Pridhvi Asset Reconstruction and Securitisation Company Ltd.

Pridhvi Asset Reconstruction And Securitisation Company Ltd.Profile Pridhvi Asset Reconstruction and Securitisation Company Limited (PARAS) is the FIRST Asset Reconstruction Company (ARC) established in South India, with its Registered and Corporate Office at Hyderabad. PARAS was incorporated under the Companies Act 1956 on 27th March 2007and granted Certificate of Registration by Reserve Bank Of India on 9th Apr 2008 for carrying out Asset Reconstruction and Securitisation business in the country. PARAS is promoted by Sri M .Siva Rama Vara Prasad and Dr.Murali Krishna Prasad Divi, two highly successful first generation entrepreneurs who created enormous value to the stake holders of their respective ventures. The Authorised Capital of PARAS is Rs.100 Crores. While the promoters contribution is 49%, contribution by individual NRI s is around 30%. Punjab National Bank is the first institutional investor with an equity participation of 10% and PARAS has firm commitments from other Public Sector Banks and Financial Institutions for the balance equity which will be in place very soon. Board of Directors PARAS has the distinct advantage of having on its Board, a team of highly distinguished and eminent persons drawn from various walks of life. Each one of them, have in their own field, made remarkable contributions to reach pinnacles of glory in the positions they had held and are holding. 1. Sri.D.Seetharamaiah Sri.D.Seetharamaiah is a member of the Institute of Chartered Accountants of India, since 1954 and is a senior partner in M/s. Brahmayya & Co., a leading firm of practising Chartered Accountants in Andhra Pradesh and Chennai. Presently he holds the following positions: a) Chairman of Heritage Foods India Limited, Tera Software Ltd, Jeevan Softech Ltd and Governing Body, Bhavan s New Science College, Hyderabad. b) Trustee of KLN Trust and NTR Memorial Trust. c) Member Executive Committee of Andhra Chamber of Commerce Madras. He had earlier held the the following positions: i) Member of the Southern Regional Board of RBI ii) Chairman, Tirumala Tirupathi Devasthanam 2. Sri. Motaparti Sivarama Varaprasad Sri Motaparti Sivarama Vara Prasad is a Metallurgical Engineer by profession. After extensive experience in foundries in Mumbai and Gujarat, he acquired two sick units and turned them around very successfully. Thereafter, Sri Prasad forayed into mini steel plant business and acquired M/s. Tema Steel Co. Ltd., Ghana, West Africa and turned it around in no time for which he was awarded The most successful and innovative Entrepreneur for the African Region in the year 1996 by UNIDO. After success at Tema, there was no looking back for Sri Prasad and he acquired two more sick units Amex Field Togo Steel SARL in 1994 and West African Cement S.A. in 1996. He is the chief promoter of over 25 companies which recorded an annual turnover of over Rs. 2500 Crores. Sri Prasad developed expertise in turnaround of sick units into viable industries by adopting latest technology, reduction of production cost, steep increase in production levels and good marketing strategies. 3. Dr. Divi Murali Krishna Prasad Dr. Divi Murali Krishna Prasad is a Doctorate in Pharmaceutical Chemistry. He holds memberships in American Chemical Engineers, American Chemical Society, American Cosmetic Society and American Pharmaceutical Association. He held key posts of Vice-President and Technical Director of large speciality manufacturing companies while he served in USA. On his return to India from USA, Dr. Murali co-promoted Cheminor Drugs Ltd and Globe Organics Ltd along with Dr.K.Anji Reddy of M/s Reddy Labs and was the Managing Director of these companies till May, 1990. During 1990, Dr. Murali promoted Divi s Research Centre Private Limited and in 1994 started Divi s Laboratories Limited. The company has been very successful in the manufacture of active pharmaceutical ingredients with the annual turnover of over Rs.1000 Crores and created considerable wealth for its shareholders. In terms of wealth, Dr. Murali is now ranked 36 among Fortune 40 in the country. 4. Dr. Pamidi Kotaiah Dr.Pamidi Kotaiah is a Post Graduate in Economics and was awarded Honorary degree of Doctorate of Letters by Andhra University. He commenced his career in the field of Research and Teaching in Economics in Andhra University, Waltair and stepped into RBI as Junior Officer in the year 1961. He had held 2 several positions in RBI, Agricultural Refinance and Development Corporation and thereafter in NABARD and was appointed as the Chairman of NABARD in June 92 and he served that position with distinction till May, 98. Apart from this, he worked as a Director in Agricultural Finance Corporation, Small Industries Development Bank of India, Institute of Rural Management, Anand, National Co-operative Development Corporation, apart from being a Member of the Narasimham Committee on Banking Sector Reforms,1998. Dr. Kotaiah has achieved expertise in the fields of Rural Development, Corporate Governance, Financial Management, Micro Finance, Rural Finance and Regulatory and Supervisory framework in Financial Sector. 