Asset Reconstruction Companies In India: High-Handedness, Judicial Reckoning, And Regulatory Reform

Anyone of us who have appeared before a Debt Recovery Tribunal, a High Court, or the NCLT in a Non-Performing Asset matter has, at some point, encountered an Asset Reconstruction Company on the other side of the record. They arrived with an ambitious mandate: to clean the Indian banking system's distressed debt backlog through professional, non-adjudicatory enforcement, free from the delays that frustrated bank-led recovery for decades. The Narasimham Committee I (1991) and Narasimham Committee II (1998) first proposed them.^[1] The Andhyarujina Committee reinforced the case.^[2] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") gave them statutory life and sweeping enforcement powers.

Two decades on, cumulative ARC recovery rates hover at 14–26% of acquired loan values — well below comparable international markets.^[3] Twenty-seven ARCs are currently registered with the RBI^[4] out of which top five — Edelweiss ARCL, ARCIL, Phoenix ARCL, JM Financial ARCL, and ACREL — command a combined market share of roughly 51.6%. Of these five, three have at various points been the subject of serious adverse court, regulatory, or enforcement action. That concentration, far from producing governance maturity, has produced a sector in which power over borrowers has consistently outrun accountability to them.

The engine of the ARC model is Section 5 of the SARFAESI Act. On acquiring a financial asset from a bank — whether by agreement, debenture, or bond — the ARC steps fully into the shoes of the original lender: all rights, all pending litigations, all recovery proceedings vest in it by operation of statute. Section 7 SARFAESI Act creates the Security Receipt (SR) trust structure: the ARC constitutes a trust, issues SRs (Security Receipts) to qualified buyers including the selling bank for its 85% portion, and manages the acquired assets for SR-holder benefit. Section 9 SARFAESI Act enumerates reconstruction measures — rescheduling, restructuring, sale of business, and debt-to-equity conversion. Registration under Section 3 SARFAESI Act requires a Certificate from the RBI and a minimum Net Owned Fund (NOF), raised to ₹300 crore by RBI notification dated 11.10.2022.^[5]

For NPA transfers involving aggregate exposure of ₹100 crore or more, the RBI's Master Direction (Transfer of Loan Exposures) Directions, 2021, Clause 56^[6] mandates the Swiss Challenge process: an ARC submits an anchor bid; the lender publicly invites counter-bids with a minimum mark-up of 5–15%; if no counter-bid crosses the threshold the anchor prevails; if one does, the anchor bidder receives a Right of First Refusal. NARCL's anchor bid of ₹285 crore (38.6% of ₹738 crore admitted debt) for BLA Power Ltd.^[7] and ARCIL's acquisition of Bandhan Bank's ₹3,165 crore NPA portfolio for ₹570 crore^[8] illustrate the method's application — and its limits. A 38.6% anchor is lawful. Whether it represents fair value is a different question, one the courts have increasingly been asked to answer.

The SARFAESI-IBC Interface- The most important jurisdictional question for any ARC is that once CIRP commences, what happens to SARFAESI enforcement? The Supreme Court has settled this question beyond doubt. The Section 14(1)(c) of the IBC expressly prohibits "any action to foreclose, recover or enforce any security interest... including any action under the SARFAESI Act" during the moratorium. In Indian Overseas Bank v. RCM Infrastructure Ltd., [2022] LiveLaw SC 496, the Hon'ble Supreme Court held that SARFAESI proceedings cannot continue once CIRP is admitted. The Court found that the sale was not complete as the balance consideration was accepted after the insolvency commencement date, rendering the sale void.

Further the non-obstante clause of Section 238 of the IBC establishes the Code's supremacy over inconsistent statutes. This was confirmed by the Supreme Court in Innoventive Industries v. ICICI Bank, Civil Appeal No. 8337-8338 of 2027 dated 31.08.2017 holding that the Section 238 of the IBC overrides any other inconsistent law, including state-specific regulations like the Maharashtra Relief Undertakings Act and further affirmed in ICICI Bank Ltd. v. Era Infrastructure (India) Limited [2026] LiveLaw SC 203. The only safe harbour for an ARC is where the SARFAESI sale is fully complete, the sale certificate is issued before the CIRP moratorium takes effect.

On the resolution side, India Resurgence ARC v. Amit Metaliks Ltd., [2021] LiveLaw 261 removed any remaining doubt: a dissenting ARC-creditor cannot insist on payment equivalent to its security interest over the CoC's approved plan. The commercial wisdom of the Committee of Creditors is paramount; SARFAESI enforcement rights do not translate into a veto over IBC resolution.

The ARCs may also act as Resolution Applicants under Section 29A(j)(iii) of the IBC — the RBI has permitted this from October 2022 for ARCs with minimum ₹1,000 crore NOF, subject to divestment of control within five years^[9] — but this is a narrow exception, not the primary ARC enforcement pathway.

