Asset Reconstruction is the main purpose or task of the ARCs/SCs. Enforcing security interest is the means to get possession/control of the assets to facilitate their subsequent reconstruction. Similarly securitisation of assets is a means to raise funds from the capital market to pay to the Originator for transfer of the assets to the ARC/Sc. Taking possession or raising resources from the capital market has no meaning, unless the assets are reconstructed resulting in the generation of anticipated cash flow. Security enforcement and Asset Securitisation are routine functional jobs, but Asset Reconstruction is the real business venture and needs initiative and business skill on the part of the promoters of the ARC, that will result in the fruitful functioning of the Company. Asset Reconstruction has been defined under the Ordinance as acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance; The success in Asset Reconstruction will result in real turnover of business and recycling of the funds owned/raised. It will also enable the ARC/SC to generate source for eventual redemption of securitised bonds, when they mature for payment.

The powers of ARCs/SCs for Asset Reconstruction are specified under Section-9 of the Ordinance. These powers are stated in general terms and are to be exercised as per the guidelines to be framed by RBI. These measures, additionally are without prejudice to any other law for the time being in force.

The following are the measures for reconstruction specified under section 9(a) to (f) of the Ordinance.

1. the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower;

2. the sale or lease of a part or whole of the business of the borrower;

3. rescheduling of payment of debts payable by the borrower;

4. enforcement of security interest in accordance with the provisions of this Ordinance;

5. settlement of dues payable by the borrower;

6. taking possession of secured assets in accordance with the provisions of this Ordinance.

The powers are comprehensive and all inclusive to achieve the purposes of securing possession, revival/renovation of assets, operation of taken over units or sale thereof. These can be used for dealing with the secured assets as a whole in one lot, or in piecemeal part by part. The ARC/SC may either sell the assets or may also lease them and utilise the cash flow from the lease rent. It can also hold the assets in its possession and allow the borrower further time to repay by rescheduling the loan. As the secured creditor has been paid consideration for the take over of the assets, the rights of the ARC/SC are absolute and does not depend on the secured creditor.

The ARC/SC can also manage the business though a manager appointed by it and under its control for the purpose.

As per clause 9(d) & 9(f) the powers vested with the secured creditor under the Ordinance for enforcement of security interest and for taking possession of secured assets are also vested with the ARC/SC. These powers are comprehensively discussed in the Pages dealing with taking possession and Enforcement of Security Interest of the secured assets.

Such overlapping of powers of the secured creditor in favour of the ARC/SC is in the spirit of the earlier provision contained in the Ordinance under Section 5(2), which states as under:

"If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets."

It is therefore logical that the ARC/SC secures all powers that are with the secured creditor, but the vice versa need not be correct, as securitisation of taken over assets can be attended to only the ARC/SC, and not independently by the secured creditor.

Here a distinction should be made between the power to take over possession of the secured assets, and that of taking over the management of the borrower's business. The first is a normal or general power. The secured assets are charged as cover for the credit facility extended by the banker or financial institution, and it is logical in the contingency of a default that the lender takes recourse for realising its dues through sale of these securities, for which taking possession of such securities is the first step.

Taking over management is a special power. It includes not only taking over the secured assets, but also the entire establishment i.e. its total assets & liabilities, including employees etc. Such take over is justified if the assets, as such cannot secure recovery as a closed unit or dead assets, but the operation or running of the business as such alone would provide the source for repayment. In a sense it is in public interest, as taking over the secured assets, leaves the business automatically closed, while taking over the business provide for its continuity.

The grounds for exercising this power will become more explicit, when rules under the Ordinance are framed by the Central Government and guidelines issued by RBI setting forth or defining the liabilities of the lender and that of the ARC/SC.

Any securitisation company or reconstruction company registered under this Ordinance may--

1. act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties;

2. act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be mutually agreed upon between the parties; [Section 13(4)(c) empowers the secured creditor to appoint any person to managed the secured assets, the possession of which has been taken over by the secured creditor under provisions of the ordinance.]

3. act as receiver if appointed by any court or tribunal

Provided that no securitisation company or reconstruction company shall act as a manager if acting as such gives rise to any pecuniary liability.

The functions under Section -10 implies that in carrying out these fuctions SC/ARC will not undertake the function of securitisation and there will be no legal transfer of the assets to its ownership. It will act merely as the agent of the bank/FI and carry out functions in its capacity as a service-provider without incurring financial obligation. Similarly it will act as Receiver of the Court if so appointed. These are supplementary business opportunities, in the same type of category of functions that ARC/SC otherwise handles and will help the ARC/SC by way of additional revenue earning sources.

Does the secured creditor himself directly take over and carry out recovery operations exercising powers under the Ordinance without entrusting the job to the ARC/SC? This point is discussed in the previous Page dealing with enforcement of security interest by the secured creditor i.e. bank/FI.

As already pointed out in the previous page the SC/ARC is prohibited from engaging in any other activities except those specified under this ordinance. Such a prohibition prevents any possible conflict of interest arising and influencing adversely the proper discharge of the principal functions of Securitisation and asset reconstruction. For the purposes of this provision, "securitisation company" or "reconstruction company" does not include its subsidiary.

A securitisation company or reconstruction company which is already carrying on, on or before the commencement of this Ordinance, any business other than the business of securitisation or asset reconstruction shall cease to carry on any such business within one year from the date of commencement of this Ordinance.

The power of the ARC/SC to take over the management of the business of the borrower is explicitly stated under Section 9(a). This power is not explicitly conferred on the secured creditor under Section 13(4)(a), where the secured creditor is empowered only to "take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;" Section 13(4)(b) further empowers the secured creditor to "take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset". Section 13 does not specify under any of its sub-sections the power of the secured creditor to take over the management of the business of the borrower.

However in a reverse mode, while specifying the obligations of the borrower, the management of whose business is taken over, the Ordinance refers to the "secured creditor" and not the ARC/SC. This subject is dealt with under Section 15 of the Ordinance. The subject of taking over the management of business of the borrower is dealt with in detail in the next pages.