RBI Scrutiny on Asset Reconstruction Companies (ARCs) for Allowing Backdoor Entry to Defaulters With Help of ‘White Knights’

RBI Scrutiny on Asset Reconstruction Companies (ARCs) for Allowing Backdoor Entry to Defaulters With Help of ‘White Knights’

Hello Mumbai City Desk :

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.

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.

Documents from Maharera website shows a notable case of backdoor entry that involves Asset Care & Reconstruction Enterprise Limited (ACRE), the first ARC in the nation to receive foreign direct investment post-2018’s IL&FS financial debacle. ACRE’s recent transaction involved purchasing 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 involving cash and real estate space, totaling an approximate value of Rs. 175 crores. Based on this NOC, Bombay Slum, the defaulter, entered into a Development Agreement on February 3, 2023, with another entity acting as a White Knight. This deal permits the defaulter to retain a substantial portion of the project’s developed property, valued at around Rs. 330 crores, for a paltry consideration of fulfilling the pending project obligations. This has raised eyebrows over potential conflicts of interest and ethical implications.

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.


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