RBI: ARCs must invest 15% in security receipts

Aug 07 2014, 02:16 IST
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SummaryThe Reserve Bank of India has asked asset reconstruction companies (ARCs) and securitisation companies (SCs) to increase the mandatory upfront investment in security receipts (SRs) to 15% from the earlier 5%.

The Reserve Bank of India has asked asset reconstruction companies (ARCs) and securitisation companies (SCs) to increase the mandatory upfront investment in security receipts (SRs) to 15% from the earlier 5%.

“Henceforth, SCs/RCs shall, by transferring funds, invest a minimum of 15% of the SRs of each class issued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme,” the RBI said in its notification. The RBI also changed the definition of the planning period; ARCs will now get six months instead of 12 to draw a plan to realise non-performing assets (NPAs) of the selling bank.

The amendments also shortened the period for the valuations of the security receipts to six months of acquiring the underlying asset from one year. The RBI gave ARCs more time to perform due diligence, not less than two weeks, before bidding for stressed assets from auctioning banks.

The RBI notification also stipulated new norms for management fees charged. ARCs will now have to calculate and charge management fees as a percentage of the net asset value (NAV) at the lower end of the NAV rather than as a percentage on the outstanding value of SRs, provided it is not more than the acquisition value of the asset. “But, management fees are to be reckoned as a percentage of the actual outstanding value of SRs, before the availability of NAV of SRs,” it said.

The RBI said ARCs and SCs should be a part of the banks’ Joint Lenders' Forum (JLF) for special mention accounts 2 (SMA2) category for accounts above R100 crore. ARCs will also have to report to the Indian Banks Association (IBA) the details of chartered accountants, advocates and valuers who have committed serious irregularities in course of rendering their professional services and involved in fraud.

“SCs/RCs will have to ensure they follow the guidelines issued by IBA and also give parties a fair opportunity to explain their position and justify their action before reporting to IBA,” it said.

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