Asset Reconstruction Company (India) Ltd

Asset Reconstruction Company (India) Ltd.

Incorporated in February 2002 and headquartered in Mumbai, Asset Reconstruction Company (India) Ltd. (ARCL) is in the business of buying stressed loans from banks and financial institutions at a discount and recovering them through settlement, restructuring, enforcement under the SARFAESI Act, Debt Recovery Tribunals & resolution under the Insolvency and Bankruptcy Code. ARCL was the first asset reconstruction company incorporated in India (August 2003) completing its first acquisition in December 2003.

ARCL’s total AUM stood at INR 20,150 crore as of 31 March 2026, split between corporate loans (69%), retail loans (24%) and SME and other loans (8%). ARCL's own investment in that AUM was INR 4,409 crore, or 22%. It operates from 13 offices across 12 states and Delhi with 206 employees, and works with 218 registered valuers, 206 collection agents and 988 empanelled lawyers. ARCL was the second largest ARC in India by AUM as of 31 March 2025 with a 13% market share and had the second largest net worth among private ARCs.

RHP filed: September 1, 2026

Price band: INR 132 to INR 139 per share, face value INR 10

Issue structure: Total offer of INR ~733 Cr, the entire issue is OFS.

Selling shareholders: Avenue India Resurgence Pte. Ltd. and State Bank of India as Promoter Selling Shareholders, Lathe Investment Pte. Ltd. as Investor Selling Shareholder and The Federal Bank Ltd. as Other Selling Shareholder

BRLMs: IIFL Capital Services Ltd., IDBI Capital Markets & Securities Ltd. and JM Financial Ltd.

Auditor: M S K A & Associates LLP, Chartered Accountants

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Skip | GMP: ~10% (11th September 2026)

ARCIL is a decent company operating in the Asset Reconstruction industry which is prone to delayed and partial recovery. Post FY19 the industry has seen slower growth because of lower corporate stress as bank gross NPAs fell from INR 9,33,610 Cr in FY19 to INR 4,31,630 Cr in FY25 with the GNPA ratio at 1.8% by March 2026 and because banks can now resolve directly under the IBC instead of selling to an ARC. Industry AUM went from INR 1,34,161 Cr in March 2025 to about INR 1,33,000 Cr in March 2026, suggesting that the Industry is not growing at this point in time.

Though ARCIL is one of the 5 ARCs eligible to act as a resolution applicant under the IBC and one of the 9 out of 27 ARCs meeting the RBI's Net Owned Fund requirement and has the 2nd largest market share at 13%, we'd avoid it as ARC itself is a poor quality business compared to AMCs because it may look like the management fee is recurring but the fee is linked to the recovery ratings on the security receipts and the ARC can't charge fee if the vintage crosses 8 years, at which point the receipts must be written off as loss assets in investors' books. 35% of ARCIL's AUM i.e INR 7,040 Cr of total INR 20,150 Cr has already crossed the vintage and is not earning any fee. ARCIL's retail AUM grew from INR 1,942 crore to INR 4,745 crore in two years a 56% CAGR taking retail from 13% of AUM in FY24 to 24% in FY26 however, the pivot still lags the industry opportunity. Corporate stress in banks has been flat to falling at a 0.3% CAGR between FY22 and FY26 when retail stress grew at 12.3% CAGR to INR 6,96,400 crore but corporate is still 69% of ARCIL's AUM against retail at 24% meaning two-thirds of the book still sits in the pool that is shrinking.

At IPO price of INR 139 the company is valued at 4,516 crore M. Cap and 12.85x consolidated FY26 EPS of INR 10.82, which looks cheap but 35% of profit before tax came from an unrealised fair value mark on security receipts. If we take that out and EPS drops to INR 6.36 and the multiple goes to 21.9x. The IPO is also completely OFS of INR 733 Cr and the company would not be getting any funds.

Business Overview

• Incorporated in February 2002 in Mumbai, ARCL acquires stressed loans from banks and financial institutions at a discount (cents on the dollar) and does recovery on the underlying value through resolution and collections. It was the first ARC in India, obtained RBI registration on August 2003 under the SARFAESI Act, and completed its first acquisition in December 2003.\

• ARCL earns revenue from two main sources. Fee income where the management, trusteeship, collection and resolution fee charged to the trust which ranges from 0.25% to 5% of the AUM of that trust. Investment income is the return on the security receipts ARCL subscribes to itself. Fee income is charged only where the AUM vintage is less than eight years.

• ARCL operates across three verticals, corporate loans (69%) of AUM, retail loans (24%) and SME and other loans (8%). The retail share has roughly doubled in two years while corporate has fallen from 79%.

• ARCL sets up a trust for each acquisition, the trust issues security receipts to qualified buyers. The money is used to pay the selling bank and the stressed assets are assigned to the trust. ARCL manages recovery as trustee and periodically declares a net asset value on the security receipts in line with RBI guidelines. Regulation requires ARCL to hold a minimum of either 15% of the transferor's investment in the security receipts or 2.5% of total security receipts issued whichever is higher.

