The Reserve Bank of India (RBI) has issued a significant clarification allowing asset reconstruction companies (ARCs) to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC), 2016, without meeting the net owned funds (NOF) requirement of ₹1,000 crore. According to reports from Business Standard, this clarification broadens ARC participation in IBC resolutions, enabling smaller ARCs to participate as co-resolution applicants alongside other investors. The RBI Directions, 2025, had previously required ARCs to have a minimum NOF of ₹1,000 crore and prohibited them from retaining significant influence or control over corporate debtors beyond five years. However, the minimum NOF requirement for an ARC was originally set at ₹300 crore, making the clarification particularly significant for smaller players.
The clarification is significant for ARCs and the distressed-assets market as it recognises their ability to invest in distressed assets and brings specialised distressed-debt investors into the resolution process. As reported by Business Standard, only five of 27 ARCs met the ₹1,000 crore threshold, making smaller ARCs between ₹300 crore and ₹1,000 crore unable to act as resolution applicants. However, the limitation remains that resolution plans involve much more than just acquisition of debt, and smaller ARCs cannot carry a resolution plan on their own but must participate alongside applicants undertaking non-Sarfaesi aspects of the plan. The rationale for not allowing smaller ARCs to act as full-fledged resolution applicants is not entirely clear, as an NOF threshold does not necessarily measure capability, and a lower NOF by itself may not indicate systemic concern.
Asset reconstruction companies have called for improved government intervention to accelerate debt recovery through Debt Recovery Tribunals (DRTs) and the Sarfaesi mechanism. According to The Economic Times, the Association of ARCs in India proposed that interim stays be allowed to lapse automatically after two months unless specifically extended by the tribunal. They also urged the government to advise DRTs to avoid staying recovery proceedings without hearing both sides, ensure prior notice to secured creditors, and impose appropriate pre-deposit conditions before hearing an appeal. The association sought filling of vacancies in DRTs within 15 days of them arising and greater use of electronic services in litigation, proposing that DRTs rely on authenticated records maintained with National E-Governance Services Ltd as evidence of debt and default.
The push for improved recovery mechanisms comes as DRT and the Sarfaesi mechanisms helped banks recover ₹2.30 lakh crore during 2021-25, compared with ₹2.28 lakh crore recovered through the Insolvency and Bankruptcy Code during the same period, according to data compiled by the Association of ARCs in India. The Sarfaesi Act empowers banks and financial institutions to take possession and auction collateral properties without judicial intervention to recover bad loans. Association of ARCs in India chief executive Hari Hara Mishra noted that the 2002 Act created an enabling environment for banks to repossess charged assets, emphasising that it envisaged dedicated specialised workout units called ARCs and created instruments like security receipts to facilitate securitisation of stressed assets.
