Reserve Bank of India
Date : Apr 24, 2024
The Reserve Bank of India has today issued the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024. The Directions have come into effect immediately. The Master Direction consolidates the existing regulatory guidelines issued to ARCs vide Master Circular on ARCs and Master Direction – Fit and Proper Criteria for Sponsors – Asset Reconstruction Companies (Reserve Bank) Directions, 2018.
(Yogesh Dayal)
Chief General Manager
Press Release: 2024-2025/169
Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024
RESERVE BANK OF INDIA
RBI/DOR/2024-25/116
DoR.FIN.REC.16/26.03.001/2024-25
April 24, 2024
All Asset Reconstruction Companies (ARCs)
Dear Sir/ Madam,
Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Direc-tions, 2024
ARCs play a critical role in the resolution of stressed financial assets of banks and financial institutions, thereby enhancing the overall health of the financial system. To ensure prudent and efficient functioning of ARCs and to protect the interest of investors, Reserve Bank of In-dia hereby issues the Master Direction – Reserve Bank of India (Asset Reconstruction compa-nies) Directions, 2024 (the Directions), hereinafter specified. These Directions have been is-sued in exercise of the powers conferred by Sections 3, 9, 10, 12 and 12A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
Yours faithfully,
(J. P. Sharma)
Chief General Manager
Page Contents
Section I: Introduction
1. Short title and commencement
1.1 These Directions shall be called Master Direction – Reserve Bank of India (As-set Reconstruction Companies) Directions, 2024.
1.2 These Directions shall come into effect on the day they are placed on the website of the Reserve Bank.
2. Applicability of the Directions: The provisions of these Directions shall apply to every asset reconstruction company (ARC) registered with the Reserve Bank under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. Definitions
3.1 In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:
(i) “Act” means the Securitisation and Reconstruction of Fi-nancial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
(ii) “Breakup value” means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company.
(iii) “Change in management” means effecting change by the borrower at the instance of ARC in the person who has responsibility for the whole or substan-tially whole of the management of the business of the borrower and/ or other relevant person-nel.
(iv) “Date of acquisition” means the date on which the owner-ship of financial assets is acquired by ARC either on its own books or directly in the books of the trust.
(v) “Deposit” means deposit as defined in the Companies (Ac-ceptance of Deposits) Rules 2014 framed under Section 73 of the Companies Act, 2013.
(vi) “Earning value” means the value of an equity share com-puted by taking the average of profits after tax as reduced by the preference dividend and ad-justed for extraordinary and non-recurring items, for the immediately preceding 3 years and further divided by the number of equity shares of the investee company and capitalised at the following rate:
a) in case of predominantly manufacturing company, 8%;
b) in case of predominantly trading company, 10%; and
c) in case of any other company, including non-banking finan-cial company, 12%. Note: If an investee company is a loss-making company, the earning value shall be taken as zero.
(vii) “Fair value” means the mean of the earning value and the breakup value.
(viii) “Net owned fund” means the amount arrived at by reduc-ing from owned fund, the amounts representing
a) investments of the ARC in shares of –
i. its subsidiaries;
ii. companies in the same group;
iii. all other ARCs; and
b) the book value of debentures, bonds, outstanding loans and advances made to, and deposits with –
i. subsidiaries of the ARC; and
ii. companies in the same group,
to the extent such amount exceeds 10% of the owned fund.
(ix) “Non-performing asset (NPA)” in the books of ARCs means an asset in respect of which:
a) Interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date of acquisition or the due date as per contract be-tween the borrower and the originator, whichever is later;
b) interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date fixed for receipt thereof in the plan formulated for realisation of the assets referred to in paragraph 10 herein;
c) interest or principal (or instalment thereof) is overdue on expiry of the planning period, where no plan is formulated for realisation of the assets referred to in paragraph 10 herein; or
d) any other receivable, if it is overdue for a period of 180 days or more in the books of the ARC.
Provided that the Board of Directors of an ARC may, on default by the borrower, classify an asset as an NPA even earlier than the period mentioned above (for facilitating enforcement as provided for in Section 13 of the Act).
(x) “Overdue” means an amount which remains unpaid beyond the due date.
(xi) “Owned fund” means the aggregate of
a) paid up equity capital;
b) paid up preference capital, to the extent it is compulsorily convertible into equity capital;
c) free reserves (excluding revaluation reserve);
d) credit balance in profit and loss account; as reduced by-
e) the debit balance on the profit and loss account;
f) miscellaneous expenditure (to the extent not written off or adjusted);
g) book value of intangible assets;
h) under/ short provision against NPA/ diminution in value of investments;
i) over recognition of income, if any; and
j) other deductions required on account of the items qualified by the auditors in their report on the financial statements.
(xii) “Planning period” means a period not exceeding six months allowed for formulating a plan for realisation of financial assets acquired for the purpose of reconstruction.
(xiii) “Standard asset” means an asset, which is not an NPA.
(xiv) “Takeover of management” means taking over of the re-sponsibility for the management of the business of the borrower with or without effecting change in management personnel of the borrower by the ARC.
(xv) “Trust” means trust as defined in Section 3 of the Indian Trusts Act, 1882.
3.2 Words or expressions used but not defined herein and defined in the Act, shall have the same meaning as assigned to them in the Act. Any other words or expressions not defined in that Act shall have the same meaning as assigned to them in the Companies Act, 2013.
4. Interpretations : For the purpose of giving effect to the provisions of these Directions, the Reserve Bank may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Direc-tions given by the Reserve Bank shall be final and binding on all the parties concerned. Further, these provisions shall be in addition to and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.
5. Exemptions: Reserve Bank may, if it considers necessary for avoiding any hardship to the ARCs or for any other just and sufficient reason exempt all ARCs or a particular ARC, from all or any of the provisions of these Directions either generally or for any specified period, subject to such conditions as the Reserve Bank may impose.
6. Registration
6.1 Before commencement of the business of securitisation or asset reconstruction, an ARC shall apply for registration and obtain a certificate of registration (CoR) from the Reserve Bank as provided under Section 3 of the Act.
6.2 The ARC seeking registration shall submit its application in the application form hosted on the Reserve Bank’s website, duly filled in with all the relevant annexures/ supporting docu-ments, to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, Shahid Bhagat Singh Marg, Fort, Mumbai – 400001.
6.3 An ARC, which has obtained a CoR from the Reserve Bank, can undertake both securitisa-tion and asset reconstruction activities.
6.4 An ARC shall commence business within six months from the date of grant of CoR by the Reserve Bank. Reserve Bank may grant extension up to twelve months from the date of grant of CoR on receipt of the application from the ARC.
6.5 Provisions of Section 45-IA, 45-IB and 45-IC of RBI Act, 1934 shall not apply to an ARC reg-istered with the Reserve Bank under Section 3 of the Act.
6.6 Any entity not registered with the Reserve Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act subject to requisite authorisation/ approval1.
7. Net owned fund
7.1 To commence the business of securitisation or asset reconstruction, an ARC is required to have a minimum net owned fund (NOF) of ₹300 crore and thereafter, on an ongoing basis.
7.2 ARCs existing as on October 11, 2022 have been provided the following glide path to achieve the minimum required NOF of ₹300 crore:
| Minimum required NOF on October 11, 2022 |
by March 31, 2024 | by March 31, 2026 |
| ₹100 crore | ₹200 crore | ₹300 crore |
In case of non-compliance at any of the above stages, the non-complying ARC shall be subject to supervisory action, including prohibition on undertaking incremental business till it reaches the required minimum NOF applicable at that time.
8. Activities of ARCs
8.1 An ARC shall commence/ undertake only securitisation and asset reconstruc-tion activities and functions provided under Section 10 of the Act.
8.2 In terms of the provision of Section 10(2) of the Act, ARCs have been permitted to under-take those activities as Resolution Applicants under Insolvency and Bankruptcy Code, 2016 (IBC) which are not specifically allowed under the Act. This permission shall be subject to the following conditions:
(i) The ARC has a minimum NOF of ₹1,000 crore.
(ii) The ARC shall have a Board-approved policy regarding tak-ing up the role of Resolution Applicant which may, inter alia, include the scope of activities, internal limit for sectoral exposures, etc.
(iii) A committee comprising of a majority of independent di-rectors shall be constituted to take decisions on the proposals of submission of resolution plan under IBC.
(iv) The ARC shall explore the possibility of preparing a panel of sector-specific management firms/ individuals having expertise in running firms/ companies which may be considered for managing the firms/ companies, if needed.
(v) In respect of a specific corporate insolvency resolution pro-cess (CIRP), the ARCs shall not retain any significant influence or control over the corporate debtor after five years from the date of approval of the resolution plan by the Adjudicating Au-thority under
IBC. In case of non-compliance with this condition, the ARCs shall not be allowed to submit any fresh resolution plans under IBC either as a Resolution Applicant or a Resolution Co-Applicant.
8.3 An ARC may, as a sponsor and for the purpose of establishing a joint venture, invest in the equity share capital of another ARC.
8.4 An ARC may deploy its funds for undertaking restructuring of acquired loan account with the sole purpose of realizing its dues.
8.5 An ARC may deploy any surplus funds available with it, in terms of a Board-approved poli-cy, in –
(i) Government securities and deposits with scheduled commercial banks, Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) or such other entity as may be specified by the Reserve Bank from time to time.
(ii) Short-term instruments viz., money market mutual funds, certificates of deposit and corpo-rate bonds/ commercial papers which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible credit rating agency (CRA), subject to a cap of 10% of the NOF of the ARC on maximum investment in such short-term instruments.
8.6 No ARC shall invest in land or building. However, this restriction shall not apply to –
(i) investment by the ARC in land and building for its own use up to 10% of its owned funds; and
(ii) land and building acquired by the ARC in satisfaction of claims in ordinary course of its business of reconstruction of assets in accordance with the provisions of the Act. Any land and/ or building acquired by the ARC, in the ordinary course of its business of reconstruction of assets while enforcing its security interest, shall be disposed of within a period of five years from the date of such acquisition or such extended period as may be permitted by the Reserve Bank in the interest of realisation of the dues of the ARC.
8.7 An ARC shall not raise monies by way of deposit.
Section III: Guidelines on Asset Reconstruction and Securitisation
Asset Reconstruction
9. Acquisition of financial assets
9.1 Every ARC shall frame a Board-approved ‘financial asset acquisition policy’ within ninety days of grant of the CoR which shall provide that transactions take place in a transparent manner and at a fair price in a well-informed market and the transactions are executed on arm’s length basis by exercise of due diligence. It shall clearly lay down the policies and guide-lines covering, inter alia, the following:
(i) norms and procedure for acquisition either on its own books or directly in the books of the trust;
(ii) types and the desirable profile of the assets;
(iii) valuation procedure ensuring that the assets acquired have realisable value which is ca-pable of being reasonably estimated and independently valued; and
(iv) in the case of financial assets acquired for asset reconstruction, the broad parameters for formulation of plans for their realisation.
9.2 The Board may delegate powers to a committee comprising any director and/ or any func-tionaries of the ARC for taking decisions on proposals for acquisition of financial assets.
9.3 Deviation from the policy should be made only with the approval of the Board.
9.4 Before bidding for the stressed assets, ARCs may seek adequate time, of not less than two weeks, from the auctioning banks to conduct a meaningful due diligence of the account by verifying the underlying assets.
9.5 The share of financial assets to be acquired from the bank/ financial institution should be appropriately and objectively worked out keeping in view the provision in the Act requiring consent of secured creditors holding not less than 60% of the amount outstanding to a bor-rower for the purpose of enforcement of security interest.
9.6 For easy and faster realisability, all the financial assets due from a single debtor to various banks/ financial institutions may be considered for acquisition. Similarly, financial assets hav-ing linkages to the same collateral may be considered for acquisition to ensure relatively fast-er and easy realisation.
9.7 Both fund and non-fund based financial assets may be included in the list of assets for ac-quisition. Assets classified as special mentioned accounts (SMAs) in the books of the origina-tor may also be acquired.
