Enactment of Fair Practices Code for ARCs By CS Anchal Jindal

Section 9 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI”) provides for “Measures for Asset Reconstruction”. Pursuant to the provisions of the Section 9 of SARFAESI, an Asset Reconstruction Company (“ARC”) while complying with the guidelines issued by Reserve Bank of India (“RBI”) from time to time may take any of the following measures for the purposes of asset reconstruction:

  1. Proper management of the business of the borrower, by change in or take-over of the management of the business of the borrower;

  2. Sale or lease of a part or whole of the business of the borrower;

  3. Rescheduling of payment of debts payable by the borrower;

  4. Enforcement of security interest;

  5. Settlement of dues payable by the borrower or

  6. Taking possession of secured assets.

So as to guarantee most elevated level of transparency and fairness in the process of reconstruction of assets on the part of ARCs and to protect the interest of stakeholders at large, on 16th July 2020 RBI introduced Fair Practices Code for Asset Reconstruction Companies (“FPC”) that ARCs are advised to practise while discharging their functions post approval of the same by their respective Board. Pursuant to the directions issued by RBI, the Board of ARCs are additionally required to consistently supervise the proper implementation of FPC and should also intermittently review its compliance.

Highlights of FPC are as follows:

  • ARC shall follow transparent and non-discriminatory practices in acquisition of assets and shall acquire assets at arm’s length price.

  • For the purpose of ensuring the sale of secured assets in a lucid manner, ARCs should publicly invite the participation from as many prospective buyers as possible for auction. ARCs may decide the terms and conditions of such sale in wider consultation with investors and provisions of Section 29A of Insolvency and Bankruptcy Code, 2016 may be followed in dealing with prospective buyers.

  • ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled/ paid.

  • ARCs shall put in place the policy approved by their respective Board on the management fee, expenses and incentives and such policy should be transparent and ensure that management fee is reasonable and proportionate to financial transactions.

  • ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy approved by their respective Board. The policy should clearly define the criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARCs shall ensure that outsourcing arrangements should not supersede their core area of responsibilities. The outsourced agency, if owned/controlled by a director of the ARC, the same may be made part of the disclosures specified in the Master Circular.

  • In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. ARCs shall ensure that the staff are adequately trained to deal with customers in an appropriate manner.

  • ARCs shall put in place the Code of Conduct for Recovery Agents duly approved by their respective Board and should obtain undertaking from Recovery Agents to abide FPC.

  • Recovery Agents of ARCs shall observe strict customer confidentiality and should not adopt uncivilized, unlawful and questionable behaviour or recovery process.

  • ARCs should have in place a sound and robust Grievance Redressal Mechanism in place that also incorporates dealing of issues relating to the services provided by the outsourced agency and recovery agents.

  • All the information received by ARCs in ordinary course of business shall be kept strictly confidential and shall not disclose until and unless required by the law or there is duty towards public to reveal information or post borrower’s permission.

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