The Reserve Bank of India (RBI) on August 12, 2022, updated the Master Circular - Asset Reconstruction Companies to keep all current instructions/guidelines on the subject in one place, with reference to The Asset Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003, vide Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003.
The following provisions have been amended:
• Applicability of the Guidelines/ Instructions
(2) ARCs covered by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their financial statements. In order to promote high quality and consistent implementation as well as facilitate comparison and better supervision, the Reserve Bank has issued regulatory guidance on Ind AS vide circular DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated March 13, 2020 which along with subsequent instructions on the subject is applicable on such ARCs for preparation of their financial statements from financial year 2019-20 onwards.
• Registration and matters incidental thereto
(ii) The ARC seeking registration from the Bank shall submit their application in the format specified at the clause (i) above, duly filled in with all the relevant annexures/ supporting documents to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai - 400 001;
(iv) Any entity not registered with the Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act subject to requisite authorisation/ approval.
• Asset Reconstruction
(2) Permission to acquire financial asset from other ARCs
ARCs will acquire financial asset from other ARCs on the following conditions:
a. The transaction is settled on cash basis;
b. Price discovery for such transaction shall not be prejudicial to the interest of Security Receipt (SR) holders;
c. The selling ARC will utilize the proceeds so received for the redemption of underlying SRs;
d. The date of redemption of underlying SRs and total period of realisation shall not extend beyond eight years from the date of acquisition of the financial asset by the first ARC.
(3) Acquisition of financial assets by ARCs from sponsors and lenders
ARCs shall not acquire financial assets from the following on a bilateral basis, whatever may be the consideration:
(i) a bank/ financial institution (FI) which is the sponsor of the ARC;
(ii) a bank/ FI which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its operations;
(iii) an entity in the group to which the ARC belongs.
However, they may participate in auctions of the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and the prices are determined by market forces.
• Conversion of any portion of debt into equity of a borrower company
Provided that ARCs meeting the criteria set out in sub-paragraph (a) below shall be exempted from the cap of 26% subject to compliance with the provisions of the Act, Guidelines/ Instructions issued by the Bank from time to time as applicable to ARCs as well as Foreign Exchange Management Act, 1999, Reserve Bank of India Act, 1934, Companies Act, 2013, SEBI Regulations and other relevant Statutes. The extent of shareholding post conversion of debt into equity shall be in accordance with permissible Foreign Direct Investment (FDI) limit for that specific sector.
(a) ARCs that meet the conditions mentioned below are exempted from the limit of shareholding at 26% of post converted equity of the borrower company:
(i) The ARC shall be in compliance with NOF requirement of Rs.100 crore on an ongoing basis;
(ii) At least half of the Board of Directors of the ARC comprises of independent directors;
(iii) The ARC shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion;
(iv) The equity shares acquired under the scheme shall be periodically valued and marked to market. The frequency of valuation shall be at least once in a month.
(b) The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which could be considered for managing the companies.
Disclaimer – Please refer to the master circular for further information provided in the Link/Document.
[Circular No. RBI/2022-23/03 DOR.SIG.FIN.REC 1/26.03.001/2022-23]