• It acquires through four deal structures. Cash acquisitions where ARCL subscribes to all the security receipts and keeps all the return. Co-investor acquisitions, where other qualified buyers participate alongside. Ordinary security receipt acquisitions where the selling bank itself takes security receipts. And structured acquisitions where the selling bank participates but ARCL's return is capped by an IRR ceiling, in this case larger share of its revenue is fee instead of investment income.

• Cumulatively as of 31 March 2026 ARCL had acquired INR 89,909 crore of principal debt at a cost of INR 44,114 crore, or 49% of principal, and had made recoveries of INR 31,915 crore. Since inception it has transacted with 32 private sector banks including nine foreign banks, 28 public sector banks, 51 NBFCs, 18 housing finance companies, two co-operative banks and seven other institutions.

AUM by Business Vertical

Vertical (INR cr)

Findings

• The RBI licence is the main barrier to entry in this industry, operating as an ARC requires RBI registration under the SARFAESI Act and RBI mandated a minimum Net Owned Fund of INR 300 crore, only 9 of 27 ARCs met it as of March 2024. Only ARCs with Net Owned Funds above INR 1,000 crore can act as a resolution applicant under the IBC, and ARCL was one of only four that qualified in October 2022 and one of five as of March 2025.

• ARCL is one of only two vintage private ARCs to have grown AUM between Fiscal 2023 and Fiscal 2025, the other being Phoenix. Over the same period Edelweiss ARC's AUM fell 37% and its market share dropped 16 percentage points, JM Financial ARC fell 3% and ACRE fell 9%. ARCL's market share rose from 12% to 13%.

• ARCL is second among the seven largest ARCs behind only NARCL which is government backed with public sector banks holding roughly 84% and Phoenix at which is backed by Kotak Mahindra Bank.

• ARCL had the lowest expenses as a percentage of average total AUM among the top seven ARCs in Fiscal 2025 at 0.68% on a standalone basis and the highest profit after tax as a percentage of average AUM at 2%.

• The business model is shifting toward fee income, structured acquisitions where ARCL's return is capped by an IRR ceiling and a larger share of revenue arrives as management fee rose from 37% of AUM in FY24 to 56% in FY26. Fee income is more predictable and more cash-generative than recovery upside, so on that measure the revenue mix is improving.

Issues

• Asset reconstruction is a lumpy business and the return generated on SRs varies with the time of recovery as we’ve seen from case studies above. Arcil has bought its book at an average of 49% of principal debt since inception(50 cents on Dollar) and at 27%, 39% and 35% of principal in FY24, FY25 and FY26 respectively. On a pool bought at 50 cents recovering the full principal is a 2x gross multiple but if it’s earned in 5 years the IRR is 15% but if recovery is prolonged let’s say 10 years the IRR drops to ~7%, also, beyond eight years the return the security receipts must be written off as loss assets in investors' books. Though it looks like that the business is insulated from this as the management fee is recurring but the ARC stops earning a management fee on that AUM as the fees is charged only where vintage is under eight years.

• The recovery timetable is not in Arcil's control. Corporate resolution routinely runs years past the statutory clock. The IBC requires a corporate insolvency resolution process to finish within 330 days including litigation, but IBBI data shows resolution approvals averaging around 597 days. For example Bhushan Power and Steel was admitted to insolvency on 26 July 2017. The NCLT approved JSW Steel's plan in September 2019, the NCLAT in February 2020, JSW paid financial creditors only in March 2021 and operational creditors in March 2022, the Supreme Court set the whole plan aside and ordered liquidation on 2 May 2025, recalled that judgment on 31 July 2025, and finally upheld the plan in September 2025, almost 8 years.

• Roughly 35% of the headline AUM earns no fee. INR 7,040 crore of the INR 20,150 crore AUM is more than eight years old. Under RBI guidelines those security receipts must be treated as loss assets and written off in the books of investors, management fees is charged only where vintage is under eight years. Fee-earning AUM is therefore INR 13,110 crore, and the second largest AUM in India claim is measured on the gross number.

• Cash collections dropped 10% from INR 3,883 crore in FY25 to INR 3,484 crore in FY26, even as AUM rose 20%. Collections as a percentage of closing AUM fell from 24% in FY24 to 17% in FY26.

• The RBI has raised supervisory findings in three consecutive inspection cycles. The February 2024 inspection and risk assessment report listed nine major concerns, the August 2025 report listed nine more and the April 2026 observations eight further items. No penalty has been levied in three years but several items required re-submission of compliance on earlier observations.

Industry

• The ARC industry was created by the SARFAESI Act of 2002, following the recommendations of the second Narasimham Committee in 1998. An entity must register with the RBI to operate as an ARC. India today has 27 operational ARCs managing assets of approximately INR 1,33,000 crore as of March 2026.

