To improve transparency and uniformity of processes in the sale of stressed assets to asset reconstruction companies (ARCs), banks/ financial Institutions will be widely disseminating information relating to proposed transfer of stressed assets, including reserve price and payment terms.
Further, ARCs will get access to an information checklist, comprising brief history of borrower account, debt and security profile and legal status.
The aforementioned measures have been approved by the Indian Banks’ Association (IBA). This follows suggestions by the Association’s five-member working group for implementing the recommendations of the Reserve Bank of India’s committee on the “working of the ARCs”.
The Group included Ajit Kumar, MD and CEO, Secondary Loan Market Association (SLMA); Hari Hara Mishra, CEO, Association of ARCs in India; and Mythili Balasubramanian, Executive Director, Edelweiss ARC.
Once a stressed asset’s reserve price is arrived at, banks/FIs will give adequate publicity via press/ media/ e-auction platforms etc with regard to the proposed transfer, inviting expression of interest (EoI) from prospective acquirers, per the model process document.
Reserve price
The reserve price will take into account the value of charged securities/ enterprise value of the company, net worth of the guarantors, value of uncharged assets (where attachment is obtained), brand value, intrinsic value, cash, etc.
Banks/FIs may also upload information on the auction on respective websites of banks/FIs. To facilitate wider participation, ARCs/ Association of ARCs/ NBFCs could also be informed about the proposed auction process.
Lenders have to clearly indicate the reserve price and the payment terms – components of cash or combination of cash and security receipts.
Banks/FIs will give adequate time to prospective acquirers, who have submitted EoI and executed Non-Disclosure Agreement (NDA), of say two-three weeks to conduct due diligence.
Lenders may consider stipulating earnest money deposit (EMD) for participating bidders to encourage only serious bidders.
Information checklist
Banks/ FIs will share an information checklist, comprising borrower overview, debt and security profile, legal status, among others, at the pre-deal stage to enable ARCs to weigh the recovery prospects.
Lenders will share operational data/MIS and audited financial statements for the past few years as available on records; documents evidencing constitution of the borrower (company, partnership firm, etc); KYC of borrower, promoters, guarantors, mortgagors; NPA declaration date; a note on reasons for stress/ default; wilful defaulter status and whether classified as “fraud”.
When it comes to debt profile, ARCs will get details of lender-wise break-up of working capital/ term loan; status of non-fund based exposure; whether bank has lent to any group companies; status of asset classification with other lenders; details of restructuring/ re-schedulement.
Other details
Lenders will share security profile, including charge status (including details of guarantees/ shares pledged), latest valuation reports, certificate of net worth of guarantors, and memorandum of entry/ title deeds/ loan documents/title search reports, etc.
ARCs will also get a legal status report from lenders. This will include DRT (debt recovery tribunal) status of the stressed account, status of IBC (Insolvency and Bankruptcy Code) proceedings.