Solution: ARC is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
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Asset Reconstruction Company:
- ARC is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
- ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
- They take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets.
- They are engaged in the business of asset reconstruction or securitisation or both.
- All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC.
- The required funds to purchase such debts can be raised from Qualified Buyers.
What is asset reconstruction?
- It is the acquisition of any right or interest of any bank or financial institution in loans, advances granted, debentures, bonds, guarantees or any other credit facility extended by banks for the purpose of its realisation.
- Such loans, advances, bonds, guarantees and other credit facilities are together known by a term – ‘financial assistance’.
Who are Qualified Buyers?
- They include Financial Institutions, Insurance companies, Banks, State Financial Corporations, State Industrial Development Corporations, trustee or ARCs registered under SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of mutual funds, pension funds, FIIs, etc.
- The Qualified Buyers (QBs) are the only persons from whom the ARC can raise funds.
What type of debts can the ARC take over?
- The ARC can take over only secured debts which have been classified as a non-performing asset (NPA).
- In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give a notice of 90 days before it qualifies to be taken over.