The full form of ARC in the financial jargon stands for Asset Reconstruction Company.
The chief source of business for ARCs is the distressed assets of the Indian Banking balance sheets.
Over the years a large number of ARCs have entered the Indian Asset space.
Few such ARCs’ are
02)Arcil – the first reconstruction company in India
03)UVARCL – with the tag line as “Restoring NPAs back to health’
The ARCs have a time-frame of 5 years to reconstruct the assets and realize them. The five years include 1 year planning period.
The ARCs can offer two types of payment modes to the NPA seller. The two types are Cash or Security Receipts.
The Security Receipts are converted into cash as and when the NPAs realize into cash. Naturally, the cash will be paid at a depreciated value.
There is an Association of ARCs in India. At present the website is not up to date. However, a beginning has been made.
Key Advisory Group (KAG) was constituted by the Government of India on the Asset Reconstruction Companies (ARCs) in September 2011. The first report of the group was released on 30/12/2011.
The terms of reference of the Group was as under –
i. Review of existing legal / regulatory / institutional framework for ARCs and its efficacy;
ii. Action plan including policy initiatives for orderly growth of the Sector;
iii. To recommend the legal / institutional / regulatory initiatives related measures required for orderly growth of the Sector.
Based on the recommendations of the Key Advisory Group (KAG) constituted by the Government of India on the Asset Reconstruction Companies (ARCs), Reserve Bank of India released the guidelines on uniform accounting standard for ARCs.
The highlights are as under:
a. Acquisition cost (Pre and post acquisition)
Expenses incurred at pre acquisition stage for performing due diligence etc. for acquiring financial assets from banks/ Fls should be expensed immediately by recognizing the same in the statement of profit and loss for the period in which such costs are incurred.
Expenses incurred after acquisition of assets on the formation of the trusts, stamp duty, registration, etc. which are recoverable from the trusts, should be reversed, if these expenses are not realised within 180 days from the planning period
b. Revenue Recognition-
(i) Yield should be recognised only after the full redemption of the entire principal amount of Security Receipts.
(ii) Upside income should be recognized only after full redemption of Security Receipts.
(iii) Management fees may be recognized on accrual basis. Management fees recognized during the planning period must be realized within 180 days from the date of expiry of the planning period. Management fees recognized after the planning period should be realized within 180 days from the date of recognition.
c. Valuation of Security Receipts (SRs)
Considering nature of investment in SRs where underlying cash flows are dependent on realization from non performing assets, it can be classified as available for sale. Hence investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category. Net depreciation, if any shall be provided for. Net Appreciation, if any should be ignored. Net depreciation required to be provided for should not be reduced on account of net appreciation.
d. Applicability of ‘Operating Cycle Concept’ under Schedule VI
SC/ RCs are advised in their balance sheet to classify all the liabilities due within one year as “current liabilities” and assets maturing within one year along with cash and bank balances as “current assets”. Capital and Reserves will be treated as liabilities on liability side while investment in SRs and Long term deposits with banks will be treated as fixed assets on the assets side.
The above accounting guidelines are effective from the current accounting year i.e 2014-15. Uniform guidelines are always good for the industry and also aid in benchmarking.