The Hindu : Business : Centre permits 49 p.c. FDI in ARCs

Online edition of India's National Newspaper
Thursday, Nov 10, 2005

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Business

Centre permits 49 p.c. FDI in ARCs

Special Correspondent

FII investments will not be allowed FII investments will not be allowed

NEW DELHI: In a major development for the banking sector, the Government on Wednesday threw open the asset reconstruction companies (ARCs) to foreign direct investment (FDI). It has decided to permit FDI up to a maximum of 49 per cent in the equity capital of ARCs.

Essentially, the ARCs are those entities that buy out the non-performing assets (NPAs) or bad debts of banks. The NPAs now stand at over Rs. 60,000 crore.

Interestingly, this significant step in continuation of reforms in the banking sector has come within a day of the U.S. Treasury Secretary John Snow's arrivan in India. The U.S. has been pressing for opening up of India's financial sector.

With 49 p.c. FDI allowed in ARCs, it is now `open doors' for the entry of foreign banks and ARCs which have been keenly waiting in the wings to enter the Indian market.

The opening up would enable foreign players to assist the domestic companies in better and faster recovery of NPAs.

According to a Finance Ministry release here, the Foreign Investment Promotion Board (FIPB) will, from now on, consider the applications from companies eligible to invest in India in the equity capital of ARCs registered with the Reserve Bank of India (RBI) under the FDI route.

While a maximum foreign equity of 49 per cent in ARCs has been permitted, investments by foreign financial institutions (FIIs) would not be allowed, the release said.

In cases where any investment by an individual exceeded ten per cent of the equity, the ARCs would have to comply with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

The RBI will soon come out with a notification under FEMA (Foreign Exchange Management Act) for the FDI in ARCs. The new policy on FDI in ARCs would be reviewed after two years, the release said.

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