India: 100% Foreign Investment In ARCs: Finally There?

Last Updated: 6 June 2016
Article by Ruchir Sinha and Abhinav Harlalka

The Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India ("DIPP") released Press Note 4 of 2016 on May 6, 2016 ("Press Note") permitting 100% foreign direct investment ("FDI") in asset reconstruction companies ("ARC"). In this hotline, we have analyzed the changes proposed by the Press Note, and the potential implications of such changes.


The Indian government had enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI") in an attempt to assist banks and financial institutions in cleaning up their bad loans, or non-performing assets. However, almost a decade and a half later, experience has shown that very few ARCs have been set up and a very small quantum of banks' bad loans have been acquired by asset reconstruction companies ("ARC")1.

One of the main reasons attributed to the lack of the success of ARCs was that the ARCs were under-capitalized. A modest attempt was made by the central government back in 2013, when the foreign investment in ARCs was liberalized, and foreign investment up to 49% was permitted under the automatic route, and up to 100% was permitted under the government route (against the earlier limit of 74% completely being under the government route). However, this failed to evoke sufficient interest in ARCs, and foreign investment in ARCs still remained low, largely due to the fact that foreign investors were still minority investors without adequate control of the ARC, and accordingly, enforcement.

With foreign investment in ARCs being restricted from the very outset, measures were required to encourage further investment in ARCs. The Finance Minister, in his budget speech for the year 2016-17 had proposed to make changes with respect to ARCs to attract further investment. These measures included permitting (i) 100% FDI in ARCs under the automatic route; (ii) foreign portfolio investors ("FPI") to hold up to 100% of the security receipts ("SR") issued by a scheme of an ARC; and (iii) a sponsor to hold up to 100% of the share capital of an ARC. The Press Note seeks to give effect to the first two proposals of the Finance Minister.

Changes and analysis

The Press Note revises the Para 6.2.18 of the Consolidated FDI Policy Circular of 2015 ("FDI Policy"), which deals with foreign investment in ARCs. The changes have been analyzed below.

Foreign investment limits

Proposed changes as per the Press Note

FDI Policy

100% foreign investment permitted under the automatic route

100% foreign investment permitted as follows:

  • Up to 49% under automatic route;
  • Beyond 49% under the government route

Under the existing regime for FDI in ARCs, 100% foreign investment was permitted in ARCs, subject to the condition that up to 49% of the investment was permitted under the automatic route, while investment in excess of 49% was to be permitted under the government or approval route.

Under the Securitisation Companies and Restructuring Companies (Reserve Bank) Guidelines and Directions, 2003 ("RBI Directions"), an ARC requires the prior approval of the Reserve Bank of India ("RBI") in case of a substantial change in the management of an ARC by way of transfer of shares. The guidelines provided that any transfer of shares, which resulted in the change in the sponsors, or which amounted to a transfer of shares in excess of 10% of the existing share capital of the ARC would require the prior consent of the RBI.

Accordingly, any substantial transfer in the shares of the ARC, required the approval of the financial regulator, the RBI. In light of this requirement, it was always felt that the requirement of obtaining the approval of the Foreign Investment Promotion Board ("FIPB") was an unnecessary administrative hurdle which could have been avoided. It was probably for these reasons, and to further 'ease of doing business' in India, that the Finance Minister proposed to do away with the requirement of the FIPB, and bring investment into ARCs under the automatic route. The Press Note seeks to give effect to the intention of the Finance Minister.

Sponsor holding

Proposed changes as per the Press Note

FDI Policy

Investment limits of sponsors to be governed by SARFEASI

No sponsor permitted to hold more than 50% of the shareholding in the ARC, either by way of FDI or by routing it through FII/ FPI controlled by a single sponsor

The FDI Policy stated that no sponsor could hold more than 50% of the shares of the ARC, whether under the FDI route or by way of holdings under the foreign institutional investor ("FII") or FPI route. This was in line with the restrictions contained under SARFAESI. Section 2 (zh) of SARFAESI defines 'sponsor' as a person holding not less than 10% of the paid up capital of the ARC. Further, Section 3 (3)(f) states that no sponsor (i) can be a holding company of the ARC, or (ii) can hold a controlling interest in the ARC. Accordingly, under SARFAESI, no single sponsor could hold more than 50% of the shares of the ARC in any case, and the FDI Policy reflected the same.

However, the Finance Minister, in his budget speech, proposed removing the limits on the shareholding of a sponsor of an ARC. Since the restriction was provided in Section 3 of SARFAESI, an amendment to SARFAESI would be required. To give effect to removing the restrictions on sponsor's shareholding, 'The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016' ("Debt Amendment Bill") has been drafted and introduced in the Lower House of the Parliament on May 11, 2016.2 The Debt Amendment Bill proposes to remove the restriction contained in Section 3(3)(f).

