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Asset Reconstruction Companies

Asset reconstruction companies (ARCs) in India acquire non-performing assets from banks to relieve their balance sheets and help revive distressed companies. ARCs are regulated by the Reserve Bank of India and acquire non-performing loans and assets through securitization trusts. They aim to restore value and operationality of distressed assets, providing an option for entrepreneurs facing financial difficulties and benefiting the overall economy.

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110 views4 pages

Asset Reconstruction Companies

Asset reconstruction companies (ARCs) in India acquire non-performing assets from banks to relieve their balance sheets and help revive distressed companies. ARCs are regulated by the Reserve Bank of India and acquire non-performing loans and assets through securitization trusts. They aim to restore value and operationality of distressed assets, providing an option for entrepreneurs facing financial difficulties and benefiting the overall economy.

Uploaded by

Pari Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Asset Reconstruction Companies (ARCs) have been created to bring about a system for

recovering Non Performing Assets (NPAs) from the books of secured lenders and unlocking
the value of Non-Performing Assets (NPA). Reserve Bank of India (RBI) provides license for
ARCs and ARCs are empowered by the SARFAESI Act. The following is the list of asset
reconstruction companies in India licensed by RBI. Fore more information about Asset
Reconstruction Companies in India, refer to an article on Asset Reconstruction Company in
India in IndiaFiling Learning Center.

Asset Reconstruction Company (ARC) in India


In India the problem of recovery from NPAs was recognized in 1997 by Government of
India. The Narasimhan Committee Report mentioned that an 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 with a combination of policy and institutional
development, new NPAs in the future could afford to be lower. However, the huge backlog
of existing NPAs continued to hound the banking sector and this impinged severely on the
banks’ performance and any ensuing hopes of their profitability. The Report envisaged
creation of an “Asset Recovery Fund” to take the NPAs off the lender’s books at a discount.

Accordingly, Asset Reconstruction Company (Securitization Company / 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).

RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the
Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI.

ARC has been set up to provide a focused approach to Non-Perforforming Loans


resolution issue by:-

(a) Isolating Non Performing Loans (NPLs) from the Financial System (FS),
(b) Freeing the financial system to focus on their core activities and
(c) Facilitating development of market for distressed assets.
Functions of Asset Reconstruction Company (ARC)
As per RBI Notification No. DNBS.2/CGM (CSM)-2003, dated April 23, 2003, ARC performs
the following functions:-

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

How an Asset Reconstruction Company (ARC) actually


works
The ARC transfers the acquired assets to one or more trusts (set up u/s 7(1) and 7(2) of
SRFAESI Act, 2002) at the price at which the financial assets were acquired from the
originator.

Asset Reconstruction Companies have seen an increase in their client base during the
recession, with many companies experiencing financial difficulties and having distressed
assets in their possession. Banks see that many of their loans turn non-performing and
require restructuring in Toto. ARCs have the opportunity to relieve these companies, resell
their assets and make the most of them, with the trusts they turn to buying them off and
bearing the risks concomitant with them.
These ARCs will have the obligation to help companies in times of stress rejuvenate the
activities of non-performing assets. Some companies that have not been working for a while
will be enabled to continue their operations by virtue of a transaction made by these
companies. The trusts themselves issue Security Receipts to Qualified Institutional Buyers
[as defined u/s 2(u) of SRFAESI Act, 2002]. The trusteeship of such trusts shall vest with the
ARC. ARC receives a management fee from the trusts. Any upside in between acquired
price and realized price will be shared with the beneficiary of the trusts and ARC. Likewise,
any downside in between acquired price and realized price will be borne by the beneficiary
of the trusts.

Benefit to Investors
Many leading investment banks in the west perform the functions of asset management, as
there is a lot of scope for such a business. In India, there is no equivalent of the Glass-
Steagall Act, and consequently no wall of separation between commercial and investment
banking. Asset Management or Reconstruction is sometimes performed by specialized
companies setup for that end, at other times performed by other miscellaneous financial
institutions or by banks. The major or key business skill involved here is to be able to spot
the right company for acquisition and restructuring.

Usefulness of ARC to the MacroEconomy


Distressed Debt and Securitization is the asset instrument of the future. Investors with their
detailed knowledge of the market environment and internal and external conditions will be
more easily able to spot an undervalued product, acquire it at low cost, work to restoring it to
somewhere nearer to its true value and sell it off for a healthy profit. In the process, the
whole economy benefits, as a previously non performing asset is now restored to
operationality and functionality. The ARC is an intermediary in this process and justly
charges its own fee for overseeing this successfully.

Confidence Booster to Entrepreneurs


That such an option exists itself is a means of boosting entrepreneur’s confidence, and gives
other options than filing for bankruptcy or insolvency in times of stress. Entrepreneurs know
that distressed debt and assets does not mean everything is lost, but because of ARC’s and
other such financial players to turn to, this can be viewed as a temporary setback. Turning to
an ARC, one has the opportunity to gain some time if nothing else to restore the company’s
operations to profitability, or else at least to close it in a relatively debt-free manner.
Institutional buyers and professional investors will increasingly turn to this mode of capital as
a means of reactivating potential, trusts have much to gain if they can successfully revamp
the company’s operations and restore it to operational normalcy and profitability. Thus, there
exists a significant market for this sort of activity, and those who have the requisite skill and
know-how in the business of Asset Reconstruction are rewarded with substantial returns on
investment.

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