9.8 Acquisition of funded assets should not include takeover of outstanding commitments, if any, of any bank/ financial institution to lend further. Terms of acquisition of security interest in non-fund transactions, should provide for the relative commitments to continue with bank/ financial institution, till demand for funding arises.
9.9 As far as possible, the valuation process should be uniform for assets of same profile. It should be ensured that the valuation of the financial assets is done in a scientific and objec-tive manner. Valuation may be done either internally or by engaging an independent agency, depending upon the value of the assets. Ideally, valuation may be entrusted to the committee authorised to approve acquisition of assets, which may carry out the task in line with financial asset acquisition policy mentioned at paragraph 9.1.
9.10 An ARC can sell financial asset to another ARC subject to the following conditions:
(i) The transaction is settled on cash basis;
(ii) Price discovery for such transaction shall not be prejudicial to the interest of SR holders;
(iii) The selling ARC shall utilize the proceeds so received for the redemption of underlying security receipts (SRs); and
(iv) The date of redemption of underlying SRs and total period of realisation shall not extend beyond eight years from the date of acquisition of the financial asset by the first ARC.
9.11 ARCs shall not acquire financial assets from the following on a bilateral basis, whatever may be the consideration:
(i) a bank/ financial institution which is the sponsor of the ARC;
(ii) a bank/ financial institution which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its operations;
(iii) an entity in the group to which the ARC belongs.
However, they may participate in the auctions of the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and the prices are determined by the market forces.
10. Plan for realisation of financial assets
10.1 Every ARC may, within the planning period, formulate a plan for realisation of as-sets which may provide for one or more of the following measures:
(i) Change in or takeover of the management of the business of the borrower
(ii) Sale or lease of the whole or part of business of borrow-er
(iii) Rescheduling of debts payable by the borrower
(iv) Enforcement of security interest in accordance with the provisions of the Act
(v) Settlement of dues payable by the borrower
(vi) Conversion of any portion of debt into equity of a borrower company
10.2 The ARC shall formulate the policy for realisation of financial assets under which the pe-riod for realisation shall not exceed five years from the date of acquisition of the financial as-set concerned.
10.3 The Board of the ARC may increase the period for realisation of financial assets so that the total period for realisation shall not exceed eight years from the date of acquisition of the financial asset concerned.
10.4 In case, the ARC is one of the lenders in an account, where a resolution plan has been fi-nalised and the same extends beyond the maximum resolution period allowed for ARCs as per paragraph 10.3 above, the ARC may accept a resolution period co-terminus with other se-cured lenders.
10.5 The Board of the ARC shall specify the steps that shall be taken by the ARC to realise the financial assets within the time frame referred to in the paragraphs 10.2 and 10.3 above as the case may be.
10.6 The qualified buyers (QBs) shall be entitled to invoke the provisions of Section 7(3) of the Act only at the end of such extended period if the period for realisation is extended under par-agraph 10.3 above.
Measures of Asset Reconstruction
11. Change in or takeover of the management of the business of the borrow-er
11.1 An ARC may resort to change in or takeover of the management of the business of the borrower for the purpose of realisation of its dues from the borrower subject to the provisions of these guidelines. The objective of these guidelines is to ensure fairness, transparency, non-discrimination and non-arbitrariness in the action of ARCs and to build in a system of checks and balances while effecting change in or takeover of the management of the business of the borrower by the ARCs under Section 9(1)(a) of the Act. The ARCs shall follow these instructions while exercising the powers conferred on them under Section 9(1)(a) of the Act. The ARCs re-sorting to takeover of management of the business of the borrower shall do so after complying with the manner of takeover of the management in accordance with the provisions of Section 15 of the Act. On realisation of its dues in full, the ARC shall restore the management of the business to the borrower as provided in Section 15(4) of the Act. However, if any ARC has con-verted part of its debt into shares of a borrower company and thereby acquired controlling in-terest in the borrower company, such ARC shall not be liable to restore the management of the business to such borrower.
11.2 Grounds for effecting change in or takeover of management: An ARC shall be entitled to effect change in management or takeover of the management of business of the borrower on any of the following grounds:
(i) the borrower defaults in repayment of the amount due under the relevant loan agreement/s in following circumstances:
(a) non-payment of dues despite adequate cash flow and avail-ability of other resources, or
(b) routing of transactions through banks which are not lenders/ consortium members so as to avoid payment of dues, or
(c) siphoning off funds to the detriment of the defaulting unit, or misrepresentation/ falsification of records pertaining to the transactions with the ARC.
For the purpose of this paragraph, the default by the borrower must be deliberate and calcu-lated as detailed above. ARC shall keep in view the track record of the borrower and the deci-sion regarding such defaults by the borrower should not be based on isolated transactions/ incidents which are not material.
(ii) the ARC is satisfied that the management of the business of the borrower is acting in a manner adversely affecting the interest of the creditors (including ARC) or is failing to take necessary action to avoid any event which would adversely affect the interest of the creditors;
(iii) the ARC is satisfied that the management of the business of the borrower is not competent to run the business resulting in losses/ non-repayment of dues to the ARC or the key manage-rial personnel of the business of the borrower have not been appointed for more than one year from the date of such vacancy which would adversely affect the financial health of the busi-ness of the borrower or the interests of the ARC as a secured creditor;
(iv) the borrower has without the prior approval of the secured creditors (including ARCs), sold, disposed of, charged, encumbered or alienated 10% or more (in aggregate) of its assets se-cured to the ARC;
(v) there are reasonable grounds to believe that the borrower would be unable to pay its debts as per terms of repayment accepted by the borrower;
(vi) the borrower has entered into any arrangement or compromise with creditors without the consent of the ARC which adversely affects the interest of the ARC or the borrower has com-mitted any act of insolvency;
(vii) the borrower discontinues or threatens to discontinue any of its businesses constituting 10% or more of its turnover;
(viii) all or a significant part of the assets of the borrower required for or essential for its busi-ness or operations are damaged due to the actions of the borrower;
(ix) the general nature or scope of the business, operations, management, control or owner-ship of the business of the borrower are altered to an extent, which in the opinion of the ARC, materially affects the ability of the borrower to repay the loan;
(x) the ARC is satisfied that serious dispute/s have arisen among the promoters or directors or partners of the business of the borrower, which could materially affect the ability of the bor-rower to repay the loan;
(xi) failure of the borrower to acquire the assets for which the loan has been availed and utili-zation of the funds borrowed for other than stated purposes or disposal of the financed assets and misuse or misappropriation of the proceeds;
(xii) fraudulent transactions by the borrower in respect of the assets secured to the creditor/s.
11.3 Eligibility conditions to exercise power for change in or takeover of manage-ment: In the circumstances set forth in paragraph 11.2 above,
(i) an ARC may effect change in or takeover of the management of the business of the borrow-er, where the amount due to it from the borrower is not less than 25% of the total assets owned by the borrower; and
(ii) where the borrower is financed by more than one secured creditor (including ARC), secured creditors (including ARCs) holding not less than 60% of the outstanding SRs agree to such ac-tion.
Explanation I: ‘Total assets’ means total assets as disclosed in its latest au-dited balance sheet immediately preceding the date of taking action.
11.4 Policy regarding change in or takeover of management
(i) The ARC shall have a Board-approved policy regarding change in or takeover of the man-agement of the business of the borrower and the borrowers shall be made aware of such poli-cy of the ARC.
(ii) This policy shall, inter alia, include the following aspects:
(a) The ARC shall carry out due diligence exercise and record the details of the exercise, in-cluding the findings on the circumstances which had led to default in repayment of the dues by the borrower and why the decision to change in or takeover of the management of the busi-ness of the borrower has become necessary.
(b) The change in or takeover of the management of the business of the borrower should be done only after the proposal is examined by an Independent Advisory Committee (IAC) to be appointed by the ARC consisting of professionals having technical/ finance/ legal background who, after assessment of the financial position of the borrower, time frame available for re-covery of the debt from the borrower, future prospects of the business of the borrower and other relevant aspects, shall recommend to the ARC that it may resort to change in or takeo-ver of the management of the business of the borrower and that such action would be neces-sary for effective running of the business leading to recovery of its dues.
(c) The Board of Directors including at least two independent directors of the ARC should de-liberate on the recommendations of the IAC and consider the various options available for the recovery of dues before deciding whether under the existing circumstances, the change in or takeover of the management of the business of the borrower is necessary and the decision shall be specifically included in the minutes.
(d) The ARC shall identify suitable personnel/ agencies, who can take over the management of the business of the borrower by formulating a plan for operating and managing the business of the borrower effectively so that the dues of the ARC may be realized from the borrower within the time frame.
(e) This plan shall also include the process for restoration of the management of the business to the borrower in accordance with paragraph 11.1 above, borrower’s rights and liabilities at the time of change in or takeover of management by the ARC and at the time of restoration of management back to the borrower, rights and liabilities of the new management taking over management of the business of the borrower at the behest of ARC. It should be clarified to the new management by the ARC that the scope of their role is limited to recovery of dues of the ARC by managing the affairs of the business of the borrower in a prudent manner.
Explanation II: To ensure independence of members of IAC, such members should not be connected with the affairs of the ARC in any manner and should not receive any pecuniary benefit from the ARC except for the services rendered for acting as members of the IAC.
11.5 Procedure for change in or takeover of management
(i) The ARC shall give a notice of sixty days to the borrower indicating its intention to effect change in or takeover of the management of the business of the borrower and calling for ob-jections, if any.
(ii) The objections, if any, submitted by the borrower shall be initially considered by the IAC and thereafter the objections along with the recommendations of the IAC shall be submitted to the Board of the ARC. The Board shall pass a reasoned order within a period of thirty days from the date of expiry of the notice period, indicating the decision of the ARC regarding the change in or takeover of the management of the business of the borrower which shall be communicated to the borrower.
12. Sale or lease of a part or whole of the business of the borrower: No ARC shall take the measures specified in Section 9(1)(b) of the Act, until the Reserve Bank issues necessary guidelines in this behalf.
13. Rescheduling of debts payable by the borrower
13.1 The ARC shall frame a Board-approved policy, laying down the broad parameters for re-scheduling of debts due from borrowers.
13.2 All proposals should be supported by an acceptable business plan, projected earnings and cash flows of the borrower.
13.3 The proposals should not materially affect the asset liability management of the ARC or the commitments given to investors.
13.4 The Board may delegate powers to a committee comprising any director and/ or any func-tionaries of the ARC for taking decisions on proposals for rescheduling of debts.
13.5 Deviation from the policy should be made only with the approval of the Board.
13.6 In cases, where ARCs have exposure to a borrower in respect of which a resolution plan is under implementation in terms of the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019, as amended from time to time, ARCs shall also sign the inter-creditor agreement (ICA) and adhere to all its provisions.
14. Enforcement of security interest
14.1 The ARCs are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors (including ARCs) holding not less than 60% of the amount out-standing to a borrower.
14.2 While taking recourse to the sale of secured assets in terms of Section 13(4) of the Act, the ARC may itself acquire the secured assets, either for its own use or for resale, only if the sale is conducted through a public auction.
15. Settlement of dues payable by the borrower
15.1 Settlement of dues with the borrower shall be done only after the proposal is examined by the IAC mentioned at paragraph 11.4(ii)(b) above. The IAC, after assessing the financial po-sition of the borrower, the time frame available for recovery of the dues from the borrower, projected earnings as well as cash flows of the borrower and other relevant aspects, shall give its recommendations to the ARC regarding settlement of dues with the borrower.
15.2 The Board of Directors including at least two independent directors shall deliberate on the recommendations of IAC and consider the various options available for recovery of dues before deciding whether the option of settlement of dues with the borrower is the best option available under the existing circumstances and the decision, along with detailed rationale, shall be specifically recorded in the minutes of the Board meeting.
15.3 Settlement with the borrower should be done only after all possible steps to recover the dues have been taken and there are no further prospects of recovering the debt.
15.4 The net present value (NPV) of the settlement amount should generally be not less than the realizable value of securities. If there is a significant variation between the valuation of securities recorded at the time of acquisition of financial assets and the realisable value as-sessed at the time of entering into a settlement, reasons thereof shall be duly recorded.
