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SECURITISATION, ASSET RECONSTRUCTION &
ENFORCEMENT OF SECURITY INTERESTS
SECURITISATION, ASSET RECONSTRUCTION &
ENFORCEMENT OF SECURITY INTERESTS
47 ———
SARFAES] Act
updated with reference to the Companies Act, 2013

Fourth Edition
20h

Vinod Kothari
Chartered Accountant, Chartered Secretary,
Director, Indian Securitisation Foundation

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 Preface to the Fourth Edition

This book has been around for nearly 11 years now, and over this time, the legal
environment for resolving problem loans has remain topical, issue-centric, rather than
policy-focused. Through prefaces to each of the previous editions, I have lamented
about near absence of policy towards corporate insolvency and problem loans. The
problems remains exactly it was. As India faces an uphill task with escalating problem
of corporate debt restructuring, much of which may turn bad over a period of time, the
country cannot afford to have knee-jerk solutions to a problem which is clear
by-product of the liberalised, globalised financial system.
Companies Act, 2013 was recently enacted, and is currently going through enforcement in a
phased manner. The new Act makes some effort to streamlining and speeding the winding up
process. However, provisions about revival of sick companies have been made creditor-driven,
rather than debtor-motivated. Revival of sick companies is more like survival instinct, which
has to come from the person facing sickness rather than the creditors. True, sickness cannot be
used as a ploy to keep creditors at bay; at the same time, the social costs of creditor-driven
enforcement are huge. There has to be a balance between creditor needs and debtor
concerns — the balance is missing at the current time.
As regards asset reconstruction companies, India is the only country which allows ARCs as
a business model, and that too, equipped with statutory powers. Recently, the foreign
investment regime was relaxed to permit upto 74% foreign direct investment and investment by
foreign institutional investors.
In short, the country seems to be moving about impulsively on a subject which requires a
balanced policy decision.
The SARFAESI Acct itself continues to engage attention of DRTs and courts all over the
country.

Kolkata - Vinod Kothari

September 18, 2013 vinod @ vinodkothari.com
www. vinokothari.com
www.india-financing.com
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 Preface to the Third Edition

Legislation on security interests has been a very significant area of lawmaking for ages; this
significance has only increased over the years with increasing preponderance of credit and
security. In exactly the same manner as it needs physical infrastructure such as roads and
telecommunications for business, a nation needs legal infrastructure that clearly defines
rights, obligations and remedial measures of parties in commercial contracts. Large, very
large proportion of commercial contracts today involve use of credit — hence, legislation on
credit and security occupies a central place in the legal infrastructure of any country. When
a business that uses credit and borrowings goes bad, there is a complicated question of
resolution of a business failure — it may lead to revival, or liquidation. In either case, there
will be questions of priorities, equities and distribution.
India as a nation has anything but clarity in law of credit and security. The laws are not clear
because the policy is not clear — in fact, there seems to be no policy at all. When a business
fails, who assesses, and how soon, whether the business can be revived or should be sent to
liquidation? If the business goes into liquidation, what will be the claims that will have
overriding priority? How will secured lenders realize their claims? How will the workers be
paid? And so on. Some fundamental principles were created decades ago in the Companies
Act, but over the years, each successive statute came and made dents into these fundamental
principles. Today, there is an utter chaos as to which concern overrides other concerns. The
revival provisions for sick companies seem to suggest that considerations of revival take a
priority, and it would be utterly counterintuitive if during the revival process, creditors are
allowed to take away the assets on which they hold security interest, as then, there would be
nothing left to revive. However, this is exactly what both the SARFAESI Act and the
proposed provisions in the Companies Bill, 2009 lay down. Giving a primacy to the interests of
creditors completely defies the whole objective of revival of a company — so, it is only a
product of policy confusion that the laws seem to provide for this.
The conflict between revival considerations and creditors’ interests is not the only where we
lack any sense of direction. The cacophonic situation where one law seeks primacy over the
others, without any semblance or centralized thinking at all, was quite evident in the
Supreme Court’s ruling in Central Bank of India v State of Kerala, where the apex court had
to do the tough and unexpected role of writing the law, trying reconciling and settling the
claims of various central and state laws that were fighting like little children for the first
snare in a failed business’ assets.

Not only does confusion prevail as between laws, utter confusion prevails inside the
SARFAESI and debt recovery laws. These laws were designed to be non-judicial enforcement
devices, but they are hardly non-judicial now. The pretexts on which civil courts and high
courts are interfering in enforcement actions under this law are only increasing, not entirely
without rationale. In fact, the SARFAESI Acct itself is a product of a confused state of policy,
and can be explained only as an over-optimistic attempt to create a pro-creditor environment, as
an anti-thesis to the highly pro-debtor environment that prevailed before. In previous
editions of this book, I have strongly contended that this enactment is like treating a leaning
 Preface wo the Third Edinon

t ~i it is
pole by making ut lean on the Opposite side. The idea is to make the pole straigh
rights
leaning on either side, it is still leaning. Several examples of illogical exercise of
under this law keep coming before judicial forams, and more will be coming up in future.
For instances, banks have used this law for enforcement of claims under derivatives
contracts. whereas a derivative deal is not a banking facility but essentially a trading
transaction. The wide-spread practice of asset reconstruction companies using the trust
device for parking non-performing assets and claiming privileges ofthis Act, while the trust
is not subject tothe discipline of the Act, will also sooner or later come before judicial
forums. In short, the expenence inimplementation of the Act sofar has only left readers with
more questions than answers, and | am very sure more fundamental questions will keep
coming before jadicial forums over the years,
Law is a reflection of the collective state of mind of our society; a confused law is, therefore,
a bad reflection of our state of thinking and resolution, India can ill-affo rdof
this state
confusion, It is surprising that we are re-writing most of our basic laws — income tax,

what is equally important — the law of credit and security interests.

ACKNOWLEDGEMENTS
In bringing up this revised edition, I have received very valuable contribution from Manoj

hard to see the edition comes out on schedule. The publishers, as usual, have been very
patient and very cooperative throughout the process of revision.
Needless to say, I will be most obliged for readers’ feedback.

Kolkata
July 20, 2010
 Preface to the Second Edition

Between the time the last edition of this book was written and now, there have been very
significant changes in the environment in which we operate. The Indian growth story is now
a global theme. In cocktails parties, office luncheons, and even gathering of mummies and
daddies, India is not merely seen as an interesting tourist destination, but a place which
exports software professionals, financial professors, highly articulated men and women to
the world. Our own business confidence level is scaling new peaks.
In this new era of resurgence, non-performing assets have come down sharply — how much of
that is due to the SARFAESI Acct is by itself a question, but there is no doubt that this
enactment has undone the borrowers’ general belief that bank funds are like the Indian bride
that enters the husband’s courtyard never to go back.
This enactment has created a new seriousness about security interests. However, in course of
implementation of this law, several significant issues pertaining to security interest regime
will come up. First of all, the very tricky question of choosing between enforcement of
security interests, workouts, and winding up will have to be reviewed at a policy level. If
banks were invariably to choose to enforce security interest and not look at the workout
option, it would lead to demolition of a corporate enterprise which is a huge social cost.
Besides, enforcement of security interest is not an equitable remedy — the secured lender is
entitled to look at his own interests ignoring the interests of the other lenders, workmen and
the shareholders of the borrower. The second critical issue is one of predatory lending. I had
made a mention of this in the preface to the last edition as well. Banks of today are no more
developmental banks: they are business enterprises that are in the business to make profits.
In the process, they sell dreams of owning a house or a car on the strength of the collateral.
The rate of defaults in consumer loans has been much lower in our country compared to
many other countries, but with aggressive marketing of consumer lending, the default rate,
and consequently, the enforcement of security interests using the wide powers granted by
this law is bound to go up. The lawmakers would have given strong powers in this law
hoping they would not be misused; however, in the new era of banking, a misuse of such
powers cannot be ruled out. Armed with this Act, a bank might do excesses against the
borrowers as also against other lenders.
The provisions of this law would continue to be litigated for several years. The Supreme
Court ruling in Mardia Chemicals has helped clear some of the doubts about this Act.
However, amendments made pursuant to that ruling were as reckless as the rest of the drafting of
the law. The draftsman’s strong urge to give whatever powers a bank may need to enforce
security interests may be seen in the 2004 amendments that gave such drastic power as the
right to takeover the business of the borrower. I have elaborately discussed such powers in
my treatise: I have a strong belief that such excessive powers will be read down by the
Courts. Essentially, this lawprovides only a means of non-judicial enforcement of the rights
that were mutually agreed between the parties in the loan document: the law cannot give
such powers to the lender that were never envisaged in the loan document.
 Preface to the Second Edinon

inthe last edition. | had stated that the applicability of this law to sequritisation transactions
was quite doubted, since securitisation really needed a facilitative, enabling law whereas
this enactment had a regulatory tone, and particularly in relation to special purpose
vehicles, the whole concept embedded in this law had gone fundamentally wrong, It is a fact
that after passage of this law, thousands of crores of securitisation transactions have been
done, al! outside this law. This law has remained, as apprehended in the preface to the last
edition, completely irrelevant for securitisation transactions.
In fact, the tithe tothis law has only helped to create misnotions about what ‘securitisation’
really means. It would not be uncommon to hear someone speak at one of securitisation
conferences, who would define securitisation as a means to reduce the NPAs of banks, Due
to completely ijlogical mixing up of securitisation provisions in this law, the words
“securitisation” and “enforcement of security interests” have been muddled, In fact, even
the highest Court of the country in a recent ruling spent the first few paras of the j
on defining securitisation, making reference to Basel TI, while the case actually relatd to
enforcem of securityent
interests.
Since the coverage of the book extends to securitisation, asset reconstruction as well as
enforcement of security interests, | have included several Chapters in the present edition
that deal with each of these subjects.
On securitisation as a financial instrument, there are Chapters that describe the basics of the
securitisation technology, Indian securitisation market, and detailed comments on the RBI's
guidelines on securitisation. The business of asset reconstruction in global context, and
then specifically in Indian context, has been reviewed in exclusive chapters. There are
several chapters that deal with secured lenders’ rights, choosing between different remedies,
in both global and Indian context.
This edition isbeing published by Wadhwa & Company, and I hope their strong
grip onthe
market for books on law and capital markets will help the book to reach extensive readership.
Like always, I would be eager to get readers’ feedback.

Kolkata
April 14, 2007
 Preface to the First Edition

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act (SARFAESI Act) enacts extremely important provisions relating to three
domains: securitisation, resolution of non-performing loans via the asset management route,
and, above all, enforcement of the rights of the secured lender.
The significance of securitisation as a financial instrument cannot be over-emphasized.
Coupled with derivative devices, banks all over the World are engaged in transforming
loans and lending risks into capital market securities and selling the same. “Structured
finance” is a global buzzword — though not without its traps and tribulations. The debacle
of Enron brought to fore the dangers inherent in unbridled use of structured finance, leading
a US Senate Committee [U.S. Senate Permanent Sub-committee on Investigations, Fishtail,
Bacchus, Sundance and Slapshot: Four Enron Transactions Funded and Facilitated by
U.S. Financial Institution, report dated January 2, 2003] to recommend to the Senate that
Financial regulators should define acceptable and unacceptable structured finance practices
for banks and securities firms and that the S.E.C. should punish financial intermediaries that
help public companies produce misleading financial reports by means of deceptive financial
products or transactions.
However, it could hardly be argued that the aim of the lawmaker, as far as securitisation in
India is concerned, was regulatory. The securitisation potential in India is huge, but the
market is simply in infancy. As far as banks are concerned, there was virtually no securitisation
activity at all: therefore, the clear aim of lawmaking was to remove the hurdles on the way to
securitisation and encourage banks to securitise their assets. Thus, though with the pious
intention of enabling it, the present law sets a regulatory framework for securitisation, and it
is only to be seen over time how it succeeds in giving impetus to securitisation activity in
the banking sector.
The next domain of this law is asset reconstruction, as a way of resolution of the overhand of
non-performing loans in the banking sector. Though it is clear that the inspiration for the
asset reconstruction company as an institution came from the South East Asian countries,
there is a substantial difference in all spheres: the nature of non-performing loans, the nature
of the asset management companies, their ownership, and their powers. Hence, India is
clearly indulging into a new experiment.
The third and the most sensitive domain of this law are secured lender’s rights. As this is,
quite naturally, the most significant part of the law, this law was widely known as the NPA
law. The idea of secured lending laws is not new: inspired by global thinking, most countries
have recently tried to put in place a system for non-judicial enforcement of the rights of the
secured lender. But such enforcement always gets into an extremely sensitive area of
competing and conflicting interests: of other creditors, workmen, and so on. Therefore, it is
necessary that such a law should not only provide for the rights of the secured lender, but
should enact rules of priority, appropriation and perfection of security interests. As important as
it is to safeguard the interests of the secured lender, it is equally important to ensure that
 Preface to the First Edition

lendo der s predators. Predatory lending 1salready a big issue in countries that
not become
have more creditor-friendly security laws. Clearly, with more private interests 10 banking.
the lawmaker must adopt an extremely balanced approach in secured lending laws,
Unarguably; the Government was in a great haste to have this law passed. It was
promulgated as an Ordinance, while such sensitive law should have been routed through
the Standing Committee of Parliament. In the Lok Sabha, the discussions on the law
were skeletal and went only in the fringe issues, In the Rajya Sabha, there were quite
elaborate discussions, but the core issue of creditors’ rights was not well presented.
Members were mostly obsessed with the idea of willful defaulters and the problem of
non-performing assets as a “loot”.
The provisions of this law suffer from multiple flaws of drafting: loose language, bad
English, flawed conceptual understanding and lack ofmeticulousness. As a nation, we have
to be very cautious with the laws that are handed down to us. If lawmakers do not read the
laws they pass, our democracy is at stake. If our democracy is at stake, so is our life, liberty
and property. Luckil we have an y,
extremely articulate and equity-ori ented
judiciary, but it
is a long road before interpretation of such a sketchy law is settled at the Courts, and the
uncertainty that thrives in the meantime helps none except the lawyers.
In completing this book, there was a timeline to meet. I only hope readers do not bounce my
own words at me: loose language, bad English, flawed conceptual understanding, and lack
of meticulousness! I am certainly prepared to admit that the proof-reading has been far from
meticulous. But honestly, I had lesser time to bring this book to print than the Government
had between the promulgation of the Ordinance and the final enactment of the law. The
reason for the hurry is clear: there is so much activity all over the country on enforcement of
security interests under this law that both lenders and the borrowers need an exhaustive and
honest interpretation, and I got a feeling that I could possibly help.
Of course, I would be very open to constructive critique.
I owe gratitude to my colleague Manoj Banthia for his valuable comments, and Manoj
Mandal for his assistance with the script.

Kolkata Vinod Kothari

January 7, 2003
 About
the Author
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 VINOD KOTHARI
SECURITISATION, ASSET RECONSTRUCTION
& ENFORCEMENT OF SECURITY
INTERESTS
4TH EDITION, 2013

General Contents

FUE TARE. 2. <2. MORE Par sac Pah apie Aictmss acnaee, ili
PPREfACC Tr The FPOUMME IO. ois 0s beiciescecinsvnnnsseaninns Vii
PERI ree te, PN POM oS cat ios ix
PEAIACE SINE SCCOMMIE ION: ais. oo pun 8hisevisnein'aners xi
PRETACE 10 Te PUSAN ON Ee,«so spc a6 Bayan esninsonnsacene xiii
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PRSG PAE CUE. -ccghs peas teorsatar di xercavtenectsZt AVUNG
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SD Ci TARA hs aes treaties sync eA Ahi? © Pri EPOA 1393

PART I

INTRODUCTION TO SECURITISATION, ASSET

RECONSTRUCTION AND ENFORCEMENT
OF SECURITY INTERESTS

CHAP. 1 INTRODUCTION TO SECURITISATION ........cccccceeeeeeeeeeees 3

CHAP.2 | THEINDIAN SECURITISATION MARKET .........cccceeeeeeees hi
App.1 STAMP NOTIFICATIONS IN SOME STATES 110
App.2 GUIDANCE NOTE ON SECURITISATION
ae 0s00secereoneeee
RUNG aires es ta vegiiwesGhtKo 113

xvii
vidi
General Conienis

App.3 RECOMMENDATIONS OF PATIL COM-

MITTEE REPORT: ASSET BACKED SE-
ComerTens RAADIET q.ncccnccevelbetennnnsensenen 123
App.4 SBOURITIBS CONTRACTS REGULATION
(AMENDMENT) BILL, 2008 ,...........c00008 139
Ape.5 ExTrRAcT OF REPORT OF THE PARLIA-
MENTARY STANDING COMMITTEE OF
PINANCEON SBCURITISATION ...........006 143
App.6 S®BCURITIES AND EXCHANGE BOARD OF
INDIA (PUBLIC OFFER AND LISTING OF
SECURITISED DEBT INSTRUMENTS) RE-
GUL ATRONER, GAID ccnscscscncnsncnstatnereiantn
Cuar. 3 RBI's GUIDELINES ON SBCURITISATION OF PBR-
peensnirs GTS... ...cocosanananseemennenaennenameaniansananen

App.1 DISCUSSION PAPER ON EMBRGING

TRENDS IN REGULATION AND SUPERVI-
SION OF SECURITISATION ACTIVITIES

CHAP. 4
EEE EEE EEE EEE E HEE EEEHE EE EEE EEE EEE EE EEEEEEEEEEEEEEEEEREEE

CHAP. 5 NON-PERFORMING LOANS—A GLOBAL PROBLEM .....

CHAP. 6 ASSET MANAGEMENT COMPANIES AND RESOLUTION
OEE EERE THEE E HEHEHE EE EEE EEE EEE EREEEEEREEEEEREE EERE EEEE 447
App.1 IMPORTANT FEATURES OF THE THAI-
LAND ASSET MANAGEMENT CoOR-
SEERA EEE EEE EERE 483
App.2 IMPORTANT FEATURES OF THE PENGUR-
USAN DANAHARTA NASIONAL BERHAD
ST epceseeermetenumeemeeanel
App.3 DANAHARTA’S LOAN RESTRUCTURING
PRINCIPLES AND GUIDELINES COORD

CHAP. 7 NON-PERFORMING LOANS—A SLEW OF MEASURES ..

ANNEX.1: CHA PTE

IIJ-A OF THE RESERVE
R BANK
TOSCO HHH EE

ANNEX. 2: MASTER CIRCULAR ON WILFUL DEFAU-

TEES. rceretresttnetitela
onbcp enses
Mexsrsces
 General Contents XIX

ANNEX. 3: CREDIT INFORMATION COMPANIES

(REGULATFION ACT 2005 .:...........0c..00000 555
ANNEX. 4: SECTION 22 OF SICK INDUSTRIAL COM-
PANIES (SPECIAL PROVISIONS) ACT,
ee ie 579
ANNEX. 5A: PRUDENTIAL GUIDELINES ON
RESTRUCTURING OF ADVANCES BY
581
ANNEX.5B: GUIDELINES FOR RESTRUCTURING
UNDER CDR MECHANISM. ...........csccseeeees mB
ANNEX. 6A: RESTRUCTURING IN CASE OF SMES RBI
NOTIFICATION DATED 8TH SEPTEMBER,
604
ANNEX. 6B: RESTRUCTURING OF SME ADVANCES-
SME DEBT RESTRUCTURING
MECHANISM 4.A.. ALT AALS). 609
ANNEX. 7: GUIDELINES ON PURCHASE/SALE OF
NON-PERFORMING FINANCIAL ASSETS
(AS INCORPORATED IN- MASTER
CIRCULAR ON PRUDENTIAL
[IL
>)20 10 a al Pa 0 ann 610

CHAP. 8 ASSET RECONSTRUCTION COMPANIES IN INDIA: GE-

NESIS AND PERFORMANGE = RICTaLIN.
Ce. oecb ADG AL. 617

CHAP. 9 LAW AND PRACTICE OF ASSET RECONSTRUCTION IN

POPPA HEHEHE HEHEHE HHEHEEEHEHEEHEEEESEHEHEEEEEHHHEEEEEEEEEEHES 633

RBI GUIDELINES AND DIRECTIONS......... 655

GUIDELINES TO BANKS FOR SALE OF
NPLS TO ASSET RECONSTRUCTION
COMPANIES ......sc0ccsscvecvccccccsecccovscvesevssecos 670
GUIDANCE NOTE FOR SECURITISATION
COMPANIES AND RECONSTRUCTION
COGEIPANTES Cs ALUGA tasth ss ins (apse del ones 675

NOTIFICATIONS RELATING TO ASSET

RECONSTRUCTION COMPANIES ........+00+08+ 680
xx General Conienty

Bde UD OGD 5 1 aoe... csensnneneenenononnnns O&2

Apr.6 MAasTeR CIRCULAR ON DIRBCTIONS/

INSTRUCTIONS ISSURD TO THE
SECURITISATION COMPANIES/
RECONSTRUCTION COMPANIBS...........05 ORS

Car. 10 INTRODUCTION TO GLOBAL LAWS ON SECURITY IN

| ||) EEE 6945

App. 1 LAW COMMISSION OF UK RECOMMEN-

DATIONS ON REFORM OF SBCURITY
OETURET LAD Zicsnsiecseniniinnetiaetnem 737
CuHap.11 Dest RECOVERY LAW IN INDIA: AN OVERVIEW ........ 743

PART IL

SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT, 2002
CHAP. I re 77\

CHAP.IIT REGULATION OF SECURITISATION AND RECON-

STRUCTION OF FINANCIAL ASSETS OF BANKS AND
FINANCIAL INSTITUTIONS .ruscaniesmaupenvemenuenaypsosses. 875
CHAP. IIT ENFORCEMENT OF SECURITY INTEREST ......202000000000000. 953
CHAP.TV CENTRAL REGISTRY ....0scscssesssseesesessssssssssessbevbbosousseses 1149
CHAP. V OFFENCES AND PENALTIES o.cc.sccccsesescssssesssseseseseseseseees 1163
Ciap. Vi =MESCELLANSOUS |.id:..didititeli
didi Mbcncinsvcen 1167
ApP.1 MODEL CLAUSES IN CONSTITUTIONAL
DOCUMEOF NTSSPVS 200.ccccccccccecccccceeeeees 1211

eessowveseuveteneeevooreesssensigueettseeiores 1214
 General Contents XX1

App.3 STANDARD AND POOR’S LEGAL

CRITERIA FOR SPECIAL PURPOSE
ENTIBIES OO). OF. OITA Rh?..... 1219

PART III

SUBORDINATE LAW (RULES, DIRECTIONS,

ETC.) WITH COMMENTS

[1] SECURITY INTEREST (ENFORCEMENT) RULES, 2002... 1229

TT A i 2s shad aeatenso«teoses 1260
Th yh ami a ys | veld Rie aed rele De 1261
App. IIT CERTIFICATE OF SALE...............ccceeeeseeee 1262
Pee POSSESSION NOTION tie AS, 1263
APPeVAYSALP CERTIFICATE. 20. YSa 0082.50. 1265
Je Sm at gggSl wee eee etManele ae Aart aa 1267
App. VII APPLICATION UNDER SUB-SECTION (1)
OF SECTION 17 OF THE SECURITISATION
AND RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF SECUR-
ap bbda JW aah e/a eg Ad b U54g as Ra 1270
App. VIII APPLICATION UNDER SUB-SECTION (6)
OF SECTION 17 OF THE SECURITISATION
AND RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF SECU-
RIPY TNTERDST ACL, ZOOL teicestisesteviesesess 1273
App. TX APPEAL UNDER SECTION 18 OF THE
SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCE-
MENT OF SECURITY INTEREST ACT,
POM rads ctatirosnriere Bepech ise oscst ott! SE sane LS
[2] SARFAESI Act (REMOVAL OF DIFFICULTIES)
RM asOakes ish si WEARS IRSaRes Cevehitvanssexesasesryegenavevesees 1278
[3] ARC DIRECTIONS AND GUIDELINES ..........+2sseeeseeseeeees 1280
[4] GUIDELINES FOR BANKS FOR DISPOSAL OF NON-
PERFORMING OR FINANCIAL ASSETS ........cs0scceseeeeeeeees 1281
[5] A ATE TUCO TIFICA TIONS 5...socccsstcecsecevecscvorvecccaeeuses 1282
 General Cunienls

1285
(6) APPLICATION FORM FOR SETTING UP AROS ,.........55
(7) FORM OF APPLICATION FOR CBRTIFICATE OF RwGI-
STRATION TO COMMENCE/CARRY ON THE BUSINESS
oF A SECURITISATION COMPANY OR RBCONSTRUC-
TION CODPANY ...ccsccescsssssseesrrnsrsnnscnnsbonnennnnensenhnnnnnsnnsns 1286

PART IV

REFERENCE LAW: STATUTES INTEGRALLY

REFERRED IN THE MAIN LAW

APPENDICES

App.1 RELEVANT EXTRACTS FROM THE TRANSFER OF PRO-

PERTY ACT, 1882... <cousstned saben etitibediiniesssssy
App. 2 THE RECOVERY OF DEBTS DUE TO BANKS AND FINAN-
CIAL INSTITUTIONS ACT, 1998 siccosssnpstibsssttipte testa
App.3 DEBT RECOVERY TRIBUNAL (PROCEDURE) RULES,
he Ee ee ee ne
App.4 DEBTS RECOVERY APPELLATE TRIBUNAL (PROCE-
DURE) RULES, Ge cereseenccneeeonentiaptitehirccsevesvusemnnsntens
App.5 THE DEBTS RECOVERY TRIBUNAL (PROCEDURE)
ADMEDIMEIT RULES, DIGG oc pevvcscevestrrentysvtbovteiedevieasssitabs
ApP.6 THE DEBTS RECOVERY APPELLATE TRIBUNAL (FINAN-
CIAL AND ADMINISTRATIVE POWER) RULES, 1997.........
App.7 DEBTS RECOVERY TRIBUNAL (FINANCIAL AND ADMIN-
ISTRATIVE POWER) RULES, 1997 000.0....ccccccccceceeeeseceeseeees
App.8 SPECIAL RECOVERY PPOWERS UNDER SOME INDIAN
FO ee ee ee
ANNEX. 8.1 PROVISIONS IN THE STATE FINANCIAL
CORPORATIONS ACT, 1951 000000000...
ANNEX. 8.2 PROVIIN
SIONS
THE IPC ACT ceeceeecoee. 1373
ANNEX. IONS
8.3 PROVISIN THE IRBI Act, 1984...
SUBJECT INDEX lalallala nt cinta ne
1393
 TABLE OF CASES

A.P. State Financial Corporation v. Gar Re-Rolling Mills., (1994) 2

OE et Si erahs. Panaiont Caciemes +t, COR OT
A.P. State Financial Corporation v. Official Liquidator, 2000 (7)
NE!” |SIM ead TST Mabsteke ie ERAT acne a oe eae Ay PRR he 1076, 1080
Aas Mohmad v. Punjab National Bank, I (2009) BC 72 (DRAT)...... 1128
Abdul Azeez v. Punjab National Bank, (2005) 1 KLT 243 : (2005)
OA SUS IAS (RET ie oF Sites SLORSY At Cnn ter RO Od 974, 976
Abdul Navas v. Dhanalakshmi Bank Limited, II (2009) BC 160....... 970
ABL International Ltd. v. Export Credit Guarantee Corporation of
1 GR Eos eM oe Seana dedi adadehene atlanta: beretindiabae me 905
Aboobacker v. Punjab National Bank, (2005) 64 SCL 42 (Ker). ....... 1113
Ace Media Advertisers Pvt. Ltd. v. Bank of Baroda, IV (2009) BC
RSW 5|2SSNA SPR Satie b at ase?op Ame Voter eet SollWe:Nel. Boeri 2s ne il 979, 996
Adhunik Steels Ltd. v. Orissa Manganese and Minerals Pvt. Ltd.,
COUD NESEY SAS (2007 MIELGCET 287-(SC)o- wiry Wee ea 1199
Aditya Dudani v. Canara Bank, I (2011) BC 638 (Jhar)..................... 992
Administrator-Shri Dhakdi Group Co-operative Cotton Seed v.
Union of India, Special Civil Application No., 930 of 2011.......... 790
Agarwal S K vy. Oriental Bank of Commerce, (2006) I BC 562 (DB). 1093, 1094
Agencia Commercial International Ltd. v. Custodian of Branches of
Banco National Ultramarino, AIR 1982 SC 1268................eee 1139
Ahmad Raza v. AbidHussain, ILR 48 All 494 (PC)... eeeeeees 774
Akbar Ali SK v. State of West Bengal, III (2012) BC 261 (Cal.). ..... 1111
Akshat Commercial Private Limited v. Smt Kalpana Chakraborty,
BM PL ME LAG cup A lenmeyty yh Lea dhaats 1h) be dMA 3s Poked BOP coos enreessys 1167
Akshat Commercial Pvt. Ltd. v. Kalpana Chakraborty, IV (2010)
BC 26s] LGAL CIEE. beh cole tiscaves toaae Fe cetarn $ eG AKn WAC they Leobah 1145
Allahabad Bank v. Bank of Rajasthan Ltd., If (2011) BC 147
CLAD): «toc sencntdednke «Rcataasvunno decyl icadiisats« de> Lp pasta) ss yale Fatih ss 1023, 1026
Allahabad Bank vy. Canara Bank, (2004) 4 SCC 406............. cece ibe iga eeu’
PPP TTTTETILELI TT eee 1084, 1085,
1194
Allahabad Bank vy. Canara Bank II (2012) BC All. 294 ....... essere 1135, 1183
Allahabad Bank vy. Canara Bank and International Coach Builders
Limited v. Karnataka State Financial Corporation, (2003) 10
BOC ABD, 01, 17, Mastbionnrnass etal te Pec Whar sscosvsvagsbunennasevegnise 1081
Allahabad Bank v. Rajinder Mehra, IV (2011) BC 185 (DRAT
Dee TIi) costes <pshebeeek-btobescerctyseveaseschooervercersessessacenceoencoccvssonsorveteasenserdaces 909

