Asset reconstruction cos can now raise up to 74% FDI

The finance ministry on Friday increased the foreign direct investment cap for asset reconstruction companies (ARCs) to 74 per cent from the current 49 per cent, in a move aimed at not only attracting capital inflows into the country but also helping such firms at a time when bad loans are on the rise.

"The foreign investment limit of 74 per cent in ARC would be a combined limit of FDI and foreign institutional investors. Hence, the prohibition on investment by FIIs in ARCs will be removed," a finance ministry release said, adding that the government had way back in 2005 permitted 49 per cent FDI in such companies.

ARCs are firms that help settle bad loans by taking them over from banks and financial institutions, and in return work on a recovery of the asset. They typically set up trusts to acquire individual assets, for which they issue security receipts (SRs). Banks, qualified institutional buyers and other investors are permitted to buy the SRs. But ARCs usually face a crunch in funds as the government has barred public sector banks from buying such receipts to curb any risk to their balance sheets.

Additionally, the finance ministry has also agreed to a long-pending demand of the industry to enhance the limit of FII investments in SRs from 49 per cent to 74 per cent.

Further, replacing the individual 10 per cent investment limit of a single FII in each tranche of SR, the finance ministry has made the ceiling equal to that of FII limit on corporate bonds. Analysts said the move to allow FIIs to invest in ARCs would help such firms list on the bourses as well as get funding at a time when non-performing assets (NPAs) are increasing due to the slowing economy.

"It's been done to finance the revival of sick companies when banks are reporting a rise in NPAs," said Akash Gupt, executive director at PricewaterhouseCoopers.

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