Bad loan companies seek level playing field
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MUMBAI: Asset reconstruction companies (ARCs) have asked the RBI to let them sell assets of defaulting promoters back to them. They have also asked the central bank to allow corporates and high net worth individuals to invest in troubled loans through the securities issued by ARCs.
The Association of ARCs in India recently responded to the RBI’s call for suggestions to overhaul their structure in the country. ARCs were created under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, which allowed lenders to seize assets.
The role of ARCs reduced after the Insolvency and Bankruptcy Code (IBC), 2016, which enabled banks to sell the defaulting business to a new promoter. To prevent defaulters from buying back their companies at a discount, Section 29A was incorporated. This blacklisted defaulting promoters. After the IBC Act, the RBI had asked ARCs to stick to the principles of its Section 29 and not sell loans to promoters even outside the bankruptcy process.
According to the ARC association, the SARFAESI Act allows them to sell assets to the borrower or the promoter group of companies. “Hence, following the spirit of Section 29A of IBC would be contradictory to the provision of SARFAESI Act,” it said in a note.
Another request from the ARCs is that they be allowed to pick up equity in bankrupt companies as a ‘resolution applicant’ in IBC cases. In the bidding for RCom, the RBI had rejected the winning bid by UV ARC, stating that the SARFAESI law disqualifies them from holding equity in a company.
In a note to members, the association said it has sought a level playing field with the National Asset Reconstruction Company (NARC), which is proposed to be set up by public sector banks, and which will be backed with some form of government guarantee. “Government has announced the formation of new ARC/asset management company to takeover non-performing assets (NPAs) from different banks to clean up their books and work on resolving those NPAs. We request that special regulatory dispensation/benefit if any given to proposed ARC should apply to all existing ARCs and level playing field from regulatory perspective be given to all existing ARCs,” the association said.
ARCs raise money for buying bad loans by selling security receipts (SRs) that entitle investors a share of the recovery proceeds. To ensure that they retain skin in the game, the RBI has asked ARCs to invest at least 15% in the SRs they issue. ARCs have asked for this minimum investment to be brought down to 2.5% in cases where the bank selling the bad loan is not the investor. Other suggestions include a request to be classified as non-banking financial companies (NBFCs), which will enable ARCs to borrow from banks.