The banking regulator Reserve Bank of India has sent show cause notices to a few asset reconstruction companies (ARCs), seeking answers on why their licences should not be cancelled, reported Economic Times.
The move follows a special audit conducted by the banking regulator after the income-tax department raided the premises of these ARCs in 2021, they said.
In December 2021, the I-T department carried out a search and seizure of 60 premises of four ARCs — Omkara ARC, Rare ARC, CFM ARC, and Invent ARC.
The searches, according to the department, revealed that some ARCs adopted various unfair and fraudulent trade practices in acquiring non-performing assets (NPAs) from lender banks.
The ARCs were also found to be using funds of the borrower group to make the minimum cash payout to lender banks for acquiring the stressed assets. Such funds have been routed through several layers of dummy companies controlled by the borrower group or through hawala channels, the I-T department had noted.
“In 2021, the I-T department had only assessed the income statement of four ARCs,” said one of the people cited above. “To expand the probe further, RBI has conducted a special audit and sent a show cause notice to a few of them.”
While the show cause notice does not mean the licence will be cancelled, RBI has asked ARCs why the certificate of registration issued to them should not be cancelled for having violated the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act) and guidelines issued by the RBI.
One of the persons cited above, though, said the ARCs will challenge the show cause notice.
Rare ARC said it is in compliance with relevant legislations and guidelines while Invent ARC said it has not received any communication from the RBI.
An ARC executive said the RBI show cause notice to a few companies will have little impact on the ARC industry as 80% of business is managed by the top five players. “These developments may lead to consolidation of smaller ARCs, which are under pressure to augment their capital to ₹300 crore from ₹100 crore,” the person said.
There are 29 ARCs operating in India but only a few including Edelweiss ARC, JM Financial ARC, and Asset Reconstruction Co (India) Ltd have a net worth of over ₹1,000 crore.