Asset Reconstruction Company (ARC) [Securitization Company (SC)/Reconstruction Company (RC)] is a company set up to provide a focused approach to the problem of Non Performing Assets of Banks, popularly known as NPAs:

• Isolating NPAs from the Financial System (FS),
• Freeing the FS to focus on their core activities and
• Facilitating development of market for distressed assets.

It is registered under The Companies Act, 1956 and regulated by Reserve Bank of India as an Non Banking Financial Company [u/s 45I ( f ) (iii) of RBI Act, 1934]. RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934.

It has legal standing under section 3 of the "Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002".

The pilot ARC, in India, is Asset Reconstruction Company (India) Limited.

ARC will function like a Mutual Fund. The assets acquired by ARC will be transferred to one or more trusts [set up u/s 7(1) and 7(2) of SRFAESI Act, 2002] at the price at which the financial assets were acquired from the originator (Banks/FIs). The trusts shall issue Security Receipts to Qualified Institutional Buyers [as defined u/s 2(u) of SRFAESI Act, 2002]. The trusteeship of such trusts shall vest with the ARC.

ARC will get only management fee from the trusts. Any upside in between acquired price and realized price will be shared with the beneficiary of the trusts (Banks/FIs) and ARC. Any downside in between acquired price and realized price will be borne by the beneficiary of the trusts (Banks/FIs). In fact, ARC is a bankruptcy remote company.

Some of the key reasons on account of which Banks / FIs may sell NPAs to ARC include:

• The sale of the financial assets to ARC enables the NPA to be taken off the loan books of the Bank / FI and unlocks capital. Investment in these assets shall be treated as performing as per RBI guidelines.
• ARC will bring about faster debt aggregation and resolution of inter creditor issues. This is especially critical as NPAs lose value by 20-30% each year.
• Debt aggregation by ARC will enable single point responsibility and ensure speedy implementation of resolution strategy.
• Sale of NPAs on a portfolio basis enables loss on sale of any one asset to be set off against capital gains on another, subject to RBI guidelines on provisioning / valuation norms.
• Reduces expenditure on NPA maintenance (legal expenditure, follow-up requirements etc.) and releases resources for core operations.