ARCs in spotlight – The Hindu BusinessLine

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The charges levelled by tax authorities against ARCs are serious and may require RBI to act, if they’re true

From their inception in 2003, a lot of hopes have been pinned on Asset Reconstruction Companies (ARCs) to relieve banks of their non-performing assets (NPAs) and improve recoveries. Banks have handed over 30 to 60 per cent of their NPAs in the past decade to ARCs. But the battery of charges recently levelled by the Income Tax (IT) department against four unnamed ARCs whose premises it raided, raises fundamental questions about their governance. The allegations are that specific ARCs acquired stressed loans from banks at prices much below collateral value, had an ‘unholy nexus’ with borrowers who indirectly funded them and used ‘non-transparent’ methods to dispose of acquired assets. ARCs are accused of selling seized assets back to defaulting borrowers and of concealing and diverting profits from such transactions. Given the serious nature of these allegations, it may not be out of place for the Reserve Bank of India if, as regulator for ARCs and banks, it decides to initiate forensic investigations into the books of the named ARCs. But even assuming that these allegations are found to be true, policymakers must find regulatory fixes rather than jettisoning the ARC idea altogether, given that this route has been useful globally to discover a fair price for stressed assets.

But given that the tax department’s allegations revolve mainly around governance infractions at ARCs, these process fixes may need to be accompanied by a tighter governance framework. ARC promoters must be subjected to more stringent ‘fit and proper’ criteria on the lines of those for banks and must be asked to file more comprehensive statutory returns on their transactions, with RBI maintaining a stricter supervisory vigil. Allegations against private ARCs, if found true, would also strengthen the case for the public sector bank owned National Asset Reconstruction Company, set up by the Centre. Apart from ushering in best practices such as separation of the ARC’s sponsors from its management and price discovery through Swiss challenge, NARCL can ensure that banks enjoy greater oversight over NPA resolution attempts even after loans change hands, and thus perhaps, provide a fairer deal for them when they take the ARC route.

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