RBI's order could spell trouble for ARC-owning PE funds, say experts

Private equity (PE) funds owning asset reconstruction companies (ARCs), apart from pure-play ARCs, could land in serious trouble if the Reserve Bank of India (RBI) does not reverse its decision to disallow them from being resolution applicants of a stressed asset under the Insolvency and Bankruptcy Code (IBC). 

The RBI had recently rejected a resolution plan — approved by the National Company Law Tribunal in June — that proposed selling Aircel’s assets to UV Asset Reconstruction Company (UVARC).

It was disallowed by the banking regulator on grounds that it was not in conformity with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, under which ARCs are registered.

Many leading PE funds, including Blackstone, AION Capital, and SSG Capital, have either set up their own ARCs or bought over an existing company to handle stressed assets. 

Says a top executive of a PE fund which also has an ARC: “At a time when funds are required, the idea should be to not place restrictions. In this case, it seems the two wings of the government — the banking regulator and the law ministry — have to resolve different interpretations of the rules.”  

ARCs have petitioned the regulator through the Association of ARCs in India. The association is believed to have requested the regulator to resolve the regulatory gap between the IBC and the older SARFAESI Act, so that a harmonious interpretation is applied and ARCs are enabled to become the resolution applicant in the IBC.  

However senior executives in ARCs are baffled by the RBI’s move.  They say with growing maturity of the IBC, the government has added numerous amendments to ensure greater flow of resources to stressed assets.  

“The IBC (Amendment) Act, 2017, which was notified in January 2018, amended Section 29A and widened the list of exemptions of ineligible persons who could submit a resolution plan. Under this, an ARC registered with the RBI or an alternative investment fund is allowed to submit a resolution plan. It is amply clear from this rule that the ARCs registered with the RBI under the SARFAESI Act are eligible to become a resolution applicant. But now there seems to be a question of interpretation,” says a senior executive of an ARC. 

Others say that the provisions in Sections 238 of the IBC clearly state that they shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. 

On the other hand, the SARFAESI Act is quiet on the issue, mostly because the IBC is a newer Act and there is no direction from the RBI earlier that they cannot bid for the IBC stressed assets. But based on the regulator, it is not allowed to bid for stressed assets in the IBC.  

The move will, of course, impact the resolution of Reliance Communications, where a committee of creditors has cleared UVARC as the highest bidder. Under the same RBI lens, the deal could get into trouble. If that happens, the Rs 23,000-crore resolution plan could go awry.