RBI Allows ARCs To Submit Resolution Plans Under IBC
ARCs can submit resolution plans if they meet with certain requirements of the RBI.
The Reserve Bank of India has allowed asset reconstruction companies to act as resolution applicants under the bankruptcy law.
In a set of revised guidelines issued on its website, the banking regulator said it would be allowing ARCs to undertake activities as a resolution applicant, which are not directly permitted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
The permission, however, would be subject to certain specific conditions laid down by the regulator. These conditions require that:
ARCs acting as resolution applicants must have net-owned funds of Rs 1,000 crore or more.
ARCs shall have a board-approved policy regarding taking up the role of resolution applicants, which may include the scope of activities, internal limit for sectoral exposures, etc.
The reconstruction firm must have a committee comprising a majority of independent directors to take decisions on the proposals of submission of resolution plan under the Insolvency and Bankruptcy Code.
ARCs shall explore the possibility of preparing a panel of sector-specific management firms or individuals having expertise in running firms.
ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the concerned court or tribunal. If this is not complied with, the ARCs will not be allowed to submit any fresh resolution plans.
ARCs shall make additional disclosures in the financial statements with respect to assets acquired under IBC in addition to the existing disclosure requirements.
ARCs must disclose the implementation status of the resolution plans on a quarterly basis in their financial statements, after approval.
The revised guidelines were introduced after a committee had made recommendations in November 2021. The committee had first floated the idea of allowing ARCs to act as resolution applicants.
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.