The markets regulator has given more leeway to Non-Banking Finance Companies to invest in Security Receipts issued by Asset Reconstruction Companies, recognising all of them, including housing finance companies, as qualified buyers.
This may encourage more Non-Banking Fnance Companies (NBFCs) to explore investments in Security Receipts (SRs) issued by Asset Reconstruction Companies (ARCs), thereby widening the investor base in these financial instruments. ARCs acquire stressed loans from financial institutions at a haircut and issue SRs.
So far, only non-deposit taking NBFCs with asset size of ₹50 crore and above were allowed to invest in SRs.
In one the last notifications issued under the name of Madhabi Puri Buch (who demitted office as Chairperson on February 28th) and published as a Government Gazette, SEBI said all NBFCs, including housing finance companies (HFCs), regulated by the Reserve Bank of India (RBI), are hereby specified as qualified buyers for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, subject to certain conditions.
As per the conditions, NBFCs have to ensure that the defaulting promoters or their related parties do not directly or indirectly gain access to secured assets through SRs; and they have to comply with such other conditions as the RBI may specify from time to time.
“Broad basing investor base in Security Receipts issued by ARCs will bring in depth and liquidity, which will lead to a vibrant secondary distressed debt market,” Hari Hara Mishra, CEO, Association of ARCs in India.
As per SEBI’s 2008 notification, systemically important non-deposit taking, NBFCs with asset size of ₹100 crore and above; and other non-deposit taking NBFCs with asset size of ₹50 crore and above and capital to risk-weighted assets ratio of 10 per cent as applicable to non-deposit taking NBFCs as per the last audited balance sheet, can be considered as qualified institutional buyers for the purposes of the SARFAESI Act.
A qualified buyer includes Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation, Trustee or ARC or any asset management company making investment on behalf of mutual fund, Foreign Institutional Investor registered under the Securities and Exchange Board Of India (SEBI) Act, 1992 or regulations made thereunder, any category of non-institutional investors as may be specified by RBI or any other body corporate as may be specified by the SEBI, according to FAQs on ARCs by Reliance ARC.
The RBI’s Committee to Review the Working of ARCs (2021) observed that a vibrant secondary market for SRs is essential for many reasons. It is a prerequisite for providing an easy exit to Qualified Buyers and to thereby attract more investors.
Better price discovery
“Increased investor participation may also facilitate better price discovery in the stressed assets market. All this may, in turn, motivative lenders to sell stressed assets at an earlier stage and ARCs to attempt faster resolution,” per the Committee’s report.
In the interest of giving impetus to listing and trading of SRs, the Committee recommended that the list of eligible qualified buyers may be further expanded to include HNIs (high networth individuals) with minimum investment of ₹1 crore, corporates (net worth-₹10 crore & above), all NBFCs/HFCs, trusts, family offices, pension funds and distressed asset funds, subject to conditions.
