Incorporation:

As per Section 2(1)(ba), the ARC has to be a Company incorporated under the Companies Act, 2013. Further, it has to be registered with the Reserve Bank of India. The main purpose of ARC has to be the carrying on the business of asset reconstruction and securitisation.

Conditions for Registration:

As per Section 3 of SARFAESI Act, an Asset Reconstruction Company shall obtain a certificate of registration from the Reserve Bank of India (RBI).

Such Company shall have net owned fund of not less than Rs.2 Crore or such other higher amount as the RBI may specify.

The RBI, vide Circular No. RBI/2016-17/295 DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17 dated April 28, 2017, has specified that keeping in view the greater role envisaged for ARCs in resolving stressed assets as also the recent regulatory changes governing sale of stressed assets by banks to ARCs, it has been decided to fix the minimum NOF requirement for ARCs at Rs.100 crore on an ongoing basis with effect from the date of the enclosed Notification.

The RBI, for the purpose of considering the application for registration, is required to be satisfied, by an inspection of records or books of such ARC, that the following conditions are fulfilled:

a.    The ARC has not incurred losses in any of the three preceding financial years.

b.    The ARC has made adequate arrangements for realisation of financial assets acquired for the purpose of securitisation or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates the investments made in the company by qualified institutional buyers (QIB) or other persons.

c.    The directors of ARC have adequate professional experience in matters related to finance, securitisation and reconstruction.

d.    The Board of Directors of ARC does not consist of more than half of its total number of directors who are either nominees of any sponsor or associated in any manner with the sponsor or any of its subsidiaries

e.    That any of its directors has not been convicted of any offence involving moral turpitude.

f.     That a sponsor of an ARC is a fit and proper person in accordance with the criteria specified by the Reserve Bank for such persons.

g.    That the ARC has complied with or is in a position to comply with prudential norms specified by RBI.

h.    That the ARC has complied with one or more conditions specified in the guidelines issued by RBI for the said purpose.

If RBI is satisfied that the conditions specified have been fulfilled, it can grant certificate of registration to the ARC with such conditions which it may consider fit to impose. Otherwise, the RBI may reject the application after giving the applicant a reasonable opportunity of being heard.

Prior Approval of RBI for substantial change in management: Every ARC shall obtain prior approval of the Reserve Bank for any substantial change in its management including appointment of any director on the board of directors of the asset reconstruction company or managing director or chief executive officer thereof or change of location of its registered office or change in its name:

Provided that the decision of the Reserve Bank, whether the change in management of a securitisation company or a reconstruction company is a substantial change in its management or not, shall be final.

"Substantial change in management" means the change in the management change affecting the sponsorship in the company by way of transfer of shares or amalgamation or transfer of the business of the company, namely:

Ø  any transfer of shares by which the transferee becomes a sponsor

Ø  any transfer of shares by which the transferor ceases to be a sponsor

Ø  an aggregate transfer of ten percent or more of the total paid up share capital of the ARC by a sponsor during the period of five years commencing from the date of certificate of registration.

Ø  a transfer shall be deemed to be a transfer of more than ten percent of the total paid up share capital of the ARC if the aggregate of all the transfer of shares made by the sponsor prior to that transfer, and including that transfer, is 10% or more of the total paid up share capital of the ARC.

Form of Application:

Ø  Every ARC shall apply for Registration in the form of application specified vide Notification No. DNBS.1/CGM(CSM)-2003 dated March 7, 2003.

Ø  The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India. The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in . At this stage, the applicant company will not need to log on to the COSMOS application and hence user ids are not required. The company can click on “CLICK” for Company Registration on the login page of the COSMOS Application. A window showing the Excel application form available for download would be displayed. The company can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company may note to indicate the correct name of the Regional Office in the field “C-8” of the “Annex-I dentification Particulars” in the Excel application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the online Company Application Reference Number, along with the supporting documents, to the concerned Regional Office.

Commencement of Business:

Ø  ARC to commence business within 6 months of obtaining registration from RBI. RBI can grant extension for further period of 6 months.

Exemptions from requirements of RBI Act:

Ø  Provisions of section 45-IA (regarding minimum net owned fund for NBFC), 45-IB (regarding maintenance of percentage of assets in approved securities) and 45-IC (relating to reserve fund) of RBI Act,1934 shall not apply to non-banking financial company, which is a SC / RC registered with the Bank under Section 3 of the SARFAESI Act, 2002

Owned Fund:

Ø  Owned fund to be not less than 15% of total financial assets acquired or to be acquired by ARC (irrespective of whether the assets are transferred to a trust set up for the purpose of Securitisation or held in its own books), or Rs.100 Crore, whichever is less.

Ø  The amount shall be continued to be held by the ARC until realisation of assets and redemption of Security Receipts (SRs) issued against such assets. The ARC can utilize this amount towards the SR issued by the trust under each scheme. This will ensure the stake of the ARC in the assets acquired;

Ø  the ARC shall, by transferring funds, invest in the SRs of each class issued by the trust set up for the purpose of securitization, an amount not less than 15% under each scheme and shall continue to hold the same on an ongoing basis till the redemption of all the SRs issued under such schemes.

Not to raise deposits: ARCs shall not raise monies by way of deposits.