ARCs seek higher sponsor shareholding cap

Asset reconstruction companies (ARCs) are urging the government to increase the percentage of sponsor shareholding in these companies, a move that could encourage strategic investors like private equity funds to play a more meaningful role. They also want the government to permit them to lend or invest in shares of distressed companies — in addition to buying their non-performing assets (NPAs). 

The shareholding limit for a person deemed to be a sponsor in an ARC needs to be enhanced from 10 per cent to 26 per cent, according to ARCs. Under the current provisions of the SARFAESI Act, a sponsor assumes certain responsibilities and liabilities for the operations of the ARC and has to fulfill specific eligibility conditions. This, at times, discourages strategic investors like private equity funds from taking up a significant minority interest in ARCs for fear of being classified as a sponsor. 

The Reserve Bank of India’s (RBI's) guidelines for NBFCs permit a strategic investor to acquire up to 26 per cent shares without the requirement of obtaining RBI approval. However, the apex bank’s ARC guidelines are such that a 10 per cent shareholding acquisition makes an investor a sponsor of the ARC. This requires prior RBI approval.  “The present threshold of 10 per cent is too low and it is imperative that the said limit is enhanced to facilitate fund-raising from strategic investors by the ARCs," said Bhavin Shah, partner-financial services tax leader at PwC India.

Siddharth Shah, partner, Khaitan & Co, said: “There is an urgent need to capitalise the ARCs, especially if they have to bring in their ‘owned funds’ to the extent of 15 per cent of the total tranche of security receipts. The relaxation will help in allowing strategic or financial investors to acquire meaningful stakes in the ARCs.” 

ARCs also want the government to allow them to lend or invest in shares of distressed companies. This includes priority debt funding to distressed companies and interim finance to distressed companies under the Insolvency and Bankruptcy Code (IBC). 

According to experts, once bankruptcy proceedings are admitted by NCLT, on account of moratorium on discharge of debt, it becomes difficult to find financiers to provide the interim financing. “ARCs would be better placed to fund this requirement, which is currently restricted under rules. Also, for any restructuring at the asset level before it hits the IBC threshold, opportunities for the ARC to refinance and restructure the entities and provide fresh financing will help expedite the resolution process,” said Siddharth Shah. 

There are expectations that ARCs will reduce the 15-85 security receipt model and enhance cash-based NPA acquisitions. Under the 15:85 plan, banks get 15 per cent of the ARC sale proceeds in cash, while the rest is settled in security receipts that can be redeemed as and when the money is recovered. “In the light of this, it becomes important for the government and the RBI to provide greater flexibility to ARCs to undertake business in terms of providing priority debt funding and acquiring equity stakes in distressed entities. The same could be made subject to additional prudential or reporting norms, if required. This is again an area which requires parity with the norms applicable to NBFCs,” said Shah of PwC India. 

Riaz Thingna, director at Grant Thornton Advisory, said: "This would help the ARC business become more feasible and assist in more comprehensive solutions. However, the NBFC norms and controls would need to be incorporated to control and monitor their operations."

BUILDING IT UP

• ARCs urge govt to raise sponsor shareholding cap to 26% from 10% 
• This will encourage strategic, financial investors to play a more meaningful role in these
• Under the SARFAESI Act, sponsors assume certain liabilities for operations of the ARC
• ARCs want leeway to lend or invest in shares of distressed firms
• This includes priority debt funding and interim finance to distressed companies under the IBC
• If implemented, ARCs may have to comply with additional reporting norms akin to NBFCs