Should you subscribe to ARCIL’s IPO?

The IPO of Asset Reconstruction Company (India) Limited (ARCIL) which is pure offer for sale of shares worth ₹733 crore closes on September 11. The company manages securitisation trusts (trusts) or special purpose vehicles (SPVs) that buy bad loans from banks and make money in the event of recovering dues from the borrower that exceed the initial acquisition price of the bad loans. ARCIL is promoted by Avenue India Resurgence (belongs to Singapore-based Avenue Capital Group) and SBI who hold 69.7 per cent and 20 per cent of pre-IPO stake. The duo is set to offload stakes of 7.6 per cent and 3.4 per cent in the OFS. Besides, public shareholders Lathe Investment and Federal Bank also participate in the OFS. Promoters’ stake post-IPO falls to 78.7 per cent.

Asset reconstruction is a good business to be in, if one can crack it. As long as there is credit growth, growth in bad loans or stressed assets cannot be ruled out. As of FY26-end, stressed assets of banks and NBFCs across retail, corporate and SME segments amount to ₹23.7 lakh crore. Stressed assets include SMA 0, SMA 1, SMA 2, NPAs and written-off accounts. While some of them may have been sold to asset reconstruction companies (ARCs), the rest are being managed by the lenders themselves. ARCIL’s AUM, on comparison, is a tiny ₹20,150 crore. The ARC business benefits on both the sides of the credit cycle. When the cycle is healthy and NPAs are low (as it is currently), ARCs benefit from good collection momentum. When it turns for the worse, ARCs get opportunities to acquire fresh bad loans.

However, that sounds good only on paper as the business is too complex to execute. One bad purchase decision can erode substantial capital. IRR (internal rate of return) targets set at the time of acquisition of stressed assets may not be met. Collections or recoveries often come in lumps, especially given 69 per cent of ARCIL’s AUM belongs to the corporate segment. Legal proceedings can take longer for resolution.

ARCIL’s FY24-26 performance presented in the RHP paints the picture of a healthy, growing, profitable business. Between FY24 and FY26, AUM has expanded from ₹15,230 crore to ₹20,150 crore, revenue from ₹570 crore to ₹753 crore and profit from ₹305 crore to ₹408 crore. These are standalone figures and best represent the ARC’s business. ARCIL’s consolidated financials that consolidate the SPVs it manages, need to be looked only as regulatory compliance.

At the upper band of the IPO price, the issue values ARCIL at ₹4,516 crore or about 1.5x book value. It may seem inexpensive considering the business generates RoA of about 11 per cent. However, in the ARC business, three years may not be adequate to draw concrete conclusions about future profitability. Going forward, growth is dependent on fresh acquisitions and timely collections, which are difficult to estimate reasonably, in the absence of management’s guidance. The RHP also does not identify any listed peer to build a perspective on valuation. Given this situation, we advise investors to give the IPO a pass for now and probably revisit the company once post-listing disclosures (like earnings call) start coming in.

About ARCIL

Incorporated in 2002, ARCIL is India’s first ARC and has experience dealing with all credit cycles since. It is currently the second largest by AUM market share, after the government-guaranteed NARCL. NARCL may not be ARCIL’s rival as it was floated primarily to deal with large, legacy stressed assets of over ₹500 crore. ARCIL manages an AUM of ₹20,150 crore, of which, 69 per cent is corporate loans, 23 per cent is retail loans and about 8 per cent is SME and other loans.

Per RBI Directions, ARCs are required to have ‘skin in the game’ in the SPVs they manage. This means that ARCIL is also required to invest its own money and assume the risk on its balance sheet, alongside other investors (qualified buyers or QBs) when acquiring stressed assets. This amounts to about 22 per cent of the AUM as of FY26. ARCIL’s stake in each SPV may vary, but to simplify, on average, ARCIL is entitled to share 22 per cent of the combined profits (or losses) of all SPVs put together. We will cover this aspect more when dealing with deal structures.

ARCIL has a network of 988 lawyers, 206 collection agents and 218 registered valuers. Its CRAR is 65.3 per cent against a regulatory floor of 15 per cent.

Brass tacks

In general, banks and NBFCs auction stressed assets and invite bids. ARCs and other interested investors conduct due diligence of the portfolio and make an assessment of the purchase price at which their internal IRR target can be reached. This forms the basis for the bids. Bids above this price will only deliver a lower IRR.