Xxill
on Table ofCases
Allena (1) Agencies v. North Kanara GSB Co-op Bank Lid, Ul
agen
(2006) BC 100 (DRT—Mubai )..........2- seeps
Alpana Shankar v. Unio Bank of India, 11 (2006) BC 452 (DB). ..
Amba Devi Paper Mills Lid. v, State Bank of India, 1 (2012) BC
nnarsn
ne2QRHainn
haannnn ?
425 (DIB) ocnacnnrconrononnnnnnnnnsnnnsnnsennennnnennnnsnnnnannnnnnnsnnnn
Ambati Narasayya v. M Subba Rao, AIR 1990 SC 119...»
American Express Bank v, Hurley, (1985) 3 All |
Amish Jain v. ICICI Bank Lid., IV (2012) BC $52 (Del.) (PB). .......
Amit Raj Enterprises v. UCO Bank, (2008) 56 BLIR 894 ........0
622
Analkumar Rajkishore Mishra v. Dena Bank, | (2012) BC
Gib.) (DBD). c.ccaccecessecosssssersesessnnssnsnnesnenstnnnnennn nnanen eapnni
ennnennnn nntht
inio ny
Anant MillsCo, Lid. v. State ofGujarat, AIR 1975 SC 1234...
Andhra Bank v. Official Liquidator, II (2005) BC 425 (SC)......... sooes
Andhra Pradesh State Financial Corporation v. Gar Re-rolling Mills,
BO Comp Cas 140.......ccsssseeenensennnsnnensnnsnensnnennananennensanasnannanannenens
Ankit Steel Indore v, Bank of India, Indore, 1(2005) BC 534... 1157
Anumaji vy. Punjab National Bank, (2004) 8 SCC 498 .....c0ceeeee
Anushree Sah y. Bombay Mercantile Bank Ltd., Il (2008) BC 63
(DRA T—Miuitd). .00..sessereseoverserstirsenosesnnnnesbeopengeyerannnnspanterbesrepainise® 795, 991, 1136
Apex Electricals Limited v. ICICI Bank Limited, (2003) 2 GLR
1785; (2003) 117 Comp Cas 412 ceccccsssessssessesseecsssesnsnstnsnsssussossessen 972, 1186
Aradhana Sethy. Presiding Officer, DRT, Allahabad, AIR 2009
ALD 41 ....canscectenpasecsctte scen
eberediii tnan
vress eret
vipee tps taanupabang
sang tint anans 1149, 1187
Arasa Kumar v. Nallammal, II (2005) BC 127 ...0..c.c:cccccccssecesseeeeees 1184
ARC Pvt. Ltd. v. Ishan Systems Pvt. Ltd., [1 (2012) BC 98 (DRAT-
EE 1248
Arihant Pharma, Bangalore v. The Registrar, DRT, Bangalore, |
0) Oe, i 1158
Arun Jagannath
Gedam vy. State Bank of Hyderabad, I](2005)
BC
247 (DRATAIRD). sconaceeenseveressitznnaptetiem intestate: 1172
Arun Kumar Arora v. Union of India, 2006 (3) Law Herald (P&H)
100)! 1117
Aseena v. Sub-divisional Magistrate, II] (2009) BC 145 (DB).......... 1111
Ashok Broth ers nk 6)
v. Baof India, II(200 BC 137 (DRA T—DR T) 993, 998, 1248
Ashok Sharda v. Small Industries Development Bank of India,
(2007) 5 ALD 866 (DB) EEE EERE EEE EEE EEE EEE EEE EEE EEE EEE EEE EEEEE EERE EEE 967, 1006,
TE EEE EEE EEE EEE EERE EEE EEE TEETER EEE RHEE EEE EEE EEE HEHE EEE HEHE EEE DEER EEEEEEEEE 1100, 1186
1130, 1136,
EEE EEE EEE EEE EEE EEE EEE EEE EEE EE EEE HEE HERE HEHE EEE EE EEE EEEE HEHEHE EEE HEHEHE EEEE
1184
Asset Reconstruction Company (India) Limited vy. Kumar
niet a Ae eee hee SE ees
TEE ETE TEE EEE EEE E EEE EEE HEE EE EEE HEHE EEE EEE HEHEHE 1110, 1174,
hee ficcoveld Gimli eee ner OTTER
EERE EERE EE EUEEEEEEE HEE -
1210
(2012) BC 733 (Bombay High Court) (DB) viccccccccceceecssecesceceeeeerves 1105
iva Co-operative Bank Ltd., III (2006)
te eewee

aaah i tin ntl itt tater terdetend nnonnnce......

 Table of Cases

Atma Tube Products Limited vy. Debt Recovery Appellate Tribunal,

PE (2067) BE GPRD BP sists scccscsccssesc
81 Rselierrisels;
robs
ATV Projects India Ltd y. State of Maharastra, IV (2008) BC 221

B
B. Johnson & Co. (Builders) Ltd., (1955) Ch 634, 661 ..........ccccccceeeee 1038, 1044
Badugu Vijayalakshmi v. State Bank of India, IV (2010) BC 189
TEES SE RS EIT eR Panne aman 1057
Balakrishna K. v. Debt Recovery Tribunal, I (2008) BC 447 (DB—
1191
Bank of Baroda v. Fairgrowth Financial Services Ltd., (1994) 80
Ee eV De ne rn eee ee 1015
Bank of Baroda v. Union of India, III (2009) BC 349.00... 1131
Bank of Baroda v. Veena Chandyoke, I (2010) BC 93 (DRAT)........ 979, 1149,
Bank of Bihar Ltd. v. Dr. Damodar Prasad, AIR 1969 SC 297........... 796
Bank of Bihar v. State of Bihar, (1971) 41 Com Cas 591 : AIR 1971
1062, 1089
Bank of India v. Registrar, DRAT, Chennai, IV (2011) BC 336 AP
a Sate Se ak a as Te £1 O89) 3 ALLER. BAG, occoseees: 1163
Bank of India Bombay v. Yogeshwar Kant Wadhera, AIR 1987
BA 7G Shep EAC A SOLO 4B O0D isda 841
Bank of India v. Development Credit Bank Ltd., TV (2012) BC 409
(Andhra Pradesh High Court) (DB)..............::cccccccsseeessreeeeseeeterneees 1129
Bank of India v. Manickam @ Sellakumarasamy, IV (2007) BC 149
1181
Bank of India v. Pankaj Dilipbhai Hemnani and Ors., AIR 2007 Guj
20 E008) BC 355, (2007) 2iGLR 1810....:....22.20--.renroonneseedanene 1107
Bank of India v. Ramniklal Kapadia, I (1997) BC 543 (545). ......... 748
Bank of Maharashtra v. Dilip Kumar Saha [I (2013) BC 34 (DRAT-
Delhi) cornwell a AOR edad hak GidRa, pS 1162
Bank of Nova Scotia v. RPG Transmission Limited and Minerva
Telelink Limited v. ICICI Bank Limited, Delhi High Court order
Gated 231d Noy: 2004 1.0063.141..hosissie dca qapihl-soleretr--stegelecg->} 980
Barak Valley Tea Co. v. Union of India, III (2007) BC 548 .............. 1192, 1200
Bharat Nidhi Limited v. Takhatmal, AIR 1969 SC 313 ..........:eeeeee 867
Bharatbhai Kamalshi Mehta v. The Kapol Cooperative Bank Ltd, I
(2006) BE127: (DREVDRAT isto tsiihesy B51 ceplceepenesS}onnpoprbogbed 1233
Bharatbhai Ramniklal Sata v. Collector & District Magistrate, II
2010iBG3203....9.2..N AK A,. HRARDATR A AN eededdelh dee bbbareerdete 1115
Bhartia Trades (P.) Ltd. v. UCO Bank, I (2008) BC 462 ..............04.. 1113
Bhaskar Acharya v. Bank of India, I (2007) BC 99.......:::ssssseseeeeeees 963
Bhuvanendran v. LIC, Housing Finance Limited, IV (2009) BC 564
(KEL)... JR. tah hpecssvosstondde supvesdlecveveaveveesterovaneprsvesensnnsonesgaedectees 989
Bidulata Maharana v. Bank of India, II (2009) BC 182 (DB)............ 1192
Binny Ltd. v. V. Sadasivan., 2005 AIR SC 3202.......s:ssssesereereeeeees 905, 1193
de-) 1191
Birendra Singh Negi v. Bank of Baroda, I Q011). BC 7.228.
840
Bond Worth Ltd., (1980) Ch 228 .......ccccccessccesseeessteeeesseseseeseneesenaeenens
xvi Table of Cases

Chemicals
Boolan Engineering Corporation v. Asup Synathetcs and nnnnn nnn
nana 1079
nnn
nenrn
Lid, (1994) 81 Comm Cas 872 .........-.sso-seennrrenn
Limited vy. Inter Modal Transport Technology Systems
BPL LOBO, 1084
SED nnsavins
(Karnataka) Lid. (In Liquidation), (2001) 107 Com Cas le
Branch Manager, State Bank of India, Commercial Branch, Ongo
.0-0ess erssese enrennn nen 1133, 1181
v. Chinigepalli Lathangi, 111 (2007) BC 35 ....... 914
Brandt vy. Dunlop Rubber Co., 1905 AC a
902
British India Steam Navigation Co vy, IRC, (1881) 7 QBD 165 .........
BSK Madhavi vy. Kotak Mahindra Bank Ltd., | (2013) BC 24 AP
nanennnnnys
vets 1191
(IDB) (CN) cccccecocorsesnsssennnennsnsnnsrsnensnnsnnnnnnssnensnsnansnnnsnnnsnsna
Business India Builders & Developers Lid. v, Union Bank of India,
sns
2OOT (2) KLT 237 .....ecsvceceessreesnnensensnsesnensnnensnsnsnsnansnanenvanstinvnnennn 1257

C.S. Hotel Pvt. Ltd. v Ahmedabad People Co-op. Bank Lid., (2007)
SBI Z36 CRA TAIT cshecacrceccbshecicictleinbdtshbthtb iiendae
Sibabadonct 1041, 1067,
PePPPTTTTTTTTTiTTrTiiitii tite
el 1135, 1247,
60 605660 0065506006656 S658 66S SCC CSO COCOCOERE TER ES COST OOSHOOSSS ES HTO OD ERE OT OCON TOFU EFSF ERSTEE EEE UD SES 1252
904
Camdex International Ltd. v. Bank of Zambia, (1998) Q.B, 22 (CA),
Canara Bank vy. Official Assignee, High Court, 88 Com Cases 642
|: |Ea mabsorstasbbtensitiahs 725, 726
Canara Bank v. Promila Rani [TV (2012) BC 92 (DRAT-Delhi )} ...... 1162
Canara Bank v. R. Parvathi, I] (2004) BC 72 (DRAT/DRT).............. 749
Canara Bank v. Sulay Traders [ Il] (2010) BC 578 (Guj)] ................. 1106
= Bank v. Supreme Ceramics Ltd., Il] (2012) BC 3 (DRAT-
BND). seneveviveves Nesivonsetvcitocsnes satenbisiesesaiidiates silints
tinstidtaaaitetess
Canara Bank v. Umesh Kumar Ahuja, IV (2009) BC 126 (DRAT)...
Canfin Homes Ltd. v. Lloyds Steel Industries Ltd., (2001) 106 Com

as aaa v. Punjab& Sind Bank, III (2008) BC 86 (DRAT

c ee |a Gm OC dit
Orissa (DB) «Wien wasnewieniestintinnsisssstititintussettalds
Central Bank of Indiav State of Kerala, I (2009) BC 705 (SC)..........
Central Bank of India v. Apple Finance Limited, TV (2004) BC 233
o (DRAT—DRT). ...00.....cccccsceeeeseeeeees ladatbsselbstesasiees ssttstittittesssesetatesiste
entral Bank of India v. Cyber Quest Systems Pvt. Ltd., II] (2006)
BC 77 CORAT LIT) PRD iisiciciesssaccilatnescs
Atal. meni
Seeman

FREE E EH EEEEE EEE E EEE E HEHEHE EEE EEE EEEEEEHEEEEEEBEEEEEEEEEEEEEREEEEEE

Cent
Bankral
of India v. State of Kerala, (2009) 4 SCC 94.0000.000000....,
Das. See Ram Kishan IH (2011) BC 193 (DRAT

Central Bureau of Investigation v. Duncans Agro Industries

Com Cases 849 mallinahie
: par imi ’ , -weno ' , . aati cla
tataalta

Ltd., (1995) 4 SCC 595 ehhh LLL LL Sees eewe wee s

 Table of Cases XXVIL

Chairman, Indore Vikas Pradhikaran v. Pure Industrial Coke &

Chemicals Ltd... (2007) 8 SCC FOS on 8 ccscnccseccn
GTA SETS a! 1011
Chandrachud D.Y. (Dr.) and Anoop V. Mohta, JJ Goldie Sud v.
Punjab National Bank, III (2011) BC 333 Bom (DB).................... 1255
Chandrakala Sharma v. Bank of India, I (2011) BC 91.0.0... 796
Chandrasekaran K. R. v. Union of India, II (2012) BC 527 (DB-
NERS ER. BEBreccccocsetzesact Mie heel. SUA ibd A. brlol, love hT13; 4191
Chandrasekaran K. R. v. Union of India, [TV (2012) BC 105 Mad.
OE ee Pe AE IE Ry oe ee Ac, Se WR 1100, 1104,
RR RRR REE EEE EEE REET EETEE EEE EEEEE TEESE EEEEEES ESTEE EEHEE TEESE EHESEESESESE EEE EEEES 1107, 1108,
eee EERE EERE EEE HEHE HEHE EEE TEETH EE HEHE THEE EE HEEEEES ESSE EEEEEE ESSE SHEET ES EES EEE EEEEEES 1113991131;
eee R REET EEE E TEETH EEE E HEHE EEE ESET EEE EESESE SESE EEEEE ESTES EEEEESESESEEEESEEEES 1188
Chandrasekran K.R.(supra), [TV (2012) BC 105 (DB).................... 1107, 1108
Chembeti Brahmaiah Chowdary v. State Bank of Hyderabad, IV
C010) BC.21R. CAP) (BB) sisessesad Bececclcnant deatnant 22h (BARS 987
Chemstar Chemicals and Intermediates v. Commercial Tax Officer,
H 2011) BCU64 001. sibal io.goeW...«..noisinoes,.1sd..ias 1187
Chidambara Manickam K. v. Shakeena, AIR 2008 Mad 108............. 1054, 1066,
1201
Chief Manager, Bank of India v. Gunvantiben Bhawarlal Mehta
(Smt), Il (2006) BC 16 (DRAT-DRT). .............:cccccccecessseseeeeeeeeeeees 962
China and South Sea Bank Ltd. v. Tan, (1989) 3 All ER 839............ 1048, 1092
Chinta Lingam and Others v. The Government of India and Others,
Aa} 97 1iSG RIA BE erecta eho hen. Dake) le 1103
Chopra G.R. v. Asset Care Enterprises Ltd. [I (2012) BC 93
(DRAT-Delhi Wi. Gs (2008 AAs ttle) Valdes. ne Dilke 1024
CIT v. Marsons Beneficiaries Trust, [1991] 188 ITR 224 (Bom.) ..... 410
Citibank, Bangalore v. Sudeep Singh, IV (2004) BC 529..............4. 1111
City and Industrial Development Corporation v. Dosu Aardeshir
Bhiwdndiwala,(2009)1eSCC 168 1.)82.00 2005. SI... bii ie. a. 1189
Clarity Gold Pvt. Ltd. v. State Bank of India, HI (2012) BC 416
(DBEBont See ROA)... 1... Aad... cgthaad..m.bi.d.anigar 1000, 1191
Cochin International Airport Limited v. Presiding Officer, DRT, I
C2031) BC 322 Get B32) BL his Oceserserenrerseneerrerenernnnnss 806
Computer Skill Ltd. v. Chairman and M.D., IV (2011) BC 307
(Gj) Lecseesiiseteen nts ki as tetasaiedetencencsnesbssaasesssonncnncnadasnsacsnbencanensesseseds 1204
Corporation Bank vy. Avanthi Leathers Ltd., Il (2006) BC 227
(DRAT—DRT - Chennai). ..........:ccscccesscssessceseeenecsneeneseneeseeeneensees 1159
Corporation Bank vy. N.K. Malhotra, I (2011) BC 156 (DRAT).......-. 1132
Corporation Bank y. Ravikant I (2011) BC 37 (DRIAT) IAC. GS. ..asceeee 1024
Corporation Bank y. Ruia Kotex, II (2006) BC 250 (DRT/DRAT). .. 976
Corporation Bank v. Vithaldas Bhandarkar, IV (2007) BC 52
(DRAT). woccsccssesscsscssescssscssssssacesessssessccscsrssasssessssnsassrsneenssasseensoassrents
1154
808
Cosmosteels P. Ltd. v.Union of India, I (2006) BC 237.........::sceee
Creative Home Fashions Limited v. Union Of India And Others,
1031
AIR 2011 Delhi 140; (2011) 164 Comp Cas 422.......:cscceseeseseeees
1041, 1043
Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd., (1971) Ch 949. ....
Cybaba Netscripts v. Mahesh Sahakari Bank Ltd. Pune, IV (2005)
1174, 1255
BC 241 (DRAT/DRT).......::cs:esseereersereeseeseessessensseneraseascnssneenesnesnens
cevill Table of Cases

Cyril Kotian v. The Bharat Co-operative Bank (Mumbai) Lad,, I'V 995
(2004) nnn
BC 175 (DRA TADRT). .........-osseeseeeennee nnanant
nennnn nnn

D.N. Motorsv. State Bank of India, 1 (2009) BC 331 .......:.0:8 999

Dahya Lala vy. Rasul Mohd. Abdul Rahim, 1963 (3) = ) 708
Data Access India Lid. y. Mahanagar Telephone Nigam Lid., 126
905
(2006) DLT 617 ..ccncnccasnssnsnrsnsnnnssnnsnnnnnnnsnnnnsnnnanensnnnnnannnsnnnnsnnnhnnnnhes
re et Shanker More y. Anand Chintaman Datar, (1974) 2 SOC
723, 1197
See~Kishen Sharma vy. Punjab National Bank, IT (2008) BC 169
(DRAT)........ {e See n Sees eS 113)
Dayanath Pandey y. State of U.P., 11 (2008) BC 634 (DB-—-Alll). ...... 1054, 1241
Dearle v. Hall, (1828) 3 Russ 1 ........ccrssssneneneenernesnenesesennsnrsnsnabnanees 914
Debasree Dasy. State of West Bengal, II] (20BC 11) 330 Cal. (DB) 1186
Delhi High Court Bar Association v. Union of India, 1995 IAD
Dethi 1238, AIR 1995 Delhi 323, 11 (199BC 5) 42.......ccccceeeeeees 744, 1182
Delhi Punjab Goods Carrier (P) Lid. v. Bank of Baroda, 2008 (2)
LSJ. (Banking)G1 ....ccecsvovsticosssivessve ssssessvn esorssrsdivbeapsus eneas
siuiiibns»
Dena Bank v. Bhikhabhai Prabhudas Parekh and Co., ILR 1992 Kar
/ eS a ee a a el
Dhananja yaD. v. Ban
Rao k
of India, 05)
IT] (20BC 604 (AP)...........
Dhanlakshmi Bank Limited v. Kovai Foods & Beverages, II] (2007)
et) |) ew a ee
Dhanlakshmi Bankld Ltd v. Bank of India, II] (2006) BC 183
(DRAT—DRT,, Manel). cihesctccitise-scvsssacinssbtbianbesidtbsliiiaidvaillites
Dharmendr
Dolubha ng v. State Bank of Saurashtra
asiZala ,
(1998)
91 Com Cas 290 (Q6)) .ncicsninrses- -ietonmeaintetntntintdibaaictitnalivess 1018
Dhian v. Secretar y AIR 1945 Nag 91 oo.cccecccesseeseresenenens
of State, 1019
Dhulabhaiv. Sta of te
MP, AIR 196SC978 SEE EEE EERE EEE EEE EEEEEETEHEEE HEHEHE 1179
(Mad—DB) EOE EEE ETHER EEE EEE HEHE EEE EE EEEEEEREEEEEEEEEEEEEEEEEEEEEEEEEEREEES 1142, 1157,
TE EEE EERE EEE EEE EEE EE EEE EEE T THEE EEE EEE EE EEE HEHEHE EEE EH EEEEEEEEEEEEREEEEEEEEEEEE 1190
EERE EERE TEETH EEE EE EEE EEEE EEE EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEREEEE 1043
Duge Sash olKesho Lal., (1939)
18 Pat. 839 ....00c...sscssssssssbeccossoossdi 827
Anitha v. State Bank of Hyderabad, Il (2012) BC 646
(DB- Agia Pradetly i teiincsntinsutsthieadadithedbiialerdiadimiiel bs 1193

E
EB Societyv.Abarupammal, AIR 1943 Mad 30 oo....0.cccccccccccececeeseee.
Employees Provident Fund Commissionerv. Financial Liquidator
of Esskay Pharmaceuticals
Limited, (2011) 10 SCC 727 vocecocoese...
Eupharma Laboratories
Ltd. v. State Bank of India, I (2006) BC 25
(DRAT/DRT) Z
ihe ansanatemnnenractnasesenle; — —
ee

Eureka Forbes Limitedv. Allahabad Bank, (2010) 6 SCC |a

1204, 1254
748
 Table of Cases XXIX

F
Fair Air Engineers P. Ltd. v. N.K. Modi, (1996) 3 CPJ 1 (SC)..........
Fairgrowth Investments Ltd v. Custodian, IV (2004) CLT 156 (SC).
Fakrudheen Haji v. State Bank of India, II (2009) BC 352 0...
Fanny Skinner vy. Bank of Upper India, (1935) 62 IA 115: AIR
Wee BOS. FLAY GSE FS eG Mati conch bun tdevida yobs oc hase dose
Faris Fathima v. Bank of Baroda, II (2007) BC 6 (DRAT—DR1T)....
Federal Bank Ltd v. S.K. Rowther, 1981 KLT 678 .000......ccccceceeecceeees
Federal Bank Ltd. v. Sanmac Motor Finance Ltd., II (2004) BC 215
ee Rs LA BA cts cuts ccataassicvessessssssdvtsancvesses.
Finolex Industries Limited v. Reserve Bank of India, Writ Petition
(boda) NG 4 OF JOM SO 2 SR. Aves scsccectstccsesseesccs dscns ROBIN
Berster v.. Baker; (1940),2 KB 6368 1.9: OR AAL Re A ER. Q,
Fortune International Ltd v. Central Bank of India, III (2008) BC 82
(DRA F-Delhi Peaunes. Secrcantne Dank Aainied, Lik teak eyval

G
G.V. Films Ltd. v. Indian Bank, I (2010) BC 222.0... eeeeeeeeees
Gajran Jain v. State of Bihar, III (2004) BC 514 (SC)...eee
Gajula Exim P Ltd v. Authorised officer, Andhra Bank, IV (2008)
re Pe EM LN i vinecncternocine entsSesinnbeoiantassdeaatbiagey

V5 5 1G OLS SE ee ye Oe eee een 966

Garments India Exports v. Dhanlakshmi Bank Ltd., Il (2006) BC
ROG CDR ATi aia es testa dps ph a tyib a, hn kN Adie choi sacains denege 1247
Gaurangbhai Bipinbhai Pandya v. Bank of Baroda, III (2009) BC
a cians achanccsacdaananinnlig Aaioochespaentncbteebeay roa» 1059, 1194
Gaurav Enterprises v. State Bank of India, Il (2012) BC 377 (MP)... 1066
Gawai Enterprises v. Vidarbha Urban Co-operative Bank Ltd.,
ba FB! 9) OL 8S:1) a en a 998
Gerty Suvarna v. Union of India, (1998) 92 Comp Cas 782 (Kant)... 750
Ghisulal v. Gambhirmal, (1932) 62 Cal 510.................:::cscscscnccceeeeers 827
Giles v3 Gotover; CLBS ZING ERI DGS) 20) 63 jecbbb.0-.dehanrrer
donbededepodershcase 1089
Girish Upadhyay Plant Operator v. Paschim Petrochem Ltd., .C.A.
No. 541 of 2010 decided on 27.04.2011 .......cceceeesseseseeeeeseeeeneeees 1030
Godavari Laxmi Co-Op. Bank Ltd. v. Union of India, III (2012) BC
ASCO CRiomnasCOBYK. 22. ARK sa AAS) ced Soh oft Mle Eile Aid brtbesdeness 1164
Godawari Shridhar v. Union Bank of India, III (2009) BC 98........... 1255
Goldy Fin Agro Cotton Pvt. Ltd. v. State Bank of India, I (2013) BC
ZS (DRAT Allahabad viessans.u65tnpe-sennspstefornsonopntehonssrarsbnopannnatansbeSontin 1163
Gopal Krishna Bhasin v. State Bank of Patiala, I (2005) BC 211
CDRAT/DRD)y..Sistss. Bad, A Laie ielsdlels) Likes db Weer dddedeve 1174
Gopal Singh Hira Singh v. Punjab National Bank, AIR 1976 Del
1 PSak ar. v. ELK aed. SABA ORCI HOMO Ba fe sesh ho pryabedh seo 725
Governments Stock and Other Securities Investment Co. Ltd. v.
Manila Railway Co., 1897 AC 81. .....cccesessesessersersseseneeeeneeneeneenes 842
Greater Bombay Co- Op. Bank Ltd vs M/S United Yarn Tex. Pvt.
746
Ltd, AIR 2007 SC 1584 uu... ecesessessessereesesecssesesesnessneacnseneeneneeasenenenes
_ Table of Cases
Greater Bombay Co-operative Bank Limited vy, United Yarn Tex
anne
nnnay
enemy
Pvt. Lid.. (2007) AER 1SBS ....ccccnneressnnrnnnnnrnnnnnnnnnnnn
Gujarat Poly-AVX Electronics Lid. v. CMD, IDBI, ff (2012) BC
63S Cra. (DIB) o onca.a-a--ssonse-sonneeconnpnsnsns>sansnar ngnnnn
ne:s3SRB022 snns> 0
2 072299
Gulshan Rai Jain vy. DRAT, Allahabad, 11 (2012) BC 5 (All) (DB). .
Gupte K.L. and Others v. The Municipal Corporation of Greater
Bombay and Others, AIR 1968 SC |) REEERT I
Gurudeva N.B. v, State Bank of Mysore, If (2012) BC 60 (Kar). ......

