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RBI tightens norms for acquisition of financial assets by ARCs from sponsors and lenders

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On December 6, 2019, India’s central Bank, the Reserve Bank of India (RBI) has tightened norms for Asset reconstruction companies (ARCs) by barring them to bilaterally buy assets from banks /financial institutions (FIs) which is its sponsor, lender or has subscribed to the fund raised by the ARC for its operations or an entity in the group to which the ARC belongs.rbiKey Points:

i.However, RBI allowed ARCs to participate in auctions of the financial assets, that should be conducted in a transparent manner, on arm’s length basis and the prices are set by market forces only.

ii.In June 2019, The Reserve Bank has permitted allowed to acquire financial assets from other ARCs, in the view of amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002. However, RBI cleared that all such transactions have to be settled in cash basis only and price discovery for such transactions should not be prejudicial to the interest of Security Receipt holders.

About SARFAESI act,2002:
It gives detailed provisions for the formation and activities of Asset Securitization Companies (SCs)and Reconstruction Companies (RCs) & give powers to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt.

About Asset Reconstruction Company(ARC):
It is a specialized financial institution that buys the NPAs (Non Performing Assets) or bad loans from banks and financial institutions at a negotiable price and helps banks to clean up their balance sheets (by removing the NPAs).

About RBI:
Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (BP Kanungo, N S Vishwanathan, Mahesh Kumar Jain, 1 is yet to be appointed)