ASSET RECONSTRUCTION

COMPANY
Under guidance of Prof. Sumant Kelkar
 Group Members
Prasad C-21
Minal C-31
Roshan P-28

Sanjay C-41
Heena C-07
Prashant P-25

Agenda
• Origin and background of ARC
• Formation of ARC
• NPA’s Management
• Approaches to Resolution
• Foreign Investment in ARC
• ARCIL and RARC
• Laws and Regulations
 ORIGIN OF ARCS
 Established under SARFAESI Act(The Securitization
and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, ) 2002.

 Established to acquire, manage and recover illiquid or
‘Non-Performing’ Assets [NPAs] from Banks / FIs.

 Recovery value with optimal costs through its
innovative NPA resolution methods.

 BACKGROUND OF ARC’S.
 Recommended by narsimham committee2 to clean up
balance sheets.

ARC is a company which is set up with the objective of

 taking over distressed assets (Non performing assets)

from banks or financial institutions .
 to reconstruct or re-pack these assets to make those
assets saleable.

 Why there is need for ARCs in
India???
 In India, level of non-performing assets with banks
and FIs alarmingly high due to:
 Economic condition
 Poor repayment environment
 Government intervention in loan sanctions
 Loan waivers
 The Government of India has proactively taken steps
to clean up bad loans in the banking system
 MEANING OF ARC
 Reconstruction company is a company formed for
reconstruction


 FORMATION OF ARC’S

• General guidelines are given in the amendment of.

 SARFAESI Act which is done in 2004.
•
• Key requirements
1. Issuing a certificate.

2 . Director should have relevant professional exp.

 PROCESS OF ACQUISTION
• Can acquire the financial assets of non performing
asset companies on their own balance sheet.


 Issue of bonds or debentures for acquisitions
•

Non Performing Assets
 •
•
•
• Some facts in NPA
•
•
 Causes of NPA’s Formation

• Poor Credit Appraisal System



• Lack of Proper monitoring of lending portfolio



• Lack of corporate culture



• Non – Transparent accounting policy



• Abolition of License Raj.

 RESULT
• Credit Information Bureau (CIB)


• The Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest
Act,2002.


• Asset Reconstruction Companies(ARC)

•
•
Role of ARC under SARFAESI Act,
2002
•
• Improve the recovery and reduce NPA
• Acquisition of Interest
•
 What will ARCs do???
 Purchase the non performing assets from banks
 and financial institutions at a discount as high as
 75 per cent of the original value of the loan.

 NPAs can be assigned by banks and FIs. In turn these
assets will be reconstructed /re- packed and then
sold in the market in various forms or recovered
through securitization and reconstruction of
enforcement of security.

 Measures for Reconstruction specified u/s
9(a) to (f) of the Ordinance
• Proper management of business of borrower.
• Sale or lease of a part or whole of business of
borrower.
• Rescheduling of payment of debts payable by
borrower.
• Settlement of dues payable by borrower.
• Taking possession of secured assets
•
 Issues that deserve attention in
establishing ARCs
• Must have operational independence and sufficient
authority.
• There should be some kind of fiscal incentives.
• Cost control occupies an important place.
• There should be a mechanism to review the working
of ARC.
 The problem of non-performing
loans
• Owners do not receive a market return on their
capital.


• Lower deposit rates and higher lending rates



• Misallocate credit from good projects



• Which may lead to economic contraction

•
 Approaches to Resolution:

•
•
 Bank-led approach (Creditor-led approach)
Vs
 The AMC approach
Advantages of an ARC approach
 Centralization of bad loans in one or a few hands


 Banks do not have to deal with problem clients


 Easier capital-market based funding for an ARC
 Powers of ARC
• Possession
• Management
• Reduce the procedure[Short term]
• Decision on Asset
•
Functions of ARC
• Act as an agent
• Act as receiver
• Act as manager Sec 13 (4) (c)
• AS a service provider
• ARC not to undertake function of securitization and
no legal transfer of asset to its ownership, while
caring out the function
•
 Methods for NPA
• Securitization
• Asset reconstruction company
• Exemption from registration of security receipt
 RBI Guidelines
• Minimum owned fund of Rs.2 Crores (Sec-3)
• Capital Adequacy ratio
• Target
• No account to be maintain for asset of (Trust)
• Amount realization
• May invest amount of owned funds in the security
deposit issued by trust.
 Foreign Investments in Asset
Reconstruction Companies
• Government decided to permit Foreign Direct
Investment (FDI) in equity capital.


• Foreign Investment Promotion Board (FIPB) to

consider applications from persons/entities eligible
to invest in India in equity capital.
•
 Conditions
• Maximum foreign equity shall not exceed 49% of the
paid up capital.


