ARCs can set up JVs to buy specific assets

MUMBAI: RBI has permitted asset reconstruction companies to set up joint ventures to acquire specific assets. The much-awaited draft guidelines for ARC/securitisation companies was released by the central bank on Wednesday.
As per RBI guidelines, an ARC should have a minimum capital of Rs 2 crore as a pre-requisite for registration by RBI. Although RBI has prescribed a 15% capital adequacy ratio, bankers said that it is possible for an ARC to acquire large assets, as the assets would be funded through the securitisation route by placing the securitised paper with Qualified Institutional Buyers.
A condition in the guidelines is that ARCs cannot take over management of or sell or lease, the whole or part of the business of the borrower. They may, however, take recourse to any of the measures to recover the secured debt as provided for in sub section (4) of section 13 of the Ordinance.
According to RBI''s former executive director, MR Umarji, who helped draft the legislation on securitisation and reconstruction of assets, acquiring assets is the better alternative compared to acquiring management control of a business.
“While acquiring management control the acquirer also has to take over the liabilities of the company, while this is not the case while acquiring assets,� he said.
Promoters wanting to get into asset reconstruction will have to set up a separate company, as an ARC can undertake only securitisation and asset reconstruction. RBI has prescribed aggressive provisioning requirements with the ARC having to classify an asset as a non-performing asset if it is not able to resolve it through restructuring or sale within 12 months.
In terms of the guidelines, asset acquired by the ARC will have to be written-off at the end of 36 months from the date of an asset becoming an NPA in the ARC''s books.
Under the guidelines, a company can conduct the composite business of asset reconstruction and securitisation. But in the case of securitisation, the securitised paper can be issued only to Qualified Institutional Buyers such as financial institutions, insurance companies, mutual funds and provident funds.
ARCs can in turn promote another ARC as a separate joint venture company. According to bankers, this clause has been incorporated so that an ARC can tie up with strategic partners for the acquisition of specific assets. The strategic partner can also be a foreign one, as there is no restriction on foreign investment. However, there is prescription that the maximum stake an individual can hold does not exceed 49%.
RBI has given significant responsibility to the ARC''s board in approving a restructuring proposal. But at the same time it has said that every ARC must formulate its own asset acquisition policy.
The asset acquisition policy should incorporate, norms and procedure for acquiring assets, the desirable profile of assets, the valuation procedure, delegation of powers to various functionaries and in the case of impaired financial assets framing of plan for their realisation.
RBI has invited comments on the draft recommendations within 10 days following which it is expected to come out with the final guidelines and commence registration of ARCs.