Allowing ARCs to take equity stakes in companies will boost cash flows
What is the major implication of the Bill on ARCs?
Until now, banks could undertake corporate debt restructuring (CDR) of stressed accounts and convert a portion of the debt into equity according to prescribed RBI guidelines. But no such option was available for ARCs. Henceforth, ARCs are permitted to take equity stakes in companies.
By doing so, ARCs can now participate in the growth of businesses and exit at a later date by earning an upside on the equity. The exit could be through different modes, including share sales through IPOs, PE stake sale, etc.The potential upside for returns are better than was the case in the past. Equity stakes also give us the option of getting a place on the board of the company or making management changes. However, this will be within the limits of the RBI guidelines.
How will the borrowers benefit?
By taking equity stakes, we are reducing the debt burden on the company and, thus, improving its cash flows and viability.
How will the option to buy immovable properties towards the settlement of the dues help financial institutions?
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