Conceptual · Article 2.1.7.8

Security Receipts (ARCs).

Q: Can I, as an individual, directly invest in Security Receipts?

No. Security Receipts can only be issued to Qualified Buyers under the SARFAESI Act — banks, insurance companies, mutual funds via their AMCs, larger NBFCs and HFCs, and Category II/III AIFs. Even with a ₹10 lakh minimum, individual retail investors are not eligible buyers. The only indirect route is a mutual fund or a distressed-asset AIF that itself holds SRs — and AIFs typically require a ₹1 crore minimum.

Q: What happens if the ARC fails to fully recover after 8 years?

The RBI (ARC) Directions cap the total realisation period at 8 years from the date of acquisition by the first ARC. At the end of 8 years the ARC must formally close out the position — any unrecovered portion is written down, and SR holders receive only what has been recovered up to that point. For government-guaranteed SRs (typically NARCL), any amount outstanding after the guarantee period expires is written down to ₹1, effectively extinguishing the residual claim.

The Distressed-Debt Claim Born From India's Bad-Loan Cleanup.

Published as on 22 July 2026

A Security Receipt is not a bond and not a mainstream fixed-income product. It is a receipt issued by an Asset Reconstruction Company — through a trust it manages — when the ARC buys a bank's bad loans at a discount under the SARFAESI Act, 2002. The SR gives its holder an undivided claim on whatever the ARC eventually recovers from those defaulted borrowers. There is no coupon and no fixed maturity value: the return depends entirely on recovery, whose timing and amount are uncertain. Value is marked periodically at a NAV set by a rating agency's Recovery Rating. SRs are highly illiquid, restricted to institutional Qualified Buyers from a ₹10 lakh minimum, and taxed on a pass-through basis. This is specialist distressed debt — not a place to park short-term savings.

Qualified Buyers

Access · Institutional

₹10 lakh

Minimum Investment

~55%

Cumulative Recovery FY25

No Coupon

Recovery-Linked

Executive Summary · Page 2

Executive Summary · 6 Findings

A Security Receipt is the plumbing of India's bad-loan cleanup. When a bank sells a soured loan to an Asset Reconstruction Company, the ARC parks it in a trust and issues SRs — paper that says, in effect, "you now own a slice of whatever we can claw back from this defaulted borrower." For an investor the question is not "what yield does this pay?" — it pays no coupon at all — but "how much of the face value will actually be recovered, and over how many years?" The honest answer is uncertain, illiquid, and institutional-only.

Covers what an SR is and why ARCs exist, where it sits as a specialist distressed-debt instrument rather than fixed income, how the SR transaction works and the ARC's mandatory skin in the game, valuation by Recovery Rating and NAV, recovery-linked returns, the five risks that define the instrument, who qualifies to invest, the SARFAESI and RBI (ARC) 2024/2025 regulatory frame, pass-through taxation under Section 115TCA, and six questions Indian investors ask.

Key Findings

A claim on recovery from a bank's bad loan.

An SR is a receipt defined under the SARFAESI Act, 2002 and issued by an ARC's trust to Qualified Buyers. It evidences an undivided right in a financial asset the ARC has acquired — a defaulted loan bought from a bank at a discount. Whatever the ARC recovers flows proportionately back to SR holders. It combines debt and equity features; the RBI itself says it cannot be strictly called a debt instrument.

Specialist distressed debt — not fixed income.

This is the opposite end of the securitisation spectrum from a Pass Through Certificate. A PTC pools performing loans and pays predictable EMIs; an SR pools non-performing loans and pays only when recovery happens. SRs are institutional-only — banks, insurers, mutual-fund AMCs, larger NBFCs/HFCs and AIFs — with a ₹10 lakh minimum. Retail investors reach them only indirectly, through a fund that holds them.

No coupon; returns are outcome-dependent.

