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Asset Reconstruction Company: Financial Requirements, Prerequisites & Procedure

Narasimham Committee (1998) suggested establishing an Asset Reconstruction Company with the exclusive purpose of acquiring Non Performing Assets from banks and other financial organizations.

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asset reconstruction company

Asset Reconstruction Company

At the height of the Asian Financial Crisis, the non-performing assets of India were at a staggering rate of 14.4%. 

In light of this, the Narasimham Committee (1998) suggested establishing an Asset Reconstruction Company with the exclusive purpose of acquiring Non Performing Assets from banks and other financial organizations.

In response to that, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 was passed. 

It was signed into law in December of that same year, providing India with the legal framework for the establishment of an Asset Reconstruction Company.

The following article will provide a brief overview of Asset Reconstruction Company. The article will discuss the prerequisites, steps, and financial requirements to register an Asset Reconstruction Company.

Brief of Asset Reconstruction Company

An Asset Reconstruction Company, or ARC, is a unique type of organization that is registered in accordance with the Companies Act of 2013.

The main objective of this business is specifically the securitization of financial assets. According to the SARFAESI Act’s regulations, every entity that wants to engage in ARC activities must register with the RBI.

A percentage of the bank’s debts that meet the criteria to be classified as non-performing assets are acquired by the ARCs. ARCs can only acquire secured debts that have been designated as non-performing assets (NPA).

Therefore, it is important to register an Asset Reconstruction Company since ARCs are in the business of repurposing assets, securitizing them, or doing both. ARCs can only acquire secured debts that have been designated as non-performing assets (NPA).

As a result, these businesses make sure that non-performing assets, bad debts, and other assets are bought from banks and other financial entities in order to develop and maintain adequate liquidity.

An ARC, after Asset Reconstruction Company registration, will take the required actions for loan recovery after it has legitimately acquired the loans, just as if it were the original lender.

Asset Reconstruction Companies, or ARCs, are authorized by the Reserve Bank of India(RBI). They carry out their duties in accordance with the rules set forth by the RBI. Presently, there are 27 ARCs listed with the Reserve Bank of India.

Meaning of SARFAESI Act

SARFAESI Act, also known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, is a legislative act that enables banks and other financial institutions to efficiently recover bad loans.

The SARFAESI Act can be used in a variety of ways to address the issue of non-performing assets (NPAs).

The SARFAESI Act essentially gives financial institutions the authority to “seize and desist.” Asset Reconstruction Companies (ARCs) are incorporated in accordance with the Act in order to purchase assets from banks and other financial organizations.

Asset Reconstruction Company Registration

No corporation engaged in the business of securitization or asset reconstruction may begin or continue asset reconstruction company registration first without:

  • Acquiring an asset reconstruction company registration certificate.
  • Possessing a net worth of at least Rs. 2 crores, or a sum greater as specified by the Reserve Bank in an announcement that does not surpass 15% of the overall financial assets of the securitization firms or reconstruction businesses. has obtained or will obtain.

The RBI can, nevertheless, announce particular held fund requirements for various categories of securitization firms or reconstruction businesses.

All businesses established solely with the intention of engaging in securitization operations are required to submit an application for such within six months or the conclusion of six months of the law’s enactment.

  • To register an Asset Reconstruction Company, businesses must submit an application for Asset Reconstruction Company Registration to the Reserve Bank in the format and method specified by the latter.
  • For the sake of evaluating a request for Asset Reconstruction Company Registration, the Reserve Bank of India might necessitate that certain conditions be met through an examination of the company’s records or documents.

Prerequisites to register an Asset Reconstruction Company

In order to register an ARC, there are certain prerequisites or eligibility standards that must be met. 

This prerequisite or eligibility standards are the following:

  • The business must be established as a firm in accordance with the Companies Act of 2013.
  • After the firm is established, it should meet the requirements of the applicable statutory provisions in order to qualify for registering with the Reserve Bank of India.
  • In order to register an Asset Reconstruction Company, the business shouldn’t have suffered any significant losses over the last fiscal year or the three years before that.
  • If there exists a procedure for asset realization, then suitable arrangements must be made for the purposes of securitization and asset reconstruction.
  • The Asset Reconstruction Company should be capable of paying each and every periodical return.
  • In order for eligible purchasers and investors to make investments in the firm, the company must be competent enough to repay the full amount of those investments.
  • Directors need to have a suitable level of experience and knowledge in topics relating to financial concerns, such as recovery, insolvency, capital instruments, and other regulatory-related domains.
  • The directors cannot have any criminal charges against them.
  • The stockholders and directors shouldn’t have engaged in any actions that reflect poorly on their moral character. All actions that could result in legal action is also not allowed.
  • All important management personnel or individuals must meet the necessary criteria to be fit and appropriate person test requirements to be in compliance with the Act’s standards. The RBI will occasionally announce the criteria for the fit and suitable examination. The sponsors of the company would likewise be subject to these standards and requirements.
  • The organization is in charge of adhering to the economic and regulatory standards established by the Reserve Bank of India.
  • There are specified rules of the Reserve Bank of India that must be adhered to in order to register an Asset Reconstruction Company in India.

In order to register an Asset Reconstruction Company, the candidate can move forward with the procedure if the above standards are satisfied.

 

Process to register an Asset Reconstruction Company

process to register an asset reconstruction company

An Asset Reconstruction Company Registration can be done using the following steps:

  1. Filing an Application
    • In order to register an Asset Reconstruction Company, the candidate must meet all necessary requirements relating to the ARC registration procedure.
    • According to the specifications of the relevant law, all application forms for ARC registration must be completed and submitted to the relevant authorities.
  2. Preparing Documents
    • The candidate would be required to submit the necessary documents and records to the relevant authority along with the application form for an Asset Company Registration.
    • The Reserve Bank of India is the appropriate regulatory body.
  3. Authentication Procedure
    • After receiving the necessary documents and records, RBI would do a thorough examination of the documents.
    • To determine if the company is economically stable enough to perform all the responsibilities mandated by the ARC, the RBI would handle all the work involved in reviewing the company’s financial records.
  4. Providing The Certificate
    • In the event that there are no problems with the application form and the documents, the Reserve Bank of India would provide the asset reconstruction company with the certificate of registration.
    • However, if the requirements regarding the Asset Reconstruction Company Registration are not met, then the application form to register an Asset Reconstruction Company will be rejected by the Reserve Bank of India.

Documents for Asset Reconstruction Company registration

The following documents must be submitted in order to register an Asset Reconstruction Company:

  • The firm’s certificate of incorporation.
  • Article Of Association (AOA) of the firm.
  • Memorandum Of Association (MOA) of the firm.
  • Details indicating that, in accordance with the Companies Act’s provisions, the directors are not ineligible
  • Details pertaining to the firm’s management. Stockholders and company directors would make up the management of the business.
  • Data and profiles pertaining to the firm’s sponsors
  • Resolutions indicating that no payments of any kind have been received or accepted by the firm. The firm’s board of directors would be required to abide by these resolutions.
  • Certified Copies of the Certificate of Audit issued by the Firm’s Auditor.
  • Details of the audited balance sheet of the firm.
  • Data showing the director’s and auditor’s assessment of the firm.
  • Net Owned Assets of the firm.
  • A thorough report on Related Party Transactions (RPT).

 

Financial requirements of an Asset Reconstruction Company

  • According to the revision made to the SARFAESI Act in the year 2016, an ARC must have at least a minimum net-owned capital of Rs. 2 crores.
  • However, In 2017, the RBI increased this sum to Rs. 100 crores. Additionally, the ARCs are required to keep their ratio of capital adequacy at 15% of their risk-weighted assets.
  • In an attempt to lower the probability of insolvency, banks and other financial organizations should adhere to a certain level of capital, which is determined by risk-weighted assets.

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Conclusion

The above article gives a brief overview of Asset Reconstruction Company. It talks about the various steps and documents required for an Asset Reconstruction Company registration.

For more queries regarding the steps to register an Asset Reconstruction Company, you can consult Odint Consultancy. Our team of professionals will help you solve your queries.

FAQ’s

An Asset Reconstruction Company, or ARC, is a unique type of organization that is registered in accordance with the Companies Act of 2013. The main objective of this business is specifically the securitization of financial assets.

Asset Reconstruction Companies, or ARCs, are authorized by the Reserve Bank of India(RBI).

SARFAESI Act, also known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, is a legislative act that enables banks and other financial institutions to efficiently recover bad loans.

A non-performing asset (NPA) is a categorization employed by financial organizations for loans and advances with the principal that is overdue for payment and for which no interest payments have been conducted for a number of months.

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