| 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 (Rs 740
mn) 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.
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