SRs carry no interest rate and no scheduled payment. Cash reaches holders only when the ARC settles, enforces collateral or resolves the account through the IBC. The defining metric is the cumulative recovery rate — cash recovered as a percentage of SR face value — which for India's private ARCs rose from ~38% in FY 2022-23 toward a projected 55–60% by FY 2024-25. Holders routinely receive well below face value; that is the expected outcome, not a failure.

Value is a rating, not a market price.

With no active market, an SR's NAV is set as Recovery Rating % × face value. A SEBI-registered rating agency assigns the Recovery Rating within six months of acquisition and reviews it twice a year. Banks — who hold the bulk of India's SRs — must carry them at the lower of face value or the declared NAV, forcing a write-down when recovery prospects deteriorate.

Recovery, time, liquidity and valuation risk.

The entire return rides on recovery from failed borrowers. Resolution takes years — the RBI permits up to eight — locking capital with uncertain timing. There is virtually no secondary market, so exit before redemption is impractical. And valuation carries judgment: the ARC picks a recovery percentage within the agency's range. A sovereign guarantee does not exist here; only the underlying assets stand behind the paper.

Pass-through tax under Section 115TCA.

The ARC trust pays no tax (exempt under Section 10(23DA)); income is taxed in the SR holder's hands with its character preserved, reported in Schedule PTI. From FY 2025-26 a uniform 10% TDS applies to resident distributions under Section 194LBC (40% for non-residents, subject to DTAA). A secondary-market sale is a capital-gains event; SRs held over 24 months are long-term at 12.5% without indexation. Character analysis needs a professional.

At A Glance

Metric	Value	Detail
Issuer	ARC trust	Under SARFAESI
Underlying	NPAs / bad loans	Distressed
Return	Recovery-linked	No coupon
Valuation	NAV via Recovery Rating	Reviewed 2x/yr
Min Investment	₹10 lakh	Qualified Buyers only
Max Realisation	8 years	From acquisition
Liquidity	Very low	No real secondary market
Tax	Pass-through	Sec 115TCA · 10% TDS

Exhibit 01: The ARC Industry in Numbers (FY 2024-25)

Measure	Figure	Note
ARCs operating	27	+ NARCL
Private ARC AUM	~₹1.11–1.12L cr	−15% YoY
SR redemptions	~₹26,900 cr	Outpaced issuance
Recovery rate	~55–60%	Up from ~38%

*Indicative, FY 2024-25, per CRISIL/ICRA industry data. Recovery rates are cumulative cash recovered as a percentage of SR face value; they vary sharply by vintage and asset type. The AUM contraction reflects redemptions outpacing new issuance — the industry resolving its legacy backlog rather than growing it.

The Opening · Page 3

The Opening

A Security Receipt exists because banks accumulate loans that borrowers stop repaying. Carrying these Non-Performing Assets is corrosive — they tie up capital, force provisioning, and signal stress. So the SARFAESI Act of 2002 created a class of specialist firm, the Asset Reconstruction Company, to buy those bad loans off a bank's books at a discount and chase recovery using powers ordinary lenders lack. When it acquires a pool, the ARC houses it in a trust and issues Security Receipts against it. The bank usually takes SRs as payment rather than cash; the SR is its ongoing claim on whatever the ARC can salvage.

"A bond promises a coupon and a date. A Security Receipt promises neither — only a proportionate share of an uncertain recovery. Its worth is not a market price but a rating agency's estimate of how many paise on the rupee will eventually come back from a borrower who has already defaulted."
Recovery, Not Yield

The hybrid nature. An SR is not a pure debt instrument. Its return is contingent on the outcome of a legal and commercial recovery process — settlement, enforcement of collateral without a court order, insolvency proceedings under the IBC, or restructuring. The RBI explicitly recognises that SRs cannot be strictly characterised as debt, which is why they are valued, regulated and taxed differently from bonds or Pass Through Certificates.

The FY 2025-26 context. The framework has tightened sharply. The RBI (ARC) Directions of 2024 and 2025 raised capital thresholds, mandated the ARC's own investment in every scheme, imposed Recovery Ratings and quarterly investor reporting, and codified an eight-year ceiling on realisation. The intent is transparency — ending an era when SRs could sit on bank books at inflated values.