HP. State Financial Corporation, Shimla v, Prem Nath Nanda,

(2000) 8 SCO S2B .....ceoresseeseeesssnnsdsnbabesvorsnannb abonbpnneoabaphonsaaipabsne shoe?
Haji Abdul Rahman v. Haji Noor Mohomed, (1892) 16 Bom 141.....
Harbanslal Shahnia v. Indian Oil Corporation Limited, (2003)1 SLT
153+ (2003) 2 SOC 107 ccssscsssrssssoorsseressssreeseosnpovnavonssronanspepbhorsnnsiulh
Haresh Rasiklal Shah v. Small Industries Development Bank of
India, IT (2005) BC 157 (DRAT—DRT). ......cccccccseeseenseennereennes
Harun Ali Mallick v. The State of West Bengal, AIR 2011 Cal 45....
Haryana State Financial Corporation v. Jagadamba Oil Mills, 110
CT Cae FD spice ccustep canpsosespntvvcnppenvepovesveotanay songhoocastivipasoapsiasangeinape
Haryana Steel and Alloys Ltd. v. IPCI Ltd., AIR 2007 Del 65 : 2007
156 Ct COG FG peerorerensengeysesenvenpemapys -onectpepasosgosseosv eg abaanannaaaians
Fey Were W. SAMOS, (29) LF CBE aenn cccecssceccccsscesszesenssthcassvonrerevveaxsna3>
HDFC Bank Ltd. v. Consumer Dispute Redressal Forum, Il} (2011)
BC 346 Ker EEE EERE EEE EEE EEE EEE EE EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEREEEEE

CRE <cvnivredtnenveaumecesseeeresncbvertvorteastvecsebeeneetniseaee

Himachal Pradesh State Financial Corporation v. Prem Nath

FRG, 8 PCED Cae BG ecvccssctarconcmectsipiesgercmmmmmmmmmiaaane
Hindustan Petroleum Corporation Ltd. v. Debts
TV (2012) BC 737 (Orissa High Court) (DB). 0.....20ccccccecceeceeceererees
ote Ltd. v. State ofOrissa (1969)
2 SCC 627 : (1970) 1
wcvienaniprommnnsapiovosiogassocondiggestivetimoncra aaa
Holroyd v. Marshall, (1862) 10 HL Cas 191 o0....o.ccccccecceecceeceseesceneeee
Hotel Payal v. Central Bank of India, ITI (2011) BC 363 (Cal)..........
NR a ernatonal ¥. Indian Overseas Diam, T (2007)
TENET ESTES LETT TTT TOSS I OTST STS S SSS SSSS SESS STEKO OSS SEN SSS SE MESS ESSEC EEE SOSESSESESEEEES

FEET EERE EEE EEE EEE EEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

ICICI Bank Ltd v. Pahwa Steels, 1 (2009) BC 62 att.

ICICT Bank Ltd. v. Official Li otAa teareae Lid,
IX (2010) SLT 30=1 (2011) BC 178 (SC).ccscssecsccssssssesniun
ICICT Bank Ltd. vy. Premier Housing and Industrial Enterprises
Il(200BC 4)37 (DRAT/DRT). Be alten
ll
 Table of Cases XXX1

ICICI Bank Ltd. v. SIDCO Leathers Ltd., (2006) 10 SCC 452.......... 1073, 1086
ICICI Ltd. v. Grapco Industries Ltd., 1999 (4) SCC 710 wo... 1133
ICICI Ltd. v. Official liquidator of APS Star Industries Ltd., AIR
219 RR 2! |ac aape rept aerate wl eee en A a 534, 904,
ENTS OS Ee Re aeeee eeee neee 905
IDBI Bank Ltd. v. District Magistrate, Navsari, II (2011) BC 459 .... 1106
IDBI Bank Ltd. v. Hytaisun Magnetics Ltd., IV (2011) BC 541
(Gui). (DB) eauaciave--coahlasic <1 cisebsto-cleaS-tansnce! 1105
IDBI Bank Ltd. v. District Magistrate, Navsari [ IV (2011) BC 655
(Guj.) (DB)) agincnia?- grasanna>-1--bh-)-cibah t6-caitexouwy.} 2 1105
Illingworth v. Houldsworth, (1904) AC 355. woe ceecccccesesesseeeeeee 858
Imperial Bank of India v. Bengal National Bank, (1931) 59 Cal.
677,733 OWN. 1044 > ATR $933 Cal 246 2..1.62535.23.. RGSIEIDSAL:! 829
Imperial Tubes (P) Ltd. And Anr. vs Board For Industrial And
Financial Reconstruction And Ors., AIR 2008 Cal 15...............0... 1032
Inbarajan K. v. Tamilnad Mercantile Bank Limited, Il (2005) BC
URED a NGyD) oo ee Se et A ee as eS 1231, 1248
Ind Bank Housing Limited v. The Debts Recovery Appellate
Tribunal, W.P. No. 20255 of 2008 decided on 21st November,
024 Er ee a ee. er. en 1166
Ind Synergy v. Authorised Officer, I1(2012)BC231 oo... ee eee eees 843
India Finlease Securities Ltd., Chennai v. Indian Overseas Bank, I
COPS BC 1B AP COB) (CN).. -ccccrccc.ccsescsscevseneeno
il ALT) Bale. 1065, 1254
Indian Bank v. ABS Marine Products Pvt. Ltd., AIR 2006 SC 1899;
(2006) & SCC MDa 88 phat ABR bo SIA cD thee Gs hc ER oe Rents 1180, 1182
Indian Bank v. B.M. Ramachandar, III (2009) BC 6 (DRAT). .. 1154
Indian Bank v. Blue Jaggers Estates Ltd., III (2010) BC 694 (SC)... 773
Indian Bank vy. Debts Recovery Appellate Tribunal, I (2011) BC
SRAM CRAG) ORME ert shscascne BSac6 «Se sich ein Peaehvades Pieatcnornred-E2-<
cals.» 1163, 1164
Indian Bank v. Krishnamoorthy, IV (2007) BC 207...........::cccceeseeeeees 1181
Indian Bank v. Nippon Enterprises South [ I (2012) BC 370 (Mad)
COB) os-tanan- eee eA IMs AIA. gOTED. Rs AGTA. -016 Dh 1021, 1170
Indian Bank vy. S. Harvinder Singh Arora II (2011) BC 115 (DRAT
— DST) ann hg LB ok bots AEE 2 clad 7s Mizgdath gegen po whosstl..3s.4 1024
Indian Bank v. Tetrahedron Ltd, Il (2013) BC 218; 2013 (1) CTC
Sn a Pet a tanh la cdtatieain Rid nants 1256
Indian Oil Corporation Limited, Nagpur v. Shikshak Sahakari Bank
Limited, Nagpur, IV (2005) BC 50 (DRAT—DRT)). ..........::00+ 1020
Indian Overseas Bank v. Ashok Saw Mill, III (2009) BC 640 (SC)... 1152
Indian Overseas Bank vy. G.S. Rajashekaran I (2009) BC 421 (DB).. 1187
Indian Overseas Bank v. Sree Aravindh Steels Ltd., (2009) 1 CTC -
Sy) SRT TE LEST RTE eer EEE treet TTT th
Indian Overseas Bank. v. Ashok Saw Mill, II (2009) BC 640 (SC).. 1128
Indrajeet N. Suri v. State Bank Of India, 111(2011) BC 204 (DRAT-
805
Delhi) ........ecceccsrserestensesecnecsscsseerensenssnenssencecenscnsssssscseensensnnessenscasnsess
Indu Kakkar v. Haryand State Industrial Development Corporation
832, 907
Ltd., AIR 1999 SC 296 .....ecsecsssesscesseersessccsessesssesseenessenaeaensnssseess
Indumati Pattanayak v. Chief Manager and Authorised Officer,
1187, 1199
Bank of India, [V (2005) BC 357 (DB) «......:scceeceeessesseestereneeenneees
XK Table af Cases
Bom
indusind Bank Lid vy. The State of Maharashtra, (2008) 110
i eS gp. Sickest sossovennengnnnnnnngnnpnentngs 1113
ee
97
indusind Bank Lid. v. Deva Tools and Forging, 1 (2005) BC
CDRA T/DRT) oc ccccceccsconesecesnsevesnsnsnnsnnnsnnsnnnnnnnnnnennnnnnnyennnnan nnnnan
nny 972, 975,
1142
Industrial Credit and Investment gr Of India Lid. ¥.
Srinivas Agencies, 86 Com Cases 255... sessenserennnenieny os 735, 1078
Industrial Development Bank of India v, Kamaldeep Synthetics
Limmited, (2007) 2 CTC 397........cscscceecersersnesnsennernnenrennenannnney sevnsenes
Industrial Finance Corporation of India Lid. v. Cannanore Spinning
& Weaving Mills Lid., 110 Com Cas 685 (SC). ...::sseceeeererescrens
Industrial Finance Corporation of India v. Parekh Platinum Limited,
ILL (2009) BC 437 (DB) .........sssvessesssesnrennesnnnnesnnsnnsnnsennnnnensnannentnnys
Industrial Investment Bank ys. India Limited v.
Jhunihuawala, (2009) 9 SOC 478 ....cvvccsesseesensesenserrnnenansnensssvvnnnssne»
inicoenies Nanion Exports Lid. v. Industrial Finance Corporation, I]
VD Of1]
International Asset Reconstruction Co. Pvt. Lid. v. Union of India |
I} (2012) Bouts 351 (DB))«20s. .cdscectvsvecetestivvanapistitnsesssvestniinatiehsss vs
International Asset Reconstruction on
Co. Pvt. Lid. v. Uniof India,
It (2012) BC 351 (Bom) (DB). .scsisiccsscisscostssssensebstitabsbasssiteaaaveniys
International Asset Reconstruction Co. v. Rohini Chemicals (P)
Lad, (2011) 1 BC 166 QDRAT) neces. scsssccssosssnssnsevinentbnchatninisstas
Isha Marbles v. Bihar State Electricity Board, I (1995) BC 529 ........
Ishar Dass Malhotra v. Dhanwant Singh, AIR 1985 Delhi 83 (DB)...
Ishrat Enterpri ses
(P.) Ltd. v. Punjab & Sind Bank, IV (2008) BC 35
(DRAT De dhi). .002nit vee -ctevsctevcn ssinas
steele aivhtee etan tets
thin e’

J
J. Rajiv Subramanian v. Pandiyas, II (2012) BC 159 Mad (DB)........
J.V.Mansukhani & Co. v. Presiding Officer, AIR 2000 Del 103
2) a ene en) Se a ae
Jaffer Meher Ali v. Budge Budge Jute Mills Co., (1906) 33 Cal 702
+», berpppdllemantees v. United Bank of India, 1 (2009) BC 266
RGR). 2s cerececensennnrnesenesepatnrnpingsenssnsesanemmmmiieiaidiaaasiinns
Jai Electronic v. Central Bank of India, II (2008) BC 251 (DB)........
Jai Logistics v. Syndicate Bank, ITI (2010) BC 594 Mad. (DB).........
Jai Logistics v. The Authorised Officer, (2010 (4) CTC 627) 2.00000...
"tes GOR v. State Bank of India, I (2011) BC 214
leet ddd AAALAC
eeeeee eee eewe 773, 900,
ede FEET EEOC EEE HERE EEEEEEEEROEEEEEEEEMEEDEO EES 1017, 1126,
, aaah aati

Jain V. K. v. Pegasus Assets Reconstruction

rein tnt tinted neon...
1129, 1183
Pvt. Ltd., TV(2011)
BC
904
92 (DRAT-Delhi)..........
CORR R Ree eee N EERE EE

Jay Electric Wire 1152

: union v. Praveen
15) BC 57 Ca) OD), winttlintsineititinshicisililadenchitttAasiaieal
ineering Works Ltd. v. Facilitation Council, (2006)
8 SLT 320; AIR 2006 SC 3252 intact
nn.
 Table of Cases XXXII

wie. Agencies v. Canara Bank, 2011(2) JCR 27; IM (2011) BC

999
Jitendra Nath Singh v. Official Liquidator, IV (2012) BC 566 (SC).. 1085
Jose Antony v. Anil Kuruvilla Kattottil, III (2012) BC 635 (Ker.). ... 1132
Joseph George v. Joint Registrar, (2006) 65 SCL 239 (Ker).............. 1173
Jupiter Jewel Tech. v. Indian Overseas Bank, III (2010) BC 385
BONE CIR a setaaete nts amma rcaectaqcsczsacecdeevacsessecccadactieleedetoeeécervvececevecees 123451232

K.R.S. Latex (India) Pvt. Ltd v. The Federal Bank Limited, AIR
2011 Ker. 7eaRti011 )BG@dic®: eistentd::.¢: botime danas: 1187, 1247
Kailsah Pati Asthana v. State Bank of India, I (2012) BC 609 AIl.
no) (BREE ERR cae at he Rate alelle rian Mini ei inet eel eae eRe eee 1191
Kalpesh P.C. Surana v. Indian Bank, IV (2012) BC 44
OE ETS ERED AEE TIE CE TUOR 5 2 Meni e) e ES Pe Pe PE OO 1174
Kalyani Sales Company v. Union of India, I (2006) BC 1 (DB)........ 977, 1016,
THEE HEHEHE E EEE E EEE EEHEEEE HEHE EE EEE EEE EEEEEEE EEE EEEEEE TESS HE EEE E EEE EEE E ES Itl9s1157,
TORRE HOHE HEHE TEETH HEHEHE EEE HEE HEHEHE HEHEHE EEE EEE EEEEEEEE TEETH EE EEEEE SEES ESEEEEEEEEEEEE HEED 1158314173
Kanaiyalal Lalchand Sachdev and Others v. State of Maharashtra
and Others, (2011) 2 SCC 782; I (2011) BC 698; (2011) II SLT
TS icons -dustesszctntacessam rigid bl eee. hte. die AeA AE gh 1115, 1189,
1192
Kanha International v. Union of India, III (2011) BC 316 (DB- Guj) 1247
Kanji Manji Kothari & Co v. UCO Bank, I (2008) BC 91 (DRAT)... 1148
Kanji Manji Kothari & Co. (supra) and on Ponnuswamy and
Another (supra), the Allahabad High Court in State Bank of
Patiala v. Chairperson, DRAT, (2012) BC 51 (Allahabad)............ 1146
Kapil Cement Allied Products Pvt. Ltd v. Punjab National Bank, I
Pe TS RES OS) 8S 2 TLE a A NCE TI «9HA” 796
Kapu China Veerabhadra Rao vy. Authorised Officer; Punjab
National Bank, III (2008) BC 474..........cccssccccsssesscsssscveenseecneeteeees 1192
Karnataka State Industrial Investment and Development
Corporation Ltd. v. Cavalet India Ltd., II (2005) BC 443 (SC)..... 1044, 1242
Karshaka Sanghatana Aykyavedi v. State Bank of Tranvancore, II
(ZOE) BC 189 Kiet) (DB) aa Sh bl Abadi AO AME abe ih CHC. he 1174
Kasturi Devi Jain v. Union Bank of IndiaI (2012) BC 189 MP.......... 1200
Kaushar Ara vy. ICICI Bank, ITV (2012) BC 709 All. (DB)................ 1192
Kaypan Vanijya P. Ltd. v. Uco Bank, II (2012) BC 60 (Kar). ........... 992
Kennedy v. De Trafford, (1896) 1 Ch 762..........cecssesecsssseseeeneesereeaes 1041, 1043
Kerala Financial Corporation v. Syndicate Bank, 101 Com Cases
940
Kerala High Court in Jayan v. Hong Kong And Shanghai Banking
Corporation Limited, TV (2009) BC 635.......::scsesescesesessssesessseeees 1127
Kesoram Industries and Cotton Mills Ltd v. CWT, (1996) 59 ITR
"TOT, .vvcncecse cadbdhd stores» Ueebbsepeliveesve
MMI b sd lide
ovtbehaceset tetre )achl l evectbes
e 805
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of
Wealth Tax [1966 AIR 1370, 1966 SCR (2) 688]. .....:eceeeeeereees 749, 805
Khaja Industries v State of Maharastra, 2008 (2) BomCR 860; 2007
eo vlercctessstsclesvsveonssnessettescesessecneee 789
XAAIY luble of Cases

)... 1026, 1191

Khanna O.P. v. Union Bank of India, (2005)62SCL 390 (Del
1962 SC
Khardah Co. Lid. vy. Raymon and Co, (India) (P) Lid., AIR 832, 907
n
nnnnnnnengnnnnny
PBLO : (1963) 3 SCR UBB. .......ccccceceee-rennnnnnnnnnnnnnennnnnnn
Kimlin Housing Development Sda Bhd vy Bank Bumiputra [M] 493
Bid, (1997) 2 MIS BOS, .....cccccsscesnseseonnnennnnnnnsnnnnnnnnnanannannnnnennnnannnsy
Kinetic Engineering v. M.P. Finance Corporation, 105 Com Cases
QHD ccnceucsnressasansnnnancannnnnnnnnnnnnnnnnennnnennnannnnnsnnnsnaninnnnannnnnannn"nanassnnananis¥®
| 938
Kirandevi Bansal v. D.G.M. Small Industries Development Bank of
India, IV (2009)BC 56 (DB). ......c.:cerersnesecenennnenenerenerennnennnnnnennnnns 1000
Kishan Lal Gahlot v. UCO Bank, HI (2010) BC 1 (DRAT),........06 1065
Kochumariam v. Kshema Vilasam Co., AIR 1974 Ker 78.........0000 1017
Kotak Mahind ra vy. Eastern Spinning Mills and
Bank Limited
Industries Limited, A.P.O. No, 469 Of 2012, decided on 13th
February, 2013 .......ccssesercnsenersessnensnnsnensenennenennnsssneananannanennannennnnsy 1078
Kotak Mahindra Bank Ltd v. Balaram Cements Lid., Il] (2011) BC
~-Y * Pee 119%
Kotak Mahindra Bank Lid vs Megnostar Telecommunications,
12013} 176 Com. Cas. 246 (Dd). sere vicsecseuerncineenesntisieltiessatantinins 1082
Kotak Mahindra Bank Ltd. v. District Magistrate [2011 (1)
D.R.T.C. 513 CQaap)) esscvecinosskssivorest iets titi
delitasesitinsthib n 1105
Kotak Mahindra Bank Ltd. v. Hindustan National Glass &
Industries Ltd., Civil Appeals 8916, 8917, 8918 of 2012 0.0.00. 801
Kotak Mahindra Bank Ltd. v. Marvel Industries Lid., | (2011) BC
FB CDRA T-Raaaths iii chi Aillha dies hh sealable been 993
Kotak Mahindra Bank Ltd. v. Megnostar Telecommunications Pvt.
Leck, EV C2002) BG 742 eI assess. Meas ksDill diasilas 1012
Kotak Mahindra Bank Ltd. v. State of Maharashtra, 1 (2012) BC
603 (Bom) (DB).....iiadnieas ic RA SAOs Lal 1014
Kotak Mahindra Bank v. District Magistrate, I] (2011) BC 249;
C(O, OO 1063
Kotak Mahindra Bank v. Official Liquidator, APS Star Industries
Ltd., (2009) 3 Comp LJ 459 (Guj).2...cccccccccceceseesessssccsseserensessnsvenes
Kottakkal Co-operative Urban Bank Ltd v. Balakrishnan, I'V (2008)
Kotti Finance
Ltd v. Indian Bank, II (2009)BC 108 (DRAT)...........
Krishna Chandra Sahoo v. Bank of India, I] (2009) BC 635 (DB)...

SEER HEHE EEE EE HEAT REEEEE EE

Krishnegowda K.R. . Kotak1 Mahindra Bank I(2013) BC 455 Kar.

ihe
Le

Krushna Chandra Malli

allickv. State Bank of India, AIR 2009 Ori 99,
(2009) BC 64 (DB). TEETER
EERE HEHEHE EERE EEE EE EE Selita

Kushal N Aggarwal v. Saraswat Co-operative Bank I

BC 7 (DRAT/DRT)... TORSO eee dtl ee
eee ewe ewete bee esedsetenebee eee eee ed
POU UR UO OOO UOC OOO OES EPO SSeS ERE R SEE eee eee

eee eee eee PPP eee ee ee eee eee eee eee eee eee

d. v. Bank of India, II (2012) BC Guj. 226..

DRT, I (2013) BC 46A (CN) Kar...............

ional Ltd. v. Axis Bank Ltd., [TV (2011) BC

if Baroda, I (2013) BC 431 All. (DB) .......~.

) Ltd. v. Municipal Corporation of Greater
Re WIZ ccssscappsesesocaceebety
tabid atest Ak devedhdaan al

ancial Corpn., (1995) 82 Com Cas 342

ie SPORES rape ate emer "ies oe . 1079

arashtra Ltd., (1993) 78 Com Cases 803:

CEE EEEEEEEEEEEEEEEEEEEEEEREEEEEEEER RRRERE RR RR eee 1194
988, 991,
CEE E EEE EEE EERE REE RRR RR RE RR RRR RR RRR RRR Ree ee eee eee 995, 1174
Financial Corporation, (1993) 2 SCC 279.. 1044
te Bank of India, I (2010) BC 176 (DB)...... 998
Allahabad Bank, I (2013) BC 99 (DRAT
Ahhh ee ied 1067
889
1040, 1067,
DERE eee eee eee 1187

PEE EERE EEE EEE EERE EEE EERE RT ee 1020

PEER ee 1170, 1193

1102, 1105,
EEE EEE EEE 1114
*. wre + we reese
ee l(a !UlCUCUCUrTlUrrrhlUrir,.hUCSCUWlUh OO!
_ Hable af Cases
of
Maxim Lightech Pvt. Lad. v. Small Ladustnes Development Bank
BC 655
India, Hl (201 1) Del... sopengannennvannnnsate
Mayank Cable Industries P. Lid. v. The Nagpur District Central Co-
operative Bank Lad., Il (2005) BC 229 (DRAT—DRT).......068
McHugh v. Union Bank of Canada (1913) Ce eee eae
Meghraj v. Bayabai , (1969) 2 SOC 274: (1970) 1 SOR $23...
Micronix India v. Disco Blectronies Lid., (1999) 96 Com Cases 950
Ly... nnnennnnssanenshanenaeenseensennnnnsthsn snanneynanbasS
nnshnniinin senemnantShns?
ensnnnnnen
‘dienes Gears Pvt. Lad. v. Industrial Finance Corporation of
India, 11] (2009) BC 245 (DB). ...c.sceseseeessseensennnnnnrnenrnnernnennnnnny
Misons Leathers Limited v. Canara Bank, 1 (2008) BC 440, .......0..
Misuki Exports Pvt. Lid. v, State Bank of India, Il (2008) BC 51
DUBRAT). ..cclccccecssocsscnsenvessesosetnncnssivnssebosivnsivbesinnsts siiienenieniivnrhesbsneiiie
MM Carpet Industries v Punjab Nationa Bank, 1 (2007) BC 44
ONOh
Model Financial Corporation v. Indian Bank, II] (2008) BC 526 ......
Mohammad Kavi Mohamad Amin v. Fatmabai Ibrahim, (1997) 6
BESO. FI cicsoceciesureodiocntovastuteclveenlipsocesssoneescont ona n scedag
enesio Eran

221 CDRA TIOR GD cccrececcovcvoveccccvecsesenrepraiitanmernsseas agpeniaiaeipels

Morgan Securities and Credit Private Limited v. Modi Rubber Lid,
(2006) 9 SLT 620; AER 2007 SC GBD secccinnisstnstisetisigertibsestiysee. 1202
Morion Chemicals Ltd. vy. UCO Bank Lid., 1 (2008) BC 46 (DRAT). 115%
MTV Networks (India) P. Ltd. v. Oriental Bank of Commerce, IV
(2005) BC 225 (DRAT =EIRE ecccictossesincidbnsniaiinstaviaeae dian 1025
Muhammad Ashrafv. Union of India (supra), I] (2009) BC 612 1107, 1106,
1942,1114
Muhammed Basheer v. Kannur District Co-operative Bank Lid., 1
8 ee ee ae 1174
Multan v. Bank of Madras, (1904) 27 ILR Mad 347.0000. 101%
Mumtaz Shahnawaz Sakarvala v. Bombay Mercantile Co-operative
Bank Ltd., III (2006)BC 207 (DRAT-DRT). .0....0..000ccccceeceeeeeeees
Munnilal and Another v. Town Rationing Officer, Gorakhpur and
Aansinet,(1995) 3% FOU GD. cessecscdsocsneissvtbcsse easiest
Munshi Ram Gupta v. State Bank of India, II (2012) BC 331 Senne nnnne

MuthurajE. v. The Authorised Officer, 1 (2013) BC 713 COREE EERE

N
Nabisa Beevi v. Canara Bank, AIR 1984 Mad 249 oo......occcccccececceeseee.
Nagpur Foundries Limited v. United Commercial Bank, 1 (2005)
BC 112 (DRAT—DRT) + sepeannnnaosmmnnsenseionmmucadntmnmecnsamemgannel as
Nahar Industrial Enterprises v. HSBC, (200
4 CTC
9) 742000000... .
Nangia & Contractors v. Bank of Maharashtra, I] (2009)

Narasimhaiah N. v. KSPC Bangalore, 1(2004)

BC49... cccccscssun
TUCO C CUS ere rere eee reer eres

TOC Ce reer ree eedide

Kumar Sarkar, ALK 1954 Cal 505................. 1095
ralia v. United Hand in Hand Co. (1879) 4
1041, 1056
thority of India v. Ganga Enterprises., AIR
OSB BOSS iia, 5.1 I hhc scone 905
_Chanley, (1924) 1 KB 431.000.0000... eee
Jnion of India [ I (2012) I BC 97 (Bom.)
SEE EEE EEE EEE EEE EEE

CEE EEE EEE ee

COE

CEE EEE EEE EEE EEE EEE EEE EEE EEE EE ERR

P.) Ltd. v. Authorised Officer, Union Bank

| eoonminsen at. tlle ating month pee tell
“o. Ltd. v. BhorukaRoadlines Ltd., | (2005)
FEE EEE EEE EEE EE EEE EE ERR EERE EEE RR RRR eee

CEE EERE EEE EEE EEE EEE RE EEE EE EERE ER RR RRR RE PR eee ee

COE EEE EEE EERE EEE EEE EE EEE EE EERE EEE ERE REE EERE RRR RRR RE Ree eee

CSET AIRC PEON Teck. Loceenrunnpeoeensconsvovsoepee

irjee v. Union of India, IT (2008) BC 14.........
1 Bank Ltd., (1998) 2 MLJ 465, (1999) 4 All
udgments, 60 (Mad) ............cccccecceueeeseeseeerenees
nited v. State Bank of India, |(2009) BC 534
103; 106 (2008) CLT 126; 2008 IOLR 702. 1202, 1210
State Bank of India, AIR 2008 Ori 103........ 1028, 1031
Ltd. v. UCO Bank, (2007) 139 Comp Cas
SP ARTI Diic. Lb tdecedetl ede hereshevedepsapsepeeegtens 988, 1192
id and Public Works Co., (1877) 7 Ch. D.
720
ite Ltd v. Appellate Authority for Industrial
struction Company, AIR 2010 Bom 159........ 1032
Lid. v. AAIFR & Co. (supra, I (2011) BC
DIP P PP PPO POPP PPP PPP PPR EERE S REESE RSE ESSE EEE EEE EEE EEE ESE 1203, 1210

PPP eR PR RRP E PEE REESE EEE EEE 1040

peeeuit Table af Cases

(1994) 4
Oil and Natural Gas Commission vy. Utpal Kumar Basu, 1139
suinh
sninnhnnans annss
in enn n
Sas000082
nyhthsinns
GO cceneeennnncnncennncnncnnnnnnnsnnnnnnsnn
TAG ca
Oriental Bank of Commerce v. Canara Bank, (2011) IV BC 14
nss
(DIRAT-Decbiad).-.......-..ccnnersnnnevernnnnnnnnnnnnnneessenyeguennssnnnnnnnpnnnnynninnns
Orie Banknt alce v. Gallop Granites Lid,,
of Commer 1 (2005) BC 86
(DRA T/DRT). ...-.2---.00022202000000 ssonessnensnssnness sessusnnnmsnngnnangnnnnngsnnangn
Orissa State Financial Corporation v, Narsingh Ch, Nayak, 120
Comp Cas 279 (SC). .....0-.0eererseneseresnnnnnnnennnnnnss vvsepseaneaneanpannnnnennennany
Orix Auto Finance (india) Lid. v. Jagmander Singh., 11 (2006) BC

Padma Prafulla Shirke v. Maharashtra State Financial Corporation,

SOI 5 EED eeA ae a 1038
Padmavathi Ammal V.P. v. P.S. Swaminatha lyer, AIR 1975 Mad
1056
Ichinichi Software International Lid, v. Indian Bank, III
(2012) BC 324 (Mad) (DB). ..c0ver-csiesssto-nssponbssvsseunnssntsssssssusebanstsihy 1009, 1051,
1255
g v. State Bank of Hyderabad, | (2006) BC 59
CORA TAIT: canee-evitinwsintepintntertttmanaenenenmmiaia 797
Pankaj Shah v. Cosmos Cooperative Bank Lid., 1V (2005) BC 217
IN0 1135
Panna Lal Bhansali v. Axis Bank Ltd. Ors. [ II] (2012) BC 443
PO an a al 1135
Paper Prints (India) Pvt. Ltd vs Phoenix Arc Pvt. Ltd order dated
Wate July, 2012,
1(2013) BC WIS .iscsisck-smcesstesipeniipalenciansleiaad
Paresh Spinners Limited v. State Bank of India, IV (2009) BC 523 ..
Patheja Forgings and Auto Parts Mfg. Ltd. v. IPCI Ltd., 1V (2005)
BC $7 DRAT— DR 1) .0ccses-010- eetippypeamna pipes
Mudaliar v. Narayana Ayyar, AIR 1943 Mad 157........
— Right Society v. London Theatre of Varieties, (1924)

