How Does An Asset Reconstruction Company In India Create Wealth?

In business, there are buyers for every asset. This is true even in the case of distressed assets which has fuelled the growth of Asset Reconstruction companies in India. 

An asset reconstruction company in India is a relatively new concept compared to banks and non-banking finance companies. These companies are registered with the Reserve Bank of India, under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

An asset reconstruction company in India (ARC) works on the resolution of a distressed asset. These companies acquire distressed assets from banks or financial institutions or a consortium thereof. An ARC generally acquires secured assets declared as a non-performing asset (NPA). The process of asset reconstruction is fairly straight forward. ARC pays the bank a mutually decided sum as a consideration for the distressed asset. This is typically at a discount to the loan outstanding, the discount is termed as haircut in industry parlance. After paying the bank, the ARC takes over the control of the business of the borrower. The ARC assesses the business and at times sells some portion of the business or liquid assets to realise some money, if feasible. In most cases, ARCs opt for corporate debt restructuring. The lenders and other claim holders are offered alternative repayment options under corporate debt restructuring. These alternatives mean longer repayment period and even moratoriums. In some cases, an ARC may opt to convert some debt into equity at the option of the lenders to the business. This option helps reduce the debt burden while corporate debt restructuring becomes plausible. Successively, it has been seen ARCs take operational control of the business and appoint professionals to the top management of the acquired company.

For an ARC to function smoothly, it requires two things – one, a solid funding plan to keep the business afloat and an ARC to invest either its own funds or borrow from large institutional investors such as mutual funds, insurers and pension funds. An ARC investing its own funds in an acquired distressed asset reflects its seriousness and commitment to the deal. But, invariably, there are investors involved in asset reconstruction exercise to achieve scale. These investors and other stakeholders such as government, employees, creditors and clients are comfortable working with an ARC if and only if the governance standards are high. This is the second most important ingredient in the success of a reconstruction plan of an asset reconstruction company.

Given these factors, an ARC needs to also adhere to the highest level of corporate governance, work ethics and transparency to ensure that all stakeholders work together on the asset reconstruction plan. This can be achieved in several ways. An ARC needs to put forth a tailor-made resolution plan for the revival of the business along with quarterly appraisals and a participatory approach to resolution involving employees and equity stakeholders.

In a medium to long-term period, these measures begin to bear fruits. Cash flows of the acquired asset become positive and it has been also observed that an acquired distressed asset becomes financially and operationally sound. This makes the valuation of the acquired distressed assets more attractive from the standpoint of ARCs as they can easily identify potential buyers for the acquired asset. Eventually, a reasonably good amount of wealth is created for all stakeholders. Hence, over a sufficiently long period of time, a well-managed asset reconstruction company can create wealth for all stakeholders and not just be a sweatshop involved in corporate debt restructuring.