Asset Reconstruction Companies (ARCs) in India are seeking a bigger pie of the stressed asset market and looking to enlist high networth individuals.
ARCs have written to the Reserve Bank of India (RBI) this month, requesting permission to acquire financial assets from asset management companies (AMCs) and alternative investment funds (AIFs). The move aims to streamline the resolution of stressed assets and offer an exit option to mutual funds and AIFs.
ARCs have also proposed that high net worth individuals (HNIs) be allowed to subscribe to and trade in ‘security receipts’ (SRs) issued by ARCs.
AIF assets
Currently, ARCs are restricted to purchasing stressed assets exclusively from banks and financial institutions. However, AMCs and AIFs frequently invest in debentures and bonds of companies. When these entities or their assets become non-performing, AMCs and AIFs struggle to manage these bad assets. Allowing ARCs to acquire such assets would potentially provide an exit route for these investors.
The proposal is seen as a way to achieve a more comprehensive solution for all participants in the financial system and expedite the asset resolution process. Disagreements between bankers and representatives of AMCs and AIFs regarding resolution plans have been known to cause unnecessary delays.
This proposal revives a recommendation made two years ago by the Sudarshan Sen Committee, which suggested that ARCs should be allowed to invest in AIFs. However, while some of the committee’s recommendations were put into action, this particular proposal remained unaddressed.
HNI subscription
ARCs have also proposed that high net worth individuals (HNIs) be allowed to subscribe to and trade in ‘security receipts’ (SRs) issued by ARCs. SRs are issued as partial payment for loan portfolios purchased from banks and are akin to ‘junk bonds’ in India’s growing market for stressed loans.
Current regulations dictate that when ARCs acquire loans, they must pay banks or financial institutions at least 15 percent of the deal consideration in cash. The remaining amount can be settled with SRs specific to the transaction. However, many ARCs lack the financial resources or bank credit to carry out substantial cash transactions.
The proposal suggests that ARCs could secure advance investment commitments from HNIs and other qualified investors, using these funds to finalize loan purchase deals with banks. This arrangement could bridge the gap and facilitate cash transactions between ARCs and banks.
The industry is revisiting this proposal, which would necessitate approval from the RBI for HNIs to participate in the SR market. Banks and industry experts have differing opinions on whether the central bank will support this initiative. Some argue that with improving financials and a reduction in reported non-performing assets (NPAs), the RBI may be reluctant to make changes. Others believe that this could be an opportune moment to introduce mechanisms enabling savvy individual investors to participate in the market.
