The RBI, pursuant to its circular no. RBI/2019-20/110 DOR.NBFC(ARC) CC. No. 8/26.03.001/2019-20 dated December 6, 2019 has directed asset reconstruction companies ("ARCs") not to acquire financial assets on a bilateral basis from:
- a bank/ financial institution which is a sponsor of ARC;
- a bank/ financial institution which is either a lender to the ARC or a subscriber to the fund, if any, raised by ARC for its operations; and
- an entity in the group to which ARC belongs.
The RBI has permitted ARCs to participate in auctions of financial assets provided such auctions are conducted in transparent manner, on arm's length basis and the prices are determined by market forces.
DSK Legal's Observations: The circular aims to continue to encourage asset reconstruction companies to buy financial assets while ensuring the same is done in a transparent and fair manner. The circular prohibits ARCs from purchasing assets from lenders on a bilateral basis (related party entities, investor entities, group entities) to avoid any potential conflict unless such transactions are carried out by way of a fair and transparent auction.
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