Assets Reconstruction Company Registration

Asset Reconstruction Companies, also known as ARCs, are financial institutions that are formally registered under the Companies Act 2013. These entities are tasked with examining NPAs and must be registered with the RBI, the governing body for such entities. The ARC is defined in Section 3 of the SARFAESI Act as financial institutions specializing in purchasing non-performing assets or bad loans. These institutions improve the liquidity in the market and maintain cleaner balance sheets for their banks.

Once ARC purchases the non-performing loans from financial institutions or banks, it assumes ownership of the assets and takes on the role of the lender in the deal. Now, they can proceed with recovering delinquent loans instead of the original lender. The rules and regulations of these entities are by the SARFAESI Act.

To receive an Asset Reconstruction Company Registration certificate, a business must apply to the RBI within six months of starting operations as per the SARFAESI Act. Asset reconstruction or scrutiny operations cannot proceed without the RBI registration certificate.

Definition of the SARFAESI Act

The SARFAESI Act of 2002 enables banks and financial institutions to efficiently recover non-performing loans by seizing and selling off assets. The SARFAESI Act offers multiple approaches for dealing with non-performing assets (NPAs). The SARFAESI Act essentially empowers financial institutions to take possession and stop. ARCs are established under the Act to buy assets from banks and other financial institutions.

Asset Reconstruction Companies gather and combine Non-Performing Assets from different lenders to expedite corporate restructuring. The main goal is to obtain and quickly sell Non-Performing Assets, tidy up financial records by decreasing Non-Performing Assets, minimize interactions with Non-Performing customers, and grant specific legal authority to a select few Asset Reconstruction Companies instead of every bank. The constant obstacle to the strong development of the Indian economy was the quick increase in bad debts/non-performing assets. Asset Reconstruction Companies were created as specialized organizations to assist in the securitization and reconstruction of non-performing assets to achieve quick resolution and inject liquidity into the system.

Criteria for Registering an Asset Reconstruction Company

An asset reconstruction company cannot start or operate an asset reconstruction business without:

• Getting a registration certificate
• Having a minimum net owned fund (NOF) of two crore rupees or a different amount of up to fifteen percent of total financial assets acquired or to be acquired by the securitization or reconstruction company, as specified by the Reserve Bank through notification.

Nevertheless, the RBI might introduce distinct requirements for owned capital for various types of securitization companies or reconstruction companies. Every company established specifically for conducting securitization must apply for approval within 6 months of this law taking effect, or within 6 months of its expiration.

• All securitization companies or reconstruction companies must apply for registration with the Reserve Bank in the specified form and manner.
• The Reserve Bank of India may need to inspect the records or books of an asset Reconstruction Company to assess its application for registration.

A company must meet the following requirements to be registered as an ARC.

• The company should not have experienced any financial losses in the years leading up to it.
• To obtain financial assets, the company needs sufficient infrastructure and appropriate arrangements.
• The company needs to provide regular profits to financial buyers and other investors who have invested in the company.
• The company directors must have experience in financial management, asset scrutiny, and reconstruction management.
• The directors need to have a good reputation in public and should not have any criminal convictions involving moral wrongdoing.
• The sponsor or promoter of ARC must fulfill all the requirements of RBI.

The company is required to adhere to the regulatory guidelines set by RBI.

According to RBI regulations, the company needs to have a minimum net-owned fund of 100 crores.

• Gather all the required paperwork and ready the ARC registration application as outlined by RBI.
• Make sure to register the company with RoC before applying for RBI registration.

Request registration with the RBI. 

• RBI may inspect the records, books, and assets of the Reconstruction company to assess its eligibility for the registration certificate before issuing it.
• If the RBI determines that all requirements have been met, it will issue a registration certificate to the recently established Asset Reconstruction Company.

• Company's articles of association and memorandum of association copies.
• Official copy of the company's certificate of incorporation.
• A board resolution stating that the company has not accepted any deposits is on file.
• Information about promoters or administrators and their educational and professional qualifications along with relevant documents.
• In-depth information about the director’s background, prior work experience, and other related details.
• A duplicate of the audit certificate from an accredited auditor.
• The balance sheet of the past three years has been reviewed by auditors and accompanied by reports from the directors.
• A declaration providing information about the capital possession.

Details about transactions within a party.

• The ARCs will purchase NPAs at a reasonable price based on the "Arm's length principle".
• The SARFAESI Act enables Asset Reconstruction Companies to purchase non-performing financial assets through a bank agreement. Banks and financial institutions may receive bonds/debentures in return for transferring NPAs to ARCs. A fraction of the amount may be given as Security Receipts (SRs).

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