Transaction Structure:

Ø  ARC acquires NPA portfolios by floating an SPV which acts as a trust, with the ARC as a trustee and manager. NPAs are acquired from banks/FIs at fair value based on an assessment of the realizable amount tenor. The banks/FIs may receive cash/bonds/debentures as consideration or may invest in SRs issued by the ARC.

Ø  The trust acquires NPAs from banks/FIs and raises resources by devising fund/ schemes for the financial assets taken over. SRs represent undivided right, title and interest in the trust fund. Subsequently, the ARC redeems the investment to the bank/FIs out of the funds received from the issued securities. After acquiring the NPA, the trust becomes the legal owner and the security holders its immediate beneficiaries. The NPAs acquired are usually held in an asset-specific or portfolio trust scheme. In the portfolio approach, due to the small size of the aggregate debt the ARC constitutes a portfolio of the loan assets from different banks and FIs. When the size of the aggregate debt of a bank/FI is large, the trust takes the asset-specific approach.

Ø  Thereafter, different fund schemes are pooled together in a master trust scheme and sold to other investors on an agreed-term basis. The ARC periodically declares the NAV of the respective schemes.

Uniform Accounting guidelines for ARCs issued by RBI:

Ø  Every SC/RC shall prepare its balance sheet and profit and loss account as on March 31 every year.

Ø  Expenses incurred at the pre-acquisition stage for performing due diligence should be expensed immediately by recognizing them in the statement of profit and loss for the period in which they are incurred.

Ø  Expenses incurred after acquisition of assets on the formation of the trusts, stamp duty, registration, etc. which are recoverable from the trusts, should be reversed, if these expenses are not realised within 180 days from the planning period or downgrading of Security receipts (SRs) [i.e. Net Asset Value (NAV) is less than 50% of the face value of SRs] whichever is earlier.

Ø  The yield and upside income should be recognized only after the full redemption of the entire principal amount of SRs.

Ø  ARCs are advised in their balance sheet to classify all the liabilities due within one year as "current liabilities" and assets maturing within one year along with cash and bank balances as "current assets". Capital and Reserves will be treated as liabilities on liability side while investment in SRs and Long-term deposits with banks will be treated as fixed assets on the assets side.

Ø  Considering nature of investment in SRs where underlying cash flows are dependent on realization from non-performing assets, it can be classified as available for sale. Hence investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category. Net depreciation, if any shall be provided for. Net Appreciation, if any should be ignored.

Ø  All other investments should be valued at lower of cost or realisable value. Where market rates are available, the market value would be presumed to be the realisable value and in cases where market rates are not available, the realisable value should be the fair value. However, investments in other registered ARC shall be treated as long term investments and valued in accordance with the Accounting Standards and guidance notes issued by the Institute of Chartered Accountants of India (ICAI).

Ø  a “True sale” (this term would hereinafter include direct sale, assignment and any other form of transfer of asset, but not include loan participation through interbank participation certificates, bills rediscounted, outright transfer of loan accounts to other financial entities at the instance of the borrower and sale of bonds other than those in the nature of advance) should result in immediate legal separation of the “selling bank” (this term would hereinafter include the direct selling bank, assigning bank and bank transferring assets through any other mode) from the assets that are sold. The assets should stand completely isolated from the selling bank after their transfer to the buyer, i.e., put beyond the selling bank’s as well as its creditors’ reach, even in the event of bankruptcy of the selling/assigning/transferring bank. The selling bank should effectively transfer all risks/rewards and rights/obligations pertaining to the asset and should not hold any beneficial interest in the asset after its sale except those specifically permitted under these guidelines. The buyer should have the unfettered right to pledge, sell, transfer, exchange or otherwise dispose of the assets free of any restraining condition.