The core job of an asset reconstruction company (ARC) is to buy troubled assets, recover maximum value from bad loans, clean up bank balance sheets and restore financial stability. They fulfil the first function efficiently, but their role has become increasingly controversial over the years. When ARCs acquire loans of individuals or MSMEs (micro, small and medium enterprises), it is borrowers who often get a raw deal; the opposite holds for large corporate defaulters.
Last week, the Supreme Court (SC) offered serious hope of aggressive judicial scrutiny. On 19 June 2026, a bench comprising chief justice of India (CJI) Surya Kant and justice V Mohana heard a public interest litigation (PIL) (Prateeksha &Ors. v. Union of India &Ors., with advocate Ashwini Kumar Upadhyay) alleging that a ₹1,537 crore debt owed to a consortium of public sector banks (PSBs) led by State Bank of India (SBI) was settled for a mere ₹73.5 crore through transfers to two ARCs: Prudent ARC Ltd and Phoenix ARC Ltd. (Read: From ₹1,537 Crore to ₹73.5 Crore: SC To Hear PIL on Alleged Banking Fraud and ARC Role in JKM Infra Case)
The case centres on JKM Infra Projects Ltd, a Noida-based firm that borrowed heavily from seven banks between 2012 and 2015 against meagre collateral of ₹72 crore. A 2018 forensic audit by Ernst & Young revealed diversion of over ₹902 crore to shell companies. Despite this, banks allegedly delayed fraud classification and sold the loans to ARCs at steep discounts. The PIL highlights inaction by multiple agencies, despite repeated representations, and has sought the constitution of a judicial commission or an expert committee to probe ‘large-scale banking fraud’ facilitated through ARC transactions.
CJI Kant did not mince words, observing the possibility of a “very deep-rooted nexus between borrowers, ARCs and banks.” He also stressed that public money demands serious recovery efforts, not casual write-offs. The Court has issued notices to Union ministries of home and finance, RBI, serious fraud investigation office (SFIO), Securities & Exchange Board of India (SEBI), the lender banks (SBI, Canara Bank, Union Bank of India), the ARCs, and Ernst & Young which conducted a forensic audit in 2018, revealing siphoning of funds. Notices were also issued to the company promoters.
Readers of this column know that these issues are not new. Moneylife has repeatedly flagged dodgy deals by banks and ARCs which are particularly cruel and extortive with small borrowers. The difference is that when the Supreme Court takes cognisance, it can cut through bureaucratic red tape and rivalry between ministries and regulators to order investigations and force accountability.
The Supreme Court has done this before. In a landmark April 2025 order, it directed the central bureau of investigation (CBI) to probe the ‘unholy nexus’ between banks and real estate developers in subvention schemes, leading to multiple first information reports (FIRs) and the setting up of a special investigation team. That order also came from a bench led by justice Surya Kant along with justice N Kotiswar Singh.
CBI went on to register 28 cases in the first phase, followed by 22 more cases, after a nation-wide crackdown expanded the probe.
This time, too, the bench has declared that it ‘will not spare anyone’ and also revisit the very creation and functioning of ARCs, if necessary. If the current PIL triggers a comprehensive probe into the bank-borrower-ARC nexus, it could mark a significant shift from the narrative that ARCs provide a pure market-driven solution to bad loans.
A judicial examination should address the points raised by RBI deputy governor (DG) J Swaminathan in his speech of May 2024. The DG flagged the following issues: banks offloading bad debts to ARCs in order to show cleaner balance sheets, while retaining recovery responsibility and collateral; non-transparent deals with group entities of defaulter companies without scrutiny under related-party transactions; incorrect reporting to central repository for information on large credits system (CRILC). Mr Swaminathan had a lot more to say about transparency, dodgy valuations and security receipts as well as interpretation of RBI directives and circulars. These are serious charges and are based on RBI’s inspection findings.
In 2025, the comprehensive RBI (Asset Reconstruction Companies) Directions, 2025 attempted to plug critical operational and regulatory loopholes to eliminate bad loan evergreening, moral hazard and conflicts of interest within India's stressed-asset ecosystem.
