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Asset Reconstruction Companies as Resolution Applicants: Recent Developments

Sara Jain[i]


Recently, the RBI rejected the resolution plan of UV Asset Reconstruction Company (‘UVARC’) for the resolution of Aircel Limited (‘Aircel’). The said plan had been approved by the NCLT through an order dated June 9, 2020.[ii] This post throws light on various aspects related to this significant development.

  • Why was RBI approval required for the said resolution?

In accordance with Section 30(4) of the Code read with Regulation 37(1)(l) of the (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the resolution applicant is required to undertake necessary approvals from relevant authorities as per law for the time being in force.

While granting approval to UVARC’s resolution plan, the NCLT stated that the regulatory sanction of RBI is required because an asset reconstruction company acquiring shares of Aircel.[iii] Thus, in accordance with the SARFAESI Act, 2002, ARCs require approval of RBI before implementation of the resolution plan.

  • Why did RBI reject UVARC’s resolution plan?

Although the Association of ARCs in India has sought a clarification with regard to RBI’s decision, it has been reported that the regulator has done so because the resolution plan does not comply with guidelines laid down for ARCs and the SARFAESI Act, 2002.[iv]

In particular, it is said to be in contravention to the RBI notification dated November 23, 2017 entitled, ‘Conversion of debt into equity- Review’[v] (‘2017 Notification’).[vi] This is a review of the ‘Conversion of debt into shares, consent level of security enforcement actions and permission to acquire debt from other SC/RCs’ notification dated January 23, 2014 (‘2014 Notification’)[vii]. These notifications are in reference to the ‘The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003’.

The 2014 Notification inter alia states that securitization or reconstruction companies are allowed to acquire a shareholding not exceeding 26% of the post converted equity of the company under reconstruction (in case of debt conversion to equity).

The 2017 Notification provides an exemption to this cap of 26% if the following criteria are met:

  1. The ARC shall be in compliance with Net Owned Fund (NOF) requirement of 100 crore on an ongoing basis;

  2. At least half of the Board of Directors of the ARC comprises of independent directors;

  3. The ARC shall frame policy on debt to equity conversion with the approval of its Board of Directors and may delegate powers to a Committee comprising majority of independent directors for taking decisions on proposals of debt to equity conversion;

  4. The equity shares acquired under the scheme shall be periodically valued and marked to market. The frequency of valuation shall be at least once in a month.

In the given case, post-approval of resolution plan, UVARC shall get 76% shareholding in Aircel Limited in the first five years.[viii] Thus, RBI rejected the resolution plan for exceeding the 26% threshold and (apparently) not fulfilling the exemption criteria.

  • What are the arguments put forth by ARCs and other stakeholders?

The ARCs contend that the IBC explicitly allows them to be resolution applicants and in case of any contradiction between the Code and SARFAESI, the former will have an overriding effect due to the non-obstante clause under Section 238.[ix]Explanation II of Section 29A of the Code defines ‘financial entity’ for the purposes of the provision which clearly includes asset reconstruction companies. It states that Section 29A(c) shall not be applicable in case the resolution applicant is a financial entity. Therefore, this indicates (by logical interpretation) that ARCs can be resolution applicants according to the Code.

  • What is the impact of the rejection of the plan by RBI?

It is raised a pertinent question as to whether ARCs can be resolution applicants or not. The legal position needs to be clarified as soon as possible as various ARCs are involved in different CIRPs. For instance, JM Financial ARC, ARCIL and Phoenix have submitted bids for Reliance Naval and Engineering, while Suraksha ARC recently submitted its interest for HDIL.[x]

  • What is the take of RBI on this?

At present, there is no information that the RBI has provided any clarification with regard to its decision. However, on August 31, 2020, Economic Times has reported that may propose amendments in the SARFAESI Act, 2002 to permit ARCs to bid as resolution applicants for insolvent companies.[xi]


[i] Sara Jain is a Graduate of MNLU Mumbai and an incoming associate at Shardul Amarchand Mangaldas & Co. Her interest lies in Insolvency laws in furtherance of which she runs her own blog – Insolvency Simplified. [ii] In the matter of Aircel Limited, Dishnet Wireless Limited & Aircel Cellular Limited IA No. 1864-MBII-2019 in CP (IB) No.298-MB.II-2018, IA No. 1863-MB.II-2019 in CP (IB) No.302-MB.II-2018 & IA No. 1865-MB.II-2019 in CP (IB) No.300-MB.II-2018, found at [iii] Ibid. at Pg. 48 [iv] [v] [vi] [vii] [viii] [ix] [x] [xi]

Asset Reconstruction Companies as Resolu
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