RBI Looks at ARCs Amid a Flood of Allegations: Report

Moneylife Digital Team 13 May 2024

Investor Interest

Top executives of Reserve Bank of India (RBI) are scheduled to meet the top management of asset reconstruction companies (ARC) this week to discuss corporate governance and stressed-asset resolutions amid concerns of potential back-door entry by defaulting promoters, says a report from Economic Times (ET) quoting people with knowledge of the development.

According to the report, RBI has asked the chairman of the board, chairman of the audit committee and managing director of the ARCs to attend the 17th May meeting in Mumbai. Two executive directors of RBI and senior officials will also participate in the meeting, the first by the banking regulator that will see the participation of all 27 registered ARCs, it added.

In December 2021, the income-tax (I-T) department, which carried out search and seizure operations on Omkara Asset Reconstruction Pvt Ltd, Rare Asset Reconstruction Pvt Ltd, CFM Asset Reconstruction Pvt Ltd, and Invent ARC Pvt Ltd, found a nexus between the borrower group and ARCs and a maze of shell or dummy companies used in acquiring non-performing assets (NPAs).

In a release at that time, the central board of direct taxes (CBDT) said, "The search has revealed that the minimum cash payout made out by the ARCs to lender banks for acquiring the stressed assets or NPAs have usually been using the funds of the borrower group. Such funds have been routed through several layers of dummy companies controlled by the borrower group or through hawala channels." (Read: RBI May Cancel Licence of 4 ARCS after I-T Audit: Reports)

According to ET, the meeting called by RBI comes amid allegations that ARCs often strike deals with defaulting promoters, effectively giving them a back-door entry at a steep discount.

Under Section 29A of the Insolvency and Bankruptcy Code (IBC), defaulting promoters are prohibited from giving a resolution plan to lenders.

"The modus operandi here, as alleged, is that an ARC acquires the majority or entire debt of defaulting companies from banks at an auction at a steep discount. Thus, as the largest debtholder, it is in control of the resolution process of the company undergoing corporate insolvency under the supervision of the national company law tribunal (NCLT)," the report says.

According to the IBC rules, the ARC (with 66% debt) has a significant say over the sale process since a resolution can only pass with the consent of 66% of the debtholder.

When a company is not under corporate insolvency, an ARC sometimes sells the assets of a defaulting borrower covertly under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to entities linked to a promoter, ET says, quoting people cited above.

At times, an ARC sells assets under the SARFAESI Act to those entities with whom the defaulting promoter has struck a deal, the people cited above told the newspaper.

According to industry estimates, ARCs have acquired nearly Rs10 lakh crore of bad loans from banks since starting operations in 2003. These loans are acquired against cash or a combination of cash and security receipts (SR). The ARCs have issued nearly Rs2.85 lakh crore of SRs; of this, almost Rs1.5 lakh crore of SRs are redeemed.

The government-backed National Asset Reconstruction Company of India (NARCL) has emerged as one of the most active players in the ARC industry.

According to media reports, NARCL acquired 18 accounts with outstanding loans of Rs92,500 crore until 31 March 2024. It includes the Rs32,000 crore debt of bankrupt Srei Infrastructure Finance Ltd and Srei Equipment Finance Ltd.

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