The Hindu Business Line : Single investor must have control over ARCs: Report

A REPORT commissioned by the Asian Development Bank (ADB) and the Ministry of Finance on changes in the framework for setting up asset reconstruction companies (ARC) has suggested that a single investor should be permitted to have effective control over such companies.

The report, prepared by PricewaterhouseCoopers (PwC) in association with Amarchand & Mangaldas & Shroff & Co, has said that the restriction on effective control "may act as a significant deterrent for large reputed investors in distressed assets from setting up or investing in ARCs as they may have concerns about their ability to control the ARC operations effectively."

It has said that international experience suggests that investments by independent investors, both domestic and international, have been a key driver of success for the structure for asset reconstruction in other countries.

The Securitisation Act has allowed ARCs to be set up in India to help banks and financial institutions to recover their bad debts by taking them over and selling them to other investors. The Act places a restriction on holding of controlling interest by sponsors of ARCs or being a holding company of the ARC.

The report has also called for clarity on the extent of security receipts that a single investor can hold under any scheme set up by ARC. It has said that ideally a single investor in non-performing assets (NPA), including foreign investors, should be allowed to subscribe to 100 per cent security receipts under any scheme.

"Holding 100 per cent security receipts would enable the NPA investors to exercise control over resolution strategy being used in respect of that scheme, which is typically the primary requirement of independent NPA investors for considering such investments," the report has said.

While suggesting the removal of the applicability of 15 per cent capital adequacy requirement of financial assets acquired by ARC, the report has suggested that RBI may consider granting registration to ARC promoted by reputed parties with adequate financial resources with a minimum net owned fund criterion of Rs 500 crore.

Besides the capital adequacy requirement, the present norms stipulate that ARCs should have a minimum net worth of Rs 200 crore.

On NPA valuation, the report has suggested that the process should recognise negotiated transactions and encourage involvement of independent valuers and consultation among lenders. It has been pointed out that the present system of transfer of NPA at `fair value' could have several limitations.

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