Budget 2016: 100% FDI in asset reconstruction companies a welcome move

To tackle bad debts in the banking sector, finance minster Arun Jaitley allowed 100% foreign direct investment (FDI) in asset reconstruction companies (ARC) and foreign portfolio investors (FPI) can invest into security receipts.

This is a big enabling provision for ARCs which are struggling for funds as banks refuse to give steep discounts on the stressed assets and the ARCs have to make an upfront payment of 15% of the cost of the asset.

Siby Antony, managing director and chief executive officer, Edelweiss ARC, said: "Already few foreign funds like SSG have bought stake in ACRE — an ARC promoted by IFCI and KKR in talks with IARC. So, there is a great interest. This will encourage many more funds to come into the country."

There are about 15 asset reconstruction companies in India which are likely to see interest from foreign funds.

Vibha Batra, group head, financial sector ratings at ICRA, said: "Since the launch of Indradhanush in August 2015, Grosss NPAs of PSBs have ballooned by around Rs1 trillion to Rs4 trillion as on December 31, 2015 (compared to Rs 3 trillion as June 2015). At the same time PSBs have reported a cumulative loss of Rs110 billion on in Q3, FY16 as against net profit of around Rs100 billion in Q1, FY16. Further, there has been significant softening in the commodity prices, which have led to deterioration in credit profile of the corporates."

She added: "ARCs may play a great role as higher sponsor stake may lead to higer equity flows and the permission granted to FPIs to invest in Srs may widen the funding base for ARCs."

Further, the budget also allowed the ARC trusts that issue the security receipts agains the purchase of NPAs will have complete pass through of Income tax. S Sriniwasan, CEO, Kotak Realty Fund, said: "This clarification is extremely welcome and puts to rest some doubts that investors had. Both these measures will give a fillip to the ARC industry and help in cleaning up the stress in the banking system."

The other enablers for debt recovery is the Amendments in the SARFAESI Act 2002. ARC can acquire upto 50% or more in borrower company, to bring in sync with Strategic Debt Restructuring (SDR) norms of the Reserve Bank of India wherein bank can change the promoter and get new promoters to run companies which are not run professionally.