COMPANY LAW
| Govt likely to allow 100 Percent FDI in ARCs Tue, 17 Aug 2010 22:26:45 GMT |
| The Economic Times Govt likely to allow 100% FDI in ARCs DELHI: The government may allow higher foreign investment in asset reconstruction companies (ARCs) that buy distressed loans of banks and make money by recovering them. The proposal is aimed at addressing the capital constraints faced by ARCs, which has impaired their ability to scale up business. Foreign direct investment, or FDI, in ARCs may be increased to 100% from 49% at present. The finance ministry and the central bank will work together to make regulatory changes in the law relating to security and reconstruction of financial assets, also known as SARFESI Act, to facilitate this increase in limit. “The proposal (for raising foreign equity up to 100%) is being discussed with RBI. Given that there is a rise in non-performing assets of banks, foreign investment will help resurrect some of these potentially viable distressed assets,” said a finance ministry official. ARCs typically set up a trust to raise money from qualified institutional buyers (QIB) to buy distressed assets from banks and in turn issue security receipts (SR), or certificates of share in the distressed asset. “Raising finances is a problem since ARCs also have to maintain a capital adequacy ratio of 15%. Hence they cannot buy the assets totally on their own,” the official said. The rules exempt ARCs which have a net owned fund of `100 crore from maintaining the adequacy norms. The proposal is expected to give a boost to the sector at a time when non-performing assets or bad loans for public sector banks have risen 30% at the end of March 2010 from a year ago. The total NPAs for the banking sector stood at `74,685 crore and are expected to rise further. “There have been fresh slippage, especially in the small and medium enterprise sector. The banks may not like to keep these bad loans in their books for long,” the official said. At the end of March 2009, there were over one lakh sick SMEs with an outstanding due amount of over `3,600 crore, according to official data. Recently, two public sector banks, Central Bank of India and Punjab and Sind Bank, announced sale of distressed assets, a staggering `3,500 crore in the case of the latter. “Due to the current restrictions, there is not much foreign participation. Funds with a long-term horizon are also reluctant because with the small chunk that they buy profits are not large,” said P Rudran, MD & CEO, India SME Asset Reconstruction Company (ISARC). ISARC is promoted by SIDBI and has various public sector banks and financial institutions as its shareholders. In the current business model, the cash-strapped asset reconstruction companies pick up a meagre stake, as low as 5%, in the distressed asset and the balance is picked up by the selling bank itself. This allows the bank to get rid of the NPA from its books, and also capture the bulk of the upside in case the asset is disposed off profitably by the asset reconstruction company. But this does not really help the asset reconstruction business. “Since there is no cash transaction in this case, banks get the upside of the profit,” said an official with ARCIL, India’s first ARC, adding that it becomes mostly a loss-making proposition for ARCs. |
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