RBI Registration

Key Updates:RBI Master circular on Asset Reconstruction Company

The RBI is the apex body that regulates the financial market in India. To protect the investors’ interest and use the advantage for the country’s benefit, the RBI regularly issues guidelines and circulars. The current guidelines are in reference to the notification on “The Asset Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003″, dated 23^rd April 2003. The current guidelines aim to prevent the activities of the Securitisation Company and Reconstructions company from conducting in a manner that is detrimental to the interests of the investor. Various changes occurred in the economy’s financial environment that necessitated changes in the earlier guidelines on the Asset Reconstruction Company. Hence, the present article will enlighten the key updates in the RBI Master Circular on Asset Reconstruction Company dated 12^th August, 2022.

New Definitions

1. Break-up Value:

The value is determined by reducing the intangible assets and revaluation reserves from the equity capital and reserves and then dividing the result by the number of equity shares held by the investee company.

2. Earning value:

The average profit determines the value of an equity share after tax by reducing the preference dividend and adjusting for extraordinary and non-recurring items for the immediately preceding 3 years, and then dividing the result by the number of equity shares held by the investee company. It shall be capitalised at the rate of:

• Predominantly Manufacturing Company- 8%
• Predominantly trading company-10%
• Any other company including, NBFC-12%

3. Owned Fund

It is the aggregate of:

• Paid-up equity capital
• Paid-up Preference Capital, till the limit it is convertible to equity shares
• Free reserves, Not including Revaluation Reserves
• Credit balance of P&L account, deductible by:
• Debit balance of P&L account
• Miscellaneous Expenditure only includes the value that is not written off or adjusted.
• Book value of Intangible assets
• Under and Short provision against NPA and diminution of investments.
• Any over-recognition of income
• Other deductions as dictated by the auditor in the report

Financial Statement Requirements under Ins AS (Indian Accounting Standards)

To promote better facilitation, suspension and regulation over the financial conduct of the Asset reconstruction company, the RBI has issued a circular on “Implementation of Indian Accounting Standards” dated 13^th March 2020. In keeping with the circular on accounting standards, the current guideline has made it mandatory for all the Asset Reconstruction Companies covered under Rule 4 of the companies (Indian accounting standards) rules 2015 to comply with the circular for preparing their financial statements from 2019 onwards.

Submission of Documents

The current guidelines have expressly provided the place for submitting the application form for registration with the bank. It states that the ARC who wants to register from the bank shall have to submit their application along with the supporting documents at “Chief General Manger-in-charge, Department of Regulation, Central Office, Reserve Bank of India, 2^nd Floor, Main office building, Shahid Bhagat Singh Marg, Fort, Mumbai-400001.”

Moreover, the entity not registered with the bank can perform the activity of securitisation and asset reconstruction outside the act’s purview, provided that they have prior approval or authorisation.

Limit on Net owned Fund of Asset Reconstruction Company

The updated guidelines had made it mandatory for the Asset Reconstruction Company to have a minimum of Rs 100 crore as their Net owned fund on an ongoing basis from 28^th April 2017 onwards. Henceforth, the asset construction company cannot carry out the activity of securitisation and reconstruction on without having a minimum Net Owned Fund of Rs 100 crore.

The Net owned fund shall be the value reduced from Owned Fund. The owned fund shall be to the extent of 10% exceeding the:

• Investments of the Asset Reconstruction Company in shares of-
• Subsidiaries
• Same group of companies
• Any other Asset Reconstruction Companies
• Book value of bonds, outstanding loans and advances, bonds deposited with-
• ARC’s Subsidiaries
• Same group of Companies

Permission before acquiring Assets from other Asset Reconstruction Company

The updated guidelines have provided an opportunity to the ARCs to acquire financial assets from other Asset Reconstruction Companies, provided that they fulfil the following conditions:

1. Cash-based transactions
2. Discovery of the price shall not be prejudicial to the interest of the SR (security Receipt) holders
3. Selling ARC shall utilise the proceeds for the redemption of underlying Security Receipt holders
4. Redemption along with the total realisation period shall not exceed 8 years from the date of acquisition

