The Reserve Bank of India (RBI) released a new regulatory framework for Asset Reconstruction Companies (ARCs) on 11 October allowing them to be resolution applicant (RA) entities under the Insolvency and Bankruptcy Code, 2016 (IBC), marking a significant change to the existing policy.
As the current Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act does not clearly address this matter, the banking regulator had to issue a special authorisation under section 10 of the act to establish the policy change.
Chapter III of the SARFAESI Act regulates the process of creating, regulating and running ARCs. The actions that an ARC may take in order to reconstruct an account’s assets are outlined in section 9 of the act. These actions resemble resolution plans under the IBC in many ways.
Among the notable changes were the new norms for the security receipts programme. ARCs were previously required to invest at least 15% in each security receipts programme. According to the updated regulatory framework, ARCs must now invest a minimum of 2.5% of all security receipts issued, or 15% of a transferor’s investment in SRs, whichever is the higher amount.
The framework has evoked mixed responses from law firms. Those in favour say it will help in clearing cases that are pending with the National Company Law Tribunal and the courts. Others feel it may be a missed opportunity, as the new framework has not taken into account resolution-friendly measures like changing a borrower’s management, or giving ARCs protection from routine legal actions that could slow down the resolution process.
