RBI proposes norms for takeover of business by ARCs

MUMBAI: Reserve Bank today came up with draft guidelines for change in management or takeover of the company by reconstruction companies, in case of willful default, under Sarfaesi Act. Sarfaesi Act empowers banks and financial institutions to recover non-performing assets without the intervention of courts.

The draft say reconstruction or secularisation companies will be able to do so in case the amount due from borrower is at least 25 per cent of total assets of the borrower.

In the proposed guidelines, comment on which have been sought within 2 months, the central bank said in case the borrower is financed by more than one creditor, those who have given at least 75 per cent of the total loan should agree to such an action.

The reconstruction companies will have to give a notice of 60 days to the borrower indicating its intention to effect change in or takeover in the management of his business and give him time to file objections. These objections must be considered by the board of directors of the reconstruction companies.

Willful defaulter will include the person who is not paying dues despite adequate cash flows and good networth or siphoning of funds to the detriment of the defaulting unit among others.

The management could be taken over or changed if the reconstruction company is satisfied that the management of the borrower is acting in a manner adversely affecting the interest if creditors or is failing to take necessary action to avoid any events which would adversely affect the interest of creditors.