Mumbai
With the Reserve Bank of India (RBI) recently clearing the decks for Asset Reconstruction Companies (ARCs) to raise equity via initial public offering (IPO), the smaller entities among them may be the first off the starting block to tap the capital market.
The option to go public comes at an opportune time as they will need capital to achieve the regulatory minimum net owned fund requirement (NOF) of ₹300 crore, prescribed by RBI for ARCs, by March-end 2026.
About 9-10 large ARCs have already met the minimum NOF requirement, according to industry estimates. Currently, there are 27 ARCs in India.
The Reserve Bank of India (RBI) recently advised ARCs that there is no bar on them for listing their shares on the exchanges.
This advisory comes in the backdrop of ARCs staring at a March-end 2026 regulatory deadline to achieve minimum NOF of ₹300 crore and the companies needing more resources to expand their operations.
It may be pertinent to mention here that the finance ministry’s key advisory group on ARCs (in 2011) had recommended allowing these companies to go public. This suggestion was aimed at increasing their pool of funds to resolve bad loans in the financial system, getting them to make higher disclosures and stepping up public scrutiny, among others.
Chandan Churiwal, CEO, Assets Care & Reconstruction Enterprise (ACRE) Ltd, said: “About three weeks ago, we received a clarification from the regulator confirming that there are no restrictions on IPOs by ARCs.
“While the decision to pursue an IPO remains a separate consideration, this regulatory clarity now opens up the possibility of tapping the market. I believe we will see IPO activity in the ARC space, with some players likely to take this route.”
The ACRE Chief highlighted two perspectives on ARC IPOs — one is that larger ARCs should lead the way, encouraging others to follow suit; and the other is that smaller ARCs could tap the market to meet the regulatory requirement of minimum NOF of ₹300 crore by March 2026.
“Larger ARCs, those with an AUM of ₹10,000 crore and above, should ideally go public as they have already established a strong business foundation. However, smaller ARCs have a more pressing need to list, given the regulatory mandate,” Churiwal said.
He noted that it will be better if larger ARCs go to the market first as they have the institutional set up to service the shareholders well and this will set a precedence. Further, a good experience of investors in ARC IPO is important from the perspective of building industry’s reputation in equity markets.
ARCs: one of the recovery channels
Sale of stressed assets to ARCs is one of the channels for their resolution for lenders. This is done either through a combination of cash payment and issue of security receipts (SRs) or all cash transaction.
As at March-end 2024, there were 27 ARCs, with collective book value of assets of ₹10,25,429 crore. They cumulatively issued SRs aggregating ₹2,83,330 crore. The SRs outstanding as at March-end 2024 were at ₹1,48,070 crore.
The book value of stressed assets acquired by ARCs was lower at ₹1,86,303 crore in FY24 against ₹2,09,812 crore in FY23, per RBI data.
Crisil Ratings has assessed that the cumulative recovery rate (the ratio of cumulative recoveries to cumulative SRs issued) of SRs issued by ARCs is set to jump up for the second straight year by up to 15 percentage points per annum, touching 75-80 per cent by next fiscal.
Th agency attributed three reasons for this: one, healthy performance of stressed assets in key infrastructure sectors (real estate, thermal power and roads); two, higher share of retail and low vintage assets; and three, lower growth in new acquisitions in comparison to incremental recoveries.
In addition, the improving performance of stressed assets in these infrastructure sectors and the deterrence effect of the Insolvency and Bankruptcy Code (IBC) are impelling debt restructuring, which is emerging as a most-preferred resolution strategy and a win-win for both promoters of the stressed assets and ARCs.