The Judicial Reckoning: On ARCs High-Handedness- The courts have confronted ARC's conduct directly for their unfairness, high handedness in dealing with the debts assigned to them which culls out from the following notable judgments-

The Supreme Court in Mathew Varghese v. M. Amritha Kumar - Civil Appeals Nos. 1927-29 of 2014 dated 10.02.2014 while dealing with the pre-2016 unamended Section 13(8) SARFAESI, held that the right of redemption of a mortgaged property survives right up to the moment of confirmed sale, and cannot be extinguished prematurely. However, Parliament amended Section 13(8) in 2016 to drastically curtail this right. The redemption window now closes on the date of publication of the auction notice, not the date of sale. The Supreme Court confirmed this in Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd., 2023 INSC 838, and reaffirmed it in M. Rajendran v. KPK Oils and Proteins India Pvt. Ltd., 2025 LiveLaw SC 931. Mathew Varghese remains good law only for loans taken before the 2016 amendment. In post-2016 enforcement proceedings, once the auction notice is published, the borrower's right to redeem — with this the ARC's obligation to honour a last-minute tender — ends; which was earlier resulting in arbitrary, unfair and prejudicial to the secured assets as the value diminishes.

The ARCs had developed a practice of using Section 14 SARFAESI — the provision for CMM/DM assistance in taking possession — not as the limited ministerial tool it is, but as a shortcut to bypass DRT adjudication entirely. The Supreme Court in Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd., Crl. Appeal NO.736 of 2024 ; Crl. Appeal Nos.737-804 of 2014 dated 03.04.2026 closed this off holding that the CMM/DM's role is strictly ministerial. It held that the magistrate has no jurisdiction to decide disputed questions of title or borrower objections bringing down the malpractice of ARCs that uses a Section 14 SARFAESI order to dispossess a borrower who has a pending Section 17 SARFAESI application and is acting outside the statute.

The Andhra Pradesh High Court in Ghanta Infrastructures Ltd. v. ARCIL & Ors., Writ Petition No.8223 of 2007 dated 23.01.2008 is the most clinically damning judicial assessment of ARC conduct in the reported case law. ARCIL conducted a bidding process for the SPGL power project. Ghanta Infrastructures emerged as the highest bidder in a formal process that ARCIL had itself designed. ARCIL then allowed a fifth respondent to intervene at a late stage and awarded the bid to another entity — without notice to Ghanta, without an opportunity to match, and without reasons.^[11]

"The very conduct of the ARCIL in allowing the 5th respondent to intervene in the Bidding Process at a late stage is arbitrary and illegal. The malicious designs can be unveiled and can be exposed to show that the Bidding Process conducted by the ARCIL was a mere eye-wash and the successful bidder was already decided upon by the ARCIL."

The Court held that a general power to reject bids does not confer an arbitrary power. Even contractual discretions exercised by an ARC must satisfy Article 14's guarantee of non-arbitrariness. SARFAESI auction processes are not merely private commercial transactions; they are exercises of quasi-public power subject to constitutional scrutiny.

The Bombay High Court judgment in Prime Downtown Estates Pvt. Ltd. v. Omkara Assets Reconstruction Co. Pvt. Ltd. [Writ Petition (L) No.4526 of 2025 dated 04.07.2025] is the most recent and practically significant judgment where High Court noted that the Omkara ARC had been exploiting two ambiguities in Section 18(1) SARFAESI: whether a mortgagor (distinct from the principal borrower) has standing to appeal; and how the pre-deposit quantum is calculated. The Bombay High Court resolved both against the ARC. A mortgagor falls within "borrower" under Section 2(1)(f) SARFAESI and has standing to appeal. The pre-deposit quantum is not capped at the Section 13(2) SARFAESI demand notice — the ARC's response under Section 13(3A) SARFAESI must also be factored in. The judgment directly checks the practice of inflating pre-deposit calculations to make appeals economically unviable.

All these judgments shows that there is requirement of stricter checks and balances of these ARCs to maximise the recovery of assigned bad debts rather than turning them to bad debts or for the benefits of promoters/borrower promoters et.all.

In order to curbs these arbitrary, unfair and unjustified practices of the ARCs, the RBI in 2020, formalised what the courts had been articulating in these judgments and issued a Fair Practices Code (FPC) vide Circular dated 16 July 2020^[10]. Its premise is direct that an ARC steps into a bank's shoes under Section 5 SARFAESI inherits not just enforcement rights but the obligation to deal as a financial institution — fairly, transparently, and without harassment. The FPC's most consequential provision is its prohibition on non-arm's length acquisitions. Bilateral transactions between an ARC and connected entities — sponsor banks, group companies, financial institutions — are prohibited outright, regardless of price. Acquisitions from connected parties must proceed through publicly solicited open auctions. This targets the practice exposed by the Income Tax Department's 2021 search operations against Omkara ARC, CFM ARC, Rare ARC, and Invent ARC: ARC acquisition funds were being routed back through the borrower via dummy companies, the defaulter in effect repurchasing its own stressed asset at a deep discount. On the recovery side, three strict rules apply: no harassment of borrowers; recovery agents must operate under a Board-approved Code of Conduct for which the ARC is legally responsible; customer information is strictly confidential. Securities must be released on repayment — the ARC cannot hold collateral hostage beyond the legitimate extent of the debt. Any exercise of the right of set-off requires advance written notice with full particulars.