Once identifying a potential deal, ARCIL floats a trust (SPV). The trust issues security receipts (SRs) to raise funds. ARCIL (for ‘skin in the game’) and other qualified buyers (like alternate asset managers, even selling banks themselves at times) subscribe to the SRs. On transferring funds to the selling bank or NBFC, the bad loans are then sold (assigned) to the SPV. ARCIL creates a trust for each successful auction. Currently, it manages 487 live trusts.

The acquisition price of the loans equates to the value of SRs issued by the SPV and this forms ARCIL’s AUM. Cumulatively, ARCIL has acquired ₹89,909 crore worth of loans (principal outstanding or POS) for ₹44,114 crore or at about 49 per cent on average. Once the loans are on the SPV’s balance sheet, ARCIL, as its trustee, begins work on collections/ recoveries from the borrower. Recoveries largely take the form of restructuring (relaxing repayment terms), settlement (settling a ₹100 loan at ₹70 for example), enforcement of security interest (selling off collateral) or legal proceedings in extreme cases. Per the RHP, 88 per cent of the AUM is secured.

Deal structures

ARCIL’s acquisitions take the form of one of the following deal structures. In the first two structures, the selling bank or NBFC do not become QBs investing in the SPV, but they do in the other two.

1. Cash acquisitions – Where ARCIL is the sole QB subscribing to every SR issued by the trust.

2. Co-investor acquisitions – Where ARCIL invests in the SRs alongside other QBs. ARCIL is regulatorily required to invest at least 2.5 per cent of SRs here (skin in the game).

3. Ordinary SR acquisitions – Where ARCIL invests in the SRs alongside the selling bank or NBFC. Here, the regulatory minimum investment for ARCIL is the higher of 15 per cent of SRs subscribed by the seller (bank) or 2.5 per cent of total SRs issued.

4. Structured acquisitions – This works similar to ordinary SR deals. But the difference is that ARCIL’s returns are capped in favour of preferential treatment. It makes money more by way of management fee than investment income in such deals (covered in revenue model).

As of FY26, of AUM outstanding for less than eight years, the four deal structures account for 11, 0.2, 3.1 and 85.7 per cent respectively. AUM outstanding for less than eight years is 65 per cent of the total AUM. The significance of eight years is that, per RBI norms, SR holders must fully write-off the investment if they are not fully redeemed within eight years. The RHP does not give the deal structure breakup on the full AUM.

Within company’s share in total AUM of 21.9 per cent, the four deal structures account for 35.9, 0.2, 15.6 and 48.3 per cent respectively.

Revenue model

The trusts are merely pass-through vehicles and ARCIL is their manager. When collections start coming in, ARCIL takes the first cut as the manager and this forms the ‘management, recovery fees’ — the first revenue stream. This is generally agreed as a percentage of AUM (between 1 and 1.5 per cent of AUM in FY24-26) and accounted for 37.2 per cent of FY26 revenue.The recovered money after paying the manager’s cut then accrues to the SR investors (including ARCIL). This is termed as SR redemptions. SR redemptions proportionate to ARCIL’s stake along with ‘upside’ (when redemptions exceed the face value of SRs invested) if any, accrues to ARCIL as ‘other operating income’ or ‘income from investment in SRs, upside income’ — the second revenue stream. This accounted for 25.4 per cent of FY26 revenue.By regulation, the investments in SRs are required to be marked to market based on credit rating agencies’ assessment of an NAV of the SRs. This results in an unrealised gain or loss and makes the third revenue stream of ‘fair value changes’. This accounted for 25.9 per cent of FY26 revenue.

As said above, investment in SRs outstanding for over eight years are written off. However, recovery proceedings can continue. Successful collections are written back as income and forms the fourth revenue stream. This accounted for 8.8 per cent of FY26 revenue.

Interest income from investments other than in SRs form the fifth revenue stream, accounting for 2.7 per cent of FY26 revenue.

The revenue streams’ share in FY26 revenue is given just for perspective and their relative shares can vary in a different year. Except for management fees and interest income, external factors play a major role in deciding how much ARCIL can earn from the other revenue streams — and this makes it extremely difficult to model for.

As a percentage of AUM, in FY26, ARCIL made about 4.2 per cent of AUM as revenue, paid 0.8 per cent as operating costs, incurred 0.5 per cent in impairment (provisions, write-offs) resulting in pre-tax profit of 2.9 per cent and 2.2 per cent on a post-tax basis.

Published on September 10, 2026