p.1
Introduction to Asset Reconstruction Companies (ARCs) in India
What is the primary function of asset reconstruction companies (ARCs) in India?
To manage and recover distressed assets.
p.1
Evolution and Historical Context of ARCs
How have ARCs evolved in India?
They have developed in response to the growing need for effective management of non-performing assets (NPAs).
p.1
Regulatory Framework Governing ARCs
What regulatory framework governs ARCs in India?
The framework includes the SARFAESI Act and the RBI guidelines.
p.1
Key Challenges Faced by ARCs
What key challenges do ARCs face in India?
Challenges include legal hurdles, valuation issues, and market dynamics.
p.1
Impact of the Insolvency and Bankruptcy Code (IBC) on ARCs
How has the Insolvency and Bankruptcy Code (IBC) impacted ARCs?
The IBC has provided a structured process for resolving insolvency, enhancing the role of ARCs.
p.1
Performance Metrics and Recovery Rates of ARCs
What are the performance metrics used to evaluate ARCs?
Metrics include recovery rates and the time taken to resolve distressed assets.
p.14
Key Challenges Faced by ARCs
What has been a key challenge faced by ARCs in India?
They have not been able to acquire large cases with potential turnaround possibilities due to various constraints.
p.12
Regulatory Framework Governing ARCs
What regulatory change has marginalized smaller players in the ARC industry?
The net-owned funds requirement increased from 2 crore INR to 100 crore INR.
p.3
Evolution and Historical Context of ARCs
What was the first ARC established in India?
ARCIL (Asset Reconstruction Company India Limited).
p.7
Key Challenges Faced by ARCs
What is a widely held view regarding ARCs in India?
Little has been done by ARCs in rehabilitating and turning around sick but potentially viable companies.
p.14
Key Challenges Faced by ARCs
What is crucial for the performance of ARCs according to the text?
Accurate valuations, turnaround options, and speedier legal remedies.
p.7
Key Challenges Faced by ARCs
What has been the trend in the performance of ARCs?
The actual performance of ARCs has not been satisfactory, with few successful turnarounds.
p.12
Key Challenges Faced by ARCs
What percentage of stressed assets does India recover compared to Japan and Germany?
India recovers 26%, while Japan recovers 92% and Germany 81%.
p.15
Key Challenges Faced by ARCs
What are the key challenges faced by Asset Reconstruction Companies (ARCs) in India?
The challenges include regulatory hurdles, asset valuation issues, and inter-creditor disputes.
p.7
Key Challenges Faced by ARCs
What impact has the poor performance of ARCs had on banks?
It has led to reduced overall deals between ARCs and banks and a preference for cash sales over security receipts.
p.11
Key Challenges Faced by ARCs
How does the time taken for insolvency resolution in India compare to other regions?
It is longer than in Latin America, South Asia, and North Africa.
p.12
Key Challenges Faced by ARCs
How does the SARFAESI Act, 2002 affect ARCs' management capabilities?
It limits their power to change management, leading to ineffective and delayed resolutions.
p.13
Regulatory Framework Governing ARCs
What does the successful implementation of the IBC require?
Creation of an enabling infrastructure and ecosystem, including an insolvency regulator and skilled professionals.
p.5
Market Dynamics and Valuation Challenges for ARCs
How did the acquisition cost to book value of stressed assets change after 2013?
Increased from around 20% to above 40%.
p.5
Business Models and Operational Strategies of ARCs
What was the primary focus of ARCs after the revised guidelines linking management fees to NAVs?
To expedite the recovery/restructuring process.
p.4
Business Models and Operational Strategies of ARCs
How do ARCs acquire stressed assets?
By paying in cash or issuing security receipts (SRs) whose redemption depends on recoveries made.
p.4
Business Models and Operational Strategies of ARCs
What is the nature of security receipts (SRs) issued by ARCs?
They have characteristics of both debt and equity, backed by impaired assets.
p.4
Business Models and Operational Strategies of ARCs
What is the 'waterfall structure' in the context of ARCs?
A distribution method for recovery proceeds where legal and resolution expenses are met first, followed by management fees, before distributing the balance among SR holders.
p.4
Key Challenges Faced by ARCs
What measures were taken in August 2014 to discourage the agency model for ARCs?
Upfront investment increased to 15% and management fees were linked to NAV.
p.11
Key Challenges Faced by ARCs
What is a significant issue in the Indian banking landscape that affects ARCs?
