India’s central bank leadership is scheduled to meet the top management of asset reconstruction companies (ARC) next week to discuss corporate governance and stressed-asset resolutions amid concerns of potential back-door entry by defaulting promoters, people with knowledge of the development told ET.
The Reserve Bank of India (RBI) has asked the chairman of the board, chairman of the audit committee, and managing director of the ARCs to attend the May 17 meeting in Mumbai. Two Reserve Bank executive directors and senior Mint Road officials will also participate in the meeting, the first by the banking regulator that will see the participation of all 27 registered ARCs.
The meeting comes amid allegations that ARCs often strike deals with defaulting promoters, effectively giving them a back-door entry at a steep discount. Under Section 29A of Insolvency and Bankruptcy Code (IBC), defaulting promoters are prohibited from giving a resolution plan to lenders.
The modus operandi here, as alleged, is that an ARC acquires the majority or entire debt of defaulting companies from banks at an auction at a steep discount. Thus, as the largest debtholder, it is in control of the resolution process of the company undergoing corporate insolvency under the supervision of the National Company Law Tribunal (NCLT). Here, the ARC (with 66% debt) has a significant say over the sale process since a resolution can only pass with the consent of 66% of the debtholder, according to the IBC rules.
When a company is not under corporate insolvency, an ARC sometimes sells the assets of a defaulting borrower covertly under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi) to entities linked to a promoter, said people cited above.
At times, an ARC sells assets under Sarfaesi to those entities with whom the defaulting promoter has struck a deal, the people cited above said.
Apart from this, there are allegations of tax evasion, prompting search and seizure operations on four ARCs in December 2021.
These include CFM ARC, Omkara ARC, Rare ARC and Invent ARC. All four have denied any wrongdoing. The people cited above said that ARCs will seek uniform treatment on the resolution of stressed assets between banks and ARCs during the meeting.
For instance, the RBI has often frowned upon ARCs finalising settlements with promoters tagged as wilful defaulters, while banks are not subject to such restrictions. The RBI officials will also deliberate on ways to improve corporate governance.
The regulator conducted the onsite supervision of the ARCs last year, and a senior official from an ARC said they would likely share their insights on the inspection reports.
According to industry estimates, ARCs have acquired nearly `10 lakh crore of bad loans from banks since starting operations in 2003. These loans are acquired against cash or against a combination of cash and security receipts (SR). The ARCs have issued close to `2.85 lakh crore of SRs, and of this, nearly `1.5 lakh crore of SRs are redeemed.
The government-backed National Asset Reconstruction Company of India (NARCL) has emerged as one of the most active players in the ARC industry.
According to media reports, NARCL acquired 18 accounts with outstanding loans of `92,500 crore until March 31, 2024.
It includes the `32,000 crore debt of bankrupt Srei Infrastructure Finance and Srei Equipment Finance under the IBC.
