India: FDI Liberalisation In The ARC Sector


Close at the heels of the announcement made in the Union Budget in February 2016, the Government released Press Note 4 of 2016 dated 6 May 2016 (Press Note 4) liberalising foreign entry norms in asset reconstruction companies registered with the Reserve Bank of India (RBI) (ARCs) by allowing 100% foreign direct investment (FDI) under the automatic route in ARCs. It has also proposed amendments to bring the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) in sync with the dispensations provided under Press Note 4 by introducing the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 (Proposed Amendment) in the Lower House of Parliament. In this note, we briefly analyse the changes brought out by Press Note 4 and the impact of the Proposed Amendment in liberalising the regime on foreign investment in ARCs.

Changes Introduced

Press Note 4 purports to amend the currently existing FDI regime in respect of ARCs as follows:

Position before Press Note 4

Position after

Press Note 4

Our Analysis

Persons resident outside India can invest in the capital of an ARC up to 49% under the automatic route and beyond 49% with the permission of the Government.

Persons resident outside India can invest in the capital of an ARC up to 100% under the automatic route.

  • To effectuate the Press Note 4, requisite amendments to Foreign Exchange Management (Transfer or Issue of Security to a Person Resident outside India) Regulations, 2000 will be required. This is expected shortly. 
  • In sync with Press Note 4, the Proposed Amendment removes the restriction on sponsors1 acquiring a controlling stake in an ARC. However, board control by a sponsor is still not permitted.

No sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing it through an FII/FPI controlled by the single sponsor.

Investment limit of a sponsor in the shareholding of an ARC will be governed by the provisions of the SARFAESI. Similarly, investment by institutional/non-institutional investors will also be governed by the SARFAESI.

Total shareholding of an individual FII/FPI shall be below 10% of the total paid up capital of an ARC. 

Total shareholding of an individual FII/FPI shall be below 10% of the total paid up capital of an ARC.

FIIs/FPIs can invest in the security receipts issued by an ARC (SR) with a cap of up to 74% investment in each tranche of scheme of SRs. Such investments should be within the prescribed FII/FPI limit on corporate bonds prescribed from time to time, and sectoral caps under extant FDI regulations should also be complied with.

FIIs/FPIs can invest in the SRs issued by ARCs. FII/FPIs may be allowed up to 100% of each tranche in SRs issued by ARCs subject to directions/guidelines of the RBI.

  • The RBI Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines, 2003 require an ARC to have "skin in the game" of not less than 15% under each scheme which is launched by the ARC. The Press Note 4 does not remove this requirement. In fact, it expressly yields to the RBI on this issue. It remains to be seen whether RBI will reduce co-investment norms to allow FII/FPIs to invest in SRs up to 100%. 
  • The Proposed Amendment also empowers RBI to permit (in consultation with SEBI) non-institutional investors such as NRIs, HNIs, etc. to invest in SRs issued by an ARC.
  • It is, however, important to note that the Proposed Amendment empowers RBI to issue directions regulating the transfer of SRs by qualified institutional buyers.

All investments would be subject to the provisions of Section 3(3)(f) of SARFAESI.

All investments would be subject to the provisions of SARFAESI.

  • This change seems to bring in compliance with SARFAESI as an obligation on the foreign investor with the implication of applicable penalties for breach or non-compliance under the Foreign Exchange Management Act, 1999.

Perhaps as a counterbalance to this liberalisation or as a result of the increased importance of ARCs in this day and age, the Proposed Amendment proposes greater RBI oversight on ARCs. Some key proposals include:

  • RBI approval to be required for appointing any director on the board of directors of the ARC (in addition to the existing requirement where there is substantial change in management).
  • RBI to be empowered to carry out periodic audits and inspection and take necessary action where it determines that the business of the ARC is being conducted in a manner detrimental to the interests of either investors or the public.
  • Failure to comply with the directions of RBI can incur a financial liability of the higher of INR 1 Crore or twice the amount involved in such a failure (payable within 30 days of issue of notice to such effect by RBI).


With the current levels of distress, the importance of ARCs and their capital needs is well known. Despite the significantly high level of bad debts in the banking system the valuation mismatch between banks and ARCs has been holding-up the sale of non-performing loans to ARCs. Perhaps the greater capital flow arising out of Press Note 4 will help address this mismatch, at least to some extent.

It also remains to be seen whether RBI would completely remove the minimum investment requirement applicable to ARCs as that may result in a change in character of an ARC from a reconstruction company to an asset manager acting purely under the instructions of its investors.

Foreign investors and new sponsors, in weighing opportunities in the ARC sector, should consult their advisors on the corporate governance norms and greater RBI oversight. Learnings from other similarly regulated sectors like insurance would also be helpful.


1 The SARFAESI Act identifies a sponsor to mean any person holding not less than 10% of the paid-up equity capital of the ARC and restricts a sponsor from holding a controlling interest in the ARC.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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