4 ARCs under RBI Lens after Special Audit, I-T Raids: Report
Moneylife Digital Team 01 March 2023
The Reserve Bank of India has sent show-cause notices to a few asset reconstruction companies (ARCs), seeking answers on why their licences should not be cancelled, says a report quoting two people close to the development. According to the report, the move follows a special audit conducted by the banking regulator after the income-tax (I-T) department raided the premises of these ARCs in 2021.
In the report, Economic Times (ET) says, "While the show cause notice does not mean the licence will be cancelled, RBI has asked ARCs why the certificate of registration issued to them should not be cancelled for having violated the provisions of the securitisation and reconstruction of financial assets and enforcement of security interest act, 2002 (SARFAESI Act) and guidelines issued by the RBI."
The I-T department, which carried out search and seizure operations on four ARCs in December 2021, found a nexus between the borrower group and ARCs and a maze of shell or dummy companies used in acquiring non-performing assets (NPAs). 
In a release, the Central Board of Direct Taxes (CBDT) says, "The search has revealed that the minimum cash payout made out by the ARCs to lender banks for acquiring the stressed assets or NPAs have usually been using the funds of the borrower group. Such funds have been routed through several layers of dummy companies controlled by the borrower group or through hawala channels." (Read: I-T Dept Finds Unholy Nexus between Borrowers and ARCs in Buying Stressed NPAs)
The search and seizure operation covered 60 premises spread over Mumbai, Ahmedabad, and Delhi belonging to four ARCs.
While the I-T department did not reveal the names of the ARCs, according to the ET report, these are - Omkara Assets Reconstruction Pvt Ltd, Rare Asset Reconstruction Pvt Ltd, CFM Asset Reconstruction Pvt Ltd, and Invent ARC Pvt Ltd.
The I-T department found that the ARCs have been following non-transparent methods in the disposal of assets acquired by them from the banks. It says, "More often than not, the underlying assets had been re-acquired by the same borrower group, albeit at a fraction of their real values." 
"The ARCs are found to have concealed the profits on disposal of the underlying assets by diverting the actual profit to their related concerns, under the garb of consultancy receipts or unsecured loans or investments. Through this method, the ARCs have not only evaded the payment of due taxes but also deprived the lender banks of their share of actual profits," it added.
One of the ARCs was found to be maintaining a parallel set of accounts on Tally accounting software, in a pen drive, recovered from the custody of the trusted employees of the promoter. 
"This parallel set of accounts contained cash transactions aggregating to more than Rs850 crore. Handwritten diaries have also been found during the search, containing detailed entries substantiating the deliberate act of layering transactions by the promoter group and using a network of middlemen for the same. There are also pieces of evidence of routing of funds through offshore structures to acquire the assets," the I-T department says.
The tax authorities also seized cash of Rs4 crore during the search operation. It says, "Large volumes of documentary and digital evidence seized are being further analysed for detection of violations under the income tax and allied acts."
Rare ARC told the newspaper that said it is in compliance with relevant legislations and guidelines while Invent ARC says it has not received any communication from RBI.
An ARC executive told the newspaper that the RBI show-cause notice to a few companies will have little impact on the ARC industry as 80% of business is managed by the top five players. "These developments may lead to consolidation of smaller ARCs, which are under pressure to augment their capital to Rs300 crore from Rs100 crore," the person says.
Over the past two years, the central bank has constituted a committee to review the working of ARCs and introduced several norms like increasing the net worth to Rs300 crore from Rs100 crore, enhancing disclosure norms and allowing ARCs to become resolution applicants to strengthen the sector. Only those ARCs with Rs1,000 crore net worth are permitted to be resolution applicants.
There are 29 ARCs operating in India but only a few, including Edelweiss ARC, JM Financial ARC, and Asset Reconstruction Co (India) Ltd have a net worth of over Rs1,000 crore, the report says.
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