According to CRISIL Rating‘ analysis, new norms announced by Reserve Bank However, ARCs said last Tuesday in a phased manner by March 2026 would require net owned funds to increase four-fold from Rs 100 crore to Rs 300 crore, which could be challenging for the smaller ones.
But ARC’s business profile will benefit from two significant changes to the regulatory framework: lower funding requirements for asset acquisition and, two, the option to participate as a resolution applicant under the Bankruptcy Code.
Under the new norms, ARC investment in Security Receipts (SRs) is envisaged under each of the asset classes at a minimum of 15 per cent of the SR transferor’s investment, or 2.5 per cent of the total SRs issued, whichever is higher. Till the time the SR is not redeemed, the scheme will continue.
Earlier, ARCs could invest at least 15 per cent of the SRs issued in each category under each scheme, even if there were investors other than the selling lenders.
According to Subha Sree Narayanan, a director of the agency, the revision in minimum investment in SRs is a significant advantage for ARCs as it will free up their funds and support growth in the form of cash transactions in the medium term, it may lead to 80- 85% savings.
It may be noted that the proportion of cash-based transactions in SRs has been steadily increasing and stood at 36 per cent in February 2022 as compared to 4-5 per cent in February 2017 and the agency expects the momentum to continue with lower funding requirements. Will stay Cash based transactions.
the agency believes reserve Bank of India Allowing ARC to become a resolution applicant in the IBC process as a step in the right direction, as it will increase the business options available and potentially open up a new revenue stream. But to be a resolution applicant, the ARC would need net owned funds of over Rs 1,000 crore, which only a few of the 28 may be able to achieve.
The regulator has also introduced several measures to strengthen the governance framework of ARCs such as increasing the independence of their boards, limiting the tenure of board members as well as a performance review process for them.
The mandate to enhance disclosure norms related to financial information, track record of returns generated and recovery rating on SRs is expected to bring greater transparency in proposal documents and ultimately boost investor interest in ARCs, the report said. Having said.
The guidelines for charging management fees only from realization of the underlying assets should persuade ARCs to focus on faster resolution.
According to Gautam Shahi, another director of the agency, while the revised guidelines are clearly aimed at strengthening the sector, it may face some challenges.
More than half of the ARCs have net owned funds less than the increased requirement of Rs 300 crore and therefore many of them may not be able to bring in additional capital.
Also, the new governance measures are likely to increase compliance and operating costs, which can be challenging for smaller ARCs, which will lead to consolidation over time.