The government recently allowed 49% foreign direct investment in asset reconstruction companies, but barred foreign institutional investors from equity participation in firms buying non-performing assets of the banking sector.

The decision to allow FDI paves the way for the entry of CDC into the arena. CDC, formerly Commonwealth Development Corporation, is an agency of the UK government for private sector investments in developing countries. CDC had proposed to set up a firm called Actis Asset Reconstruction Company Pvt Ltd with 48-74 % equity, depending on the policy.

Corporation Bank and ING Vysya Bank were to be the other shareholders in the Firm. The Foreign Investment Promotion Board was approached for setting up the company with an initial equity investment of Rs 74 crore (USD 17) and $50 mn in security receipts. But the proposal got deferred repeatedly in the absence of clear-cut guidelines.

A large number of foreign companies have been looking at investing in ARCs in India. While Asset Reconstruction Corporation of India, with equity participation from all leading banks, is already functional, other players like IFCI Ltd and UTI Asset Management Company Ltd have also set up ARCs. The Punjab government, too, is contemplating setting up an ARC. Global players like Goldman Sachs and PricewaterhouseCoopers are also eyeing the asset reconstruction business in India.

The government said a clearance from the FIPB would be required for foreign investors subscribing to the equity capital of Indian ARCs registered with the Reserve Bank of India. It also said sponsors could hold up to 49% in an ARC with the RBI's permission.

Until the recent announcement, the policy governing foreign investment in ARCs was unclear as it was not among the 19 notified activities of non-banking financial companies where FDI was permitted. The new policy on FDI in ARCs would be reviewed after two years, announced an official release- adding that the RBI would issue additional guidelines.