Regulations must remove the fetters on asset reconstruction companies

To make the Insolvency and Bankruptcy Code (IBC) work efficiently, regulation must remove the fetters on asset reconstruction companies (ARCs) buying stressed assets of failed companies. The committee that RBI has set up to review the role of ARCs in resolving bad loans under IBC should, ideally, recommend redefining an ARC as a corporate entity engaged primarily in the business of reconstructing bad loans, governed by the Companies Act 2013, and take it out of the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act altogether. This is necessary to give it the operational freedom an ARC needs to realise its full potential in resolving bad loans under IBC.

An ARC should not be limited to buying and selling financial securities, but must be free to buy and sell the underlying assets of bad loans as well, a role RBI has deemed it fit to deny it, notwithstanding the express mandate of Section 5(3) of the Sarfaesi Act that all the rights of the lender over the borrower flowing from the credit relationship will be transferred to the ARC when the ARC takes over the bad loan from the original lender. The job of an ARC is to resolve bad loans. So, any restriction on an ARC buying an asset underlying a bad loan and being forced to purchase only bad loans from banks is plain irrational. It restricts the market for stressed assets and increases the eventual haircuts that banks have to take. Take RBI's reported rejection of UV Asset Reconstruction Co Ltd's (UVARCL) resolution plan to buy the assets of the bankrupt telecom operator Aircel Group, saying that the plan does not conform to Sarfaesi guidelines.

As the resolution of bad loans takes time, it must be entrusted to patient capital that can get most of the assets placed in their care. ARCs are or should represent patient capital that can buy bankrupt companies, run portions that can be run profitably and sell off bits to buyers looking to buy just those bits and nothing more, to get the optimal value of the assets.