What changed
RBI allowed FDI in ARC equity up to 49% for eligible entities (excluding FIIs) via FIPB route, with a 10% individual cap triggering SARFAESI compliance. Separately, FIIs got general permission to invest in ARC-issued Security Receipts up to 49% per tranche, with a 10% per-FII limit per tranche.
What it means for you
Banks and lenders can now attract foreign capital into ARCs for faster NPA resolution, but must ensure ARC equity stays within 49% foreign holding. FII participation in Security Receipts provides a new liquidity channel for stressed assets, though individual FII exposure is capped. The two-year review clause signals RBI's cautious approach to foreign involvement in asset reconstruction.
What you must do
- Verify that any FDI in ARC equity does not exceed 49% of paid-up capital and that individual investments above 10% comply with SARFAESI Section 3(3)(f).
- Ensure FII investments in Security Receipts per tranche stay within 49% aggregate and 10% per FII limit.
- Advise ARC clients to route FDI applications through FIPB and maintain compliance with FEMA regulations.
- Monitor policy review timelines (2 years for FDI, 1 year for FII) for potential changes.
Who it affects
Authorised Dealer banks handling foreign exchange, Asset Reconstruction Companies registered with RBI, Foreign investors eligible under FDI route (excluding FIIs), Foreign Institutional Investors registered with SEBI, Lenders and borrowers involved in NPA resolution via ARCs
Can FIIs invest directly in ARC equity under this circular?
No, FIIs are explicitly excluded from FDI in ARC equity. They can only invest in Security Receipts issued by ARCs, subject to the 49% per tranche and 10% per FII limits.
What happens if an individual FDI entity invests more than 10% in an ARC?
The ARC must comply with Section 3(3)(f) of the SARFAESI Act, 2002, which likely imposes additional regulatory conditions. The circular does not specify further details.
Is there a sunset clause on these investment rules?
Yes, the FDI policy in ARCs will be reviewed after two years, and the FII investment in Security Receipts after one year from the circular date (November 11, 2005).