• FDI alone will be permitted; investments by FIIs will

not be permitted.
 International Scenario
• In 1980s, U.S. used government sponsored ARC - Resolution
Trust Corporation (RTC) to overcome thrift crisis. RTC
acted as a "bad bank" and functioned as an effective sales
mechanism for disposal of assets.
• In the early 1990s Mexico and Sweden demonstrated
successful use of ARC mechanism.
• Korea used KAMCO as the nodal agency for acquiring and
disposing NPA’s.
• In Malaysia, Danaharta is the centralized ARC set up at the
instance of Government.
• Japan, China, Thailand and Indonesia have all used ARC
mechanism during the South-East Asian crisis.
•
 List of the name of ARC’s
 Asset Reconstruction Company (India) Ltd, (ARCIL)
 Assets Care Enterprise Ltd.,
 ASREC (India) Ltd,
 Pegasus Assets Reconstruction Pvt. Ltd.
 Dhir & Dhir Asset Reconstruction & Securitization
Company Ltd
 International Asset Reconstruction Company Pvt.
Ltd.(IARC)
 Reliance Asset Reconstruction Company Ltd.

 CONT…
• Pridhvi Asset Reconstruction and Securitization
Company Ltd.
• Phoenix ARC Pvt Ltd.
• Invent Assets Securitization & Reconstruction Private
Limited
• JM Financial Asset Reconstruction Company Limited
• India SME Asset Reconstruction Company Limited
(ISARC)
• Edelweiss Asset Reconstruction Company Limited
•
•
 ARCIL
 First Asset Reconstruction Company to commence
business of resolution of NPAs .
 In pursuance of Section 3 of the Securitisation Act
2002, it holds a certificate of registration dated
August 29, 2003, issued by the Reserve Bank of
India (RBI) and operates under powers conferred
under the Securitisation Act, 2002.

 CONTD………..
• Arcil has recently launched a retail NPAs resolution
initiative through Arcil-Arms (a division of Arcil).
• Arcil was incorporated as a public limited company
on February 11, 2002 and obtained its certificate of
commencement of business on May 7, 2003.
• Assets under management over Rs. 8000 cr

 Shareholdings of ARCIL
State Bank of India 64,816,980 19.95
IDBI Bank Ltd. 62,323,800 19.18
ICICI Bank Ltd. 43,076,000 13.26
Punjab National Bank 32,506,486 10.01
Lathe Investment Pte Ltd.1 32,164,818 9.90
Infrastructure Development Finance27,197,743 8.37
Company
First RandLtd.
Bank Ltd., South Africa 13,358,662 4.11
Barclays Bank, plc 9,733,514 3.00
Karnataka Bank Ltd. 8,562,600 2.64
ICICI Home Finance Company Ltd.7,340,000 2.26
The Karur Vyasya Bank Ltd. 6,380,000 1.96
Quiveo Enterprises Ltd. 4,400,000 1.35
The South Indian Bank Ltd. 4,139,300 1.27
Federal Bank Ltd. 4,139,300 1.27
Others 4,757,937 1.47
Total Shares Outstanding 324,897,140 100.00
 Business Model
• Declaration of a trust for the benefit of the holders of
the Security Receipts (SR) issued by the trust.
•
• The sellers are typically a bank or a financial
institution operating in India as defined under the
Securitisation Act, 2002.
•
• NPLs are acquired by Arcil under a trust structure.
 Contd…
• They reconstruct by adopting various measures as
prescribed under the Securitisation Act, 2002 to
realize value from the underlying assets.
•
• Portfolio of NPLs is prepared, the same should not be
modified during the process of sale having regard
to the substantial efforts put in by the prospective
buyers as well as the selling banks during the
process.
•
Structured along the DRA model

Management
Acquisition & Sell Down
Resolution
Sell asset Sell debt
Banks / FIs ARCIL Investor
SRs Proceeds
Restructuring

servicing
Debt

Company
 KEY DEVELOPMENTS FOR ASSET
RECONSTRUCTION COMPANY (INDIA) LIMITED

• Plans to Raise INR 20,000 Million. Both domestic

and foreign investors will contribute to the fund.
•
• To Acquire Stake In Southern Petrochemical
Industries Corp. Ltd(SPIC).


•
•
Reliance Asset Reconstruction
Company Ltd.
 Who are benefited by RARC ?
• Lenders
•
• Investors
•
• Asset Buyers
•
• Service Providers
 Challenges of ARC
•
• Sourcing funding from co-investors
•
• Working out the acquisition price
•
• Finding a way to speed up recovery process
 Major factors in the successful
functioning of ARCs
• Ensuring participation of FIIs which would bring in
new money and providing tax-exempt status would
reduce the intermediation costs further.


• Banks/FIs need to accelerate the sale of NPAs to

ARCs, thereby converting their illiquid, capital-
consuming NPAs to cash.
•
 Contd…
• ARCs need to provide an early exit to the banks from
NPAs.
• Well functioning of ARCs differ from other
businesses.
• Quality of team and resources available with them.
• Ability to work with the legal system.
•
 WEBLIOGRAPHY
• www.arcil.co.in
• www.banknetindia.com/banking
• www.iarc.co.in
• www.rarc.com
• www.google.com
•
Happy Teachers
Day