Asset Reconstruction

Asset reconstruction is handling of distressed assets to attempt to recover their value

and clear them from the books. It arises in response to a financial crisis that causes the
number of bad loans to rise rapidly in response to a series of economic problems.
Some governments directly fund asset reconstruction programs as part of an economic
recovery plan, and it is also possible to see private firms performing this service. The asset
reconstruction company assumes bad assets from another company to clear them from that
company's books. It may purchase the assets at a very discounted price, causing the original
company to take a loss, but clearing nonperforming assets can allow it to start accurately
assessing financial health and working on a recovery plan. Once the company takes
possession, it can work on recovering those assets.
For example, an asset reconstruction company may assume a group of home loans in default.
The company can pursue collections and if this does not work, it can start foreclosing and
selling the properties in order to extract cash from the loans and close them out. The asset
reconstruction company specializes in this activity and can handle the process more
efficiently than a regular financial institution, because it has the personnel, experience, and
support network to do so. It may own a real estate firm that can handle the process of
evaluating the properties, listing them, and making any necessary modifications to make them
more saleable.
Borrower
An individual, organization or a company that is using funds, materials or services on credit
Default
Failure to fulfil an obligation, especially to repay a loan or appear in a law court.
Financial Asset
A financial asset is a tangible liquid asset that derives value because of a contractual claim of
what it represents. Stocks, bonds, bank deposits and the like are all examples of financial
assets.
Non-Performing Asset
A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest
and/or installment of Bond finance principal has remained 'past due' for a specified period of
time. NPA is used by financial institutions that refer to loans that are in jeopardy of default.
Reconstruction company
Reconstruction refers to the transfer of company or several companies business to a new
company. This therefore means that the old company will get into liquidation ,and

shareholders will therefore agree to take shares of equivalent value in the new company.
When a company is suffering loss for several past years and suffering from financial
difficulties, it may go for reconstruction. This also means that when a companies balance
sheet shows huge accumulated loss,heavy fictitious and intangible assets or is in financial
difficulties or is over capitalized,then the process of reconstruction can be restored.
Reconstruction can either be internal or external. External reconstruction takes place when a
company is suffering losses for the past several years and facing financial crisis,the company
can sell its business to another newly formed company. The new company is therefore formed
to take over the assets and liabilities of the old company. Take overs usually take place when
a bigger company takes a smaller company.
External reconstruction therefore refers to sale of the business of existing company to another
company formed for that purpose. In external reconstruction therefore,one company is
liquidated and a new company is formed .The liquidated company is called the vendor
company and the new company is called the purchasing company. Shareholders of the vendor
company becomes the shareholders of purchasing company. External reconstruction can also
take place through mergers. Merger refers to two companies joining together to form one
company.
External reconstruction can also take place through amalgamation. Amalgamation refers to
when two companies which are in the same line of duty come together to form one company.
Internal reconstruction on the other hand refers to the internal re-organization of the financial
structure of the company. It permits the existing company to be continued. Share capital is
reduced to write off the past accumulated losses of the company.
Securitization
Securitization is a process by which a company clubs its different financial assets/debts to
form a consolidated financial instrument which is issued to investors.
In return, the investors in such securities get interest.
Asset Reconstruction Company
An Asset Reconstruction Company (ARC) is a company that is set up to do exactly what the
name suggests reconstruct or re-package assets to make them more saleable. The assets in
question here are loans from banks, card companies, financial institutions etc.
Section 13 (4) SURFACIE ACT -- (symbolic possession/actual possession of the assets) --In
case the borrower fails to discharge his liability within the period specified in sub-section (2),
the secured creditor may take recourse to one or more of the following measures to recover
his secured debt, namely--

(a) 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.;
(b) take over the management of the business of the borrower including the right to transfer
by way of lease, assignment or sale for realising the secured asset.;
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only
where the substantial part of the business of the borrower is held as security for the debt;
Provided further that where the management of whole, of the business or part of the business
is severable, the secured creditor shall take over the management of such business of the
borrower which is relatable to the security or the debt.
(c) appoint any person (hereafter referred to as the manager ), to manage the secured assets
the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured
assets from the borrower and from whom any money is due or may become due to the
borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured
debt.