ARCs must be allowed to acquire bad assets of mutual funds, AIFs

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₹46.94 trillion. Within this, debt schemes account for just under a fifth of the industry's entire asset pool. This segment is primarily driven by institutional investors such as banks, who significantly invest in liquid, money market, and debt schemes, highlighting them as seasoned investors.

However, before allowing ARCs to acquire these assets from mutual funds, it would be wise for both financial regulators – the RBI and the Securities and Exchange Board of India (Sebi), which supervises mutual funds – to establish clear guidelines. This would ensure transparency in such acquisitions and set recovery benchmarks, akin to the protocols for bank bad loan acquisitions. The existing framework used by banks, which includes board approvals, could serve as a model here, placing the responsibility on the trustees of asset management companies to sanction such distressed asset purchases.

This approach might pave the way for a fresh revenue stream for ARCs, reminiscent of their recent endorsement to function as Resolution Professionals or IRPs. It is likely that ARC’s will resist any possible stiff norms for such entry having been restricted for long to buying out bad loans of only banks and other financial institutions. But the shadow of the income tax raids on a few ARCs which had colluded with borrower groups involving dummy firms and funding by some promoter groups and the subsequent special audit by the RBI would mean that regulators are likely to tread far more cautiously.