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MDs, CEOs of ARCs can't have more than 3 terms in office without a cool-off

Mumbai, October 11, 2022

RBI allows ARCs to bid for assets in IBC cases

The Reserve Bank of India (RBI) on Tuesday said managing directors (MDs) and chief executive officers (CEOs) of asset reconstruction companies (ARCs) cannot have more than three terms in office, with each term not exceeding five years. In addition, the retirement age of CEOs has been brought on a level pegging with CEOs of private banks, which is 70 years.

Apart from enhancing governance norms, ARCs have been allowed to become resolution applicants (RSa) in bankruptcy proceedings — they can bid for assets in Insolvency and Bankruptcy Code (IBC) cases.

The new norms for ARCs in India was announced after a review of existing norms, with the expressed aim of bringing the norms on a par with private banks’.

In case the ARC wishes to appoint the MD and CEO after three terms, there will be a cooling-off period of three years.

“…the individual shall be eligible for reappointment as MD/CEO or whole-time director in the same ARC, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling period, the individual shall not be appointed or associated with an ARC in any capacity, either directly or indirectly,” the RBI said.

ARCs have been asked to put in place appropriate measures to ensure succession planning.

RBI said the Chair of the ARC’s board should be an independent director.

“In the absence of the Chair of the board, meetings of the board shall be chaired by an independent director. The quorum for board meetings shall be one-third of the total strength of the board or three directors, whichever is higher. Further, at least half of the directors attending the meetings of the board shall be independent directors,” the new norms said.

The board of ARCs should have an audit committee and a nomination remuneration committee.

The ARCs, which do not comply with the above norms, have been given six months to comply with.

In line with private banks, ARCs have to ensure fit and proper criteria for appointments of CEOs, and such appointments will need prior RBI approval.

The regulator has also prescribed enhanced disclosure norms for ARCs, which could enable them to garner investments from a broader set of qualified buyers. Among disclosures, the summary of financial information of the ARC for the past five years or since commencement of business of the ARC has been mandated.

In addition, the track record of returns generated for all security receipt (SR) investors on schemes floated in eight years and of recovery rating migration and engagement with rating agencies of schemes floated in the past eight years has been mandated.

Regarding engagement with credit rating agencies (CRAs) and rating of SRs, the RBI has said that ARCs shall mandatorily obtain recovery rating of SRs from CRAs and disclose the assumptions and rationale behind such rating to SR holders.

“ARCs shall retain a CRA for at least six rating cycles (of half year each). If a CRA is changed mid-way through these six rating cycles, the ARC shall disclose the reason for such change,” the norms said.

Regarding settlement of dues with borrowers, the RBI said such will be done only after the proposal is examined by an independent advisory committee, consisting of professionals having technical/finance/legal background.

“Settlement with the borrower should be done only after all possible steps to recover dues have been taken and there are no further prospects of recovering debt,” observed the RBI.

Requirement of net-owned funds (NOFs) for ARCs has been increased to Rs 300 crore, from the existing requirement of Rs 100 crore in a phased manner.

NOF has been increased to Rs 200 crore by March 2024 and to Rs 300 crore by March 2026.

In a significant move, ARCs have also been allowed to become RAs under IBC. This will mean ARCs can bid for assets facing bankruptcy proceedings.

“It has now been decided under the provision of Section 10(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to permit ARCs to undertake those activities as an RA under IBC which are not specifically allowed under the SARFAESI Act,” the RBI said.

For becoming RA, the NOF of an ARC should be Rs 1,000 crore.

“A committee comprising a majority of independent directors shall be constituted to take decisions on the proposals of submission of resolution plan under IBC,” the RBI said.

The Criteria

  1. 3-year cooling off period in case of re-appointment and age of retirement 70 years
  2. Allows ARCs to bid for assets in IBC cases
  3. Chair of ARC’s board should be an independent director
  4. Board should have an audit and a nomination remuneration committee
  5. ARCs have been given six months to comply with the norms
  6. Requirement of net-owned funds for ARCs raised to Rs 300 crore from Rs 100 crore, to be done in phases

[The Business Standard]

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