The Honest Boundary: An SR is NOT a fixed-income product — there is no coupon and no guaranteed maturity value. It is NOT a retail instrument — access is restricted to Qualified Buyers. It is NOT liquid — there is virtually no secondary market and capital is committed for years. It IS a way for sophisticated institutions to take a calculated position in distressed-debt recovery, accepting uncertainty of both amount and timing in exchange for potential upside above the acquisition cost.

Structure

Part I

What an SR Is, Why ARCs Exist & Where It Fits

Part II

Valuation by Recovery Rating, Returns & the Five Risks

Part III

Who Can Invest, the Regulatory Frame & Taxation

Part IV

The Verdict: A Specialist's Instrument

Suits

✓ Institutional Qualified Buyers

✓ Banks retaining recovery upside

✓ Distressed-asset specialist funds

✓ Multi-year, illiquid capital

Does NOT Suit

✕ Individual retail investors

✕ Anyone needing fixed income

✕ Money needed within a few years

✕ Capital that must stay liquid

Part I

What a Security Receipt Is, Why ARCs Exist, and Where It Fits

The SARFAESI definition and the trust mechanics of buying at a discount; how ARCs take bad loans off bank balance sheets and pursue recovery; and where SRs sit on the securitisation spectrum — the distressed extreme, opposite the performing-asset PTC, and firmly institutional.

Part I · Page 4

How the Transaction Works

NPA transfer at a discount.

A bank flags a loan as non-performing (typically 90+ days overdue) and negotiates a transfer price with an ARC — always below the outstanding amount, reflecting the impairment and recovery uncertainty.

Trust creation & SR issuance.

The ARC forms a dedicated trust, the loan and its security interests transfer in, and the trust issues Security Receipts. The bank typically receives SRs as consideration; other Qualified Buyers may also subscribe.

The ARC's mandatory skin in the game.

The RBI requires the ARC to invest in its own SRs — the higher of 15% of the transferor's investment or 2.5% of total SRs issued — and hold it until redemption, aligning the ARC with outside investors.

Recovery, distribution & redemption.

As the ARC recovers cash — via settlement, enforcement, IBC or restructuring — it flows into the trust and is distributed proportionately. SRs redeem as recoveries arrive, with total realisation capped at eight years.

Why ARCs Exist

Bad loans trap a bank's capital, force provisioning and drag on profitability. ARCs — RBI-registered specialists — take these problem assets off banks' hands so lenders can return to lending, then deploy legal powers ordinary creditors lack to squeeze recovery from defaulted borrowers.

Where SRs Sit on the Spectrum

Layer	Instrument	Return
Deposits	Bank FD	Fixed, insured to ₹5L
Bonds	Investment-grade debt	Fixed coupon
Performing ABS	PTCs	Predictable EMIs
Distressed	Security Receipts	Recovery-linked
Equity	Stocks / funds	Residual upside

SRs occupy the distressed extreme of the securitisation spectrum. A PTC is backed by loans that are still being repaid; an SR is backed by loans that have already failed. That single difference reshapes everything downstream — no coupon, rating by recovery rather than default probability, and returns contingent on a resolution process rather than a payment schedule.

The ARC's toolkit: One-Time Settlements negotiated with borrowers; SARFAESI enforcement — seizing and selling collateral without a court order, the Act's signature power; IBC proceedings to force resolution or liquidation; debt restructuring for viable borrowers; and, rarely, management takeover of a salvageable business. The route chosen shapes how much is recovered, and when.

Part II

Valuation by Recovery Rating, Recovery-Linked Returns, and the Five Risks

Why an SR's NAV is a rating agency's estimate rather than a market quote; why the return is the cumulative recovery rate, not a yield; and the five risks — recovery, time, liquidity, valuation and legal — that define this instrument far more than any headline number.

