RBI issues draft norms for ARC

While banks and financial institutions have moved fast to recover funds locked up in non-performing assets NPAs by sending notices to defa...

While banks and financial institutions have moved fast to recover funds locked up in non-performing assets NPAs by sending notices to defaulters, the Reserve Bank of India has set in motion the process of creating Asset Reconstruction Companies ARC which will take over and manage NPAs8212;which are estimated in the region of Rs 1,10,000 crore8212;of banks and FIs.

The draft guidelines on ARC prepared by the committees appointed by the RBI have set Rs 2 crore of minimum owned funds for a recognised ARC, and it is mandatory for them to obtain a certificate of registration from the apex bank before commencement of business. The draft norms, released on Wednesday, also proposed that every securitisation or reconstruction company S038;R company or ARC should frame with the approval of its board a 8216;Financial Asset Acquisition Policy8217;, within 90 days of grant of certificate of registration, which will clearly lay down the policies and guidelines covering the ARC.

The early issuance of final guidelines will enable setting up of ARCs in the country. ICICI Bank8217;s blueprint for setting up an ARC on the lines of a mutual fund company with Rs 10 crore capital base, along with other banks and institutions, is already in place, while the beleaguered IFCI is also planning to float an ARC.

8216;The acquisition of assets by S038;R company should be in conformity with the principles of 8216;true sale8217; whereby the risks and rewards associated with the assets stand transferred to the transferee. Asset acquisition should be made under the supervision of an Asset Acquisition Committee, which is a committee of the board with independent directors who are not nominees of the sponsors in majority,8217; the RBI said.

The draft norms also envisage that the existing ARCs would cease to do such business within one year from the commencement of the Ordinance by June 20, 2003. And S038;R companies are not supposed to undertake any activity other than S038;R activity without the prior permission of the RBI. The draft allows the ARCs to set up one or more trusts which could issue security receipts to qualified institutional buyers QIBs under section 7 of the Ordinance, and trusteeship of such trusts should vest in their board of directors. The security receipts issued are transferable/ assignable only in favour of other QIBs.

Rescheduling and/or settlement of debts should be done according to the rules framed by their boards and under the supervision of a committee formed by the board for the purpose, the draft norms say. However, new ARCs could be formed in joint venture. An ARC, which is carrying on any other business, should cease to do such business within one year from the commencement of the Ordinance.

No S038;R company could change or takeover the management of or sell or lease, the whole or part of the business of the borrower. They may, however, take recourse to any of the measures to recover the secured debt as provided for in the Ordinance, the RBI draft norms said. The guidelines have also specified the continuous disclosures to be made by ARCs, besides those relating to the issuer of security receipts and terms of offer.