Allowing ARCs to take equity stakes in companies will boost cash flows

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SummaryThe passage of the Enforcement of Security Interest and Recovery of Debts Laws Bill, 2011, is expected to help banks and asset reconstruction companies recover their bad debts faster.

The passage of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, is expected to help banks and asset reconstruction companies (ARCs) recover their bad debts faster. In a conversation with Pranav Nambiar, MD & CEO of Asset Reconstruction Company of India (ARCIL), P Rudran, explains how the change will enable ARCs to gain better returns and give them a bigger say in the affairs of the defaulting company

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?

This comes as a relief because, some times, there are no buyers for a property or there is a cartelisation of bidders that lowers the valuation of the property. In such cases, the Bill gives us the option to acquire the property, so as to reduce the debt burden on the borrower. The process will ensure that we do not get into a situation of distress sale.

Does the amendment open up new business opportunities for ARCs?

Multi-state cooperative banks have now been included in the definition of banks under the Sarfaesi Act. Multi-state co-operative banks can now sell stressed assets to ARCs, which will improve the flow of non-performing loans to ARCs. This is good news as it comes at a time when the sale of NPLs by banks has been weak.

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