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The Reserve Bank of India will not approve bankruptcy resolution plans submitted by asset reconstruction companies (ARCs), a person aware of the matter said, a move that is likely to jeopardize the recovery of thousands of crores worth of bad loans.

ARCs can instead purchase the debt of the stressed accounts from banks and participate as a creditor under IBC. RBI had recently rejected UV Asset Reconstruction Co. Ltd’s (UVARCL) resolution plan for the bankrupt telecom operator Aircel Group.

“In order to allow ARCs to participate as resolution applicants, several enabling conditions need to be evaluated. There is a need to expedite the mechanism for resolution of corporate insolvency, but it will be wrong to use an inappropriate tool for the purpose," said the person.

With RBI refusing to approve resolution plans from ARCs, banks may have to write off 6,630 crore, which they otherwise would have received from UVARCL. It also puts the insolvency process of Reliance Communication Ltd in jeopardy as UVARCL had also emerged as the highest bidder for the bankrupt telco.

Section 29A of IBC disqualifies ARCs from acting as resolution applicants.

“Exemption under 29A neither has the legal intention nor does it allow, per se, ARCs to act as resolution applicants or to override the statutory limitations barring such participation. It merely exempts them from certain disqualifications if they were otherwise permitted to act as resolution applicants," added the person.

Last month, Mint had reported that RBI had rejected the resolution plan submitted by UVARCL for acquiring the assets of Aircel, saying the plan does not conform to the guidelines of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act.

According to RBI’s stance, the Sarfaesi Act defines ARC as an entity that carries out the business of securitization and asset reconstruction. An ARC is allowed to do no other business unless there is prior approval of RBI. An ARC can therefore acquire only loan assets from banks or NBFCs to be realized through restructuring and recovery.

According to the person cited earlier, UVARCL approached the central bank in July 2019 seeking approval for submission of a resolution plan under IBC. “The ARC was denied permission in August 2019 as the proposal neither conformed to extant regulatory guidelines nor provisions of the Sarfaesi Act. This was reiterated to the ARC and the Association of ARCs in subsequent meetings with their officials," said the person.

Aircel has a liability of 12,289 crore in AGR dues to the government, while RCom owes 25,199 crore, including spectrum usage charges and licence fees. Both resolution plans have also been challenged by the department of telecommunications (DoT) as it fears it may not recover its dues from the resolution of these bankrupt telcos.

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