As per SARFAESI Act, the nature of business of asset reconstruction is as under:

Section 5: Acquisition of rights or interest in financial assets:

Any asset reconstruction company may acquire financial assets of any bank or financial institution as under:

a.    By issuing debenture or bond for agreed consideration.

b.    By entering into an agreement for transfer of financial assets to the company on the agreed terms and conditions.

Ø  Stamp Duty exemption: As per Section 5 (1A), Any document executed by any bank or financial institution in favour of the asset reconstruction company under sub-section (1) for the purpose of acquiring financial assets shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899.

Ø  No requirement of asset acquired being NPA in bank books: As per Section 5 (1B), an asset reconstruction company may acquire the financial asset of any bank or financial institution for the purpose of asset reconstruction where a borrower has failed to pay the secured debt or any instalment thereof on due date, whether or not the account of such borrower is classified as non-performing asset.

Ø  Deemed to be lender: As per Section 5(2), if the bank or financial institution is a lender in relation to any financial assets acquired by an asset reconstruction company, such company shall be deemed to be the lender. All rights of such bank or financial institution shall vest in such company in relation to such financial assets.

Ø  Notice to Obligor and discharge of obligation: As per Section 6(1), the bank or financial institution may give a notice of acquisition of financial assets by any asset reconstruction company, to the concerned obligor and any other person and concerned registering authority (including Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment or other interest created on the financial assets had been inserted.

Ø  As per Section 6(2), where any notice is given by the bank or financial institution, the obligor shall make payment to the concerned asset reconstruction company. Payment made to such company shall be a full discharge to the obligor making the payment from the liability.

Ø  As per Section 6(3), where no notice is given by a bank or financial institution, any money or other properties subsequently received by the bank or financial institution shall constitute monies or properties held in trust for the asset reconstruction company. The bank or financial institution shall forthwith deliver such payment or property to such asset reconstruction company, or its authorised agent.

Resolution of Disputes: As per Section 11, any dispute relating to securitisation or reconstruction or non-payment of dues including interest amongst the parties, namely, bank or financial institution or asset reconstruction company or qualified buyer shall be settled by the conciliation or arbitration provided in the Arbitration and Conciliation Act 1996.

RBI guidelines regarding acquisition of financial assets by ARCs: As per RBI notification No.RBI/2015-16/94 DNBR.(PD).CC.No. 03/SCRC/26.03.001/2015-16 dated July 01, 2015, the guidelines for acquisition of financial assets are as under:

a.    Every ARC to form a policy, with the approval of the Board of Directors, regarding acquisition of financial assets within 90 days of grant of registration by RBI which, inter alia, should provide for:

Ø  norms and procedure for acquisition either on its own books or directly in the books of the trust

Ø  types and the desirable profile of the assets

Ø  valuation procedure ensuring that the assets acquired have realisable value which is capable of being reasonably estimated and independently valued

Ø  in the case of financial assets acquired for asset reconstruction, the broad parameters for formulation of plans for their realisation.

Ø  transactions to take place in a transparent manner and at a fair price in a well-informed market, and the transactions are executed on arm's length basis by exercise of due diligence.

b.    The Board of Directors may delegate powers to a committee comprising any director and / or any functionaries of the company for taking decisions on proposals for acquisition of financial assets.

c.    Deviation from the policy should be made only with the approval of the Board of Directors.

d.    Before bidding for the stressed assets, ARC may seek from the auctioning banks adequate time, (not less than 2 weeks), to conduct a meaningful due diligence of the account by verifying the underlying assets.

e.    ARCs are not permitted to acquire any non-performing financial asset from their sponsor banks on a bilateral basis, whatever may be the consideration. However, they may participate in auctions of NPA by their sponsor banks provided such an auction is conducted in a transparent manner, on arm’s length basis, at prices determined by the market factors.

f.     The share of financial assets to be acquired from the bank / FI should be appropriately and objectively worked out keeping in view the provision in the Act requiring consent of secured creditors holding not less than 60% of the amount outstanding to a borrower for the purpose of enforcement of security interest;

g.    For easy and faster realisability, all the financial assets due from a single debtor to various banks / FIs may be considered for acquisition. Similarly, financial assets having linkages to the same collateral may be considered for acquisition to ensure relatively faster and easy realisation.

h.    Both fund and non-fund based financial assets may be included in the list of assets for acquisition. Assets classified as SMA- 2 in the books of the originator may also be acquired.

i.      Acquisition of funded assets should not include takeover of outstanding commitments, if any, of any bank / FI to lend further. Terms of acquisition of security interest in non-fund transactions, should provide for the relative commitments to continue with bank / FI, till demand for funding arises.

j.      Loans not backed by proper documentation should be avoided.

k.    As far as possible, the valuation process should be uniform for assets of same profile and should ensure that the valuation of the financial assets is done in scientific and objective manner. Valuation may be done internally or by engaging an independent agency, depending upon the value of the assets. Ideally, valuation may be entrusted to the committee authorised to approve acquisition of assets, which may carry out the task in line with an Asset Acquisition Policy laid down by the board of directors in this regard.

l.      The assets acquired by ARC should be transferred to the trusts set up by the ARC at the price at which these were acquired from the originator of the asset. However, there is no restriction on acquisition of assets from banks / FIs directly in the books of trusts set up by ARC.