Centre proposes 74% FDI in ARCs

The government is learnt to be proposing 74 per cent foreign direct investment (FDI) in asset reconstruction companies (ARCs).

According to sources close to the development, the FDI limit will include investments by a single or group entity, foreign institutional investors (FIIs) and non-resident Indians.

The Reserve Bank of India (RBI) has already recommended 49 per cent limit for investment by FIIs in an ARC. Over and above 49 per cent, the investments will be done through subscription to security receipts issued by ARCs.

As per the Securitisation Act, security receipts will be issued by one or more trusts set up by a specific securitisation or reconstruction company to qualified institutional buyers.

In its earlier recommendation, the RBI had ruled out single-party ownership in ARCs "" something not permitted under the Securitisation Act, sources said. The Act allows ARCs to be set up in India to help banks and institutions recover their bad debts by taking them over and selling them to other investors. It, however, places restriction on shareholding by sponsors of ARCs.

RBI's recommendations had favoured fiscal incentives for ARCs in the form of tax benefits.

Although a final decision on tax benefits will be decided by the Central Board of Direct Taxes, the central bank has proposed that tax incentives could be designed in line with that for mutual funds. The objective is to avoid double taxation "" both in the hands of the promoter and the investor.

The Asian Development Bank had earlier suggested to the government and the RBI that single investor holding be permitted to ensure that there is effective control in ARCs.

The ADB report viewed that single investor of non-performing assets, including foreign investors, should be allowed to subscribe to 100 per cent of the security receipts under any scheme.

Holding 100 per cent security receipts would enable investors to exercise control over resolution strategy, it suggested.

This is typically the primary requirement of independent NPA investors when considering such investments, the report had stated.