What is ARC ?
ARC means a Securitisation company(SC) or Reconstruction company(RC) registered under the Companies Act, 2013 and which has obtained a certificate of registration from Reserve Bank of India to commence or carry on the business of securitisation or assets reconstruction under section 3 of the SARFAESI Act, 2002 . A SC or RC apart from undertaking securitisation and reconstruction activities may also carryout the following functions provided under section 10 of the Act :
- Act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges.
- Act as a manager to manage the secured assets possession of which is taken by any bank or financial institution.
- Act as receiver if appointed by any court or tribunal.
What Are functions of ARC ?
- Acquisition of Financial Assets in accordance with the provisions of the SARFAESI Act.
- Change or takeover of Management/Sale or Lease of Business of the Borrower.
- Rescheduling of Debts.
- Enforcement of Security Interest in accordance with the provisions of the SARFAESI Act.
- Settlement of dues payable by the borrower.
- Act as an agent for any Bank/ FI for recovering their dues.
- Act as a receiver if appointed by any court or tribunal.
- Taking possession of secured assets in accordance with the provisions of the SARFAESI Act.
- Act as a manager to manage the collateral assets taken over by the lenders under security enforcement rights available to them.
Uniform Accounting Standards at ARCs
The Reserve Bank of India (RBI) prescribed uniform accounting standards for asset reconstruction companies (ARCs) for acquiring non-performing loans, recognising revenue and management fees to ensure common treatment for firms.
Pursuant to the recommendations of the Key Advisory Group (KAG) constituted by the Government of India on the Asset Reconstruction Companies (ARCs), Reserve Bank of India advises the guidelines on uniform accounting standard for ARCs as under:
a. Acquisition cost (Pre and post acquisition)
Expenses incurred at pre acquisition stage for performing due diligence etc. for acquiring financial assets from banks/ FL’s should be expensed immediately by recognizing the same in the statement of profit and loss for the period in which such costs are incurred.
Expenses incurred after acquisition of assets on the formation of the trusts, stamp duty, registration, etc. which are recoverable from the trusts, should be reversed, if these expenses are not realised within 180 days from the planning period or downgrading of Security receipts (SRs) (i.e. Net Asset Value(NAV) is less than 50% of the face value of SRs ) whichever is earlier.
b. Revenue Recognition-
(i) Yield should be recognised only after the full redemption of the entire principal amount of Security Receipts.
(ii) Upside income should be recognized only after full redemption of Security Receipts.
(iii) Management fees should be calculated and changed as a percentage of the NAV calculated at the lower end of the range of the Recovery Rating specified by the Credit Rating Agency (CRA) provided that the same is not more than the acquisition value of the underlying asset. However, management fees are to be reckoned as a percentage of the actual outstanding value of SRs, before the availability of NAV of SRs.
Management fees may be recognized on the accrual basis. Management fees recognized during the planning period must be realized within 180 days from the date of expiry of the planning 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 will be reversed if before the prescribed time for realisation, NAV of the SRs fall below 50% of face value. However, ARCs are allowed to write off the accrued unrealised Management Fee receivables prior to March 31 , 2014 in a staggered manner in four half-yearly installments over a period of two years, 2014-15 and 2015-16 subject to the disclosure of age wise such receivables in the Balance Sheet of the company.
iv) The income recognition on all other items shall be based on recognised accounting principles.
v) All the Accounting Standards and Guidance Notes issued by the ICAI shall be followed in so far as they are not inconsistent with the guidelines contained herein;
vi) Interest and any other charges in respect of all the NPAs shall be recognised only when they are actually realised. Any such unrealised income recognised by an ARC before the asses became non-performing and remaining unrealised shall be derecognised.
c. Methodology for valuation of SRs for declaration of NAV
Each rating category in the recovery scale will have an associate range of recovery, expressed in percentage terms , which can be used for computing NAV of SRS. The NAV should be restricted with in 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 indicated by the Rating Agency. The Recovery Rating percentage so picked by the ARC multiplied by the face value of the SR will give the NAV. The ARC should provide the rationale for selection for the particular percentage of Recovery Rating.
d. Applicability of ‘Operating Cycle Concept’ under Schedule VI
SC/ RCs are advised in their balance sheet to classify all the liabilities due within one year as “current liabilities” and assets maturing within one year along with cash and bank balances as “current assets”. Capital and Reserves will be treated as liabilities on liability side while investment in SRs and Long term deposits with banks will be treated as fixed assets on the assets side. 3. The accounting guidelines will be effective from the accounting year 2014-15.
Restructuring support finance-participation by investors
Value Maximization in NPAs occurs only after detailed workout involving restructuring. To make this exercise successful, infusion of fresh funds to scale up operations to optimal level is essential. While RBI has already issued Guidelines for disbursal of Restructuring Support Finance (RSF) by ARCs to scale up operational efficiency, source of funding is constricted due to paucity of funds with ARCs. To make restructuring viable, depth of liquidity is a necessary pre-condition. ARCs can contribute maximum to the growth of economy by successful turnaround of companies increasing capacity, boosting output and improving employment. Here ARCs should be permitted to draw upon deep pockets with necessary skill and resources to work out viable turnaround cases.
At present Funds mobilized from investors is utilized only for acquisition of financial assets.
- In case funds mobilized from investors is utilized for acquisition of financial assets with restructuring as resolution strategy and with extending RSF for successful implementation of the restructuring package, draw down may be permitted from the Fund for extending RSF in addition to for acquisition of financial assets.
What Are Foreign Investments in India ?
Foreign Investment in India has been the direct outcome of the liberal trade policies undertaken and implemented by successive governments. The liberalization program of the government aims at rapid and substantial growth of the country’s economy and besides a harmonious integration with global economy. While foreign investment in India comprises of investments made by overseas companies in India, the reverse i.e. outflow of foreign investment from India is also prevalent in the Indian economy. Foreign investment in India has created some wonderful opportunities in the country in terms of creating employment and improving the basic infrastructure of the country.
Foreign Investment in India has huge potentials. However, foreign investment in India has its own share of advantages and disadvantages. Overseas investors must prepare themselves well in advance to face with adversities and deal with them properly. Some of the drawbacks that investors may have to face are bureaucratic hassles, infrastructural deficiencies, power shortages and sometimes political uncertainty. Despite these uncertainties, India presents a huge potential to global players to invest in the market. Many leading overseas brands have already invested while some of the companies have plans in the pipeline to invest in India.
Foreign Investment Policy in India
The government has undertaken various liberal policy decisions to make the whole process of foreign investment in India hassle free. Some of the foreign investment policies include:
1. The list of industries that are eligible for automatic approval of foreign investment has been expanded by the Ministry of industry.
2. The upper limit of the rate of foreign investment in India has been raised to 74% from the earlier 49%; in some cases this has been increased to 100%.
3. Indian companies will no longer need prior clearance from the reserve Bank of India, RBI for inward remittance of foreign exchange or for issuing of shares to foreign investors.
4. The exchange control regulations has been amended by the government.
5. The ban against the use of foreign brand names/trademarks has been removed.
6. The corporate rate of corporate tax on foreign companies has been reduced from 65% to 55% by the government in the annual budget of 1994-95.
7. The government reduced long term capital gains rate for overseas companies to 20%.
8. Under the Indian Income Tax Act, export earnings are exempted from corporate income tax for both overseas and domestic firms.
9. 100% inflow of foreign investment is permitted in strategic sectors such as roads, ports, tunnels, highways and harbors on the condition that the total investment in any of the sector should not exceed ` 1500 crore.
10. Any increase within the prescribed limit does not require permission from the foreign investment promotion board.
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