The document discusses Asset Reconstruction Companies (ARCs) in India. It provides details on the members of ARC Group 4, key attributes of ARCs such as RBI approval and net owned funds required. ARCs help banks by purchasing their non-performing assets (NPAs) so banks can focus on normal activities. The regulatory framework and role of ARCs in acquiring bad loans from banks, raising funds by issuing security receipts, and using legal powers to recover dues from borrowers is also summarized. Finally, it discusses the future of ARCs in addressing expected increased NPAs from COVID-19 pandemic.

1. ASSET
RECONSTRUCTION
COMPANY (ARC'S)
GROUP 4 MEMBERS:
• LAKSHAY SHARMA (247/2021)
• SAMRIDDH SINGH (206/2021)
• HIMANSHU RALHAN (250/2021)
• HARSHIT BANSAL (242/2021)
• SHIREEN TARAGI (222/2021)

2. INTRODUCTION
• An Asset Reconstruction Company is a
specialized financial institution that buys
NPAs or bad assets from banks and
financial institutions so that the latter can
clean up their balance sheets.
• In other words, ARCs are in the business of
buying bad loans from banks.
• It helps banks to concentrate on normal
banking activities.

3. KEY ATTRIBUTES
– RBI approval required for setting up ARC
– 100% FDI permitted
– Net Owned Fund (NOF) of at least INR 100 crore (USD 13.89 million)
– (CCDs not considered towards NOF)
– Permitted to undertake securitization and reconstruction activities only;
lending not permitted
– Can acquire “financial asset” from financial institution; to be realized within 8
years of acquisition
– Financial assets to be held through trusts
– Can be a sponsor or investor in another ARC or Acquire debt from another ARC
– Permitted to convert debt into 100% equity shares of borrower company subject
to provisions of loan documentation; does not trigger open offer under takeover
code

4. GENESIS
• The Committee on Banking Sector Reforms of 1991 (Narasimham Committee I)
had envisaged an asset management company (AMC) like structure, namely
an Asset Reconstruction Fund (ARF) to address the NPA crisis of that time.
• The current form of the ARC Model finds its root in one of the
recommendations of the Committee on Banking Sector Reforms of 1998
(Narasimham Committee II).
• Another important committee involved in shaping the current form of the
ARC model was the Expert Committee for Recommending Changes in the Legal
Framework concerning Banking System (Andhyarujina Committee) (1999-2000)
which, inter alia, had recommended a legal framework for securitization. The
current framework of securitization under the SARFAESI Act is based on the
Committee’s draft Securitisation Bill.
• The Government of India enacted the SARFAESI Act in 2002 and paved the way
for setting up ARCs in India. The Act envisaged that ARCs would be registered
and regulated by RBI. Accordingly, initial guidelines were issued by RBI in April
2003. The first ARC, namely, Asset Reconstruction Company (India) Limited,
was also registered in 2003. As on date, there are 28 ARCs in operation.

5. Regulatory Framework
• Like all companies, the asset reconstruction company has to
be incorporated under the Companies Act, 2013
• The legal genesis of the asset reconstruction company, as a
concept comes under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
• Most institutions in the banking space – such as private banks,
non-banking financial companies, payment banks, or small
finance banks are additionally under the purview of the Reserve
Bank of India. Asset reconstruction companies, being closely
integrated with the lending aspect of banking are no exception –
hence, the RBI also has the power to regulate it.

6. ROLE OF ARC
The asset reconstruction company
acquires assets through auctions of
non-performing assets of the banks.
They can also engage in contracts with
banks for such transfers.
Asset acquisition
After the acquisition, the asset
reconstruction company raises funds
from qualified buyers, sponsors, etc., in
exchange for security receipts. The
company itself acts as the trustee of
the fund.
Setting up of a Trust
A sponsor can acquire 10% or more
of the paid-up capital of the asset
reconstruction company.
Role of a Sponsor
The company then uses its powers
under the Securities and Reconstruction
of Financial Assets and Enforcement of
Security Interest Act, 2002 to recover
dues from the borrower. It has broad
powers of enforcing the collateral given
by the borrower to recover the amount.
Moreover, this includes the sale of any
asset – immovable or movable given as
a security while taking the loan
Reconstruction of loans
Taking over management of
the borrower’s business
After the acquisition, the asset
reconstruction company raises funds
from qualified buyers, sponsors, etc., in
exchange for security receipts. The
company itself acts as the trustee of the
fund.

7. IMPORTANCE OF ARC
The additional advantages include:
• Pooling of junk and doubtful assets
under trained management adept at loan
reconstruction.
• Injecting liquidity into the system
• Isolates bad loans from the financial
system to improve the overall outlook
• Freeing bank's resources to help them
focus on lending and credit generation
• Facilitates market development for
stressed assets.

8. Growth Pattern
Back to Lean Canvas Overview
Trend of AUM growth of ARCs*
– AUM increased by 7%
– AUM growth slowed on higher discount
rate and increase in SR redemptions
– Structural shift – substantial increase
in
cash share of acquisition cost

9. Growth Pattern
Back to Lean Canvas Overview
Trend of investment proportion by
different subscribers*
– Investment by investors increased
as against selling institutions
– Foreign banks, stressed assets
funds and global pension funds,
subscribed to ~60% of total SRs
issued

10. FUTURE OF ARC
• The movement in asset quality of banks and NBFCs following the Covid-19 pandemic could bring
ARCs into greater focus and action.
• The ARC proposed in the Budget will be set up by state-owned and private sector banks, and
there will be no equity contribution from the Centre.
• The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets,
will look to resolve stressed assets of Rs. 2-2.5 lakh crore that remain unresolved in around 70
large accounts.
• The introduction of a new ARC for addressing the NPAs of public sector banks may also shape
the operations of the existing ARCs.
• There is a definite scope for the entry of a well-capitalised and well-designed entity in the Indian
ARC industry. Such an entity will strengthen the asset resolution mechanism further.