The Hindu Business Line : Finance Ministry, RBI differ on FDI in asset reconstruction cos

FOREIGN assistance in cleaning up the Indian banking system's non-performing assets (NPAs) mess might take a while to come with the Ministry of Finance and the Reserve Bank of India unable to resolve their divergent views on the extent of FDI to be permitted in asset reconstruction companies (ARCs).

While the Finance Ministry has favoured starting off with an aggregate cap of 74 per cent FDI in Asset Reconstruction Companies (ARCs) with a sub-cap of 49 per cent for individual holding, the RBI is arguing that it be restricted to the initial cap to 49 per cent for both aggregate and individual holding.

ARC operations centre on buying up NPAs of lending institutions at a discount and trying to recover them. Any recovery made over and above the price at which the loan has been bought is a profit to the ARC.

The Finance Ministry and RBI have stuck to a similar position even on foreign institutional investor (FII) investment in security receipts (SRs) issued by ARCs with the Ministry arguing for allowing 74 per cent and the RBI for 49 per cent.

However, according to official sources, differences have emerged on the extent of individual FII holding in SRs.

While the Ministry has suggested individual holding to be capped at 49 per cent, the RBI has suggested limiting it to 10 per cent.

Security receipts are securities issued by an ARC or a securitisation company to qualified institutional buyers that provide proof of purchase by the holder of undivided right and title to the financial assets involved in the securitisation exercise.

ARCIL is the only functioning ARC in the country at present, while two more applications for registration have been pending with the RBI. It is felt that a proper FDI framework might encourage more ARCs to start operations.

"We have asked the RBI and the Government to permit foreign investment in ARCs," a senior official of Asset Reconstruction Company of India Ltd (ARCIL) told Business Line.

Interestingly, though enjoying a monopoly status, ARCIL has strongly supported the setting up more ARCs.

"ARCIL supports the urgency of multiple ARCs. That will help not only the price benchmarking but also facilitate the resolution process. ARCs, through substantial debt aggregation between themselves and common objective of resolution, would be expected to operate in tandem and drive the resolution process faster," ARCIL has said.

The aggregate NPAs of public sector banks, which account for the lion's share of the banking activity in the country, had stood at Rs 54,000 crore at the end of March 2004.

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