Recovery Risk Ratings for security receipts issued by Asset Reconstruction Companies (ARCs)

The SARFAESI Act provides three alternative methods for recovery of non-performing assets, namely securitisation, asset reconstruction and enforcement of security without the intervention of the Court. This facilitates resolution of long-drawn legal matters in recovery cases and involves professional expertise by way of involving securitisation companies (SCs) / asset reconstruction companies (ARCs) in the recovery process. Security Receipts (SRs) are instruments issued under ‘The SARFAESI Act’ by SCs/ARCs (against the acquired financial assets) after acquisition of assets to Qualified Institutional Buyers (QIBs). Infomerics vets the assumptions made by the SC/ARC in arriving at valuation of SRs and modifies these wherever required. Infomerics arrives at Present Value of all cash flows from SRs till their maturity. Infomerics uses an indicative yield as the discounting rate for valuation of SRs. Once Infomerics arrives at an expected valuation, it assigns appropriate recovery rating (the ratings gives the range of recovery possible), which indicates the recovery expected from the underlying loan (and SRs), with respect to the face value of the SR, within a predefined band.RBI has issued guidelines for declaration of NAVs on these SRs issued by SCs/ARCs with the objective of enabling QIBs value their investment in SRs in accordance with the applicable guidelines.