The Reserve Bank of India (RBI) has raised the minimum capital requirement for asset reconstruction companies (ARCs) while widening their role by allowing them to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC).

 However, for qualifying as a resolution applicant, the ARCs need to have a minimum net-owned fund of Rs 1,000 crore. They will also have to have a board-approved policy to take up the role of an applicant.

Earlier, the RBI was opposed to allowing ARCs to bid for debt resolution under the bankruptcy courts.

Under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, ARCs are prohibited from doing other activities than that of securitisation or asset reconstruction, without the RBI's permission.

The revised set of rules for the ARCs, laid down by the RBI on Tuesday, aims to improve the regulatory framework and strengthen the governance standards of ARCs.

Under the new guidelines, the central bank has raised the minimum capital requirement for setting up an ARC to Rs 300 crore from the current Rs 100 crore.  The ARCs can do so in a phased manner - Rs 200 crore by end-March 2024 and Rs 300 crore by end-March 2026.

 "Consequently, any ARC obtaining the certificate of registration on or after the date of this circular shall not commence the business of securitisation or asset reconstruction without having minimum NOF of Rs 300 crore," the RBI said in a circular.

The guidelines are effective immediately.

"In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including the prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time," the circular said.

As per the RBI, the ARC should have a committee comprising a majority of independent directors to take decisions on proposals of submitting resolution plans under the IBC. It should also explore the possibility of preparing a panel consisting of sector-specific management firms and individuals with expertise in running firms and companies.

As per the new guidelines, ARCs shall not retain any significant influence or control over the corporate debtor after five years from the approval date of the resolution plan by the adjudicating authority.

The ARCs should also make additional disclosures in their financial statements on assets acquired under IBC, in addition to the existing disclosure requirements, RBI said.

Reviewing the guidelines, the RBI said the reconstruction of financial assets through settlement of dues payable by the borrowers have been modified.

"Settlement of dues with the borrower shall be done only after the proposal is examined by an Independent Advisory Committee (IAC) which shall consist of professionals having technical/ finance/ legal background," it said.

IAC, after assessing the financial position of the borrower, the time frame available for recovery of the dues, projected earnings and cash flows of the borrower and other relevant aspects, shall give its recommendations to the ARC regarding settlement of dues with the borrower.

Under the earlier guidelines, each ARC was required to frame a board-approved policy laying down the broad parameters for settlement of debts due from the borrowers.

Further, the board was permitted to delegate powers to a committee comprising any director and/or functionaries of the ARC for taking decisions on the proposals for settlement of dues.

The circular further said any management fee/ incentives charged towards the asset reconstruction or securitisation activity should come only from the recovery effected from the underlying financial assets.

Also, ARCs will have to constitute an audit committee of the board comprising of non-executive directors only.

The changes in regulatory framework followed the recommendations of an RBI-appointed committee, which was set up last year to review the working of ARCs and recommend suitable measures for enabling them to function in a more transparent and efficient manner.