An asset reconstruction means acquisition by an ARC of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realisation of such financial assistance.
An Asset Reconstruction Company (ARC) is a company incorporated under the Companies Act and registered with Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Rapid growth of bad debts/ non-performing assets was the chronic hurdle for healthy growth of Indian economy. Asset Reconstruction Companies were established as specialised entities to facilitate securitisation and asset reconstruction of non-performing asset thereby earliest resolution and bringing the liquidity in the system.
In India, ARCs function under the supervision and control of Reserve Bank of India. ARCs are in the business of securitisation and reconstruction of financial assets. They are strictly as per SARFAESI Act and guidelines issued by Reserve Bank of India. ARCs acquire the bad debts/NPA accounts from Banks and Financial Institutions and try to resolve expeditiously by availing remedies under existing laws of India.
Sponsor is any person holding not less than 10 percent of the paid up equity capital of an ARC.
Securitisation means acquisition of financial assets by an ARC from Banks/ FIs by raising of funds from Qualified Buyers (QBs) by issue of security receipts (SRs) representing undivided interest in such financial assets or otherwise.
Security Receipt means a receipt or other security, issued by an ARC to any Qualified Buyers (QBs) pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.
A Qualified Buyer (QB) means Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation, Trustee or ARC or any asset management company making investment on behalf of mutual fund, Foreign Institutional investor registered under the Securities and Exchange Board Of India Act, 1992 (15 of 1992) or regulations made thereunder, any category of non-institutional investors as may be specified by Reserve Bank of India or any other body corporate as may be specified by the Securities and Exchange Board of India.
ARCs can acquire assets either through participation in auctions of NPAs conducted by the banks/financial institutions or through bilateral negotiations. In case of auctions, the following is the process: Submission of expression of interest for acquisition of NPAs Due Diligence of the financial asset to be acquired, Submission of bids Negotiation with the selling bank/FI and finalisation of purchase consideration Declaration of Trust – A trust is constituted for acquiring the financial asset wherein the ARC acts as a sole trustee. The Trust raises funds from qualified investors through issue of Security Receipts for financing the acquisition. SRs are issued pursuant to an Offer Document specifying the details of the acquisition. The SC/RC is required to invest an amount of at least 5% of the purchase consideration. The Trustee is the legal owner of the financial asset acquired under the trust while subscribers to the SRs become the beneficial owners of the financial asset. ARC acts as a trustee and the manager of the trust and uses its powers available under the SARFAESI Act to recover the dues from the Borrower. Payment of Purchase consideration and simultaneous Execution of Assignment Agreement between selling bank/FI (Assignor) & ARC (Assignee). Collection of all the relevant files & documents of the borrowers whose assets are acquired by ARC from selling bank/FI for resolution. Substitute ARC in all recovery proceedings.
As per Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 the total holding by a single FII in each tranche of scheme of SRs should not exceed 10% of the issue and the total holdings of all FIIs put together should not exceed 49% of the paid up value of each tranche of scheme of SRs issued by the ARC.
Financial assets which can be bought by SC/RC from any bank or FI where the asset is a NPA, including non-performing Bond or Debenture.
A Standard Asset where:
  • The asset is under consortium/ multiple banking arrangement
  • At least 75% by value of the asset is classified as non-performing asset in the books of other banks/ financial institutions, and
  • At least 75% (by value) of the banks / financial institutions who are under the consortium / multiple banking arrangements agree to the sale of asset to SC/RC
Thus, an asset reconstruction company can buy standard assets as well. However, enforcement of security interest cannot be applied against the standard assets.
Any asset movable or immovable, given as a security whether by way of creating a mortgage, hypothecation or creating a security interest in any other form are covered under the SARFAESI action. However, provisions of the act are not applicable in certain cases as specified under section 31 of the Act.
Yes, in accordance with the provisions of the SARFAESI Act, an ARC, for the purpose of asset reconstruction, can ensure proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower as per guidelines issued by RB.
After sending demand notice u/s 13(2) if outstanding dues are not paid within 60 days, the secured creditor can take possession u/s 13(4) of the Act, provided consent of the secured lenders holding at least 75% of the secured debt has been obtained.
If the borrower fails to discharge his liability within the period of 60 days from the date of notice issued u/s 13(2) the secured creditor may take a recourse u/s 13(4) by taking possession of secured assets with a right to transfer by way of lease, assign or sale for realising the secured asset. In case of joint financing of a financial asset or where there is more than one secured creditor at least 75% in value of the outstanding creditor should agree for such an action.