The Reserve Bank of India (RBI) issued today the revised guidelines on the settlement of dues payable by borrowers of Asset Reconstruction Companies (ARCs), replacing the earlier provisions outlined in paragraph 15 of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, dated April 24, 2024. The amendments were introduced through a circular issued under the authority of Sections 9 and 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The revised provisions became effective from the date of the circular.
According to the revised guidelines, ARCs were required to establish a Board-approved policy for the settlement of dues, covering aspects such as eligibility criteria, permissible sacrifice, and methodologies for determining the realizable value of securities. Settlements were mandated to be considered only after exploring all possible avenues for recovery, and the Net Present Value (NPV) of the settlement amount was expected to generally exceed the realizable value of securities. Significant variations in asset valuation were to be documented with appropriate justifications.
For accounts exceeding ₹1 crore in principal outstanding, settlements were subject to examination by an Independent Advisory Committee (IAC), which assessed the financial position, recovery timelines, and projected cash flows of the borrower. The Board of Directors, including at least two independent directors, was required to deliberate on IAC recommendations before finalizing any settlement decisions.
For accounts with outstanding principal of ₹1 crore or below, settlements were to be conducted per Board-approved policies, ensuring that officials involved in asset acquisition were not part of the settlement approval process. A quarterly report detailing settlement trends and recoveries was mandated to be presented to the Board.
Additionally, settlements involving borrowers classified as frauds or willful defaulters were subject to stricter scrutiny and required adherence to the guidelines applicable for high-value accounts, irrespective of the outstanding amount. ARCs were permitted to settle dues without prejudice to ongoing legal proceedings.
The revised guidelines emphasized compliance with other applicable legal provisions and required obtaining consent decrees from judicial authorities in cases where recovery proceedings were already initiated in judicial forums. Consequently, the Master Direction was updated to reflect these changes.
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