Finally giving ARCs financial muscle

The Reserve Bank of India‘s move to let asset reconstruction companies (ARCs) to participate as resolution applicants (RA) under the Insolvency and Bankruptcy Code (IBC) is an overdue reform. This will enable ARCs to buy stressed assets of failed companies, instead of buying only bad loans from banks. Earlier, RBI had opposed ARCs bidding for debt resolution under IBC, saying the regulation – Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act – prohibited them from doing activities other than that of securitisation or asset reconstruction. This led to RBI blocking UV Asset Reconstruction Co‘s plan to buy the assets of failed telecom operator Aircel. Easing the regulation will allow ARCs to directly control equity in stressed firms, and prevent a repeat of this.

The revised rules require ARCs to have a minimum net- owned fund of Rs 1,000 crore to qualify as an RA. They should also make additional disclosures in their financial statements on assets acquired under IBC. The intent to ensure a strong entity resolves bad loans in a holistic way is sound. ARCs represent patient capital that can buy bankrupt companies, run portions that can be run profitably, and sell off bits to buyers looking to buy those bits, to get the optimal value of the assets. This will help businesses revive, protect the productive assets of the economy and enable banks to fetch a better price.

But ARCs’ attempt, so far, to revive businesses has been tough due to inadequate capital and the regulatory prescription limiting the extent of funds that could be raised from external investors through securitisation, noted the RBI’s expert panel to review the working of ARCs. Now, RBI has raised their minimum capital requirement. This will make ARCs more efficient as capital comes with a cost. An active debt market, from which ARCs can raise funds via subprime bonds to buy out bad loans, is also needed. Overall, changes in the regulatory framework of ARCs to improve governance and financial health are welcome.