The Reserve Bank of India (RBI) has recently introduced the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, aimed at enhancing the efficiency and prudence of Asset Reconstruction Companies (ARCs).

Introduction:

The Reserve Bank of India (RBI) has recently introduced the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, aimed at enhancing the efficiency and prudence of Asset Reconstruction Companies (ARCs). These directives, effective upon publication on the RBI website, regulate all ARCs registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Let's delve into the key provisions of these guidelines.

RBI Guidelines for Asset Reconstruction Companies:

Registration and Related Matters:

• Before commencing operations, ARCs must obtain a Certificate of Registration (CoR) from the RBI.
• The application process is detailed, requiring submission through a specified form on the RBI website. ARCs are mandated to maintain a minimum Net Owned Fund (NOF) of ₹300 crore to initiate operations, with existing ARCs given a transition period to meet this requirement.
• ARCs are authorized to engage in securitization, asset reconstruction, and other
  specified activities.

Asset Reconstruction and Securitisation:

• ARCs must establish transparent policies for asset acquisition and formulate plans for asset realization within specified timelines.
• Meaningful due diligence is required before acquiring stressed assets, and acquisition strategies should prioritize the consent of secured creditors and easy realisability.
• Additionally, ARCs are provided with guidelines for management change, sale or lease of business, rescheduling of debts, enforcement of security interest, settlement of dues, and debt-to-equity conversion.

Prudential Regulations:

• ARCs are required to maintain a capital adequacy ratio of at least 15% of their total risk- weighted assets.
• Assets in ARCs'; books are classified into standard assets and Non-Performing Assets (NPAs), with further classification of NPAs based on duration and recoverability.
• Provisioning requirements are outlined for sub-standard, doubtful, and loss assets.

Governance and Conduct:

• Stringent criteria are set for directors, CEOs, and sponsors/investors, emphasizing integrity, track record, and financial stability.
• Governance structures must include independent directors, and performance reviews should be conducted annually.
• ARCs are required to have Audit and Nomination and Remuneration Committees, and prior approval from the RBI is necessary for significant management changes.

Fair Practices Code (FPC):

• Transparent asset acquisition and sale practices are mandated, along with clear policies for management fees, outsourcing, debtor recovery practices, grievance redressal, and confidentiality.
• The FPC should be periodically reviewed by the board and made available to all stakeholders.

Accounting and Disclosures:

• ARCs must prepare annual balance sheets and profit & loss accounts, adhering to RBI- prescribed prudential norms.
• Security Receipts (SRs) are treated as available for sale, and income recognition follows specific guidelines.
• Detailed disclosures are required in the balance sheet, including information on financial assets, SRs, asset valuation, and more.

Conclusion:

The RBI's 2024 guidelines for ARCs are aimed at enhancing the efficiency, transparency, and prudence of these vital entities in managing distressed financial assets. By setting clear standards for registration, operations, governance, and disclosure, these guidelines seek to strengthen the regulatory framework and promote financial stability and resilience. ARCs play a crucial role in maintaining the health of the financial system, and by adhering to these guidelines, they can contribute to the overall stability and integrity of the financial landscape.

For quick updates follow: click here

To check our Compliances service vist click here