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.
Emails sent to the central bank and Omkara ARC remained unanswered till press time Tuesday.
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.
The central bank’s action shows that it “wants all ARCs and NBFCs to adhere to their guidelines”, said an ARC executive who requested not to be identified.
A senior banker said, “ARCs must follow RBI guidelines and rules. If there is any wrongdoing by any ARC, RBI as a regulator will take the action, as deemed necessary.”
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.
Over the last two years, the central bank has constituted a committee to review the working of ARCs and introduced several norms like increasing the net worth to ₹300 crore from ₹100 crore, enhancing disclosure norms and allowing ARCs to become resolution applicants, to strengthen the sector. Only those ARCs with ₹1,000 crore net worth are allowed to be resolution applicants.
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.
ARCs’ assets under management are expected to grow 9.8% this fiscal to a five-year high of ₹1.19 lakh crore, driven by a few large transactions, according to a recent report by Crisil.