Perumal v. Perumal, (1921)

44 Mad 196 .0.0..0...cccccccccccececeseeesceveseevseees
Phoenix ARC Pvt. Ltd. v. Ishaan Systems Pvt. Ltd. and Anr., TV
(2092) BL 9 GRATIS) .......no-emimeapeeeemnenanagbimamaets
PNL Depositors Welfare Association v. Union of India, (2005) 64
SUL. 113 GURBB), ...0nvevenenenieaneeienmiatctemnnnnn
nas
Ponnuswamyand Another v. DRT Coimbatore and Another, 2009
(2) sa Ane (2009) 3 WLS 1271... revsterotdapiegin. etblebapopecenmpbabinss
Pooran v. State of Uttaranchal, III (20007) BC 285 (DB). ...
Prabir Chakraborty v. State of West Bengal, I (2012) BC 45 (Cal)...
gar = Antrartramrathadttahenes nth ncn. roi
— ee SUP imeeonI aon.
Prafulla Shankerrao Shirke v. The Co-operative Bank
Ltd.. TV (2005) BC 60 aE Fei enteceemenemedenn =
 Table of Cases XXXIX

Pragati Builders & Promoters y. Ram Murthy Pyara Lal, III (2012)
2 Sak egboo) MEER PP et eR 1009, 1249

SO Ope|) garde OR LN LS DR Nera 7 0 1103

Prakash Khandelwal vy. State Bank of India, II (2006) BC 102
ED ag le os AR ee Sonera rerege 987, 999
Pramod Kumar v. Punjab National Bank, I (2005) BC 548................ 796
Pranjivan Purushottam Zaveri v. Dena Bank, IV (2011) BC 558
5,1) by eo) oyMies precbe RA ie all Shara tg Na A ll ED ETS oagg 1132
Prashant Khushe y. State of Maharastra, III (2007) BC 417 .............. 1109, 1116
Pravat Kumar Banerjee v. United Bank of India, I (2004) BC 127.... 756
Praveen Kumar vy. Allahabad Bank, II (2011) BC 75 (DRAT)........... 1024
Presiding officer in Akola Oil Industries Ltd v. State Bank of India,
EEE C2000) EG 2a C8 ertreeM bbc da eke <a se sccetensss sce ce scasy esses 1145
Prime Industries, Bangalore v. Official Liquidators(OL) of BS
refrigerators Itd., Bangalore, I (2013) BC 700 (Kar.). .................5 1083
Principles of Corporate Insolvency Law, 1997, p. 168], citing Re
PGIEE PACU Ore tah ok Eee Cie Ee rece tecen es ehezensivarenensssits P35
Priya v. Indian Overseas Bank, IV (2012) BC 68 (Mad) (DB)........... 1020
Punjab & Sind Bank vy. Arun Kumar Arora, II (2006) BC 232
6k een: panelled a openers amemins satin sine 99 ct RYO ry he a 1 AM oat 1016
Punjab and Sind Bank vy. Bhim Sain, IV (2011) BC 44 (DRAT-
1! atteiage eon eer beget yet deg ateelstpetate aniiane lt ace ytetdai atad ht 1154
Punjab and Sind Bank vy. Rakesh Gupta IV (2010) BC 119 (DRAT). i fe PA
Punjab and Sind Bank y. Tripurari Prasad Kesari, I (2009) BC 49
02 hoa @)Soaps cpp yceppr deli Diag so vii. aptnem nar By Bae gama AelRnate tiewogekIB ini 1138
Punjab Distilling Industries Ltd v. CIT, Punjab, AIR 1965 SC 1862. 415
Punjab National Bank v. AAIFR, AIR 2008 Del 192.0000... eee 1032
Punjab National Bank v. Consumer Disputes Redressal Forum, I
CELE Se 4 Pee its Oe, ORE. ath aR ta icamasat rtd sass: ator 8k- 5-8 <osap 1198
Punjab National Bank v. Mohit Garg, IV (2009) BC 113 (DRAT).... 1010
Punjab National Bank y. Oriental Bank of Commerce II (2011) BC
i ey palate peymneeniin iin seer lbpeien ce. iain waters Me tmnireSe: tn ead teint 1023
Punjab National Bank v. SI (Engineering) Pvt. Ltd., I (2010) BC 20
SN srketebessraceketesusts ths
late cc psccstiveecetteecacteisrieocts Wha AB dene 1130
Punjab National Bank v. Sonal Madan, [III (2011) BC 1339............... 773
Punjab National Bank y. State Bank of India, (2012) I BC 34
PSECAL HEC TINE osta cata scp «775 ed OPP ah ve ER o nota ans Si eee E oN oars oboe Taine spt ase 949
Punjab National Bank y. Tata Infotech Ltd., I (2005) BC 16
CEPA IOI Dy cssccssosocenstccsboccaccssvesadvisvetoass sevsonsses¥isahetrwrs: opm ery am eres 806
Punjab National Bank v. Union Bank of India II (2011) BC 53
CDRA T — DCU) carry tases oPaeuio reed brtehy th ctanocdaveres onsesoocsseapeoyossneavarertyenes 1023
Puran Maharashtra Automobiles v. Sub-Divisional Magistrar, IV
(2009) BC 1 (DB) Bom HC 1.0... .ceeesesssseecsrseteeesesteeessensensetneseneensens 1104
Pushpalata v. State Bank of Travancore III (2009) BC 613 ...........+04 950
Pushpangadan y. Federal Bank Ltd., II (2012) BC 115 Ker. (FB)..... LaSeige
a dia ado Oat 00a 0 bs CTS STORE RESOOEDSCCECEDEOOESOSODO POO COC HOODS 5S 019 606 7 Op PE? DeeCOR eee Cee oEe HEC Sle lO CSS eee 1195, 1021,
dihenn 0 6p 00000600 0eb Ub cheb oes D9t con Ded 9S vhs ¥ a0ps here ace dd.o 608 yep oe £0802 cr eE0 0D. 209s ee dP 0000 one eeeeeeee 1197
Pushpendra Rana vy. Central Bank of India, I (2011) BC 175
(DRAT). «.ccccccssesscsccocesscsscsorsceserscsacssensscscssvonsvscusensecnenconensneauacassonnoes
1065
al luble of Cases

India Overseas Bank, | (2010) BC 489 (DB)... 1255

aati -»
ee 0.
= dower Kerala, III (2009) BC 343 (DB), 0.0.0NO. 1114
Radhakrishnan, V.N. Venmelil v, State of Kerala, CRL.M.C.
AB te MB a ROtell too 1112
4369 of 2008 ...... pemrenereneas tinct
Pe | ee en 914
v. Ni
Ragho
pee CheparetioneBaak of Baroda, 11 (2005) BC 8 (OB)(DB)nc nnnnr ny 807
.........0. 1115
Raj Rani Singh v. State of UP, 1 (2011) BC 667 (All)
827
Rajamier vy. Subramaniam, (1929) he
Rajasthan Art Emporium y. Bank of India [1] (2012) BC 13 (DRAT- 1166
Dociad))}.......00cceeevressnnensnnsenavgnecnseesonnnpenes spennnennes sossnssnnnegnennnennnennagsyyns
Rajasthan Financial Corpn, v, The Official Liquidator, (2005) 8
GO 19D ccccccececceesceeeccervsesssveesersessssonnrennneenersarapesnnenennanpbaregsnapesanensnite 736, 1081
Rajasthan Financial Corp, y, The Official Liquidator, order dated
Sth October, 2005 : (2005) 8 SCC 190 .,...cccccnensrscneerenresersnnnesenene 1080, 1194
Rajasthan State Electricity Board, Jaipur v, Mohan Lal, AIR 1967
stngrepcssati
BO 1BSP vccncceees-consreicoasesssenssecesseressce ngsast
iibipihap iqen
imisviins : tp 1181
Rajendra Kumar Sharma vy. Allahabad Bank, | (2012) BC 280
NO) ) 119)
Rajendra R.M. v. Recovery Officer, (2001) 104 Comp Cas 19
(Eg). occ cevicecerssocseserrocnsnscernsenossasnepepievooapprooapensnscons sesgesp
srees0sssssne sons 752
iesh Kumar v. Union of India, (2005) 63 SCL 499 (Pat) ............... . 1142
Rajkot Nagrik Sahakari Bank Ltd. v. Jignesh Jayantilal Ramanuj
{IV (2012) BC 785 (Gujarat High Court) (DB) ..........::00cceeee 1129, 113)
Rajneesh Kumar Tialang v. Oriental Bank ofCommerce, IV (2011)
BC 70 (DRAT-Delhi)............0000000000 ae 1027
Rake Kumar shMahajan v. State Bank of Bikaner & Jaipur, IV
CAU09) BC. 699 (CRD. atin nmr nerdinetosceniaeolingantn 979
Ram Kumar v. Ravinder Kumar Gulati, I] (2007) BC 224........ seaptnans 1136
Ram Murti Pyare Lal v. Central Bank of India, II (2012) BC 72
(DRAT-Delhi) eed 1067, 1066,
EEE EEE EEE EEE EEE EEE EEE EE HEHEHE EEE EEEEE EEE EEEEEEEEEEEEHEEEEEEEEEHEE 1135, 1198,
EEE EEE EEE EEE EEE TET EET EEE EEE TEETH EHH EEE EEE EEE EEE HEE EEE EEEEEEE 124%

Ae 2 Ee En ee
Ramadhin
v. Sheodutt, AIR 1938 Nag 544 ooo... ccccccccccccessecesneeesseerees
Ramakrishnan M. v. Dena Bank, II ( ) BC 633 (Mad HC) (DB).
Ramco Super Leathers Ltd. v. UCO Bank, II] (2008) BC 102 (DB)..
Ramesh Kumar MK. v. Asset Reconstruction Company (India)
BG., BV ClUGr)
Wis 6e GPU), vi rennevnsinmiiaienatiibreenmensiniaienss
Rameshwaram Cotton Industries (Gujarat) Pvt. Ltd. v. District
Magisand
trate
Others, L.P.A No. 165 of 2010 in$.C.A No. 712
of 2010, decided on 4th February, 2010. o...0.:.ccccccccccsesececesseeseeren

teen

steerer eee anhalt beh dd oe, nw... en

oe
wnwee

ee ee ee Ill (2004) BC 224

TTR ee eee eee ewer eee ere eed
hehehe
 Table of Cases

Ravi Spinning Lid. And Ors. v. Union Of India (Uoi) And Anr.,
SD 2 ME BAP Akan LA tie ichabscorascovceeccssccocoapeuasarrepasaneeroes 1032
Ravindra Agrawal v. Bank of India, (2005)61 SCL 91 (MP)... 1191
Kavindranath K. v. indian Bank, I (2012) BC 613 (Mad). _.........---..
Real Value Appliances Lid. v. Canara Bank, Il (1998) BC 357;
tN eee
Reconstruction Company (India) Limited vy. Kumar Metallurgical
Corporation, Ill (2005) BC 44 (DRAT—DRT)..00024-.:eecccecereceeeeee
Richard Dale Agnew v. The Commissioner of Inland Revenue,
(popularly known as the Brumark’s case, [2001] 1 BCLC 353;
a EM BE BE Ty PER: ES SE Oe
Rupesh Mines & Minerals v. State Bank of India, [V (2012) BC 253
And. (DB) COPOPOOEEEDEPOPPEEPEOOOLODLEDODSOOEEEETOESODEEUDEDOOPORPODEBEIDOODEDbI00000I9000000 880 1191

“BC 396(Bom.) OU elie te eee ee 1105

2421 FAAP AA EEE EEE EE EEE EE

‘
LEEELEEEECEELEEEELEBLEEEEDEEEBEEELEEELEEEEEEEBEPEBEBDEELEBEBEEEEPEBDEBEEEEEEEEEM 1185

1193
Sabir Shah v. Bank ofIndia. Il(2006) BC 386 (DB). eh 4. oN ceebert ies 976
Begumvy. State Bank of Hyderabad (supra), I (2013) BC 24
a crteebe cement teeerie cihnanecotish eck arreeeie tile mmetese 1146, 1162
Salem Textiles Limited v. The Authorized Officer, Phoenix ARC
memes Sel, COIS) 0 7 Cm CA IS rec cccerrcercercccerceaprereoeece 800, 1032,
POOL EERE EEEEEEEEEELEEEEEEELELEEELEBBLBEELELEELLEEEEEEEEBEREEEEEPLLELEEBEBEBECEBEBEEEEBELEEEEEEEEEED DE 1210

I
: er iret 0 ik ole Ap tage 2k Tale sea - aes aad 1203

972
Sameer Chand v. Central Bank of India, I (2010) BC 3 (DRAT)____. 1241
Sami K. v. Bank of India, I (2012) BC 455 (Ker.).................--.---------- 1142
Sand Plast (India) Ltd v. Punjab National Bank [III (2011) BC 117
FE), Serna eres nee ieee eePONDS PFDe FFs 1028, 1142
Sant Nirankari Mandal v. Punjab National Bank. I (2005) BC 587 _. 1053, 1243
Santosh Kumar Agarwalla v. State of Orissa, AIR 1973 Orissa 217.. 1134
Santosh Traders v. Bhusaval People’s Co-operative Bank Lid.. Ill
Sn A Perce 993, 1095,
OOOO EEO ROOD FOE A OOOO EAE OOOO Oe OOO OOOO OOOO errrwwe 1246
Sapthagiri Pee Gee Fruits Processing (P.) Lid. v.“Uco Bank, IV
SE TREACY 9 918 9b spe celle lee te tenes 5 eee aa 1048
Saraspathy Sundarraj v. oe Beek ot ees, BECOTS) EL 30 ee
cee TD Aeteteah: Set FL Ae “nO ea 1191
Saraswat Je a State of Maharashtra [ IV
OS 8 | pe tanh ae hele se 1105, 1106
Sardar Associates v. Punjab and Sind Bank, AIR 2010 SC 2138._._. 982
Sarika Jain v. Urmila Pawar, III (2011)BC 105 (DRAT-Delthi) 1250
BC 17 (DRAT)....
-Saroj Kumar Samantra v. Indian Bank, IV (2009) 1168
ii Table of Cases

Saroj Shivkhare v. Gaurav Enterprises, IV (2012) BC 93 (Madhya

nnn ene ne
Pradesh High Court) (IDB). ..........--s--ss:nnennseenenn
Sarwan ane Kasturi Lal, AIR 1977 SC 265 : (1977) 2 SCR 421
Sashi Agro Food (P) Lid. y, Andhra Bank, SS! Branch And Anr., IV
(2008) BC 298 (AP)... ........cscerssnsesesnnnnrnnnnsnsnsnannnsnannnnnnnansnnnnananennn®?
Sashi Agro Food (P.) Lid v, Andhra Bank, TV (2008) BC ee dhe
Sasidharan Pillai v. Indian Overseas Bank, Il (2011) BC 286...........
Satyam Associates v, Canara Bank | (2012) BC RRR,
Satyavol Venkat Krishna Rao v, Union of India, IV (2010) BC 625
(Deeh..) (IDB). ..ccccnscessersnscnssnnnnnsnnennnsnannnnnnensnannannnsnnennnnnnnnnnenennanasnnnninnns
Saxena R.V. v. UOI, I (2006) BC 455 (DB), .........:ccrcreccneeererrnnnnnns
Sea Poly Plast India Pvt. Lid. v. Union Of India, 1 (2013) BC 33B
YY. eS
Secretary, Thirumurugan Cooperative Agricultural Credit Society y.
M. Lalitha, (2004) 1 SLT 200 ........s:0000.0000rserseserserenevevessensnsnrnsvsonns 1199
Senthil Kumar A. y. Assistant Commissioner (CT), Koyambedu
1 CTC 828..........
Assessment Circle, Chennai and Others, (2011) 1027
Serene Industries Ltd. v. ING Vysya Bank, II (2005) BC 124
CR A
Tee DIRT). 20cecessececcnsevcesseocesvenrcsesnrsssnbosnnsitennsapssteasesarsrsreivenees 1013
Sesha Saila Power & Engineering Pvt. Lid. v. State Bank of India,
IV (2012) BC 490 (Andhr Pradesh) (DB). ........:.:::ccccceceeeeeerens
a 1007, 1076
Seshadri S. v. The Recovery Officer, I] (2004) BC 200
CORT IDRAT pe eveerctresrenrtaurtsccrmspesensts temntagseiapeirerinmssientediimpretine 1048
Seth Bansidhar Kedia Rice Mills Pvt. Ltd. v. State Bank of India, I
(2013) BC 667 QAP) (DB), encrooserterwnnncrematunemporesrempercssveansstanenety 1162
Shabbir Ahmed Khan y. Central Bank of India, TV (2008) BC 155... 1055
Shambhoo Khimiji v. Baloch Roze, ATR 1947 Sind 32 w0...ccccccecces 1017
Shamken Spinners Ltdv. State ofU.P, ITI (2011) BC 452 Alll........... 1203
B. v. Union Bank of India, TV (2008) BC 104.............. 1001, 1181
Sheeba Philominal Merlin v. The Repartriates Co-Op Finance &
Development Bank Ltd, ITI (2011) BC 7 (Mad.) (DB). ................. 987
Shilpa Homes v. A.P. Mahesh Co-operative Urban Bank Ltd., II
(2007) BC 37 (ORATIOR 1). .....0ncsp.myenmmemenmmsesamemmainss
woot Basayya Mathad v. Vijaya Bank,(1998) 94 Com Cases 16
EEE EE ETOH EEE EEE EERE EEE EEE EEE EE EEEEEEEEEHEEEEEEEEEEEEHEEEEEEE

Shivmoni Steel Tubes Ltd., (1998) 94 Com Cas 1 o..ccscsccssseeccsseseereens

Sho Designs v. Allahabad Bank, IV (2010) BC 55 (DRAT). .....2.22..
~~ Kappuswami Mudliyarv. Indian Bank, I (2008) BC
Shradha Enterprises v. Washim Urban Co-operative Bank Ltd., Il
(2005) BC 101 (DRAT/ DRT). oicccececcccscicsececssesececeessecenesee sipocnaetne
Shree Bharat Co-op. Bank Ltd. v. Vilasben Lalchand Kothari TV
(2081) BC 268 Cah, RD) sereneesncrgumnennentapcqaaipamepmammens
Shree Engineering Industries Pvt. Ltd. v. United Bank of India [II
ae D> GRATE ..ocectenamenmianitiiees
Shree Vidya Paper Mills Ltd. v. Stressed Assets Stabilization Fund,

am Narain v. Simla Banking and Industrial Co. Ltd., (1956

26 Com Cases 280 : AIR 1956 SC 614 : (1956) SCR a
 Table of Cases xliii

Shridhar Construction Pvt. Lid. v. Shetrunjay Co-operative Housing

TE el OOS et 1 0) 2 Lr 1137
Shyam Ice and Cold Storage (P) Ltd. v. Syndicate Bank, III (2012)
EN al EEE ER 982
Shyam Kishore Prasad v. Bank of Baroda, II (2009) BC 311
i a Ea nai a iss hss sa shdyh 94550050 040099556018. 968, 1188
SICOM vy. Union of India, I (2007) BC 82. .0...ceee ieee eeeeeeeceeeeecceeeeese 1063
Siddh Industries Limited v. Union Bank of India, I (2004) BC 402... 1001
Siebe Gorman & Co. Lid. v. Barclays Bank Ltd, (1979) 2 Lloyd’s
PE AA 5 a Mabestch tlesad on baeba tee dese feb deeee eH ite ivbocvasvhtce Sue 859
Signal Apparels Pvt. Ltd. v. Canara Bank, II (2011) BC 124 (DB)... 810, 986
Sivakumar Textiles v. DRAT, IIIf (2012) BC 45 (Mad.) (DB). .......... 1163
SJS Business Enterprises (P.) Ltd. v. State of Bihar, (2004) 3 Scale
ES API Da, date hein catass Rll chin hace cies conti s us isibinateniastibe rah» -arsecars 1044
Skipper and Tucker v. Holloway and Howard, (1910) 2 KB 630....... 827
Skyhigh Bright Bars P. Lid v. Co-operative Bank of Ahmedabad
ee ee OR A PRE Be, 5 Ssatsicsavdnoneysdsvateysydipsvevensa
zensa 1231
Smita Smt v. Bank of Mahrashtra, III (2005) BC 241 (DRAT—
38 Ee I eT Pre Ice ie he RS) oe a eee 998
Sneha Industries v. State Bank of Hyderabad, II (1999) BC 695...... 748
Solaris Systems Pvt. Ltd. v. Oriental Bank of Commerce, IV (2006)
Be es ahh A) ei cles ghee ine bes -balddadiactl Oo ashciduee - a warrdc inte 1112
Sosamma Abraham v State Bank of Travancore, IV (2008) BC 233. 1116, 1143
South Indian Bank Ltd. v. A. Abdul Hameed, II (2004) BC 228
IT cies naka iaanaadee Dh sakhddediusebtnioindds
ratesvytbys seistiti cavcpemee 749
Sree Lakshmi Products v. State Bank of India, (2007) 2 CTC 193
Ge FIT. 52, SESAEL AIA Sis sbididssthasicbucdcbsdestrasirrnsvistissescvedecebeh 1023, 1025,
EEA AAA EERE EEE EERE EERE EEE EEEEEEEEEEEEEEEEEEEEEEEEEEEREREEEHEHEEEHEEEEEEEEEEEEEEEEEEEEE ED 1096
Sreedharan v. Indian Bank, III (2011) BC 407 (Ker.) ..................00008 1199
Sri Basaveshwar Co-operative Bank Ltd. v. Umesh, I (2009) BC 21
gh Say Me ips Mee TsFe pseihalh bag, tha bgp ceshe ite rR Ee 789
Sri Lakshmi Products v. State Bank of India, AIR 2007 SC 148; B
Shanmugam v. Union Bank of India, IV (2008) BC 104, I (2012)
ND OB 1 pam aitSepere iy ob oa te ta leer ‘a 1004
Sri Lal Bihari Singh v. Canara Bank, I (2005) BC 20 ..2.............2000 1140
Sri Manicka Vinayagar Spinning Mills v. State Bank of India, I
TN REE CEP eos Las slcsattcabetsanceees aangoirgarcescerasap are 1006, 1017
Sri Natarajan S. v. Indian Bank., I (2007) BC 114 (DRAT/DRT)...... 1127
Sri Sarat Chandra Acharya v. Bank of India, Bhubaneshwa, 2009
ee Re eS te pt i Ain nh Rg 796
Sri Vedagiri Lakshmi Narasimha Swami Temple v. Induru
Pattabhirami Reddi, AIR 1967 SC 781 ..................ecsccssccseeneesceseeees 1179
SRTC v. Bal Mukund Bairwa, (2009) 2 SLT 98 = (2009) 1 CLT 307
Ren ee sary Leservesmyers*
ect eree tart healmceederercricirr-ceu 1180
Standard Chartered Bank v. LIC Housing Finance Ltd., (2011) Il
ME err reer arora ie anaes rates anessamporesenzcareusane 949
Standard Chartered Bank v. Walker, (1982) 1 WLR 1410................. 1042
State Bank of Bikaner & Jaipur v. Ballabh Das & Co., I (2001) BC
MP Fr errrrttes cctatccndnsesssccctascvepsocscceneccnccocebederesesvsbecccsovsvcoonsessovemp 747
aliv Table af Cases

State Bank of Bikaner & Jaipur vy. National Iron & Stel Rolling
‘orporation, (1995) 2 SOC 19...» soungnnennnsnsnnnnnnnnngnnnay® 1062
a...Bank of bikaner & Jaipur y. Vandana Rani, Il (2008) BC 151
,) CEN ee ONS 1136
aeineived Bikaner and Jaipur v. Ballabh Das and Co,, AIR 1999
B® BAB... .....anceaceacenaneensasrsevsnnsnnnanssnsshnpenshennpnsunsannnspehnnyanXBaDanan apne? 806
eek of India v. Abhijeet Singh, 1'V (2008) BC 38 (DRAT)..... 1025
State Bank of India v. Gopal @Gopalan, IT] (2009) BC 147,,.......... 1185
State Bank of India vy. Heera Laxmi Contractor Pvt, Lid., 1 (2007)
BC 224 on..ccnsnecnssnenesnsnnnnnennnnnnnannnnnnnnnannnnannnnsnansnnnnanns¥annnss sesssunsennnaannn 1198
State Bank of India v. Indexport Registered, AIR 1992 SC 1740..... 796
State Bank of India v. Jigishaben B. Sanghavi | TV (2011) BC 401
999, 1183
State Bank of India v. Jigishaben B, Sanghavi [IV (2011) BC 401
Boa.) (DB))........0..ccrrsevsecesererensssenesenpenrnnases stosapsenseusanennsnnannsnnsananyy 1135, 1192
State Bank ofIndia ¥.Kandhari and Kandhari Pvt. Lid., 1V (2009)
1148
State Bank of India v. Katthikai Tea Plantations, IV (2009) BC 674. 1115
State Bank of India v. Saksaria Sugar Mills Litd., AIR 1986 SC 868 . 796
State Bank of India v. Sharda Spuntex P. Ltd, 1 (2010) BC 562
GRE), enevectinrs<ctoncsvectviscsnenen nevetetabintnaseAbevercs easennssnneesusennssnasnnensnegy 799, 806
State Bank of India v. Shripad Madhao Kapil, Il] (2012) BC 27
Ge PU RIIIIIIIEET cnrenrmecsocngeeneuetinetninememaemnnnenen

EEE EEE EEE EE EE EEE HEHEHE EERE EEEEEEEEEEE EEE EEHEEEEEEEEEEEE

8 ye ee ee ee ae+een
State
of Assam v. State Bank of Bikaner & Jaipur, II (2000)
BC
FOR cathtiniinvnvectnppitiiingustllinsipamtidiancatmnslaminmsetlllieesenaapes
State of Gujarat v. Patil Raghav Natha, (1969) 2 SCC 187.000.000.000...
State of Maharashtra v. Atur India Pvt. Ltd., 1994 (2) SCC 0497
GL). wersin.renequmninnvogpatatliontin tatemsbtnaieliansniaivatamtitenellbasatth
State ofPunjab v. Gurdial Singh, ATR 1980 SC 319
State v. Rajah Ram Varu, AIR 1966 AP 233 (DB) -.oc-cccccccsoceccssseseeese
SOE EERE EERE EEE EREEEH

Stephen Samuel A. v. Union of India, ITI (2003) BC 469. ..00.............

Stock and Other Securities Investment Co. Ltd. v. Manila Railway
Co., [1897] AC 81 tated Didi dddd dee

Subhas
aati
attain ater teh eh ono... ...........hC hse

Subramaniyan R. Shiva v. State Bank of India, TV (2011) BC 452

dedi ee * 1107, 1188
tele hatintiaaiatiatl ata nlaatete....
... 1054
aaa alata can iatateeteteetnninnsin......

