Short Note on Asset Reconstruction Company explaining Background of Assets Reconstruction Company, Meaning of Assets Reconstruction Company, Meaning of Assets Reconstruction, Objects of Assets Reconstruction Company, Registration of Assets Reconstruction Company and Functions of ARC in India.
Banks are financial institutions that are engaged principally in the business of money lending and money borrowing. The customer base of the banking sector is very large and there is also a substantial risk involved in lending money. While the bank always has the option of taking legal action on the defaulting borrowers, it is not always economically feasible to do so. The bank sometimes decides to just cut its losses, clean up its balance sheet and keep the business moving towards better avenues. This is where an asset reconstruction company comes in.
Asset reconstruction companies are in the business of buying bad loans from banks. For instance, if a bank lends money to a person or company, they expect to receive periodic payments of principal and interest. However, when they do not receive those periodic payments for an extended period of time, these loans are classified as nonperforming assets. If these NPA’s are allowed to stay on the bank’s balance sheet, they erode investor confidence in the bank.
Hence, banks sell these bad loans to specialists called asset reconstruction companies. The business of these companies is to buy bad loans from banks at a steep discount. These companies then take special measures to recover the money owed. If they are able to recover the money, they make a profit, if not they lose the money.
Asset Reconstruction Company means a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitization***, or both.
Thus ARCs are engaged in the business of asset reconstruction or securitisation or both. All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The required funds to purchase such such debts can be raised from Qualified Buyers.
*** Securitisation means acquisition of financial assets by an ARC from Banks/ FIs by raising of funds from Qualified Buyers (QBs) by issue of security receipts (SRs) representing undivided interest in such financial assets or otherwise.
*** Qualified Buyer (QB) means Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation, Trustee or ARC or any asset management company making investment on behalf of mutual fund, Foreign Institutional investor registered under the Securities and Exchange Board Of India Act, 1992 or regulations made thereunder, any category of non-institutional investors as may be specified by Reserve Bank of India or any other body corporate as may be specified by the Securities and Exchange Board of India.
An asset reconstruction means acquisition by an ARC of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realization of such financial assistance.
Further it is the acquisition of any right or interest of any bank or financial institution in loans, advances granted debentures, bonds, guarantees or any other credit facility extended by banks for the purpose of its realization. Such loans, advances, bonds, guarantees and other credit facilities are together known by a term – ‘financial assistance’.
Asset Reconstruction Companies acquire and aggregate the Non-Performing Assets from various lenders in order to quicken the process of corporate restructuring. The major objective is to acquire and rapidly liquidate Non-Performing Assets, clean books of accounts by reducing Non-Performing Assets, less to deals with Non Performing clients and special legislative powers to fewer Asset Reconstruction Companies rather than to each bank.
Rapid growth of bad debts/ non-performing assets was the chronic hurdle for healthy growth of Indian economy. Asset Reconstruction Companies were established as specialised entities to facilitate securitisation and asset reconstruction of non-performing asset thereby earliest resolution and bringing the liquidity in the system.
(1) No asset reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without—
(a) obtaining a certificate of registration granted under this section; and
(b) having net owned fund of not less than two crore rupees or such other higher amount as the Reserve Bank, may, by notification, specify;
Provided that the Reserve Bank may, by notification, specify different amounts of owned fund for different class or classes of asset reconstruction companies.
(2) Every asset reconstruction company shall make an application for registration to the Reserve Bank.
In India, ARCs function under the supervision and control of Reserve Bank of India. ARCs are in the business of securitisation and reconstruction of financial assets. They are strictly as per SARFAESI Act and guidelines issued by Reserve Bank of India. ARCs acquire the bad debts/NPA accounts from Banks and Financial Institutions and try to resolve expeditiously by availing remedies under existing laws of India.