What changed
RBI amended the 2003 SC/RC Guidelines to allow conversion of debt into shares up to 26% post-converted equity. The consent threshold for enforcement of security interest was reduced from 75% to 60% of outstanding secured debt. ARCs are now permitted to acquire debt from other ARCs for aggregation, provided the acquiring ARC's holdings are below 60% and the total reaches at least 60% after acquisition, with cash settlement and proceeds used for SR redemption.
What it means for you
ARCs gain more flexibility in restructuring by taking equity stakes in borrower companies, which can improve recovery outcomes. Lowering the enforcement consent threshold makes it easier for ARCs to act against defaulting borrowers. Allowing inter-ARC debt acquisition enables consolidation of debt for more effective enforcement, but the cash settlement and SR redemption conditions ensure liquidity discipline and protect investor interests.
What you must do
- Update internal policies to reflect the new 26% equity conversion cap and 60% enforcement consent threshold.
- Review existing debt portfolios to identify opportunities for inter-ARC debt aggregation under the new rules.
- Ensure any inter-ARC acquisition is settled in cash and that proceeds from selling ARCs are used for SR redemption.
- Train compliance and credit teams on the revised SARFAESI-related thresholds and documentation requirements.
Who it affects
All registered Securitisation Companies and Reconstruction Companies (ARCs), Banks and financial institutions that sell NPAs to ARCs, Borrower companies undergoing asset reconstruction
Can an ARC now hold more than 26% equity in a borrower company after conversion?
No, the RBI circular explicitly caps the ARC's shareholding at 26% of the post-converted equity of the borrower company.
What is the new consent threshold for enforcing security interest under SARFAESI?
ARCs now need consent from secured creditors holding at least 60% of the outstanding debt to a borrower, reduced from the earlier 75%.
Are there any restrictions on the use of proceeds when an ARC sells debt to another ARC?
Yes, the selling ARC must use the cash proceeds solely for redemption of the underlying Security Receipts (SRs).