15.5 The settlement amount should preferably be paid in lump sum. In cases, where the bor-rower is unable to pay the entire amount in lump sum, IAC shall make specific recommenda-tions about minimum upfront lump sum payment and maximum repayment period.
15.6 ARCs shall frame a Board-approved policy based on the above-mentioned framework.
16. Conversion of any portion of debt into equity of a borrower entity
16.1 The ARC shall frame a Board-approved policy, laying down the broad parameters for con-version of debt into equity of the borrower entity.
16.2 In cases of financial assets, which have turnaround potential after restructuring but nor-mally with huge default and unsustainable level of debt, it shall be necessary to arrive at sus-tainable level of debt, on the basis of evaluation of detailed business plan with projected level of operations, which can be serviced by the entity. A part of residual unsustainable debt may have to be converted into equity for an optimal debt equity structure. While ARCs are permit-ted to have significant influence or have a say in the decisions surrounding the borrower enti-ty’s turnaround through conversion of debt into equity, they should not be seen to be running the entities. The shareholding of the ARC shall not exceed 26% of the post converted equity of the entity under reconstruction.
16.3 However, ARCs satisfying the conditions mentioned below are exempted from the limit of shareholding at 26% of post converted equity of the borrower entity subject to compliance with the provisions of the Act, guidelines/ instructions issued by the Reserve Bank from time to time as applicable to ARCs as well as Foreign Exchange Management Act,1999, Reserve Bank of India Act,1934, Companies Act, 2013, Securities and Exchange Board of India (SEBI) Regulations and other relevant statutes. The extent of shareholding post conversion of debt into equity shall be in accordance with permissible foreign direct investment limit for that specific sector:
(i) The ARC shall be in compliance with the prescribed NOF re-quirement on an ongoing basis;
(ii) At least half of the Board of Directors of the ARC comprises of independent directors;
(iii) The ARC shall delegate powers to a committee comprising majority of independent directors for taking decisions on proposals of debt-to-equity conver-sion; and
(iv) The equity shares acquired under the scheme shall be peri-odically valued and marked to market. The frequency of valuation shall be at least once in a month.
16.4 The ARC shall explore the possibility of preparing a panel of sector-specific management entities/ individuals having expertise in running entities which could be considered for manag-ing the entities.
17. Securitisation
17.1 Special features of Security Receipts (SRs)
(i) SRs cannot be strictly characterized as debt instruments since they combine the features of both equity and debt. However, these are recognized as securities under Securities Contracts (Regulation) Act, 1956.
(ii) The cash flows from the underlying assets cannot be predicted in terms of value and inter-vals.
(iii) These instruments, when rated, would generally be below investment grade. These instru-ments are privately placed.
17.2 Issuance of SRs
(i) An ARC shall give effect to the provisions of Sections 7(1) and 7(2) of the Act through one or more trusts set up exclusively for the purpose. The trusteeship of such trusts shall vest with the ARC.
(ii) The ARC proposing to issue SRs shall, prior to such an issue, formulate a Board-approved policy providing for issue of SRs under each scheme formulated by the trust.
(iii) The ARC shall transfer the assets to the said trusts at the price at which those assets were acquired from the originator if the assets are not acquired directly on the books of the trust.
(iv) The trusts shall issue SRs only to QBs and such SRs shall be transferable/ assignable only in favour of other QBs.
(v) The trusts shall hold and administer the financial assets for the benefit of the QBs.
17.3 Investment in SRs issued by the trusts floated by the ARC: ARCs shall, by transferring funds, invest in the SRs at a minimum of either 15% of the transferors’ invest-ment in the SRs or 2.5% of the total SRs issued, whichever is higher, of each class of SRs is-sued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme.
17.4 Rating/ Grading of SRs
(i) Every ARC shall mandatorily obtain initial rating/ grading of SRs from a SEBI registered CRA within a period of six months from the date of acquisition of assets and declare the Net Asset Value (NAV) of the SRs issued by it. Thereafter, ARCs shall get the rating/ grading of SRs re-viewed from the CRA as on June 30, and December 31 every year and declare the NAV of SRs forthwith, to enable the QBs to value their investments in SRs.
(ii) The rating shall be assigned on a specifically developed rating scale called ‘recovery rating (RR) scale’. Each rating category in the recovery scale shall have an associate range of recov-ery, expressed in percentage terms, which can be used for arriving at the NAV of SRs. Symbols should be assigned by the CRAs to the associated range of recovery, which would inter se not deviate by a specified percentage points, say (+/ -) 10%. The rating would be indicative. The rating/ grading should be based on ‘recovery risk’ as against ‘default’ which is the basis for rat-ing assignments in normal assets, i.e., how much more can be recovered instead of timely payment. Rating should reflect present value of the anticipated recoverability of the future cash flows.
(iii) The recovery rating shall be assessed after factoring in any other relevant obligation and not on the original debt obligation. The other key factors that should be factored in while as-signing recovery rating are extent of debt acquired, composition of lenders, collaterals availa-ble, security and seniority of debt, individual lender vis-à-vis institutional lender, estimated cash flows, uncertainty in realising expected cash flows in initial period, management, busi-ness risk, financial risk, etc. The recovery rating shall also reflect changes like change in reso-lution strategy of the ARC from time to time.
(iv) The recovery rating should comprise of rating of not only the SRs of the scheme as a whole but wherever feasible a desegregation of each component in the scheme, which means that the underlying assets of each entity in the scheme forming the basket should also be rated.
(v) ARCs shall require the CRAs to disclose the assumptions and rationale behind the rating and shall disclose these to SR holders.
(vi) ARCs shall retain a CRA for at least six rating cycles (of half year each). If a CRA is changed mid-way through these six rating cycles, the ARC shall disclose the reason for such change.
17.5 Methodology for valuation of SRs for declaration of NAV: Each rating category in the recovery scale shall have an associate range of recovery, expressed in per-centage terms, which can be used for computing the NAV of SRs. The NAV should be restricted within the recovery range associated with the rating assigned to the SRs. The ARC based on its recovery experience should choose a particular percentage within the recovery range indicat-ed by the CRA. The recovery rating percentage so picked by the ARC multiplied by the face value of the SR shall give the NAV. The ARC should provide the rationale for selection of the particular percentage of recovery rating.
Illustration: If the range of recovery is between 81% – 90%, ARC may pick up 87% based on its judgement. If the face value of SR is ₹10, the face value will be multiplied by the recovery percentage, i.e., 87%, to arrive at the NAV as ₹8.70.
17.6 Restructuring support finance: An ARC can utilize a part of funds raised under a scheme from the QBs for restructuring of financial assets acquired under the relative scheme subject to the following conditions:
(i) ARCs with acquired assets in excess of ₹500 crore can float the fund under a scheme which envisages the utilization of part of funds raised from QBs in terms of Section 7(2) of the Act, for restructuring of financial assets acquired out of such funds.
(ii) The extent of funds that shall be utilized for reconstruction purpose should not be more than 25% of the funds raised under the scheme in terms of Section 7(2) of the Act. The funds raised to be utilized for reconstruction (within the ceiling of 25%) should be disclosed upfront in the scheme. Further, the funds utilized for reconstruction purposes should be separately ac-counted for.
(iii) Every ARC shall frame a Board-approved policy laying down the broad parameters for utili-zation of funds raised from QBs under such a scheme.
17.7 Disclosures: Every ARC intending to issue SRs shall make disclosures mentioned in Annex I.
Section IV: Prudential regulations
18. Capital adequacy ratio: Every ARC shall maintain, on an ongoing basis, a capital adequacy ratio of minimum 15% of its total risk weighted assets. Capital for the pur-pose of calculation of capital adequacy ratio will have the same meaning as NOF. The risk-weighted assets shall be calculated as the weighted aggregate of on-balance sheet and off-balance sheet items as detailed hereunder:
| On-balance sheet items | Risk weight(%) | |
| (i) | Cash and deposits with scheduled commercial banks/ SIDBI/ NABARD | 0 |
| (ii) | Investments in Government securities | 0 |
| (iii) | Shares in other ARCs | 0 |
| (iv) | All other assets | 100 |
| Off-balance sheet items | ||
| (v) | All contingent liabilities | 50 |
Note: Assets which have been deducted from owned fund to arrive at NOF shall have risk weight of 0%.
19. Asset classification
19.1 Every ARC shall, after taking into account the degree of well-defined credit weaknesses and extent of dependence on collateral security for realisation, classify the assets held in its own books into following categories, namely:
(i) Standard assets; and
(ii) NPAs
19.2 The NPAs shall be classified further as-
(i) ‘Sub-standard asset’ for a period not exceeding 12 months from the date it was classified as NPA;
(ii) ‘Doubtful asset’ if the asset remains a sub-standard asset for a period exceeding 12 months;
(iii) ‘Loss asset’ if-
a) the asset is non-performing for a period exceeding 36 months;
b) the asset is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non-availability of security;
c) the asset has been identified as a loss asset by the ARC or its internal or external auditor; or
d) the financial asset including SRs is not realized within the total time frame specified in the plan for realisation formulated by the ARC under paragraph 10.2 or 10.3 and the ARC or the trust concerned continues to hold those assets.
19.3 Assets acquired by the ARC for the purpose of asset reconstruction may be treated as standard assets during the planning period, if any.
19.4 Where the terms of agreement regarding interest and/ or principal relating to a standard asset have been renegotiated or rescheduled by an ARC (otherwise than during planning peri-od), the asset concerned shall be classified as sub-standard asset with effect from the date of renegotiation/ rescheduling or continue to remain as a sub-standard or doubtful asset as the case be. The asset may be upgraded as a standard asset only after satisfactory performance for a period of 12 months as per the renegotiated/ rescheduled terms.
20. Provisioning requirements: Every ARC shall make provisions against NPAs, as under:
| Asset category | Provisioning required | |
| Sub-standard assets | A general provision of 10% of the outstanding amount | |
| Doubtful assets | (i) | 100% provision to the extent the asset is not covered by the estimated real-isable value of security |
| (ii) | In addition to item (i) above, 50% of the remaining
outstanding amount |
|
| Loss assets | The entire asset shall be written off | |
| (If, for any reason, the asset is retained in the books, 100% thereof shall be provided for). | ||
Section V: Governance and conduct
21. Board and management
21.1 Fit and proper criteria for directors and CEO
(i) In terms of the provisions of the Act, prior approval of the Reserve Bank is required for ap-pointment/ re-appointment of a Director or Managing Director (MD)/ Chief Executive Officer (CEO). ARCs shall undertake due diligence to determine the suitability of the person for the post based upon track record, integrity and other ‘fit and proper’ criteria. For this purpose, ARCs shall obtain necessary information and declaration from the appointed/ existing direc-tors and MD/ CEO in the format enclosed in Annex II. The Nomination and Remuneration Committee shall scrutinise the declarations for this purpose. 2ARCs are advised to submit ap-plications, complete in all respect, along with duly signed Annex III and the documents/ infor-mation mentioned in Annex IV to Department of Regulation3 of the Reserve Bank at least ninety days before the vacancy arises/ the proposed date of appointment or reappointment. Reserve Bank may call for additional information/ documents for processing the application, if required.
(ii) The declaration in Annex II with updated information shall be obtained from the directors/ MD/ CEO on an annual basis, as on March 31 of each year. Any change in position with refer-ence to items in paragraphs 3 and 4 of Annex II shall be communicated to the Department of Regulation of the Reserve Bank for its consideration.
(iii) The ARC shall require the directors to execute a covenant in the format enclosed at Annex V, at the time of their joining the ARC, binding them to discharge their responsibilities to the best of their abilities, individually and collectively. This deed shall be preserved by the ARC and should be made available to the Reserve Bank as and when called for.
21.2 Age of the MD! CEO and Whole-time Directors (WTDs): No person shall continue as MD/ CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, ARCs’ Boards are free to prescribe a lower retirement age.
