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Central bank sets up committee to review ARCs\' role
Photo Credit: Reuters

The central bank has set up a six-member committee to review the working and business models of asset reconstruction companies (ARCs).

A panel will also review their role under the Insolvency & Bankruptcy Code (IBC).

The committee will be chaired by former executive director of the central bank, Sudarshan Sen. It will review the legal and regulatory framework for ARCs and recommend measures to improve efficacy of the debt purchasers.

Of the five other members, two are bankers, namely, ICICI Bank’s executive director Vishakha Mulye and former deputy managing director of the country’s biggest lender State Bank of India, PN Prasad.

The other three members are – Management Development Institute’s (MDI) professor of economics Rohit Prasad, EY partner Abizer Diwanji and chartered accountant R Anand, who was previously a special advisor to EY.

The committee will make suggestions for improving liquidity in and trading of security receipts.

Currently, ARCs act as primary buyers of non-performing assets from bank and non-bank lenders through a 15:85 structure (earlier 5:95) where they are mandated to invest 15% upfront cash and balance 85% by issuing security receipts (SRs). These SRs are redeemable after the asset is turned around.

Most ARCs are capital-starved at present.

As of January end 2021, the number of ARCs registered with the central bank stood at 28, of which about 5-6 top firms are active.

The panel will submit its report within three months from the date of its first meeting, which is yet to take place.

The committee will also review matters relevant to the functioning, transparency and governance of ARCs.

The committee has been set up against the backdrop of the government’s plan to set up a National Asset Reconstruction Company Ltd to sell large stressed assets of Rs 500 crore and above.

It also comes after the resolution of distressed assets under the Insolvency and Bankruptcy Code (IBC) hit a stumbling block in August 2020 with the central bank rejecting UV Asset Reconstruction Company Ltd’s bid to acquire Aircel Ltd’s assets.

The RBI nixed the Delhi-based ARC’s resolution plan on the grounds that the SARFAESI Act doesn’t allow an ARC to acquire another company. SARFAESI is short for Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest. The 2002 law allows banks to auction defaulters’ assets to recover loans.

UV ARC’s plan to acquire Aircel’s assets was approved by the National Company Law Tribunal (NCLT) in June 2020.

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