Asset reconstruction company is a specialised financial institution/ non-banking institution that are engaging in the business of purchasing ill assets/ non-performing assets of companies/banks. Such companies are also known as asset management companies. Hence, such companies manage the non-profitable assets of banks and other organisations. RBI registers such institutions as a banking financial company. Moreover, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up ARCs in India. Thus, under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of SARFAESI Act, 2002. Accordingly, in the 2021-22 budget, the government of India has announced the setting up of asset reconstruction companies to manage the bad loans of banks.
Some of the examples of ARC operating in India are-
- Pegasus Assets Reconstruction Private Limited
- Alchemist Asset Reconstruction Co Limited
- International Asset Reconstruction Co Private Limited
- Reliance Asset Reconstruction Company Limited
- Pridhvi Asset Reconstruction and Securitisation Co Limited
- Phoenix ARC Private Limited
- Invent Assets Securitisation & Reconstruction Private Limited
- JM Financial Asset Reconstruction Company Limited
- India SME Asset Reconstruction Company Limited (ISARC)
- UV Asset Reconstruction Company Limited
Functions of ARC
- Firstly, acquisition of financial assets [ section 2(L) of SRFAESI Act, 2002]
- Secondly, change or takeover of Management / Sale or Lease of Business of the Borrower
- Furthermore, rescheduling of Debts
- Again, enforcement of Security Interest [ section 13(4) of SRFAESI Act, 2002]
- Finally, settlement of dues payable by the borrower
RBI Guidelines for Securitisation and Asset Reconstruction Companies
- Firstly, the Reserve Bank of India (RBI) brought into force guidelines relating to securitization and Asset Reconstruction Companies (ARCs). Under various provisions of the SARFAESI Act, the RBI has issued the 2003 Guidelines and Directions.
- Secondly, the exception to the scope of the Directions is that most of the operative part of the Directions apply to a direct acquisition of assets by a SARC, but does not apply only if such assets are held as a trustee for a trust. The SARC has to settle a trust, be a trustee to such trust, and acquire assets as a trustee to fall outside the discipline of the Directions.
- Furthermore, SCs/RCs shall become members of JLF as described on ‘Framework for Revitalised Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)and shall be a part of the process with reference to such stressed assets.
- Finally, SCs/RCs shall obtain prior approval of Reserve Bank when transfers result in substantial change.