Alerts & Updates 12th Oct 2022

In a big policy shift RBI allows asset reconstruction companies to be resolution applicant under Insolvency and Bankruptcy Code, 2016

Authors

Mukesh Chand Senior Counsel | Mumbai

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In a big policy shift, the Reserve Bank of India (RBI) has allowed Asset Reconstruction Companies (ARCs) to be a Resolution Applicant (RA) under the Insolvency and Bankruptcy Code, 2016 (the Code).

On October 11, 2022, the RBI issued a revised regulatory framework for ARCs.  Under the revised framework, ARCs are permitted to undertake activities as RA under the Code. This function is not specifically covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) and needed specific authorization of RBI under Section 10 of the Act.

  • Background

    Here it needs to be noted that the mechanism of setting up, regulating and operating ARCs is governed by Chapter III of SARFAESI Act. Section 9 of the Act prescribes the measures that an ARC may adopt for the purpose of asset reconstruction of an account. These measures more or less also take the form of a resolution plan under the Code. However, serious concern arose on the issue of participation of ARCs as RA in the resolution process under the Code.

    In the case involving Corporate Insolvency Resolution Process (CIRP) of Aircel entities i.e. Aircel Limited, Dishnet Wireless Limited and Aircel Cellular Limited, the ARC namely UV Assets Reconstruction Company Ltd (UVARC) submitted a resolution plan which was eventually approved by the Adjudicating Authority. The rider was that   UVARC had to obtain approval of the RBI to acquire shares in the corporate applicants.  The RBI, in turn, denied the approval and issued a show cause notice to UVARC for violating Section 10 of the SARFAESI Act. The show cause notice was challenged by UVARC and stayed by the Delhi High Court vide an order dated November 27, 2020. There are other cases where ARCs participated as resolution applicants. However, due to the stand taken by RBI however before the High Court, participation of ARCs in the resolution process as RA was uncertain and resolution of such cases was getting struck.

  • The Road Ahead

    With clarity on this issue, the road is now clear for participation of ARCs in CIRP under the Code. However, this comes with certain conditions and rider as ARCs with a minimum NOF of  INR 1,000 crore are eligible for acting as RA. Further, ARC will need to have a Board-approved policy for this purpose with an internal limit set for sectoral exposures. Participation of ARC will be on a case-to-case basis and subject to approval of an internal committee which will majorly comprise of independent directors. ARC will have to dilute their control in such resolved cases after five years from the date of approval of the resolution plan. In case of non-compliance ARCs will not be allowed to submit any fresh resolution plans either as a RA or a resolution co-applicant.

    The ARC will also need to comply with the related disclosures requirement with respect to assets acquired under IBC, type and value of assets acquired, the sector-wise distribution based on business of the corporate debtor and status of implementation of the resolution plans in their financial statements.

  • ELP comments

    This development is expected to bring a much-needed impetus to the resolution eco-system which was noticing shrinking competition as large ARCs were staying away from direct involvement in the resolution plans for want of clarity from RBI.

    This will also help in resolution of cases which are pending with NCLT/Court on account of lack of clarity. With the entry of big ARCs in the arena, the resolution scenario should see a better response in terms of resolution plans. It is important to note however that a lot will depend on the policy to be finalized by each ARC and more specifically their respective policies on the sector and sectoral exposure limit.

  • We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our author:

    Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein