The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), was enacted to allow for the registration and regulation of asset reconstruction companies (ARCs) by the Reserve Bank of India (RBI). ARCs can acquire and recover non-performing assets (NPAs) and can, like other secured creditors under SARFAESI, enforce security interests without judicial intervention.
It has often been said that SARFAESI was enacted more as a prudential measure than as a reaction to a systemic NPA crisis. This may be why SARFAESI contained strict limitations that made it harder to operate ARCs.
Section 3(3)(f) of SARFAESI prescribed that shareholding in an ARC by a single sponsor (a person holding at least 10% of the paid-up equity share capital of an ARC) should not be more than 50%, and restricted a sponsor from holding any “controlling interest” in an ARC. Section 3(3)(d) of SARFAESI restricted more than half of the board of an ARC from being made up of sponsor-nominated or associated directors. The obvious investor concern became – how to steer an ARC effectively, after having made significant capital investments, without the ability to control.
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Anu Susan Abraham is a partner and Anandita Kaushik is a senior associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.
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