive for ARC participation as equity buyers in stressed companies.
Last year, the central bank had rejected a resolution plan submitted by UV Asset Reconstruction Co Ltd for acquiring assets of Aircel citing that the plan does not conform to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act. The UV ARC resolution plan involved the ARC getting a 76% stake in the company in the first five years, with the financial creditors getting the rest. Following this, the ARC association and lenders like State Bank of India (SBI) sought clarifications from RBI on the involvement of ARCs in resolution plans under IBC.
Mint reported on 26 September that RBI has decided not to approve bankruptcy resolution plans submitted by asset reconstruction companies. However, ARCs can instead purchase the debt of the stressed accounts from banks and participate as a creditor under IBC.
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