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Foreign investment in ARC at 49%

June 29, 2005 13:56 IST

The government is learnt to have decided to allow 49 per cent foreign direct investment in the proposed Asset Reconstruction Company.

According to sources close to the development, in step with the recommendations of the Reserve Bank of India, the government will be capping both individual and group limit at 49 per cent as far as FDI is concerned.

ARC is an entity, to be set up under the Companies Act, which will buy stressed assets from banks at a discounted price. While this move will relieve banks of their non- performing and stressed assets, ARC will initiate recovery either through negotiations or through legal settlements.

On the other hand, the government has decided to allow foreign institutional investment in security receipts.

The aggregate limit for FII investment is likely to be capped at 49 per cent while individual FII limit will be at 10 per cent. But, only registered FIIs will be allowed investments while sub-accounts of institutional investors will be discouraged.

In its recommendations to the government and the RBI, the Asian Development Bank had earlier suggested that single investors should be permitted to have effective control over such companies. The ADB report had favoured 100 per cent foreign holding in SRS.

"Holding 100 per cent security receipts will enable the NPA investors to exercise control over resolution strategy being used in respect of that scheme, which is typically the primary requirement of independent NPA investors for considering such investments," the report said. Securitised receipts are a form of tradable instruments.

RBI recommendations have favoured fiscal incentives for the ARC sector in the form of tax benefits.

Although tax benefits will be decided by the Central Board of Direct Taxes, the central bank is of the view that tax incentives can be designed in sync with mutual funds. The objective is to avoid taxation of the instrument at the hands of both the promoter and the investor.

The Securitisation Act has allowed ARCs to be set up in India to help banks and financial institutions recover their bad debts by taking them over and selling them to other investors.
Anindita Dey in Mumbai
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