Part II · Page 6

Valuation & Returns

NAV = Recovery Rating % × Face Value

With no active market, an ARC obtains a Recovery Rating from a SEBI-registered agency within six months of acquisition, reviewed each June and December. Each rating band carries a range of expected recovery as a percentage of face value; the ARC picks a point within that range and must disclose why.

The Return Is the Recovery Rate

There is no yield to quote. The metric that matters is the cumulative recovery rate — total cash recovered as a percentage of SR face value. If ₹100 of SRs recovers ₹55 over several years, that is the return, received in unpredictable instalments as the ARC progresses.

Cumulative Recovery Trend

Period	Private ARC Recovery
FY 2022-23	~38%
FY 2024-25 (proj.)	~55–60%

CRISIL/ICRA. Improvement driven by stronger retail and MSME resolution. Banks must carry SRs at the lower of face value or declared NAV — deterioration forces a write-down.

The Five Defining Risks

Recovery Risk — The Core

There is no guaranteed interest or principal. Everything depends on how much the ARC extracts from a borrower who has already defaulted. Industry recovery of ~38–60% means holders routinely receive well below face value — the expected result, not the exception.

Time & Liquidity Risk

Resolution runs for years; the RBI permits up to eight. Capital is locked with uncertain distribution timing. And there is almost no secondary market — an SR holder cannot easily exit and is effectively a long-term partner in the resolution.

Valuation & Legal Risk

The ARC selects a recovery percentage within the agency's range — genuine judgment, historically prone to optimism. And recovery threads multiple forums (DRTs, NCLT, NCLAT, the courts); borrower challenges and shifts in bankruptcy-law interpretation can delay or diminish outcomes.

SR vs Pass Through Certificate

Aspect	SR	PTC
Underlying	Non-performing	Performing
Return	Recovery-linked	Regular EMIs
Rating	Recovery scale	Credit scale
Coupon	None	Fixed

Both are trust-issued securitisation instruments, but they sit at opposite ends of asset quality. A PTC's minimum is ₹1 crore; an SR's is ₹10 lakh — but the SR is far the riskier of the two.

Part III

Who Can Invest, the Regulatory Frame, and How SRs Are Taxed

Qualified Buyers and the ₹10 lakh gate, widened in 2025 to all NBFCs and HFCs; the SARFAESI foundation and the sweeping RBI (ARC) Directions of 2024 and 2025; and pass-through taxation under Section 115TCA with a rationalised 10% TDS from FY 2025-26.

Part III · Page 8

Who Qualifies to Invest

Qualified Buyer	Basis
Banks & FIs	Directly eligible
Insurers (IRDAI)	Directly eligible
Mutual funds (via AMC)	Indirect retail route
NBFCs & HFCs	All, from Feb 2025
AIFs (Cat II/III)	Notified, with DD
FPIs	10% / 49% tranche caps

The ₹10 Lakh Gate — Institutional Only

SRs may be issued only to Qualified Buyers under Section 2(1)(u) of SARFAESI, with a ₹10 lakh minimum. Individuals are excluded outright. From 28 February 2025 SEBI notified all RBI-regulated NBFCs and HFCs as QBs — dropping the earlier size threshold — to widen the investor base and deepen the thin secondary market.

The Regulatory Frame

SARFAESI Act, 2002 — The Foundation

Creates ARCs and SRs, and lets secured creditors take possession of and sell collateral without a court order — bypassing the litigation that once made NPA recovery glacial.

RBI (ARC) Directions, 2024 & 2025

The 2024 framework set a ₹300 crore Net Owned Fund by March 2026, a 15% capital-adequacy floor, skin-in-the-game and governance mandates. The 2025 overhaul (28 Nov 2025) added Recovery Ratings, quarterly investor reports, conservative provisioning and the codified eight-year realisation cap.

Taxation — Section 115TCA Pass-Through

The ARC trust pays no tax (exempt under Section 10(23DA)); income is taxed in the SR holder's hands with its character preserved, reported in Schedule PTI. From FY 2025-26, TDS under Section 194LBC is a uniform 10% for residents (40% for non-residents, subject to DTAA) — down from the old 25%/30% rates.

