The Hindu Business Line : Investment in ARCs — Regulatory structure likely for debt FIIs

DEDICATED debt market foreign institutional investors (FIIs) could soon find themselves lending their financial muscle to Indian asset reconstruction companies (ARCs).

The Ministry of Finance is considering a proposal to create a separate regulatory framework to allow debt FIIs to route their investment into debt instruments issued by ARCs.

In a recent note on ARCs, the Ministry has said that it was looking into a suggestion to create a regulatory environment to encourage FII participation in fund raising by ARCs. "FIIs are capable of bringing in large funds required by ARCs to buy NPAs from banks," the note has said.

A mention of the Government's intent to create a definite required regulatory framework for enhanced FII participation in the NPA restructuring market could find a place in the forthcoming Union Budget.

At present, the asset reconstruction business is in a nascent stage in the country with only one ARC — the Asset Reconstruction Company of India Ltd (ARCIL) — being operational. A couple of more such companies have registered with the Reserve Bank of India and are waiting to take a plunge into the market.

The suggestion for a separate regulatory treatment for debt FII which focus their activities on distressed assets across the globe was initially made by the consultancy company, Pricewaterhouse Coopers (PwC), that had submitted a detailed report to the Finance Ministry on the steps needed to create a better environment for the functioning of ARCs.

The report had suggested that the Government should consider creating a separate annual sub-ceiling for distressed asset funds within the overall country ceiling for investments by all SEBI-registered debt FIIs. Foreign investors have to necessarily register with SEBI as FIIs if they wish to invest in debt instruments of Indian companies.

"Given the existing levels of NPAs and possible requirements for additional funding for completion of projects under implementation, we believe that the proposed sub-ceiling for distressed asset investors' investments in debt instruments of ARCs may be initially set up at a level of not less than $1 billion per annum," the report had suggested.

Incidentally, SEBI had recently raised the overall country ceiling for debt FIIs from $1 billion to $1.75 billion. Besides, fixing the overall country ceiling for such investment, the capital market regulator also allocates sub-ceilings for the individual debt FIIs.

"Since distressed asset funds may be expected to invest in India largely through FIIs, their ability to invest would be limited by the individual and general permissible debt FII ceiling, which may be modified from time to time considering general policy considerations rather than the specific policy objectives of encouraging asset reconstruction activity," PwC has said while arguing for a separate sub-ceiling for the distressed asset funds.

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Investment in ARCs — Regulatory structure likely for debt FIIs