Overhaul of the ARC Framework – Need of the hour

In continuance of various measures to resolve the pile of non-performing assets (NPAs) in the financial sector, the Reserve Bank of India (RBI) has now turned its focus on the role and framework of Asset Reconstruction Companies (ARCs) in being an important part of the solution. Even though the ARCs were in the game since enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), their performance has been sub-optimal and the recovery percentage abysmally low.[1]

Hence, in order to strengthen the role of ARCs in stressed asset resolution, the RBI, in April, 2021, set up a committee under the chairmanship of Shri Sudarshan Sen (former Executive Director of RBI) to undertake a comprehensive review of the working of ARCs  (“Committee”).[2] The Committee submitted its report on September 14, 2021[3], providing 42 recommendations focusing on (i) extant legal and regulatory framework including streamlining of legal provisions/processes; (ii) acquisition, securitisation and reconstruction measures for financial assets; (iii) liquidity and trading of security receipts (“SRs”); and (iv) operational efficiency of ARCs.

Some of the key recommendations and findings of the Committee (with our observations on the same in italics) are as follows:

Measures for acquisition and asset reconstruction

  • ARCs to become resolution applicants under the Insolvency and Bankruptcy Code, 2016 (“IBC”) either through their SR trust or through an alternative investment funds (“AIF”) sponsored by them.[4] This is an important recommendation as ARCs are being restricted from participating in asset resolution through the IBC framework on grounds of the same not being one of the permitted activities under SARFAESI.
  • A two-year moratorium is being proposed on proceedings against the borrower upon acquisition of 66% of debt by an ARC, along with payment deferment of government dues[5]. This will provide a much-needed breathing space for ARCs and the borrowers alike to come out with a revival plan, and the ARC will not be faced with multitude of legal proceedings during the resolution process, which may interfere with the revival process.
  • With an exposure of INR 500 Crore and above, the ARCs will be allowed to formulate a resolution plan involving debt restructuring (that satisfies the viability assessment criteria as prescribed under the RBI’s June 7 Circular[6]), thereby ensuring focus on revival instead of recovery.
  • All categories of Special Mention Accounts (“SMAs”), and not only NPAs, to be considered for sale to ARCs and dispensation to be provided to the lenders on an on-going basis to amortise the loss on sale over a period of two years. This will allow banks to offload stressed assets (not being NPAs) at an early stage and enable the ARCs to aggregate the debt of the borrowers.
  • Minimum requirement for SR holding by ARCs to be the higher of 15% of the lenders’ investment in SRs or 2.5% of the total SRs issued, per SR class/ scheme. This is a welcome step to ease the 15:85 regime, thereby improving capital-availability situation for the ARCs.
  • Minimum net worth to be increased from INR 100 Crore to INR 200 Crore to ensure that ARCs are backed by financially strong sponsors.
  • To further debt aggregation, the ARCs are to be allowed to acquire stressed loans availed by domestic borrowers from regulated overseas banks and financial institution. Though this will widen the asset pool for ARCs and originators as well as facilitate debt aggregation, it may require corresponding changes in the foreign exchange regulations.
  • Permission to change the trustee without requiring extinguishment of SRs. In such cases, the acquiring ARC will need to purchase the SRs basis the prescribed minimum threshold.[7] This will avoid the time and documentation required for fresh issuance of SRs in case of an ARC-to-ARC transfer.
  • Decision of 66% (by value) of lenders to sell asset to an ARC will be binding on all lenders with the sale to be implemented in 60 days and 100% provisioning to act as deterrent for any dissenting lenders. This will allow ARCs to implement reconstruction measures in a comprehensive manner without the fear of any holdouts. This recommendation is also consistent with the RBI directions on transfer of loan exposure pursuant to a resolution plan formulated under the June 7 Circular.
  • SEBI has been requested to extend the exemption from open offer to ARCs for pledge invocations, which is currently available to banks and public financial institutions[8].

