New Legislations Give Better Options For ARCs

Rajesh Begur, managing partner, ARA LAW, discusses how asset reconstruction companies are now better poised to handle the stressed assets:

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N. Mohan: How would you view the scope of making asset reconstruction companies in India more effective? Can you list some of the necessary steps?

Rajesh Begur: In my view, a persistent problem with ARCs has been their reliance on the ‘management fee model’ for financial sustenance – given the lack of institutional funding and historically low capital. There has been a displacement of focus from putting strategies to revive stressed assets. In other words, ARCs have merely functioned as asset warehousing companies. Therefore, while ARCs have managed to stay afloat, the problem of rising stressed assets has not been solved or even mitigated by them.

However, this situation is expected to improve. Critical measures have been taken by regulators. SEBI’s allowance to list Security Receipts (SRs) is expected to bring in much needed liquidity in the business of SRs. The enactment of the Insolvency and Bankruptcy Code (IBC) has provided ARCs with a faster and profitable exit route, which is expected to bring in investments from institutions with deep pockets. RBI has also brought in regulations to ensure ARCs have a greater skin in the game. Further, heavier capital requirements have made it difficult for casual players to broach the market.

How would you view the move by SEBI to allow listing of SRs issued by ARCs? Will this be a major impetus for ARCs?