Date: 2017-04-28Category: Not ApplicableState: Union GovernmentCountry: India
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- Section 3 (1) (b) - Requirement of Net Owned Fund (NOF) for Asset Reconstruction Companies
Executive Summary:
This document from the Reserve Bank of India (RBI) announces an increase in the minimum Net Owned Fund (NOF) requirement for Asset Reconstruction Companies (ARCs) to ₹100 crore. This change, effective immediately from April 28, 2017, aims to strengthen ARCs' role in resolving stressed assets. Existing ARCs below this threshold must meet the new requirement by March 31, 2019.
Key Points / Main Content:
Minimum NOF Requirement:
* The minimum NOF for ARCs is set at ₹100 crore on an ongoing basis.
* This is based on Section 3(1)(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002), as amended.
NOF Calculation:
* NOF is calculated by deducting certain investments and financial exposures from Owned Funds (OF).
* Deductions include investments in shares of subsidiaries, companies in the same group, and other ARCs.
* Also deducted are the book value of debentures, bonds, outstanding loans, advances, and deposits with subsidiaries and companies in the same group exceeding 10% of the OF.
Compliance Deadline:
* ARCs registered with the RBI as of April 28, 2017, with NOF below ₹100 crore, must achieve this level by March 31, 2019.
* ARCs must submit periodic certificates from their Statutory Auditors as proof of compliance.
Impact Analysis:
Asset Reconstruction Companies (ARCs)
Impact: ARCs must meet the increased NOF requirement of ₹100 crore to continue operations. They may need to raise additional capital or adjust their investment portfolios to comply.
Action Required: ARCs below the threshold must increase their NOF to ₹100 crore by March 31, 2019, and provide periodic auditor certificates confirming compliance.
Reserve Bank of India (RBI)
Impact: The RBI will oversee the implementation of the new NOF requirement and monitor ARCs' compliance.
Action Required: Enforce the new NOF requirement and review compliance reports from ARCs' Statutory Auditors.
Statutory Auditors of ARCs
Impact: They are responsible for verifying and certifying the ARCs' compliance with the new NOF requirement.
Action Required: Provide periodic certificates confirming that ARCs are meeting the minimum NOF requirement.
Key Entities Referenced
Asset Reconstruction Companies: Financial institutions that acquire non-performing assets from banks and financial institutions.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: An Indian law that provides a legal framework for securitization and asset reconstruction, and for the enforcement of security interests.
Net Owned Fund: The minimum capital requirement for Asset Reconstruction Companies, calculated as Owned Fund less certain investments and advances.
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and formulating monetary policy.
Enforcement of Security Interest and Recovery of Debts Laws Misc. Provisions Amendment Act, 2016: An Indian law amending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Statutory Auditors: External auditors responsible for verifying the financial statements of Asset Reconstruction Companies.
Mumbai, Maharashtra: City in India where Reserve Bank of India Department of Non-Banking Regulation Central Office is located
Sudarshan Sen: Executive Director of Reserve Bank of India
RBI/2016-17/295
DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17 April 28, 2017
The Chairman / Managing Director / Chief Executive Officer
All registered Asset Reconstruction Companies.
Dear Sir,
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002- Section 3 (1) (b) - Requirement of Net Owned Fund
(NOF) for Asset Reconstruction Companies.
A reference is invited to paragraph 9 of the Bank’s Monetary Policy Statement on
Developmental and Regulatory Policies dated April 06, 2017 (extract enclosed as
annex).
2. Section 5 of the Enforcement of Security Interest and Recovery of Debts Laws &
Misc. Provisions (Amendment) Act, 2016 (No.44 of 2016), substitutes clause (b) in
sub-section (1) of Section 3 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as
“the SARFAESI Act, 2002”).
3. Consequent to the above amendment, no Asset Reconstruction Company
(hereinafter referred to as “the ARC”) shall commence or carry on the business of
securitisation or asset reconstruction without having Net Owned Fund (hereinafter
referred to as NOF) of not less than Rupees two crore or such other higher amount
as the Reserve Bank may, by notification, specify.
4. Accordingly, and keeping in view the greater role envisaged for ARCs in resolving
stressed assets as also the recent regulatory changes governing sale of stressed
assets by banks to ARCs, it has been decided to fix the minimum NOF requirement
for ARCs at ` 100 crore on an ongoing basis with effect from the date of the
enclosed Notification.
15. NOF shall be arrived at by reducing from Owned Fund (OF), as defined in the
Notification DNBR (PD).CC.No.03/SCRC/26.03.001/2015-16 dated July 1, 2015, the
amounts representing -
i. investments of the ARC in shares of –
a. its subsidiaries;
b. companies in the same group;
c. all other ARCs; and
ii. the book value of debentures, bonds, outstanding loans and advances made
to, and deposits with, -
a. subsidiaries of the ARC; and
b. companies in the same group,
to the extent such amount exceeds 10% of the OF.
6. All the ARCs which are already registered with Reserve Bank of India as on the
date of the Notification and not having the revised minimum NOF as on date shall
achieve a minimum NOF of ` 100 crore latest by March 31, 2019. ARCs shall submit
a certificate from their Statutory Auditors periodically as evidence of compliance
thereof.
7. A copy of the Notification DNBR (PD-ARC) No. 05/ED(SS)-2017 dated April 28,
2017 is enclosed.
Yours faithfully,
(C. D. Srinivasan)
Chief General Manager
Encl : 1. Notification DNBR (PD-ARC) No. 05 /ED(SS)-2017 dated April 28, 2017;
2. Annex
2Reserve Bank of India
Department of Non-Banking Regulation
Central Office, Centre No 1
World Trade Centre
Mumbai 400 005.
NOTIFICATION
Notification DNBR (PD-ARC) No. 05 /ED(SS)-2017 dated April 28, 2017
In exercise of the powers conferred by clause (b) of sub-section (1) of section 3 of
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, Reserve Bank of India hereby specifies that the Net
Owned Fund (NOF) for Asset Reconstruction Companies (ARCs) shall be minimum
Rupees One Hundred Crore on an ongoing basis with effect from the date of this
Notification.
2. All the ARCs which are already registered with Reserve Bank of India, having less
than Rupees One Hundred Crore NOF shall achieve the prescribed minimum NOF
level latest by March 31, 2019 and the same should be duly certified by the
Statutory Auditors.
(Sudarshan Sen)
Executive DirectorAnnex
Statement on Developmental and Regulatory Policies - April 06, 2017
Reserve Bank of India
II. Banking Regulation and Supervision
9. Asset Reconstruction Companies(ARCs): Raising the Minimum Level of Net Owned
Funds (NOF) - While the earlier provision in the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 of a minimum
of ‘₹ 2 crore of owned funds’ was amended in 2016 as ‘₹ 2 crore of net owned funds (NOF)’,
the cap on owned fund of 15 per cent of financial assets was removed. In view of the
enhanced role of ARCs and greater cash based transactions, it is proposed to stipulate a
minimum NOF of ₹100 crore for ARCs. The necessary instructions will be issued by end-
April, 2017.