Master Direction Asset Reconstruction Companies

On 24-04-2024, the Reserve Bank of India (‘RBI’), through powers conferred by Sections 3, 9, 10, 12, and 12-A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘Act’), issued Master Direction namely – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 (‘Directions’) to ensure prudent and efficient functioning of Asset Reconstruction Companies and to protect the interest of investors.

An Asset Reconstruction Company (‘ARC’) is a specialized financial institution that buys Non-Performing Assets 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. ARCs play a very critical role in enhancing the overall health of the financial system.

Key Points:

  1. These Directions shall come into effect on the day that they are placed on the website of the Reserve Bank i.e. 24-04-2024.

  2. These Directions shall apply to every ARC registered with the Reserve Bank under provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

  3. Any interpretation of any provision of these Directions given by the RBI shall be binding on all parties and these provisions shall be in addition to and not in derogation of the provisions of any other laws, rules, regulations, or directions for the time being in force.

  4. The RBI holds the power to exempt any ARC from all or any of these Directions either generally or for a specified period if it considers it necessary to take such action to avoid any hardship to any ARC.

  5. To commence the business of securitisation and asset reconstruction, an ARC is required to have a minimum net owned fund of Rs. 300 cr. and thereafter on an ongoing basis.

  6. An ARC shall commence/undertake only securitisation and asset reconstruction activities and functions provided under Section 10 of the Act.

  7. An ARC may also invest in the equity share capital of another ARC, deploy its funds for undertaking restructuring of acquired loan account, may deploy any surplus funds in terms of a Board-approved policy, shall invest in land or building, and shall not raise money by way of deposit.

  8. The Directions lays down guidelines on Asset Reconstruction and Securitisation wherein it is mentioned that every ARC shall frame a Board-approved ‘financial asset acquisition policy’ which shall provide that transactions transparently take place.

  9. The guidelines also state that the ARCs may participate in the auctions of financial assets provided such auctions are conducted transparently, and the prices are determined by the market forces.

  10. The Directions require the ARCs to formulate a plan for the realization of assets within the planning period which may provide for one or more of the measures as have been mentioned in the Directions.

  11. Certain measures for asset reconstruction have also been provided in the Directions.

  12. As per the Directions, ARCs are required to obtain the consent of secured creditors holding not less than 60 percent of the amount outstanding to a borrower for the purpose of enforcement of security interest.

  13. The Directions state that the ARC shall frame a Board-approved policy that lays down the broad parameters for the conversion of debt into equity of the borrower entity.

  14. Through the Securitisation policy of the Directions, RBI states that Security Receipts cannot be strictly characterized as debt instruments since they combine the features of both equity and debt. These Security Receipts are recognized as securities under the Securities Contracts (Regulation) Act, 1956.

  15. Section IV of the Directions states that every ARC would have to maintain a capital adequacy ratio of a minimum 15 percent of its total weighted assets.

  16. Every ARC shall classify the assets held in its books in two categories, namely — Standard assets and NPAs, after the degree of well-defined credit weaknesses and extent of dependence on collateral security are considered.

  17. The Directions also include a Fair Practices Code to achieve the highest standards of transparency and fairness in dealing with stakeholders, the implementation of which needs to be monitored by the Board.

  18. An effective internal control system that provides for periodical checks and review of the asset acquisition procedures and asset reconstruction measures that are followed must be put in place.

  19. Every ARC must become a member of at least one credit information company that has obtained Certification of Registration from the RBI in terms of the Credit Information Companies (Regulation) Act, 2005, and shall provide them accurate data on the borrowers periodically.

  20. The instructions/guidelines in the circulars mentioned in Annexure VII issued by the RBI stand repealed with the issue of these Directions.

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