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New Delhi, Nov. 9

IN a bid to accelerate the cleaning up of the banking sector's non-performing assets (NPAs), the Government today permitted 49 per cent foreign direct investment in asset reconstruction companies (ARCs).

FDI was not allowed earlier in ARCs

According to an official release, the Foreign Investment Promotion Board would consider applications from persons/entities eligible to invest in India in the equity capital of ARCs registered with Reserve Bank of India under the FDI route subject to the condition that the maximum foreign equity shall not exceed 49 per cent of the paid up capital of the company.

In case where any individual investment exceeds 10 per cent of the equity, ARC should comply with the provisions of Section 3(3)(f) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

This section states that before giving registration to the ARC, the RBI must satisfy itself "that a sponsor is not a holding company of the securitisation company or reconstruction company as the case may be, or does not otherwise hold any controlling interest in such securitisation company or reconstruction company."

Though foreign direct investment is permitted, investments by foreign institutional investors has not been allowed.

The policy on FDI in ARCs would be reviewed after two years, the release said and added that necessary notification/circular under the Foreign Exchange Management Act are being brought out separately by the RBI.

ARC operations centre on buying up NPAs of lending institutions at a discount and trying to recover them. Any recovery made over and above the price at which the loan has been bought is a profit to the ARC.

Asset Reconstruction Company of India Ltd is the only functioning ARC in the country, while a few applications for registration have been pending with the RBI.

(This article was published in the Business Line print edition dated November 10, 2005)
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