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RBI permits ARCs to convert debt into equity

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SummaryReserve Bank permitted asset reconstruction companies (ARCs) to convert debt of crisis-ridden companies into equities as part of restructuring process.

Reserve Bank on Thursday permitted asset reconstruction companies (ARCs) to convert debt of crisis-ridden companies into equities as part of restructuring process.

"Securitisation or reconstruction companies are permitted to convert a portion of debt into shares of the borrower company as a measure of asset reconstruction provided their shareholding does not exceed 26% of the post converted equity of the company under reconstruction," RBI said in a notification.

Such companies are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors holding not less than 60% of the amount outstanding to a borrower as against 75% at present.

The following changes have been made following amendments made in Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) and on the recommendations of the Key Advisory Group constituted by the government on the Asset Reconstruction Companies (ARCs).

ARCs are specialised entities which picks up stressed assets of banks and financial institutions at a discount and make recovery.

Such companies are also permitted to acquire debt from other ARCs subject to certain conditions. The condition, including that such transaction should settled on cash basis. The selling ARCs will utilise the proceeds so received, for the purpose of redemption of underlying security receipts, it added.

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