Inter-creditor issues due to consortium/multiple lending.
p.10
Key Challenges Faced by ARCs
What is a key challenge faced by Asset Reconstruction Companies (ARCs) in India?
Unrealistic pricing mismatch leading to a lack of investor appetite.
p.11
Key Challenges Faced by ARCs
What is one of the key challenges faced by ARCs in resolving NPAs?
Lengthy resolution processes.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
How many people are part of the PwC network?
More than 236,000 people.
p.5
Regulatory Framework Governing ARCs
What significant change occurred in the regulatory requirements for ARCs in the fourth phase?
Mandatory contribution by ARCs increased to 15%.
p.5
Impact of the Insolvency and Bankruptcy Code (IBC) on ARCs
What was the impact of relaxed guidelines by RBI in February 2014 on ARCs?
Allowed the sale of SMA2-labelled accounts and increased sales to ARCs.
p.8
Key Challenges Faced by ARCs
What is a significant barrier to obtaining working capital for distressed assets?
High cost of available working capital.
p.4
Evolution and Historical Context of ARCs
What are the four phases of ARC evolution in India?
The evolution of ARCs can be broadly divided into four phases from 2002 until now.
p.2
Key Challenges Faced by ARCs
What was the gross non-performing assets (NPAs) ratio that crossed 10% during the crisis?
The ratio of gross non-performing assets (NPAs) crossed 10%.
p.1
Future Prospects and Recommendations for ARCs
What are the future prospects for ARCs in India?
Future prospects include increased focus on technology and improved recovery strategies.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What does the inclusion of a company in PwC publications imply?
It does not imply any endorsement of that company by PwC.
p.2
Key Challenges Faced by ARCs
What is the Insolvency and Bankruptcy Code (IBC) of 2016?
It is a strong measure aimed at addressing NPAs, but lacks operational guidelines.
p.2
Key Challenges Faced by ARCs
What has been a significant deviation in the journey of ARCs?
The exit through sale of stressed loans to ARCs has remained largely subdued.
p.12
Key Challenges Faced by ARCs
What are the two main factors causing delays in the asset resolution process for ARCs in India?
Slow judicial processes with repeated appeals and the market value of stressed assets being much lower than banks' balance sheets.
p.3
Evolution and Historical Context of ARCs
What did the 2nd Narasimham Committee Report recommend?
The creation of an asset recovery fund to acquire and recover stressed assets.
p.14
Key Challenges Faced by ARCs
What recent development by SEBI could benefit ARCs?
The approval to allow the listing of security receipts issued by ARCs on stock exchanges.
p.15
Key Challenges Faced by ARCs
What is a significant regulatory challenge for ARCs?
Navigating complex regulations and compliance requirements.
p.10
Key Challenges Faced by ARCs
Why do professionals hesitate to join ARCs?
Due to the responsibilities associated with being a 'deemed promoter' if they hold more than 9% shareholding.
p.8
Key Challenges Faced by ARCs
What is a major challenge for ARCs regarding funding?
Inability to fund the working capital needs of stressed loans.
p.8
Key Challenges Faced by ARCs
What do global distressed asset funds require from ARCs to take high risks?
Cash flow priority, a clear first charge on assets, and returns in excess of 25%.
p.8
Key Challenges Faced by ARCs
What complicates the collaboration among lenders for distressed asset funds?
A consortium of lenders often acts independently.
p.9
Key Challenges Faced by ARCs
Why is there a lack of incentive for private investors to participate in auctions?
High reserve prices due to low discount rates used by banks.
p.13
Key Challenges Faced by ARCs
What does the IBC emphasize regarding business failures?
It recognizes that some businesses may fail and emphasizes decisive corrective action.
p.2
Key Challenges Faced by ARCs
What was a major limitation of the Strategic Debt Restructuring (SDR) Scheme of 2015?
It was dependent on promoters and finding buyers for converted equity.
p.4
Key Challenges Faced by ARCs
What impact did increased regulator scrutiny have on ARCs after August 2014?
It adversely impacted transaction volumes.
p.11
Key Challenges Faced by ARCs
What rank does India hold in terms of insolvency resolution according to the World Bank’s Doing Business 2018 report?
174th out of 212 countries.
p.11
Key Challenges Faced by ARCs
What percentage of secured lenders' consent is typically required for resolution approaches?
75% of the total debt by value.
p.7
Key Challenges Faced by ARCs
What are some key challenges faced by ARCs?
