RBI's Powers over ARCs and Resolution of Disputes under SARFAESI

An ARC is registered by the RBI and stays under its hand. Sections 12 to 12B give the RBI the tools to direct, monitor and inspect an ARC throughout its life, and Section 11 keeps commercial disputes among the financial parties out of the ordinary courts, routing them to conciliation or arbitration. This note sets out the RBI's continuing powers, the dispute-resolution mechanism, and how entry, conduct and disputes are all held within the regulatory frame.

1. The RBI's Regulatory Powers

Figure 1: Direct, monitor, inspect

• Policy and directions, s.12. The RBI may determine the policy for ARCs and issue directions on the conduct of their business and prudential matters, which the ARC is bound to follow.
• Statements and information, s.12A. The RBI may require an ARC to furnish statements and information at such intervals as it specifies, so it can monitor the ARC's working on a continuing basis.
• Audit and inspection, s.12B. The RBI may carry out audit and inspection of an ARC, a supervisory power added by the 2016 amendment to strengthen oversight of the sector.
• The thread. Together these make the RBI a continuing supervisor, not merely the body that registers an ARC at the outset, so compliance is a lifelong condition.

2. Resolution of Disputes under Section 11

Figure 2: Conciliation or arbitration, not the courts

• What it covers. A dispute relating to securitisation, reconstruction, or non-payment of any amount due including interest is to be settled by conciliation or arbitration.
• Among whom. Between the bank or financial institution, the ARC, and the qualified buyer, the parties to the securitisation transaction; it does not cover the borrower's challenge to enforcement.
• Under which law. The conciliation or arbitration is conducted under the Arbitration and Conciliation Act 1996, keeping these commercial disputes out of the ordinary civil courts.
• Why carved out. It gives the financial parties a swift, specialised forum, separate from the borrower's remedy before the DRT under s.17 (Topic 35)

3. The Oversight Web

Figure 3: Entry, conduct and disputes all within the frame

• Entry control. Registration under s.3 and the net owned fund decide who may be an ARC at all, the gate to the sector (Topic 15)
• Continuing control. Directions (s.12), statements (s.12A) and audit (s.12B) keep the ARC under ongoing supervision after it is registered.
• Dispute control. Section 11 routes disputes among the financial parties to conciliation or arbitration, so even conflicts stay within a controlled forum.
• The cancellation backstop. Failure to meet the conditions or follow directions can lead the RBI to cancel registration, the ultimate sanction behind the oversight (Topic 15)

4. Frequently Asked Questions

What powers does the RBI have over an asset reconstruction company?

The Reserve Bank of India supervises an asset reconstruction company throughout its life. Under Section 12 it may determine the policy for ARCs and issue binding directions on the conduct of their business and prudential matters. Under Section 12A it may require an ARC to furnish statements and information at specified intervals, so it can monitor the ARC's working. Under Section 12B, added by the 2016 amendment, it may carry out audit and inspection of an ARC. These powers sit on top of the registration requirement under Section 3 and the net owned fund condition, and are backed by the RBI's power to cancel registration, so the ARC remains under continuing regulatory control.

How are disputes between an ARC, a bank and a qualified buyer resolved?

Under Section 11, a dispute relating to securitisation or reconstruction, or to the non-payment of any amount due including interest, arising among the bank or financial institution, the asset reconstruction company and the qualified buyer, is to be settled by conciliation or arbitration conducted under the Arbitration and Conciliation Act 1996. The provision keeps these commercial disputes among the financial parties out of the ordinary civil courts and in a swifter, specialised forum. It does not extend to a borrower's challenge to the enforcement of security interest, which lies before the Debt Recovery Tribunal under Section 17.

5. Related Topics

• Topic 15: Section 3 Registration of ARCs. The entry control these powers continue.
• Topic 20: Security Receipts and Qualified Buyers. The parties a Section 11 dispute is among.