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The RBI may tweak certain rules under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to allow asset reconstruction companies (ARCs) to acquire equity directly in companies sold under the Insolvency and Bankruptcy Code (IBC).
ARCs and banks have impressed upon the central bank the importance of recognising ARCs, which are in the business of buying stressed assets from banks and financial institutions, as resolution applicants (RAs) under the IBC.
“ARCs have written to the RBI and are awaiting a response. They are hopeful of a solution,” said a person familiar with the development, pointing out that ARCs, too, play a positive role in resolving bad loans. The SARFAESI Act was passed in 2002 while the IBC is a recent legislation, passed in 2016.
Bankers feel that the RBI, in consultation with the Centre, may tweak the rules under the SARFAESI Act to allow ARCs to directly pick up stakes in stressed companies.
Aligning the rules under SARFAESI Act with the IBC will ease the resolution process, they said.
Currently, ARCs can take a stake in such companies only by converting debt into equity. This was the route ARCs had taken in earlier cases where they were resolution applicants under the IBC.
The Aircel case
The development follows the RBI’s rejection of a resolution plan submitted by UV ARC Ltd for Aircel, which the National Company Law Tribunal (NCLT) had approved in June. The move could also impact other resolution processes where ARCs are involved, such as that of Reliance Communication.
On August 18, the Association of ARCs in India asked the RBI to address the regulatory gaps between the IBC and the SARFAESI Act to enable them to bid for bankrupt companies.
Under the IBC, which replaced the Sick Industrial Companies Act on December 1, 2016, the debtor ceases to have control of the business, which then shifts to the Committee of Creditors (CoC).
A Resolution Professional (RP) is appointed to manage the business of the debtor on behalf of the CoC with a view to preserving its assets to the extent possible.
However, the SARFAESI Act allows lenders to directly auction assets pledged with them to recover their loans. According to the ARCs’ Association, IBC has specifically permitted RBI-registered ARCs to act as RAs, which the SARFAESI Act is silent about. The Association has also requested the RBI to issue enabling guidelines on the role of ARCs as RAs under IBC rules.
How they differ
While under the IBC, ARCs can convert 76 per cent of their debt into equity, there are no such provisions under the SAFERASI Act. However, ARCs fall under the SARFAESI Act, with the RBI as their regulator, while the IBC is controlled by the Ministry of Corporate Affairs.
In its letter, the Association of ARCs said that there were conflicting provisions in these enactments and a “harmonious interpretation” is required.
Also read: ARCs asked to frame fair practices code for transparency in sale of secured assets
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