RBI may propose tweaks to Sarfaesi Act to bridge regulation gap with IBCs for ARCs

Mumbai: The Reserve Bank of India may propose amendments to the Sarfaesi Act to allow asset reconstruction companies (ARCs) to bid for bankrupt companies and infuse equity in them at the resolution stage. The central bank has asked its legal teams to draw up an amendment plan so that ARCs do not back out from buying bankrupt firms and halt the resolution process across sectors, people familiar with the matter said.

The recommendations, which will be made to the government, could be taken up in the monsoon session of parliament, scheduled to start later in September, they added.

“RBI’s legal team is chalking out the amendments in the Sarfaesi Act, which will be a huge win for ARCs,” said one person.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (Sarfaesi Act) – unlike the insolvency law – does not allow ARCs to become resolution applicants and invest equity in companies that have gone under. This rule led the central bank to reject UV Asset Reconstruction Company’s plan to buy insolvent telco Aircel’s assets. ARCs petitioned the RBI on the matter and said this would deter them from bidding for assets and impact the resolution processes across sectors.

According to an official, the RBI will most likely issue some clarifications on the Sarfaesi Act and the amendments could be taken up in the monsoon session. “The changes will be made only for ARCs to invest equity,” the official said.

RBI and the Association of ARCs in India did not respond to ET’s queries.

ET has learnt that the Association of ARCs in India has also asked the Insolvency and Bankruptcy Board of India to clarify its stance to the government and the RBI and suggest amendments, if required.

State Bank of India, Aircel’s lead banker, sought an urgent meeting with the RBI’s top brass to reconcile differences between the central bank and ARCs. SBI feared the RBI’s stance would scuttle not just Aircel’s resolution plan but also that of bankrupt telco Reliance Communications. State-owned banks, including SBI, are among the biggest lenders to bankrupt companies that rehabilitation companies are looking to buy.

If the RBI does not approve UVARCL’s resolution plans, then SBI may have to write off Rs 4,800 crore of its loans to RCom and Rs 7,246.14 crore to Aircel or restart the sale process.