The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003

The Reserve Bank of India issued guidelines and directions relating to registration, measures of ARCs, functions of the company, prudential norms, acquisition of financial assets and related matters under the powers conferred by the SARFAESI Act, 2002. Defining NPAs: Non-performing Asset (NPA) means an asset for which: Interest or principal (or instalment) 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) 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 interest or principal (or instalment) is overdue on expiry of the planning period, where no plan is formulated for realisation of the any other receivable, if it is overdue for a period of 180 days or more in the books of the SC or ARC. Provided that the Board of Directors of a SC or ARC may, on default by the borrower, classify an asset as a NPA even earlier than the period mentioned above. Registration: Every SC or ARC shall apply for registration and obtain a certificate of registration from the RBI as provided in SARFAESI Act; A Securitisation Company or Reconstruction Company, which has obtained a certificate of registration issued by RBI can undertake both securitisation and asset reconstruction activities; Any entity not registered with RBI under SARFAESI Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act. Net worth of Securitisation Company or Reconstruction Company: Net worth is aggregate of paid up equity capital, paid up preference capital, reserves and surplus excluding revaluation reserve, as reduced by debit balance on P&L account, miscellaneous expenditure (to the extent not written off ), intangible assets, diminution in value of investments/short provision against NPA and further reduced by shares acquired in SC/ARC and deductions due to auditor qualifications. This is also called Owned Fund. Every Securitisation Company or Reconstruction Company seeking the RBIs registration under SARFAESI Act, shall have a minimum Owned Fund of Rs 20 mn. Permissible Business: A Securitisation Company or Reconstruction Company shall commence/undertake only the securitisation and asset reconstruction activities and the functions provided for in Section 10 of the SARFAESI Act. It cannot raise deposits.

Some broad guidelines pertaining to Asset Reconstruction are as follows: Acquisition of Financial Assets: With the approval of its Board of Directors, every SC/ARC is required to frame, a Financial Asset Acquisition Policy, within 90 days of grant of Certificate of Registration, clearly laying down policies and guidelines which define the; norms, type, profile and procedure for acquisition of assets, valuation procedure for assets having realisable value, which could be reasonably estimated and independently valued; plan for realisation of asset acquired for reconstruction The Board has powers to approve policy changes and delegate powers to committee for taking decisions on policy/proposals on asset acquisition. Change or take over of Management/ Sale or Lease of Business of the Borrower: No SC/ARC can takeover/ change the management of business of the borrower or sale/lease part/whole of the borrowers business until the RBI issues necessary guidelines in this behalf. Rescheduling of Debt/ Settlement of dues payable by borrower: A policy for rescheduling the debt of borrowers should be framed laying the broad parameters and with the approval of the Board of Directors. The proposals should to be in line with the acceptable business plan, projected earnings/ cash flows of the borrower, but without affecting the asset liability management of the SC/ARC or commitments given to investors. Similarly, there should be a policy for settlement of dues with borrowers. Enforcement of Security Interest: For the sale of secured asset as specified under the SARFAESI Act, a SC/ARC may itself acquire the secured assets, either for its own use or for resale, only if the sale is conducted through a public auction. Realisation Plan: Within the planning period a realisation plan should be formulated providing for one or more of the measures including settlement/rescheduling of the debts payable by borrower, enforcement of security interest, or change/takeover of management or sale/lease of a part or entire business. The plan should clearly define the steps for reconstruction of asset within a specified time, which should not exceed five years from the date of acquisition. Broad guidelines with regards to Securitisation are as follows: Issue of security receipts: A SC/ARC can set up trust(s), for issuing security receipts to QIBs, as specified under SARFAESI Act. The company shall transfer the assets to the trust at a price at which the assets were acquired from the originator. The trusteeship remains with the company and a policy is formulated for issue of security receipts. Deployment of funds: The company can sponsor or partner a JV for another SC/ARC through investment in equity capital. The surplus available can be deployed in G-Sec or deposits in SCBs. Asset Classification: The assets of SC/ARC should be classified as Standard or NPAs. The company shall also make provisions for NPAs.