• The market is highly concentrated. Industry AUM was INR 1,34,161 crore as of 31 March 2025, of which the top seven players held ~74%. ARCL was second at 13%, behind NARCL at 18% and ahead of Edelweiss ARC at 11%, Phoenix at 10%, JM Financial ARC at 10%, ACRE at 7% and Omkara at 6%.

• Regulation has tightened and is consolidating the industry. In October 2022 the RBI required all ARCs to maintain a minimum Net Owned Fund of INR 300 crore by 31 March 2026, and only 9 of 27 ARCs met that threshold as of March 2024. Separately, only ARCs with Net Owned Funds above INR 1,000 crore may act as a resolution applicant under the IBC and only five ARCs met that criterion as of March 2025.

• The industry is seeing a shift as the corporate NPAs have fallen as bank asset quality improved, which is why most large ARCs saw weak AUM growth between Fiscal 2023 and Fiscal 2025. Only ARCL and Phoenix recorded positive growth among the vintage private players over that period, while Edelweiss ARC's market share fell 16 percentage points. At the same time Retail credit stood at INR 76 lakh crore as of 31 March 2025 and grew at ~18% CAGR between Fiscal 2019 and Fiscal 2025 and is expected to grow at 14% to 15% between Fiscal 2025 and Fiscal 2028. Total stress in the retail segment across banks and NBFCs rose from INR 3,46,950 crore in Fiscal 2020 to INR 6,96,400 crore a 12% CAGR driven mainly by unsecured lending where consumer loans, personal loans and credit cards grew stress at 15%, 25% and 24% CAGR respectively between Fiscal 2020 and Fiscal 2026.

• MSME stress is a large pool, estimated MSME credit grew at ~19% CAGR from INR 41 lakh crore at March 2022 to INR 82 lakh crore at March 2024 and overall MSME stress grew at roughly 8% CAGR from INR 7 lakh crore to INR 9 lakh crore between Fiscal 2022 and Fiscal 2026. MSME NPAs were ~INR 2 lakh crore as of 31 March 2026.

Top 7 ARCs by AUM

Promoters and Management

ARCL has two promoters, both of which are also classified as Sponsors under the RBI Master Directions and the SARFAESI Act. Neither is the original promoter of the company. Together they hold ~90% of paid-up capital before the IPO.

Avenue India Resurgence Pte. Ltd. holds 70%. It is an investment holding company & an affiliate of Avenue Capital Group a global investment firm headquartered in New York focused on specialty lending, opportunistic credit and special situations across the United States, Europe and Asia. It is owned by five Avenue funds: Avenue Asia ARK Co-Investment SCSp at 38%, Avenue Asia Special Situations Fund V LP at 36%, Avenue RP Opportunities Fund LP at 12%, Avenue Asia Special Situations Fund VI LP at 10% and Avenue Global Opportunities Master Fund LP at 3%. It has no identifiable promoters of its own and is not listed on any exchange.

Avenue did not build this business, it acquired its entire 70% stake from the consortium of banks and financial institutions that founded ARCL, at prices ranging from INR 48 to INR 61 per share.

Board and Management

• Phanindranath Kakarla, 59, is CEO & MD, appointed on 8 March 2026 for a term of three years to 7 March 2029. He holds a bachelor's degree in mechanical engineering from IIT Bombay and a PGDM from IIM Calcutta and was previously Senior Executive Vice President at Edelweiss Group which runs a competing ARC. He joined ARCL as President on 2 April 2025, so there was likely an 11 month internal handover before he took the top position.

• Pallav Mohapatra ceased as Chief Executive Officer and Managing Director on 7 March 2026 on completion of his term. He drew remuneration of INR 4 crore in FY26, INR 3 crore in FY25 and INR 3 crore in FY24, He’s previously served as MD & CEO of Central Bank of India.

• Narayanan Subramaniam, 65, is Chairman and Non-Executive Independent Director, on the board since 27 May 2021. He is a member of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India, with a PGDM from IIM Ahmedabad. He was previously a board member of City Union Bank and CEO of First India Mutual Fund, and has three decades of experience across private equity, investment management, banking and finance.

• Sudarshan Sen, 67, is a Non-Executive Director, on the board since 13 November 2023. He was an Executive Director at the Reserve Bank of India overseeing banking regulation, co-operative banking regulation and non-banking regulation, represented the RBI on three Basel Committee groups, and served on the Insolvency Law Committee and the Bankruptcy Law Reforms Committee. He also chaired the RBI's own Committee on the functioning of Asset Reconstruction Companies and review of regulatory guidelines applicable to them.

• Ashish Shukla is a Nominee Director on the ARCL board and is also a director of Avenue India Resurgence Pte. Ltd. Other key managerial personnel include Pramod Gupta as Chief Financial Officer and Ameet Ashok Kela as Company Secretary, Compliance Officer and Head of CSR.

Case Study - A

Case Study - B