RBI has issued a Circular on October 11, 2022, by which it has introduced revisions to the framework for functioning and operating of Asset Reconstruction Companies (‘ARCs’) with immediate effect. Some of the important provisions introduced are as follows:

i.     New corporate governance provisions in relation to, inter alia, (a) composition and meetings of the Board of Directors; (b) tenure, age, and performance of certain key-managerial personnel; and (c) introduction of audit committee and nomination and remuneration committee. ARCs are required to comply with the requirements within 6 (six) months from the date of the Circular;

ii.    Requirement of prior approval of the RBI if there is a change in (a) the shareholding of the ARC on account of transfer^[1] of shares; and (b) sponsor(s) of an ARC due to fresh issuance of shares;

iii.   Requirement to make enhanced disclosures in relation to financial information, track record of returns for security receipts (‘SRs’) and track record of recovery rating migration and engagement with rating agencies;

iv.    Mandatorily obtaining recovery rating of SRs from credit rating agencies and disclosing assumptions and rationale behind such ratings to SR holders;

v.     Settlement of dues with the borrower after examination by an independent advisory committee;

vi.    Additional measures to ensure that management fee / incentives charged by ARCs are reasonable and transparent including recovering them from only the underlying financial assets;

vii.   Increase in the minimum net owned fund (‘NOF’) requirement from ₹100 crores ( US$ 12.3 million) to ₹300 crores (approx. US$ 36.9 million) on an ongoing basis. Existing ARCs are required to achieve minimum NOF of ₹200 crores (approx. US$ 24.6 million) by March 31, 2024, and ₹300 crores (approx. US$ 36.9 million) by March 31, 2026;

viii.  Permission to deploy surplus funds in short term instruments , money market mutual funds, certificates of deposits and corporate bonds / commercial papers satisfying the required rating criteria, provided the maximum investment in such instruments is capped at 10% of the NOF of the ARC and the ARC has a Board approved policy;

ix.    Permission to invest in SRs at a minimum of either (a) 15% of the transferors’ investments in the SRs; or (b) 2.5% of the total SRs issued, whichever is higher, of each class of SRs issued by the ARC under each scheme on an ongoing basis till the redemption of all SRs issued under such scheme;

x.     Permission to ARCs having a minimum NOF of Rs. 1,000 crores ( US$ 123,004,300) to undertake activities as resolution applicants under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), which are not specifically allowed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Such ARCs are not allowed to retain significant influence or control over the corporate debtor after 5 (five) years from the date of approval of the resolution plan. Additionally, RBI has also introduced certain corporate governance measures in relation to this; and

xi.    Permission to transfer stressed loans which are in default in the books of the transferor to ARCs, subject to RBI Circulars dated June 28, 2019, on ‘Permission to acquire financial asset from other Asset Reconstruction Companies’ and dated December 6, 2019, on ‘Acquisition of financial assets by Asset Reconstruction Companies from sponsors and lenders’.

[1] Any transfer of shares by which the transferee becomes a sponsor; any transfer of shares by which the transferor ceases to be a sponsor; an aggregate transfer of ten percent or more of the total paid up share capital of the ARC by a sponsor during the period of five years commencing from the date of certificate of registration.