India’s SARFAESI Act sets a clear, end-to-end playbook for how Asset Reconstruction Companies (ARCs) are registered, how they acquire stressed assets, how obligors are notified, how security receipts are issued, what measures ARCs can deploy to resolve assets, how disputes are addressed, and the supervisory powers available to the Reserve Bank of India (RBI) to keep the market fair and transparent.
ARC registration
ARCs must be companies with securitisation/asset reconstruction as their principal business and obtain a Certificate of Registration from RBI under Section 3 after meeting fit-and-proper, net owned fund, governance, and compliance criteria. RBI’s Master Directions and circulars further prescribe prudential standards, capital adequacy, valuation, disclosure, and “skin-in-the-game” requirements for schemes.
Cancellation of registration
RBI may cancel an ARC’s registration for specified grounds including failure to meet ongoing conditions, breach of directions, inadequate records, or unsafe practices; due process includes notice and opportunity to be heard, and a right of appeal to the Central Government within 30 days. An ARC holding qualified buyers’ investments remains deemed registered until investor dues are repaid as directed by RBI.
Acquisition of financial assets
ARCs can acquire rights or interests in financial assets (including NPAs) from banks and financial institutions via assignment or similar transfers, stepping into the shoes of the originator as the secured creditor for enforcement and recovery purposes. Post-transfer, servicing arrangements and true-sale documentation govern how collections flow and rights are exercised.
Notices to obligor and discharge
Once assets are acquired, the obligor must be notified so that further payments discharge obligations only when made to the ARC or its authorized agent; payments made in good faith to the transferor before notice remain a valid discharge under the statute. This notice mechanism ensures clarity on whom the obligor must pay and prevents double payment risk.
Security receipts and raising funds
ARCs can raise funds by issuing security receipts (SRs) to qualified institutional buyers and by formulating schemes to acquire financial assets, with ongoing minimum SR holding by the ARC to align incentives. Regulatory norms commonly require at least a 5% continuing stake in each SR scheme, along with robust valuation, disclosure, and trustee oversight.
Exemption from registration of SRs
Security receipts issued by ARCs enjoy a statutory exemption from compulsory registration under Section 17 of the Registration Act, 1908, streamlining issuance and transfer among eligible investors. Despite the exemption, ARCs must maintain investor registers, scheme documents, and periodic disclosures as per RBI directions.
Measures of asset reconstruction
Permissible measures include change/takeover of borrower’s management, sale or lease of the borrower’s business, rescheduling of debt, enforcement and sale of secured assets, settlement/OTS, conversion of debt to equity or instruments, and infusion of funds for revival. The chosen measure should be backed by a documented resolution plan, valuation, and board-approved governance trail.
Other functions of ARCs
ARCs may act as agents for banks/FIs in recovery, manage secured assets as receivers/managers after possession, and undertake ancillary servicing tasks consistent with their license and RBI directions. Non-core activities are restricted, with enhanced corporate governance, independent directors, and fair practices codes mandated by RBI.
Resolution of disputes
Borrower challenges to enforcement flow to the DRT/DRAT framework under SARFAESI, while investor-side matters are typically addressed through scheme terms, trusteeship arrangements, and applicable law, including arbitration where provided. Amendments and directions emphasize transparency in valuations and returns to reduce dispute incidence.
RBI’s supervisory powers
RBI sets prudential norms, conducts inspections, issues directions, and can impose penalties, restrict business, or cancel registration for non-compliance to protect investors and maintain market integrity. Recent directions strengthen governance (independent directors, disclosures, CIC membership) and require continuous minimum SR holdings to align ARC-investor interests.
Action checklist
- For selling lenders: prepare complete loan files, ensure enforceable security, execute true-sale documentation, and issue obligor notices promptly
- For ARCs: maintain capital and governance standards, hold minimum SR stake, ensure quarterly valuations and investor reporting, and pick reconstruction measures based on viability and compliance.
- For investors: review scheme IMs, historical returns, valuation methodology, fees, and governance safeguards before subscribing to SRs
This guide distills Chapter II of SARFAESI and RBI’s evolving directions into clear steps for practitioners navigating ARC licensing, asset acquisition, resolution strategies, and compliance with supervisory expectations.
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