An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. In other words, ARCs are in the business of buying bad loans from banks.
An Asset Reconstruction Company is a specified economic organization which purchases the Assets which are not performing assets or corrupt assets from banks and fiscal/financial organizations.
It includes the business of purchasing the bad loans from the banks and cleans up the bad and non-recoverable financials of the banks after that sold out these to the Asset reconstruction company. To avoid the time to be wasted and efforts the non-performing assets to be sold to the Asset reconstruction company at a mutually decided value. The main purpose is to achieve or to make profit from the non-profitable assets which are not able to provide efficient revenue to fulfill the unpaid liabilities.
The main and foremost drawback of suffering from the possible damage/loss of revenue to resolve from the crises when company suffers from insolvency. If the asset reconstruction company manages the same in a proper way then there is a chance of profit if they can release the company from fiscal/financial stress and sell off the assets in better way. For their services the administrative cost or commission is charged from the insolvent company/individual.
The securitization and reconstruction of financial assets and enforcement of securities interest (SARFESI) Act, states that the ARCs have the responsibility to perform as the mediator between the promoter and the trust where the trust has the role to take over the assets or loan at the agreed value which is subsequently paid to the promoter for the attainment/acquisition.
What is Asset Reconstruction Company?
Asset Reconstruction Company or ARC are financial entities registered under the Companies Act 2013. The purpose of these entities is scrutinization of NPAs and they need to be registered with RBI which is the regulatory body for such entities. Section 3 of the SARFAESI Act describes the ARC as specialized financial institutions for buying bad loans or NPAs. These institutions ensure enhanced liquidity in the market and a cleaner balance sheet for their banks.
After buying the bad loans from financial institutions or banks, ARC becomes the owner of such assets and get the responsibility of the lender in the transaction. Now, they can move with the recovery process of bad loans in place of the original lender. The applicable rules and regulations of these entities are as per the SARFAESI Act.
A company willing to obtain Asset Reconstruction Company Registration certificate must apply to RBI within six months of its commencement under the SARFAESI Act. The business of asset reconstruction or scrutinization cannot be carried without the registration certificate of RBI.
Eligibility Criteria to Get Asset Reconstruction Company Certificate
- A company must fulfill the following conditions to get registered as an ARC.
- The company must not have incurred any losses in the financial years prior to it.
- To realise the acquirement of financial assets, the company must have enough infrastructure and adequate arrangements.
- The company must be able to give periodic returns on the investment made in the company by financial buyers or other investors.
- The company directors should be experienced in financial management, reconstruction management, and scrutinization of assets.
- The directors must possess a clean image in public and should not have any convictions related to any case of moral turpitude.
- The sponsor or promoter of ARC must meet all the criteria of RBI.
- The company must comply with the regulatory norms of RBI.
- The company must have a net owned fund of 100 crores or more as specified by RBI.
Documents Required For Asset Reconstruction Company Registration
- Copies of AOA and MOA of the company.
- Certified copy of the incorporation certificate of the company.
- A copy of the resolution by the company’s board stating it has not accepted any deposit.
- Details of promoters or administrators and all the related documents of their educational and professional qualifications.
- Detailed information on the director’s profile, previous experience, etc.
- A copy of the audit certificate from a verified auditor.
- The audited balance sheet of the previous three years with auditor’s and director’s report.
- A statement expressing details of the owned fund.
- Information related to party transactions.
Acquisition and Valuation rules for ARC
- The ARCs shall acquire NPAs at a ‘fair price’ following the “Arm length principle”.
- The SARFAESI Act allows ARCs to acquire financial assets (NPAs) by way of a bank agreement. In exchange for NPAs transferred to ARCs, banks and FIs may receive bonds/debentures. A portion of the value may be paid as Security Receipts (SRs).
Funding Resources for ARC
- The ARC could issue bonds or debentures related to funds to meet its funding requirements. Issuing security receipts is one of the primary sources of funding for ARC.
- According to the SARFAESI Act, security receipts are the securities issued by a qualified reconstructional company to any certified Qualified Institutional Buyer (QIB) regarding any particular scheme. The receipt gives a title, right, or interest to the QIB in the financial assets acquired by the ARC. The security receipts have impaired assets for back up.
- The Qualified Buyer or QIB means a financial entity which can be a financial institution, bank, insurance firm, state-owned industrial development corporation, state-owned financial corporation, trustee, or any other asset reconstruction firm certified under SARFAESI Act.
- An ARC is not allowed to raise funds through investors who are not a designated qualified buyer.
Asset Restructuring and Resolution Strategies for ARCs
- Take over or restructure the management of the borrower’s company.
- Facilitate settlements or sale and lease of the borrower’s company.
- Debt rescheduling and restructuring.
- Strengthening the security interests of the company.
- Take possession/lease/sale of the sponsored asset of the borrower such as land or building etc.
Procedure to Get Registration Certificate of Asset Reconstruction Company
- Compile all the necessary documents and prepare the application for ARC registration as specified by RBI.
- Before applying for RBI registration get the company registered with RoC.
- Apply for registration to the RBI. Before granting the registration certificate to the company, RBI may verify the records, books, and assets of the Reconstrutuoion company to determine its eligibility for the registration certificate.
- If all the conditions are satisfied, the RBI will release a certificate of registration to the new Asset Reconstruction Company
FAQs
What is an Asset Reconstruction Company (ARC)?
An ARC is a specialized financial institution in India that acquires non-performing assets (NPAs) from banks and financial institutions to resolve and recover them.
What are the eligibility criteria for registering as an ARC?
To be eligible for registration as an ARC in India, a company must meet the eligibility criteria specified by the RBI, which typically includes minimum net owned funds, management expertise, and compliance with regulatory requirements.
Who regulates Asset Reconstruction Companies in India?
ARCs are regulated by the Reserve Bank of India (RBI) under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).
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