Capital Gains on Secondary Sale

SRs are unlisted securities (not bonds/debentures, so outside Section 50AA). Post Finance Act 2024: held ≤24 months, gains are short-term at slab rate; held >24 months, long-term at 12.5% without indexation. The character of each distribution needs a CA's determination.

Part IV

The Verdict

A recovery bet for specialists. Not a fixed-income product.

Part IV: The Verdict · Page 10

30-Second Summary

A Security Receipt is an instrument an Asset Reconstruction Company issues, through a trust, when it buys a bank's bad loans at a discount under SARFAESI. It carries no coupon and no guaranteed maturity value — the holder owns a proportionate claim on whatever the ARC recovers from defaulted borrowers, valued periodically at a NAV set by a rating agency's Recovery Rating. India's cumulative recovery rate has run around 38–60% across recent years; holders routinely receive well below face value, and only over many years.

SRs are restricted to Qualified Buyers from a ₹10 lakh minimum, are highly illiquid with virtually no secondary market, and cap realisation at eight years. They are taxed on a pass-through basis under Section 115TCA — the trust exempt, income taxed in the holder's hands, a uniform 10% TDS from FY 2025-26. This is specialist distressed debt. Compare it to a Pass Through Certificate or a distressed-asset fund — never to a bond, an FD, or anything you would call safe.

"The right question about a Security Receipt is not 'what does it yield?' — it yields nothing until recovery arrives. It is 'how much of this defaulted loan will come back, and can I wait years to find out?' Answer that honestly and the instrument reveals itself: a calculated bet on recovery for those equipped to make it, and entirely wrong for everyone else."
The Final Orientation

The Bottom Line: Security Receipts are the machinery that lets India clean bad loans off bank balance sheets — and a genuine distressed-debt opportunity for the institutions equipped to underwrite recovery. But they are institutional-only, illiquid, coupon-free and outcome-dependent, with returns that hinge on legal resolution over many years. For an individual investor the practical exposure, if any, is indirect — through a fund that holds them, with eyes open to the risk. Judge an SR by its Recovery Rating and the credibility of the resolution plan, never by a headline number, and take professional tax advice on the character of every distribution.

ADWIZR · July 2026

Decision Rules

Appropriate For

✓ Qualified Buyers only

✓ Banks retaining recovery upside

✓ Distressed-debt specialists

✓ Patient, illiquid capital

Wrong Tool For

✕ Individual retail investors

✕ Predictable income

✕ Capital preservation

✕ Money needed on a timeline

Three Misconceptions

What Investors Get Wrong

(1) "It's a bond-like fixed-income product." No coupon, no fixed value — the RBI says it is not strictly debt. (2) "The NAV is a market price." It is a rating agency's recovery estimate, refreshed twice a year. (3) "I can sell if I need to." There is virtually no secondary market; capital is committed until redemption.

vs a Pass Through Certificate

Distressed vs Performing

SRs: non-performing underlying, recovery-linked, no coupon, Recovery Rating — for distressed-debt specialists. PTCs: performing loans, regular EMIs, fixed coupon, credit rating — for income. Same trust plumbing, opposite risk.

QBs

Access

₹10 lakh minimum

≤8 yr

Realisation

Recovery-linked

115TCA

Tax

Pass-through · 10% TDS

Investor FAQ

Questions Indian Investors Ask

Six questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 Can I, as an individual, directly invest in Security Receipts?

No. SRs can only be issued to Qualified Buyers under the SARFAESI Act — banks, insurers, mutual funds via their AMCs, larger NBFCs and HFCs, and Category II/III AIFs. Even with the ₹10 lakh minimum, individual retail investors are not eligible buyers. The only indirect route is a mutual fund or a distressed-asset AIF that itself holds SRs — and such AIFs typically require a ₹1 crore minimum under SEBI's rules.

Q2 Is a Security Receipt the same as the bad loan (NPA) itself?