Sumantri Devi v. Canara Bank, II (2009) BC 511.

pelted ae

Sumathi N. Mrs. and Mr. L

ittA
heP PETE

i
a le A en OSESSSSISODTS AITO DO SADE

FOOSE COM EMMEHSS

1132
 Table of Cases xly

Sun Star Future Wood Ltd. v. Authorised Officer Stressed Assets

Stabilisation and Fund, I (2009) BC 460 uo... ee ceceececeseeescesseees 1045
Sundaram BNP Paribas Home Finance Limited y. State of Kerala,
Fe CR 1109, 1111
Sundaram BNP Paribus Home Finance Ltd. v. Mir Ali, I (2012)
ee a MN aa a8 3, Or BE OEE EAB GEER iil) 50d, ohG43 ie 1199
Sundaram Home Finance Limited v. K. Raja, AIR 2009 Mad 151.... 1116
Surender Kumar v. State Bank of Mysore, III (2008) BC 157
ON baonc vessaccnicanessc Go SOse EUS
ncansnasnthnl derbies:
sscs 1135
Surinder Mahajan v. Debts Recovery Appellate Tribunal & Others,
CWP Nos 22567 and 17894 of 2011, decided on Sth April, 2013. 1147
Suryakant Jagtap v. State Bank of Indore, I (2011)BC 569................ 797
Sushen Medicamentos Pvt. Ltd. v. Ashok Enterprise, III (2012) BC
Be@Gry. (DB) '2 Stote f\o.cBank .Licnelit ive
mecet oom Joes 1256
Sushil Kumar Agarwalla v. State of Assam, II (2007) BC 695........... 1192
Sushma Suri v. Mahamedha Urban Co-operative Bank Ltd., I
@GIAVBOAG 6 entra 6 onnemiiee..Bom ier!) ge lsl ey 1183
Swami Motor Transports Pvt. Ltd. v. Shri Sankraswamigal Mutt and
Raval & Co. v. K.G. Ramachandran, 1974 (1) SCC 424............... 768
Swan Industries Ltd. v. Ajmer Vidyut Vitaran Nigam Ltd., I (2005)
Me PEGG ae &. Resiowal. Deeanors ()fiicer. JE 62004). BOLALL 1244
Swift Finlease (India) Ltd v. Bank of India, IV (2005) BC 197
(DRARDRDabo dD: cit: tik S seinen hi hated 62 denen 1072
Syndicate Bank v. Basalingappa, II (2008) BC 274 (Kar)................ 1057, 1156,
1188
Syndicate Bank v. Canara Bank, I (2005) BC 10 (DRAT/DRT)....... 748
Syndicate Bank v. Estate Officer & Manager, A.P.I.I.C. Ltd., (2007)
BG aehee Fu... ie. Beers ees... 8. ed. Seana 981
Syndicate Bank v. Official Liquidator, Prashant Engineering Co. P.
Ldn SS ComiGases-301-. (Ded)... a6. bivdensiail...2.. AM... 726
Syndicate Bank v. Sri Basalingappa, AIR 2007 Karn 125. ................ 1154

Tailby v. Official Receiver, AIR 1969 SC 313...... ..c:

eneeenesereteeetees 727, 831
Tara Devi Kelanka v. State Bank of India, IV (2009) BC 366
Gira t).553 -2 es 07 6a 6h 9: BS > ercecderpeeeeten tH “tex nerereD=+ep-pedbons 1180
Tarun Krishna Aggarwal v. Central Bank of India, III (2011) BC 1
CDRA Delitigyass. bere
cases. gseuovets «1555 «++ cnpeh re RUdepepdoers SIF beepananatiyopponeb 1249
Taylor v. London & Country Banking Co., gh Be Gi hes * Pre 828
Tea Brokers (Guwahati) Pvt. Ltd. vy. UCO Bank, I (2007) BC 66
GEIR AT aces bin Ae satarp NCA iia dp Adee do ote bh» bagoWed ve) Harleys.gtbdbe do fbsbodvveneasens 1138
Tensile Steel Ltd. v. Punjab & Sind Bank, AIR 2007 Guj 126........... 998
Tetulia Coke plant v. Bank of India, I (2013) BC 493 (Jhar.). ........... 999
Thane Janata Sahakari Bank Ltd. v. The Commissioner of Sales
Tax, (2006) 132 Comp Cas 823 .......scceccssterserseesesssesereseeseneneeneenens 1195
Thangaraj V.V.R. v. UCO Bank, III (2006) BC 251 (DRAT/DRT
Chennai).Vil oh eBirtey gd evan zadac oe Rv vi eee hn nt svaiaVen yen iv topsen ys onedornves fore putas 1094
Thansingh Nathmal v. Superintendent of Taxes, (1964) 6 SCR 654.. 1186
 AIR
Thressiamma Verghese v. Kerala State Finance Corporation, 1O38
1986 Ker 222. .........-..--.0--+--0-* Nn a re TE
.....0 1192, 1193
Timber RK. y. ICICI Bank Lad., I'V (2012) BC 622 MP........
Todkar Associates v. Shree Veerashaiva Co-operative Bank Lid., WW 970, 1250
nanny
nnennnnnnnnnnn
(2006) BC 230 (DRA T/DRT). .........-s-s-ssesnsennennnnnnnnnnn annnnn nenness 1041
Tomlin v. Luce, (1889) 43 Ch D 191 ........seensnnenensrnnnrnnnnn
Trade Well v. Indian Bank, (2007) (2) CCR 349; (2007) 1 Bom CR
nn 1105, 1116
(CI) TRB .cacecesnencru-cesensnenssnsnsnsnsnsnnntnnnnnansnansnnnenennnsnnnsnennnennnannannnnn
1246
Transcore v. Union Bank of India, (2007) 1 BC 33......0:::0:eeeneee
Transcore v. Union of India, Civil Appeal No, 3228 of 2006 ............ 769, 770, 772,
0b$0000h000e 200408 2OSeeeeserUeReeseeeeRenseneee SPaRPReRPaPEP Pn slr PPh se &PaPPERRP heh >)» 773, 776, 961,
1115
900060seeeenenhe

0nn 8 eeSenseseeseeen ee SSERESeREOORRD DODD SESE POS ETR TPES RSD REDDER? POPP PEP
90500656000 ccehh 008eees 0010000

(SC) 151 : 12007) BC 33 (SC) .....cssscsssnserennnensrrarsnnenersnesinneesaiens 978, 1127

Tripta Bhambi v. State Bank of Hyderabad, HI (2011) BC 111
(DRAT-Deliti).........sscesesssecsseresssorsvsnsnbsnvennsnssnanssbasbsansonsonsbennnneaneiee 989
Triveni Alloys Limited y. Board for Industrial and Financial
Reconstruction, (2006) 132 Com Cas 190 (Mad)...
Tse Kwong Lam v. Wong Chit Sen, (1983) 3 All ER 54 ee

U
U.P State Co-operative Land Development Bank Ltd. v. Chandra
Bhan Dubey, (1999) I SLT 27; 1 (1999) CLT 134 (SC).......:.::000
UCO Bank y. Achal Bansal, IT (2009) BC 63 (DRAT-Delhi)............
UCO Bank v. Dipak Debbarma, IV (2007) BC 169 .0...ccccccccceseeeeenes
® QRAT) v. Elementies Coke Private Limited, 1] (2007) BC 55

UCO Bank v. Kanji Manji Kothari & Co., (2008)

3 Bom CR 290.....
UCO Bank, Churchgate Branch v. Kanji Manji Kothari and Co.,
(2008) 3 Bom CR 290 : 2008 (110) Bom LR 744 o.....ccccsssusssseen
Ujjal Kumar Das v. State Bank of India, W.P 10315 (W) of 2013
Ullash Chandra Sahoo v. Bank ofIndia, III(2007) BC 659.......000..
United Steel Allied Industries Private Limited v. M/S. Indian Bank,
W.P. No. 19297 of 2012 and 33655 of 2011 SOOO EEE EEE EOE EEREEEEEEEEHEEEEE

eee eeee EEE EEE EEE EEE ETE E EEE TEE EEE EEE EEE EEE EEE EE EEE EE EE EEE EEE EEE EE EEEEEEEEEEEEE

Union Bank of India v. General Workers Union, Til (2009)

BC 459
Union Bank of India v. Madhu Goenka, IV (2009) BC 34 (DRAT). .
277 piamamthets boo ohoamabebtrrnrenr te ten
e. TR Oe EEE TEETH EET EEE EEE EEE EEE EEE EE EEE EEE EEE EEE EEE EEEEEEE EEE EERE EEE “-

Union of India v. Ct. Shentilanathan, 48 Com Cases 640 (Mad)........

eS Oe ne et Cone See
ihe eee eee eee ee ee eee eee eee ee eres _ 1133, 1179
514
EEE ERE OEE TEETH EEE EEE EE EERE EEEEEEEEEECEREECEEEEEEEEEE ENERO ene
 Table of Cases Avii

United Bank of India v. Debts Recovery Tribunal, (1999) 96 Comp

RII tii te ticaktoeaccnndbsbenctaascascsaccersssecsesosecceeese
SAUCE iG EEOL +4 605
7T3, 992,
OEE AAA ALLELE EEEEEBEEBEEEEEBBEEEEEEEEEEEEEEEEEEEEEEEEEEREBEBEED 1134, 1186
Unitex Steels Pvt Lid v. Bank of India. 22.............0cccccccccccrerororcrerereeees 1117
Upasana Garg v. State of U.P., I] (2012) BC 438 (DB).........-....4.- 1010
UTI Mutual Fund v. Income Tax (No. 2), (2013) 260 CTR (Bom)
408, 409

Vandanaben Kasik Dagli v. Royal Co-op. Bank Ltd., (2006) 65 SCL

TE FTL ON Nee ine 974
Varghese v. Kerala State Co-operative Bank Ltd, AIR 200% Ker 91;
I a hath arecsseststencneecdocbibesdceobderenceuneececeree 789, 790
Veerbhadra Shetkari Sahakari Dal Prakriya Sansthan Maryadit v.
Nanded District Central Cooperative Bank Ltd, II (2006) BC
ahcedehalicInewbnb borJadoo reodrboode 993, 1249
Venkatadri Appa Row v. Parthasarathi Appa Row, (1920-21) 48 IA
Lon Seco tndsvoalbbrendotnrocteniocie 1175
Vijay Kumar Mane v. Regional Transport Officer, If (2004) BC 311 1047
Vijaya Bank v. B. L. Gupta, IV (2011) BC 1 (DRAT-Dehi)............ 1132
Vijaya Bank v. Lucy Dsouza [IV (2012) BC 96 (DRAT-Dethi)]}....... 1162
Vii SK v. Indian Overseas Bank, Ill (2006) BC 148
a I a ocho nn dncnsanpscucobbentveonvevonaseorociee 968
Vinay Container Services Pvt. Lid. v. Axis Bank [ IV (2011)
BC
EET ee 1142, 1166
Vinodh Kumar P. v. The Recovery Officer, DRT-2, Chennai, LI
SN 2) Sn ee heOD SEs OPE eeOn 1027
Vinodha R. Joshi v. State Bank of Hyderabad, IV (2007) BC 65
eo decreed nnd vmnrocenndnaropanicpeesacicéree 1144
Viral Filaments Lid. v. Indusind Bank Ltd., (2001) 33 SCL 132
(Bom 980
Virendra Kumar Jaiswal v. Chief Metropolitan Magistrate, Kanpur
i Be Stay pated OF Aid Aa TOT a TOE
Vysya Cooperative Bank Ltd v. G. Keerthana, II (200%) BC 214:
i i sia li eencdcmpomenionnstepnrcbeccosenedes

Walter& Sullivan v. J Murhpy Ltd., (1955) 1 All ER 843 ................

Wasan Shoes v. DRAT, IV (2009) BC 344 (All). -........
ane oem On wr, All 1973 SC 1293 8. emroreroronsorceoenee
Web v. Stendon, (1883) 11 Q.B.D. 518, 572.0000... eee ceeeceeeeeceeeeee
West London Commercial Bank v. Reliance Permanent Building
SN BR Fe BES I oo acircinceetctsinenmonsntncorverantecteareccsscesivosnes
i RD I ic eccremsencnnevesernesoncoccsooovocescoconsesseese
Williams v. Wellingboro ugh Bourough Council, (1975) All ER 462
EER EEEAO DEDEDE EE EEEEEEELEELEEEBEDLDLELED LEED EEELLEEELELELELEL ELLE E EEE EHD
CO OEE EEE EEE EE EEE EERE
adv Table af Cases

Workmen of Firestone Tyre and Rubber Co. of India (P.) Lid, ».

1 SOC 81 3.........c-veesssnnrerenssnnennnnnnnnnneennntnns
ent,
(1973)
Managem 1087

Yarnala Leela Krishna Prasad v. Central Bank of India, I (2008)

ok | eee eee ee ee el Um
Yukta Mookhey v. Bank of India, 2006 (3) Bom CR 26, 2006 (4)
NA a es Se ae. eT
Yukta Mookkey v. Bank of India, Order dated 20" March , 2006.....
Yuth Development Bank Lid v, Balasaheb Dinkarrao
Salokzhe,
1 (BOD) BC GEG on.acnccccccebcsevecdecccsossessebbscconetes
nan
Z
Zubida Begum (DR.) v. Indian Bank, 1 (2013) BC 67 (Mad.) (DB) .. 773, 1962
 TABLE OF STATUTES

Advocates Act, 1961 (25 of 1961), pp. 1332, 1346

Air Force Act, 1950, p. 1172
Aircraft Act, 1934 (24 of 1934), p. 1167
Amendment Act, | of 2000, p. 1330
—,s. 7, p. 1330
Amendment Act, 1995, s. 2, 1314
—,s.2,p. 1314
—,s. 3, p. 1315
Amendment Act, 2000, p. 1326
—,s.2, pp. 1315, 1316
—,s. 3, p. 1313
—,s. 4, 1314
—,s.5,p. 1315
—, s. 6, p. 1316
—,s. 7, p. 1316
—,s. 10, p. 1326
Amendment Act, 2001, p. 1313
—,s. 3, p. 1313
Amendment Act, 2004 (30 of 2004), p. 861
—, s. 2, pp. 804, 861
—, 8. 3, 886
—, 8. 4, pp. 893, 896
—, s. 2, pp. 778, 779
—, s. 3, p. 876
Andhra Pradesh Co-operative Societies Act, 1964, 789
Arbitration and Conciliation Act, 1996 (26 of 1996), pp. 567, 948, 1172
Arbitration and Conciliation Act, 1996, p. 133
Army Act, 1950, p. 1172
Banker’s Books Evidence Act, 1891, p. 992
Banking and Financial Institutions Act, 1989, p. 489

xlix
: Tabl e s
of Statuic

(Acquisition and Transfer of Undertakings) Act, 1970,

Banking Companies
pp. 539, 803
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980,
p. 803
Banking Regulation Act, 1949 (10 of (1949), pp. §39, 557, 592, 746, 777, 778,
792, 793, 800, 803, 1282, 1313
Banking Regulation Act, 1949 (10 of 1949), p. 576, 1313
Banks and Financial Institutions Act, 1993 (51 of 1993), p. 784
Banks and Financial Institutions Act, 1993, p. 1067
Bills of Sale Acts, 1878-1891, p. 742
Bombay Land Revenue Code, 1879, p. 1005
Bombay Stamp Act, 1958 (Bom.LX of 1958), p. 110
BR Act, 1949, p. 536
Central Civil Services (Classification, Control and Appeal) Rules, 1965,
pp. 1363, 1364
Central Civil Services (Conduct) Rules, 1964, pp. 1363, 1364
Central Civil Services (Joining Time) Rules, 1979, pp. 1363, 1364
Central Civil Services (Leave) Rules, 1972, pp. 1363, 1364
Central Registry Rules, 2011, p. 1156
Chartered Accountants Act, 1949 (38 of 1949), p. 182
Civil Services (Pension) Rules, 1972, pp. 1363, 1364
Code of Civil Procedure, 1908 (5 of 1908), p. 1167, 1369
Code of Civil Procedure, 1908, pp. 756, 1108
Companies (Second Amendment) Act 2002, pp. 514, 517
Companies Act 1956, pp. 517, 1006
Companies Act, 1956 (1 of 1956), pp. 918, 919, 956, 1055, 1056, 1099, 1150,
1201, 1313, 1322, 1386
Companies Act, 1956 (5 of 1986), p. 1384
Companies Act, 1956, pp. 469, 493, 508, 510, 514, 579, 645,
— 848, 921, 1149, 1156, 1158, 1160, 1163, 1209

Companies Act, 1965, p. 488

 Table of Statutes li

Companies Act, 2013, pp. 469, 510, 514, 518, 516, 645, 729, 1024, 1057, 1062,
1151, 1158, 1160, 1163,
Debt Recovery Tribunal (Procedure) Rules, 1993, p. 1332
Debts Due to Banks and Financial Institutions Ordinance 1993, p. 1331
Debts Recovery Appellate Tribunal (Financial And Administrative Power) Rules,
1997,p. 1363
Debts Recovery Appellate Tribunal (Procedure) Rules, 1994, pp. 1279, 1346
Debts Recovery Tribunal (Financial and Administrative Power) Rules, 1997,
p. 1364
Debts Recovery Tribunal (Procedure) Amendment Rules, 2003, p. 1355
Debts Recovery Tribunal (Procedure) Rules, 1993, pp. 1075, 1258, 1278, 1279
Debts Recovery Tribunal under the DRT Act, 1993, p. 774
Debts Recovery’ Appellate Tribunal (Procedure) Rules, 1994, p. 1279
Delegation of the Financial Powers Rules, 1978, p. 1363
DRT (Amendment) Act, 2000, p. 512
DRT (Procedure) Rules, 1993, pp. 1117, 1119, 1134
DRT Act, 1993, pp. 774, 775
Emergency Economic Stabilization Act of 2008, p. 455
Employees Provident Fund and Miscellaneous Provisions Act, 1952, p. 1068
Enforcement of Securities Interest and Recovery of Debts Laws (Amendment)
Act 2004, p. 134

Enforcement of Security Interest Act, 2002 (54 of (2002), p. 1313

Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Act,
2012 (1 of 2013), p. 777
—, ss. 2, pp..777,.788
—,s.9, p. 1161
—,s. 10, p. 1164
—,& ll, pi: i476

Enforcement of Security Interest and Recovery of Debts Laws (Amendment)

Act, 2012, p. 761
Enforcement of Security Interest and Recovery of Debts Laws (Amendment)
Act, 2004 (30 of 2004), pp. 918, 924
== "3:6, p. 920
—, s.7, p: 951
lu lable of Statules

Debts Laws (Amendment)

Enforcement of Security Interest and Recovery of
Act, 2012 (1 of 2013), p. 910
—, s. 3, pp. 898, 910
—, 8. 4, p. 933
s Laws (Amendment)
Enforcement of Security Interest and Recovery of Debt
Act, 2004, p. 1143
s Laws (Amendment)
Enforcement of Security Interest and Recovery of Debt
Act, 2004 (30 of 2004), pp. 1104, 1319
—, 8. 8, pp. 953, 993, 1000
—, 8. 9, p. 1098
—, s. 10(a)(i), p. 1104
—, 8. 10(a){ii), p. 1104
s. LO(a)iii), p. 1104
s. 10(b), p. 1105
s. 11, p. 1136
—, 8. 12, p. 1137
s. 13, pp. 1143, 1144
s. 14, p. 1146
s. 19, p. 1313
Enforcement of Security Interest and Recovery of Debts Laws (Amendment)
Act, 2012 (1 of 2013), pp. 1081, 1144
—, s. 5(a), pp. 953, 993
—, s. 5(b), pp. 954, 1040
—, s. 5(c), pp. 956, 1056
—, s. 6(a), p. 1081
—, s. 6(b), p. 1082
—, s. 6(c), p. 1083
—,s.7, p. 1144
—, s. 15, p. 1159
—,s. 16, p. 1164
—, s. 17, p. 1167
—, s. 18, p. 1206
Enforcement of Security Interest and Recovery of Debts Laws (Amendment)
Act, 2012, pp. 1318, 1328
English Law of Property Act, 1925, p. 913
Factoring Regulation Act, 2011, pp.556, 1152, 1156
Finance Act, 2013, pp. 106, 411
Financial Powers Rules, 1978, p. 1364
Foreign Exchange Management Act, 1999 (42 of 1999), p. 681
 Table of Statutes liti

General Financial Rules, 1963, pp. 1363, 1364

General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), p. 834
General Provident Fund (Central Services) Rules, 1960, p. 1363, 1364
Income Tax Act 1961, pp. 106, 407, 614, 1328
Income-tax (Certificate Proceedings) Rules, 1962, p. 1328
Indian Contract Act, 1872 (9 of 1872), pp. 782, 873, 1167
Indian Contract Act, 1872, p. 798
Indian Income-tax Act, 1922, p. 1128
Indian Limitation Act, 1963, p. 755
Indian Penal Code (IPC) 1860, p. 506
Indian Penal Code. (45 of 1860), p. 1329
Indian Registration Act, 1908, p. 155
Indian Stamp Act, 1899 (2 of 1899), p. 111
Indian Stamp Act, 1899 (Central Act IT of 1899), p. 111
Indian Stamp Act, 1899, p. 111
Indian Trust Act, 1882 (2 of 1882), pp. 194, 919, 924
Industrial Disputes Act, 1947 (14 of 1947), p. 1389

Industrial Finance Corporation (Amendment) Act, 1972 (74 of 1972), p. 1376

Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
(Act 23 of 1993), p. 1373
Industrial Finance Corporation Act, 1948 (15 of 1948), p. 1329
Industrial Finance Corporation Act, 1948, p. 757
Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), p. 834
Industrial Reconstruction Bank of India Act, 1984, p. 757
Information Technology Act, 2000 (21 of 2000), p. 1206
Insolvency Act, 1986, p. 729
Interest Act, 2002 (54 of 2002), p. 788
International Finance Corporation (Status, Immunities and Privileges) Act, 1958,
p. 837
International Finance Corporation (Status, Immunities and Privileges) Act, 1958
(42 of 1958), pp. 779, 833
liv lable af Statutes

IRBI Act, 1984, p. 1379

Karnataka Cooperative Societies Act, 1959, p. 790
Karnataka Stamp Act, 1957 (Karnataka Act 34 of 1957), p. 110
Legal Services Authorities Act, 1987, p. $13
Limitation Act, 1963 (36 of 1963), pp. 1200, 1325
Maharashtra Co-operative Societies Act, 1960, p. 788
Marine Insurance Act, 1963 (11 of 1963), sec. 92, pp. 1310, 1311
Merchant Shipping Act, 1958 (44 of 1958), pp. 1150, 1167
Merchant Shipping Act, 1958, p. 1169
Minister of Finance (Incorporation) Act, 1957, p. 488
Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969), p. 180
Motor Vehicles Act, 1988 (59 of 1988), p. 1150
Multi-State Co-operative Societies Act, 2002 (39 of 2002), pp. 1318, 1319, 1329
Multi-State Co-operative Societies Act, 2002, pp. 745, 747, 752, 789, 792
Mutual Fund Regulations 1996, p. 104
National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981),
pp. 174, 175, 179
National Housing Bank (Amendment) Act, 2000, p. 153
National Housing Bank (NHB) Act in 2000, p. 156
National Housing Bank Act, 1987 (53 of 1987), pp. 175, 179, 557
National Housing Bank Act, 1987 (NHB Act), p. 141
National Housing Bank Act, 1987, pp. 838, 1282
“whe eee
1987),
p.420
Navy Act, 1957, p. 1172
NPA Act, 2002, pp. 774, 775, 976
Patents Act, 1970 (39of 1970), p. 1150
Personal Property Security Act, 1999, p. 1048
Personal Property Security Interest Act, 1999,p.716
Personal Property Security Interest Act, 2009, p. 716
Presidency Towns Insolvency Act, 1909, p. 725
 Table of Statutes lv

Provident Funds Act, 1925, p. 1172

Provincial Insolvency Act, 1920, p. 725
Public Provident Fund Act, 1968, p. 1172
RDB Act, 1993, p. 757
Reconstruction Bank (Transfer of Undertaking and Repeal) Act, 1997 (Act 7 of
1997), p. 1379
Recovery of Debts Due to Banks and Financial Institutions (Act), 1993), p. 1268
Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act,
2000, p. 1329
Recovery of Debts due to Banks and Financial Institutions Act, 1993, pp. 743,
763, 804
Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of
1993), pp. 777, 778, 779, 804, 808, 833, 911, 1106, 1137, 1178, 1201, 1258,
1278, 1363
Recovery of Debts Due to Banks and Financial Institutions Act, 1993, p. 1135

Recovery of Debts Due to Banks and Financial Institutions Act, 1993, pp. 1278,
1279, 1342, 1344
Recovery of Debts Due to Banks and Financial Institutions Ordinance, 1993 (25
of 1993), p. 1332
Regional Rural Banks Act, 1976 (21 of 1976), p. 1314

Registration Act, 1908 (16 of 1908), pp. 931, 1150

Reserve Bank of India (Amendment) Act, 1974 (51 of 1974), p. 541
—,s. 15, p. 541

Reserve Bank of India Act 1934, pp. 509, 575, 656, 802
Reserve Bank of India Act, 1934 (2 of 1934), pp. 556, 557, 680, 779, 780, 833,
850
Restoring American Financial Stability Act of 2010, p. 215
Sale of Goods Act, 1930 (3 of 1930), p. 1167
SARFAESI (Central Registry) Rules, 2011, p. 1151
Sarfaesi Act (Removal Of Difficulties) Order, 2004, p. 1278
SARFAESI Act, 2002, pp. 156, 690, 1149, 1187
SCR Act, 1956, pp. 156, 157
SEBI (AIF) Regulations, 2012, pp. 639, 849
lv lable of Statutes

SEBI (Mutual Funds) Regulations, 1996, p. 105

SEBI Act, 1992, pp. 161, 163, 165
Securities (Appeal to Securities Appellate Tribunal) Rules, 2000, p. 193
Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, p. 848
Securities and Exchange Board of India (Public Offer and Listing of Seouritised
Debt Instruments) Regulations, 2008, p, 194
Securities and Exchange Board of India (Public Offer and Listing of Securitised
Debt Instruments) Regulations, 2008, pp. 198, 199
Securities and Exchange Board of India (Public Offer and Listing of Securitised
Debt Instruments) Regulations, 2008, pp. 196, 412
s Exchange Board of India Act (15 of 1992), p, 173
Securitieand
Securities and Exchange Board of India Act, 1992 (15 of 1992), pp. 777, 780,
782, 794, 873, 918, 919, 1201
Securities and Exchange Board of India Act, 1992, pp. 192, 412, 419, 794
Securities
and Exchange Board ofIndia (Public Offer and Listing of Securitised
Debt Instruments) Regulations, 2008, p. 419
Securities Appellate Tribunal (Procedure) Rules, 2000, p. 193
Securities Contract and Regulation Act (SCRA), 1956, p. 99
rel Contracts (Regulation) Act, 1956 (42 of 1956), pp. 82, 139, 157, 172,
18, 919 .
Securities Contracts (Regulation) Act, 1956, pp. 154, 412, 419, 1209
Securities Contracts (Regulation) Amendment Act, 2005, p. 139
Securities Contracts Regulation (Amendment) Act 2007, p. 139
eh ere licsornccipntd yichncmioviicle oy
p.
Paeneneit ant(Regulation) Amendment Bill 2005, pp. 98, 145, 146, 155,

Securities Contracts (Regulation) Rules, 1957, pp. 189, 193

Securities Contracts Regulations (Amendment) Bill, 2005, p. 165
Securities Exchange Act of 1934, p. 215
Securities and Exch Board
an of India
geAct. 1992 (15 of 1992),
pp. 193, 194
Securitisation Act, 2002, pp. 1024, 1211
 Table of Statutes lvii

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002, p. 141
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002), pp. 173, 175, 179
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act), p. 154
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interests Act, 2002, pp. 96, 761, 771, 973, 1021
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002), p. 788

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interests (Removal of Difficulties) Order 2004, p. 1134
Securitisation And Reconstruction Of Financial Assets And Enforcement Of
Security Interest Act, 2002, pp. 1270, 1267, 1273, 1275, 1281
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002), pp. 1230, 1232
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (Removal of Difficulties) Order, 2004, p. 1279
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002), pp. 1278, 1282, 1283, 1319
Securitisation Companies and Reconstruction Companies (Reserve Bank)
Guidelines and Directions, 2003, pp. 884, 1248
Securitised Debt Instruments) Regulations, 2008, p. 172

Security Interest (Enforcement) Rule, 2002, pp. 1262, 1068, 1229, L26L«Lz03,
1265 :
Security Interest and Recovery of Debts Laws (Amendment) Ordinance, 2004,
p. 973
Security Interest Ordinance, 2002 (Ord. 3 of 2002), p. 1208

Security Interest Rules, 2002, p. 1250

Security Interests (Enforcement) Rules, 2002, p. 1078
Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), pp. 908,
1330 |
Sick Industrial Companies (Special Provisions) Act, 1985, pp. 514, 517, 579,
TST) T209
Small Industries Development Bank of India Act, 1989, pp. 757, 835, 1330
lviti Table of Statutes

State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), pp. 782, 872,
1314
State Bank of India (Subsidiary Banks) Act, 1959, pp. 539, 576
State Bank of India Act, 1955, p. 576
State Bank of India Act, 1955 (23 of 1955), pp. 782, 872, 1314
State Financial Corporation Act, 1951 (63 of 1951), pp, 557, 1329
State Financial Corporation Act, 1951, p. 757
Tamil Nadu: Indian Stamp Act, 1899,p. 111
The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970,
p. 577
The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980,
p. 577
The Deposit Insurance and Credit Guarantee Corporation Act, 1961, p. 577
The Export-Import Bank of India Act, 1981, p. 577
The National Housing Bank Act, 1987, p. 578
The Public Financial Institutions (Obligation as to Fidelity and Secrecy) Act,
1983, p. 578
The State Agricultural Credit Corporations Act, 1968, p. 577
Transfer of Property (Amendment) Act, 1929 (20of 1929), sec. 39
—, s. 39, p. 1307
—, s, 41, p. 1309
Darr of Property Act, 1882 (4 of 1882), pp. 782, 873, 953, 959, 1366, 1374,
. 1383
Transfer ofProperty Act, 1882, pp. 1017, 1202, 1301
U.P. Public Moneys (Recovery of Dues) Act, 1972, p. 757
Unit Trust of India Act, 1963 (52 of 1963), p. 1329
Unit Trust of India Act, 1963, p. 757
Wall Street Reform and Consumer Protection Act 2009, p. 215
Wealth-tax Act, 1957, pp. 1230, 1232
 LIST OF TABLES

