The Reserve Bank of India ("RBI") vide its circular dated January 20, 2025 ("Circular"), has revised the guidelines in respect of settlement of dues payable by the borrowers of asset reconstruction companies ("ARCs") by amending paragraph 15 of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 ("Master Directions").
Following is an overview of the modifications made to the Master Directions by the Circular:
1. Every ARC is required to frame a board approved policy for settlement of dues payable by borrowers. Pursuant to the Circular, it has been specified that such policy is to cover aspects such as cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount and methodology for arriving at the realisable value of the security.
2. Erstwhile guidelines specified that settlement with the borrower is to be done only after all possible ways to recover dues have been taken and there are no further prospects of recovering the debt. The Circular has modified this requirement to examination of all possible recovery methods and for the settlement to be considered to be the best option available.
3. The Circular has further introduced guidelines for accounts having an aggregate value of: (a) more than INR 1,00,00,000 (Indian Rupees one crore) ("Settlement Event 1"); and (b) equal to or less than INR 1,00,00,000 (Indian Rupees one crore) ("Settlement Event 2"), in terms of outstanding principal in the books of transferor(s) at the time of acquisition by the ARC. The limit of INR 1,00,00,000 (Indian Rupees one crore) shall be the aggregate outstanding principal of all the accounts of the borrower acquired by the ARC from the transferor(s).
4. In case of Settlement Event 1:
a. An independent advisory committee ("IAC") will examine the proposal and assess the financial position of the borrower, time frame available for recovery of the dues from the borrower, projected earnings and cash flows of the borrower and other relevant aspects.
b. The IAC shall consist of professionals having technical/ finance/ legal background. Under paragraph 11 of the Master Directions, an IAC is required to be constituted in relation to change in or takeover of management of business of the borrower. This IAC will examine the proposals of settlement of dues with the borrower.
c. The board of directors will deliberate on the recommendations of the IAC and consider various options available for recovery of dues before deciding whether the option of settlement of dues with the borrower is the best option and the same will be recorded in the minutes of the meeting along with detailed rationale.
d. The abovementioned board of directors shall include at least 2 (two) independent directors or a committee of the board meeting the following criteria:
i. the committee is chaired by an independent director and includes a minimum of 2 (two) independent directors including the chair;
ii. the committee consists of at least 1/3rd (one third) of the total strength of the board or 3 (three) directors, whichever is higher;
iii. at least half of the directors attending the meeting of the committee are independent directors;
iv. the committee is created and mandated by the full board; and
v. the decisions of the committee along with rationale are recorded in the minutes and placed before the board at quarterly intervals.
5. In case of Settlement Event 2:
a. Any official who was part of the acquisition (as an individual or part of a committee) of the concerned financial asset will not be part of processing / approving the settlement proposal of such financial asset, in any capacity.
b. A quarterly report on the resolution of these accounts will be placed before the board/ committee of the board which meets the criteria prescribed in paragraph 4 above.
c. The board shall mandate a suitable reporting format to ensure adequate coverage of the following aspects at the minimum:
i. trend in number of accounts and amounts subjected to compromise settlement (q-o-q and y-o-y);
ii. out of (i) above, separate breakup of accounts classified as fraud, wilful default declared by the banks and NBFCs;
iii. amount-wise, acquisition authority wise, and business segment / asset-class wise grouping of such accounts; and
iv. extent and timelines of recovery in such accounts.
6. In case of settlement of dues payable by borrowers classified as frauds or wilful defaulters, the guidelines specified for Settlement Event 1 shall be applicable, irrespective of the amount involved.
7. The erstwhile guidelines specified that settlement amount should be preferably paid in lump sum and in case the borrower is unable to pay the entire amount in lump sum then IAC shall make specific recommendations about minimum upfront lump sum payment and maximum repayment period. Pursuant to the Circular, in case the settlement does not envisage payment of the settlement amount in 1 (one) instalment then the proposal is required to be in line with and supported by an acceptable business plan (where applicable), projected earnings and cash flows of the borrower.
8. The compromise settlement with the borrower shall be without prejudice to the provisions of any other statute in force.
9. In case an ARC had commenced recovery proceedings under a judicial forum and the same is pending, then any settlement arrived at with the borrower shall be subject to obtaining consent decree from the concerned judicial authorities.
Please find a copy of the Circular, here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
