Under the 15:85 plan, banks get 15% of the ARC sale proceeds in cash. (Source: Reuters)In a move that would aid recovery of bad loans, the government on Wednesday proposed listing and trading of security receipts (SRs) on stock exchanges.
Finance minister Arun Jaitley said that listing and trading of SRs issued by a securitisation company or a reconstruction company under the SARFAESI Act will be permitted in SEBI-registered stock exchanges. “This will enhance capital flows into the securitisation industry and will particularly be helpful to deal with bank NPAs,” he explained.
At present, only qualified institutional buyers (QIBs) which constitute banks and NBFCs can hold SRs and is therefore a very illiquid market. Siby Antony, MD & CEO, Edelweiss Asset Reconstruction Company told FE that the move will be beneficial if the government allows high net-worth individuals (HNIs) or investors who can buy SRs worth at least R10 lakh on the basis of face value.
“At least for companies with good underlying assets, it makes sense for banks to get their SRs listed and exit the loan,” Antony explained.
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Under the 15:85 plan, banks get 15% of the ARC sale proceeds in cash, while the rest is settled in SRs which can be redeemed as and when money is recovered. That apart, banks need to pay anywhere between 1.5% and 2% as management fee to the ARC.
“Listing and trading of security receipts can potentially allow asset reconstruction companies to access capital markets for financing their acquisition of specific loan portfolios, as well as obtain liquidity by selling exposure to specific portfolios in the public markets”, said Kartick Maheshwari, Partner, Khaitan & Co.
Meanwhile, banks have been unable to find buyers for bad loans as they negotiate price with ARCs. The valuation tussle between the lenders and ARCs began in August, 2014 when the Reserve Bank of India (RBI) mandated upfront investment of 15% in security receipts (SRs) from 5% earlier to ensure ARCs have ‘more skin in the game’.