Table 1.1 Off-balance sheet assets of certain US Banks 24

Table 1.2 The basic process of receivables securitisation 33
Table 1.5 Comparison: Direct Portfolio Transfers and Securitisation 47
Table 1.6 Pass through and pay through structure: Main differences 56
Table 1.7 Asset-backed securitisation and future flows securitisation:
Main differences 63
Table 1.12 Default rate of structured finance securities dz
Table 2.1 Number of securitisation transactions 80
Table 2.2 Volume of securitisation transactions 81
Table 2.3 Rating downgrades and average extent of downgrade in
ABS and LSO3 ratings since 2004-05 81
Table 2.4 Credit enhancements in some recent transactions 88
Table 2.5 Credit enhancements in some older transactions eM
Table 3.1 Minimum Number of Instalments to be Paid before Secu-
ritisation 277
Table 3.2 Minimum Retention Requirements at the Time of Securiti-
sation 279
Table 3.5 Direct assignments and securitisation under the RBI guide-
lines 302
Table 5.1 Bank Non-performing Loans to Total Loans 427
Table 5.2 Bank Provisions to Non-performing Loans 433
Table 5.3 Non-performing Loans Ratio: 2002-2011 439
Table 5.4 Transition of Non-Performing Loans (NPLs) based on the
Financial reconstruction Law (FRL) 440
Table 5.5 Major Regulatory Indicators of Commercial Banking Insti-
tutions 44]
Table 5.6 Non-Performing Loans (NPL) of Scheduled Commercial
Banks 442
Table 5.7 Bank Group-Wise Classification of Loan Assets of Sched-
uled Commercial Banks - 2007 to 2012 442
Table 6.3 East Asia: Nonperforming Loans 457

lix
lx List af Tables

Table 6.4 Bank Non-performing Loans (as % of Total Gross Louns)

of Selected Asian Countries
Table 6.7 Acquisition of NPLs by KAMCO between 1997 and 2002
Table 6.8 Decline in NPL Levels of Korean Companies
Table 6.9 Analysis of recovery from various recovery methods as at
3 September 2005
Table 6.15 Selected NPL portfolio sale transactions in Thailand in
2010
Table 6.15 Recent transactions
Table 7.1 Measures of resolving NPAs (2003-04 and 2004-05)
Table 7.2 Measures of resolving NPAs (2007-08, 2008-09)
Table 7.3 Measures of resolving NPAs (2010-11 and 2011-12)
Table 7.4 Summary Statistics about Case Processing in Bombay High
Court vy. Mumbai DRTs (as provided in the article Legal Re-
form and Loan Repayment: The Microeconomic Impact of
Debt Recovery Tribunals in India) 512
Table 7.5 Data on Pending Cases in Winding-up Matters (as given by
the Eradi Committee) [as on 31st March, 1999] 514
Table 7.6 Board for Industrial & Financial Reconstruction Year Wise
Performance 515
Table 7.7 Overall Status 526
Table 7.8 Industry-wise Classification of Approved Cases 526
Table 7.9 Comparative Performance over the years 528
Table 7.10 Debt Recovery Remedies: a Comparative View 538
Table 8.1 Incremental NPAs and Incremental SRs issued 622
Table 8.2 NPA reduction by ARCs 623
Table 8.3 Recoveries by ARCs 623
Table 8.4 Profit and Loss Summary of ARCs (FY 2009 and 2010) 625
Table 8.8 5 year- Data: Details of Recovery 632
Table 9.1 Disclosure as Required under RBI Master Circular:
Details of Financial Assets Sold to SC/RC for Asset Recon-
struction 654
 LIST OF FIGURES

Figure 1.3 ABC types based on collateral

Figure 1.4 Broad Types of Securitisation Structures
Figure 1.8 Pay-through Structure
Figure 1.9 Pass-through Structure
Figure 1.10 Cash and Data Flow Chart
Figure 1.11 Illustration of Sequential Pay CMOs
Figure 3.3. Maturity of Loans and MRR
Figure 3.4 RMRR and Forms
Figure 3.6 Classification of Credit Enhancement
Figure 3.7 Breach of Delinquency Trigger
Figure 3.8 Conditions for Reset of Credit Enhancement under the RBI
Guidelines
Figure 4.1 Requisites for Application of Section 115TA
Figure 6.1 Components of Public-Private Investment Program
Figure 6.2) TARP Tracker
Figure 6.5 Credit Cost Ratio and Non-performing Loan Ratio
Figure 6.6 Loans Outstanding by Borrower Classification
Figure 6.10 Comparative NPL, NPA and Coverage Ratios
Figure 6.11 Philippines Banking System: Selected Asset Quality Indicator-
for End Periods Indicated
Figure 6.12 Total Non-performing Loans in the Market
Figure 6.14 Total Non-performing Loans in the Market
Figure 8.5 Shareholding Pattern of ARCIL
Figure 8.6 Stage I
Figure 8.7 Stage II — Pooling at Subsequent Stage
Figure 10.1 Remedies Available to a Secured Creditor in India: An
Overview

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 PARTI
INTRODUCTION TO SECURITISATION,
ASSET RECONSTRUCTION AND
ENFORCEMENT OF SECURITY
INTERESTS

ARRANGEMENT OF CHAPTERS

CHAP. 1 INTRODUCTION. TOL SEG LIRITISA

TION s2sceoatieo
os«sonncsasnarsscccs
CHAP. 2 THE INDIAN SECURITISATION MARKET................s0eccceeeeee
CHAP. 3 RBI’S GUIDELINES ON SECURITISATION OF PERFORMING
OO Ee SS fe ae eee re ee I OY al
CHAP. 4 SECURIFISATION AND IN€OME PAX .o.cccccccecsscecsevceccesscecses
CHAP. 5 NON-PERFORMING LOANS—A GLOBAL PROBLEM .........-
CHAP. 6 ASSET MANAGEMENT COMPANIES AND RESOLUTION OF
er no Dit is 0c Pevae daar scr ssc v< GRMN cakes neha cdamnntennuee
CHAP. 7 NON-PERFORMING LOANS—A SLEW OF MEASURES IN
Ji )), A ee 9 en re ek SOLS Bats eee
CHAP. 8 ASSET RECONSTRUCTION i IN INDIA: GEN-
Ree REP TIR TANG Pies dL niccducesnasenseraeemmertmeveesocecsstianecs
CHAP. 9 LAW AND PRACTICE OF ASSET RECONSTRUCTION IN IN-
DUA DERI cevecch a hevesstersveteba te. ARR. Rk

CHAP. 10 INTRODUCTION TO GLOBAL LAWS ON SECURITY INTER-

ee err errr. rear. Pot ctr rtmenatammainenreswiteverrcs$s 695
CHAP. 11 DEBT RECOVERY LAW IN INDIA: AN OVERVIEW ............. 743
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 CHAPTER 1

INTRODUCTION
TO SECURITISATION!
Just as the electronics industry was formed when the vacuum
tubes were replaced by transistors, and transistors were then re-
placed by integrated circuits, the financial services industry is
being transformed, now that securitised credit is beginning to
replace traditional lending. Like other technological transforma-
tions, this one will take place over the years, not overnight. We
estimate it will take 10 to 15 years for structured securitised
credit to displace completely the classical lending system -not a
long time, considering that the fundamentals of banking have
remained essentially unchanged since the middle Ages.
Lowell L Bryan

SYNOPSIS
1. Basic meaning of securitisation.............. a 7. Economic impact of securitisation ......... 18
1.1. Asset securitisation................... 6 7.1. Facilitates creation of markets
1.1.1 What is an asset-backed in financial claims ................+4+ 18
RCCUMIDY io hart. BI...... 7 7.2. Disperses holding of financial
1.1.2 Legal preference by a a ne ee 18
ISON AMON 3. 231tins95
5.2 pant tipses. 8 7.3. Promotes SavingS.............000+ 18
1.1.3. Capital market window....... 9 tides REAUCES/CONIB cists... BSS 19
1.1.4 Use of special purpose 7.5. Diversifies risks... 19
WEhiGles.....4c070s.:..4- 20... 9 7.6. Focuses on use of resources,
1.2. Some definitions of and not their ownership............ 19
SECURINISALION . ib: s004..1. ARE 4 10 7.7. Smoothens impact of
2. Securitisation of receivables................- 10 TOCESSION isha giieecyy nes sfiGultbee. 20
3. Quick guide to Jargon ..........::ccccesseeeeeees 11 8. The alchemy of securitisation: is the
4. Securitisation and structured finance...... 13 sum of parts more than the whole?......... 20
5. Some quick features of securitisation..... 13 8.1. The alchemy of structured
5.1. What receivables are FIANCE 6,pease oh Abs veeserebeosns 20
SELIG MEME ara 51...asssucathrteaead> 14 8.2. Structured finance..............0006+ 21
5.1.1 Creation of security............. 14 8.3. Lower costs due to higher
5.1.2 Special purpose vehicle ...... 15 PO VETARO i cdics Mhnnke this abtedeed ings 21
5.1.3. Re-distribution of risks ....... 15 8.4. Capturing scale and volume
ed MEM as hte ode osigeeie epevarseme 16 Phat (|: ee 22
6. SecuritiSation as a tool of risk manage- 9. Risks and benefits of securitisation........ 22
MEAL. M22... .28et AANA... SL IL As 2tvonthh eos 16 9.1, Abdication ofcredit.................. 23
6.1. Securitisation and _ credit 9.2. Trading on thin capital ............. 24
derivatives........ SeeeE ee 17 9,3. Increases opacity of banks........ 25
6.2. Synthetic securitisation............. 17 9.4, The case of Superior Bank....... 26

1. This Chapter is a brief, sketchy introduction to the concept of securitisation and structured finance.
The
Securitisation as a funding instrument is discussed at length in Vinod Kothari: Securitisation:
of latest edi-
Financial Instrument of Future (see www.vinodkothari.com/secbook.htm for details
tion) (accessed on Ist September 2013).
+ Sya. lt Part —Chap. 1 —Aninaduction to Seouritisation

and sub-prime 17.12. Revolving SECUFHSAHON

95. Securttisaioen ee cenvannnepnnannnenss ov
cons 27 a,
9.6. Cross-sector sk wansfers 0 17.13, Future Hows seouritisation ...... ol
31 | TR Advantages of securitisation tor the =
9.7. Monetary policy stemlised itt (
Mudus of Seourtisahon Brie CC eer
eT TT TT TT
31 18.1. Lower cost veanennnnneanenanannannya
nya 06
= Fly expla
Secunusauon af 18.2. Alternative investor base ......... 66
11. Features
Reveiy ables a3 18.4, Perteot matching of assets and
33 LADIES 0.0006 vespanvannanans ow OF
11.1. Mode of asset-based financing .
11.2. Mode of structured financing... 34 18.4. Makes the issuer -rauing
11.3. Secuntsation of claims against SEPIA VBI ......50000rrsnnverrnnnrnnnverenes 6)
third PATTIES —.ccccmerrone a4 18.5, Multiplies asset = creation
45 EERE 67
11.4. Recourse features............. ose
Asset FeMtUPES ....... cece 35 18.6, Allows higher funding .......... 67
PAS.
PE.G. Issuer feMtUPEs ........ ccc 8 18.7, Off-balance sheet financing ..... Oe
ia ff er 40 18.8, Helps in capital adequacy
11.8. Investor features... i rr | tee nny O8
12. Securitiand sati ong ..........0%
factorin 4 18.9. lmproves capital structure ........ 69
13. Securiti andsati on .............
ring fencing 4 18.10 preonade serene: A of trading on
BG, Aseit CHRIIIE onic. ccevecnsesssesenesisosbeseenses 42 equity no increased 69
1S. broad of securitisation structures ., 44 IB.AL, Lxtends credit pool ............ 09
15.1. Ca vs,sh Synthetic structures... 45 18,12, Not regulate as 4 d loan............. 69
15.2. True sale vs. Secured loan 18.13. Redu concents
creditce ration 69
CASIO cssistsccndsvcilincctinsesinnbnecie 45 18.14, Avoids interest rate risk............ 10
15.3. Pass-through vs. Collateral 18.15. by repackaping. . . 70
adhctesseratemeni 45 18.16. Arbitraging on ligu and
15.4. Discrete trust vs. Master trust... 46 CTT CCN 0... sssscsrsesersreeses 70
16. Direct Assignments or portfolio 18.17. Improves accounting profits. . . 1
UANSFETS cececccccceeesctdieeerteeeeceseseeeeeseseeeees, 46 | 19. advantages to the investors ............0 7
17. Pass-through structure... 4k 19.1. Better SCCwMY o6.....00s.s0ss0s.00e000 7)
17.1. Steps in a _ pass through 19.2 ae te eepeonunansananesiiitapite 71
eovssvssissssmnssccnccsinillag 49 19.3. Rating resi puvimniieuiings: oe
17.2. Nature of pass through 19.4. Better matching with
cntcitiapthiccsisidialibistatsce 50 investment objectives 0.00... 73
17.3. Advantages and Difficulties in 19.5. en ee 73
one sad moe oon gpeesnese 51 ae Few instance s .........
of defauit.. 73
in pass ete responsibility oo... 74
nL 52 | 20. Thrin eat s .... ‘bedeePessssssese2,
securitisation.. 74
17.5. Pay-through structure ............... 54 BDA, Comhy COMID Bis ....005s00se2s000000 14
17.6. mortgage 20.2. for lower
a ee 57 |, CR BBA ...
Deb shcssrnicr 74
17.7. Refine inmen tse.
CMO structur 59 20.3. Passes on data-base to
17.8. Planned amortisation class ....... re ee 74
17.9. Targeted amortisation class ...... 59 20.4. Leaves the entity with junk
17.10. Accrual bonds or accretion §$ = = @S8@I®i ue i 74
ae ae ee 60 20.5. IVE MVOTNBE iisii.cisissiis.. 75
17.11. Floa and inverse r
tefloaters ...... 60 204. Loosen ing
of credit standards. 75

Innovation, supported by technology, is cons changing

tant the face
ly of the
world of finance. It is today more a world of transactions than a world of rela-
tions. Most relations have been transactionalised.
Transactions mean coming together of two entities with a common purpose
whereas relations mean keeping together of these two entities. ie tales,
when a bank provides a loan of a sum of money to a user, the transaction
leads to
a relationship: that of a lender and a borrower. However, the relationship is ter-
minated when the very loan is replaced by a bond. The bond is not a relation: itis
a commodity, capable of acquisand
ition
disposal.
Financial markets inthe World today are replete with products which
lations
at one time. Insurance risk has always been a relation - ofproviiits end
 Basic meaning of Securitisation Syn. 1 5

seeking protection. Today, this relation is tradable as a commodity. Aided by

derivatives devices, more such risks and relations are placed in the capital
markets today—signalling a broader trend - the trend of commoditization, of
securitisation. .
Thus, securitisation is not just a funding device or an alternative to secured
funding: it is a new-found way of lending a tradable character to business rela-
tionships, not limited to financial relationships.
While the trend towards commoditization of financial products was changing
the face of the world of finance, excessive risk-taking in certain products, and
consequential parceling of such risk in form of securities using the device of se-
curitisation, caused major debacle, now known as the “subprime crisis”. The
subprime crisis was nothing but over-exuberant lending, which, when combined
with the high levels of leverage in securitisation transactions, led to excessive
risks to investors. When things turned for the worse in the subprime mortgage
market, it led to tumult for the resulting securities, which worsened into a major
crisis. Several people see securitisation as the culprit - in fact, securitisation did
not do anything to create the risk in the underlying mortgages; it only packaged
that risk. Of course, securitisation is associated with high levels of leverage — as
we discuss later in this Chapter.

1. BASIC MEANING OF SECURITISATION

“Securitisation” in its widest sense implies every such process that converts a
financial relation into a transaction, more specifically, into a capital market in-
strument or security.
History of evolution of finance, and corporate law, the latter being supportive
for the former, gives other instances where relations have been converted into
transactions. In fact, this was the earliest, and by far unequalled, contribution of
corporate law to the world of finance, viz., the ordinary share, which implies
piecemeal ownership of the company. Ownership of a company is a relation,
packaged as a transaction by the creation of the ordinary share. This earliest in-
stance of securitisation, viz., the ordinary share, was so instrumental in the
growth of the corporate form of doing business, and hence, industrialisation, that
someone rated it as one of the two greatest inventions of the 19th century -the
other one being the steam engine.’ That truly reflects the significance of the ordi-
nary share, and if the same idea is extended, to the very concept of securitisation:
it is as important to the world of finance as motive power is to industry. In many

Century in Italy - there is

2. The joint-stock form of ownership seems to have originated in the 12th
ion and operation of ships was funded by jointly contribut ed capital or stock.
evidence that construct
of a fixed denomina tion seems to have
However, the idea of a tradable instrument such as a share in 1602 was
the 16th century. The Joint East India Company
become popular much later - around
florins.
funded by thousands of shareholders contributing total of 6.5 million
6 Sya. | Part i—Chap. 1—Antreduction to Seouritisation

the concept of
respects, the present day concept of seourtusation sull draws upon
|
equity share.
Tradable loans in form of debentures formed another very significant iNNOVa
:
tion in the world of finance - which is also a generic instance of securitisation
Highlighting the significance of the bond as an innovation, Henry Dunning
McLeod said: “The man who first discovered that a debt is a saleable commodity
made the discovery which has most deeply affected the fortunes of human
race”,
Other instances of securitisation of relationships are commercial paper, which
securitizes a trade debt.

RP Asset securitisation
The wide meaning of securitisation explained above was in vogue before the
1980s." John Reed, the-then Chairman of Citicorp defined securitisation as “the
substitutionof more efficient public capital markets for less efficient, higher cost,
financial intermediaries in the funding of debt instruments”.”He was obviously
referring to the generic meaning of securitisation as replacing imtermediated
fundin g fundi
by direct from ng
capital marketsby issuance of securities.
However, in the sense in which the term is used in present day capital market
activity, securitisation has acquired a typical meaning of its own, which is at
times, for the sake of distinction, called asset securitisation. It is taken to mean a
device of structured financing where an entity seeks to pool together its interest
in identifiable cash flows over time, transfer the same to investors either with or
without the support of further collaterals, and thereby achieve the purpose of fi-
nancing. Though the end-result of securitisation is financing, but it is not “financ-
ing” as such, since the entity securitising its assets is not borrowing money, but
selling a stream of cash flows that was otherwise to accrue to it.
The simplest way to understand the concept of securitisation is to take an ex-
ample. Let us say, I want to own a car to run it on hire. I could take a loan with
which I could buy the car. The loan is my obligation and the car is my asset, and
both are affected by my other assets and other obligations. This is the case of
simple financing.
On the other hand, I might analytically envisage the car, my asset in the instant
case, as claim to value over a period of time, that is, ability to generate a series of
hire rentals. This claim to value represents at least four major elements:
 Basic meaning of Securitisation Syn. 1 7

(a) originating the transaction, that is, spotting a potential hiring opportu-
nity, buying a suitable car for the said purpose, etc;
(b) servicing the transaction, that is, running the car on hire and doing all
that is required by way of client servicing;
(c) funding the transaction, that is, generating sufficient returns to pay off
the investment inherent in buying the car;
(d) residual value, that is, the value that is left over after paying off the
investment.
If I were to sell off so much of the cash flow by way of hire rentals such that
the funding part in (c) above is taken care of, I am still left with the (a), (b) and
(d) fractions, and properly speaking, in most businesses, the profit of the operator
of the business lies in these elements rather than in the funding part. Hence, the
investment becomes self-liquidated by way of the cashflows, and as an operator
of the business, I still have my cream.
So, what is asset securitisation? Literally, as the word implies - it is a process
of converting something into a security, that is to say, when something that is not
a security is converted into one, it is securitisation. A “security” is a capital mar-
ket instrument. In the example we have taken above, if the cashflows on account
of hiring of the car were converted into a security, and this security were to be
offered in the capital market, we have securitized the cashflows, or securitized
the asset. Thus, securitisation is the process that transforms an asset into a secu-
rity, and the security that results is typically called an “asset-backed security”.

1.1.1. What is an asset-backed security?

The security at the end of the process of securitisation is an asset-backed secu-
rity, and this security is significantly different from a usual capital market in-
strument. A usual capital market instrument is an exposure in the business of the
issuer. An asset-backed security is simply an exposure in an asset, or, as the case
may be, a bunch of assets. Going back once again on the example we took above,
the investor who acquires the cashflows generated by the hiring of the car, rein-
carnated as a security, is not concerned with the generic risks of the business of
the operator. The investor is exposed to the risks of the asset in question, but not
the risks of the operator's business. Therefore, an asset-backed security is not a
claim on an entity but an asset.
Two important points come up here. At the end of day, any claim on an asset is
a claim on an entity as no asset is a value by itself. For instance, if the security in
the example is not a claim on the car operator's business, it is a claim on the car
hirer's business, and therefore, ends up into a claim on an entity. This point is
answered by the “portfolio” nature of the asset - that is, if the hire rentals in the
example above represent hire rentals from a portfolio of hirers, the investor in the
security has a claim on a diversified portfolio of hirers, he is obviously better
than the one who has a claim on the operator.
The second issue is an offshoot of the answer to the first one. If we say that the
asset-backed investor is better off since he has a claim on a diversified portfolio
5 sya. | Part 1—Chap. 1—datreduction te Seourtisaiion

Corporate
of hirers, then we are aot very far from a Waditonal investor, say, in &
to cover the
bond. Only if the “diversified portfolio of hirers” was extended
whole of the assets of the operator, there is no difference between the two inves:
tors. The one who invests in a waditional bond issued by the operator is also, i
essence, backed by the whole of the assets of operator, If and to the extent these
assets do not pay, both the investors would suffer losses, and almost likewise,
This discussion leads to an important feature of an asset-backed security:
Whether asset-backed or entity-backed, there is no value-added merely by secu-
ritising assets. The only source of value-addition is by a sort of an inter-creditor
arrangement whereby an asset-backed investor is put to two advantages: legal
preference, and structural preference.
Legal preference refers to the preference that an asset-backed investor enjoys
over a traditional investor as a claimant on the assets of the operator, A tradi-
tional investor essentially has a claim against the operator, If the operator were to
run into financial problems, the investor's claim is subject to bankruptcy admini-
stration, which, in most countries is a time consuming process, and might be le-
gally preceded by other statutory claims. An asset-ba operatorcked
has a claim
over the assets of the operator, as those assets have been hived off and made legal
property of the investors. Therefore, these assets subserve the claims of the inves-
tors before they can be claimed by anyone else. Creating this legal preference is
the key to securitisation.
Structural preference refers to the qualitative attributes of the assets transferred
to the investors in asset-backed securities. Though theoretically, these assets are
not “cherry-picked”, the assets obviously answer to some qualitative standards,
and therefore, the claims of the asset-backed investors are on assets that are either
historically seen to be good assets, or prospectively believed to be good assets. In
other words, securitisation creates a structural preference for the investors in as-
set-backed securities by sort-of de-constructing a corporation and making its spe-
cific assets exclusively available to asset-backed investors.
We used a word inter-creditor arrangement above as the genesis of the two
preferences noted in the preceding paragraphs. That an asset-backed investor en-
seende Catadeummnsanadl Gapvanee cabana
mutual arrangement among the various “creditors” (including, for this purpose,
the asset-backed investor) of an entity. A preference is understandably an advan-
tage that one has over the other, and looked at the other way round, it is only
gained by the acceptance of a deference by the other creditors. That is to say, the
advantage that asset-backed investors gain isatthecost ofthe other creditors
Does this mean that the sum of the parts is no different from the whole? This is-
sue has been discussed later in this Chapter.

1.1.2 Legal preference

by isolation
_ As discussed earlier, legal preference ofthe asset-backed investor over
tional
for securitisation
key
investor isto totheveryeconomics ofsecuritisation, Much ofthemoed
exist would disappear if it were possible to allow a certain
section ofinvestors a bankruptcy-proofing certaineby
device wher assets otall
 Basic meaning of Securitisation Syn. 1 9

assets of a corporation would first be used to pay them off °. Thus, securitisation
. Strives at arbitraging the law by ensuring that at least some specific assets stay
free from any other claim and used to pay off only the asset-backed investors.
The device used for creating this legal preference is simple: transfer of assets.
The operator in the example we took above transfers a stream of hiring receiv-
ables to the investors. This transfer should be a legally recognised transfer, such
that the receivables now become the legal property of the investors. Being the
property of the investors, obviously, the receivables are not affected by any bank-
ruptcy of the operator, or claims of the general creditors of the operator.
In securitisation parlance, this legal transfer is often referred to as “isolation”.
Isolation is actually nothing but a perfected, irreversible legal transfer. That the
receivables are isolated from the operator means the receivables are beyond the
legal powers of either the operator, or the operator's liquidator or creditors, or for
that matter, anyone who has a claim against the operator.

1.1.3. Capital market window

Securitisation has the law in its head, and the capital market in its heart. The
very idea of converting an asset into a capital market security is to raise money
from the capital markets. A preliminary question that comes here is: why create
assets into securities? If the only idea was to sell an asset to an investor, it could
well be done by discounting the receivables with a bank or some such investor.
Securitisation, as the very name implies, has a capital market window. The idea
is to create a security and take the asset out into the market. In other words, the
idea is to move the funding from the banking world to the investment banking
world. This is simply explained by the growing preponderance of the capital
markets - which is an obvious product of the institutionalisation of finance, dis-
cussed in more details later.

1.1.4 Use of special purpose vehicles

The twin objectives of transfer of assets to investors, and at the same time, cre-
ating a capital market instrument, can only be attained by use of a transformation
device known as special purpose vehicle. The special purpose vehicle is a legal
outfit, specially and solely created for the purpose of holding the assets sought to
be transferred by the originator, and the issuance of securities by the special pur-
pose vehicle, such that the securities of the vehicle are no different from a claim
over those assets. Thus, investors do not have to acquire or hold the assets of the
originator directly, but they do so indirectly through the vehicle. The vehicle, as
an intermediary between the originator and the investors, sits with the assets as
some sort of a legalised facade for the multifarious and nebulous body, that 1s,
the investors.

“cover assets”, and such

6. European-style covered bon ds, where the bonds have the security of certain of the law giving
claim of the investors is una ffected by the bankruptc y of the issuer, is an example
bonds provide an € ffective alternativ e to securitisa tion. See, for de-
such preference. Hence, covered
d on 2 9" August 2013).
tails of covered bonds, http://vinodkothari.com/covered_bonds.htm (accesse
LO Sya. 2 Part |—Chap. 1—Intraduction te Seouritisation

1.2. Some defini of ti tion

itisas
securon
e The pooling together of assets, mostly consisting of cashflows, and
their isolation from the originator thereof, so that _-*— —
parked into a distinct, special purpose entity and pay aims oO
investors on securities on self-liquidating basis, using structure d finance
principles to carve out securities suited to investor needs, credit.
enhanced to their satisfaction
e the process by which (relatively) homogeneous, but illiquid, assets are
pooled and repackaged, with security interests representing claims to
the incoming cash flows and other economic benefits generated by the
loan pool sold as securities to third-party investors, Such asset-backed
securities (ABSs) may take the form of a single class offering, im which
all investors receive a pro rata interest in the incoming revenues from
the asset pool, or a multiclass offering, whereby two or more classesor
tranches ave granted different (and, in some cases, uncertain) claims,
each with its own pay-out and risk characteristics.”
eStandard and Poor's thus explains the concept of asset-backed seour-
ties: “Typically, investors in corporate bonds are repaid from an issuer's
general revenues. In contrast, investors in securitized bonds, also called
structured financings, are repaid from the cash flow generated by a spe-
cific pool of assets. An originator sells its assets to a trust or corporation,
which then issues securities backed by these assets. The securities are
usually obligations that have been issued by these special-purpose enti-
ties. In a traditional securitisation, investors do not usually have recourse
to the seller
of the assets, only to the assets contained within the trust.”
e The word has found its way into common man's dictionary as well. The
Concise Oxford Dictionary gives the following meaning of the word
“securitise” (or securitize): “v. Convert (an asset, specially a loan) into
marketable securities, typically for the purpose of raising cash”.

