Master Circular - Asset Reconstruction Companies

RBI/2023-24/12 DOR.SIG.FIN.REC 8/26.03.001/2023-24 April 03, 2023 All Asset Reconstruction Companies Dear Sir/Madam, Master Circular - Asset Reconstruction Companies In order to have all current instructions/ guidelines on the subject at one place, the Reserve Bank of India issues updated circulars/ guidelines . The instructions contained in The Asset Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 (vide Notification No. DNBS.2/CGM(CSM)-2003, dated April 23, 2003 ) together with Guidance Notes updated as on March 31, 2023 are reproduced below. Yours faithfully, (J P Sharma) Chief General Manager Table of Contents Paragraph No. Particulars 1 Applicability of the Guidelines/ Instructions 2 Definitions 3 Registration and matter incidental thereto 4 Net Owned Fund 5 Permissible Business 6 Asset Reconstruction 7 Securitisation 8 Requirement as to Capital Adequacy 9 Deployment of Funds 10 Accounting Year 11 Asset Classification 12 Investments 13 Income Recognition 14 Disclosures in the balance sheet 15 Internal Audit 16 Exemptions 17 Submission of Quarterly Statements 18 Submission of Audited Balance Sheet 19 Submission of data to Credit Information Companies 20 Filing of Transactions with Central Registry set up under the Act 21 Submission of Financial Information to Information Utilities 22 Reporting to Indian Banks’ Association (IBA) 23 Bank’s prior approval for any substantial change in management by way of transfer of shares 24 Fit and Proper Criteria for Sponsors/ Investors 25 Fair Practices Code 26 Corporate Governance Framework 27 ARCs as Resolution Applicant under Insolvency and Bankruptcy Code, 2016

Master Circular - Asset Reconstruction Companies

1. Applicability of the Guidelines/ Instructions (1) The provisions of these guidelines/ instructions shall apply to ARCs registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, in respect of the trust/s mentioned in paragraph 7 herein, the provisions of paragraphs 3, 4, 5,8, 9(i), 9(iii) 11,12,13 and 14 shall not be applicable. (2) ARCs covered by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their financial statements. In order to promote a high quality and consistent implementation as well as facilitate comparison and better supervision, the Reserve Bank has issued regulatory guidance on Ind AS vide circular DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated March 13, 2020 which alongwith subsequent instructions on the subject is applicable on such ARCs for preparation of their financial statements from financial year 2019-20 onwards.

2. Definitions (1) (i) "Act" means the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

• (ii) "Bank" means the Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act (RBI Act), 1934;
• (iii) “Break up Value” means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company;
• (iv) "Change in Management" means effecting change by the borrower at the instance of ARC in the person who has responsibility for the whole or substantially whole of the management of the business of the borrower and/ or other relevant personnel;
• (v) "Date of acquisition" means the date on which the ownership of financial assets is acquired by ARC either on its own books or directly in the books of the trust;
• (vi) "Deposit" means deposit as defined in the Companies (Acceptance of Deposits) Rules 2014 framed under Section 73 of the Companies Act, 2013;
• (vii) “Earning value” means the value of an equity share computed by taking the average of profits after tax as reduced by the preference dividend and adjusted for extra-ordinary and non-recurring items, for the immediately preceding three years and further divided by the number of equity shares of the investee company and capitalised at the following rate:
  • in case of predominantly manufacturing company, eight per cent;
  • in case of predominantly trading company, ten per cent; and
  • in case of any other company, including non-banking financial company, twelve per cent;
  • Note: If, an investee company is a loss-making company, the earning value will be taken at zero;
• (viii) “Fair value” means the mean of the earning value and the break up value;
• (ix) "Non-performing Asset" (NPA) means an asset in respect of which:
  • Interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date of acquisition or the due date as per contract between the borrower and the originator, whichever is later;
  • interest or principal (or instalment thereof) is overdue for a period of 180 days or more from the date fixed for receipt thereof in the plan formulated for realisation of the assets referred to in paragraph 6(C) herein;
  • interest or principal (or instalment thereof) is overdue on expiry of the planning period, where no plan is formulated for realisation of the assets referred to in paragraph 6(C) herein; or
  • any other receivable, if it is overdue for a period of 180 days or more in the books of the ARC;
  • Provided that the Board of Directors of an ARC may, on default by the borrower, classify an asset as NPA even earlier than the period mentioned above (for facilitating enforcement as provided for in Section 13 of the Act).
• (x) "Overdue" means an amount which remains unpaid beyond the due date;
• (xi) “Owned Fund" means the aggregate of
  • (a) paid up equity capital;
  • (b) paid up preference capital, to the extent it is compulsorily convertible into equity capital;
  • (c) free reserves (excluding revaluation reserve);
  • (d) credit balance in Profit and Loss Account as reduced by:
  • (e) the debit balance on the profit and loss account
  • (f) Miscellaneous Expenditure (to the extent not written off or adjusted);
  • (g) book value of intangible assets;
  • (h) under/ short provision against NPA/ diminution in value of investments;
  • (i) over recognition of income, if any;
  • (j) other deductions required on account of the items qualified by the auditors in their report on the financial statements;
• (xii) "Planning period" means a period not exceeding six months allowed for formulating a plan for realization of financial assets acquired for the purpose of reconstruction;
• (xiii) "Standard asset" means an asset, which is not an NPA;
• (xiv) "Takeover of Management" means taking over of the responsibility for the management of the business of the borrower with or without effecting change in management personnel of the borrower by the ARC;
• (xv) "Trust" means trust as defined in Section 3 of the Indian Trusts Act, 1882.

(2) Words or expressions used but not defined herein and defined in the Act, shall have the same meaning as assigned to them in that Act. Any other words or expressions not defined in that Act shall have the same meaning as assigned to them in the Companies Act, 2013.

3. Registration and matters incidental thereto (i) Every ARC shall apply for registration in the form of application hosted on the Bank’s website and obtain a certificate of registration from the Bank as provided under Section 3 of the Act; (ii) The ARC seeking registration from the Bank shall submit their application in the format specified at the clause (i) above, duly filled in with all the relevant annexures/ supporting documents to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai - 400 001; (iii) An ARC, which has obtained a Certificate of Registration issued by the Bank under Section 3 of the Act, can undertake both securitisation and asset reconstruction activities; (iii) (a) An ARC shall commence business within six months from the date of grant of Certificate of Registration by the Bank; Provided that on the application by the ARC, the Bank may grant extension for such further period, not exceeding 12 months from the date of grant of Certificate of Registration. (iii) (b) Provisions of Section 45 -IA, 45-IB and 45-IC of RBI Act,1934 shall not apply to non-banking financial company, which is an ARC registered with the Bank under Section 3 of the Act; (iv) Any entity not registered with the Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act subject to requisite authorisation/ approval.

4. Net Owned Fund (1) Net Owned Fund (NOF) for ARCs shall be minimum Rs.300 crore on an ongoing basis with effect from October 11, 2022. Consequently, any ARC obtaining the certificate of registration on or after October 11, 2022 shall not commence the business of securitisation or asset reconstruction without having minimum NOF of Rs. 300 crore. The following glide path is provided for the ARCs existing as on October 11, 2022 to achieve the minimum required NOF of Rs. 300 crore: