On October 25, 2018, the Reserve Bank of India (“RBI”) issued the Fit and Proper Criteria for Sponsors - Asset Reconstruction Companies (Reserve Bank) Directions, 2018 (“Directions”). 

The Directions are applicable to existing and proposed sponsors of asset reconstruction companies (“ARCs”) registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).  The Directions provide that sponsors should be fit and proper in order to be eligible to promote ARCs. 

Further, paragraph 5 of the Directions provides that in determining whether a sponsor is fit and proper, RBI shall take into account all relevant factors, including the following:

- The sponsor’s integrity, reputation, track record and compliance with applicable laws and regulations;

- The sponsor’s track record and reputation for operating business in a manner that is consistent with the standards of good corporate governance, integrity, in addition to the similar assessment of individuals and other entities associated with the sponsor;

- The business record and experience of the sponsor;

- Sources and stability of funds for acquisition and the ability to access financial markets;

- Shareholding agreements and their impact on control and management of the ARC. 

Pursuant to the Directions, a sponsor is required to furnish, and the ARC is required to obtain within 1 (one) month of the close of financial year from all its sponsors, a self-declaration in the prescribed Form I. Further, ARCs must also file Form III annexed to the Directions with RBI, by the end of May every year, on the changes in the status of the sponsors.

For any change in shareholding of an ARC, the ARC is required to seek RBI’s prior approval by filing an application in Form II annexed to the Directions.