RBI allows small ARCs to join bids in insolvency cases

MUMBAI: RBI has cleared the way for smaller asset reconstruction companies (ARCs) to participate in insolvency proceedings as co-resolution applicants and acquire financial assets under a resolution plan without meeting the Rs 1,000-crore net owned fund (NOF) threshold otherwise prescribed for ARCs to bid in insolvency proceedings.The clarification, issued last weekend, matters because it allows ARCs, which specialise in financing turnaround of distressed loan assets, to take over part of a defaulter's debt through the Insolvency and Bankruptcy Code (IBC), while a strategic investor provides the capital and operational expertise needed to restart the business and runs the company.RBI's FAQ settles an ambiguity over whether ARCs could compete alongside strategic buyers in bankruptcy proceedings to acquire financial assets through the IBC. The central bank said ARCs need not meet the conditions specified in paragraph 18 of RBI (Asset Reconstruction Companies) Directions, 2025, including the Rs 1,000-crore NOF requirement, when acting as a resolution applicant to acquire financial assets covered by the SARFAESI Act."The present clarification gives complete clarity on role and limitations of ARCs as resolution applicant and besides ARCs, this will benefit all stakeholders associated with IBC," said Hari Hara Mishra, CEO, Association of ARCs in India.A 2021 RBI committee recommended allowing ARCs to act as resolution applicants under IBC, citing their stressed-asset expertise and potential to improve recoveries. RBI's 2022 rules permitted this subject to a Rs 1,000-crore net worth and safeguards, including independent-majority approval of plans and no significant control over the corporate debtor beyond five years.With only five of 27 ARCs above the threshold, smaller ARCs faced uncertainty over joining IBC bids as co-resolution applicants.The clarification removes it, allowing them to acquire debt alongside a strategic investor where their role stays within SARFAESI-essentially financing the debt-while activities beyond that scope still trigger the Rs 1,000-crore requirement.Get the latest Business News and Live updates. Download the TOI app.