Introduction to Asset Reconstruction

Asset Reconstruction Companies (ARCs)are specialized financial institutions licensed and regulated by Reserve Bank of India established for the purpose of resolving Non-Performing Assets(NPAs) of Banks & Financial Institutions(FIs). ARCs play a crucial role in the financial sector and help banks in resolution of their stressed loans. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002 provides the legal basis for setting up ARCs and facilitates Banks/FIs in hastening the process of recovery, without the intervention of the courts.

Banks sell NPAs either via an auction route or though bilateral arrangements.  These transactions are without recourse and can be in the form of only cash or a combination of cash and security receipts(SRs). ARCs shall, by transferring funds, invest in the SRs at a minimum of either 15% of the transferors’ investment in the SRs or 2.5% of the total SRs issued, whichever is higher of each class SRs issued by them under each scheme on a ongoing basis till the redemption of all the SRs issued under such Scheme.

Upon sale of a NPA,the selling Bank/FI assign the debt to an ARC,by virtue of which the assignee ARC steps into the shoes of the assignor and becomes entitled to exercising all it’s rights for ultimate recovery of the assigned dues by adopting any of the following measures (Sec.9 of SARFAESI Act,2002):

1. The proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower;

2. The sale or lease of a part or whole of the business of the borrower;

3. Rescheduling of payment of debts payable by the borrower;

4. Enforcement of security interest in accordance with the provisions of this Act;

5. Settlement of dues payable by the borrower;

6. Taking possession of secured assets in accordance with the provisions of this Act;

7. Conversion of any portion of debt into shares of a borrower company:

In addition to the above, ARCs may also carry out the following other functions (Sec.10 of SARFAESI Act,2002):

1. 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 as may be mutually agreed upon between the parties;

2. Act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be mutually agreed upon between the parties;

3. Act as receiver if appointed by any court or tribunal:

Important guidelines governing the business of ARCs:

1. Minimum Net Owned Fund requirement for ARCs increased to Rs. 300 crores to be achieved by 31st Mar,2026

2. ARCs shall maintain, on an ongoing basis, capital adequacy ratio of not less than 15% of its total risk weighted assets.

3. Foreign Direct Investment in Equity of Asset Reconstruction Companies registered with the Reserve Bank of India under Section 3 of SARFAESI Act. is allowed up to 100% on the Automatic route.

4. Persons resident outside India can invest in the capital of ARCs registered with Reserve Bank of India, up to 100% on the automatic route.

5. A sponsor is allowed to invest up to 100% in the Capital of ARCs.

6. The total shareholding of an individual FII/FPI shall be below 10% of the total paid-up capital.

7. FIIs/FPIs can invest in the Security Receipts (SRs) issued by ARCs up to 85% of each tranche in SRs issued by ARCs, subject to directions/guidelines of Reserve Bank of India. Such investment should be within the relevant regulatory cap as applicable.

8. All investments would be subject to provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended from time to time