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Asset Reconstruction Companies (ARCs) are specialized financial entities established under Section 3 of the SARFAESI Act, 2002, with the primary objective of acquiring and managing distressed assets from banks and financial institutions. However, recent scrutiny by the Reserve Bank of India (RBI) has unearthed several supervisory concerns regarding the functioning of ARCs, discussed during a conference themed ‘Governance in ARCs – Towards Effective Resolutions.’
Issues Identified with ARCs:
| Concerns | Description |
|---|---|
| Back-door entry to defaulting promoters | Some ARCs facilitate the re-entry of defaulting promoters of insolvent companies, potentially undermining resolution efforts. |
| Asset sales to entities with vested interests | Instances of selling distressed assets to entities with pre-existing arrangements with defaulting promoters have been observed. |
| Lengthy settlement processes | ARCs often encounter delays in settling disputes with borrowers, prolonging the resolution timeline and impeding effective recovery. |
| Focus on debt recovery over business revitalization | The primary emphasis of ARCs appears to be on recovering debts rather than fostering the revival and sustainable growth of businesses. |
| Lack of transparency and fairness | Instances of non-transparent and discriminatory practices have been reported, raising concerns about the integrity of resolution processes. |
These issues also affect new upcoming entrepreneurs of India, specially from tier 2 cities of India where young entrepreneurs are promoting more and more companies which can be seen and observed by analysing the increased company registrations in tier 1, and tier 2 cities such as company registration in Jaipur and private limited company registration in Delhi.
Measures Proposed to Enhance Governance:
- Institutional Culture: Foster a robust institutional culture that prioritizes integrity and ethical conduct in all operations.
- Transparency and Fairness: Adhere strictly to transparent and non-discriminatory practices, aligning with the Fair Practice Code (FPC) mandated by the RBI.
- Assurance Functions: Place significant emphasis on assurance functions such as risk management, compliance, and internal audit to ensure effective oversight.
- Regulation-Compliance Approach: Adopt a proactive “regulation plus” approach, striving for compliance with both the letter and spirit of regulatory requirements.
These measures aim to address the identified supervisory concerns and enhance the effectiveness and integrity of ARCs in managing distressed assets and facilitating resolution processes.