Section 3 SARFAESI: Registration of Asset Reconstruction Companies

An asset reconstruction company exists as an ARC only because the RBI registers it. Section 3 is the gateway: no company may commence or carry on securitisation or asset reconstruction without registration, and the RBI grants registration only on a net owned fund test and a set of conditions going to the company's soundness and management. The section also lets the RBI cancel registration. This note sets out the registration requirement, the conditions, the certificate, and cancellation.

1. The Registration Requirement

Figure 1: From application to certificate of registration

• No business without registration. No company may commence or carry on the business of securitisation or asset reconstruction without obtaining a certificate of registration from the RBI under s.3: registration is the precondition to existing as an ARC at all.
• The net owned fund test. The applicant must have the minimum net owned fund the RBI specifies, now set as a percentage of the assets acquired subject to a floor, a threshold the RBI has raised over time to ensure the ARC has real capacity (check the current figure against the latest RBI direction)
• The certificate. On being satisfied that the conditions are met, the RBI grants a certificate of registration, which may be subject to conditions, and only then may the company operate.

2. The Conditions the RBI Weighs

Figure 2: What the RBI must be satisfied of

• Who must register. Any company proposing to carry on securitisation or asset reconstruction, so both routes under Topic 14 run only through a registered ARC.
• Net owned fund. The company must hold and maintain the minimum net owned fund, a continuing requirement and not merely a one-time entry test.
• Soundness and management. The RBI must be satisfied of the company's sound financial position, that its directors are fit and proper, that it has adequate arrangements to carry on business, and that registration is in the interest of the business and of investors.
• Conditions on the certificate. The RBI may impose conditions in the certificate, and the ARC must comply with them and with the RBI's continuing directions as a condition of staying registered.

3. Certificate, Cancellation and Oversight

Figure 3: Registration as the gate and the continuing leash

• Registration as the gateway. A company becomes an ARC, able to acquire financial assets and issue security receipts, only once the RBI registers it: without the certificate it is outside the Act.
• Continuing RBI supervision. The net owned fund, the fit and proper test and the RBI's directions keep the ARC under continuing oversight, not merely vetted at entry.
• Power to cancel. The RBI may cancel registration where the ARC ceases to carry on business, fails to maintain the conditions, or breaches its directions, ordinarily after giving the ARC an opportunity to be heard.
• Consequence of operating without it. Carrying on the business without registration, or after cancellation, falls outside the Act and exposes the company to action, since the s.3 certificate is what authorises the activity.

4. Frequently Asked Questions

Can a company carry on asset reconstruction without registering with the RBI?

No. Section 3 provides that no company may commence or carry on the business of securitisation or asset reconstruction without obtaining a certificate of registration from the Reserve Bank of India. Registration is the gateway: a company becomes an asset reconstruction company, able to acquire financial assets and issue security receipts, only once the RBI registers it. To register, the company must have the minimum net owned fund the RBI specifies and satisfy conditions as to its financial soundness, the fit and proper status of its directors, and its arrangements for carrying on business. Operating without registration, or after the registration is cancelled, falls outside the Act.

On what grounds can the RBI cancel the registration of an ARC?

The RBI may cancel an asset reconstruction company's registration where the company ceases to carry on the business of securitisation or asset reconstruction, fails to maintain the net owned fund or the other conditions of registration, or fails to comply with the conditions in the certificate or the directions the RBI issues. Cancellation is ordinarily preceded by an opportunity to be heard, except where immediate cancellation is warranted. The effect is that the company can no longer carry on the business, because the Section 3 certificate is what authorises the activity in the first place.

5. Related Topics

• Topic 14: Securitisation and Asset Reconstruction. The two activities registration authorises.
• Topic 16: Powers and Functions of an ARC. What a registered ARC may then do.