ARC policy review in two years likely: RBI

Two days after the government announced its decision to allow 49 per cent foreign direct investment (FDI) in asset reconstruction companies (ARCs), the Reserve Bank of India (RBI) on Friday said it will review the policy after two years.

RBI also said the general permission given to foreign institutional investors (FIIs) to invest up to 49 per cent in each tranche of Security Receipts issued by ARCs would be reviewed after one year.

RBI, in a circular to the banks, said that persons/entities, excluding foreign institutional investors (FIIs), eligible under the FDI route will be permitted to invest in the equity capital of ARCs.

All applications for investment in ARCs will be considered by Foreign Investment Promotion Board (FIPB). The central bank underscored that investment by FIIs in ARCs will not be permitted.

It has also been decided to grant general permission to FIIs registered with Securities and Exchange Board of India (Sebi) to invest in Security Receipts issued by ARCs registered with RBI.

"RBI wanting to review the FDI and FII leeway is a very natural response. It is a very critical and sensitive decision to allow foreign investment in ARCs. This does not imply that RBI will withdraw this leeway in future," said S Khasnobis, president and COO, Arcil.

A 10 per cent ceiling has been placed on a single entity acquiring a stake in an ARC and also on an FII buying security receipts issued by ARCs. "This is a good move. Players in this market have been eagerly waiting for the government's go-ahead for allowing FIIs to buy security receipts. This will provide a good exit route for banks saddled with non-performing assets (NPAs). Banks now can actually sell bad assets to entities which are capable of absorbing bad loans risk," Khasnobis said.