The Reserve Bank of India has barred independent directors from becoming board members of an asset reconstruction company and its promoter entity simultaneously.

In other words, the ARCs and its promoters cannot have common independent directors.

According to banking sources, this clause on the appointment of independent directors is the main reason for the delay in clearing the licence of ARC of India Ltd, the first asset reconstruction company in the country.

Three independent directors of Arcil are also on the boards of promoting entities - Industrial Development Bank of India and State Bank of India.

They are PR Khanna (SBI), JJ Irani and MG Bhide (IDBI). Arcil will get the nod only after the promoters sort out this issue.

Sources said that Khanna is likely to remain with State Bank and step down from Arcil. Chartered accountant Rajendra Chitale and venture capitalist Pradip Shah are expected to join the board as independent directors.

ICICI Bank, IDBI and SBI hold 24.5 per cent each in the ARC, which has an equity base of Rs 10 crore (Rs 0.10 billion). HDFC and HDFC Bank hold 10 per cent each of the equity and the rest is held by a clutch of banks including Federal Bank and IDBI Bank.

N Vaghul is the non-executive chairman of the company. The list of directors includes Deepak Parekh, P P Vora, P N Venkatachalam, Ashok Ganguly and Y H Malegam apart from Irani, Bhide and Khanna.

Rajendra Kakkar, former managing director, State Bank of Hyderabad, has recently taken over as the chief executive officer of the Arcil, which is set to take off by buying out bad assets over Rs 5,000 crore (Rs 50 billion).

Starting with over Rs 5,000 crore (Rs 50 billion) asset base, it plans to acquire Rs 20,000 crore (Rs 200 billion) worth of assets by the end of fiscal 2004.

Most of the assets being transferred to the Arcil book are common in the books of IDBI, SBI, IFCI and ICICI Bank. PricewaterhouseCoopers and another chartered accountant have undertaken the valuation of assets.

Arcil will be modelled on the lines of an asset management company of a mutual fund. After taking over these assets, it will bundle the assets like a mutual fund and create asset portfolios.

In the second stage, pass through certificates against these assets will be issued to banks and institutions as there is no qualified institutional buyer in the market to buy junk bonds.

Sources said there will be a negotiated floor price and if the ARC is able to recover more, then the spoil will be shared between the bank or institution, and the ARC.