Acquisition of Financial Assets from Sponsors and Lenders

The updated guidelines have provided that the asset reconstruction company can acquire financial assets from sponsors and lenders. Further, the financial assets shall not be acquired on a bilateral basis from the following irrespective of any consideration:

1. Bank or Financial Institution- who is the sponsor of ARC
2. Bank or Financial Institution- who is either a lender or a subscriber to the fund of ARC
3. Any entity which belongs to ARC

However, the Asset Reconstruction Company can participate in the auction of financial assets, provide the auctions are done in:

1. Transparent Manner
2. Arm’s Length Basis
3. Market forces determined the prices

Proviso to the takeover of management

The updated guidelines have added a provision to the rule of “Change in or takeover of the management of the Business of the borrower”. It states that an asset reconstruction company cannot restore the management of a borrower’s business if they had converted part of their debt into the shares of a borrower company and had subsequently acquired control over the affairs of the Business Company.

Inter-creditor Agreement

The updated guidelines have added a new provision under the rule “Rescheduling of Debts”, whereby the Asset Reconstruction Company, along with the rule “Prudential Framework for Resolution of Stressed Assets” dated 7^th June 2019, also has to sign the Inter-creditor agreement and shall also adhere to all its terms.

Exemption of limit for shareholding

The updated guidelines have done away with the shareholding limit of 26% that is acquired after the conversion of debt into equity of Borrowers Company by an Asset Reconstruction Company, provided that they fulfil the following conditions:

1. Comply with NOF requirement of not less than Rs 100 crore
2. Half of the board of Directors are Independent Directors.
3. Board of directors has approved the conversion of debt to equity, and powers have been delegated to the committee comprising a majority of Independent directors for taking approvals.
4. Equity shares acquired are valued periodically, and the frequency of it shall be at least once a month.

Extended Resolution plan with the Secured Lenders

The previous guidelines stated that the period of realisation of financial assets should not exceed 8 years. However, the updated guidelines have provided that the ARC may come up with a resolution with other secured lenders in case the resolution plan extends the maximum period of 8 years, provided that the Asset Reconstruction company is one of the lenders.

Submission of Quarterly Statement

All the Asset Reconstruction Company must submit ARC return according to the instructions enumerated in the “Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016; the details of reporting is summarised as follows:

Name of Return	Periodicity	Start Date	Reporting Period	End Date
ARC	Quarterly	31st March	15 days	15th April
ARC	Quarterly	30th June	15 days	15the July
ARC	Quarterly	30th September	15 days	15th October
ARC	Quarterly	31st December	15 days	15th January

Submission of Audited Balance Sheet

The updated guidelines have provided that the audited balance sheet shall be furnished every year within one month from the Annual General Meeting (AGM) to the “Regional office of Department of Supervision of the Bank” under whose jurisdiction the ARC is registered.

Transactions Filing under Central registry.

All the Asset Reconstruction companies must record all their transactions relating to securitisation and reconstruction of financial assets with the central registry.

Submitting finical Information to IU (Information Utilities)

It is mandatory for all the registered Asset Reconstruction Company to submit any financial information about an asset to which any security inters has been created to the Information Utility (IU) in the prescribed manner.

Application of Fit and proper criteria for Sponsors and Investors

The term “Fit and Proper Criteria” is governed by the “Fit and Proper Criteria for Sponsors – Asset Reconstruction Companies (Reserve Bank) Directions, 2018”. The directions have provided a detailed determinant that helps the RBI determine whether an “Asset Reconstruction Company” sponsor is “Fit and Proper”. The Asset Reconstruction Company must gather all the information and submit it to the RBI so that there will be an expeditious approval process. In abreast with the directions, the updated guidelines have provided that these directions shall also apply to all the existing and proposed sponsors.

Further, all the registered Asset Reconstruction Company must adhere to the instructions on “Investment in NBFCs from FATF non-compliant jurisdictions”dated 12^th February 2021. The instructions are summarily described as:

1. Investor in the existing NBFCs before classification of the jurisdiction as FATF non- Compliant: Continue with the investments or bring additional investments.