Lack of industry expertise for turnaround, valuation mismatch, inter-creditor issues, capital inadequacy, lengthy resolution, regulatory constraints, focus on the agency model, and lack of a mature market for SRs.
p.3
Evolution and Historical Context of ARCs
What role did BIFR play in the context of ARCs?
It was formed to revive sick industrial companies and wind up unviable units.
p.13
Regulatory Framework Governing ARCs
What significant legal shift does the IBC introduce regarding asset stripping?
Imprisonment of up to five years for asset stripping noticed within 12 months before default.
p.8
Key Challenges Faced by ARCs
What has been the outcome of restructuring efforts by ARCs thus far?
There have been very few cases of genuine restructuring.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What does PwC refer to?
The PwC International network and/or one or more of its member firms.
p.2
Key Challenges Faced by ARCs
What prompted the Central Bank to conduct an asset quality review?
Macroeconomic factors combined with weak credit assessment and monitoring.
p.9
Key Challenges Faced by ARCs
What change has influenced ARCs to focus more on recoveries and realistic pricing?
Increased investment to 15% and management fees based on lower NAV.
p.9
Key Challenges Faced by ARCs
What prolonged focus has hindered ARCs' recovery efforts?
Prolonged focus on the agency model.
p.2
Key Challenges Faced by ARCs
What act created Asset Reconstruction Companies (ARCs)?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
p.3
Evolution and Historical Context of ARCs
What problem emerged in the Indian banking industry in the late 1990s and early 2000s?
Low recoveries from NPAs (Non-Performing Assets).
p.12
Key Challenges Faced by ARCs
What impact does the upfront payment requirement of 15% cash have on ARCs?
It magnifies capital inadequacy and creates capital constraints.
p.13
Impact of the Insolvency and Bankruptcy Code (IBC) on ARCs
What is the most significant reform introduced by the current government regarding asset reconstruction in India?
The Insolvency and Bankruptcy Code (IBC).
p.14
Key Challenges Faced by ARCs
What is the expectation regarding foreign capital in the distressed market?
Foreign capital is expected to flow in, allowing ARCs to take more risks and bid for bigger assets.
p.10
Key Challenges Faced by ARCs
What is a consequence of the 'deemed promoter' status for professionals in ARCs?
It increases the cost of functioning of ARCs.
p.10
Key Challenges Faced by ARCs
What is a significant challenge regarding talent in ARCs?
There is a general dearth of talent and skill sets required for unit revival and turnaround.
p.9
Key Challenges Faced by ARCs
What has led to a decline in the transaction closure rate for ARCs?
The gap in discounting rates between banks and ARCs.
p.3
Regulatory Framework Governing ARCs
What was a key outcome of the SARFAESI Act enacted in 2002?
It allowed banks and financial institutions to recover stressed assets.
p.13
Impact of the Insolvency and Bankruptcy Code (IBC) on ARCs
What is the role of the insolvency professional (IP) once an insolvency petition is approved?
To take over the management of the defaulter on behalf of all financial creditors.
p.6
Key Challenges Faced by ARCs
What was the management fee structure for ARCs under the initial investment model?
A one-time investment requirement of 5% with annual management fees of around 1.5% based on outstanding SR.
p.9
Key Challenges Faced by ARCs
What is one of the key challenges related to valuation for ARCs?
Valuation mismatch between ARCs and seller institutions.
p.2
Key Challenges Faced by ARCs
What is the primary objective of Asset Reconstruction Companies (ARCs)?
To acquire non-performing loans and manage them for recovery.
p.11
Key Challenges Faced by ARCs
How does the intermediation by ARCs affect the resolution process?
It is often slow and causes a loss of value to stakeholders.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What is the primary purpose of PwC?
To build trust in society and solve important problems.
p.15
Key Challenges Faced by ARCs
How do inter-creditor issues impact ARCs?
They complicate asset recovery and resolution processes.
p.9
Key Challenges Faced by ARCs
What is the expectation mismatch between ARCs and banks regarding NPA pricing?
ARCs seek higher discounts while banks are unwilling to reduce prices.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
In which Indian cities does PwC have offices?
Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai, and Pune.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What should readers do before acting on information from PwC publications?
Obtain specific professional advice.
p.6
Key Challenges Faced by ARCs
What significant change occurred in August 2014 regarding ARC investments?
The self-investment requirement increased from 5% to 15%.
p.4
Key Challenges Faced by ARCs
What changes occurred in the NPA percentage from July 2013 to August 2014?
