Revised guidelines for ARC powers round the bend

The Reserve Bank of India (RBI) may issue fresh guidelines on an asset reconstruction company's (ARCs) power to change the management of a defaulting borrower.

This follows last week's Supreme Court verdict in the Mardia versus ICICI Bank case upholding the constitutional validity of the Securitisation Act. The RBI may fine-tune the norms under sections 9(A) and 9(B) of the Act, said a source.

These two sections deal with measures for assets reconstruction with regard to change of management of the business of the borrower and sale or lease of the part or whole of the business of the borrower.

The RBI on April 23 last year in its guidelines on the implementation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 had stated that the central bank was in the process of framing a set of standard guidelines in the matter of takeover of the management, sale or lease of whole or part of the business of the borrower.

The central bank had advised the asset reconstruction companies to refrain from exercising the measures of take over of management, sale or lease of the borrowers' business as provided for in Section 9 of the Act, until guidelines in this regard are notified by it.

If the RBI issues fresh guidelines under section 9(A) and 9(B), the ARC's would be empowered further to tackle borrowers who are not co-operative, said managing director & CEO Asset Reconstruction Company India Ltd (Arcil) Rajendra Kakker.

"The ARCs will be a position to take drastic steps like change the management or lease the facility to a new management in case promoters of the companies are not willing to co-operate in the entire process," he explained.

While formulating the strategy the RBI will have to keep in mind the fact that the borrower has the right to appeal to the debt recovery tribunal (DRT) as the Supreme Court in its verdict had declared section 17 (2) of the Act as unconstitutional thus leaving room for litigation, said senior vice president department of law, UTI Bank, B Gopalakrishnan.

This section earlier made it mandatory for the defaulters to deposit 75 per cent of the loan amount with DRT as a precondition of filing an appeal. The Supreme Court has set aside this section.