Tainted promoters misusing asset reconstruction companies, says RBI

Rao emphasised the need for robust governance structures for ARCs for transparent and effective functioning

Asset reconstruction companies (ARCs) are acting as a front for promoters who have defaulted by bidding on their behalf in the bankruptcy process, Reserve Bank of India’s (RBI’s) deputy governor, M Rajeshwar Rao, has said in an interaction with the chief executives of debt recast firms.

“There are concerns around activities in this process chiefly relating to the ARC route becoming a vehicle for entry of ‘tainted’ promoters, who in the first place were responsible for the default of the underlying entity,” Rao said in a speech delivered at the conference on ‘Governance in ARCs – Towards Effective Resolutions’ on May 17, 2024.

 

The speech was uploaded on the RBI website on Friday.

“This aspect has become particularly relevant since the introduction of Section 29A in the Insolvency and Bankruptcy Code (IBC), which was specifically meant to keep out such promoters. The entities meet this requirement by getting a declaration signed from the perspective buyer without undertaking any independent verification,” Rao said.

Rao emphasised the need for putting robust governance structures for ARCs.

“There is a key area, which is a point of concern for us as regulators, namely the governance in ARCs,” he said.

He observed that some ARCs have not implemented the revised guidelines related to the composition and functioning of the board.

“What we observe is that not all ARCs have implemented the revised guidelines on composition and functioning of the Board.”

Based on the Sudarshan Sen committee report, the RBI revised the norms in October 2022, which was subsequently incorporated in April 2024.

According to the revised norms, the Board is required to appoint an independent director as the Chair. Half of the directors on the Board should be independent directors.

The Board should also constitute two committees of the board namely Audit Committee and Nomination and Remuneration Committee.

“I would take this opportunity to urge all ARCs to implement these guidelines in the right spirit. Also, failure to meet regulatory guidelines and wilful violations would invite strict supervisory and enforcement action, if warranted,” Rao added.

The deputy governor also reminded the ARCs to be conscious of their conduct with distressed borrowers.

“While we acknowledge the rights of the ARCs to recover overdue loans, they or their recovery agents should not resort to harassment of borrowers,” he said.

He added that the conduct of ARCs with borrowers has become more critical in view of the share of retail loans in the financial assets acquired by the ARCs has increased from 9 per cent, as of March 31, 2020, to 16 per cent as of March 31, 2023.