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Wednesday, October 21, 2020

Corporate Affairs Ministry, IBBI bat for ARCs bidding on stressed assets

The association of ARCs has also written to the RBI, seeking a clarification on why the RBI rejected UV ARC’s resolution plan for Aircel.

Written by Karunjit Singh | New Delhi | Updated: October 3, 2020 1:16:56 am
The RBI recently rejected a resolution plan for distressed telecom player Aircel by UV ARC, noting that the acquisition did not conform with the guidelines of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

The Corporate Affairs Ministry and the Insolvency and Bankruptcy Board of India (IBBI) have written to the Reserve Bank of India (RBI), asking the central bank to permit Asset Reconstruction Companies (ARCs) to bid for stressed assets under the Insolvency And Bankruptcy Code (IBC), according to senior government officials.

The RBI recently rejected a resolution plan for distressed telecom player Aircel by UV ARC, noting that the acquisition did not conform with the guidelines of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The primary role envisaged for ARCs under the SARFAESI Act is to acquire bad loans from lenders and conduct recoveries, thereby helping banks clean up their balance sheets and carry out normal banking activities.

“There are going to be very few resolution applicants for distressed companies because of the state of the economy. To prevent ARCs from participating at this stage would be counter-productive,” said a government official, noting that ARCs were a preferred investment vehicle for foreign investors and, thus, preventing ARCs from directly investing in distressed companies would also negatively impact the participation of foreign investors in the distressed assets market.

Explained

Move will help distressed cos get resolution plans

Under current regulations, Asset Reconstruction Companies (ARCs) are not allowed to bid for equity in stressed companies directly, though they can acquire equity through conversion of debt into equity. Allowing ARCs to participate would improve the probability of distressed companies receiving resolution plans.

The association of ARCs has also written to the RBI, seeking a clarification on why the RBI rejected UV ARC’s resolution plan for Aircel.

According to experts, under current regulations, ARCs are not allowed to bid for equity in stressed companies directly, though they can acquire equity through conversion of debt into equity.

Another source aware of developments said the IBBI had requested that ARCs be allowed to participate in the corporate insolvency resolution process after receiving representations from industry, requesting that ARCs be allowed to directly bid for distressed companies under the IBC. The official noted that the RBI should work with stakeholders to address any concerns and allow ARCs to bid for distressed companies.

Manoj Kumar, partner at law firm Corporate Professionals, said allowing ARCs to participate would improve the probability of distressed companies receiving resolution plans, and that the concerns of the RBI could be addressed by amending regulations to restrict the amount of time for which the ARC can hold equity in a distressed company.

“ARCs can raise funds from outside and invest in stressed companies. That should not be totally prohibited,” said Kumar, noting that the RBI could permit ARCs to take over control with the condition that they relinquish control within a specific time frame to address objections that the purpose of ARCs is not to run businesses.

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