Changes in the SARFAESI Act

  • Increase in threshold of a ‘sponsor’ from 10% to 20% such that the ARC has at least one sponsor. This is to ensure that the sponsors with strong capital infusing capability are duly invested in the ARC and provide a wider pool of investors an opportunity to invest in ARCs.
  • Ambit of ‘qualified buyers’ (“QBs”) to be widened to include HNIs[9] (minimum investment of INR 1 Crore), corporates (net worth of at least INR 10 Crore), NBFCs/ HFCs[10] (not yet notified as ‘financial institutions’), trusts, family offices, pension funds, distressed asset funds, with no related party connections. This will open more avenues for capital infusion in ARCs as well as make the market for SRs deeper.
  • Ambit of Section 5 of the SARFAESI to be expanded to allow ARCs to acquire ‘financial assets’ from regulated entities notified by the RBI – AIFs, foreign portfolio investors, AMCs making investments on behalf of mutual funds, NBFCs (including HFCs), regardless of asset size and retail investors, thereby providing the ARCs with an access to wider pool as well as allowing them to aggregate debt of a borrower.
  • RBI to consider issuing guidelines pertaining to the sale and lease of businesses of borrowers by ARCs without taking over of management as contemplated under Section 9(1)(b). Also, the much-debated phrase ‘substantial part of business’ under Section 13(4)(b) to be clarified to mean that the asset is either capable of 20% revenue generation in the preceding financial year or is valued at more than 50% of the total assets of the borrower. This provision has been dormant since inception and now is a good time to bring it into effect.
  • ARCs to be given enforcement rights under Section 13 of the SARFAESI Act, even if assignors did not have such rights, by modifying the definition of ‘secured creditor’.
  • Government of India to consider a mechanism for automatic transfer of charge without borrower’s consent upon sale of assets to an ARC. This will necessitate changes in the provisions pertaining to registration/modification of charge by a borrower under the Companies Act, 2013[11].

Changes reflecting confluence with the RBI’s Master Directions on Transfer of Loan Exposures[12]

  • In case of default of INR 100 Crore and above, lenders’ resolution plan to necessarily evaluate sale / auction of NPAs to ARCs as one of the options.
  • Allowing sale of fraud accounts subject to adequate safeguards and accountability.
  • Secondary Loan Market Association to provide lenders with comprehensive checklist on information to be given to ARCs at pre-deal stage for due diligence and deal evaluation, with the data room open for 30 days. This is in any case a requirement for any loan transfer via a public auction, such as Swiss challenge, as provided in the Master Directions.
  • Final approval of the reserve price to be determined by a high-level committee, having power to write-off the loan. Further details on the high-level committee has not been provided but will need to be ironed out.

Governance of ARCs

  • Half of the board members of an ARC to be independent directors in the event the ARC sponsors an AIF.
  • Common data staging platform for filing of periodic returns with various agencies – RBI, MCA, RoC, NeSL, CERSAI, etc. This avoids duplication of data and consistency in data collection and information symmetry, which was contemplated in the 2016 amendments to SARFAESI.

Other key recommendations

Additionally, other key recommendations of the Committee include prescription of a model process document for auction by lenders along with separate online platform to be established for ensuring transparency and uniformity, relaxations on provisioning requirements for lenders on SRs held by them[13] and taxability of income from investments in SRs for AIF investors (as pass through).

Closing Remarks

The recommendations of the Committee are a welcome step towards strengthening and streamlining of the ARC framework in India. These recommendations, if adopted by the legislature and regulatory/statutory bodies, will be instrumental in improving the positioning of the ARCs as an important tool for resolving the NPA situation. If one looks closely at the recommendations along with the rationale and objectives (which focusses on widening the ambit of their capital base, asset pool, debt resolution avenues etc), it becomes clear that apart from streamlining the framework by including elements of clarity, transparency, uniformity and governance, the objective is to ensure that the ARCs are well equipped to operate in a commercially effective manner so as to achieve their debt resolution/revival/recovery goals.

While the Report covers several important recommendations, it doesn’t address points such as sale between ARCs (which is currently part of an RBI circular), clarity on requirement for fulfilment of net worth criteria at the time of incorporation, permission to purchase equity of companies other than its borrowers, to name a few. We hope some of these will get included as part of the consolidated Master Directions to be issued by the RBI.

Strengthening the ARC ecosystem will also give a much-needed breather to the IBC ecosystem as the IBC has become a pre-dominant tool for stress resolution leading to a huge backlog of cases and stretching the institutional capacity.


