RBI says asset reconstruction companies can act as resolution applicants under IBC

The Reserve Bank of India (RBI) on October 11 allowed asset reconstruction companies (ARCs) to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC), subject to conditions.

For an ARC to be eligible, it should have a minimum Net Owned Fund (NOF) of Rs 1,000 crore, the RBI said in a release. Further, the ARC should also have a board-approved policy regarding taking up the role of resolution applicant, which may, among other things, include the scope of activities, internal limit for sectoral exposures.

Additionally, a committee comprising a majority of independent directors has to be constituted by the ARC to take decisions on the proposals of submission of resolution plan under IBC, said the RBI.

The ARC shall also explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which may be considered for managing the firms/ companies, if needed, the regulator said.

ARCs play a vital role in the management of distressed financial assets of banks and financial institutions. They buy stressed assets from banks and financial institutions. ARCs are currently not permitted to commence or carry on any business other than that of securitisation or asset reconstruction or the business without prior approval of the RBI.

Also read: 5 years on, resolutions under IBC struggle due to poor infrastructure, delays

In April 2021, the RBI had set up a committee to undertake a comprehensive review of the working of ARCs and recommend suitable measures for enabling them to function in a more transparent and efficient manner.

The RBI, in its release dated October 11, also said that ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the adjudicating authority under IBC.

The ARC is also expected to disclose the implementation status of the resolution plans approved by the adjudicating authority on a quarterly basis in their financial statement.

Nearly six years after India introduced the bankruptcy, issues of poor infrastructure and inordinate delays in the resolution of stressed assets continue to haunt lenders.

Strict timelines prescribed under the code, the multiplicity of cases, and the lesser number of tribunals have increased the backlog of cases. Lenders, on the other hand, have had to take steep haircuts on their exposure to stressed companies.