21.3 Tenure of MD! CEO and WTDs: Tenure of MD/ CEO or WTD shall not be for a period of more than five years at a time and the individual shall be eligible for reappointment. However, the post of the MD/ CEO or WTD shall not be held by the same in-cumbent for more than fifteen years continuously. Thereafter, the individual shall be eligible for re-appointment as MD/ CEO or WTD in the same ARC, if considered necessary and desira-ble by the Board, after a minimum gap of three years, subject to meeting other conditions. During this three-years cooling period, the individual shall not be appointed or associated with the ARC in any capacity, either directly or indirectly. The ARCs shall put in place appropriate measures to ensure succession planning.
21.4 Chair and meetings of the Board of directors: The Chair of the Board shall be an independent director. In the absence of the Chair of the Board, meetings of the Board shall be chaired by an independent director. The quorum for the Board meetings shall be one-third of the total strength of the Board or three directors, whichever is higher. Further, at least half of the directors attending the meetings of the Board shall be independent directors.
21.5 Performance review: The performance of MD/ CEO and WTD shall be reviewed by the Board annually.
21.6 Committees of the Board: In order to strengthen the oversight by the Board, all ARCs shall constitute the following committees of the Board:
(i) Audit Committee: ARCs shall constitute an Audit Committee of the Board, which shall comprise of non-executive directors only. The Chair of the Board shall not be a member of the Audit Committee. The Audit Committee shall meet at least once in a quar-ter with a quorum of three members. The meetings of the Audit Committee shall be chaired by an independent director who shall not chair any other committee of the Board. Each of the members of the Audit Committee should have the ability to understand the financial state-ments as well as the notes/ reports attached thereto and at least one member should have requisite professional expertise/ qualification in financial accounting or financial manage-ment. The Audit Committee shall have the same powers, functions and duties as laid down in Section 177 of the Companies Act, 2013. In addition, the Audit Committee shall periodically review and assess the effectiveness of internal control systems, especially with respect to the asset acquisition procedures and asset reconstruction measures followed by the ARC and matters related thereto. The Audit Committee shall also ensure that accounting of manage-ment fee/ incentives/ expenses is in compliance with the applicable regulations.
(ii) Nomination and Remuneration Committee: ARCs shall constitute a Nomination and Remuneration Committee of the Board which shall have the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013. In addition, the Committee shall ensure ‘fit and proper’ status of proposed/ existing directors and sponsors.
22. Fit and Proper criteria for sponsors/ investors
22.1 Determinants of fit and proper status of sponsors of ARCs: In determin-ing whether the sponsor is fit and proper, Reserve Bank shall take into account all relevant fac-tors, as appropriate, including but not limited to, the following:
(i) The sponsor’s integrity, reputation, track record and compliance with applicable laws and regulations;
(ii) The sponsor’s track record and reputation for operating business in a manner that is con-sistent with the standards of good corporate governance, integrity, in addition to the similar assessment of individuals and other entities associated with the sponsor;
(iii) The business record and experience of the sponsor;
(iv) Sources and stability of funds for acquisition and the ability to access financial markets; and
(v) Shareholding agreements and their impact on control and management of the ARC.
22.2 Information to be furnished by the sponsors along with relevant supporting doc-uments
(i) Information by a natural person: Self-declaration as per Form I (Part A, B and C) as provided in Annex VI.
(ii) Information by a legal person: Self-declaration as per Form I (Part A, B, C and D) as provided in Annex VI.
(iii) The ARC should furnish additional information as per Form I (Part E) as provided in Annex VI.
22.3 Continuous monitoring arrangements for due diligence in case of existing spon-sors
(i) For the purpose of ensuring that all its sponsors are fit and proper, every ARC shall
(a) obtain within one month of the close of the financial year a declaration from all its sponsors in Form I as provided in Annex VI
(b) furnish a certificate in Form III as provided in Annex VI, by the end of May every year, to the Reserve Bank on the changes in the status of the spon-sor.
(ii) Every ARC shall examine any information on the sponsors which may come to its notice that may render such persons not fit and proper to hold such shares and shall immediately furnish a report on the same to the Reserve Bank.
22.4 Prior approval for any substantial change in management by way of transfer of shares
(i) Notwithstanding anything to the contrary contained in the terms and conditions stipulated in the CoR issued under Section 3 of the Act, ARCs shall obtain prior approval of the Reserve Bank only for transfers that result in substantial change in management namely –
(a) any transfer or fresh issuance of shares resulting in a new sponsor
(b) any transfer or fresh issuance of shares resulting in cessa-tion of an existing sponsor
(c) an aggregate transfer of 10% or more of the total paid up share capital of the ARC by a sponsor during the period of five years commencing from the date of the CoR
Explanation III: For the purposes of this clause, a transfer shall be deemed to be a transfer of more than 10% of the total paid up share capital of the ARC if the aggregate of all the transfer of shares made by the sponsor prior to that transfer, and including that transfer, is 10% or more of the total paid up share capital of the ARC.
(ii) The ARCs shall make an application along with Form II as provided in Annex VI and infor-mation mentioned at paragraph 22.2 above, for Reserve Bank’s prior approval for change in shareholding of the ARCs.
(iii) The Reserve Bank shall, inter alia, seek feedback on the persons from other domestic as well as foreign regulators and enforcement and investigative agencies as deemed appropriate to make an assessment on whether a sponsor is fit and proper.
22.5 Investment in ARCs from FATF non-compliant jurisdictions4
(i) New investors from or through non-compliant Financial Action Task Force (FATF) jurisdic-tions5, whether in existing ARCs or in companies seeking CoR, are not allowed to directly or indirectly acquire ‘significant influence’ in the investee, as defined in the applicable accounting standards. In other words, fresh investors (directly or indirectly) from such juris-dictions in aggregate should be less than the threshold of 20% of the voting power (including potential6 voting power) of the ARC.
(ii) Existing investors in ARCs as on February 12, 2021 holding their investments prior to the classification of the source or intermediate jurisdiction/s as FATF non-compliant may contin-ue with the investments or bring in additional investments as per extant regulations so as to support continuity of business in India.
23. Fair Practices Code (FPC)
23.1 In order to achieve the highest standards of transparency and fairness in dealing with stakeholders, ARCs are advised to put in place a Board-approved FPC. The FPC must be fol-lowed in letter & spirit and its implementation needs to be monitored by the Board. The following paragraphs provide the minimum regulatory expectation while each ARC’s Board is free to enhance its scope and coverage:
(i) The ARC shall follow transparent and non-discriminatory practices in acquisition of assets. It shall maintain arm’s length distance in the pursuit of transparency.
(ii) In order to enhance transparency in the process of sale of secured assets,
a) invitation for participation in auction shall be publicly solic-ited; the process should enable participation of as many prospective buyers as possible;
b) terms and conditions of such sale may be decided in wider consultation with investors in the SRs as per the Act; and
c) ARCs shall ensure compliance with Section 29A7 of the IBC in dealing with the prospective buyers.
(iii) ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan, subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given no-tice about the same with full particulars about the remaining claims and the conditions under which the ARCs are entitled to retain the securities till the relevant claim is settled/ paid.
(iv) ARCs shall put in place a Board-approved policy on the management fee, expenses and incentives, if any, claimed from trusts under their management. The Board-approved policy should be transparent and ensure that management fee is reasonable and proportionate to the financial transactions.
(v) Any management fee/ incentives charged towards the asset reconstruction or securitisa-tion activity shall come only from the recovery effected from the underlying financial assets. The Board-approved policy shall indicate the quantitative cap/ limit on the management fee/ incentives under various scenarios, any deviation from which shall require approval of the Board.
(vi) ARCs intending to outsource any of their activity shall put in place a comprehensive Board-approved outsourcing policy which incorporates, inter alia, criteria for selection of such activ-ities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARCs shall ensure that outsourcing arrangements neither diminish their ability to fulfil their obliga-tions to customers and the Reserve Bank nor impede effective supervision by the Reserve Bank. The information about outsourced agency, if owned/ controlled by a director of the ARC, shall be disclosed by the ARC under the disclosures provided in paragraph 27 of these Direc-tions.
(vii) In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. ARCs shall ensure that the staff are adequately trained to deal with customers in an appropriate manner.
a) ARCs shall put in place a Board-approved code of conduct for recovery agents and obtain their undertaking to abide by that code. ARCs, as principals, are responsible for the actions of their recovery agents.
b) It is essential that the recovery agents observe strict cus-tomer confidentiality.
c) ARCs shall ensure that recovery agents are properly trained to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling, privacy of customer information, etc. They should ensure that recov-ery agents do not induce adoption of uncivilized, unlawful and questionable behaviour or re-covery process.
d) 8ARCs shall ensure that they or their agents do not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude upon the priva-cy of the debtors’ family members, referees and friends, sending inappropriate messages ei-ther on mobile or through social media, making threatening and/ or anonymous calls, persis-tently9 calling the borrower and/ or calling the borrower before 8:00 a.m. and after 7:00 p.m. for recovery of overdue loans, making false and misleading representations, etc.
(viii) ARCs should constitute a grievance redressal machinery within the organisation. The name and contact number of designated grievance redressal officer of the ARC should be mentioned in the communication with the borrowers. The designated officer should ensure that genuine grievances are redressed promptly. ARCs’ grievance redressal machinery shall also deal with the issues relating to services provided by the outsourced agency and recovery agents, if any.
(iii) ARCs shall keep the information, they come to acquire in course of their business, strictly confidential and shall not disclose the same to anyone including other companies in the group except when (a) required by law; (b) there is duty towards public to reveal information; or (c) there is borrower’s permission.
(iv) Compliance with FPC shall be subject to periodic review by the Board. 23.2 The FPC shall be placed in public domain for information of all stakeholders.
23.3 ARCs shall follow the guidelines issued vide Circular No. DoR.MCS.REC.38/ 01.01.001/2023-24 dated September 13, 2023 on ‘Responsible Lending Conduct –
Release of Movable/ Immovable Property Documents on Repayment/ Settlement of Personal Loans’.
Section VI: Accounting and disclosures
24. Guidelines related to accounting
24.1 Every ARC shall prepare its balance sheet and profit and loss account as on 31st March every year. ARCs are advised to classify all the liabilities due within one year as ‘current liabili-ties’ and assets maturing within one year along with cash and bank balances as ‘current as-sets’ in their balance sheet.
24.2 The accounting policies adopted in preparation and presentation of the financial state-ments shall be in conformity with the applicable prudential norms prescribed by the Reserve Bank.
24.3 Where any of the accounting policies is not in conformity with these guidelines/ instruc-tions, the particulars of departures shall be disclosed together with the reasons therefor and the financial impact on account thereof. Where such an effect is not ascertainable, the fact shall be so disclosed citing the reasons therefor.
24.4 An inappropriate treatment of an item in balance sheet or profit and loss account cannot be deemed to have been rectified either by disclosure of accounting policies used or by dis-closure in notes to balance sheet and profit and loss account.
24.5 ARCs covered by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their fi-nancial statements. In order to promote a high quality and consistent implementation as well as facilitate comparison and better supervision, Reserve Bank has issued regulatory guidance on Ind AS vide circular DOR (NBFC).CC.PD.No.109/ 22.10.106/2019-20 dated March 13, 2020 which, along with subsequent instructions on the subject, is applicable on such ARCs for preparation of their financial statements from financial year 2019-20 onwards.
25. Investments
25.1 Considering the nature of investment in SRs where underlying cash flows are dependent on realisation from NPAs, it can be classified as available for sale. Hence, investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored.
25.2 All other investments should be valued at lower of cost or realisable value. Where market rates are available, the market value would be presumed to be the realisable value and in cas-es, where market rates are not available, the realisable value should be the fair value. Howev-er, investments in other ARCs shall be treated as long term investments and valued in accord-ance with the applicable accounting standards.
26. Income recognition
26.1 Yield on SRs should be recognised only after the full redemption of the entire principal amount of SRs.
26.2 Upside income should be recognized only after full redemption of SRs.
26.3 Management fees should be calculated and charged as a percentage of the NAV calcu-lated at the lower end of the range of the recovery rating specified by the CRA, provided that the same is not more than the acquisition value of the underlying asset. However, manage-ment fees are to be reckoned as a percentage of the actual outstanding value of SRs, before the availability of NAV of SRs.
