Kapil Agarwal Kapil Agarwal

During the late 1990s, in view of the rising level of bank NPAs, the Narasimham Committee II and Andhyarujina Committee were constituted to examine the scope for banking sector reforms and the need for changes in the legal system to resolve NPAs. These committees suggested a new legislation for securitisation, empowering banks and financial institutions (FIs) to take possession of the securities and sell them without the intervention of the court. Accordingly, the SARFAESI Act (the Act) was enacted in 2002 to provide an enabling environment for resolution of NPAs and for strengthening the financial sector. It provides three alternative methods for recovery of NPAs – securitisation, asset reconstruction and enforcement of security interests. It envisaged the formation of asset reconstruction companies (ARCs) under Section 3 of the Act. ARC’s primary goal is to acquire, manage and recover the financial assets which have been classified as NPAs by the banks/FIs. Presently, there are 24 ARCs in the country. The Reserve Bank has been assigned powers under the Act to regulate and supervise ARCs. An ARC can acquire and keep the financial asset – NPAs – in its own balance sheet or transfer it to one or more trust(s) (set up under Section 7 of the Act) at a price at which the asset was acquired from the originator (secured lender). Most of the deals are structured with a 15 per cent upfront payment to the seller banks/ FIs and issue of security receipts (SRs) for the remaining amount with a defined cash-flow waterfall. Management fee, a primary source of income for ARCs, has priority (after netting the expenses) over redemption of SRs. The trusteeship of such trusts vests with the ARC.

Kapil Agarwal

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Kapil Agarwal