The report of the Key Advisory Group on Asset Reconstruction Companies (ARCs) was commissioned by the Ministry of Finance on September 30, 2011, to address inefficiencies in the resolution of nonperforming assets (NPAs) within the banking sector. Gross NPAs within the banking system grew from Rs. 50,486 crore in March 2007 to Rs. 84,747 crore in March 2010, with growth accelerating significantly during 2008–10. The primary objectives were to review the existing legal, regulatory, and institutional framework for ARCs, develop an action plan for the sector’s orderly growth, and recommend necessary legal, institutional, and regulatory measures. The group was chaired by Alok Nigam, Joint Secretary (Banking Operations), Ministry of Finance, and members included M. N. Swamy (GM, DNBS, RBI); K. Unnikrishnan (Deputy Chief Executive, IBA); a representative each of IIM and CII; M. S. Verma (Chairman, IARC Pvt. Ltd., FICCI Representative); V. K. Chopra (Senior Consultant, Dhir & Dhir Associates, PHDCCI Representative); Mukesh Mohan (Co-Chairperson, ASSOCHAM National Council for SMEs, ASSOCHAM Representative); Suhaan Mukerji (Advocate & Partner, Amarchand Mangaldas); Jayesh Shah (Founder Partner, Juris Corp); Neeta Mukerji (President & COO, ARCIL); Khasnobis (MD & CEO, ARCIL); Ashvin Parekh (Ernst & Young); R. Sridhar (Managing Director, Shriram Transport Finance Co. Ltd.); R. M. Umarji (Chief Advisor (Legal), IBA, co-opted); and Director (BO.II&PR), DFS, New Delhi (Member Secretary).

The report’s findings revealed several critical issues and recommendations to improve the ARC framework. Key regulatory and structural issues included the need for standardization in price discovery and the NPA auction-sale process, permission for ARCs to acquire debt from other ARCs, and enabling investments in securities by insurance companies. Market development was identified as a major area of concern, with a decline in the issuance of security receipts despite the growth in NPAs. The report recommended measures such as allowing ARCs to gradually write off losses on NPA transfers and including nonbanking financial companies in the ARC market to broaden participation. The report also proposed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to reduce the consent threshold for security enforcement actions from 75 to 60 percent, and it suggested delegating powers to officials below the district-magistrate / chief-metropolitan-magistrate level for quicker resolution of petitions for physical possession of properties.

The report emphasized the need for a comprehensive approach to enhance the effectiveness of ARCs. Specific provisions included allowing ARCs to raise equity from the market through public issuance of shares, which would increase public scrutiny and require higher disclosure levels. The report also recommended uniform assignment agreements across all banks, clarification of income tax treatment for trusts set up by ARCs, and adoption of uniform accounting standards to ensure consistency and transparency. Additionally, the report suggested measures to improve the operational and structural support for ARCs, such as enabling ARCs to undertake securitization transactions on healthy assets and creating a legal environment conducive to time-bound workout-based resolutions. By implementing these recommendations, the report aimed to foster a more dynamic and efficient NPA resolution mechanism, crucial for the growth of ARCs and the reduction of NPAs in the financial system.

Based on the recommendations, the SARFAESI Act of 2002 was amended and the Reserve Bank of India issued updates to ARC guidelines. ARCs were allowed to convert a portion of their debt into equity shares of the borrower company, provided their shareholding did not exceed 26 percent after conversion. Additionally, the consent threshold for enforcing security interest was lowered from 75 to 60 percent. ARCs were also permitted to acquire debt from other ARCs under specified conditions.

The report highlighted challenges in the resolution of nonperforming assets, such as inconsistent price discovery, limited participation in the ARC market. It proposed lowering the consent threshold for enforcement actions, standardizing assignment agreements, enabling ARCs to raise equity, and broadening participation by including NBFCs. These recommendations aimed to improve the functioning of ARCs and address the growing NPA burden in the banking system.