The April 2021 Development and Regulatory Policy Statement of the Reserve Bank of India (RBI) noted the growth of Asset Reconstruction Companies (ARCs) and that “their potential for resolving stressed assets is not not yet fully realized”. The statement proposed the creation of a committee to review the regulatory framework for CRAs and “recommend appropriate measures” to enable CRAs “to meet the growing demands of the financial sector.” On October 11, 2022, the RBI published a revised regulatory framework for CRAs, introducing measures “to enhance transparency in the CRA industry and improve corporate governance standards in CRAs”.
Previously, CRAs were required to invest up to a minimum amount of 15% in each Security Receipt (SR) scheme. The revised regulatory framework now requires CRAs to invest at least 15% of a transferor’s investment in SRs or 2.5% of total SRs issued, whichever is greater. To encourage broader participation, an SR offering document should also disclose:
- a summary of the ARC’s financial information for the previous five years or since it began operations (whichever is shorter);
- history of returns generated on SRs issued over the previous 8 years; and
- history of recovery ratings migration and engagement with credit rating agencies over the past 8 years.
It is mandatory for CRAs to obtain a recovery rating for SRs and must also disclose the rating and rationale for the rating to SR holders. A CRA must retain the services of a credit rating agency for a minimum period of six rating cycles (of six months each).
The previous regulatory framework allowed CRAs to develop a board-approved policy for the settlement of debts and delegate authority to a committee or identified officials to make decisions on such proposals. From now on, debt settlement proposals should be reviewed by an independent advisory committee (IAC), which must be composed of professionals with a technical, legal or financial background. The IAC will provide recommendations to the ARC Board after reviewing factors such as the borrower’s financial condition, time to collection, and earnings and cash flow forecasts. The board – which must be made up of at least two independent directors – will review the recommendations of the ARC and then decide on the proposal for payment of dues. Payment of dues should only be considered after all other collection options have been taken and there is no longer any prospect of collection. The revised regulatory framework provides that the management fee can only be levied on the amounts recovered from the assets managed by the ARC. In addition, the board-approved fee policy should also establish the cap on management fees and incentives. Any deviation from the above would require Board approval.
CRAs are also now permitted to participate as “Resolution Seekers” in a resolution process under the Insolvency and Bankruptcy Code 2016. Reports in the public domain indicate that previously the RBI n was not inclined to allow CRAs to act as resolution seekers on the grounds that such activities were not contemplated under the Securitization and Reconstruction of Financial Assets and Enforcement Act 2002 securities. To participate as a resolution applicant, a CRA must have a minimum net fund of 10 billion Indian rupees (approximately $121.9 million) and must also fulfill other requirements such as having a policy approved by the board of directors on participation as a candidate for the resolution and a committee composed of a majority of independent directors to make decisions on this participation.
While the decision to allow IECs to participate as candidates for the resolution was welcomed in some circles, its impact can only be determined over time. The revised regulatory framework does not address operational aspects such as debt aggregation, measures to encourage the participation of debt capital markets in SRs, improving the negotiability of SRs or improving resolution-enhancing actions, such as changing the management of a borrower or providing protection for IRCs from routine procedures that may delay the resolution process. Perhaps, in the absence of a complete overhaul of the statutory framework, the RBI’s measures would only move things forward and not spearhead progress.
For more information on this subject, please contact Aditya BhargavaWhere Sristi Yadav to Phoenix Legal by telephone (+91 22 4340 8500) or by e-mail ([email protected], [email protected] Where [email protected]). The Phoenix Legal website can be accessed at www.phoenixlegal.in.