RBI relaxes equity holding norm for asset reconstruction companies

Move to encourage foreign funds scouting for bad assets to tie up more with domestically incorporated ARCs

The Reserve Bank of India (RBI) on Thursday allowed asset reconstruction companies (ARCs) with a minimum net owned fund of Rs 100 crore to convert debt into equity worth more than 26 per cent. This gives ARCs greater control in a distressed asset and would encourage foreign funds scouting for bad assets to tie up even more with domestically incorporated ARCs, said an executive with an asset reconstruction company.

ARCs typically convert their acquired debt into equity in case they find the company can be nursed back to health. The central bank had so far put a cap of 26 per cent of equity holding in such companies. 

The RBI also put additional conditions on such ARCs, such as at least half of the board of the directors of such firms should be independent, and any policy on debt to equity conversion should be drawn in approval of the board, while delegating “powers to a committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion”. 

The shares acquired after conversion of debt should be marked to market at least once a month. In addition, “the ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/companies which could be considered for managing the companies,” the banking regulator said in its notification.