To ensure that the entire share capital of an ARC could be held by a single non-resident sponsor, the FDI Policy has been amended by the Press Note to state that the foreign investment limits of a sponsor shall be governed by SARFAESI, which would be permitted post the notification of the Debt Amendment Bill.

Till the Draft Amendment Bill is passed, a non-resident sponsor could hold up to 50% of the share capital of the ARC and cannot hold the controlling interest of an ARC. However, once the Draft Amendment Bill is passed and is notified into law, a single sponsor could hold up to 100% of the share capital of the ARC and control the board of directors of the ARC as well.

FII/ FPI holdings

The FDI Policy stated that the individual shareholding of an FII/ FPI shall be below 10% of the paid up capital of the ARC. The Press Note does not change this position. In any situation, the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 ("FPI Regs") requires the shareholding of a FPI to be less than 10% of the paid up capital of a company. Accordingly, this merely clarifies this position.

FII/ FPI investment in security receipts

Proposed changes as per the Press Note

FDI Policy

FIIs/ FPIs can invest up to 100% of each tranche of the schemes of the ARC.

FIIs/ FPIs can invest up to 74% of each tranche of the schemes of the ARC.

Such investment would be within the limits on corporate bonds prescribed from time to time, and the sectoral caps under the exchange FDI regulations should also be complied with.

  • The FDI Policy stated that investment by FIIs/ FPIs were permitted up to 74% of the security receipts ("SR") of each tranche of a scheme of an ARC. This meant that at least 26% of the SRs were required to be held by resident entities, which could also be the ARC itself.

    The Press Note now states that FIIs/ FPIs can invest up to 100% of the SRs of each scheme of an ARC. This is an extremely important relaxation, because ARCs need not look for domestic investment in the SRs when they have potential offshore investors willing to acquire all the SRs for a particular scheme.

    However, while the FDI Policy makes room for FPIs/ FIIs to invest in 100% of the SRs of each scheme of an ARC, the RBI Directions require that the ARC itself holds at least 15% of the SRs of each tranche of the ARC, to ensure some 'skin in the game'.3 As of today, it seems that the SRs of most schemes may end up being held 85:15 by the FII/ FPI and the ARC respectively.

    For an FPI to hold 100% of the SRs issued by a scheme of an ARC, the Directions would need to be amended. While RBI increased the requirement of an ARC from 5% to 15% in 2014, it may be pertinent to relook at this requirement in certain cases, especially where the holders of the other SRs are willing to relax this requirement. The requirement ensures alignment of the interests of the ARC with that of the holders of the SRs, and was considered important to protect the holders of the SRs. However, in cases where the holders of the SRs are sophisticated investors, especially FPIs, and a supermajority or all of the SR holders (except the ARC itself) agree that the ARC's commitment of 15% could be dispensed with, it would be beneficial to dispense with such requirement. This would provide flexibility for ARCs to acquire more distressed assets.

  • Currently, FIIs/ FPIs are permitted to invest an amount of up to USD 51 billion into corporate bonds. Investments by FIIs/ FPIs into SRs were hitherto taken into consideration when calculating the limit of USD 51 billion. It seems that Press Note seeks to provide that investment by FIIs/ FPIs into SRs shall not be within the limits on corporate bonds, notified from time to time. It is to be seen if the amendment to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 ("TISPRO") by the RBI, which would be necessary to give effect to the Press Note clarifies this position.


The changes to foreign investment in ARCs and SRs issued by ARCs should prove to be a major shot in the arm for ARCs in India. Foreign investment being largely regulated, coupled with challenges on enforcement of security interest resulted in merely 14 ARCs being registered with the RBI over the last 14 years. While distressed investments was on the rise, these were structured through alternate modes of investment, such as equity linked instruments or debt based equity tickers. The investments in ARCs remained substantially low, since enforcement of security interests under the ARC route meant reliance on domestic partners, which foreign investors were not comfortable with.

However, with the Government sending the right signals to mushroom ARCs, it is expected that investments in ARCs and SRs issued by schemes of ARCs would be on the rise. In fact, a large number of corporate houses have already applied or initiated steps for setting up their own ARCs in the last few months.4 It is expected that the steps contemplated in the Press Note, once notified by the RBI, coupled with the recently passed Bankruptcy Code, and the passing of the pending Debt Amendment Bill shall provide ARCs in India a conducive regulatory framework for its operations, and in turn help in cleaning up bad loans of banks in India.



2 A draft of the Debt Amendment Bill can be accessed at,%202016.pdf

3 This 15% SR holding requirement (which was increased in 2014, from the earlier requirement of 5%) meant that ARCs required larger discounts for upfront payments to the banks. This ultimately resulted in disagreement on the valuation of assets.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions