RBI Introduces Revised Guidelines for Asset Reconstruction Companies

In its latest move to bolster the stability of the financial sector, the Reserve Bank of India (RBI) has issued revised guidelines for Asset Reconstruction Companies (ARCs) through the Master Direction – Reserve Bank of India (Asset Reconstruction companies) Directions, 2024. Effective immediately, these new guidelines entail a significant increase in the minimum capital requirement for ARCs to commence securitization, now set at Rs 300 crore, as compared to the previous Rs 100 crore stipulated on October 11, 2022.

To ensure a smooth transition, the RBI has provided a roadmap for ARCs to achieve the minimum required net owned fund (NOF) of Rs 300 crore. ARCs are mandated to raise their NOF to Rs 200 crore by March 31, 2024, and subsequently to Rs 300 crore by March 31, 2026. Failure to comply with these milestones will result in supervisory action, including restrictions on conducting additional business activities until the requisite NOF is attained.

Additionally, ARCs are prohibited from investing in land or buildings, except for limited investment for their own use, capped at 10% of their owned funds. Furthermore, ARCs are now permitted, under certain conditions, to undertake activities as Resolution Applicants under the Insolvency and Bankruptcy Code, 2016, subject to meeting specific criteria and conditions.

The guidelines also mandate ARCs to maintain a capital adequacy ratio of a minimum of 15% of their total risk-weighted assets and to report instances of serious irregularities committed by professionals such as chartered accountants, advocates, and valuers. In a bid to ensure effective governance, the directions stipulate age and tenure limits for Managing Directors/Chief Executive Officers (MD/CEO) and Whole-time Directors (WTD) of ARCs, restricting their tenure to five years at a time, with a maximum cumulative tenure of fifteen years. Moreover, individuals in these positions are not permitted to continue beyond the age of 70 years.

These revised guidelines are aimed at streamlining and regulating the operations of Asset Reconstruction Companies in India, with the overarching goals of promoting transparency, accountability, and integrity within the financial system. ARCs continue to play a crucial role in facilitating the cleanup of banks’ balance sheets by acquiring distressed financial assets and bringing liquidity into the system through securitization and asset reconstruction processes.