The prohibition on investment by FII in ARCs will be removed

The foreign investment ceiling in asset reconstruction companies (ARCs) has been increased to 74 per cent from 49 per cent, a move aimed at bringing more foreign expertise in the segment.

“The ceiling for FDI in ARCs has been increased from 49 per cent to 74 per cent,” the Finance Ministry says in a statement on Friday, adding, this is subject to certain conditions.

The decision was taken after consultation with the stakeholders and the sector regulators, the statement adds. However, foreign investment in ARCs will need to comply with the FDI policy, including the one related to sectoral caps.

Further, the foreign investment limit of 74 per cent in ARCs will be a combined limit of FDI and FII. With this change in the policy, “the prohibition on investment by FII in ARCs will be removed.’’

The total shareholding of an individual FII shall not exceed 10 per cent of the total paid-up capital, the statement says.

Earlier, foreign institutional investors (FIIs) were permitted to invest only in security receipts (SRs) issued by ARCs up to 49 per cent of each tranche of the scheme of SRs.

The Finance Ministry also says “the limit of FII investment in SRs may be enhanced from 49 per cent to 74 per cent.’’

Further, “the individual limit of 10 per cent for investment of a single FII in each tranche of SRs may be dispensed with,” it says, adding the necessary notification and circular would be issued by the Reserve Bank of India and the Securities and Exchange Board of India.

Corporate bonds limit

The investment by FIIs would remain within the limit on corporate bonds, and sectoral caps under the extant FDI regulations.

The government had opened the ARC segment for FDI in 2005 as domestic companies did not have any experience in setting up this business.

At present there are 14 ARCs in the country, of which nine have no foreign investment. ARCIL, a public sector ARC, is handling about 60 per cent of the asset restructuring business in the country.

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