RBI Issues Master ARC Guidelines: Learn About New Rules That Take Effect on April 24

The asset reconstruction companies (ARCs) master directive was announced by the Reserve Bank of India (RBI) on April 24. The RBI increased the minimum capital need for ARCs to start securitization to Rs 300 crore in the most recent guidelines, which went into effect immediately. Previously, on October 11, 2022, it was just Rs 100 crore.

The RBI has given ARCs a glide route to reach the minimum necessary net owned fund (NOF) of Rs 300 crore in accordance with the directives.

ARCs now have to raise the minimum NOF, which was Rs 100 crore as of October 11, 2022, to Rs 200 crore by March 31, 2024, and to Rs 300 crore by March 31, 2026.

“An ARC must have a minimum net owned fund (NOF) of ₹300 crore and subsequently, on a continuing basis, to undertake the business of securitization or asset reconstruction,” the RBI said.

The RBI said that if any of the aforementioned phases are not met, the non-complying ARC would be subject to supervisory action, which may include a bar on taking on new business until it exceeds the minimum NOF that is in effect at that particular time.

In accordance with RBI guidelines, ARCs may serve as resolution applicants under the 2016 Insolvency and Bankruptcy Code if they have a minimum NOF of Rs 1,000 crore.

In order to pay off debt in government securities and deposits with scheduled commercial banks, the Small Industries Development Bank of India (SIDBI), the National Bank for Agriculture and Rural Development (NABARD), or any other organization that the RBI may designate, ARCs may use their funds to undertake the restructuring of acquired loan accounts.

Additionally, qualifying credit rating agencies (CRAs) allow ARCs to invest in short-term securities such as money market mutual funds, certificates of deposit, corporate bonds, and commercial papers that have a short-term rating equal to or higher than an AA long-term rating. There will be a restriction on the maximum amount invested in these short-term securities of 10% of the ARC’s NOF.

Additionally, it stated that within ninety days of the CoR’s issuance, each ARC must develop a “financial asset acquisition policy” that has been approved by the board. This policy must ensure that transactions are carried out on an arm’s-length basis by exercising due diligence and that they occur in a well-informed market, transparently, and at a fair price.