In January 2025^[11] RBI circular a structured settlement requirements was introduced. Every ARC was now required to maintain a Board-approved Settlement Policy. For dues exceeding ₹1 crore, an Independent Advisory Committee (IAC) of financial, legal, and technical experts to assess the settlement; a Committee of Directors — including at least two independent directors —to formally deliberate and record its reasoning. Wilful defaulters be subjected to the same process regardless of the amount and last but not the least that an ARC settlement lacking IAC review and a documented Board decision is now considered to be procedurally vulnerable to challenge in DRT and appellate proceedings.

The RBI in November 2025 years^[12], Consolidated Master Directions and elevated the FPC from guidance to a mandatory regulatory requirement subject to supervisory review. Non-compliance is no longer merely a governance failure but a regulatory violation, deployable as an independent ground of challenge in enforcement proceedings.

Why ARCs Fail In Practice: The Ground-Level Critique- The judicial and regulatory critique of ARCs is matched by the assessment of the banks and financial institutions that sell NPAs to them. On interacting with various Banks and financial institutions who have assigned the debts to these ARCs, four common failures emerge consistently. Firstly, they face their litigation incapacity. Most large NPA accounts carry overlapping proceedings across the DRT, High Court, civil courts, and the NCLAT. ARCs lacking experienced in-house legal professionals distribute cases to different advocates without coordination, producing inconsistent pleadings, missed hearings, and enforcement timelines that erode underlying asset values. What was recoverable at acquisition is no longer so by the time proceedings conclude. Secondly, informational deficit i.e. to say that when an ARC acquires an NPA, it acquires the case records — not the institutional memory. The originating bank knows the borrower's group structure, the collateral's true worth, and the history of earlier enforcement attempts. The ARC knows what is in the file. That gap translates into undervalued realisations and weak advocacy in contested proceedings. Thirdly, the documentation failures- Security documents like mortgage deeds, hypothecation agreements, guarantees etc. vary in form and legal effect across originating banks. The ARCs' ignorance of these variations has resulted in critical documents not being produced before tribunals, assets being undervalued in enforcement auctions, and in extreme cases, conditions for collusion in disposal of secured assets. Lastly, the Compelled OTS and its collateral damage where an ARC that cannot litigate effectively has no leverage and settles cheaply — driven not by the borrower's genuine financial incapacity but by the ARC's own failure. That settlement then becomes a benchmark deployed by the borrower in proceedings against other creditor banks. One ARC's capitulation prejudices every co-creditor's recovery.

Structural Vulnerabilities In The Model- It can be seen that there is structural vulnerability in the ARC model.  Four structural flaws explain patterns of ARC behaviour that might otherwise appear irrational. Evergreening: public sector banks hold a substantial stake in The National Asset Reconstruction Company Limited (NARCL), NARCL the government-backed 'bad bank' incorporated on 07.07.2021 designed to clean up stressed assets/ NPAs from bank balance sheets. Where banks transfer stressed assets to NARCL at inflated values, distressed debt moves between balance sheets rather than being resolved. Management fee misalignment: ARC fees are charged on assets under management. Without a statutory resolution timeline (unlike the IBC's 330-day CIRP process), the financial incentive is to hold assets rather than resolve them. Valuation conflicts: the absence of a standardised binding methodology produces chronic deadlocks and failed auctions, leaving stressed assets on balance sheets longer than optimal.

Backdoor acquisitions: Section 29A of the IBC bars defaulting promoters from reacquiring their businesses through insolvency. No equivalent safeguard exists under SARFAESI — a gap that the IT Department's 2021 operations confirmed has been systematically exploited. The ARC sector is consolidating. The RBI's enhanced capital and governance requirements of ₹300 crore minimum NOF, 15% Capital Adequacy Ratio, mandatory FPC, IAC-based settlement approvals are squeezing smaller players out of the market. Aditya Birla ARC, India Resurgence, and Arcion have already exited. Government-backed NARCL competes directly for large NPA accounts. The RBI's April 2025 draft framework for securitisation of stressed assets^[13] signals that the regulator is actively exploring whether a fundamentally different successor mechanism is required.

