The Reserve Bank of India (RBI) has decided to hike the minimum net owned fund (NOF) for asset reconstruction companies (ARCs) three-fold to ₹300 crore, allow them to act as Resolution Applicant under the Insolvency and Bankruptcy Code, 2016 (IBC), and give them flexibility in the deployment of surplus funds, among others.
These measures are aimed at strengthening transparency in the ARC sector and improving the corporate governance standards in ARCs as per the amended regulatory framework for ARCs.
The requirement of NOF for ARCs has been increased to ₹300 crore on an ongoing basis from the existing requirement of ₹100 crore.
Glide path
The RBI has provided a glide path for the existing ARCs to achieve the minimum required NOF of ₹300 crore — ₹200 crore by March 31, 2024; and ₹300 crore by March 31, 2025.
ARCs will be allowed to act as Resolution Applicant (RA) under Insolvency and Bankruptcy Code, 2016 (IBC), subject to conditions, including minimum NOF of ₹1,000 crore; and 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.
The RBI said these companies shall, by transferring funds, invest in the Security Receipts (SRs) at a minimum of either 15 per cent of the transferors’ investment in the SRs or 2.5 per cent of the total SRs issued (earlier guidelines required investing a minimum of 15 per cent of the SRs), whichever is higher, of each class of SRs issued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme.
In order to allow ARCs to manage their surplus funds efficiently, in addition to the avenues already permitted, they have been permitted to deploy the available surplus funds in short-term instruments—money market mutual funds, certificates of deposit, and corporate bonds or commercial papers—that have a short-term rating equivalent to the long-term rating of AA-or above.
Per the revised guidelines, the tenure of MD/CEO or WTD shall not be for a period of more than five years at a time and the individual shall be eligible for re-appointment.
However, the post of the MD/CEO or WTD shall not be held by the same incumbent for more than fifteen years continuously. Thereafter, the individual shall be eligible for re-appointment as MD/CEO or WTD in the same ARC, if considered necessary and desirable by the Board, after a minimum gap of three years, subject to meeting other conditions.
RBI said no person can continue as MD/CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, ARCs’ Boards are free to prescribe a lower retirement age.
“The revised regulations incorporate sector-positive enabling measures along with enhanced governance and disclosure norms to improve the functioning of ARCs. However, quite a few recommendations of ARC Committee which could have broadened the operating dynamics, are missing,” said Hari Hara Mishra, Director, UV ARC Ltd.
Published on October 11, 2022
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