ARCIL not buying NPAs in states with high stamp duty

The Asset Reconstruction Company (India) Ltd (ARCIL), India's first asset reconstruction firm, is refusing to buy non-performing assets (NPAs) in states which have high stamp duty.

As of now ARCIL is buying assets only in six states "" Maharashtra, Gujarat, Andhra Pradesh, Chattisgarh, Jharkhand and Rajasthan.

"ARCIL is refusing to buy assets from other than these states where stamp duty is low. This has led to a slowdown in the sale of assets to the asset reconstruction company...We are unable to sell bad assets from other industrialised states such as Punjab, Haryana, Madhya Pradesh and Tamil Nadu because of high stamp duty," said a senior official at a public sector bank.

The higher the amount paid on stamp duty by ARCIL, the lower will be the net realisable value of the distressed asset.

"I have no choice. We cannot buy assets where the transfer cost is prohibitive since it makes the whole transaction unviable," said Rajendra Kakker, managing director and chief executive officer, ARCIL.

"We are corresponding with all the state governments to reduce the stamp duty since it is a state subject," he added. Stamp duty comes in when there is a transfer of assets from a bank/financial institution to ARCIL since it is treated as a transfer of property under the Contracts Act.

Stamp duty is applicable either on the buyer/seller of the asset and is as high as 8-16 per cent of the transaction size in some states.

"If stamp duty is as high as 15 per cent, the resolution of bad assets in those states will be a non-starter. It is in the interest of the states themselves to reduce the stamp duty and permit sale of NPAs for the betterment of the economy," said a banker.

In Maharashtra, Gujarat, Andhra Pradesh, Chattisgarh, Jharkhand and Rajasthan, where stamp duty has been lowered, the levy is 0.1 per cent or Rs 1-2 lakh on the transaction size whichever is lower.

This works out to Rs 90,000 on a deal size of Rs 9 crore and Rs 1-2 lakh if the deal size is larger than Rs 10 crore. There are other reasons too for ARCIL's slowdown. It is facing a major roadblock with regulatory confusion over permitting foreign institutional investors' investment in NPAs.

ARCIL has bought NPAs worth Rs 6,000 crore (i.e. accounts that have a principal outstanding plus overdue interest of Rs 6,000 crore) this financial year.

The bank had set a target to buy NPAs worth Rs 20,000 crore for this financial year, which has now been scaled down to Rs 15,000 crore.