Asset reconstruction cos seek hike in FDI limit

 

source: BL :Mumbai, May 26,2010

Asset reconstruction companies have moved the Government and the Reserve Bank of India to up the foreign direct investment limit in their equity capital as also the foreign institutional investment limit in each tranche of security receipts (SRs) issued by the companies from 49 per cent to 74 per cent.

Speaking to reporters on the sidelines of a FICCI seminar, Mr M.S. Verma, Chairman, International Asset Reconstruction Company Ltd, reasoned that when foreign investment up to 74 per cent was allowed in systemically important private sector banks, there was no reason why foreign investment in ARCs and the SRs issued by them should be capped at 49 per cent.

The need for upping the foreign investment limit in ARCs has arisen as raising funds from the domestic markets to buy non-performing assets from banks is proving to be a constraint as ARCs are perceived as high-risk enterprises.

According to Mr P.H. Ravikumar, Managing Director and Chief Executive Officer, Invent Assets Securitisation & Reconstruction Pvt Ltd, specialised international funds, which have an appetite for investing in non-performing assets, could easily fill the funding gap if the foreign investment limit is raised.

As the situation obtains now, the maximum foreign equity should not exceed 49 per cent of the paid-up equity capital of an ARC.

Further, foreign institutional investors registered with the Securities and Exchange Board of India can invest only up to 49 per cent of each tranche of scheme of security receipts subject to the condition that investment of a single FII in each tranche of scheme of SRs does not exceed 10 per cent of the issue.

To help ARCs get over capital constraints, it is understood that the RBI is considering raising the FII investment limit in SRs issued by ARCs to 74 per cent. Further, the single FII investment limit in each tranche of scheme of SRs is likely to be raised to 24 per cent from 10 cent now.

Mr M.R. Umarji, Chief Legal Adviser, Indian Banks' Association, said the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act could be suitably amended to raise the FDI limit in ARCs to 74 per cent while the RBI could suitably amend the guidelines on FII investment in SRs issued by ARCs.

ARCs are formed to acquire non-performing loans (NPLs) from banks and financial institutions with the objective of focused management and optimal recovery, thereby, relieving banks and financial institutions of the burden of NPL and allowing them to focus on core activities. Banks are left with cleaner balance sheets and do not have to deal with problem clients.