26.4 Management fees may be recognized on accrual basis. Management fees recognized dur-ing the planning period must be realized within 180 days from the date of expiry of the plan-ning period. Management fees recognized after the planning period should be realized within 180 days from the date of recognition. Unrealised management fees should be reversed thereafter. Further, any unrealized management fees shall be reversed if, before the pre-scribed time for realisation, NAV of the SRs fall below 50% of face value.
26.5 10ARCs preparing their financial statements as per Ind AS, shall reduce the following amounts from their NOF while calculating the capital adequacy ratio and the amount availa-ble for payment of dividend:
(i) Management fee recognised during the planning period that remains unrealised beyond 180 days from the date of expiry of the planning period.
(ii) Management fee recognised after the expiry of the planning period that remains unrealised beyond 180 days of such recognition.
(iii) Any unrealised management fee, notwithstanding the peri-od for which it has remained unrealised, where the NAV of the SRs has fallen below 50% of the face value.
The amount reduced from NOF and amount available for payment of dividend shall be net of any specific expected credit loss allowances held on unrealised management fee referred to in sub-paragraphs (i), (ii) and (iii) above and the tax implications thereon, if any. The Audit Committee of the Board shall review the extent of unrealised management fee and satisfy it-self on the recoverability of the same while finalising the financial statements. It shall be en-sured that the management fee is computed strictly in accordance with extant regulations.
26.6 The income recognition on all other items shall be based on recognised accounting prin-ciples.
26.7 Interest and any other charges in respect of all the NPAs shall be recognised only when they are actually realised. Any unrealised income recognised by an ARC before the asset be-came non-performing and remaining unrealised, shall be derecognised.
26.8 Expenses incurred at pre-acquisition stage for performing due diligence etc. for acquiring financial assets from banks/ financial institutions should be expensed immediately by recog-nizing the same in the statement of profit and loss for the period in which such expenses are incurred. Expenses incurred at post-acquisition stage for formation of the trusts, stamp duty, registration, etc. and which are recoverable from the trusts, should be reversed, if these ex-penses are not realised within 180 days from the planning period or downgrading of SRs, i.e., NAV is less than 50% of the face value of SRs, whichever is earlier.
27. Disclosures in the balance sheet: Every ARC shall, in addition to the re-quirements of Schedule III of the Companies Act, 2013, prepare the following schedules and annex them to its balance sheet :
(i) The names and addresses of the banks/ financial institutions from whom financial assets were acquired and the value at which such assets were acquired from each such bank/ financial institution
(ii) Segregation of various financial assets industry-wise and sponsor-wise (to be indicated as a percentage of the total assets)
(iii) Details of related parties as per the accounting standards and the amounts due to and from them
(iv) A statement clearly charting therein the migration of finan-cial assets from standard to non-performing
(v) Value of financial assets acquired during the financial year either on its own books or in the books of the trust
(vi) Value of financial assets realized during the financial year
(vii) Value of financial assets outstanding for realisation as at the end of the financial year
(ix) Value of SRs redeemed partially and the SRs redeemed fully during the financial year
(viii) Value of SRs pending for redemption as at the end of the financial year
(ix) Value of SRs which could not be redeemed as a result of non-realisation of the financial asset as per the policy formulated by the ARC under paragraph 10.2 or 10.3
(x) Value of land and/ or building acquired in ordinary course of business of reconstruction of assets (year wise)
(xi) The basis of valuation of assets if the acquisition value of the assets is more than the book value of the transferors
(x) The details of the assets disposed of (either by write off or by realisation) during the year at a discount of more than 20% of valuation as on the previous year end and the reasons therefor
(xiv) The details of the assets where the value of the SRs has declined more than 20% below the acquisition value
(xv) 11Information about outsourced agency, if owned/ con-trolled by a director of the ARC
(xvi) 12Information about assets acquired under IBC including the type and value of assets acquired, the sector-wise distribution based on business of the corporate debtor
(xvii) Implementation status of the resolution plans approved by the Adjudicating Authority on a quarterly basis
(xviii) 13Information on the ageing of the unrealised manage-ment fee recognised in their books in the format specified below as part of the Notes to Ac-counts in the annual financial statements (applicable only to ARCs preparing their financial statements as per Ind AS):
| Sr. No. | Parameters | As at the end of current year |
As at the end of previous year |
| A. | Outstanding amount of unrealised management fee | ||
| Out of the above, amount outstanding for: | |||
| B. | (a) Amounts where the net asset value of the security receipts has fallen be-low 50% of the face value | ||
| C. | (b) Other amounts unrealised for:
(i) More than 180 days but up to 1 year (ii) More than 1 year but up to 3 years (iii) More than 3 years |
||
| D. | Allowances held for unrealised management fee (on B and C) | ||
| E. | Net unrealised management fee (B+C-D) |
28. Submission of returns: ARCs shall follow the instructions on submission of returns contained in Master Direction – Reserve Bank of India (Filing of Supervisory Returns) Directions – 2024 as amended from time to time.
29. Submission of audited balance sheet: Every ARC shall furnish a copy of its audited balance sheet along with the Directors’ Report/ Auditors’ Report every year within one month from the date of Annual General Body Meeting, in which the audited accounts are adopted, to the Regional Office of the Department of Supervision of the Reserve Bank under whose jurisdiction it is registered.
30. Reporting of cases involving change in or takeover of the management of the business of the borrower: The ARC shall report all cases, where it has taken action to cause change in or takeover of the management of the business of the borrower for realisation of its dues from the borrower, to the Department of Supervision of the Reserve Bank.
31. Display of information – secured assets possessed under the SARFAESI Act, 200214: ARCs shall display information in respect of the borrowers whose secured assets have been taken into possession by them under the Act. ARCs shall upload this information on their website in the format given below:
Information on secured assets possessed under the SARFAESI Act, 2002
Sl. No |
Branch name |
State |
Borrower name |
Guarantor
|
Registered
|
Registered address ofthe guarantor (wherever applicable) |
Outstanding
|
Asset classification |
Date of asset classification |
Details of
|
Name of the title holder of the security possessed |
This list shall be updated on monthly basis.
Section VII: Miscellaneous instructions
32. Internal audit: ARCs shall put in place an effective internal control sys-tem providing for periodical checks and review of the asset acquisition procedures and asset reconstruction measures followed by them and matters related thereto.
33. Guidelines regarding Credit Information Companies
33.1 Every ARC shall become a member of at least one credit information company (CIC) which has obtained certificate of registration from the Reserve Bank in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and shall provide them accurate da-ta/ history of the borrowers periodically.
33.2 ARCs should submit the list of wilful defaulters as at end of March, June, September and December every year to the CIC of which it is a member. Every ARC shall place on its website the list of suit-filed accounts of wilful defaulters. For the purpose of this paragraph, the ex-pression ‘wilful defaulter’ shall have the same meaning as is assigned to that expression in the guidelines issued to the banks.
33.3 ARCs shall follow the guidelines issued vide following circulars:
(i) Circular No. DoR.FIN.REC.39/20.16.056/2023-24 dated September 20, 2023 on ‘Data Quali-ty Index for Commercial and Microfinance Segments by Credit Information Companies’
(ii) Circular No. DoR.FIN.REC.48/20.16.003/2023-24 dated October 26, 2023 on ‘Framework for compensation to customers for delayed updation/ rectification of credit information’
(iii) Circular No. DoR.FIN.REC.49/20.16.003/2023-24 dated October 26, 2023 on ‘Strengthen-ing of customer service rendered by Credit Information Companies and Credit Institutions’
34. Filing of transactions with the Central Registry set up under the Act: ARCs shall file and register the records of all transactions related to securitisation, recon-struction of financial assets and creation of security interest, if any, with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (Central Registry).
35. Submission of financial information to Information Utilities: Instructions contained in the Circular DBR.No.Leg.BC.98/09.08.019/2017-18 dated December 19, 2017 are applicable to the ARCs.
36. Know Your Customer (KYC): ARCs shall follow the Know Your Customer (KYC) Direction, 2016, as amended from time to time.
37. Reporting to Indian Banks’ Association (IBA): ARCs shall report to IBA the details of chartered accountants, advocates and valuers (who have committed serious irregu-larities in the course of rendering their professional services) for including in the IBA database of third-party entities involved in fraud. However, ARCs shall have to ensure that they follow meticulously the procedural guidelines issued by IBA (Circular No. RB-II/Fr./Gen/3/1331 dated August 27, 2009) and also give the parties a fair opportunity to explain their position and justify their action before reporting to IBA. If no reply/ satisfactory clarification is received from them within one month, ARCs shall report their details to IBA. ARCs should consider this aspect be-fore assigning any work to such parties in future.
38. Penal consequences for non-compliance: Implementation of these Di-rections shall be reviewed under the supervisory process and any non-compliance in this re-gard shall be dealt with appropriately in accordance with the provisions of the Act.
39. Repeal provisions
39.1 With the issue of these Directions, the instructions/ guidelines contained in the circulars mentioned in Annex VII, issued by the Reserve Bank stand repealed.
39.2 All approvals/ acknowledgements given under the mentioned circulars shall be deemed as given under these Directions.
39.3 All the repealed circulars are deemed to have been in force prior to the coming into effect of these Directions.
Annex I: Disclosures related to SRs
(cf. Paragraph 17.7 of these Directions)
I. Disclosures in the offer document
(i) Disclosure relating to the issuer of SRs
a) Name, place of registered office, date of incorporation, date of commencement of business of the ARC
b) Particulars of sponsors, shareholders, and a brief profile of the Directors on the Board of the ARC with their qualifications and experience
c) Summary of financial information of the ARC for last five years or since commencement of business, whichever is shorter
d) Details of securitisation/ asset reconstruction activities handled, if any, in last eight years or since commencement of business, whichever is shorter. This shall, inter alia, include track record of returns generated for all SR investors on the schemes floated in last eight years.
e) Track record of recovery rating migration and engagement with CRAs of schemes floated in last eight years
f) Whether the scheme envisages the utilization of part of funds raised for restructuring of fi-nancial assets acquired out of such funds? If so, the percentage of funds raised which shall be utilized for restructuring purposes.
(ii) Terms of offer
a) Objects of offer
b) Description of the instrument giving particulars relating to its form, denomination, issue price, together with an averment that the transferability of SRs is restricted to the QBs
c) Arrangements made for management of assets and extent of management fee charged by the ARC
d) Interest rate/ probable yield
e) Terms of payment of principal/ interest, date of maturity/ redemption
f) Servicing and administration arrangement
g) Details of credit rating and rationale for the rating
h) Description of assets being securitized including date of acquisition, valuation, and the in-terest of the ARC in the assets at the time of issue of SRs
i) Geographical distribution of asset pool
j) Residual maturity, interest rates, outstanding principal of the asset pool
k) Nature and value of underlying security, expected cash flows, their quantum and timing, credit enhancement measures
l) Policy for acquisition of assets and valuation methodology adopted
m) Terms of acquisition of assets from banks/ FIs
n) Details of performance record with the originators
o) Terms of replacement of assets, if any, to the asset pool
p) Statement of risk factors, particularly relating to future cash flows and steps taken to miti-gate the same
q) Arrangements, if any, for implementing asset reconstruction measures in case of default
r) Duties of the trustee
s) Specific asset reconstruction measures, if any, on which approvals shall be sought from in-vestors
t) Grievance redressal mechanism
II. Disclosures on quarterly basis
a) Defaults, prepayments, losses, if any, during the quarter
b) Change in credit rating, if any
c) Commonality and conflict of interest, if any, between the ARC and CRA
d) Change in profile of the assets by way of accretion to or realisation of assets from the exist-ing pool
e) Collection summary for the current and previous quarter
f) Any other material information which has a bearing on the earning prospects affecting the QBs.
