ARCs hail move to open up sector to foreign investment

Asset reconstruction companies (ARCs) today hailed the proposal to open up the sector fully to foreign investors and the clarity on taxation in the Budget, saying this will help the banking system tackle the menace of bad loans.
"It is a fairly good set of announcements for the asset reconstruction companies in the Budget. We had been suggesting the same for the last many years," Rashesh Shah, chairman of Edelweiss Group, which has an ARC, told PTI.
He said that large number of stressed asset funds are interested in investing in the sector.
ARCIL, the oldest ARC in the sector, feels the timing of the move is opportune.

"With more capital coming in, we will also be able to have meaningful discussions with banks to resolve bad loans," the company's Managing Director and Chief Executive Vinayak Bahuguna told PTI.
In his third Budget, Finance Minister Arun Jaitley announced 100 per cent foreign direct investment in ARCs and 100 per cent foreign portfolio investment in security receipts used in the transactions.

He also proposed to make necessary amendments in the Sarfaesi Act 2002 to enable the sponsor of an ARC to hold up to 100 per cent stake in the company.
"Enabling sponsors to hold up to 100 per cent stake in an ARC and allowing 100 per cent FDI in ARCs through automatic route will open up avenues for ARCs and facilitate them to strengthen the capital base and effectively participate in the huge NPA market in the country," V P Shetty, executive chairman, JM Financial Asset Reconstruction Company said.

Shah said the moves may result in consolidation in the sector, which has over 15 participants, as investors get more comfortable with investing in such companies.
S Srinivasan of Kotak Investment Advisors, which focuses on the alternate assets business of the group, said the collective networth of the ARCs is Rs 4,500 crore and they have limited room to tackle mounting NPAs.
Liberalisation in foreign ownership will help as most of the companies are struggling in dealing with the situation at hand, he said.
Non-institutional investors are also permitted to invest in securitisation receipts.
"There is also an attempt to increase the depth of the security receipts market by allowing non-institutional investors to invest in SRs and removing the 10 per cent investment cap in each scheme of SRs for FPIs," Shetty said.

In order to get more investment in ARCs, Jaitley also proposed to provide complete pass through of income-tax to securitisation trusts, including trusts of ARCs.
The income will be taxed in the hands of the investors instead of the trust. However, the trust will be liable to deduct tax at source, he said.
"The Budget also provides clarity on taxation in the hands of trusts set up by ARCs and confers a pass-through status to the trusts," Shetty said.
When asked about the formation of the bad bank which was expected in the Budget, Shah welcomed the no-show by Jaitley, saying creation of such an institution will not help in tackling NPAs as banks may become complacent if the stressed assets are moved to the bad bank.