Tainted Promoters Misusing ARCs: RBI Deputy Governor

Reserve Bank of India (RBI) Deputy Governor M. Rajeshwar Rao has highlighted that asset reconstruction companies (ARCs) are being misused by unscrupulous promoters to re-enter the bankruptcy process after causing their firms to default on loans. He emphasised that non-compliance with regulatory guidelines and deliberate violations would attract strict supervision from the banking regulator.

"Not all ARCs have implemented the revised guidelines on board composition and functioning. I urge all ARCs to adopt these guidelines in the right spirit," Rao said. He noted that a regulatory framework under the SARFAESI Act enables ARCs to undertake resolution.

Rao's comments were part of his keynote address at a conference on "Governance in ARCs – Towards Effective Resolutions," held in Mumbai on 17 May.

"There are concerns about the ARC route becoming a vehicle for the entry of 'tainted' promoters, who were initially responsible for the default of the underlying entity," he said.

Earlier in the week, the central bank barred two Edelweiss Group companies for engaging in the evergreening of distressed loans—a practice where further credit is granted to firms near default to help them repay existing loans.

Rao stressed that transactions in ARCs must be conducted transparently and that the resolution process for assets needs to be clearly defined. He warned that ARCs need to be mindful of their conduct towards distressed borrowers, as even a single incident of misconduct could lead to significant controversy.

He underscored the importance of strong governance frameworks, robust internal controls, and a strong compliance culture, noting that not all ARCs have implemented the revised guidelines on board composition and functioning.

To ensure robust governance, the RBI requires ARCs to appoint an independent director as the board chair and to have at least half of the directors in any board meeting be independent directors. ARCs are also mandated to establish two board committees—an audit committee and a nomination and remuneration committee—to enhance board effectiveness.

Rao stated that RBI regulations aim to promote the integrity and effectiveness of the sector. "As leaders of the ARC sector, you should ensure the sector remains aligned with legislative and regulatory intent and work to dispel any negative perceptions about ARC operations and governance standards," he said.

He concluded by reiterating the necessity for ARCs to have strong governance frameworks, robust internal controls, a well-developed risk management function, and a strong compliance culture.