Asset Reconstruction Company

An Asset Reconstruction Company (ARC) specializes in acquiring and managing distressed assets to recover bad loans.

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An Overview of Asset Reconstruction Company.

An Asset Reconstruction Company (ARC) is a specialized financial institution that acquires bad loans (Non-Performing Assets – NPAs) from banks at a pre-agreed value and takes independent measures to recover the debts. By purchasing distressed assets, ARCs help banks clean their balance sheets and focus on their core lending activities.

ARCs engage in asset reconstruction, securitization, or both, taking over all rights previously held by the bank regarding the debt. Qualified Buyers (QBs) provide the necessary funds for ARCs to acquire and manage these distressed assets. Through structured recovery mechanisms, ARCs aim to maximize debt recovery while ensuring financial stability in the banking sector.

Registration

  1. Before commencement of the business of securitisation or asset reconstruction, an ARC shall apply for registration and obtain a certificate of registration (CoR) from the Reserve Bank as provided under Section 3 of the Act.
  2. The ARC seeking registration shall submit its application in the application form hosted on the Reserve Bank’s website, duly filled in with all the relevant annexures/ supporting documents, to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, Shahid Bhagat Singh Marg, Fort, Mumbai – 400001.
  3. An ARC, which has obtained a CoR from the Reserve Bank, can undertake both securitisation and asset reconstruction activities.
  4. An ARC shall commence business within six months from the date of grant of CoR by the Reserve Bank. Reserve Bank may grant extension up to twelve months from the date of grant of CoR on receipt of the application from the ARC.
  5. Provisions of Section 45-IA, 45-IB and 45-IC of RBI Act, 1934 shall not apply to an ARC registered with the Reserve Bank under Section 3 of the Act.
  6. Any entity not registered with the Reserve Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act subject to requisite authorisation/ approval.

Net Owned Fund

  1. To commence the business of securitisation or asset reconstruction, an ARC is required to have a minimum net owned fund (NOF) of ₹300 crore and thereafter, on an ongoing basis.
  2. ARCs existing as on October 11, 2022 have been provided the following glide path to achieve the minimum required NOF of ₹300 crore:
Minimum required NOF on October 11, 2022by March 31, 2024by March 31, 2026
₹100 crore₹200 crore₹300 crore

In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time.

Activities of Arcs

  1. An ARC shall commence/ undertake only securitisation and asset reconstruction activities and functions provided under Section 10 of the Act.
  2. In terms of the provision of Section 10(2) of the Act, ARCs have been permitted to undertake those activities as Resolution Applicants under Insolvency and Bankruptcy Code, 2016 (IBC) which are not specifically allowed under the Act. This permission shall be subject to the following conditions:
    • The ARC has a minimum NOF of Rs.1,000 crore.
    • The ARC shall have a Board-approved policy regarding taking up the role of Resolution Applicant which may, inter alia, include the scope of activities, internal limit for sectoral exposures, etc.
    • A committee comprising of a majority of independent directors shall be constituted to take decisions on the proposals of submission of resolution plan under IBC.
    • The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which may be considered for managing the firms/ companies, if needed.
    • In respect of a specific corporate insolvency resolution process (CIRP), the ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the Adjudicating Authority under IBC. In case of non-compliance with this condition, the ARCs shall not be allowed to submit any fresh resolution plans under IBC either as a Resolution Applicant or a Resolution Co-Applicant.
  3. An ARC may, as a sponsor and for the purpose of establishing a joint venture, invest in the equity share capital of another ARC.
  4. An ARC may deploy its funds for undertaking restructuring of acquired loan account with the sole purpose of realizing its dues.
  5. An ARC may deploy any surplus funds available with it, in terms of a Board-approved policy, in –
    • Government securities and deposits with scheduled commercial banks, Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) or such other entity as may be specified by the Reserve Bank from time to time.
    • Short-term instruments viz., money market mutual funds, certificates of deposit and corporate bonds/ commercial papers which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible credit rating agency (CRA), subject to a cap of 10% of the NOF of the ARC on maximum investment in such short-term instruments.
  6. No ARC shall invest in land or building. However, this restriction shall not apply to –
    • Investment by the ARC in land and building for its own use up to 10% of its owned funds; and
    • land and building acquired by the ARC in satisfaction of claims in ordinary course of its business of reconstruction of assets in accordance with the provisions of the Act. Any land and/ or building acquired by the ARC, in the ordinary course of its business of reconstruction of assets while enforcing its security interest, shall be disposed of within a period of five years from the date of such acquisition or such extended period as may be permitted by the Reserve Bank in the interest of realisation of the dues of the ARC.
  7. An ARC shall not raise monies by way of deposit.

Fit and Proper Criteria for Sponsors/Investors

Determinants of fit and proper status of sponsors of ARCs: In determining whether the sponsor is fit and proper, Reserve Bank shall take into account all relevant factors, as appropriate, including but not limited to, the following:

  1. The sponsor’s integrity, reputation, track record and compliance with applicable laws and regulations;
  2. The sponsor’s track record and reputation for operating business in a manner that is consistent with the standards of good corporate governance, integrity, in addition to the similar assessment of individuals and other entities associated with the sponsor;
  3. The business record and experience of the sponsor;
  4. Sources and stability of funds for acquisition and the ability to access financial markets; and
  5. Shareholding agreements and their impact on control and management of the ARC.

Prior approval for any substantial change in management by way of transfer of shares

Notwithstanding anything to the contrary contained in the terms and conditions stipulated in the CoR issued under Section 3 of the Act, ARCs shall obtain prior approval of the Reserve Bank only for transfers that result in substantial change in management namely –

  1. Any transfer or fresh issuance of shares resulting in a new sponsor
  2. Any transfer or fresh issuance of shares resulting in cessation of an existing sponsor
  3. An aggregate transfer of 10% or more of the total paid up share capital of the ARC by a sponsor during the period of five years commencing from the date of the CoR

Explanation III: For the purposes of this clause, a transfer shall be deemed to be a transfer of more than 10% of the total paid up share capital of the ARC if the aggregate of all the transfer of shares made by the sponsor prior to that transfer, and including that transfer, is 10% or more of the total paid up share capital of the ARC.

  1. The ARCs shall make an application along with Form II as provided in Annex VI and information mentioned in RBI directions, for Reserve Bank’s prior approval for change in shareholding of the ARCs.
  2. The Reserve Bank shall, inter alia, seek feedback on the persons from other domestic as well as foreign regulators and enforcement and investigative agencies as deemed appropriate to make an assessment on whether a sponsor is fit and proper.

FAQ's

ARC is an abbreviation for Asset Reconstruction Company. This company is solely formed for the reconstruction of NPAs and financial assets.

The main regulatory authority for an ARC is the Reserve Bank of India (RBI). The main law which was brought out to regulate ARCs in India is the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).

NPAs is an abbreviation for Non-Performing Assets. These are bad loans which reduce the overall rating of the bank. Such loans may or may not be paid by the borrower.

The main function of an ARC is to take over the financial assets of a particular bank or financial institution. Hence, if a loan is provided to the borrower, the ARC would take over the functions and procedures involved in recovering the assets.

The procedures related to recovery can only be taken against the borrower after there is a transfer of legal ownership from the bank to the asset reconstruction company.

Yes, an ARC has to register with the RBI before commencing the business related to Reconstruction Company. It is a mandatory requirement that must be followed.

Increasing the liquidity of the financial systems and increasing the performance of banks are the main objectives of an asset reconstruction company. Apart from this, maintaining the credit rating of financial institutions comes under the ambit of ARC.


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