What changed
RBI updated paragraph 15 of the Master Direction on ARCs (2024) to tighten settlement norms. The revised guidelines mandate a Board-approved policy covering cut-off dates, permissible sacrifice, and security valuation methods. For settlements above ₹1 crore, an Independent Advisory Committee must now assess proposals, with Board deliberation including at least two independent directors.
What it means for you
ARCs must formalize settlement processes with stricter governance, ensuring settlements are only pursued after exhausting recovery options. The NPV floor (not less than security realizable value) reduces scope for undervaluation. For smaller accounts (≤₹1 crore), conflict-of-interest rules bar acquisition officials from approving settlements, enhancing transparency.
What you must do
- Update your Board-approved settlement policy to include cut-off dates, permissible sacrifice, and security valuation methodology.
- Ensure NPV of settlement amount is generally not less than realizable value of securities; document any significant valuation variations.
- For settlements >₹1 crore, set up an Independent Advisory Committee with technical/financial/legal experts to review proposals.
- For settlements ≤₹1 crore, enforce segregation of duties so acquisition officials cannot process or approve settlements.
- Review and revise internal processes to align with the revised paragraph 15, effective immediately.
Who it affects
All Asset Reconstruction Companies (ARCs), Borrowers with dues settled by ARCs
What is the key change in settlement valuation?
The NPV of the settlement amount must generally not be less than the realizable value of securities. Any significant variation from acquisition-time valuation must be documented with reasons.
Who must approve settlements above ₹1 crore?
An Independent Advisory Committee (IAC) with technical/financial/legal experts must assess the proposal. The Board, including at least two independent directors, then deliberates and records the rationale for choosing settlement.
Are there restrictions for small settlements (≤₹1 crore)?
Yes. Any official involved in acquiring the financial asset cannot participate in processing or approving the settlement for that same asset, to avoid conflicts of interest.