RBI widened the scope of ARCs; they can now act as resolution applicants

The Reserve Bank of India on Tuesday raised the minimum capital requirement for asset reconstruction companies (ARC) and widened the scope of their activities by allowing them to act as resolution applicants under the bankruptcy law.

Previously, the Central Bank opposed the proposal allowing ARCs to bid for debt resolution under bankruptcy courts.

ARCs are currently not permitted to commence or carry on any business other than that of securitisation or asset reconstruction or the business referred to in Section 10(1) of the SARFAESI Act without prior approval of the Reserve Bank of India.

The RBI now said that ARCs with a minimum net owned fund of Rs 1,000 crore can act as resolution applicants under the provision of Section 10(2) of the SARFAESI Act. This permission shall be subject to the following conditions:

(i) The ARC has a minimum NOF of ₹1,000 crores.

(ii) The ARC shall have a Board-approved policy regarding taking up the role of RA which may inter alia include the scope of activities, internal limit for sectoral exposures, etc.

(iii) A committee comprising a majority of independent directors shall be constituted to take decisions on the proposals of submission of the resolution plan under IBC.

(iv) The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which may be considered for managing the firms/ companies if needed.

(v) In respect of a specific corporate insolvency resolution process (CIRP), the ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the Adjudicating Authority under IBC. In case of non-compliance with this condition, the ARCs shall not be allowed to submit any fresh resolution plans under IBC either as a resolution applicant or a resolution co-applicant.

(vi) The ARC shall make additional disclosures in the financial statements with respect to assets acquired under IBC in addition to the existing disclosure requirements. These would include the type and value of assets acquired under IBC, the sector-wise distribution based on the business of the corporate debtor, etc.

(vii) The ARC shall disclose the implementation status of the resolution plans approved by the Adjudicating Authority on a quarterly basis in their financial statements.

In general, the regulator has also asked all ARCs to raise their minimum net-owned fund thresholds in a phased manner – Rs 200 crore by end-March 2024 and Rs 300 crore by end-March 2026. At present, the minimum standard is pegged at Rs 100 crore.

“In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including the prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time,” the RBI said.