RBI Releases Master Guidelines For ARCs: Know Latest Provisions Effective April 24

The Reserve Bank of India (RBI) on April 24 released the master direction for asset reconstruction companies (ARCs). In the latest directions, which have become effective immediately, the RBI has raised the minimum capital requirement for ARCs to begin securitisation to Rs 300 crore, compared with Rs 100 crore earlier on October 11, 2022.

According to the directions, the RBI has provided a glide path to ARCs to achieve the minimum required net owned fund (NOF) of Rs 300 crore.

As the minimum NOF was Rs 100 crore as on October 11, 2022, ARCs now have to increase it to Rs 200 crore by March 31, 2024, and to Rs 300 crore by March 31, 2026.

“To commence the business of securitisation or asset reconstruction, an ARC is required to have a minimum net owned fund (NOF) of ₹300 crore and thereafter, on an ongoing basis,” the RBI said.

In case of non-compliance at any of the above stages, the RBI said, the non-complying ARC shall be subject to supervisory action, including a prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time.

According to the RBI directions, ARCs with a minimum NOF of Rs 1,000 crore can undertake activities as resolution applicants under the Insolvency and Bankruptcy Code, 2016.

ARCs may deploy funds for undertaking restructuring of acquired loan accounts with the sole purpose of realising dues in government securities and deposits with scheduled commercial banks, Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) or such other entity as may be specified by the RBI.

ARCs can also invest in short-term instruments like money market mutual funds, certificates of deposit and corporate bonds/ commercial papers that have a short-term rating equivalent to the long-term rating of AA or above by an eligible credit rating agency (CRA). Such investments will be subject to a cap of 10 per cent of the NOF of the ARC on maximum investment in such short-term instruments.

It also said every ARC shall frame a board-approved ‘financial asset acquisition policy’ within 90 days of the grant of the CoR which shall provide that transactions take place in a transparent manner and at a fair price in a well-informed market and the transactions are executed on arm’s length basis by exercise of due diligence.