The Reserve Bank of India has allowed asset reconstruction companies to act as resolution applicants under the bankruptcy law.
Prior to this, the RBI has objected to ARCs participating in the bankruptcy resolution process as a bidder. The regulator’s opposition came up first when UV Asset Reconstruction Co. had submitted a resolution plan for telecom operator Aircel Ltd. At the time, the RBI had expressed the view that an ARC is not permitted to participate in IBC, as it is outside the scope of the Sarfaesi Act.
The revised guidelines also prescribe certain corporate governance and operational measures for the ARC industry.
These include the requirement that an ARC must have minimum net-owned funds of Rs 300 crore to continue to function as a reconstruction firm. This is higher than the Rs 100 crore minimum net-owned funds prescribed earlier.
The RBI, however, has provided a glide path for ARCs to reach the higher capital requirements. ARCs must raise their minimum net-owned funds to Rs 200 crore by March 31, 2024 and to Rs 300 crore by March 2026.
“In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time,” the RBI said in its guidelines.
Any kind of settlement proposal with the defaulting borrower shall only be agreed to after an independent advisory committee constituted by the ARC has reviewed the plan. The banking regulator also requires that at least two independent directors of the ARC’s board must deliberate on the recommendations of the advisory committee.
The net present value of the settlement proposal must not be less than the realisable value of the underlying assets. But in case there is a variation, the ARC is required to duly record the reasons for it.
Over and above these, the RBI requires that the managing director and a chief executive officer of an ARC must have a maximum tenure of five years, after which they shall be liable for reappointment. The MD and CEO, however, shall not continue in the position for more than 15 years.
The new norms require that any MD and CEO who completes 15 years in the position shall be eligible for reappointment only after a cooling off period of three years. During this three-year period, the person shall not be associated with the ARC in any direct or indirect capacity.
The MD and CEO shall also not be older than 70 years of age, the RBI said.
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