PremiumThe Reserve Bank of India (RBI) on Monday constituted a committee to evaluate the role of asset reconstruction companies (ARCs) in stressed debt resolution and review their business model
The Reserve Bank of India (RBI) on Monday constituted a committee to evaluate the role of asset reconstruction companies (ARCs) in stressed debt resolution and review their business model.
The panel has to submit its report within three months after its first meeting.
Premium Headed by former RBI executive director Sudarshan Sen, the six-member panel comprises Vishakha Mulye, executive director, ICICI Bank, P N Prasad, former deputy managing director of State Bank of India, Rohit Prasad, professor of economics, Management Development Institute, Gurugram, Abizer Diwanji, partner, Ernst and Young, and chartered accountant R Anand.
The committee will review the existing legal and regulatory framework and recommend measures to improve the efficacy of ARCs. It will also review their role in stressed asset resolution under the Insolvency and Bankruptcy Code (IBC), and suggest means to improve liquidity 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.
RBI 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 panel will undertake a comprehensive review of the working of ARCs and recommend measures to enable them to meet the growing requirements of the financial sector.
The central bank’s concerns seem to have stemmed from the fact that extant regulations are not conducive for the participation of ARCs as equity buyers in stressed companies.
Premium Premium Last year, RBI had rejected a resolution plan submitted by UV Asset Reconstruction Co. Ltd for acquiring assets of Aircel, citing that the plan does not conform with 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, while the financial creditors would have got the rest. Subsequently, the ARC association and lenders, including SBI, sought clarifications from the RBI on ARC’s involvement in resolution plans under IBC.
On 26 September, Mint reported that the central bank had decided not to approve bankruptcy resolution plans submitted by ARCs, but they could instead purchase the debt of stressed accounts from banks and participate as a creditor under the IBC.
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