[1] In FY 19-20, the recovery per centage for ARC has been approximately 26%, while ranging mostly between 15%-25% since FY 2012-13. Refer to https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=20203

[2] The terms of reference of the Committee were pertaining to (i) the existing legal and regulatory framework applicable to ARCs; (ii) the role of ARCs in resolution of stressed assets including under IBC; (iii) improving liquidity in and trading of security receipts; (iv) business models of the ARCs; and (v) functioning, transparency and governance of ARCs. The Committee by a press release dated April 28, 2021 invited views and suggestions on the above aspects from, market participants and other stakeholders.

[3] The Report was released by the RBI on November 2, 2021. Refer to https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1188 for the same.

[4] AIFs will be used as an additional vehicle for facilitating restructuring /recovery by using the enabling powers under Section 10(2) of SARFAESI. In such cases, the safeguard being proposed is that the cumulative AUM acquired by the ARC through AIF and should not exceed the AUM acquired through SR issuance.

[5]  This will include revenues, taxes, cesses, etc

[6] Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 issued pursuant to circular dated June 7, 2019 prescribed requirement of obtaining a credit opinion of RP4 or better for the residual debt.

[7] Such acquisition will have to be approved by majority SR holders (by value) or such threshold prescribed by the underlying agreement

[8] Regulation 10(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. It has also been recommended to modify the definition of the term ‘lenders’ in Regulation 10 (1) (i) of the said Regulations and also the Regulation 158 (6) of the SEBI ICDR Regulations.

[9] High Net-worth Individuals

[10] Non-banking Financial Companies and Housing Finance Companies

[11] Section 77 of the Companies Act, 2013 requires a borrower to sign and file CHG-1 Form within 30 days of any modification in charge. Further, Section 77(3) of the Companies Act, 2013 states that no charge created by a company shall be taken into account by the liquidator appointed under Companies Act or the IBC or any other creditor unless it is duly registered under the Companies Act.

[12]  Master DirectionReserve Bank of India (Transfer of Loan Exposures) Directions, 2021

[13] Provisioning on SRs to be done by lenders on the basis of net asset value declared by the ARC where investment of 51% or more in SRs is made by investors other than lenders (51% for 2 years and increased to 76% thereafter)

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Photo of Dhananjay Kumar Dhananjay Kumar

Partner (Head- Insolvency & Restructuring) at Cyril Amarchand Mangaldas. Dhananjay advises creditors, acquirers and office holders on the entire range of restructuring and insolvency matters including special situation financings, security enforcement, and recovery of loans. He also had extensive experience in project and…

Partner (Head- Insolvency & Restructuring) at Cyril Amarchand Mangaldas. Dhananjay advises creditors, acquirers and office holders on the entire range of restructuring and insolvency matters including special situation financings, security enforcement, and recovery of loans. He also had extensive experience in project and project finance focused mainly on oil & gas, telecom and port sectors. He can be reached at dhananjay.kumar@cyrilshroff.com

Photo of Abhishek Mukherjee Abhishek Mukherjee

Partner in the Insolvency and Restructuring Team at the Mumbai office of Cyril Amarchand Mangaldas. Abhishek advises leading banks and financial institutions as well as corporate groups (including developers) and funds on aspects of insolvency, debt restructuring, security enforcement, structured financing, loan recovery…

Partner in the Insolvency and Restructuring Team at the Mumbai office of Cyril Amarchand Mangaldas. Abhishek advises leading banks and financial institutions as well as corporate groups (including developers) and funds on aspects of insolvency, debt restructuring, security enforcement, structured financing, loan recovery and infrastructure projects. He is advising leading banks, office-holders, funds and Asset Reconstruction Companies (ARC) in various cases under the Insolvency and Bankruptcy Code, setting up of ARCs, stressed asset resolution and loan transfers. Abhishek has also served as a secondee with the Financial Restructuring Group of Milbank LLP (London). He can be reached at abhishek.mukherjee@cyrilshroff.com.

Photo of Misha Patel Misha Patel

Associate in the Insolvency Practice at the Mumbai office of Cyril Amarchand Mangaldas. She can be reached at misha.patel@cyrilshroff.com