These directions capped resolution timelines to five years (extendable to eight) to prevent warehousing; weeded out marginal players by raising net owned fund requirement of ARCs to ₹300 crore; blocked bilateral, non-transparent asset acquisitions from an ARC’s own sponsor banks; mandated ARCs’ investment in every class of security receipts issued by them to ensure genuine skin-in-the-game. The directions also mandated monthly credit reporting for large defaulters and limited management takeovers strictly to cases involving siphoning or fraud. Since these directions had a compliance deadline of March 2026, the legacy pipeline of dodgy deals has remained in place.
Consequently, enforcement agencies have regularly unearthed sophisticated bypass mechanisms where defaulting promoters establish layered networks of offshore trusts, family offices and shell companies, to buy back bad loans at a steep haircut, allowing them backdoor control over their companies. ARCs play a key role by acquiring assets worth tens of thousands of crores of rupees annually, often at 10%-30% of outstanding value and work out such sweetheart deals with defaulters.
At the national company law tribunal (NCLT) and national company law appellate tribunal (NCLAT), similar allegations of dubious ARC practices have surfaced in 2025–2026 proceedings. These have centred on undervaluation, related-party influence and prioritisation of quick liquidation over genuine revival. ARCs have been accused of abusing their dominant position to exercise de facto control through pledged shares, board observers, escrow arrangements and adviser engagements to distort stakeholders’ consultation committee votes in their favour.
In realty-related cases, home-buyer groups have accused ARCs of pushing undervalued sales or corporate debtor liquidation that disregards their interest and does not maximise fair value. Consequently, tribunals have increasingly scrutinised ARC resolution plans for transparency deficits, low-ball bids and attempts to circumvent moratorium protections, echoing the apex court’s concerns about ARCs fulfilling their core mandate of maximising fair value.
The Supreme Court’s strong observations in this PIL signal a welcome willingness to pierce the veil of opaque ARC transactions that have long shielded banks and large defaulters at the expense of public money and small borrowers. By demanding accountability from all stakeholders, including lenders and regulators, the Court could potentially drive systemic reform rather than cosmetic clean-ups. A strong order could finally ensure genuine reconstruction, instead of convenient liquidation, enforce fair valuations, and compel ARCs to serve their intended purpose instead promoting sweetheart settlements.
The Supreme Court now has an opportunity to enforce one standard of justice for all. Whether this judicial intervention translates into concrete action or fades into another set of observations and powerful directives that remain on paper, will define its legacy.
How borrowers manage to get huge loans?
If genuine corrective action is taken at that level then there is no need for ARC companies?
"?1,537 crore debt owed to a consortium of public sector banks (PSBs) led by State Bank of India (SBI) was settled for a mere ?73.5 crore through transfers to two ARCs: Prudent ARC Ltd and Phoenix ARC Ltd.
The case centres on JKM Infra Projects Ltd, a Noida-based firm that borrowed heavily from seven banks between 2012 and 2015 against meagre collateral of ?72 crore".
The intention of appointing ARC is and was for recovery of assets to pay to debtors. But as usual Hand in glove with company officers ARC and NCLT officers to prolong process in which they get hefty payouts.
As Long as we do not have a strict Punishment like for Murder/Robbery this will continue....All these are cases of Robbing Public Money ! Why are these different ?
On 3 June 2026, the Securities and Exchange Board of India (SEBI) dropped a 109-page bombshell on the markets. In an interim order against Bengaluru-based Rajesh Exports Limited (REL), it alleged financial misrepresentation worth a...
In India, litigation goes on forever. And, even when the main accused is no more, other enablers, collaborators and foot soldiers remain entangled in the slow grind of the legal system for decades.
On 7th May, a judgement by a...
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
If genuine corrective action is taken at that level then there is no need for ARC companies?
"?1,537 crore debt owed to a consortium of public sector banks (PSBs) led by State Bank of India (SBI) was settled for a mere ?73.5 crore through transfers to two ARCs: Prudent ARC Ltd and Phoenix ARC Ltd.
The case centres on JKM Infra Projects Ltd, a Noida-based firm that borrowed heavily from seven banks between 2012 and 2015 against meagre collateral of ?72 crore".