North Block set to clear 74% in ARCs

The finance ministry is close to clearing 74 per cent foreign direct investment (FDI) in asset reconstruction companies. This has been a long-standing recommendation of the Asset Reconstruction Company of India Ltd (Arcil), India's first asset reconstruction company.

Once the ministry clears it, the foreign institutional investors (FII) too will be allowed to invest in ARCs.

Currently no FII is permitted to hold stake in asset reconstruction companies (ARC) or subscribe to the instruments issued by it i.e, security receipts.

Reserve Bank of India has recommended that FII/FDI should he allowed in this sector. The government was expected to give the green signal to FIIs in this sector in the recent Budget but it was not forthcoming but the notification is expected to be cleared very soon, said senior official associated with the development.

The need for FII investment is more acutely felt for buying up security receipts rather than for equity holdings in ARCs, said Rajendra Kakker, MD & CEO of Arcil.

Security receipts are the instruments issued by ARCs against bad loans.

Only when FIIs are allowed to buy security receipts will banks have an exit route from their bad loans. As of now the banks that sell the bad loans to ARCs have to subscribe to the security receipts issued against it which essentially means that the bad loans merely shift from the bank's asset side to the investment side.

Currently Arcil is also looking at diluting ICICI Bank's shareholding in it which is "disproportionately high" compared to other promoters, Industrial Bank of India (IDBI) and State Bank of India (SBI), said Kakker.

"We are talking to some private and foreign players in order to reduce ICICI's stake to 19 per cent," added Kakker.

ICICI Bank now holds 29.58 per cent in Arcil while other co-promoters, SBI and IDBI hold 19.95 per cent each. Punjab National Bank holds 10 per cent stake in Arcil while Karur Vysya Bank (6.38 per cent), Karnataka Bank (5.50 per cent), Citicorp Finance India (4.40 per cent), HDFC, HDFC Bank, Federal Bank, IDBI Bank and South Indian Bank hold smaller stakes in Arcil.