Annex II: Declaration and undertaking by Director/ MD/ CEO as on __ (cf. Paragraph 21.1 of these Directions)
Name:
1. Relevant relationships of Director/ MD/ CEO
(i) List of relatives, if any, who are connected with the ARC (please refer to sub-section 77 of Section 2 of the Companies Act, 2013)
(ii) List of entities, if any, in which he/ she is considered as being interested (please refer to sub-section 49 of Section 2 and Section 184 of the Companies Act, 2013)
(iii) List of entities in which he/ she is considered as holding substantial interest (substantial interest means the beneficial interest held by an individual or any of his/ her relatives, wheth-er singly or taken together, in the shares of a company/ firm, the aggregate amount paid-up on which exceeds 10% of the paid-up share capital/ capital of the company/ firm)
(iv) Name of the financial institutions including NBFCs/ ARCs in which he/ she is or has been a member of the Board (also give details of period during which such office was held)
(v) Fund and non-fund facilities, if any, presently availed of by him/ her and/ or by entities listed at 1(ii) and (iii) above from the financial institutions including NBFCs/ ARCs
(vi) Cases, if any, where the director or entities at 1(ii) and (iii) above are in default or have been in default in the past in respect of credit facilities obtained from financial institutions including NBFCs/ ARCs
2. Records of professional achievements
Relevant professional achievements
3. Proceedings, if any, against the Director/ MD/ CEO
(i) Whether the director is a member of a professional association/ body? Details of discipli-nary action, if any, pending or commenced or resulting in conviction in the past against him/ her or whether he/ she has been banned from entry into any profession/ occupation at any time
(ii) Details of prosecution, if any, pending or commenced or resulting in conviction in the past against the director and/ or against any of the entities listed at 1(ii) and (iii) above for violation of economic laws and regulations
(iii) Details of criminal prosecution, if any, pending or commenced or resulting in conviction in the last five years against the director
(iv) Whether the director attracts any of the disqualifications envisaged under the Section 164 of the Companies Act, 2013? If so, details thereof.
(v) Has the director or any of the entities at 1(ii) and 1(iii) above been subject to any investiga-tion at the instance of any Government department or agency? If so, details thereof.
(vi) Has the director at any time been found guilty of violation of rules/ regulations/ legislative requirements by customs/ excise/ income tax/ foreign exchange/ other revenue authorities? If so, details thereof.
(vii) Whether the director has at any time come to the adverse notice of a regulator such as RBI, SEBI, IRDA, MCA, etc.?
(xix) Whether the director has been declared as a wilful defaulter at any time in the preceding five years?
(viii) Whether the director is continuing as a wilful defaulter?
4. Any other explanation/ information considered relevant for judging the Director/ MD/ CEO, fit and proper
Undertaking
I confirm that the above information is, to the best of my knowledge and belief, true and com-plete. I undertake to keep the Board of the ARC fully informed, as soon as possible, of all events which take place subsequent to my appointment which are relevant to the information provided above.
*I also undertake to execute the ‘Deed of Covenant’ required to be executed by the directors of the ARC.
Place :
Date :
* Applicable only for directors
Signature :
Name :
Remarks of Nomination and Remuneration Committee (NRC) of having satisfied it-self that the above information is true and complete.
Place :
Date :
Signature of the Chair of the NRC:
Name :
Annex III: Information About the Director/ MD/ CEO
(cf. Paragraph 21.1 of these Directions)
Name of ARC:
| Sr. No. |
Particulars | Information/ details | |||||||
| 1. | Name of the candidate (proposed appointee) | ||||||||
| 2. | Proposed designation/ Type of directorship
[Such as Whole-time Director/ Managing Director/ Chief Executive Officer/ Non-executive Di-rector (sponsor/non-sponsor), Independent Director, Nominee Director, etc. (to be clearly specified)] |
||||||||
| 3. | Nationality & Passport No. | ||||||||
| 4. | Date of Birth (DD/MM/YYYY) | ||||||||
| 5. | Address, e-mail ID and phone/mobile number | ||||||||
| 6. | Permanent Account Number (PAN)
Details of income tax returns filed during the last 3 years |
PAN: | |||||||
| Date of filing | Amount of tax paid (₹) | ||||||||
| 7. | Director Identification Number (DIN) and current status thereof | ||||||||
| 8. | Educational/ Professional qualifications | ||||||||
| 9. | Line of Business or Vocation/ Profession
(A brief write-up detailing the relevant knowledge and professional experience of the candi-date) |
||||||||
| 10. | Details of bank accounts of the candidate across all jurisdic-tions
(Please mention details of all accounts such as savings, current, loans and advances, etc.) |
Bank Name |
Type of A/c |
A/c Number | |||||
| 11. | Equity shareholding 15, if any, of the candidate in the applicant ARC:
(i) Number of shares (ii) Face value of shares (iii) Percentage to total paid-up share capital of the ARC |
||||||||
| 12. | Whether the candidate is a nominee of or related/associated with any of the sponsor/s? If yes, details thereof. | ||||||||
| 13. | List of relatives16 of the candidate, who are connected with the ARC (if any), and nature of such connection | ||||||||
| 14. | Present and past17 occupations (other than those covered at Sr. No. 15)
[Designation/Role, Name and address of the organisation, Employee ID, Tenure (from-to), Name of the regulator (if regulated by a financial sector regulator in India or abroad)] |
||||||||
| 15. | Names of banks, financial institutions (including NBFCs/ ARCs) and other entities in which the
candidate has been chairman / managing [Name and address of the organisation and its line of activity, Position held, Tenure (from-to), Name of the regulator (if regulated by a financial sector regulator in India or abroad)] |
||||||||
| 16. | List of entities in which the candidate is
considered as interested18 or holding |
||||||||
| 17. | Whether the candidate or the entities listed at (15) and (16) above are or have in the past been in default20 in respect of any credit facilities (fund/ non-fund-based) obtained from banks/ financial institutions
[If yes, please furnish full details such as name of the lender (including the branch name), type of facility, period and quantum of default, etc. and present status thereof] |
||||||||
| 18. | Whether the person is a member of any professional association/ body.
If yes, details of disciplinary action against him/ her, if any, commenced, pending or resulting in conviction in the past, or whether he/ she has been banned from any profession/ occupation at any time. |
||||||||
| 19. | Details of civil or criminal prosecution (including
under Section 138 (1) of the Negotiable Instruments Act, 1881), if any, against the candidate and/ or against any of the entities listed in (15) and (16) above initiated, pending or resulting in conviction in the past for violation of economic laws/ regulations. |
||||||||
| 20. | If the candidate has indulged in any breach of AML/CFT guidelines at any time, details thereof. | ||||||||
| 21. | Whether the candidate attracts any of the disqualification envisaged under the Section 164 of the Companies Act, 2013?
If yes, please give details thereof. |
||||||||
| 22. | (a) If convicted by a criminal court of an offence involving moral turpitude, details thereof.
(b) If convicted by any other court of law, details thereof along with outcome of such |
||||||||
| 23. | If the candidate or any of the entities listed at (15) and (16) above has been subject to any investigation or vigilance/ disciplinary enquiry by any of the previous employers or government departments or agencies, details thereof along with outcome of such proceedings. | ||||||||
| 24. | If the candidate or the entities listed at (15) and (16) above have at any time been found guilty of violation of rules/ legislative requirements by customs/ excise/ income tax/ foreign exchange/ other revenue authorities/ investigative agencies (including issuance of show cause notice), details thereof. | ||||||||
| 25. | If reprimanded, censured, restricted, suspended, barred, enjoined, or otherwise sanctioned by any regulator such as RBI, SEBI, IRDAI, PFRDA, MCA, professional organisations, government agencies or court because of professional conduct or activities, the details thereof21. |
||||||||
| 26. | If the candidate is a professional (such as a chartered accountant, an advo-cate, etc.) and is undertaking or has undertaken professional work in any ARC, please provide the details (including the name of the ARC and the period of association) |
||||||||
| 27. | Whether the candidate has been declared a wilful defaulter at any time in the last five years by any bank. If yes, details and present status thereof. | ||||||||
| 28. | Whether the number of directorship held by the candidate exceeds the limits prescribed under Section 165 of the Companies Act, 2013/SEBI’s (Listing Obligations and Disclosure Requirements) Regulations, 2015 (as applicable). |
||||||||
| 29. | Any other information considered relevant for assessing the person as ‘fit and proper’. | ||||||||
| Declaration by the proposed appointee | |||||||||
| 1. I confirm that I am not associated with any unincorporated body which is accepting public deposits.
I confirm that I am not associated with any company, the application for Certificate of Regis-tration (CoR) of which has been rejected by the Reserve Bank of India, National Housing Bank or any other financial sector regulator. |
|||||||||
| Undertaking by the proposed appoin-tee | |||||||||
| 1. I confirm that the above information is, to the best of my knowledge and belief, true and complete.
2. I undertake to keep the Company fully informed, as soon as possible, of all events which take place after submission of this application or after my appointment, which are relevant to the information provided herein above. I also undertake to execute a ‘Deed of Covenant’ with the Company. |
|||||||||
| Place: Date: |
Signature of the proposed appointee | ||||||||
| Submission of Nomination and Remuneration Com-mittee (NRC) | |||||||||
| Confirmation that necessary due diligence in respect of the proposed appointee has been carried out by the
NRC. |
|||||||||
| Remarks of the NRC about having satisfied itself that the infor-mation provided herein is true and complete. | |||||||||
| Place: Date: |
Signature of Chair of the NRC Name: |
||||||||
Annex IV: An indicative list of documents/ information to be furnished along with the applica-tion
(cf. Paragraph 21.1 of these Directions)
| Sr No. |
Requirements to be complied with and documents to be submitted to
RBI |
Page No. |
| i. | Covering Letter by the ARC submitting the application for prior approval for appointment/ re-appointment of Director, Managing Director or CEO, duly signed by the au-thorised signatory (with Company’s seal) | |
| ii. | Identity document of the candidate – PAN Card/ Election Card/ Driving Li-cense/ Passport/ Aadhaar Card (any one) | |
| iii. | Credit Information Report (Score + Full Report) (not older than 6 months)
[Explanation for adverse remarks/features, if any, in the report should also be submitted] |
|
| iv. | Banker’s Report for all accounts (both deposit and loan/advance accounts) where the candidate is an account holder (in the bank’s sealed cover) | |
| v. | Board Resolution proposing the appointment/ re-appointment of the direc-tor/ MD/ CEO, including the proposed tenure | |
| vi. | Declaration on the status of supervisory compliances by the ARC | |
| vii. | a) Confirmation whether there has been any change in the shareholding
pattern which has led to the proposed appointment (b) Shareholding pattern of the ARC |
|
| viii. | Composition of the Board before appointment of the proposed director (with designation, date of appointment, tenure, DIN, etc) | |
| ix. | Confirmation whether SEBI’s LODR guidelines are applicable to the ARC or not? |
Annex V: Form of deed of covenants with a Director (cf. Paragraph 21.1 of these Directions)
THIS DEED OF COVENANTS is made this_________ day of________ Two thousand _______ BE-TWEEN_________ , having its registered office at__________ (hereinafter called the ‘ARC’) of the one part and Mr./ Ms__________ of____________ (hereinafter called the ‘Director’) of the other part.
WHEREAS
A. The Director has been appointed as a director on the Board of Directors of the ARC (herein-after called ‘the Board’) and as a term of his/ her appointment, is required to enter into a Deed of Covenants with the ARC.
B. The Director has agreed to enter into this Deed of Covenants pursuant to his/ her said terms of appointment which has been approved by the Board.
NOW IT IS HEREBY AGREED AND THIS DEED OF COVENANTS WITNESSETH AS FOLLOWS :
1. The Director acknowledges that his/ her appointment as director on the Board of the ARC is subject to applicable laws and regulations including the Memorandum and Articles of Associ-ation of the ARC and the provisions of this Deed of Covenants.
2. The Director covenants with the ARC that:
(i) The Director shall disclose to the Board the nature of his/ her interest, direct or indirect, if he/ she has any interest in or is concerned with a contract or arrangement or any proposed contract or arrangement entered into or to be entered into between the ARC and any other person, immediately upon becoming aware of the same or at meeting of the Board at which the question of entering into such contract or arrangement is taken into consideration or if the director was not at the date of that meeting concerned or interested in such proposed con-tract or arrangement, then at the first meeting of the Board held after he/ she becomes so concerned or interested and in case of any other contract or arrangement, the required dis-closure shall be made at the first meeting of the Board held after the Director becomes con-cerned or interested in the contract or arrangement.
