Reserve Bank of India Deputy Governor Swaminathan J raised concerns over increasing regulatory violations among asset reconstruction companies (ARCs), urging them to adhere strictly to both the letter and spirit of regulations.
Addressing a conference attended by the top management of ARCs, Swaminathan stressed the importance of a "regulation plus" approach.
He criticised the frequent industry justifications for non-compliance, including claims of pending clarifications from the RBI and creative interpretations of regulations.
“These excuses are unacceptable,” he said, emphasising that ARCs' boards should ensure compliance proactively.
Swaminathan highlighted the critical role of ARCs in resolving stressed assets, which can only be achieved through sound governance and ethical practices.
He pointed out that some ARCs exploit their regulatory advantages to circumvent rules, structuring transactions in ways that undermine regulations.
Onsite examinations have revealed instances where ARCs facilitated the evergreen of distressed assets, lacking transparency and consistency in the issuance and periodic valuation of security receipts (SRs).
Swaminathan emphasised the necessity of setting the right ethical tone from the top, highlighting the importance of risk management, compliance, and internal audit functions in identifying and mitigating risks and ensuring legal adherence.
Scrutiny has increased in asset disposal processes, with Swaminathan noting that some proposals bypass independent advisory committees, contrary to regulations.
He also criticised the sale of assets to group entities without adhering to the arms-length principle and the misuse of the 'Swiss challenge' process, which often faces no actual competition.
Such practices, Swaminathan warned, compel supervisors to scrutinise transactions more closely to ensure compliance and maintain the integrity of the financial system.
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