Asset Reconstruction Companies are the companies that are formed to manage and recover Non Performing assets of the Banking Companies.
The main objective of such companies is to help banks in making their books clean by reducing the number of Non-Performing Assets. Such companies make profit by buying Non Performing Assets at a lower price.
Banks and Financial Institution with large proportion of bad loans or Non-Performing can sell those assets to a separate entity i.e. Asset Reconstruction Company. These entity will recover those sum through attachment or liquidation.
To create, operate and regulate Asset Reconstruction Companies an act known as Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest came into force since June, 2002.
Benefits of Asset Reconstruction Company:
- Asset Reconstruction Companies quicken the process of corporate restructuring by acquiring the Non-Performing Assets from various lenders.
- They rapidly liquidate Non-Performing Assets.
- By reducing the number of Non-Performing Assets the books of accounts of such financial institution are cleaned.
- By reducing the number of Non- Performing Assets the Institution has to deals with less number of Non Performing clients which ultimately save their time.
Capital needs for ARCs:
As per amendment made in 2016in SARFAESI Act, an ARC should have a minimum net owned fund of ₹ 2 crore. The RBI plans to raise this amount to ₹ 100 crore by the end of March 2019. Similarly, the ARCs have to maintain a capital adequacy ratio of 15% of its risk weighted assets.
Registration of securitisation companies or reconstruction companies.-
- No securitisation company or reconstruction company shall be allowed to commence or carry on the business of asset reconstruction or securitization until:
- It has obtained a certificate of registration granted under this section; and
- It has the owned fund of not less than two crore rupees or such other amount not exceeding 15% of total financial assets acquired or to be acquired by the Securitisation Company or reconstruction company, as the Reserve Bank may by notification, specify:
Note:For different classes of Securitization or Reconstruction Company Reserve Bank may specify different amounts of owned funds.
For the registration of securitisation or reconstruction company it shall before the expiry of six months from the date of commencement of this actmake an application to the Reserve Bank and it may continue to carry on the business of securitisation or asset reconstruction until a certificate of registration is granted to it orcommunication of rejection of such application is made to it.
- Every application for registration of the Securitisation or Reconstruction Company shall be made to the Reserve Bank in such manner or form as it may specify.
- Before granting the certificate of registration to securitization or reconstruction company the Reserve Bank will inspectthe records or books of such securitisation company or reconstruction company to satisfy itself that the following conditions are fulfilled, namely:-
- In any of the preceding 3 Financial Year the Securitisation Company or reconstruction company has not incurred any losses;
- Adequate arrangements for paying back periodical returns and realisation of financial assets that has been acquired by such Securitization or Reconstruction Company has been made;
- That all the directors of the securitisation or reconstruction company have adequate professional experience and knowledge in matters related to finance, securitisation and reconstruction;
- Not more than half of the total number of directors of such securitisation company or reconstruction company are either nominees of any sponsor company or in any manner associated with the sponsor company or any of its subsidiaries;
- That none of the directors of the asset reconstruction company has been convicted for any offence involving moral turpitude;
- That the sponsoring companyof such securitization or reconstruction company is not a holding company of such securitisation or reconstruction company ORin any manner does not hold any controlling interest in such securitisation company or reconstruction company;
- That the securitisation or reconstruction company is in the position to comply with all the specified prudential norms specified by the Reserve Bank.
- Only after the Reserve Bank is satisfied that all the prescribedconditions are fulfilled, it will grant a certificate of registration to the securitisation company or the reconstruction company to commence or carry on business of securitisation or asset reconstruction, but it may also impose some additional conditions, which it may consider fit.
- If the Reserve Bank is of the view that all or any of the prescribed conditions are not fulfilled it may also reject the application of registration.
- Before any substantial change in the management, change in the location of the registered office or change in the name of the reconstruction company prior approval of Reserve Bank shall be taken.
Provided that the decision given by the Reserve Bank, whether the change in management of a securitisation company or a reconstruction company is a substantial change or not, shall be final.
Explanation. – The expression substantial change in management means the change in the management by way of transfer of shares or amalgamation or transfer of the business of the company.