(ii) The Director shall disclose by general notice to the Board his/ her other directorships, his/ her memberships of bodies corporate, his/ her interest in other entities and his/ her interest as a partner or proprietor of firms and shall keep the Board apprised of all changes therein.
(iii) The Director shall provide to the ARC a list of his/ her relatives as defined in the Compa-nies Act, 2013 and to the extent the Director is aware of directorships and interests of such relatives in other body corporate, firms and other entities.
(iv) The Director shall in carrying on his/ her duties as director of the ARC:
a) use such degree of skill as may be reasonable to expect from a person with his/ her knowledge or experience
b) in the performance of his/ her duties take such care as he/ she might be reasonably ex-pected to take on his/ her own behalf and exercise any power vested in him/ her in good faith and in the interests of the ARC
c) keep himself/ herself informed about the business, activities and financial status of the ARC to the extent disclosed to him/ her
d) attend meetings of the Board and Committees thereof (collectively for the sake of brevity hereinafter referred to as the ‘Board’) with fair regularity and conscientiously fulfil his/ her ob-ligations as director of the ARC
e) not seek to influence any decision of the Board for any consideration other than in the inter-ests of the ARC
f) bring independent judgment to bear on all matters affecting the ARC brought before the Board including but not limited to statutory compliances, performance reviews, compliances with internal control systems and procedures, key executive appointments and standards of conduct
g) in exercise of his/ her judgement in matters brought before the Board or entrusted to him/ her by the Board be free from any business or other relationship which could materially inter-fere with the exercise of his/ her independent judgement
h) express his/ her views and opinions at the Board meetings without any fear or favour and without any influence on exercise of his/ her independent judgement
(v) The Director shall have:
a) fiduciary duty to act in good faith and in the interests of the ARC and not for any collateral purpose
b) duty to act only within the powers as laid down by the ARC’s Memorandum and Articles of Association and by applicable laws and regulations; and
c) duty to acquire proper understanding of the business of the ARC
(vi) The Director shall:
a) not evade responsibility in regard to matters entrusted to him/ her by the Board
b) not interfere in the performance of their duties by the whole-time directors and other offic-ers of the ARC and wherever the director has reasons to believe otherwise, he/ she shall forthwith disclose his/ her concerns to the Board; and
c) not make improper use of information disclosed to him/ her as a member of the Board for his/ her or someone else’s advantage or benefit and shall use the information disclosed to him/ her by the ARC in his/ her capacity as director of the ARC only for the purposes of perfor-mance of his/ her duties as a director and not for any other purpose
3. The ARC covenants with the Director that:
(i) the ARC shall apprise the Director about the:
a) Board procedures including identification of legal and other duties of Director and required compliances with statutory obligations
b) control systems and procedures
c) matters in which Director should not participate because of his/ her interest, direct or indi-rect therein
d) qualification requirements and provide copies of Memorandum and Articles of Association
e) corporate policies and procedures
f) insider dealing restrictions
g) constitution of, delegation of authority to and terms of reference of various committees constituted by the Board
h) appointments of Senior Executives and their authority
i) remuneration policy
j) deliberations of committees of the Board
k) changes in policies, procedures, control systems, applicable regulations including Memo-randum and Articles of Association of the ARC, delegation of authority, Senior Executives.
(ii) the ARC shall disclose and provide to the Board including the Director all information which is reasonably required for them to carry out their functions and duties as a director of the ARC and to take informed decisions in respect of matters brought before the Board for its consider-ation or entrusted to the Director by the Board or any committee thereof
(iii) the disclosures to be made by the ARC to the directors shall include but not be limited to the following:
a) all relevant information for taking informed decisions in respect of matters brought before the Board
b) ARC’s strategic and business plans and forecasts
c) organisational structure of the ARC and delegation of authority
d) corporate and management controls and systems including procedures
e) economic features and marketing environment
f) information and updates on major expenditure
g) periodic reviews of performance of the ARC
h) periodic reports about implementation of strategic initiatives and plans
(iv) the ARC shall communicate the outcome of Board deliberations to directors and con-cerned personnel and prepare and circulate minutes of meetings of the Board to directors in a timely manner and to the extent possible within 2 business days of the date of conclusion of the Board meeting
(v) advise the Director about the levels of authority delegated in matters placed before the Board
4. The ARC shall provide to the Director periodic reports on the functioning of internal control systems including effectiveness thereof.
5. The Director shall not assign, transfer, sublet or encumber his/ her office and his/ her rights and obligations as director of the ARC to any third party provided that nothing herein con-tained shall be construed to prohibit delegation of any authority, power, function or delegation by the Board or any committee thereof subject to applicable laws and regulations including Memorandum and Articles of Association of the ARC.
6. The failure on the part of either party hereto to perform, discharge, observe or comply with any obligation or duty shall not be deemed to be a waiver thereof nor shall it operate as a bar to the performance, observance, discharge or compliance thereof at any time or times there-after.
7. Any and all amendments and/ or supplements and/ or alterations to this Deed of Covenants shall be valid and effectual only if in writing and signed by the Director and the duly authorised representative of the ARC.
8. This Deed of Covenants has been executed in duplicate and both the copies shall be deemed to be originals.
IN WITNESS WHEREOF THE PARTIES HAVE DULY EXECUTED THIS AGREEMENT ON THE DAY, MONTH AND YEAR FIRST ABOVE WRITTEN.
| For the ARC | Director |
| Signature: | Signature: |
| Name: | Name: |
| Title: | |
| Date: |
Annex VI
(cf. Paragraph 22 of these Directions)
Name of the ARC :
| Sl. No. | Particulars | Remarks |
| Part A | ||
| 1. | Name of the sponsor (including previous names, if any, along with date of such changes) | |
| 2. | Present & permanent address of the sponsor | |
| 3. | Registered & corporate office address of the sponsor | |
| 4. | Occupation/ nature of business of the sponsor | |
| 5. | Citizenship and resident status if the sponsor is an
individual/ ownership and control status if the sponsor is an entity (as per FEMA) |
|
| 6. | Date of birth / incorporation | |
| 7. | CIN/ Registration No./ PAN/ TAN | |
| 8. | Details of bank accounts – bank, branch and account no. | |
| 9. | Profitability and average income for the last 3 years and net worth (duly cer-tified by the statutory auditors) | |
| 10. | Source of funds for acquisition of shares/ compulsorily convertible prefer-ence shares/ debentures/ bonds (duly certified by the statutory auditors) | |
| 11. | Income tax returns and audited financial statements of the sponsor for the last 3 years | |
| 12. | Details of directorship/ shareholding/ voting rights/
compulsorily convertible preference shares/ debentures/ bonds, etc. of the sponsor in banks and other institutions in the financial sector |
|
| 13. | Details of acquisition by the sponsor (shareholding in ₹ and %) in the ARC | |
| 14. | Whether any other person has beneficial interest in the proposed acquisi-tion | |
| 15. | Detailed profile on the background and experience of the sponsor, expertise and track record of business | |
| 16. | Whether the sponsor is a financial sector entity/ Government/ public sector undertaking | |
| 17. | Whether the sponsor has been declared as a wilful defaulter at any time in the preceding 5 years
If yes, whether the sponsor continues to be a wilful defaulter |
|
| Part B | ||
| 18. | (A) List of ‘Relatives’ of the sponsor
(B) List of ‘Persons acting in concert’ with the sponsor (C) List of Associate Enterprises of the sponsor (D) List of Entities which hold 10% or more of the paid-up share capital of the sponsor (i) “Relatives” means ‘relatives’ as defined in Section 2(77) of the Compa-nies Act 2013. (ii) Persons shall be deemed to be “acting in concert” who, for a common objective or purpose of acquisition of shares in excess of 10%, pursuant to an agreement or (iii) ‘Associate enterprises of the sponsor’, means a company whether incorporated or not, which (a) is a holding company or a subsidiary company of the sponsor; or (b) is a joint venture (defined in terms of AS 23) of the sponsor; or (c) controls the composition of the Board of Directors or other body govern-ing the sponsor; or is able to obtain economic benefits from the activities of the sponsor. (E) List of HUFs where the Sponsor or his family member is a member/ karta (F) List of entities in which the HUF at (E) above is holding 10% or more of the paid-up share capital of that entity (G) List of entities in which the Sponsor is holding 10% or more of the paid-up share capital of that entity (H) Entities, if any, in which the Sponsor is considered as being interested (Refer Section 184 of Companies Act, 2013) (I) Entities where there are common shareholders of the sponsor who collectively hold 20% or more of the paid-up share capital of the Sponsor and also those entities (J) Related Party (Refer AS 18) of the Sponsor Explanation: For the purpose of this part, |
|
| Part C | ||
| 19. | Has the sponsor or the persons/ entities listed in Part B been adjudged bank-rupt/insolvent at any time | |
| 20. | If the sponsor or the persons/ entities listed in Part B is a member of a professional association/ body, details of disciplinary action, if any, pending or commenced or resulting in conviction in the past against him/ her or whether he/ she has been banned from entry at any profession/ occupation at any time |
|
| 21. | Details of serious disciplinary or criminal prosecution, if any, pending or commenced or resulting in conviction in the past against the sponsor or the persons/ entities listed in Part B | |
| 22. | Has the sponsor or the persons/ entities listed in Part B at any time been found guilty of violation of rules/ legislative requirements by customs/ excise/ income tax/ foreign exchange/ other revenue authorities/investigative agencies/ economic laws/ any regu-lation, including issuance of Show Cause Notice, if so, give particulars |
|
| 23. | Whether the sponsor or the persons/ entities listed in Part B have been con-victed for any offence due to dishonesty, incompetence or malpractice under any legislation designed to protect members of the public from financial loss |
|
| 24. | Whether the persons/ entities listed in Part B has been declared as a wilful defaulter at any time in the preceding 5 years? If yes, whether he/she continues as a wilful de-faulter? | |
| Part D | ||
| 25. | If the sponsor is a regulated entity, names and addresses of the regulators of the sponsor in India and abroad | |
| 26. | Shareholding pattern of the sponsor | |
| 27. | Details of capital raised by the sponsor during the past 3 years | |
| 28. | Detailed corporate structure of the Group in case the sponsor belongs to a Group (preferably in a pictorial form) | |
*Though it shall not be necessary for a person to mention in the column about orders and find-ings made by regulators which have been later on reversed / set aside in toto, however, it would be necessary to make a mention of the same, in case the reversal / setting aside is on technical reasons like limitation or lack of jurisdiction, etc., and not on merit. If the order of the regulator is temporarily stayed and the appellate / court proceedings are pending, the same also should be mentioned.
Undertaking
I confirm that the above information to the best of my knowledge and belief, is true and com-plete. I undertake to keep the ARC fully informed, as soon as possible, of all events which take place subsequent to submission of this declaration, which are relevant to the information pro-vided above.
Signature and stamp of the sponsor
Place :
Date :
I solemnly declare that to the best of my knowledge and belief the information furnished in the statement above is correct, complete, and truly stated.