2. SECURITISATION OF RECEIVABLES

the Financial Instrument of Future. edition. p 9. quoted im Vinod Kothari: Securitisation

 Quick Guide to Jargon Syn. 3 11

of securitisation. Insurance companies are the latest of the lot to make an innova-
tive use of securitisation of risk and receivables, though the pace at which secu-
ritisation markets are growing, the word “latest” is not without the risk of being
stale soon. Before the subprime crisis caused a meltdown of securitisation mar-
kets world-over, collateralized debt obligations, being pools of corporate expo-
sure either in form of actual loans or bonds or synthetic replica of such
loans/bonds had become quite popular.
Though the generic meaning of securitisation is every such process whereby fi-
nancial claims are transformed into marketable securities, in the sense in which
we are concerned with this term here in this book, securitisation is a process by
which cashflows or claims of an entity against third parties, either existing or
future, are identified, consolidated, separated from the originating entity, and
then transformed into “securities” to be offered to investors.
The involvement of the debtors in receivable securitisation process adds unique
dimensions to the concept, of which at least two deserve immediate mention.
One, the very legal possibility of transforming a claim on a third party as a mar-
ketable document. It is easy to understand that this dimension is unique to secu-
ritisation of receivables, since there is no legal difficulty where an entity creates a
claim on itself, but the scene is totally changed where rights on other parties are
being turned into a tradable commodity. Two, it affords to the issuer the rare abil-
ity to originate an instrument which hinges on the quality of the underlying asset.
To state it simply, as the issuer is essentially marketing claims on others, the
quality of his own commitment becomes subsidiary. Hence, it allows the issuer to
make his own credit rating insignificant or less significant, and the intrinsic qual-
ity of the asset more critical.

3. QUICK GUIDE TO JARGON

This section will help the reader to quickly get familiarised with the essential
securitisation jargon.
The entity that securitises its assets is called the originator: the name signifies
the fact that the entity was responsible for originating the claims that are to be
ultimately securitized. The originator is the one who transfers receivables to the
issuing entity, discussed below. In many cases, the transferor may not be the
originator, that is, original underwriter of the claim or the asset, but might simply
be a re-packager, that is, one who buys assets from the market for the purpose of
securitising them.
There is no distinctive name for the investors who invest their money in the in-
strument: therefore, they might simply be called investors.
The claims that the originator securitises could either be existing claims, or
existing assets (in form of claims), or expected claims over time. In other
words, the securitised assets could be either existing receivables, or receivables
s called
to arise in future. The latter, for the sake of distinction, is sometime
12 Sya. 3 Part 1—Chap. 1—tntreduction to Securitisation

future flows securitisation, in which case the former is a case ofasset-backed

securitisation.
In US markets, another distinction is mostly common: between age
backed securities (MBS) and asset-backed securities (ABS), This only is to
indicate asset classes that are different: the former relates to securities based on
mortgage receivables. Elsewhere in the world, the word ABS typically includes
all kinds of receivables including mortgage-backed receivables.
Since it is important for the entire exercise to be a case of transfer of receiv:
ables by the originator, not a borrowing on the security of the receivables, thereis
a legal transfer of the receivables to a separate entity, In legal parlance, transfer
of receivables is called assignment of receivables. li is also necessary to ensure
that the transfer of receivables is respected by the legal system as a aetna trans-
fer, and not as a mere eyewash where the reality is only a mode of ing. In
other words, the transfer of receivables has to be a true sale of the receivables,
and not merely a financing against the security of the receivables.
Since securitisation involves a transfer of receivables from the originator, it
would be inconvenient, to the extent of being impossible, to transfer such receiv-
ables to the investors directly, since the receivables are as diverse as the investors
themselves. Besides, the base of investors could keep changing as the resulting
security is essentially a marketable security. Therefore, it is necessary to bring in
an intermediary that would hold the receivables for the benefit of the end inves-
tors. This entity is created solely for the purpose of the transaction: therefore, it is
called a special purpose vehicle (SPV) or a special purpose entity (SPE) that
could be a trust, or a company -hence the phrase special purpose company
(SPC). The function of the SPV in a securitisation transaction could stretch from
being a pure conduit or intermediary vehicle, to a more active role in reinvesting
or reshaping the cashflows arising from the assets transferred to it, which is
something that would depend on the end objectives of the securitisation exercise.
Therefore, the originator transfers the assets
to the SPV, which holds the assets
on behalf of the investors, and issues to the investors its own securities. There-
fore, the SPV is also calle the issuer.
d
_ There is no uniform name for the securities issued by the SPV, as such securi-
ties take different forms. These securities could either represent a direct claim of
the investors on all that the SPV collects from the receivables transferred to it: in
this case, the securities are called pass through certificates or beneficial inter-

assets held bythe SPV. Alternatively, the SPV might bere-configuring the cash-
flows byreinve sting it,soastopay totheinvestors onfixed dates, not matching
with the dates on which the transferred receivables are collected by the
this case, the securities held by the investors are called SPV. In
through certificates.

could bereferred togenerically asasset-backed obligations, andspecifically

asset-backed bonds, orasset-backed notes. Thesecurities issued by
the SPV
 Some Quick Features of Securitisation Syn. 5 13

could also be named based on their risk or other features, such as senior notes or
junior notes, floating rate notes, etc. Yet another way of referring to asset-
backed securities is based on the term of the paper concerned - if the paper is
short term of commercial paper, it is referred to as asset backed commercial
paper, otherwise referred to as term paper.
Another word commonly used in securitisation exercises is bankruptcy re-
mote transfer. What it means is that the transfer of the assets by the originator to
the SPV is such that even if the originator were to go bankrupt, or get into other
financial difficulties, the rights of the investors on the assets held by the SPV is
not affected. In other words, the investors would continue to have a paramount
interest in the assets irrespective of the difficulties, distress or bankruptcy of the
originator. Bankruptcy remoteness could also be related to the issuer, that is, the
special purpose vehicle (bankruptcy remote entity) - which is ideally so struc-
tured that it cannot go bankrupt. Technically, it is never possible to guarantee that
the SPV will not go bankrupt, but the structural protection against bankruptcy
relies on a basic tenet of life that we quite often forget - all worries are associated
with wealth. If the SPV is so structured that it can have neither wealth, nor li-
abilities, it obviously can have no worries, including worries as to bankruptcy.

4. SECURITISATION AND STRUCTURED FINANCE

Securitisation is a “structured financial instrument’. “Structured finance” has
become a buzzword in today's financial markets. What it means is a financial
instrument structured or tailored to the needs of the issuer as opposed to a ge-
neric, on-tap product. From investors’ perspective, it also means an instrument
that is structured to meet the risk-return and maturity needs of the investor, rather
than a simple claim against an entity or asset. In present-day capital market jar-
gon, the word “structured finance” is almost used as an alternative to securitisa-
tion and other asset-backed products.
Does that mean any tailored financial product is a structured financial product?
In a broad sense, yes. But the popular use of the term structured finance in to-
day's financial world is to refer to such financing instruments where the financier
does not look at the entity as a risk: but tries to align the financing to specific
cash accruals of the borrower.
On the investors’ side, securitisation seeks to structure an investment option to
suit the needs of investors. It classifies the receivables/cash flows not only into
different maturities but also into senior, mezzanine and junior notes. Therefore, it
also aligns the returns to the risk requirements of the investor.
In practice, the word “structured finance” is used in a sense broader that mere
securitisation, including structured credit trading products too.

5. SOME QUICK FEATURES OF SECURITISATION

Before barging into a full scale discussion on securitisation, it would make
sation.
sense to familiarise ourselves with some broad features of securiti
i4 Sya. 5 Part —Chap. 1—Intraduction to Securuisation

5.1. What receivables are securitisable

what re
Numb er
of prese nt-day secuntsations seem to be breaking all rules as
ceivables are seen securitisation, the traditional seounitisable peceivables
possess the following features:
y must be having «
e Substantial investment in receivables; The entit h
substantial part of its assets in form of receivables. Entities for itwhic
eco.
vables are just a fraction of working capital may not find
recei
econo:
nomical to look at securitisation option primarily due to sealar
ugh
mies. Such entities usually participate in securitisation market thro
recei vable s of
conduit activity, that is, one conduit manager buying
several originators, pooling them, and then securitising the same.
© Receivables in future for value already provided: The generic form
of receivables securitised is receivables already created, that is, existing
right to receive over time, for something already done by the originator.
This is to ensure that the receivable ares inde of the perform-
ance or existence of the originator. This is different from a future flow
that securitises receivables yet to be generated. Future flows are also
securitised but the essentials in future flow securitisation are very dif-
ferent from an existing receivable securitisation.
e Reasonable predictability: To be securitisable, the receivables must
have a reasonable predictability. Normally, the receivables in question
are backed by a prefixed payment schedule, for example, repayment of
housing loans or other loans. There are cashflows, which are not based
on a payment schedule, but which can be modelled based on experience
- for example, rentals from real estate. Absolutely unpredictable receiv-
ables will be difficult to securitise, as it is difficult to envisage a secu-
rity backed by such cashflows.
e Diversification: This is not a necessary feature, but usually it is pre-
ferred that the receivables must be diversified, both geographically as
also in terms of the obligors. No single obligor, or few obligors having
correlation, should be able to disrupt the payment stream substantially
so as to adversely affect the investors. Receivables that are essentially
backed by a single or a few obligors are not asset-backed securities, in
the strict sense of the term. Notwithstanding this fact, there have been
several real life transactions backed by cashflows from either a single or
a few obligors.

5.1.1 Creation of security

A significant distinction between securitisation and asset sales is that the for-

tion. “Asset sales” is the broad name given to transfer of an asset, or portfolio of
assets, usually by banks and financial intermediaries toraise liquidity or manage
risks. These are mostly bilateral transactions.
 Some Quick Features of Securitisation Syn. 5 15

On the other hand, the very purpose of securitisation is to ensure marketability

.to financial claims. Hence, the instrument is structured so as to be marketable.
The concept of marketability involves two postulates: (a) the legal and systemic
possibility of marketing the instrument and (b) the existence of a market for the
instrument. Securitised products are issued as transferable securities: in certifi-
cate form or in a bond or note form. However, the existence of a secondary mar-
ket in securitised products is a case-specific phenomenon. Many securitised
products are privately placed to institutional investors who intend to hold them to
maturity.

5.1.2 Special purpose vehicle

A vehicle, whether “special purpose” or general purpose, is not required in case
of asset sales in general, but is required for securitisation transactions.
Creation of marketable securities is not possible without a conduit or vehicle
that will house the assets transferred by the originator and create securities based
on such assets. Therefore, a vehicle is required to serve as an intermediary be-
tween the originator and the investors. But for such vehicle, a transfer of assets
between the originator and the investors will be a direct bilateral transfer and any
further disposal thereof by the investors will be fraught with problems.
That is why we need a vehicle, but why a special purpose vehicle? The idea of
a special purpose vehicle is to clothe an asset/assets with the garb of incorpora-
tion, such that one who owns the securities of the vehicle really owns the assets -
no more and no less. A general purpose, or operating company, is not fit to hold
securitised assets as such company might have other assets, and other liabilities,
each of which might interfere with the exclusivity of rights over the assets that
the transaction intends to give to the investors.
If an operating company holds assets, it might incur expenses, and/or incur li-
abilities, and might go bankrupt, thereby demolishing the transaction. By its very
nature, a special purpose vehicle is a legal shell with only the specific assets
transferred by the originator, and those assets are-either beneficially held by the
investors, or collateralise the securities of the vehicle, there is nothing that is left
in the vehicle for anyone to have an interest in it. This is what makes a special
purpose vehicle bankruptcy-remote - no one takes it to bankruptcy any more than
anyone would be interested to take a pauper to bankruptcy.

5.1.3 Re-distribution of risks

If there is a transfer of assets from the originator to the SPV (and from there,
beneficially or indirectly to the investors), it should follow that there is a transfer
of risks as well. For most financial assets, there is an element of credit risk, inter-
est rate risk, or similar risks. So, the question is, how are these risks re-distributed
upon securitisation.
fash-
In most securitisation transactions, the risks are transferred ina structured
come
ion: in terms of a sequence as to who will take the first hit, and who will
affected. Based on
thereafter, and who will be the last one to be concerned or
16 Sya. 6 Part |—Chap. 1—tntreduction to Securitisation

or sub-
these priorities the risks are referred to as the first loss risk, the second
junior
sequent loss risk, and soon. The one who takes the first loss risk is a of
holder, and the one who takes subsequent risk is a senior one, There might,
than three
course, be one or more mezzanine security holders. If there are more
classes. for want of a better terminology in English, these differ ent classe s may
be referred to as A Class, B Class, C Class and so on, the first one referring to

It is quite common for the originator to retain or re-acquire the first loss risk -
that is. to the extent the total loss in the portfolio does not exceed the finst loss
limit, the hit will be taken by the originator, This is done by one of the several
methods of credit enhancements provided by the originator, The extent and na-
ture of credit enhanc nt
matter of
is aeme details which depends on the nature of
the portfolio, underlying asset, desired rating of the resultant securities and so on.
The essence of securitisation is that unlike unstructured securities, investors do
not take same or similar exposure in the portfolio,

5.1.4 Rating
The need for rating of securitised products is clearly appreciated: the investors
expose themselves solely on the quality of the assets with a limited right of look-
ing back at the originator. Therefore, it is but natural that the investors must un-
derstand the quality of the portfolio. In some jurisdictions, regulations require
asset-backed offerings to be rated.
There is, however, yet another aspect of rating in securitisation transactions - if
the securities being issued are structured, the rating of the senior security
[see meaning of senior security above] is a function of the loss protection it gets
from the junior one. That is to say, higher the loss protection granted by the sen-
ior security, the greater is the credit enhancement of the senior one. In essence,
therefore, the rating of the senior security is a function of the amount of securities
junior to it, which implies that in securitisation transactions, the rating of the
senior securities is itself a derivative. In other words, you do not have to arrive
snudanh. i¢- 0)at & see
accordingly.

6. SECURITISATION AS A TOOL OF RISK MANAGE-

MENT
Securitisation is more than just a financial tool. It i important tool
tration: 2 1 sie brats bo , teond
potential diversification benefits. When assetsareremoved from a tank's belene
e
sheet", with a defined recourse orfirst loss risk, the bank limits its loss
to the amount of recourse or first loss protection provided by it. Credit risk
and

19. TAS
Accounting
rules foroff-balance sheet
39have made iverydifficelt toachieve off.talates denSain
em
 Securitisation as a Tool of Risk Management Syn. 6 17

interest-rate risk are the key uncertainties that concern domestic lenders. By pass-
ing on these risks to investors, or to third parties when credit enhancements are
involved, financial firms are better able to manage their risk exposures.
In today's banking, securitisation is increasingly being resorted to by banks,
along with other innovations such as credit derivatives to manage credit risks.

6.1. Securitisation and credit derivatives

Credit derivatives were developed along the lines of other OTC derivatives, but
have found an excellent companion in securitisation. A credit derivative is a non-
fund based contract when one person agrees to undertake, for a fee, the risk in-
herent in a credit without actually taking over the credit. The risk could be either
the risk of specified credit events such as bankruptcy, failure to pay, etc., or could
be the risk of any deviation in the total return from a credit asset.
The party that provides protection against such risk is called the protection
seller and the party that buys such protection, normally but not necessarily the
originator of the credit asset, is called the protection buyer.
The concept of credit derivatives is discussed at length in Vinod Kothari's book
Credit Derivatives and Structured Credit Trading.''
In a sense, credit derivatives seem to contradict securitisation. Securitisation
results into transfer of assets of the originator, while the risk is largely retained
by one or more credit enhancements of the originator. Credit derivatives, on the
other hand, do not result into transfer of assets but transfer risk. Therefore, the
two operate apparently in opposite directions.

6.2. Synthetic securitisation

However, in reality, the marketplace has seen interesting, and rapidly increas-
ing, application of securitisation combined with credit derivatives, in synthetic
securitisation.
Synthetic securitisation can be explained in various ways - as synthesis of secu-
ritisation and credit derivatives, or securitisation of credit derivatives, or embed-
ding credit derivatives in securities. All of these descriptions are correct, but what
goes to root of the term “synthetic security” is idea of synthetically creating an
asset by a credit derivative transaction. If soul of an asset is really a bundle of
risks and rewards (leave aside the body of an asset, viz., the funding), a protection
seller in a credit derivative transaction exposes himself to the credit risks of a
credit asset, and logically enjoys the credit spread inherent in the asset. There-
fore, though the protection seller does not buy the asset as such, but he syntheti-
cally creates or buys the asset that is actually held by the protection buyer. As
opposed to a traditional or cash securitisation which is achieved by transfer of
the assets of the originator, a synthetic securitisation is accomplished by a syn-
thetic transfer of such assets, and hence the term synthetic securitisation.

August, 2013).
11. See for details at http://credit-deriv.com/crebook.htm (accessed on 29th
 on
18 Sya. 7 Part 1}—Chap. 1—Intreduction to Securitivati

sectors, growing faster than

Synthetic securitisation Is growing, and in certain
cash securitisation.

7. ECONOMIC IMPACT OF SECURITISATION

organised markets are.
Securitisation is as necessary to the economy as any
ce of securitisation, the
While this single line sums up the economic significan
tion:
following can be seen as the economic merits In securitisa

7.1. Facilitates creation of markets in financial claims

on helps to
By creating tradable securities out of financial claims, securitisati
ral deals.
create markets in claims that would, in its absence, have remained bilate
-
In the process, securitisation makes financial markets more efficient, by reduc
ing agency costs.
in
Because it makes financial assets tradable, it also reduces the liquidity risks
the financial system. Liquidity-related problems have been responsible for a
number of economic crises: the Japanese crisis and the South Bast Asian crisis of
1997 and liquidity problems with several UK banks after the sub-prime crisis of
2007-08. Securitisation can help financial intermediaries better manage asset 1i-
ability mismatches and therefore avert liquidity problems. Result, the need for
risk capital that is needed, among other things, for supporting liquidity also
comes down.

7.2. Disperses holding of financial assets

The basic intent of securitisation is to spread financial assets amidst as many
savers as possible. With this end in view, the security is designed in minimum
size marketable lots as necessary. Hence, it results into dispersion of financial
assets.

One should not underrate the significance of this factor just because most of the
recently developed securitisations have been lapped up by institutional investors.
Lay investors need a certain cooling-off period before they understand a financial

too complicated or too uninteresting for retail investors. However, asset manag-
ers managing funds on behalf ofretail investors have consistently been
into asset backed securities — hence, there is an indirect retail involvement in as-
set backed securitiestoo.

7.3. Promotes savings

The availability of financial claims in a marketable form, with proper assurance
as to quality in form of credit ratings, and with double safety nets in form of trus-

financial cham of
airactive con. Thishasexlariote ffeetonsoviage
 Economic Impact of Securitisation Syn. 7 19

7.4. Reduces costs

_ As discussed above, securitisation tends to eliminate fund-based intermediar-
ies, and it leads to specialisation in intermediation functions. This saves the end-
user company from intermediation costs, since the specialised-intermediary costs
are service-related, and generally lower.

P35. Diversifies risks

Financial intermediation is a case of diffusion of risk because of accumulation
by the intermediary of a portfolio of financial risks. Securitisation further diffuses
such diversified risk to a wide base of investors, with the result that the risk in-
herent in financial transactions gets very widely diffused. Former Chairman of
the Federal Reserve System, Alan Greenspan lauded the risk-modulating impact
of securitisation thus: “These instruments (securitisation, CDOs) have been used
to disperse risk to those willing, and presumably able, to bear it. Indeed, credit
decisions as a result are often made contingent on the ability to lay off significant
parts of the risk. Such dispersal of risk has contributed greatly to the ability of
banks--indeed of the financial system--to weather recent stresses. More gener-
ally, the developments of these instruments and techniques have led to greater
credit availability, to a more efficient allocation of risk and resources, and to
stronger financial markets.”'* In retrospect after the subprime crisis, securitisa-
tion, and Greenspan, were criticized by several commentators, the former for en-
hancing risks rather than containing. In fact, securitisation neither reduces risk
nor does it enhance risk. It is the same as insurance — it is a risk transfer device
and not risk elimination device. Since it creates differential packets of risks from
an undifferentiated whole, it means more risks to some, and less risks to others. It
is just that in the subprime crisis, several investors were found holding securities
that represented more risks.

7.6. Focuses on use of resources, and not their ownership

Once an entity securitises its financial claims, it ceases to be the owner of such
resources and becomes merely a trustee or custodian for the several investors
who thereafter acquire such claim. Imagine the idea of securitisation being car-
ried further, and not only financial claims but claims in physical assets being se-
curitised, in which case the entity needing the use of physical assets acquires
such use without owning the property. The property is diffused over an investor
crowd.

In this sense, securitisation carries Gandhi's idea of a capitalist being a

trustee of resources and not the owner.

EEE
by Alan Greenspan delivered before
12. “The Continued Strength of the U.S. Banking System” speech
in Phoenix , dated 7°’ October, 2002.
an American Bankers Association Conference
20 sya. 5 Pant 1 -Chap. 1—datraducton te Seounisation

7.7. Smeoothens impact of recession

in 1991. whea the US economy was passing through recession, seouriisation
was booming. A December 1991 article in the /nstitutional Investor said: “The
asset-backed-seeurities market is roaring its way through the recession with re
cord issuance and reliable performance that prove it has come of age.” In year
2001-02, the global economy passed through muluitarious problems - large bank
ruptcies, terrorism, etc. However, securitisation markets have continued to grow
through all this, and the growth has been widespread across different sectors. Ev.
idently, more money is being raised by credit card securitisation than in the past -
which means consumer spending is being propped by capital markets, More auto
loans have been securitised in 2002 than in the past - once again, auto sales have
been supported by securitisation. All this tends to ease out the impact of eco-
nomic recession. The subprime crisis, however, has been a different story — here,
securitisation itself was seen as the culprit and therefore, securitisation transac-
tions came to a dead-halt in 2007, 2008 and 2009, The US government tried to
prop the market by coming up with incentive schemes such as term asset-backed
securities liquidity fund (TALF).

8. THE ALCHEMY OF SECURITISATION: IS THE

SUM OF PARTS MORE THAN THE WHOLE?
An essential economic question often raised is: does securitisation lead to any
overall social benefit? After all, all that securitisation does is to break a company,
a set of various assets, into various subsets of classified assets, and offer them to
investors. Imagine a world without securitisation: each investor would be taking
a risk in the unclassified, composite company as a whole. So, how does it serve
any economic purpose, if the company is “de-composed” and sold to different
investors?
We have discussed earlier that securitisation essentially involves putting a séc-
tion of investors in a position of priority over others. If there is any advantage to
these investors, it is at the cost of the other investors, and therefore, the sum of
the risk-return profile of these different investors should add back to that of the
firm as a whole.

8.1. | The alchemy of structur

financ
ede
Structured finance, generi
relies
calon thely,
essential principle that ther
isean
arbitrage in risk-reward tranching, and that the sum of the parts is different from
the whole. Like the rest of our society. the investor fraternity is made of
j-
ties all around - unequal risk-return appetite, unequal preferences 10
payback pe.
riod and pattern, etc. Therefore, structuring, that is, carving out different stature
s
of priorities, patterns and preferences for different investors makes
eminent
sense.
 The Alchemy of Securitisation, etc. Syn. 8 21

8.2. Structured finance

- The principle of structured finance believes in structural arbitrage, which may
be theoretically disputed but practically has been observed quite clearly.
Prof. Steven Schwarez in his book Structured Finance’’ has argued at length
that securitisation does reduce funding costs for an organisation and therefore, is
not a zero sum game. Prof Schwarcz' arguments essentially hinge on the eco-
nomic rationale for secured lending - since any secured lending by definition puts
the secured lender in priority to the unsecured one. Besides, securitisation creates
a capital market avenue, and it is proven fact that capital market funding is more
efficient than funding by intermediaries. The role of intermediaries is important
for credit creation and capital allocation, but funding should come from where it
eventually comes - the households.

8.3. Lower costs due to higher leverage

After the bankruptcy of Enron in late 2001, securitisation came into sharp focus
and academicians on the one hand and investment bankers on the other entered
into the popular duel of whether securitisation can at all reduce lending costs.
Rating agency, Moody's on this occasion released a compendium of its views on
securitisation called Moody’s Perspective 1987 — 2002: Securitisation and its
Effect on the Credit Strength of Companies. In answer to a self-raised question,
Moody's had the following comment to make on the impact of securitisation on
funding costs:
Does securitisation provide access to low-cost funding?.—Not
really. Many in the market believe that securitisation offers “cheap
funding” because the pricing on the debt issued in a securitisation trans-
action is typically lower than pricing on the company’s unsecured bor-
rowings. However, the securitisation debt is generally backed by high-
quality assets, cash held in reserve funds, and may be over-
collateralized. This means that the relatively lower pricing comes at the
expense of providing credit enhancement to support the securitisation
debt.
While it is true that the credit enhancement by way of over-collateralization or
otherwise is an inherent cost for the securitisation transaction, it is important to
understand the nature of credit enhancement. In normal corporate funding, the
equity of the firm is the credit enhancement for the lender, as equity is the first
loss capital of the firm. The extent of such credit enhancement, that is, appropri-
ate leverage ratios for the firm, is usually extraneously fixed either by regulation
or by lending practices. For example, straight-jacket debt/equity norms of a tradi-
tional lender, or the capital adequacy norms of financial regulators, limit the lev-
erage. Thereby, firms are forced to require higher credit enhancements in the
form of equity than is really warranted. In case of securitisation, the required

edition, 2002, Appen-

13. Structured Finance- A Guide to the Principles of Asset Securitization, Third
dix A- International Perfection.
22 Sya. 9 Part | —-Chap. 1—tnireduction to Securitisation

ohe, and there

credit enhancement is related to the expected losses in the porti
fore, is directly connected with the risks of the portiolio.
if we believe that equity is a costlier funding source than external funding, the
tory capital
higher leverage requirements imposed by traditional lending or regula
the firm. Seou
requirements impose higher weighted average funding costs on
a lower
ritisation allows the firm to leverage itself more, and therefore, attain
, How.
funding cost, or so to say, attain correspondingly higher returns on equity
to
ever, it is necessary to understand that such higher returns do not arise due
more efficient operations but due to higher leverage.

8.4. Capturing scale and volume efficiencies

In a capital structure framework, higher returns on equity by taking higher lev-
erage, and therefore, higher risk, is really no efficiency, Therefore, we are seem.
ingly going back where we started - a zero sum game, However, there 1s a poten-
tial for more efficient operations too - larger scale of operations, which can be
particularly significant in retail lending. It is a fact that entities that have been
active in securitisation have grown fast and attained a size at which they have
economies of scale and scope.

9, RISKS AND BENEFITS OF SECURITISATION

The Bank for international Settlements in a 1992 publication titled Asser
Transfers and Securitisation had the following to say on the risks and benefits of
securitisation:
The possible effects of securitisationon financial systems may well
differ between countries because of differences in the structure of fi-
nancial systems or because of differences in the way in which monetary
policy is executed. In addition, the effects will vary depending upon the
stage of development of securitisation in a particular country. The net
effect may be potentially beneficial or harmful, but a number of con-

While asset transfers and securitisation can improve the efficiency of

the financial system and increase credit availability by offering borrow-
ers direct access to end-investors, the process may on the other hand
lead to some diminution in the importance of banks in the financial in-
termediation process. In the sense that securitisation could reduce the
 Risks and Benefits of Securitisation Syn. 9 23

relationship between lenders and borrowers, particularly in countries

where banks are predominant in the economy.
One of the benefits of securitisation, namely the transformation of
illiquid loans into liquid securities, may lead to an increase in the vola-
tility of asset values, although credit enhancements could lessen this ef-
fect. Moreover, the volatility could be enhanced by events extraneous to
variations in the credit standing of the borrower. A preponderance of
assets with readily ascertainable market values could even, in certain
circumstances, promote a liquidation as opposed to going-concern con-
cept for valuing banks.
Moreover, the securitisation process might lead to some pressure on
the profitability of banks if non-bank financial institutions exempt from
capital requirements were to gain a competitive advantage in invest-
ment in securitized assets.
Although securitisation can have the advantage of enabling lending
to take place beyond the constraints of the capital base of the banking
system, the process could lead to a decline in the total capital employed
in the banking system, thereby increasing the financial fragility of the
financial system as a whole, both nationally and internationally. With a
substantial capital base, credit losses can be absorbed by the banking
system. But the smaller that capital base is, the more the losses must be
shared by others. This concern applies, not necessarily in all countries,
but especially in those countries where banks have traditionally been
the dominant financial intermediaries.
The above highlights the risks inherent in securitisation. BIS has expressed
concerns about a relatively smaller capital base of the banking system supporting
a much larger asset size. From a macro-economic perspective, this is not the only
concern - several other concerns have been engaging the attention of banking
regulators and academicians world-over.