A Framework For Evaluation: Fair Value And Recovery Integrity- Whatever is the regulatory future of ARCs, we strongly need a framework for assessing ARCs conduct in DRT hearings and contested proceedings like fair Value, Recovery Integrity to name a few.

Fair Value which means an asset should be acquired and disposed of at its estimated worth under prevailing market conditions, through a genuinely competitive process. The Swiss Challenge method operationalises this at acquisition; a SARFAESI auction is meant to do so at enforcement. An ARC that manipulates either predetermining the outcome structuring below-market transactions with connected parties (prohibited by the FPC), or deploying procedural barriers to make challenge impossible has departed from fair value and is legally exposed.

Recovery Integrity means that the process must be transparent, legally compliant, and ethically sound — restructuring that preserves going-concern value where possible, and settlements that are IAC-reviewed, Board-approved, and commercially justified, not compelled by litigation failure. When both benchmarks operate together, the systemic benefits are real: faster recovery, higher creditor returns, legal certainty in title transfer, and prevention of asset stripping. When either is compromised, the damage extends beyond the individual transaction to the systemic credibility of the distressed asset resolution framework.

ARCs arrived with a mandate and statutory powers to match under SARFAESI and IBC in full suite of the original lender's rights. However, it did not adequately provided for checks and balances of ARCs conduct or accountability.

The judiciary spent twenty years supplying that accountability. The judgment in Ghanta Infrastructure(supra) described the ARCIL's conduct as "a mere eye-wash" with the winning bidder "already decided upon" was an early warning. The decisions that followed on Section 14 SARFAESI weaponisation, sham auctions, and the strict pre-deposit regime confirm the pattern where it exists and build on it. The same two decades of jurisprudence has, with equal consistency, upheld SARFAESI enforcement where the ARC has complied.

The RBI's regulatory reset mandatory FPC, IAC-based settlements and Consolidated Master Directions enhanced capital norms. Though the same are belated but unambiguous acknowledgment that the sector will not self-correct. Yet regulation cannot substitute for professional competence. The ground-level critique, fragmented litigation, informational deficits, documentation failures, compelled OTS identifies constraints that circulars alone cannot fix.

Whether ARCs evolve into the genuine resolution specialists they were designed to be, or remain as RBI Deputy Governor Swaminathan J. observed — "warehousing agencies for a fee,"^[14] will depend on whether structural incentive misalignments can be overcome.

The legal framework is in place. The twin metrics of Fair Value and Recovery Integrity are available as tools of challenge and evaluation. Whether those who operate the ARC model will use it with the integrity the statute contemplated is the question that will continued to be called upon to answer.

^[1] Report of the Committee on the Financial System (Chairman: M. Narasimham), 1991; Report of the Committee on Banking Sector Reforms (Chairman: M. Narasimham), 1998.

^[2] Report of the Committee on Legislation Relating to Financial Sector (Chairman: Justice M.H. Andhyarujina).

^[3] Estimates based on RBI data on ARC recovery performance; RBI Report on Trend and Progress of Banking in India (various years).

^[4] List of ARCs registered with the RBI as on 30 June 2024; market share (AUM/SR outstanding) as on 30 June 2024.

^[5] RBI Notification dated 11.10.2022 raising minimum NOF for ARCs to ₹300 crore.

^[6] RBI Master Direction — Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, dated 24.09.2021 (updated 28.12.2023), Clause 56.

^[7] NARCL anchor bid for BLA Power Ltd. at approximately 38.6% of ₹738 crore admitted debt; Swiss Challenge with 10.2% minimum mark-up threshold.

^[8] ARCIL acquisition of Bandhan Bank's ₹3,165.25 crore NPA portfolio for ₹569.75 crore on SR basis; Bandhan Bank Ltd., Exchange Filing dated 29 December 2025.

^[9] RBI Circular dated October 2022, permitting ARCs with minimum ₹1,000 crore NOF to act as Resolution Applicants, subject to divestment of control within five years.

^[10] RBI Fair Practices Code for ARCs — Circular No. DOR.NBFC(ARC) CC.No.9/26.03.001/2020-21 dated 16 July 2020 (issued under Section 9, SARFAESI Act, 2002).

^[11] RBI Circular on Settlement of Dues by Borrowers with ARCs, dated 20 January 2025 (amending paragraph 15 of the Master Direction — RBI (Asset Reconstruction Companies) Directions, 2024 dated 24 April 2024).

^[12] RBI Consolidated Master Directions for Asset Reconstruction Companies, Press Release No. 2025-2026/1588, dated 28 November 2025.

^[13] RBI Draft Framework for Securitisation of Stressed Assets, April 2025.

^[14] Address by RBI Deputy Governor Swaminathan Janakiraman at the Conference of Asset Reconstruction Companies, Mumbai (2024).

Author is an Advocate practicing at Supreme Court of India. Views are personal