(Registration of ARC and cancellation of certificate of registration under SARFAESI Act, 2002)
An Asset Reconstruction Company is a specialized financial institution that buys the Non Performing Assets (NPAs) or bad assets from banks and financial institutions so that the letter can clean up their balance sheets. In short, ARCs are in the business of buying bad loans from banks. ARCs clean up the balance sheets of banks when the banks sells the bad loans / NPSA to the ARCs. This helps banks to concentrate in normal banking activities. Bank rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SARFAESI) ACT, 2002 PROVIDES THE LEGAL BASIS FOR THE SETTING UP ARCS IN INDIA.
SECTION 2 (1) OF THE ACT EXPLAINS THE MEANING:
“Asset Securitization”
means acquisition of financial assets by any asset reconstruction company form any originator, whether by raising of funds by such asset reconstruction company from qualified buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.
“Asset reconstruction”
means acquisition by any asset reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance.
“Asset reconstruction company”
means a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both.
Asset Reconstruction Company is a company registered under section 3 of SARFAESI ACT, 2002. It is regulated by Reserve Bank of India as a Non Banking Financial Company (u/s 45I (f) (iii) of RBI Act, 1934). They operate their functions according to the guidelines issued by the RBI. RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934
REGISTRATION OF ASSET RECONSTRUCTION
COMPANIES:
Section 3 of SARFAESI Act, 2002 states that
(1) No Asset Reconstruction Company shall commence or carry on the business of securitisation or asset reconstruction without-
(a) Obtaining a certificate of registration granted under this section.
(b) Having net owned fund of not less than two crore rupees or such other higher amount as the Reserve Bank, may, by notification, specify:
Provided that the Reserve Bank may, by notification, specify different amounts of owned fund for different class or classes of asset reconstruction companies.
(2) Every Asset reconstruction company shall make an application for registration to the Reserve in such form and manner as it may specify.
(3) The Reserve Bank may, after being satisfied that the conditions specified in sub-section (6) are fulfilled, grant a certificate of registration to the Asset reconstruction company to commence or carry on business of securitisation or asset reconstruction, subject to such conditions, which it may consider, fit to impose.
(4) The Reserve Bank may reject the application made under sub-section (2) if it is satisfied that the conditions specified in sub-section (6) are not fulfilled:
Provided that before rejecting the application, the applicant shall be a reasonable opportunity of being heard.
(5) Every Asset reconstruction company shall obtain prior approval of the Reserve Bank for any substantial change in its management or change of location of its registered office or change in its name.
(6) The Reserve Bank may, for the purpose of considering the application for registration of a Asset reconstruction company must require to be satisfied by an inspection of records or books of such Asset reconstruction company , or otherwise, that the following conditions are fulfilled, namely:-
(a) That the Asset reconstruction company has not incurred losses in any of the three preceding financial years;
(b) That such Asset reconstruction company has made adequate arrangements for realisation of the financial assets acquired for the purpose of securitisation or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on the investments made in the company by the qualified buyers or other persons;
(c) That the directors of Asset reconstruction company have adequate professional experience in matters related to finance, securitisation and reconstruction;
(d) That any of its directors has not been convicted of any offence involving moral turpitude;
(d) That a sponsor of an asset reconstruction company is a fit and proper person in accordance with the criteria as may be specified in the guidelines issued by the Reserve Bank for such persons;
(e) That the Asset reconstruction company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank;
(f) That Asset reconstruction company has complied with one or more conditions specified in the guidelines issued by the Reserve Bank for the said purpose.
SECTION 4: CANCELLATION OF CERTIFICATE OF REGISTRATION:
(1) The Reserve Bank may cancel a certificate of registration granted to a asset reconstruction company, if such company-
(a) Ceases to carry on the business of securitisation or asset reconstruction; or
(b) Ceases to receive or hold any investment from a qualified buyer; or
(c) Has failed to comply with any conditions subject to which the certificate of registration has been granted to it; or
(d) At any time fails to fulfil any of the conditions referred to in Section 3 (6);
(e) Fails to –
Comply with any direction issued by the Reserve Bank under the provisions of this Act; or
Maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve bank under the provisions of this Act; or
Submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or
Obtain prior approval of the Reserve Bank required under subsection (5) of section 3:
Provided that before cancelling a certificate of registration on the ground that the asset reconstruction company has failed to comply with the provisions or has failed to fulfil any of the conditions referred by the Reserve Bank, unless it is of the opinion that the delay in cancelling the certificate of registration granted u/s 3(4) shall be prejudicial to the public interest or the interests of the investors or the asset reconstruction company, shall give an opportunity to such company on such terms as the Reserve Bank may specify for taking necessary steps to comply with such provisions or fulfilment of such conditions.
(2) An asset reconstruction company aggrieved by the order of cancellation of certificate of registration may prefer an appeal, within a period of thirty (30) days form the date on which such order of cancellation is communicated to it, to the Central Government. Provided that before rejecting an appeal such company shall be given a reasonable opportunity of being heard.
(3) An asset reconstruction company which is holding investments of qualified buyers and whose application for grant of certificate of registration has been rejected or certificate of registration has been cancelled shall, notwithstanding such rejection or cancellation, be deemed to be a asset reconstruction company until it repays the entire investments held by it together with interest, if any within such period as the Reserve Bank may direct.
Benefits of presence of registered Asset reconstruction Companies in the market:
Since the existence of ARCs the banking institutes have seen positive functioning abilities as there has been an entity to share the burden of Non-Performing Assets. They have brought some positive changes in the financial institutes. The ARCs have fastened corporate reconstruction by taking overt the NPAs from the market. The rapid process of acquisition and liquidation of NPA reduces the loss of valuable assets and time of banking institutes.
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