The Reserve Bank of India has warned UV Asset Reconstruction Company (UVARCL) that its certificate of registration may be cancelled unless it explains by next week why it did not inform the insolvency court that the regulator had rejected its resolution plan for Aircel right at the outset.
The banking regulator said in a notice that UVARCL had flouted norms laid down by the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act and wilfully violated the RBI’s guidelines, people aware of the matter said. According to the Sarfaesi Act, asset reconstruction companies cannot infuse equity into an insolvent company at the resolution stage.
UVARCL has been asked to respond to the RBI’s notice by the end of next week. However, officials familiar with the issue said UVARCL had informed the RBI about all steps of the resolution plans.
A cancellation of UVARCL’s registration at this stage would mean the resolution plans of bankrupt telcos Reliance Communications (RCom) and Aircel would stand cancelled and set back State Bank of India’s plans to recover Rs 12,000 crore loaned to both telcos. While the National Company Law Tribunal (NCLT) has approved Aircel’s resolution plan, RComs’ proposal has been cleared by the committee of creditors and is pending before the tribunal.
“ In the show-cause notice, RBI has said that it had rejected the resolution plan of Aircel in October last year and despite that, UVARCL went ahead with it and did not inform the National Company Law Tribunal of the regulatory body’s decision,” said one person.
RBI and UVARCL did not respond to ET’s queries.
While clearing UVARCL’s resolution plan for Aircel in June 2020, the NCLT asked the ARC to send its plan to RBI for a nod since ARC’s are governed by the central bank.
UVARCL then sent the NCLT-approved plan to RBI, which rejected the proposal again, citing norms under the Sarfaesi Act, a legislation that allows banks and other financial institutions to auction residential or commercial properties to recover loans.
In its notice to UVARCL, the central bank said it had denied permission as early as October 2019, before the NCLT cleared the proposal, the person said.
According to another industry executive, the RBI also observed that if the NCLT had not asked for the central bank’s approval, UVARCL would have gone ahead and implemented the Aircel resolution plan.
Officials tracking the Aircel and RCom resolution cases said UVARCL sent at least six letters to the central bank between July 2019 and October 2020, informing it of the progress of the resolution plans.
“They have constantly written to the RBI on this matter, including immediately after the committee of creditors gave a go-ahead to the plan in September last year. But despite approving other resolution plans, the regulator has opposed this because of the equity investment element in the proposal,” said an official.
An industry executive said that while the RBI’s notice has gone only to UVARCL, it has a far and wide-reaching impact for the industry.
“RBI is of the view that Sarfaesi needs to be amended before ARCs are allowed to act as resolution applicants and it is completely wary of the equity infusion in distressed asset resolution plans,” the official said.
The RBI’s rejection of the Aircel resolution plan brought into focus the conflict between the insolvency law – which allows ARCs to bid for bankrupt firms through equity infusion – and the Sarfaesi Act, which is silent on the matter.
The finance ministry is said to be open to amending the Sarfaesi Act. ARCs have asked the RBI to consider this a regulation issue and issue fresh guidelines because amendments take time.
Source: Economic Times