5. Sri. K.Kannan Sri. K.Kannan is an F.C.A. and I.C.W.A and Honorary Member of the Indian Institute of Bankers. He started his career as an officer in 1965 in Bank of Baroda and worked in various capacities in the same bank upto 1992. Thereafter he was appointed as its Chairman and Managing Director and served between 1995 - 1999. He had the occasion to render his services overseas as Vice-President between 1982-84 at New York and General Manager of UK Operations of Bank of Baroda. Apart from this, he was also the Chairman of IBU International Finance Ltd., Hong Kong, Chairman BOB Cards Ltd. He had held the position as Director in several companies of which, a few are: a. Discount and Finance House of India b. Visa International Pacific c. Agricultural Finance Corporation d. New India Fire and & General Assurance Co., Ltd Presently he is also on the Board of several Limited Companies including Andhra Pradesh State Financial Corporation. 6. Sri. Medarametla Gopala Krishnaiah Sri.Medarametla Gopala Krishnaiah is a Post Graduate in Mathematics (M.A.) from Sri Venkateswara University, Tirupati (A.P.). He joined as a Probationary Officer in The Andhra Bank Ltd., in the year 1960. He became General Manager of Andhra Bank in the year 1983. He was appointed as Executive Director of Bank of Maharashtra in the year 1992. During his Banking Career of 37 years in various capacities, he handled finance to Industry, Trade, Agriculture, Exports etc., and monitored revival, rehabilitation and acquisition of Nonperforming Industrial and other enterprises in Asset Reconstruction and Securitisation activities. 3 The Team: Mr. D.Nanha Ram, President & CEO has over three decades banking experience in Public and Private Sector Banks. He has been very successful throughout his banking career. Before joining PARAS he was holding the position of General Manager in Dhanalakshmi Bank at Corporate office, Thrissur and was in charge of Credit and Stressed Assets Management Departments. Mr. M S Hussain, Vice-President possesses vast Banking Experience especially in the field of resolution of stressed assets. Prior to joining PARAS team, he was working in Development Credit Bank as Head Special Accounts Group in charge of resolution and recovery of stressed assets. Frequently Asked Questions with regard to Asset Reconstruction and Securitisation Business: What are the functions of an ARC? · · · · · Acquisition of financial assets (as defined u/s 2(L) of SARFAESI Act, 2002) Change or take over of Management/Sale or Lease of Business of the Borrower (As per the guidelines to be issued by RBI in this behalf) Rescheduling of Debts Enforcement of Security Interest (as per section 13(4) of SARFAESI Act,2002) Settlement of dues payable by the borrower Acquisition & Resolution What is the asset acquisition and asset holding structure of ARCs? The SARFAESI Act, 2002 and the RBI guidelines provide for acquisition of financial assets by Asset Reconstruction Companies (ARCs) through Trusts set up exclusively for the purpose. Accordingly, ARCs will acquire the financial assets and hold the same under the Trust. ARC would be the Trustee and the Managing Agent. How will ARC discharge the consideration for transfer of financial assets? What will be the sources of funds for ARC to effect the payment? ARCs will be holding Financial Assets (FAs) in a Fund floated by the Trust for the benefit of the investors (Qualified Institutional Buyers - QIBs). The Trust will float schemes for acquisition of Financial Assets (FAs) and issue Security Receipts (SRs) to the investors who shall subscribe to the same by making the payment for it. Such monies received from investors shall be utilized towards payment of purchase consideration for financial assets to the selling Banks / FIs. Since the selling Banks/ FIs shall also be the initial subscribers to the SRs as QIBs, the SRs subscribed to by them shall represent the proportion of their share in the aggregate principal outstanding loan amount provided all criteria such as security profile remaining the same. 4 Who are the Qualified Institutional Buyers (QIBs) as defined under SARFAESI Act? Qualified Institutional Buyer means a Financial Institution, Insurance Company, Bank, State Financial Corporation, State Industrial Development Corporation or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made there under, or any other body corporate as may be specified by the Board. What are Security Receipts? Security Receipts (SRs) represent undivided rights, title and interest of the investors in the financial assets held in the Fund floated by the Trust. SRs shall be redeemed only out of realization from financial assets held under the Trust