2. New Investors form Non-compliant FATF jurisdictions, whether in existing NBFCs or companies seeking ROC (Registration of Certificate): Shall not be allowed to acquire (whether directly or indirectly) significant interest in the investee.

Fair Practices Code

The updated guidelines have introduced a new provision, the “Fair Practice Code”, intending to provide transparency and fairness at all levels of dealing. All the registered Asset Reconstruction Company are advised to frame a fair practice code which the board shall approve of directors.The board shall have a duty to revise the code periodically and implement it at all times. It shall be published in the public domain for the purpose of information of all the stakeholders. The updated guidelines have provided the minimum requirements that need to be fulfilled by the ARCs:

1. Follow transparent and Non-discriminatory practices in the process of acquiring assets.
2. Maintain Arm’s Length distance transparency
3. Transparency in the sale of secured assets, including,
4. Public notice for participation in an auction and the auction shall aim at large participation of buyers
5. Terms and conditions shall be determined in consultation with the investors
6. In dealing with the buyers, the ARC shall adhere to Section 29A of IBC (Insolvency and Bankruptcy Code), 2016^[1].
7. Subject to any right of lien or legitimate claim over any other borrower claim by the Asset Reconstruction Company, ARCs shall release all the securities on the repayment of dues and the payment of an outstanding loan. If ARC exercises the right of lien, in that case, the borrower shall be served with a notice consisting of details about the remaining claims and conditions under which the ARCs are entitled to retain those securities.
8. Board approved policy in the matters of the management fee, incentives and expenses if claimed from trusts. It shall be transparent, reasonable and proportionate to the financial transactions.
9. The ARC can outsource its activities provided thatthey have an outsourcing policy that is approved by the board and includes:
10. Criteria for Selection of Activities
11. Criteria for Selection of Service Providers
12. Delegation of Authority depending on risks
13. System to monitor the activities
14. Review of the operations

It shall also be made sure that the outsourcing activities do not diminish the obligations that ARCs have towards their customers and banks.

• The ARC shall not misbehave with the debtor in the process of recovery of debt. They shall ensure that their staff are adequately trained and behave appropriately. In addition to the general code of conduct, the updated guidelines provide for some model codes of conduct:
• The ARC shall frame a model of conduct for the recovery agents and shall abide by that. The ARCs are also being made responsible for the acts of Recovery agents.
• Recovery Agents shall maintain confidentiality with the customers at all levels.
• The Asset Reconstruction Company shall ensure they are adequately trained with the activities of calling hours, secrecy at all levels of information etc.
• The ARCs shall have the duty to ensure that their agents shall not intimidate or harass any borrower, either verbally or physically, including:
• Public Humiliation
• Intrusion in the privacy of the borrowers, their family members and friends
• Inappropriate messages through mobile or social media
• Threat calls and anonymous calls.
• Calling the borrowers before 8:00 AM and after 7:00 PM

Grievance Redressal Mechanism

The updated guidelines have made it mandatory for the Asset Reconstruction Company to establish a Grievance Redressal Mechanism. The name and contact number of the officers shall be dictated to the borrower. The mechanism shall aim at resolving every dispute prominently and effectively. They are also responsible for complaints concerning outsourced agencies and recovery agents.

Confidentiality

The updated guidelines have made it mandatory for the Asset reconstruction Company to store the information and maintain confidentiality at all levels, including the company in different groups. However, the updated guidelines have provided an exception to the rule, which states that ARC can share the information on account of:

1. Law
2. Disclosure due to duty toward public
3. Permission form borrower

Periodical Review

The fair practice code must be reviewed periodically by the board.

Conclusion

The updated guidelines have brought new changes in the conduct of Asset Reconstruction Company. To protect the borrower’s interests and provide easy stimulation of securities in the market without any roadblocks. The updated guidelines have made it mandatory to submit a quarterly statement in accordance with the rules. This not only brings scrutiny over the activities of the Asset Reconstruction Company but also ensures that they work keeping in view the current economic opportunities. Henceforth, the fundamental changes brought under the updated guidelines will increase the responsibility of the Asset Reconstruction Company.

Read our Article: Function of Asset Reconstruction Companies & RBI Regulation for ARC