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Business EconomyPosted at: Jul 1 2015 4:42PM


ASSOCHAM urges Finance Ministry to incentivise ARCs to double capital base

Mumbai, Jul 1 (UNI) With a view to equip the Asset Reconstruction Companies (ARCs) for absorbing the entire incremental NPAs of fiscal 2016, industry body ASSOCHAM has suggested incentivising ARCs to double their capital base from the current level of about Rs 2,800 crores. In a note submitted to the Finance Ministry, The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has stated that the ARCs would require participation from entities such as private equity (PEs) and distressed asset funds. The chamber has also proposed that to sufficiently incentivise ARCs, a combination of factors, viz. a marginally-higher management fees, better incentive-sharing mechanism and improved valuations are necessary. The chamber's Secretary General, Mr D.S. Rawat said that "under the new RBI norms, ARCs have to invest at least 15 per cent of the value of assets acquired compared with 5 per cent earlier, creating additional constraints on capital, ARCs have regulatory restrictions on sponsor shareholding, which is currently capped at 49 percent. ARCs are also not allowed to raise funds from public, further limiting their ability to raise capital." Today, in certain cases, an asset under resolution process finds it difficult to access funding for critical needs such as working capital and capital expenditure. There have been instances where ARCs themselves had to lend working capital to resolve cases. Such incidents compound the pressure on the already constrained financials of ARCs, noted ASSOCHAM. The tougher environment has turned ARCs cautious about the quality and valuation of assets they acquire. This has slowed down growth in AUM to 30% in fiscal 2015 after a four-fold jump in fiscal 2014. The slowdown since August 5, 2014, has been starker with SR issuances at just Rs. 5,000-7,000 crores (corresponding to Rs. 10,000 crores of principal debt) compared with about Rs. 15,000 cores of SRs issued between April 1 and August 5, 2014. New capital norms have significantly increased the cost of asset acquisition for ARCs. To offset this, ARCs have been seeking higher discounts to buy NPAs, but banks are unwilling to reduce price resulting in an expectation mismatch. This is why there is a sharp decline in the ARC transaction closure rate or the value of assets acquired as a percentage of value of assets put on the block by banks, said ASSOCHAM. "ARCs have successfully reconstructed several large accounts, i.e. those with principal debt of more than Rs. 100 crores. Out of the large assets resolved, more than three-fourths were done using the asset re-construction strategy," said Mr Rawat. In addition, timely debt aggregation has also helped improve recovery/redemption rates; for exampe, that of a thermal power plant (redemption ratio of 85 pc), an integrated textile company (80-90 pc), a large steel company (90-100 pc), a railway supplier (90-100 pc), a large petrochemicals and fertiliser company (60-70 pc) and recovery from these five accounts was over Rs. 2,500 crore. UNI JS FH AV1635
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Tags: #ASSOCHAM urges Finance Ministry to incentivise ARCs to double capital base
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