Will ARCs join the IBC bandwagon following RBI's latest rule change?

"The more the participants, more are the chances of realisation of better value for banks. ARCs could also help avoid distress sales," said RK Bansal, managing director and chief executive officer of Edelweiss ARC.

"In the cases where an asset currently lacks sufficient interest from buyers, but has the potential for interest picking up subsequently, an ARC can act as a warehousing agent and help the investors or sellers get better realisation."

Bansal added that the move will "absolutely" help banks in the long run when it comes to the resolution of stressed assets.

Legal experts concurred with Bansal’s view. They said that the entry of a new sector in the IBC process could increase the probability of resolutions.

"There is no doubt that the resolutions under IBC will go up, as another sector is now eligible to provide resolution plans," said Raj Bhalla, partner at law firm MV Kini.

Bhalla elaborated that there have been instances when ARCs were interested to bid for stressed assets under IBC, indicating that they were awaiting the RBI’s move “since very long time".

She was referring to the RBI objecting to UV Asset Reconstruction Company’s plan to acquire telecom operator Aircel under the IBC on the grounds that it was outside the scope of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act.

ARCs play a vital role in the management of distressed financial assets of banks and financial institutions. They buy stressed assets from banks and financial institutions to help them clean up their balance sheets.

Industry participants said the entry of ARCs in the IBC space could open up avenues for more resolution applications and that could increase the bidding amount for stressed assets.

"It is a win-win for banks, especially because we have an entire category of investors that will participate in the bidding process and that gives us more scope to avoid liquidation,” said a banker with a state-run bank, requesting anonymity.

While the process of resolution will be different for each stressed borrower, depending on assets and liabilities, it will surely increase the scope of resolutions, said the banker.

Edelweiss ARC’s Bansal added that in cases where there isn’t sufficient interest from other bidders, ARCs can act as a market maker by increasing interest and visibility, thereby improving the potential participant base.

"It could also facilitate holding on to the asset without distressed liquidation where there is the visibility of industry-level improvement or revival within a short period,” said Bansal.

His view was corroborated by the MD and CEO of another ARC who spoke to Moneycontrol on condition of anonymity.

"Typically, ARCs are associated with distress sales. Now that we are on board in the IBC process, there is a higher probability that bidding will be competitive and the price for the stressed asset will not be compromised,” the official said. "However, it also depends on the kind of asset and its market value."

Nearly six years after India introduced the bankruptcy laws, issues of poor infrastructure and inordinate delays in the resolution of stressed assets continue to haunt lenders.

Out of a total of 5,258 corporate insolvency proceedings initiated under the code from December 2016 to March this year, only 3,406 have been closed, according to data from the Insolvency and Bankruptcy Board of India (IBBI). Among those closed, 1,609 proceedings have been ordered to be liquidated, while 480 have ended in approval of resolution plans.

Strict timelines prescribed under the code, a multiplicity of cases, and a lesser number of tribunals have increased the backlog. Lenders, on the other hand, have had to take deep haircuts on their exposure to stressed companies.

"This move is very likely to help shore up bidding amounts for assets under IBC, which is beneficial for the lenders,” said MV Kini’s Bhalla. “If competition will increase in submitting resolution plans, then resolution applicants would want to outbid each other, which would lead to a significant reduction in the haircuts to the lenders."

Haircut, in banking parlance, refers to the monetary sacrifice banks need to make on their original loan exposure during the resolution process of a stressed borrower.

In its circular dated October 11, the RBI said in respect of a specific corporate insolvency resolution process, ARCs should not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the Adjudicating Authority under IBC.

This, experts said, is a sufficient time for a turnaround of the company if the plan that has been approved is feasible and viable.

According to Kumar Saurabh Singh, partner at Khaitan & Co, the move creates an option for ARCs to continue in a distressed asset longer by participating in the IBC bid and getting five years to turn around the business.

Earlier, ARCs ended up exiting investments (through the acquisition of debt) in one to two years, if the asset was resolved through insolvency where they were unable to bid or participate, said Singh.

Experts said that though the move is a step in the right direction, it comes with its own set of challenges. For one, the conditions imposed by RBI would mean that ARCs will have to change their regulatory framework and hire professionals having expertise in running firms and companies. That could result in higher costs.

"It (RBI’s move) will provide an additional avenue for ARCs, whose objective is to restructure delinquent loans, but enhancing disclosures and forming a committee will increase the cost of compliance," said Sonam Chandwani, managing director at KS Legal & Associates.

However, it is too early to decide the extent of resolutions as ARCs are offered to take up these bad loans even before banks approach the bankruptcy route, said Chandwani.

"ARCs are actively focusing on retail portfolios, making them more risk-averse, and they had analysed these companies before IBC, so it all depends on the value they will get under IBC," said Chandwani.

Dhananjay Kumar, partner at Cyril Amarchand Mangaldas, said while the circular will open up the submission of resolution plans by ARCs and their constituents, any resolution, ultimately, would depend on the viability and sustainability of the business in insolvency.

"With this move, banks benefit to the extent of more flexibility in the participation of resolution applicants in the resolution process,” said Kumar. “Haircuts will not be impacted by this move as haircuts depend on the status and value of the asset in IBC."