No. The NPA is the underlying defaulted loan the ARC acquired from the original lender. A Security Receipt is the instrument the ARC's trust issues to investors, giving them an undivided proportionate claim on whatever the ARC recovers. You hold the SR — you have no direct relationship with the defaulting borrower. The trust structure provides legal separation while channelling all recovery proceeds proportionately to SR holders.

Q3 How is an SR different from a Pass Through Certificate (PTC)?

Both are trust-issued securitisation instruments, but the underlying and return profile differ fundamentally. A PTC is backed by performing, standard loans where borrowers are current; it pays predictable income from regular EMIs and is rated on conventional credit scales. An SR is backed by non-performing, distressed loans where borrowers have already defaulted; it pays no coupon and offers contingent, recovery-linked returns rated on a Recovery Rating scale. A PTC is a fixed-income product; an SR is a distressed-debt instrument.

Q4 What happens if the ARC fails to fully recover after 8 years?

The RBI (ARC) Directions cap total realisation at 8 years from the date of acquisition by the first ARC. At the end of 8 years the ARC must formally close out the position — any unrecovered portion is written down, and SR holders receive only what has been recovered up to that point. For government-guaranteed SRs (typically NARCL), any amount outstanding after the guarantee period expires is written down to ₹1, effectively extinguishing the residual claim.

Q5 How are Security Receipts taxed in India?

SRs follow the pass-through framework under Section 115TCA. The ARC trust pays no tax (income is exempt under Section 10(23DA)); income is taxed in the SR holder's hands with its character preserved, and reported in Schedule PTI of the return. From FY 2025-26, TDS under Section 194LBC on distributions to resident investors is a uniform 10% (40% for non-residents, subject to DTAA). Gains on any secondary-market sale are capital gains: SRs held over 24 months are long-term, taxed at 12.5% without indexation. Consult a chartered accountant, as the character of each distribution requires careful analysis.

Q6 Can foreign investors invest in Security Receipts issued by Indian ARCs?

Yes, within limits. Foreign Portfolio Investors (FPIs) are eligible as Qualified Buyers under SARFAESI, but a single FPI can hold no more than 10% of the paid-up value of each SR tranche, and aggregate FPI holding is capped at 49% of each tranche. These per-tranche, per-scheme limits ensure no single foreign investor can control a resolution process affecting Indian NPAs.

Key Terms & Definitions

Security Receipt (SR)

An instrument defined under the SARFAESI Act, 2002 and issued by an ARC's trust to Qualified Buyers, evidencing an undivided proportionate claim on a distressed financial asset the ARC has acquired. It pays no coupon; its value depends on recovery from the underlying defaulted loan.

Asset Reconstruction Company (ARC)

An RBI-registered specialist that buys non-performing loans from banks and NBFCs at a discount, houses each pool in a separate trust, issues SRs against it, and pursues recovery through settlement, SARFAESI enforcement, the IBC or restructuring. Twenty-seven private ARCs operate in India, alongside the government-promoted NARCL.

SARFAESI Act, 2002

India's primary law for distressed-asset resolution. It enables ARCs and SRs and, crucially, lets secured creditors take possession of and sell collateral without a court order — the power that makes ARC recovery practical rather than glacial.

Qualified Buyer (QB)

The only entities to whom SRs may be issued, under Section 2(1)(u) of SARFAESI — banks, insurers, mutual funds via AMCs, NBFCs and HFCs, AIFs and FPIs. Individual retail investors are excluded; the minimum investment is ₹10 lakh.

Recovery Rating

A rating from a SEBI-registered agency indicating the range of expected recovery as a percentage of SR face value. Assigned within six months of acquisition and reviewed each June and December, it drives the SR's NAV: NAV = Recovery Rating % × face value.

Section 115TCA (Pass-Through)

The tax framework treating the ARC trust as a pass-through entity: the trust is exempt under Section 10(23DA), and income is taxed in the SR holder's hands with its character preserved, reported in Schedule PTI. TDS under Section 194LBC is a uniform 10% for residents from FY 2025-26.