Amid growing concerns over the governance of Asset Reconstruction Companies (ARCs), the Reserve Bank of India (RBI) orchestrated a pivotal conference on May 17, 2024, in Mumbai, underlining the theme “Governance in ARCs – Towards Effective Resolutions.” The event was a significant part of the RBI’s ongoing series of supervisory engagements over the past year, attended by directors and Managing Directors/Chief Executive Officers of all 27 ARCs operating in the nation. The conference featured addresses by Deputy Governors Shri M. Rajeshwar Rao and Shri Swaminathan J., who articulated the critical importance of steadfast governance and impeccable ethical standards in the functioning of ARCs.
Shri M. Rajeshwar Rao emphasized that a sound and resilient business model in the ARC sector fundamentally depends on the commitment of Boards and top executives to cultivate a robust institutional culture. He particularly underscored the need for responsible conduct during recovery processes, advocating for transparent and fair practices in strict alignment with the RBI’s comprehensive Fair Practice Code (FPC). These practices, he argued, are crucial for maintaining public trust and ensuring equitable treatment for all stakeholders in the financial recovery process.
Adding to this imperative discourse, Shri Swaminathan J. stressed the necessity of setting the right tone from the top of the organizational hierarchy, thereby fostering a culture embedded in integrity and ethical conduct. He highlighted several supervisory concerns that have surfaced regarding ARC operations, prompting a call for a “regulation plus” approach. Such an approach necessitates adherence not only to the letter of the law but also to the underlying spirit of these regulations. Shri Swaminathan pointed out that effective risk management, compliance frameworks, and rigorous internal audits are indispensable in identifying and mitigating emerging risks.
However, the practices within some ARCs have shown deviations from these standards. A burgeoning issue revolves around defaulting promoters re-entering projects under the guise of new investors, often termed “White Knights.” These re-entries, mediated through settlements orchestrated by ARCs, controversially allow defaulting promoters to regain stakes in the very projects they defaulted on.
. This practice has raised numerous ethical and regulatory red flags.
One salient case illustrating this issue involves Asset Care & Reconstruction Enterprise Limited (ACRE), the first ARC in the nation to receive foreign direct investment post the 2018 IL&FS financial debacle. ACRE made headlines with its recent transaction involving the purchase of significant debt from Altico Capital India, aimed at a residential project in Kandivali, Mumbai, managed by Bombay Slum Redevelopment Company Private Limited, a defaulting promoter. On January 27, 2023, ACRE issued a No Objection Certificate (NOC) for a structured payment plan, encompassing both cash and real estate space, totaling an approximate value of Rs. 175 crores.
Following the issuance of this NOC, on February 3, 2023, Bombay Slum entered into a Development Agreement with a supposed White Knight. This arrangement controversially permits the defaulting promoter to retain a considerable portion of the developed property, valued at approximately Rs. 330 crores, while fulfilling pending project obligations for a significantly lower consideration. Such deals have sparked widespread concerns over potential conflicts of interest and ethical lapses.
The RBI’s apprehensions regarding these transactions are acute, as they suggest that ARCs may be facilitating the retention of control over assets by defaulting promoters, despite their prolonged defaults on loans from banks and non-banking financial companies (NBFCs). The critical Mumbai meeting aimed to address these issues head-on, with an expectation of discussing potential regulatory measures to prevent the misuse of the ARC framework and to safeguard the integrity of the broader financial ecosystem from such contentious practices.
Compounding these worries, the scrutiny on ARCs intensified in December 2021 following thorough searches and seizures by the Income Tax (I-T) department at 60 premises belonging to four ARCs: Omkara ARC, Rare ARC, CFM ARC, and Invent ARC. These investigations revealed that certain ARCs had engaged in unfair and fraudulent trade practices while acquiring non-performing assets (NPAs) from lender banks, further tarnishing the sector’s image.
As revelations of such malpractices continue to surface, it becomes crucial for regulatory bodies and financial institutions to enforce stringent oversight and to ensure that the ARC framework is not exploited. The integrity of India’s financial system hinges upon transparent, ethical practices that protect the interests of all stakeholders involved. With such measures, the RBI hopes to restore trust and ensure the effective resolution of distressed assets under the ARC system.
