FDI ceiling in ARCs increased to 74%

With an aim to attract greater foreign expertise in the domain of asset reconstruction, the government has raised the foreign investment ceiling in Asset Reconstruction Companies (ARCs) to 74% from previous 49%. However, FDI in ARCs would need to abide by the Foreign Direct Investment (FDI) policy, including the one related with sectoral caps.
Here, ‘Foreign investment’ implies that the limit of 74% would be a combined limit of FDI and FII (foreign institutional investors). This move will remove the prohibition on investment by FII in ARCs. The shareholding of an FII shall not exceed 10% of the total paid-up capital.

What are ARCs?

Asset Reconstruction Companies (ACRs) which is also known as Asset Management Companies in foreign countries are centralized agencies that deal with the problem of bad loans of banks. The word ‘asset reconstruction’ was first used, in context of Indian economy, in Narsimham I which proposed to establish a central Asset Reconstruction Fund with money contributed by the Central Govt, which was to be used by banks to resurrect their balance sheets to clean up their Non-Performing loans. However, this idea was not responded to. So Narsimham II report, opined to set up ARCs the likes of which are successful in countries like Malaysia, Korea and several other countries in the world. The ARCs were supposed to not only concern with the realization of bad loans but to also do “reconstruction” i.e. to try to revive the bad loans into good ones.



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