Reserve Bank Deputy Governor Swaminathan J has expressed concern over the increasing regulatory violations and warned Asset Reconstruction Companies (ARCs) to ensure compliance without needing the regulator to point out the issues to them.

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Addressing a conference attended by top management of ARCs in the country on May 17, he said, "I would urge you all to adopt a regulation plus approach where you not only comply with the letter of the regulation but also its spirit." Very often, he said, "We get representations to our observations stating this is industry practice or clarifications are pending from the RBI. Sometimes there are incorrect or intelligent interpretations of the circulars."

These are not acceptable excuses for failing to do the right thing, he said, adding that the boards of ARCs should ensure that they do the right thing without needing the regulator to point it out to them.

He emphasised that ARCs' potential for resolving stressed assets within the system can only be realised with sound governance and adherence to ethical practices by responsible ownership and professional management.

Some ARCs, while enjoying the full benefits of the special position granted to them under the law and the regulations, have been found to be using innovative ways to structure transactions in a manner to circumvent regulations, he said.

During the course of onsite examinations, he said, "We have come across instances where ARCs have been used or allowed themselves to be used, if I may say so, as a conduit to evergreen distressed assets." In many cases, there is a lack of transparency and consistency in the issuance and periodical valuation of Security Receipts (SRs), he said.

It is also observed that a few entities find new ways of achieving their designs once a particular practice has been called out as a violation or deviation, he said. Swaminathan emphasised that setting the right tone from the top is crucial in fostering a culture of integrity and ethical conduct.

Deputy Governor also said boards should accord due importance to assurance functions, namely, risk management, compliance and internal audit. These functions play a critical role in identifying and mitigating risks, ensuring compliance with laws and regulations as well as safeguarding the organisation's reputation.

Another area that is receiving closer scrutiny and attention of supervisors is the process followed for the disposal of assets. At times, the proposals are not even placed before the independent advisory committee, contrary to regulatory instructions, he said.

Assets are sold to group entities without following the arms-length principle and without subjecting them to scrutiny under related party transactions, he said.

Another surprising behaviour is the 'Swiss challenge', which often goes unchallenged! This has become a routine affair giving rise to a suspicion that there may be some implicit understanding among the various participants, he said.

It will not be out of place to mention that such happenings are necessitating the supervisors to lift the veil and examine the transactions more closely, he added.
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