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RBI seeks FinMin's nod for easing capital restrictions on ARCs

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February 24
7:12 AM 2016

Reserve Bank of India (RBI) has sought approval from Union Finance Ministry for relaxing capital restrictions on Asset Reconstruction Companies (ARCs). India's central bank aims at cleaning up balance sheets of banks. 

Reserve Bank of India has recommended Union Finance Ministry to increase sponsor's holding limit in asset reconstruction companies. The relaxation in capital restrictions for ARCs will enable them to clean up balance sheets. Sources close to the development observe that the central government is also keen on this and may amend few norms very soon.

Under present norms, sponsors foreign investors can invest up to 49 percent via automatic route. They need to invest through government route if the investment is more than 49 percent. Hence, sponsors can't hold more than 50 percent in ARC. The latest recommendation from RBI is that sponsors should be allowed to invest more than 50 percent under capital structure, according to The Economic Times.

For raising sponsor's equity in ARC, the amendment of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) is required. An outright sale instead of getting security receipts from sale, can enhance business of banks and bring in more capital as well, opine some analysts. 

Rashesh Shah, group CEO at Edelweiss, said "The idea was how to capitalize the ARCs, how to raise more capital from international sources and how to ensure that there is lot more risk capital available. Suggestions included additional funding means for ARCs like IPO."

Meanwhile, Euroclear has agreed to clear Indian debt overseas. Belgium-based Euroclear is the world's largest securities settlement firm. Euroclear will settle Indian government's debt papers in the overseas market as per a model suggested by Reserve Bank of India. The Indian debt papers overseas settlement will be operational from next financial year of April 2016- March 2017, according to Indian Express.

The current norms of RBI are limiting the capacity of fund raising via an initial public offer (IPO). RBI norms further stipulate that even 10 percent change in shareholding requires regulatory approval. Investors who hold more than 10 percent in ARC are classified as sponsors. ARCs are directed to shell out 15 percent cash upfront, while buying a stressed asset from financial institution. Earlier, it was five percent only. 

The Union Finance Ministry is also working closely with Reserve Bank of India on other monetary policy issues. Both are in the process of setting up a Monetary Policy Committee.

"We always hold frequent discussions between the Finance Ministry and Reserve Bank of India. Both RBI and Finance Ministry are on the same page," said Shaktikanta Das, Economic Affairs Secretary.

The Monetary Policy Committee will fix the benchmark interest rate of RBI and set inflation targets, as reported by DNA.

Gross non-performing assets (NPAs) of public sector banks rose to INR 3,100,160 crore (1crore=10 million) in 2014-15 from INR92,515 crore in 2010-11, according to a latest data from ETIG. Raghuram Rajan, RBI Governor, is keen on inflation control and some amendments to RBI Act. 

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