Signature of Authorised Official of the Company
Name :
Designation :
Company Seal :
Date :
Place :
PART E
Additional information to be submitted by the ARC
| Sl. No. | Particulars | Remarks |
| 29. | Any other explanation / information in regard to items above considered rel-evant for judging “fit and proper” status of the sponsor | |
| 30. | Brief details of shareholder agreements |
Form II: Information to be furnished to the Reserve Bank by the ARC while forwarding the application for seeking prior approval of sponsors
| Sl. No. |
Particulars | Remarks |
| 1. | Name of the ARC | |
| 2. | Paid-up share capital of the ARC | |
| 3. | Name of the existing sponsors of the ARC | |
| 4. | Name of the proposed sponsor | |
| 5. | Proposed sponsor’s track record on integrity and reputation | |
| 6. | Report of the ARC on the acquisition (based on a review by the Board of Di-rectors) | |
| 7. | Whether the proposed sponsor is resident or non-resident | |
| 8. | Whether the proposed sponsor or persons/ entities listed in Part B of Form I has been subject to any proceedings of | |
| serious disciplinary or criminal nature |
Encl :
(i) Report of the ARC
(ii) Copy of the Board Resolution
(iii) Form I for individual sponsors
Signature of Authorised Official of the Company
Name :
Designation :
Company Seal :
Date :
Place :
Form III: Annual declaration (as on March 31 every year) to be furnished to the ARC by all the existing sponsors of ARCs
Name of the ARC:
| Sl. No. |
Particulars | Remarks |
| 1. | Name of the sponsor | |
| 2. | Address of the sponsor | |
| 3. | Occupation of the sponsor (in case of individuals) | |
| 4. | Total number of shares /compulsorily convertible preference shares/ deben-tures /bonds held by the sponsor in the ARC | |
| 5. | Date/s of acquisition of shares/ compulsorily convertible
preference shares/ debentures/ bonds in the ARC in the past 5 years |
|
| 6. | Details of regulatory actions against the sponsors and persons/ entities listed in Part B of Form I by regulators in India or abroad, | |
| during the last 5 years | ||
| 7. | Whether there have been any criminal proceedings against the sponsor and persons/ entities listed in Part B of Form I during | |
| the last 5 years, if so, details thereof. | ||
| 8. | Whether there have been any civil proceedings against the sponsor and per-sons/ entities listed in Part B of Form I during | |
| the last 5 years, if so, details thereof. | ||
| 9. | Change of ownership of the sponsor in the last 5 years (in case of entities), if any |
Signature and stamp of the sponsor
Place :
Date :
Annex VII: List of repealed circulars
| Sr. No. |
Circular No. | Date | Subject |
| 1 | DNBS.PD.CC.1/SC RC/10.30/2002-03 | April 23, 2003 | Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Issue of final guidelines and directions |
| 2 | DNBS.PD.CC.2/SC RC/10.30/2003-04 | March 29,
2004 |
The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 |
| 3 | DNBS.PD.CC.3/SC RC/10.30.000/2006- 07 | September
20, 2006 |
The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 |
| 4 | DNBS.PD.CC.4/SC RC/10.30.000/2006- 07 | October 19, 2006 | The Securitisation Companies and Reconstruction Companies (Reserve Bank) (Amendment) Guidelines and Directions, 2006 |
| 5 | DNBS.(PD)CC.No.5/ SCRC/10.30.000/20 06-07 | April 25, 2007 | Quarterly Statement to be submitted by Securitisation Companies/ Recon-struction Companies registered with the Reserve Bank of India under Section 3(4) of the SARFAESI Act |
| 6 | DNBS.(PD)CC.No.6/ SCRC/10.30.049/20 06-07 | May 28, 2007 | Guidelines on declaration of Net Asset Value of Security Receipts issued by Securitisation Company/ Reconstruction Company |
| 7 | DNBS.(PD)CC.No.8/ SCRC/10.30.000/20 07-08 | March 5,
2008 |
Regulation of SCs/RCs-submission of returns and audited balance sheet by SCs/RCs |
| 8 | DNBS.(PD)CC.No.9/ SCRC/10.30.000/20 07-08 | April 22, 2008 | Regulation of SCs/RCs-disclosure while issuing Security Receipts(SRs) |
| 9 | DNBS.(PD)CC.No.1 2/SCRC/10.30.000/2 008-09 | September 26, 2008 | Quarterly Statement to be submitted by Securitisation Companies/ Recon-struction Companies registered with the Reserve Bank of India under Section 3(4) of the SARFAESI Act |
| 10 | DNBS/PD(SC/RC)C C.No.13/26.03.001/2 008-09 | April 22, 2009 | Acquisition of Financial Assets by Securitisation Companies/ Reconstruc-tion Companies (SC/RCs) – Clarifications |
| 11 | DNBS(PD)CC.No.14 /SCRC/26.01.001/20 08-09 | April 24, 2009 | Resolution of acquired assets – Extension in time frame for redemption of security receipts (SRs) issued |
| 12 | DNBS.(PD).CC.No.1 7/SCRC/26.03.001/2 009-2010
|
April 21, 2010 | Guidelines on Change in or Take Over of the Management of the Business of the Borrower by Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines, 2010 |
| 13 | DNBS.(PD).CC.No.1 8/SCRC/26.03.001/2 009-2010 | April 21, 2010 | The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 – Amendments |
| 14 | DNBS.(PD).CC.No.1 9/SCRC/26.03.001/2 009-2010 | April 21, 2010 | The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 – Amendments |
| 15 | DNBS.(PD).CC.No.2 3/SCRC/26.03.001/2 010-2011 | November 25, 2010 | Submission of information to Credit Information Companies |
| 16 | DNBS.(PD).CC.No.2 4/SCRC/26.03.001/2 010-2011 | May 25, 2011 | Setting up of Central Electronic Registry under the Securitisation and Re-construction of Financial Assets and Enforcement of Security Interest Act 2002 |
| 17 | DNBS(PD)CC.No.34 /SCRC/26.03.001/20 13-14 | December 31, 2013 | Submission of online Quarterly Statements by Securitisation Companies/ Reconstruction Companies registered with the Reserve Bank of India under Section 3(4) of the SARFAESI Act |
| 18 | DNBS(PD)CC.No.35 /SCRC/26.03.001/20 13-14 | January 23, 2014 | Conversion of debt into shares, consent level of security enforcement ac-tions and permission to acquire debt from other SC/RCs |
| 19 | DNBS(PD)CC.No.36 /SCRC/26.03.001/20 13-14 | March 19, 2014 | Restructuring Support Finance – participation by investors |
| 20 | DNBS(PD)CC.No.37 /SCRC/26.03.001/20 13-14 | March 19, 2014 | Buyback of assets from SC/RCs by the Defaulters and acquisition of assets by SC/RCs from sponsor banks |
| 21 | DNBS(PD)CC.No.38 /SCRC/26.03.001/20
13-14 |
April 23,
2014 |
Uniform Accounting Standards at ARCs |
| 22 | DNBS(PD)CC.No.41 /SCRC/26.03.001/20 14-15 | August 05, 2014 | Regulatory framework for SCs/RCs – Certain amendments |
| 23 | DNBS(PD)CC.No.42 /SCRC/26.03.001/20 14-15 | August 07, 2014 | Certain amendments in Regulatory framework for SCs/RCs – Clarifica-tions |
| 24 | DNBR(PD)CC.No.01 /SCRC/26.03.001/20 14-15 | February 24, 2015 | Bank’s prior approval for change in shareholding |
| 25 | DNBR(PD)CC.No.02 /SCRC/26.03.001/20 14-15 | May 07, 2015 | Resolution period for BIFR/CDR/JLF cases |
| 26 | DNBR. PD (ARC) CC. No. 03/26.03.001/2016- 17 | April 28, 2017 | Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- Section 3 (1) (b) – Requirement of Net Owned Fund (NOF) for Asset Reconstruction Companies. |
| 27 | DNBR.PD(ARC)CC. No.04/26.03.001/2017-18 | November 23, 2017 | Conversion of debt into equity- Review |
| 28 | DNBR.PD(ARC)CC. No.05/26.03.001/201 7-18 | January 04, 2018 | Submission of Financial Information to Information Utilities |
| 29 | DNBR. PD (ARC) CC. No. 06/26.03.001/2018- 19 | October 25, 2018 | Master Direction – Fit and Proper Criteria for Sponsors – Asset Reconstruc-tion Companies (Reserve Bank) Directions, 2018 |
| 30 | DNBR.PD (ARC) CC.No.07/26.03.001 /2018-19 | June 28, 2019 | Permission to acquire financial asset from other Asset Reconstruction Companies (ARCs) |
| 31 | DOR.NBFC(ARC) CC. No. 8/26.03.001/2019-20 | December 6, 2019 | Acquisition of financial assets by Asset Reconstruction Companies from sponsors and lenders |
| 32 | DOR.NBFC(ARC) CC. No. 9/26.03.001/2020-21 | July 16, 2020 | Fair Practices Code for Asset Reconstruction Companies |
| 33 | DoR.SIG.FIN.REC.7 5/26.03.001/2022-23 | October
11, 2022 |
Review of Regulatory Framework for Asset Reconstruction Companies (ARCs) |
| 34 | DOR. ACC.REC. No. 104/21.07.001/2022- 23 | February 20, 2023 | Implementation of Indian Accounting Standards (Ind AS) |
| 35 | DOR.GOV.REC.79/1 8.10.006/2023-24 | February 27, 2024 | Appointment/re-appointment of Director, Managing Director or Chief Execu-tive Officer in Asset Reconstruction Companies |
Note-
1 There may be instances wherein banks and other financial institutions undertake certain transactions, which are in the nature of securitisation or asset reconstruction, wherever these are permitted by their respective laws and regulations.
2 Circular No. DOR.GOV.REC.79/18.10.006/2023-24 dated February 27, 2024
3 At the address/ email ID mentioned below:
Department of Regulation, Central Office, Central Office Building, 12/13th floor, Shahid Bha-gat Singh Marg, Fort, Mumbai-400001; Tel: 22661602/ 22601000; Email: [email protected]
4 Circular No. DOR.CO.LIC.CC No.119/03.10.001/2020-21 dated February 12, 2021
5 The FATF periodically identifies jurisdictions with weak measures to combat money launder-ing and terrorist financing (AML/CFT) in its following publications: (a) High-Risk Jurisdictions subject to a Call for Action, and (b) Jurisdictions under Increased Monitoring. A jurisdiction, whose name does not appear in the 2 aforementioned lists, shall be referred to as a FATF compliant jurisdiction.
6 Potential voting power could arise from instruments that are convertible into equity, other instruments with contingent voting rights, contractual arrangements, etc. that grant investors voting rights (including contingent voting rights) in the future. In such cases, it should be en-sured that new investments from FATF non-compliant jurisdictions are less than both (i) 20 % of the existing voting powers and (ii) 20 % of existing and potential voting powers assuming those potential voting rights have materialised.
7 Section 29A of the IBC includes in its purview such persons or any other person acting jointly or in concert with such persons who are considered ineligible to submit a resolution plan viz., (i) undischarged insolvents, (ii) wilful defaulters, (iii) persons managing/ controlling accounts classified as NPA for more than one year, (iv) persons convicted for any offence punishable with imprisonment for two years or more, (v) disqualified directors under Companies Act, (vi) persons prohibited from trading in securities by SEBI, (vii) persons against whom order has been made by the adjudicating authority for preferential/ undervalued/ extortionate credit/ fraudulent transactions, (viii) guarantors to a corporate debtor against which an application for insolvency resolution has been admitted under IBC, (ix) persons subjected to the above listed disabilities under any law in a jurisdiction outside India, and (x) connected persons to ineligi-ble persons mentioned under Section 29 A.
8 Circular No. DOR.ORG.REC.65/21.04.158/2022-23 dated August 12, 2022
9 For example- calling repeatedly
10 Circular No. DOR.ACC.REC.No.104/21.07.001/2022-23 dated February 20, 2023
11 Circular No. DOR.NBFC(ARC) CC. No. 9/26.03.001/2020-21 dated July 16, 2020
12 Circular No. DoR.SIG.FIN.REC.75/26.03.001/2022-23 dated October 11, 2022
13 Circular No. DOR.ACC.REC.No.104/21.07.001/2022-23 dated February 20, 2023
14 Circular No. DoR.FIN.REC.41/20.16.003/2023-24 dated September 25, 2023
15 Please also include details of preference shares, compulsorily convertible debentures, etc., if any, separately.
16 Refer to Section 2(77) of the Companies Act, 2013.
17 At least during the last 10 years
18 Refer to Section 184 of the Companies Act, 2013.
19 Substantial interest means the beneficial interest held by an individual or his/her spouse or minor child, whether singly or taken together, in the shares of a company/ capital of a firm, the aggregate amount paid-up on which exceeds ten percent of the paid-up share capital of the company or total capital subscribed by all the partners of a partnership firm.
20 ‘Default’ means that the concerned facility has/had been classified as a non-performing asset by the bank/FI.