and carry no fixed returns. SRs may also be sold in the secondary market. How will the Security Receipts (SRs) be treated in the books of the subscriber? Do the subscribers need to "mark to market" the SRs? How will an ARC determine the Net Asset Value (NAV) of the SRs and at what intervals will the NAV be declared? · · The Security Receipts (SRs) would be treated as a Non-SLR security (investments) in the books of the subscriber Banks/ FIs as per the RBI guidelines. In the absence of a ready market, the subscribers would need to value SRs on the basis of the Net Asset Value (NAV) to be periodically declared by the ARCs at half-yearly intervals 30th June & 31st December every Year. However review would be on a continuous basis so that any further deterioration in the value of SRs is declared immediately to the SR holders. The Trusts shall issue SRs only to QIBs and shall hold and administer the financial assets for such QIBs. An ARC proposing to issue SRs shall, prior to such issue, formulate a policy duly approved by the board of Directors. The SRs issued by ARCs are predominantly backed by impaired assets and cannot be characterized either as a debt or an equity instrument, since they combine the features of both. The NAV of an SR would be arrived at after due rating which would normally be below investment grade and the SRs are generally privately placed and not listed. In the event of non realisation of the financial assets, the SR holders, representing 75% of the total value of the SRs, issued by the ARC, can call for a meeting of all SR holders in a particular scheme and every resolution passed in such meetings will be binding on the ARC. Rating of SRs should be obtained from SEBI registered rating agencies to whom all required information shall be supplied. The rating/grading should be based on recovery risk as against default risk which is the basis of rating assignments in normal assets. The other key issues that should be factored in, while assigning Recovery rating are: extent of debt acquired, composition of lenders, collaterals available, security and seniority of debt, individual lender vis-à-vis institutional lender, estimated cash flows 5 · · · · · · · · · from the underlying impaired assts till the maturity of the SRs, uncertainty in realizing the expected cash flows in initial period, management, business risk, financial risk etc. The rating will be assigned on a new specifically developed rating scale called recovery rating scale. Each rating category in the recovery scale will have an associate range of recovery expressed in percentage terms, which can be used for arriving at NAV of SRs. Who will bear the loss arising from the difference between acquisition price and realized price? ARC will function like a Mutual Fund. It will transfer the acquired assets to one or more trusts [set up u/s 7(1) and 7(2) of SARFAESI Act, 2002] at the price at which the financial assets were acquired from the originator (Banks/FIs). The trusts shall issue Security Receipts to Qualified Institutional Buyers [as defined u/s 2(u) of SARFAESI Act, 2002]. The trusteeship of such trusts shall vest with the ARC. ARC will get only management fee from the trusts. Any upside in between acquired price and realized price will be shared with the beneficiaries of the trusts (Banks/FIs) and ARC. Any downside in between acquired price and realized price will be borne by the beneficiaries of the trusts (Banks/FIs). Do the lenders need to have a policy in relation to transfer of assets to ARC? What are the key components of such a policy? The RBI guidelines to Banks/ FIs on sale of assets to ARC state that Banks/ FIs, which propose to sell their financial assets to Asset Reconstruction Company (ARC) should ensure that the sale is conducted in a prudent manner in accordance with a policy approved by the Board. The Board shall lay down policies and guidelines covering, inter- alia: · · · · · · · Financial assets to be sold; Norms and procedure for sale of such financial assets; Valuation procedure to be followed to ensure that the realisable value of financial assets is reasonably estimated; and Delegation of powers of various functionaries for taking decision on the sale of the financial assets; etc. The asset acquisition policy shall provide that the transactions shall take place in a fair and transparent manner after arms length in exercise of due diligence. Share of financial assets to be acquired should be worked out keeping in view that consent of at least 75% of secured creditors is essential for the purpose of enforcement of security interest. Loans not backed by proper documents to be avoided. If ARC acquires 75% of the secured debt, what are the options available to the lenders who have not transferred their share of the debt to ARC? As provided in Section 4 d (ii) of the RBI guidelines, in the case of consortium / multiple banking arrangements, if 75% (by value) of the Banks / FIs decide to accept the offer of the 6 Asset Reconstruction Company (ARC), the remaining Banks / FIs will be obligated to accept the offer by the ARC. Can the borrower have any say in the transfer of assets to ARC? What are the remedies available to the borrower to oppose such a transfer? Under the SARAEFSI Act, 2002 an Asset Reconstruction Company (ARC) may acquire an interest in financial assets of any Bank / FI. The Bank / FI may, if it considers appropriate, give a notice of acquisition of financial assets by ARC to the concerned obligor. The borrower cannot oppose this move of the Banks / FIs. In case additional funding is required to reconstruct an asset, will the existing lenders need to contribute? There is no compulsion on the part of the existing lenders to provide additional funding. The extant guidelines do not allow for any additional funding by ARCs and the borrowers should make their own arrangements to source additional funds. However, PARAS on best effort basis, would supplement the efforts of the borrowers How does the asset resolution strategy of an ARC differ from that under the Corporate Debt Restructuring (CDR) mechanism? The essential objective of both the Corporate Debt Restructuring (CDR) and ARC is the sameUnlocking value from non-performing / distress assets. Hence, they can be seen as complementary resolution efforts in addressing the distressed asset problem. The ARC route has the advantage of taking the asset off the Banks' books and creating a secondary market for it, thereby enhancing the value potential. ARC is focused towards resolution rather than the reschedulement of debt. Debt aggregation by ARC will enable single point responsibility and ensure speedy implementation of resolution strategy based on sustainable level of debt within a reasonable timeframe. Why should Banks and other Financial Institutions sell Assets to PARAS? · · · · · PARAS has a professional team who are well experienced in their chosen profession and are capable of bringing about great value by proper and timely acquisition and faster and effective resolution methods. The sale of the financial assets to PARAS enables the NPAs to be taken off the books of the Bank/FI and unlocks capital. Investment in these assets shall be treated as performing as per RBI guidelines. PARAS will bring about faster debt aggregation and resolution of inter creditor issues. This is especially critical as NPAs lose value by 20-30% each year. Debt aggregation by PARAS will enable single point responsibility and ensure speedy implementation of resolution strategy. Sale of NPAs on a portfolio basis enables loss on sale of any one asset to be set off against capital gains on another, subject to RBI guidelines on provisioning / valuation norms. 7 · Reduces expenditure on NPA maintenance (legal expenditure, follow-up requirements etc.) and releases resources for core operations. Legal Guidelines: How will the transfer of Financial Assets (FAs) from the Bank / FI to ARC be effected? Why is assignment of debt required? The transfer of Financial Assets (FAs) will be effected by way of an agreement between the Bank / FI and ARC.The transfer as contemplated under the SARFAESI Act, 2002 amounts to assignment of debt in law. What is the stamp duty payable on transfer of assets to ARC? Are any stamp duty concessions available for such transfer? As the process involves transfer/assignment of mortgage debts and the same will attract stamp duty as "Conveyance" on ad- valorem under the corresponding stamp laws of the states where the mortgaged asset is located. The duty in various states is very high ranging from 4% to 10%. In few states concessions are available as the same is kept under a special article as "assignment of debt with or without underlying securities" and is capped at maximum of Rs.1.00 lakh in the states of Andhra Pradesh, Maharashtra and Gujarat. Do the lenders need to take any action against the borrower under the SARFAESI Act, 2002 or otherwise prior to transfer to ARC? No. Any NPA may be transferred to ARC irrespective of the action taken by the Bank / FI under the SARFAESI Act, 2002 or otherwise. Do the loan documents for assets being proposed to be transferred to ARC need to carry any covenants to enable such transfer? Should all future documents entered between lenders and borrowers contain any specific covenants to enable ease of transfer of assets to an ARC? Any acquisition under the SARFAESI Act, 2002 does not require any covenants in the loan documents to enable the transfer. What will be the status of BIFR proceedings on acquisition of 75% of secured debt by ARC? The SARFAESI Act, 2002 stipulates that once the assets are acquired by any Securitisation/Asset Reconstruction Company, no further reference can be made by the Borrower Company to BIFR. Pending reference before BIFR shall abate only when any measure is taken by ARC under Section - 13(4) of the SARFAESI Act, 2002. 8