Asset Reconstruction Company Registration

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What is Asset Reconstruction Company Registration?

An Asset Reconstruction Company is a specialized financial institution which buys the Non-Performing Assets or bad assets from banks and financial institutions. In other words, we can say that ARCs are in the business of buying bad loans from banks. ARCs help to clean up the balance sheets of banks when the latter sells these to the ARCs. It helps banks to concentrate in normal banking activities. Banks rather than wasting their time and effort by going after the defaulters can sell the NPA’s to the ARCs at a mutually agreed value. Its primary goal is to manage and make profitable those assets which are underperforming or have formally classified as Non Performing Assets belonging to those companies which are unable to generate sufficient revenue to complete their outstanding obligations.

Under this, the main disadvantage is the potential loss of income which can be suffered in trying to resolve crises in distressed debt where companies are in danger of bankruptcy/insolvency. When ARC’s managed properly they have a significant possibility of profit if they can relieve the company under financial stress and manage to pass over the acquisition of the assets to other worthy candidates. For their services, they charge a management fee or commission from the distressed company/individual.

Under the SARFESI Act, the responsibility of the Asset management companies is to function as intermediaries between the promoter and the trust. Their main role is to see that the trust is able to take over the assets or loans at a nominal fee according to the revalued amount, which is consequently paid to the promoter for the acquisition.

In India the first ARC was a company named ARCIL which has been a leader in this field, having established industry standards for the rest of the market to follow.

Asset Reconstruction Company in India

In 1997 by Government of India, the problem of recovery from NPAs was recognized.  In the Narasimhan Committee Report it is mentioned about the important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform.  It was expected that new NPAs in the future could afford to be lower with the combination of policy and institutional development. 

Accordingly, Asset Reconstruction Company is a company registered under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as a Non Banking Financial Company (u/s 45I (f) (iii) of RBI Act, 1934). They operate their functions according to the guidelines issued by the RBI.
RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934.

ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-

  • Isolating Non Performing Loans (NPLs) from the Financial System (FS),
  • Freeing the financial system to focus on their core activities and
  • Facilitating development of market for distressed assets.

Functions of Asset Reconstruction Company (ARC)

Following functions are performed by RBI as per RBI Notification:-

  • Acquisition of financial assets (as defined u/s 2(L) of SRFAESI Act, 2002);
  • Change or takeover of Management / Sale or Lease of Business of the Borrower;
  • Rescheduling of Debts;
  • Enforcement of Security Interest (as per section 13(4) of SRFAESI Act, 2002)
    Settlement of dues payable by the borrower.

Registration of Reconstruction Companies

No asset reconstruction company shall commence or carry on the business of asset reconstruction without

  • obtaining a certificate of registration
  • having net owned fund of not less than two crore rupees or such other amount not exceeding fifteen per cent of total financial assets acquired or to be acquired by the securitization company or reconstruction company, as the Reserve Bank may, by notification, specify

Provided that the Reserve Bank of India may by notification specify amount of owned fund for different class or classes of securitization companies or reconstruction companies: Provided further that existing securitization company or reconstruction company on the commencement of this Act shall make an application for registration to the Reserve Bank of India before the expiry of six months from such commencement and notwithstanding anything contained in this sub-section may continue to carry on the business of asset reconstruction until a certificate of registration is granted or as the case may be, rejection of application for registration is communicated to it.

  • Every securitization company or reconstruction company shall make an application for registration to the Reserve Bank in such form and manner as it may specify.
  • Reserve Bank of India may for the purpose of considering the application for registration of asset Reconstruction Company requires to be satisfied by inspection of records or books of such company.

otherwise, following conditions are fulfilled, namely:

  • Reconstruction company has not incurred losses in any of the three preceding financial years.
  • Such reconstruction company has made adequate arrangements for realisation of the financial assets acquired for the purpose of asset reconstruction and shall be able to pay periodical returns and redeem on the investments on respective due dates made in company by the qualified institutional buyers or other persons.
  • Directors of the reconstruction company have adequate professional experience in matters related to finance, securitization and reconstruction.
  • Board of directors of such reconstruction company do not consist more than half of its total number of directors who are either nominees of any sponsor or associated in any manner with the sponsor or any of its subsidiaries.
  • Any of the directors has not been convicted of any offence involving moral turpitude.
  • Sponsor is not a holding company of the Securitization Company or Reconstruction Company or does not otherwise hold any controlling interest in such Securitization Company or reconstruction company
  • Such securitization company or reconstruction company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank of India.

The Reserve Bank of India may after being satisfied the conditions specified in sub-section (3) are fulfilled, grant a certificate of registration to the securitization company or the reconstruction company to commence or carry on business of securitization or asset reconstruction, subject to such conditions, which it may consider, fit to impose.

The Reserve Bank may reject the application made under sub-section (2) if it is satisfied that the conditions specified in sub-section (3) are not fulfilled:

Provided that before rejecting the application, the applicant shall be given a reasonable opportunity of being heard.

Every securitization company or reconstruction company shall obtain prior approval of the Reserve Bank of India for any substantial change in its management or change of location of its registered office or change in its name:

Provided that the decision of the Reserve Bank of India shall be final.

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