SEBI Allows NBFCs and HFCs to Invest in Security Receipts Issued by ARCs

The Securities and Exchange Board of India (SEBI) has permitted all non-banking financial companies (NBFCs), including housing finance companies (HFCs), to invest in security receipts (SRs) issued by Asset Reconstruction Companies (ARCs).

This decision broadens the range of participants who can acquire SRs, thereby encouraging investment in the bad loans space.

Enhancing Liquidity in the Distressed Asset Market

ARCs are financial entities set up to acquire bad loans from banks and financial institutions, typically at a discount, after appropriate haircuts.

In return, they issue SRs to investors, which represent a claim on the underlying distressed assets. By allowing NBFCs and HFCs to invest in these receipts, SEBI aims to provide greater liquidity and investor participation in the resolution of non-performing assets (NPAs).

SEBI’s Gazette Notification

As per a gazette notification issued on February 28, SEBI stated, “All NBFCs including HFCs regulated by the Reserve Bank of India (RBI) are hereby specified as qualified buyers for the purposes of SARFAESI Act (the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).” This inclusion enables a wider pool of financial institutions to participate in the acquisition of SRs, thereby strengthening the distressed asset resolution process.

Safeguards to Prevent Misuse

To prevent any misuse of the new regulation, SEBI has implemented safeguards ensuring that defaulting promoters cannot reclaim control over secured assets through the purchase of SRs.

The regulatory body has mandated that NBFCs and HFCs must ensure that defaulting promoters or their related parties do not, directly or indirectly, gain access to secured assets via SRs. Additionally, these entities must comply with any further conditions that the RBI may impose from time to time.

Impact on the Financial Sector

This regulatory change is expected to enhance the participation of NBFCs and HFCs in the bad loans market, providing banks with a more robust mechanism for cleaning up their balance sheets. It also strengthens the role of ARCs in asset resolution by ensuring a wider investor base and improved capital inflows.

Conclusion

SEBI’s decision to allow NBFCs and HFCs to invest in security receipts strengthens the distressed asset market by enhancing liquidity and investor participation. With strict safeguards in place, this move supports efficient bad loan resolution, bolstering financial stability and providing banks with a more effective mechanism to manage non-performing assets.

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