In an auction process, the Banks/FIs showcase NPAs intended for sale through an invitation to the ARCs. Based on the ‘Preliminary Information’ and the corresponding ‘Reserve Prices ‘provided by the Banks/FIs, ARCs carry out due diligence on the short-listed accounts at the data rooms of banks/FIs. Generally, the terms of offer provide for payment of Management Fees to the acquirer ARC ranging between 1.5% to 2% per annum calculated on the Net Asset Value of the un-redeemed Security Receipts(SRs) or the outstanding acquisition cost, whichever is less. Banks/FIs, with a view to encourage quick recovery, also incentivise ARCs by providing for payment of an incentive, ranging between 3 to 5% of the amounts recovered within 3 or 4 years of the acquisition of the debt.In addition to management fee and the incentive for timely recovery,some offers also provide for a higher share in the upside(beyond full redemption of SRs) to ARCs,which income all contribute to the bottomline of the ARCs.
The interested ARCs after carrying out due diligence place their bids account wise or for a pool of assets as per the terms of offer, subject to the cash component of the bid amount being not less than 15% or as stipulated by the seller Bank/FI.The seller, if required negotiates with the highest bidder and confirms the sale.
The ARC forms a separate trust(SPV)and upon execution of an ‘Assignment Deed’ the Banks/Qualified Buyers(QB) and the ARC transfer their share of ‘Acquisition Cost’(Investment) to the trust account, which in turn is paid to the selling Bank/FI towards sale consideration. The trust then issues ‘Security Receipts’ to the investors corresponding to the investments made in the acquisition.
Post-acquisition of the debt, ARC will independently asses the borrower and explore various options available for maximising recovery within the stipulated 5-year period ,which in deserving cases may be extended to 8 years.
Out of the recoveries, the expenses incurred if any are appropriated first, the Management Fee and incentive if any payable to the ARC are appropriated next and the residual balance amount is used to redeem SRs proportionately. In case of excess recovery, beyond the principal acquisition cost, ARC also gets paid additional incentive on the upside as per terms of offer.
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