The Reserve Bank of India (RBI) hosted a conference on May 17, 2024, in Mumbai, focusing on governance within Asset Reconstruction Companies (ARCs). Attended by directors and MD/CEOs of all 27 ARCs, the event highlighted the theme "Governance in ARCs – Towards Effective Resolutions" as part of a series of supervisory engagements organized by the RBI over the past year. Deputy Governors Shri M. Rajeshwar Rao and Shri Swaminathan J. addressed the participants, emphasizing the importance of sound governance and ethical conduct within ARCs.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Shri Rao highlighted that a robust business model relies heavily on the Boards and top functionaries developing a strong institutional culture. He stressed the need for responsible conduct in recovery processes, advocating for transparent and non-discriminatory practices in line with the RBI's comprehensive Fair Practice Code (FPC). Shri Swaminathan underscored the necessity of setting the right tone from the top to foster integrity and ethical conduct. He pointed out several supervisory concerns regarding ARC operations and urged a "regulation plus" approach, ensuring compliance with both the letter and spirit of regulations. He emphasized the critical role of risk management, compliance, and internal audits in identifying and mitigating risks.

However, there is a case of a "regulation minus" approach. The spotlight is on practices where defaulting promoters, under the guise of new investors known as "White Knights," re-enter projects through settlements orchestrated by ARCs. These arrangements often include terms that not only settle debts but controversially allow the defaulting promoters to regain a stake in the project.

The Central Bank's concerns are amplified by these transactions, suggesting that ARCs might be enabling defaulting promoters to retain control over assets despite prolonged defaults on loans from banks and non-banking financial companies (NBFCs). The upcoming meeting in Mumbai aimed to address these issues comprehensively, with potential regulatory measures expected to be discussed to prevent misuse of the ARC framework and safeguard the broader financial ecosystem from such controversial practices.

The scrutiny on ARCs intensified in December 2021 when the Income Tax (I-T) department conducted searches and seizures at 60 premises of four ARCs: Omkara ARC, Rare ARC, CFM ARC, and Invent ARC. These investigations revealed that some ARCs had engaged in unfair and fraudulent trade practices while acquiring non-performing assets (NPAs) from lender banks.

As the financial sector grapples with these revelations, it is imperative for regulatory bodies and financial institutions to tighten oversight and ensure that the ARC framework is not exploited. The integrity of the financial system depends on transparent and ethical practices that protect the interests of all stakeholders involved.