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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 23rd 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 12th August, 2022.
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.
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:
It is the aggregate of:
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 13th 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.
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, 2nd 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.
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 28th 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:
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:
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:
However, the Asset Reconstruction Company can participate in the auction of financial assets, provide the auctions are done in:
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.
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 7th June 2019, also has to sign the Inter-creditor agreement and shall also adhere to all its terms.
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:
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.
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|
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.
All the Asset Reconstruction companies must record all their transactions relating to securitisation and reconstruction of financial assets with the central registry.
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.
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 12th 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.
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:
It shall also be made sure that the outsourcing activities do not diminish the obligations that ARCs have towards their customers and banks.
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.
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:
The fair practice code must be reviewed periodically by the board.
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