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RBI's Fair Practices Code For Asset Reconstruction Companies – A Respite Or Woe

Bodhraj Kishore
18 Aug 2020 3:03 PM GMT
RBIs Fair Practices Code For Asset Reconstruction Companies – A Respite Or Woe
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Recently Reserve Bank of India (RBI) has advised Asset Reconstruction Companies (ARCs) to adopt 'Fair Practices Code' so as to ensure transparency and fairness in their operation and issued guidelines on 16th July 2020. Most of the guidelines issued are practically already in use of ARCs in one form or the other, as the actions and non-actions are always the subject matter of judicial review.

Our present study is confined mainly to the following two aspects, which have been introduced in order to enhance transparency in the process of sale of secured assets:

Firstly, the ARCs have been asked to consult with investors in their security receipts while selling the assets.

  • In this regard it is to mention that under section 7 (3) and (4) SARFAESI Act, the Qualified Buyers (QB) / holders of security receipts (SRs) / Investor - holding SRs; not less than 75% of the total value of the SRs issued – are entitled to call a meeting of all the QBs and every resolution passed in such meeting shall be binding on the company.
  • Now, in order to enhance transparency in the process of sale of secured assets, para 2(ii) of RBI FPC dated 16/7/2020 has created and other essential member / participant in decision making in the day to day affairs and may impact the pace of resolution and time lime, for the want of coordination amongst all the (QB)/Investor/holders of SRs.
  • At present ARCs in their capacity as Trustee (of securitization Trust created u/s 7 SARFAESI Act) were taking steps in accordance with extant guidelines issued by RBI itself; for prompt action/ resolution of NPAs acquired by them. According to present practice, assignor banks & FIs are also holding periodical meetings for taking review of portfolios/accounts assigned by them to ARCs.
  • Therefore, the interest of all Investors / SR holders was already protected.

Secondly, the RBI has asked ARCs to ensure that persons connected to the defaulting promoter do not buy the assets. Buying of auctioned assets by a promoter is barred under Section 29A of the Insolvency Act.

Presently (i) IBC code 2016 and (ii) SARFAESI Act 2002 both the enactments are operating in the different areas/premises. IBC 2016 applies (i) for reorganisation and insolvency resolution of entities and (ii) on all loans whether they are secured or unsecured. Whereas SARFAESI Act applies only on (a) securitization and (b) reconstruction of financial assets and (c) enforcement of securities (secured assets).

The present RBI guidelines in the form of FPC for ARCs - to ensure that persons connected to the defaulting promoter do not buy the assets. Buying of auctioned assets by a promoter is barred under Section 29A of the Insolvency Act. may not seems to accelerate the process of selling the assets, instead there are apprehensions that it will restrict the scope of marketability of the mortgage/charged assets. It is worth pointing that Para 2(i) of FPC itself provides for participation of as many prospective buyers as possible and at present the restrictions under section 29A IBC 2016 are being relaxed. Further, as principle of natural justice any coercive action against the promoters & properties if the borrowers may be taken as a last resort.

In this backdrop, making it mandatory for - ARCs to ensure that persons connected to the defaulting promoter do not buy the assets. Buying of auctioned assets by a promoter is barred under Section 29A of the Insolvency Act will give a tough time for early resolution of the NPAs. Further,

The ARCs have been created with the primary objective and entrusted with the obligation of the unlocking the economic worth and realization of the optimum value of the bad assets (NPAs) within the shortest time period.

Further, the above guidelines have been issued with the intentions to enhance transparency in the process of sale may in fact decelerate. /slow down the disposal resolution of assets
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