The NPA percentage was ~6.2%.
p.15
Key Challenges Faced by ARCs
What is the role of ARCs in the Indian financial system?
ARCs help in the resolution of stressed assets and improving the financial health of banks.
p.10
Key Challenges Faced by ARCs
What is the impact of regulatory changes on ARCs?
They contribute to the general lack of investor appetite and absence of a secondary market for SRs.
p.12
Regulatory Framework Governing ARCs
What is the new basis for calculating management fees for ARCs?
Management fees are now calculated as a percentage of NAV instead of acquisition value.
p.13
Key Challenges Faced by ARCs
What are the three main aspects that determine the success of operational turnaround under the IBC?
Timely acknowledgment of the situation, capability of the turnaround team, and an effective monitoring mechanism.
p.2
Key Challenges Faced by ARCs
What has been a significant issue for Indian banks over the last three years?
Increasing levels of stressed assets, reminiscent of the 2001–03 crisis.
p.9
Key Challenges Faced by ARCs
What was the primary business model of Indian ARCs until August 2014?
Agency business model focused on generating high internal rates of return (IRRs).
p.6
Key Challenges Faced by ARCs
How did the increase in self-investment affect ARC profitability metrics?
It led to a paradigm shift, reducing the previously high IRRs without actual recoveries.
p.6
Key Challenges Faced by ARCs
What example illustrates the financial impact of the 5/95 versus 15/85 model?
An asset sold for 100 INR under the 5/95 structure would yield a 15% IRR without recoveries, while the same asset under the 15/85 model would yield -24% IRR without recoveries.
p.14
Key Challenges Faced by ARCs
How could the listing of security receipts impact ARCs?
It would bring liquidity to the security receipts market and provide more funds to ARCs, helping resolve banks' NPA issues.
p.11
Key Challenges Faced by ARCs
What does the complexity of NPA resolution in India lead to?
It is tedious and time-consuming.
p.12
Key Challenges Faced by ARCs
What is a significant challenge related to asset redemptions faced by ARCs?
Low redemptions of stressed assets.
p.10
Key Challenges Faced by ARCs
What does the lack of a mature secondary market for SRs indicate?
It reflects the challenges in liquidity and investor confidence in ARCs.
p.1
Business Models and Operational Strategies of ARCs
What business models do ARCs typically employ?
ARCs often use models based on asset acquisition, restructuring, and recovery.
p.1
Inter-creditor Issues and Their Impact on Asset Recovery
What inter-creditor issues affect asset recovery for ARCs?
Conflicts among creditors can complicate recovery processes.
p.1
Market Dynamics and Valuation Challenges for ARCs
What market dynamics influence ARCs in India?
Market dynamics include economic conditions, regulatory changes, and competition.
p.4
Business Models and Operational Strategies of ARCs
What is the purpose of the management fee charged by ARCs?
To recover dues on behalf of SR holders.
p.6
Key Challenges Faced by ARCs
What was the impact of linking management fees to NAV on ARCs?
It diminished the incentive for ARCs to recover or rehabilitate bad loans.
p.6
Key Challenges Faced by ARCs
What was the primary reason for ARCs to bid aggressively during the 2013-2014 period?
To build up their assets under management (AUMs) and earn management fees.
p.14
Key Challenges Faced by ARCs
What is the anticipated transformation for ARCs?
ARCs are expected to become actual turnaround specialists and special situation funds with deep operational capabilities.
p.14
Key Challenges Faced by ARCs
What role does the implementation of the IBC play for ARCs?
It is hoped to lead to faster resolution and recovery in the distressed market.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What types of services does PwC provide?
Assurance, advisory, and tax services.
p.13
Regulatory Framework Governing ARCs
How does the IBC change the framework for insolvency management?
It establishes a 'creditor in control' framework instead of the 'debtor in possession' regime.
p.16
Introduction to Asset Reconstruction Companies (ARCs) in India
What is the legal status of PwC member firms?
Each member firm is a separate, independent, and distinct legal entity.
p.2
Key Challenges Faced by ARCs
What is the purpose of the Joint Lenders’ Forum (JLF) introduced in February 2014?
To allow multiple lenders to devise a collective resolution mechanism.
p.2
Key Challenges Faced by ARCs
What does the Scheme for Sustainable Structuring of Stressed Assets (S4A) allow?
It allows banks to restructure large loans with the condition that projects should be operational.
