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The Reserve Bank of India (RBI) has raised the minimum capital requirement for setting up an asset reconstruction company (ARC) to Rs 300 crore from the existing Rs 100 crore in order to strengthen the securitisation sector which plays a vital role in the management of distressed financial assets. The RBI, in a circular amending the existing regulatory framework for such entities, said the existing ARCs have been given a glide path to meet the minimum net owned fund (NOF) requirement till April 2026.

Consequently, it said any ARC obtaining the certificate of registration on or after the date of this circular shall not commence the business of securitisation or asset reconstruction without having minimum NOF of Rs 300 crore, adding the guidelines are effective immediately. Under the earlier guidelines, each ARC was required to frame a board-approved policy laying down the broad parameters for settlement of debts due from the borrowers. Upon review, the RBI said the guidelines for the reconstruction of financial assets through settlement of dues payable by the borrowers have been modified.

The circular further said settlement of dues with the borrower shall be done only after the proposal is examined by an Independent Advisory Committee (IAC) which shall consist of professionals having technical/ finance/ legal background. IAC, after assessing the financial position of the borrower, the time frame available for recovery of the dues, projected earnings and cash flows of the borrower and other relevant aspects, shall give its recommendations to the ARC regarding settlement of dues with the borrower. It said any management fee/ incentives charged towards the asset reconstruction or securitisation activity should come only from the recovery effected from the underlying financial assets. Also, ARCs will have to constitute an audit committee of the board comprising of non-executive directors only.