RBI's revised ARC norms improve governance; may shake up industry

The Reserve Bank of India's (RBI’s) revised norms for asset reconstruction companies (ARCs) will raise the bar for governance and disclosures, and may also trigger a shake-up in the ARC industry comprising 29 players due to enhanced capital requirements and stringent diligence.

R K Bansal, MD & CEO, Edelweiss ARC said: “The RBI’s amendment of the regulatory framework for asset reconstruction companies will strengthen the overall functioning of ARCs. It provides for lower minimum investment thresholds, similar to AIF structures, flexibility in the investment of liquid funds, participation in insolvency process as an RP, along with enhanced governance framework.”

Echoing Bansal’s assessment, Pallav Mahapatra, managing director and chief executive, Asset Reconstruction Company (India), said the new rules require more disclosure, increasing transparency in the working. “Governance and compliance should come along with business. That will enhance the confidence of prospective investors in the long term.”

On the shape of the ARC sector after the tightening of norms, industry executives said the RBI has raised the minimum capital requirement to Rs 300 crore, from Rs 100 crore. Small players from the pack of 29 ARCs will find it challenging to enhance their capital base for regulatory norms and business growth. This may lead to consolidation, including some exits. 

National Asset Reconstruction Company (NARCL), a vehicle set up with the majority ownership of public sector banks, came into being last year.

Three players -- JM Financial ARC, Edelweiss ARC, and ARCIL -- have a dominant presence in the sector with a sound capital base and management bandwidth. Earlier, many players faced tough times to meet the RBI’s stipulation to have net owned funds of Rs 100 crore.

An RBI study in April 2021 showed although the number of ARCs has increased over time, their business has remained highly concentrated. Of total AUM, about 62 per cent and 76 per cent were held by the top three and top five ARCs in March 2020, respectively.

Furthermore, in terms of capital base of the industry, 62 per cent was held by the top three ARCs. The corresponding share was 67 per cent for the top five ARCs, the RBI study observed.

As for enhancing capacity for doing business, the RBI said minimum subscription to securities receipts (SR) by ARCs shall be higher than 2.5 per cent of total SRs issued or 15 per cent of the transferor’s investment in SRs.

In the ARC industry, the capacity for the number of transactions would go up due to flexibility in leverage, the higher volumes would be only possible if ARCs are able to attract qualified buyers with an appetite to make substantial investments, experts said.