RBI seeks finance ministry's nod to relax sponsor capital restriction for ARCs

MUMBAI: The Reserve Bank of India ( RBI) has sought the finance ministry's approval to ease the sponsor holding limit for asset reconstruction companies ( ARCs) as it aims to accelerate the clean up of bank balance sheets, people familiar with the development said.

"RBI has recommended finance ministry to relax sponsor capital restriction; government is also seriously looking at it and may be soon amending a few things," the CEO of a private sector asset reconstruction company said, requesting anonymity.

“Under capital structure, sponsors should be allowed to put more than 50%, as sponsor capital is the most easily available source of funding today."

Currently, foreign investors can in vest up to 49% via the automatic route, and beyond 49% via the government route in the capital of ARCs. No sponsor can hold more than 50% of an ARC's shareholding either by way of FDI or by routing it through foreign institutional investorforeign portfolio investor controlled by the single sponsor.

In the sixth bi-monthly policy held on February 2, RBI Governor Raghuram Rajan had stressed on the need to create additional capacity in the system for sale of bad assets. “We never tell banks they must sell such and such asset but we need to create capacity in the system to absorb asset sales if they happen,“ Rajan had said.

“ARCs have mentioned some impediments in access to capital; we are looking into that and working with government to see their capacity can be expanded.“

Another person aware of the development said the restriction of not allowing sponsors to hold more than 50% of an ARC's equity base is a big hurdle and should be relaxed. “For sponsor equity, Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Securi ty Interest) Act has to be amended.Also, if banks can look at an outright sale instead of security receipts from the sale, that will further scale up their business and more capital can come,“ this person said.

Asset reconstruction companies have also been seeking relaxation in ownership rules, so that they could tap the capital markets for additional sources of funding. In a meeting on January 18 at the Reserve Bank headquarters in Mumbai, this particular proposal was also discussed.

“The idea was how to capitalise the ARCs, how to raise more capital from international sources and how to ensure that there is lot more risk capital available,“ Rashesh Shah, group CEO at Edelweiss, had said after the meeting. “Suggestions included additional funding means for ARCs like IPO.“

A particular norm from the RBI is acting as a hindrance for raising funds via an initial public offer of equity.According to RBI norms, a 10% change in shareholding will need regulator permission. An entity that holds more than 10% stake in an ARC is classified as a sponsor.

Recently, the RBI also mandated that ARCs pay 15% cash upfront, compared to 5% earlier, while buying a stressed asset from financial institutions.

Data compiled by ETIG shows that gross non-performing assets of public sector banks rose to Rs 3,11,169 crore in 2014-15 from Rs 92,515 crore in 2010-11.