Personal Finance - fundraising

Ø As per Section 7(1), any asset reconstruction company may, after acquisition of any financial asset, offer security receipts to qualified buyers or such other category of investors including non-institutional investors as may be specified by the Reserve Bank in consultation with the SEBI, from time to time for subscription, without violating any provisions of the Companies Act, 2013 or SCRA, 1956 or SEBI Act, 1992.

Ø As per Section 7(2), an asset reconstruction company may raise funds from the qualified buyers by formulating schemes for acquiring financial assets. It shall ensure that such financial asset is realised and applied towards redemption of investments and payment of returns on such investments under the relevant scheme. The scheme may be a Trust managed by the company. The company shall hold the acquired assets or the funds so raised in trust for the benefit of qualified buyers holding the security receipt.

Note:

RBI guidelines on Securitisation: An ARC shall give effect to the provisions of sections 7(1) and (2) of the Act through one or more trusts set up exclusively for the purpose. The ARC shall transfer the assets to the said trusts at the price at which those assets were acquired from the originator if the assets are not acquired directly on the books of the trust:

Ø The trusts shall issue SRs only to QIBs; and hold and administer the financial assets for the benefit of the QIBs

Ø Every ARC shall issue the security receipts through the trust set up exclusively for the purpose. The trusteeship of such trusts shall vest with the ARC

Ø ARC proposing to issue Security Receipts, shall, prior to such an issue, formulate a policy, duly approved by the Board of Directors, providing for issue of security receipts under each scheme formulated by the trust and such policy shall provide that the SRs issued would be transferable / assignable only in favour of other QIBs.

Ø ARC shall by transferring funds, invest a minimum of 15% of the SRs of each class issued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme.

RBI Guidelines on disclosure relating to issue of SRs:

The following needs disclosure in Offer Document relating to SRs:

a. Relating to issuer of SR

Ø Name, place of Registered Office, date of incorporation, date of commencement of business of the ARC

Ø Particulars of sponsors, shareholders, and a brief profile of the Directors on the Board of the ARC with their qualifications and experience

Ø Summary of financial information of the company for the last three years or since commencement of business of the company, whichever is shorter;

Ø Details of Securitisation / Asset Reconstruction activities handled, if any, in the last three years or since commencement of business, whichever is shorter.

Ø Whether the scheme envisages the utilization of part of funds raised for restructuring of financial assets acquired out of such funds. If so, the percentage of funds raised which will be utilized for restructuring purposes.

b. Relating to terms of offer:

Ø Objects of offer

Ø Description of the instrument giving particulars relating to its form, denomination, issue price, etc together with an averment that the transferability of security receipts is restricted to the qualified institutional buyers;

Ø Arrangements made for management of assets and extent of management fee charged by ARC.

Ø Interest rate/probable yield and terms of payment of principal/interest, date of maturity/redemption

Ø Servicing and administration agreement

Ø Details of credit rating, if any, and a summary of the rationale for the rating;

Ø Description of assets being securitized including date of acquisition, valuation, and the interest of the ARC in the assets at the time of issue of SR

Ø Geographical distribution of asset pool;

Ø Residual maturity, interest rates, outstanding principal of the asset pool;

Ø Nature and value of underlying security, expected cash flows, their quantum and timing, credit enhancement measures

Ø Policy for acquisition of assets and valuation methodology adopted

Ø Terms of acquisition of assets from banks / financial institutions

Ø Details of performance record with the Originators

Ø Terms of replacement of assets, if any, to the asset pool;

Ø Statement of risk factors, particularly relating to future cash flows and steps taken to mitigate the same;

Ø Arrangements, if any, for implementing asset reconstruction measures in case of default

Ø Duties of the Trustee

Ø Specific asset reconstruction measures, if any, on which approvals will be sought from investors

Ø Dispute Redressal Mechanism

c. Quarterly Disclosures

Ø Defaults, prepayments, losses, if any, during the quarter

Ø Change in credit rating, if any

Ø Change in profile of the assets by way of accretion to or realisation of assets from the existing pool;

Ø Collection summary for the current and previous quarter

Ø Any other material information, which has a bearing on the earning prospects affecting the qualified institutional buyers;

Disclosures regarding Net Asset Value:

Ø Every ARC shall obtain initial rating of SRs from approved Credit Rating Agency within a period of six months from the date of acquisition of assets and declare forthwith the NAV of SRs issued by it.

Ø Thereafter, the rating/grading of SRs has to be obtained every year on June 30 and December 31 and NAV to be declared immediately, to enable QIBs to value their investment in SRs. For arriving at NAV, ARC shall get the SRs rated on ‘recovery rating scale’ and require the rating agencies to disclose the rationale for rating.

Ø As per Section 7(3), in the event of non-realisation of financial assets, the qualified buyers holding security receipts of not less than 75% of the total value of the security receipts issued under a scheme by the asset reconstruction company shall be entitled to call a meeting of all the qualified buyers.

An ARC can utilize a part of funds raised under a scheme from the QIBs for restructuring of financial assets acquired under the relative scheme subject to following conditions:

a. ARCs with acquired assets in excess of Rs.500 Crore can float the fund under a scheme which envisages the utilization of part of funds raised from QIBs in terms of Section 7(2) of the SARFAESI Act, 2002, for restructuring of financial assets acquired out of such funds.

b. The extent of funds that shall be utilized for reconstruction purpose should not be more than 25% of the funds raised under the scheme in terms of Section 7(2) of the SARFAESI Act, 2002. The funds raised to be utilized for reconstruction (within the ceiling of 25%) should be disclosed upfront in the scheme. Further, the funds utilized for reconstruction purposes should be separately accounted for.

c. Every ARC shall frame a policy, duly approved by the Board of Directors, laying down the broad parameters for utilization of funds raised from QIBs under such a scheme.

a. An ARC may, as sponsor and for the purpose of establishing a joint venture, invest in the equity share capital of an ARC formed for the purpose of asset reconstruction.

b. An ARC may deploy any surplus funds available with it, in terms of a policy framed in this regard by its Board of Directors, only in Government securities and deposits with scheduled commercial banks, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development or such other entity as may be specified by the Bank from time to time.

Ø Investment by ARC in land and building for its own use up to 10% of its owned fund is allowed.

Ø Land and Building can be acquired by ARC in the normal course of its business of reconstruction of its assets in accordance with the provisions of SARFAESI Act. But, such land and building shall be disposed of within 5 years of acquisition or such extended period as may be permitted by RBI.