What changed
The RBI has introduced a comprehensive overhaul of the regulatory framework for ARCs, effective immediately or as specified in the annex. Key changes include: (1) strengthening corporate governance by requiring an independent director as Board Chair, limiting MD/CEO tenure to 15 years with a 3-year cooling period, and capping age at 70; (2) mandating an Audit Committee composed solely of non-executive directors with specific expertise; and (3) raising the minimum net-owned fund requirement and revising capital adequacy norms.
What it means for you
For banks and lenders, these changes signal a more robust and transparent ARC sector, which should improve the recovery process for distressed assets. ARCs will face higher compliance costs and stricter oversight, potentially leading to consolidation among smaller players. Lenders can expect more professional management of NPAs and better alignment of ARC interests with creditor recovery goals.
What you must do
- Review and update your ARC's board composition to ensure the Chair is an independent director and at least half of board meeting attendees are independent directors.
- Implement succession planning and ensure MD/CEO and WTDs comply with the new 15-year continuous tenure limit and 70-year age cap.
- Constitute an Audit Committee with only non-executive directors, chaired by an independent director, and ensure at least one member has financial accounting expertise.
- Strengthen internal control systems, especially for asset acquisition and reconstruction, and have the Audit Committee review them periodically.
- Prepare for higher net-owned fund requirements and revised capital adequacy norms as detailed in the annex.
Who it affects
Asset Reconstruction Companies (ARCs), Banks and financial institutions that sell NPAs to ARCs, Board members and senior management of ARCs, Audit and compliance teams within ARCs
What is the new tenure limit for an ARC's MD/CEO?
The MD/CEO or whole-time director can serve a maximum of 15 continuous years in the same ARC. After that, a 3-year cooling period is required before re-appointment, during which they cannot be associated with the ARC in any capacity.
Does the Audit Committee need to include independent directors?
Yes, the Audit Committee must consist only of non-executive directors, and its chair must be an independent director who does not chair any other board committee. At least one member should have professional expertise in financial accounting or management.
When do these new rules take effect?
The guidelines are effective immediately from October 11, 2022, unless otherwise specified in the annex of the circular.