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The Securities and Exchange Board of India (SEBI) has permitted all non-banking financial companies (NBFCs), including housing finance companies (HFCs), to invest in security receipts (SRs) issued by Asset Reconstruction Companies (ARCs). This decision expands the pool of qualified buyers, previously limited to select NBFCs. The move is expected to enhance liquidity in the distressed asset market. However, SEBI has imposed conditions to prevent defaulting promoters from regaining access to these assets. The decision follows recommendations from a 2021 RBI committee, which proposed broadening investment eligibility in ARCs.
The Securities and Exchange Board of India (SEBI) has allowed all non-banking financial companies (NBFCs), including housing finance companies (HFCs), to invest in security receipts issued by Asset Reconstruction Companies (ARCs), a move aimed at encouraging investments in the bad loans space. Advertisement
As per the SARFAESI Act (the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), only qualified buyers can invest in security receipts.
Through this gazette, Sebi has notified that all NBFCs including HFCs regulated by the Reserve Bank of India (RBI) are hereby specified as qualified buyers.
Previously, only deposit-taking NBFCs, systemically important non-deposit-taking NBFCs, infrastructure finance companies, and asset finance firms were allowed to buy security receipts. This has widened the scope of participants who can acquire security receipts from ARCs, thereby boosting liquidity in the distressed asset market.
SEBI has, however, mandated NBFCs to ensure that the defaulting promoters or their
related parties do not directly or indirectly get access to these assets through SRs. They are also required to comply with such other conditions specified by RBI from time to
time.
ARCs are set-up to acquire bad loans from banks and financial institutions after appropriate haircuts and issue security receipts (SRs). Investors in SRs receive returns based on the recovery of the distressed assets. ARCs are registered with RBI and regulated under the SARFAESI Act, 2002.
The move aligns with RBI's ongoing efforts to enhance financial sector participation in distressed asset investments, reflecting broader regulatory reforms aimed at strengthening asset reconstruction and recovery mechanisms in India.
In 2021, a RBI committee led by Sudarshan Sen to review ARC regulations had recommended expanding eligibility to all NBFCs and housing finance firms. It also proposed allowing high-net-worth individuals (INR 1 crore+), corporates (INR 10 crore+), trusts, family offices, pension funds, and distressed asset funds to invest.
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