9.1. Abdication of credit

One of the oft-repeated concerns is that securitisation has motivated banks and
non-banks to create bad credits. The rationale is simple - securitisation motivates
banks to create loans that they would hate to hold on their balance sheet. Given
their ability to push junk assets into the capital market with a given amount of
credit enhancement (large part of which is nothing but the banks’ profit in creat-
ing this credit, called excess spread), banks have generally been alleged to have
abdicated their prime responsibility - credit.
That banks are eager to securitise their relatively riskier assets is easily estab-
lished by the extent of sub-prime lending being securitised - manufactured hous-
ing, subprime loans, subprime credit card receivables and auto loan receivables,
home equity loans, etc.
and
Yet another fact proves this point - the case of Superior Bank that failed
was closed in July 2001, see below:
 hon
Part }-—Chap. 1--datroduction te Securuiya
24 sya. 9
The
ine ss Wee k onl ine arti cle (iss uc dated 7th Ovtober, 2002) tilled
A Bus
is a USD 7 willion business today —
Breakdown in Banking says “securitisation tgage
e past of whi ch is the loan s, cred it card debt, subprime debt and mor
larg
ted into securities and sold offinto the
loans written by hanks which are conver is that banks do not absorb the risks
s
capital market, The spin-off of this proces
of the article say: “By selling off their
of the credits they create. The authors
ban ks wer e abl e to len d to yet mor e borrowers because they could reuse
loans,
nt that they made lending decisions
their capital over and over. But it also mea
n ontheir own credit judgments. The
based on what the market wanted rather tha
g system less of a buffer and more
wholesale offloading of risk made the bankin
ms of the market.”
of a highly streamlined transmitter of the whi
e leverage on a whole, there is
Besides re-use of capital thus creating excessiv
of credit without enough jal
an inevitable question of moral hazard - creation
scrutiny borrowers less carelully
stake. This leads to “a temptation for banks to
abdicated credit judgement,
than when their own money was at stake. “The banks
it judgement,” says Mar-
and the people to whom they sold the paper had no cred
at rthe Brookings Institution and author of The Bankers.
tin Mayer, a guest schola
standards by banks was
In the subprime debacle, the loosening of underwriting
one of the focal points of criticism of securitisation.

9.2.‘ in
on thin
Trad g al
capit
ability tolev-
We have noted earlier that securitisation creates for the banks an
. This leads to
erage their existing capital and resources for creating more assets
excessive leverage. Excessive leverage can be compared with a multi-storied civ-
usly
icstructure. If you intend to construct a 90-storey Petronas Tower, you obvio
sooche trendGing,tsSA Gh, Te OR Ae eee

The issue of off-balance sheet assets of leading banks came into sharp focus af-
ter the Enron debacle which was mainly related to off-balance sheet risks. During
these discussions, Standard and Poor's published data about off-balance sheet
assets of 30 top securitisers in the USA. There were some banks whose off-
ee ee
retained risks in these transactions mi
capital of the banks: pie dinneahigh sro
 33,041 6.4
itter & Co. 30,650
29,255

23,929 4.5

k Girozentrale 17,984
17,679 5.6
17,050 5.7
of Commerce
ereinsbank AG 14,771

11,789
4 oS

°
*

6,76 N 27.9
a
ee 3/3/218|2
pga ty 13.0
5,071
pacity of banks
assets and still retain significant risks get into a serious
ets disappear from books and the risks stay. There is no
% Syn. 9 Part i—Chap. 1tntraduotion to Seouritisatiion

al inter
These retained risks are reflected in the valuation of retained or residu
they
ests in securitisation. Simply put, as banks retain risks post-seouritisaton,
also retain rewards, that is, the residual cash flow after paying off external inves:
tors. Since this is residual or subordinated, the risks referred to earlier should ac-
tually net off from the residual value. There have been at least three cases of bank
failures in the USA because of improper valuation of the residuals, or, pul more
bluntly, improper appreciation of the risks on securitised assets: Supenor Bank,
First National Bank of Keystone, and Pacific Thrift and Loan.
Securitisation makes bank more opaque to a regulator, “Major banks have in-
creased their opacity to regulators and the securities markets by () increasing
their lending exposures to below-investment-grade companies and subprime con-
sumers, (ii) sécuritising their assets, and (iii) expanding their dealing and trading
activities in securities and OTC derivatives.””"*
9.4. The case of Superior
Bank
The case of Superior Bank easily highlight s inherent in securitisation,
the risks
The bank was virtually romancing with subprime lending behind the securitisa-
tion facade. In 1993, it began to originate and securitise subprime home mort-
gages in large volumes and later, finding that there were investors who would
buy what a banker itself would hate to keep on balance sheet, it expanded its ac-
tivities to include subprime automobile loans as well. As would be usual, the
bank was supporting its securitisation business with residual interests and over-
collateralization. Superior’s residual interest approximately 100 per-
cent of Tier | capit al By 30" June, 2000, residual interest rep-
on 30" June,,1995.
resented 348 percent of tier 1 capital, which, put simply, would mean that the risk
on the asset side was 3 1/2 times the risk on the liability side. After all, as we
have discussed earlier in this Chapter, the first loss risk retained by the originator
in a securitisation transaction is comparab le in a corporation. If Tier |
to equity
capital is the first loss support to the bank, the equity holders in Superior Bank
agreed to absorb first loss risk of $1, and correspondingly, the bank went out in
the market to bear first loss risk to the extent of $ 3.48. To a layman, it would
mean, I have $ | in my pocket and go to the casino and put a bet of $ 3.48, how-
ever, the regulators did not see this for quite some time.
Not only did the bank's financials hide this risk, it on the contrary, continued to
book profits on sale of subprime loans that is both allowed and required under
US accounting standards. “Superior’s practice of targeting subprime borrowers
increaseits
d risk. By targeting borrow
with low credit
ers quality, Superior was
The high interest rates reflected, atleast inpart, the relatively high credit risk

the high interest rates relative tothe interest rates paid on the resulting securities,
together with the high valuation of the retained interest, enabled Superior tore-
cord gains onthe securitisation transactions that drove its apparently high earn-

14 ene Syovemie Risk inan Era of Financial Consolidation, tuly 2002 paper by Prot.
ArthurE.
 Risks and Benefits of Securitisation Syn. 9 27

ings and high capital. A significant amount of Superior’s revenue was from the
sale of loans in these transactions, yet more cash was going out rather than com-
- ing in from these activities.”
The bubble burst when regulators required the bank to revalue its residual in-
terests when the bank became undercapitalised and was ordered to be closed.

SS. Securitisation and sub-prime crisis

The role of securitisation in the sub-prime crisis has been very widely, and
sometimes, very vehemently talked about. There were sharp comments in the
financial press all over, and since the crisis caused lots of mortgages to default,
and lots of individuals to lose homes, the comments came from hundreds of thou-
sands who alleged that they were sold mortgage loans without being told about
the lethal consequences of the default.
The Financial Crisis Enquiry Report of the National Commission on the
Causes of the Financial and Economic Crisis in the United States, in its Final Re-
port of January 2011, had the following to say’®:
“Despite the expressed view of many on Wall Street and in Washing-
ton that the crisis could not have been foreseen or avoided, there were
warning signs. The tragedy was that they were ignored or discounted.
There was an explosion in risky subprime lending and securitisation, an
unsustainable rise in housing prices, widespread reports of egregious
and predatory lending practices, dramatic increases in household mort-
gage debt, and exponential growth in financial firms’ trading activities,
unregulated derivatives, and short-term “repo” lending markets, among
many other red flags. Yet there was pervasive permissiveness; little
meaningful action was taken to quell the threats in a timely manner.”
The crisis started with the fall of the subprime lenders in the USA. Among the
early casualties was New Century, once the second largest of subprime lenders.
Soon after the collapse of New Century, this author had commented: “Even as
New Century, one of the one-time leading lenders in the subprime mortgage
market filed for bankruptcy protection, the key question in everyone's mind was -
Was that the worst? While S&P ran a comparison between subprime deals of
2000 and 2006 vintage, and estimated expected losses of about 7.5%, the worry
is whether with the lowering house prices, the defaults will increase beyond that
level?!”

Soon, the crisis started spreading all over. This author wrote on 1“ August
2007:

15. Analysis of the Failure of Superior Bank: Statement of Thomas J. McCool, Managing Director,
and Ur-
Financial Markets and Community Investment before the Committee on Banking, Housing,
ban Affairs, U.S. Senate, 7‘ February, 2002. 2
on 2nd Sep-
16. http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC. pdf, at page xvii (accessed
;
tember, 2013).
http:// www. vinodk othari .com/s ecnews _405.h tm#new cen (access ed on 2 : September, 2013).
17,
28 Sya. 9 Part 1—Chap. 1—Introduction to Securitisation

“The inevitable crisis in the subprime mortgage securitizsation seg-

ment is now spreading like wild fire. And it is difficult to say if the fire
is more or the smoke, as crisis alarms have gone off everywhere.
Geographicall the crisis has already affected some European banks,
some Tecueied ale funds have also suspended redemptions, though
they claim to be unaffected by the subprime crisis, Some more US
hedge funds closed redemptions.
A third Bear Stearns hedge fund, Asset-backed Securities Fund, was
by Wall Street Jour in trouble,, has stopped redemp-
to benal
tions. C-BASS, a mortgage investor, seems to have heavily lost money,
and consequentially, MGIC and Radian have suffered losses of impair-
ment. There are other subprime lenders who have suffe red
huge casual-
ties, as reports indicated that subprime mortgage losses were not stop-
ping. Mortgage insurers might have substantial liabilities.
Australian bank Macquarie's Fortress Funds might lose value upto
25%, though it is not reportedly connected with subprime losses,
German bank IKB was also reported to have suffered huge losses out
of US mortgage market - its rating has already been downgraded by
Fitch. In Paris too, Oddo and Cie, a fund manager, is reportedly shut-
ting down two of its funds.
In the midst of the heightening worries in the subprime market,
trades in credit derivatives on subprime securitisations found that the
subordinated tranche of the ABX.HE index still meant some value -
BBB- tranche of ABX.HE's 2007-2 run went up in value from its low-
est point of 39.97 on 27th July to 41.22 on 31st. However, the senior-
most tranche still lies at 94.5, its lowest since inception.
Updated
2” August, 2007: The impact of the US securitisation
crisis
is widening. Equity markets world-over reacted sharply with most indi-
ces taking a beating. Losses in market cap add up to billions of dollars.
In the meantime, Bear Stearns hedge funds filed for bankruptcy, and in-
vestors have joined together to file litigation. Reports keep pouring
a ee TLIO PRED SE, OE Sn eavan Anee ene
et.
Notably, the Macquarie Bank's fund reported to have lost nearly
1/4th ofitscapital
isaisation
retail mutual fund.
Most other hedge funds have got margin calls from their banks,
bringing liquidity to an all time low.”"*
Soon thereafter, on 29th August, 2007, this author wrote:
“Suddenly, allseems tobe going wrong. The institutions ofstruc-
tured finance that we nurtured over all these years, on which Wall
Street investment bankers bagged fat bonuses every year, all seem to be

18. http://www. vinodkothari.com/secnews_4(7 htmiflot_smoke (acces

sed on 2nd Septerriber, 2013).
Risks and Benefits of Securitisation Syn. 9 29

looking suspicious. In India, they say - having burnt your lips with hot
milk, you would even blow into buttermilk before taking a sip.
The supply in the Asset Backed Commercial Paper (ABCP) market
is seemingly badly affected. ABCP conduits issue short term paper and
were originally created to acquire trade receivables of their clients, but
over the years, they have grown into mini off-balance sheet banks and
acquire variety of credit assets including RMBS, CMBS, CDOs, trade
paper, etc. The size of the ABCP market is nearly USD 1.2 trillion.
While most of the paper that ABCP conduits buy has already been
credit-enhanced to AAA levels, the issue of commercial paper is done
expecting a roll-over funding. The sponsoring banks provide a stand-by
liquidity support. As the investors have broadly retreated, liquidity lines
of the conduits have been drawn up in some cases, and this has created
another source of jitters in the market. Rating agency Fitch held a con-
ference call last week highlighting the liquidity concerns, and resulting
capital consequences and market-to-market pressures.
Increasing consumer bankruptcy fears have also put questions on
credit card ABS, one of the very safe collateral classes. According to
Moody's Investors service, the bankruptcy filings this year are 30%
higher than a comparable number last year.
Liquidity has dried up for student loan ABS also. Even as diverse an
asset class as aircraft leases has been affected.
Needless to say, CDO issuance is almost completelly dried up. The
volumes for August 2007 reported on abalert.com add up to $ 7.8 bil-
lion whereas usual issuance in this month would have been nearly 5
times. The total US ABS issuance for August shows as a mere $ 4.5 bil-
lion, as opposed to $ 70 billion in the same month last year.”
Thereafter, soon, the crisis spread in all economic spheres, and thereafter,
gripped the entire world. The Financial Crisis Enquiry Report of the National
Commission on the Causes of the Financial and Economic Crisis in the United
States wrote:
“By the end of 2007, most of the subprime lenders had failed or been
acquired, including New Century Financial, Ameriquest, and American
Home Mortgage. In January 2008, Bank of America announced it
would acquire the ailing lender Countrywide. It soon became clear that
risk—rather than being diversified across the financial system, as had
been thought—was concentrated at the largest financial firms. Bear
Stearns, laden with risky mortgage assets and dependent on fickle
short-term lending, was bought by JP Morgan with government assis-
tance in the spring.
Before the summer was over, Fannie Mae and Freddie Mac would be
put into conservatorship. Then, in September, Lehman Brothers failed
and the remaining investment banks, Merrill Lynch, Goldman Sachs,
and Morgan Stanley, struggled as they lost the market’s confidence.
 ritisation
Sya. 9 Part 1—Chap. 1—Intreduction to Secu
Ww
portfolio and exposure to the
AIG. with its massive credit default swap
by the government, Finally,
subprime mortgage market, was rescued
h had their Own exposures to
many commercial banks and thrifts, whic
sures to short-term credit
declining mortgage assets and their own expo
ed over the summer, In Sep:
markets. teetered. IndyMac had already fail
bank failure in US his:
tember, Washington Mutual became the jargest ired by Wells Fargo.
acqu
tory. In October, Wachovia struck a deal to be
afloat, Before i was
Citigroup and Bank of America fought to stay
ars through more than
over, taxpayers had committed trillions of doll
financial system and
two dozen extraordinary programs to stabilize the
ions.
to prop up the nation’s largest financial institut

tating. And the

The economic impact of the crisis has been devas
unemployment
human devastation is continuing, The officially reported
remploy-
rate hovered at almost 10% in November 2010, but the unde
ing for work
ment rate, which includes those who have given up look
was
and part-time workers who would prefer to be working full-time,
out
above 17%. And the share of unemployed workers who have been
of work formore than six months was just abov40%. e

The loans were as lethal as many had predicted, and it has been esti-
mated that ultimately as many as 13 million households in the United
States may lose their homes to foreclosure. As of 2010, foreclosure
rates were highest in Florida and Nevada; in Florida, nearly 14% of
loans were in foreclos Nevada was not very far behind. Nearly
and ure,
one-quarter of American mortgage ers owed more on their mort-
gages than their home was worth. In Nevada, the percentage was nearly
70%. Households have lost $ 11 trillion in wealth since 2006”
The last point in the report above — an estimated $ 11 trillion of loss — shows
the sheer pain of the subprime crisis.
There is little doubt that securitisation permitted creation of high levels of lev-
erage, and at the same time, enabled the exuberant origination of subprime mort-
gages that would not have been possible otherwise. This is, however, overuse of
a tempting instrument, which is so very natural, particularly if regulators are lax.

9.6. sec
Cross-risk tor
transf ers
It is being debated, though there is no evidence to show it, that the dispersal

poses threats to the stability of the system as a shock in the banking sector may
quickly spread to completely unrelated sectors. Iti an established fact that due to
transferred to insurance companies, investment companies, venture capital funds

19. Op. ca. p23.

 Modus Operandi of Securitisation briefly explained Syn. 10 31

and the like who buy these securities. On the one hand, Alan Greenspan thinks
this has made the system more resilient by spreading of risks, on the other, there
“are some who are concerned about making the entire system more susceptible to
shocks due to cross-sector risk transfers.

i Monetary policy sterilised

There is a contention that securitisation reduces the efficacy of monetary policy
as banks derive more of their funding from capital markets, and likewise, as dis-
intermediation results into more direct funding by capital markets rather than
through banks. If monetary policy is concerned with changing the market condi-
tions for banks with a certain objective, securitisation provides to the banks an
added flexibility of seeking a capital market access.
In sum, securitisation is an interesting financial instrument and is today an in-
delible global phenomenon. However, there is no doubt that this development has
posed new challenges for all concerned - investors, regulators, and banks. Years
ago, in an article titled On the Frontiers of Creative Finance: How Wall Street
can Securitise Anything”’ Kim Clark noted: “Investors do need to beware, of
course. Financial markets are notorious for pushing investment ideas into the ab-
surd. Some of these exotic securities will undoubtedly collapse, which will un-
doubtedly cause a backlash.”

10. MODUS OPERANDI OF SECURITISATION BRIE-

FLY EXPLAINED
Visualise an entity having a receivable as one of its major assets, say a housing
finance company or a leasing company. Suppose the company has already cre-
ated these receivables (that is, it has a contractual right to collect these receiv-
ables). This means the company’s working capital is tied in the receivables.
Securitisation will unlock this working capital, and make it free for further as-
set-creation. In this sense, securitisation is a mode of financing, or rather refi-
nancing.
The company will select the receivables to be securitised, following a certain
criteria. See below for the criteria to be adopted for such selection. While select-
ing, a set of discriminants can be used but generally it is not advisable that the
company cherry-picks assets, that is, select assets of the best quality leaving be-
hind poor quality assets with the company. For understandable reasons, cherry-
picking is frowned upon by the equity shareholders and banks” having tradi-
tional loan facilities with the company.
Such selected receivables will be transferred to a special purpose conduit,
which could be a trust or a special purpose corporation, viz., the special purpose
vehicle (SPV).

20. Fortune, 28" April, 1997. ptr:

.
21. Incertain countries, regulators also do not allow cherry-picking
32 Syn. 10 Pan |1-—-Chap J —Intreduction te Securitisation

inating company tothe SPV,

So. once thereceivables aretransferred bytheorig
the receivables,
it is the SPV that now becomes the owner of
SPV now finances itself by issuing securities, These securities can be eb
similar to bonds/debentures.
os taal interest peck elng or debtsecurities r a beneficial right
While the SPV holds the receivables, investors oom eithe
, or by buying the debt
therein by either buying the beneficial interest cert cates of
securi ofti SPV. In either case, as the SPV is merely a shell consisting
thees
ised by the asse ts
the assets ofthe originator, the rights ofinvestors are collateral
transferred by the onginator,
ties issued by
The difference between the weighted average cost of the securi
discount:
the SPV, and the yield transferred by the originator (depending on the
d, The ex-
ing rate employed for selling the receivables), is called excess sprea
cess spread isnormally captured as the residual profit ofthe originator.
The originator would usually continue to act asthe servicer, that is, itwill con-
tinue to collect the receivables, and remit the proceeds to the investors.
The transfer of the receivable the SPV, and the creation of beneficial rights
to s
therein by the SPV, involves complicated legal issues in most countries. Hence,
there might be lengthy legal documentation, and stamping involved to complete
the transfer. The legal and stamp duty issues relating to securitisation are dis-
cussed at length in Vinod Kothari's Securitisation: The Financial Instrument of
the Future.
The transfer of receivables to the investors through the SPV may be with or
without recourse, or with limited recourse to the originator.
As the servicing is mostly done by the originating company, the debtors may
often not even come to know of the fact of securitisation, unless they are notified.
The servicer continues to collect the receivables, mostly in a separate escrow ac-
count, from where the collections are drawn by the SPV. The SPV uses this col-
lection, either to pay off to the investors proportionately (as in case of pass
through securitisation), or reinvests the money to pay to the investors on stated
intervals (as in case of pay through or bond-structure securitisation). In case of
pass-throughs, since the SPV would be making a proportionate payment to inves-
tors every period, the transaction automatically comes to an end when substan-

spread or an over-collateralisation support, or simply an equity contribution

to
the SPV; therefore, the residuary cash with SPV at the end of
the originator's
residual cash inflow.

If atall any enforcement is required against the debtors, the SPV as the
owner
seen te SP
bringactionagainstthedebtors,buthereagain,the
ofthereceivables will
aie acum aiay DeWien By ieolga a5ee

22. See for details athttp://v.com/sec

inod hookkoth
htm (accesse
ari d on Ist Sepneriber, 2013).
 Features of Securitisation of Receivables Syn. 11 33

The basic process of securitisation is illustrated in the Table below:

Table 1.2: The basic process of receivables securitisation

Step 1 The originator either has or creates the underlying assets, that is, the trans-
action receivables which are to be securitised.
The originator selects the receivables to be assigned.
A special purpose entity is formed.
Step 4 The special purpose company acquires the receivables, usually at their par
value.
Step 5 The special purpose vehicle issues securities to investors - either debt type
securities or beneficial interest certificates. These are publicly offered or
privately placed, as found conducive.
The servicer for the transaction is appointed, normally the originator.
Step 7 The debtors of the originator or obligors are/ are not notified depending on
the legal requirements of the country concerned. Most likely, the originator
will try to avoid notification.
Step 8 The servicer collects the receivables, usually in an escrow mechanism, and
pays off the collection to the SPV.
Step 9 The SPV either passes the collections to the investors, or reinvests the
same to pay off to investors at stated intervals.
Step 10 In case of any default, the servicer takes action against the debtors as the
SPV's agent.
Step 11 When only a small amount of outstanding receivables are left to be col-
lected, the originator usually cleans up the transaction by buying back the
outstanding receivables.
Step 12 At the end of the transaction or periodically, depending on the transaction
structure, is allowed to be swept back to the holder of the residual interest,
usually the originator.

11. FEATURES OF SECURITISATION OF RECEIV-

ABLES

11.1. Mode of asset-based financing

As financing markets becomes more organised and investing more institution-
fi-
alised and hence, professionalized, there is a clear trend towards asset-based
nancing, rather than entity-based financing. Traditional financing is entity-based.
However, present-day finance shows a distinct inclination towards asset-based
funding.
or to user-
It is difficult to say with certainty that asset-based financing is superi
over drift towards such
based financing, but the fact remains that there is a world-
 ation
4 Sya. ll Part }—Chap. 1—Antreduction to Securmis

this move. Leasing.

financing. Latest financial innovations of the world continmare all modes of assel-
factoring, leveraged buyouts, and of course, securitisation,
based financing.
The most important feature of asset-based financing is that the credit
h of the application,
worthiness ofthe user becomes less significant, and the wort
viz., the asset more significant.
itisation transac:
Securitisation is a mode of asset-based financing, In a secur
money: he as an
tion, the originator offers to the investors an asset against their
vable is the cash-
entity does not take an obligation to pay. The investors’ recei
flows of the portfolio being transferred.
entity ris
is anr,
ato onkthe
One could ask - If not an entity risk on the originit
ult.
debtors: so how does it become a case of an asset based financing? In the
enoug h,
mate analysis, all claims are claims against an entity, as understandably
no asset can pay all by itself. However, the issue is, the risk of an obligation of
the originator failing, and that of a diversified pool of debtors, is substantially
different.

11.2. Mode of structured financing

Once financing is asset-based, it becomes possible for the originator to struc-
ture the financing based on assets or based on the needs of the investor. As the
investor is anyway looking at the asset rather than the entity, the investor's claim
is against specific asset s, risks
or specific and, so, it becomes possi for the us-
ble
er entity to offer assets that would suit the needs of the investor. The meaning of
structured finance has been discussed earlier. Though all financing can be struc-
tured, the amenability of securitisation to structured finance is much greater, ow-
ing to the isolation of the funding from the rest of the assets of the originator.

11.3. Securitisation
of claims against third parties
From a legal and investor’s point of view, the single most important difference
between securitisation of receivables and any other security issuance is that the
former seeks to market claims against third parties and not claims against the
originator. There is, as in case of every security, a claim against the issuing entity
(SPV), but since the SPV is nothing but an incorporated name for specific assets
of the originator, the claim is essentially a claim against the obligors of the origi-

This poses unique problems for the law. Though the right of receiving a certain
sum under a contract is a property, as itis a claim against third parties, there

at length im Vinod Kothari's Securitization: The Financial In-

tember, 2013). Future. ~
Fordetails, diner
see www .vimodkothari.com/secbook
htm (accessedom 2nd Sep.
Features of Securitisation of Receivables Syn. 11 35

11.4. Recourse features

~ Being a case of asset-based financing, most securitisation originators would
ideally like the investor to look at the asset only, and hence, not to have any re-
course to the issuer. That is, the investor gets a legally tenable right over the re-
ceivable, and hence, he has to recover his money only from the debtor. The role
of the originator is limited to (a) servicing the assets, and (b) providing the re-
quired degree of credit enhancements.
Unlimited or generic recourse is most often avoided in securitisation transac-
tions, as it may rob the transaction of its character as a sale and may lead to a re-
characterisation risk as a financing transaction. Of course, all securitisation trans-
actions have a risk retention with the originator.

11.5. Asset features

Over years, the concept of securitisation has been extended to a number of ap-
plications. A new innovative use of securitisation hits the market every other day.
If one thinks of which assets are capable of being securitised, the answer will be
a long one. Any asset that produces a cash flow over time is a securitisable asset.
Given this basic attribute, securitisation applications have been taken to ex-
tremely exotic and unimaginable extent. However, traditional securitisation ap-
plications represent the following essential features:
1. Asset should represent cashflows.—The asset in question should give
rise to cashflows over a period of time. Normally, the cash flows should
be steady and easy to identify. There are many assets that do not give
rise to identifiable cash flows - these would be unsuitable for securitisa-
tion as the investors have to look at identifiable series of cash flows.
~ Quality of the receivables.—Securitisation is primarily meant to create
a derivative asset (the security) out of a basic asset (the receivables).
The originator expects the derivative asset to stand on its own worth,
and hence, to make the credit rating of the originator insignificant. This
would mean the receivable being securitised should be high quality.
Generally, past payment statistics is taken as a yardstick of quality.
However, if the securitised receivable has any collateral protection,
such as guarantees, title or right over an asset, negotiable instruments,
etc. backing it, it adds up to the quality of the receivable.
The first receivable securitisation emerged in the USA based on re-
ceivables guaranteed by the US government and secured by way of
mortgage of immovable securities. Mortgages, depending upon the effi-
ciency of the legal system, could be an excellent asset to securitise.
Quality, however, is a matter to be decided based on the needs and
perceptions of the investors. At times, the investor might lay more
stress on a recourse provision rather than on inherent quality of the as-
set.
 n
36 Sya. il Part -—Chap. 1—tntraducton to Securuivatio

also understand that

Talking of the quality of the collateral, one must
sometimes tres to spin
securitisation as a device of structured finance out ofan apparently
gold from hay -that is, create highly rated tranches non
securitisation of
junk portfolio. There have been several notable
se aim atredistribut
performing loans inJapan, Italy and the USA. The
s SO as to carve out 4
ing the risks inherent in a portfolio of bad loan
rated. Securitisation
good tranche, that is senior and therefore, highly
create sufficient
transactions look atthe risk of a pool ofassets and then
to say, where
credit enhancements to mitigate against that risk, That is
ult risk 1s
the quality oftheassets is not good, meaning the inherent defa
high, higher levels of credit enhancements will be needed,
decided
3. Diversification of the portfolio.—This again is a factor to be
based on the investor's perceived needs as also the quality of each inds-
vidual component of the portfoThe lio , of diversification is to be
extent
weighed against the extent of overall leverage in the transaction, Low
degree ofcredit enhancement means high extent of leverage in @ seou-
ritisation transaction, which is mitigated by higher extent of diversifica-
tion. Also, more diversified portfolios tend to be average portfolios,
wher lessea ified portfolios may be more risky, but more reward-
diverss
ing too.
The degree of diversification of the portfolio is an important issue in
its rating. A rating agency would like to ensure that the portfolio is so
diversified that a single asset, or the contagious effect of decay in a sin-
gle asset, isnot likely to affect the health of the portfolio. No individual
asset should have a significant value relative to the size of the portfolio.
4. Size of individual receivable.—This again is correlated with diversifi-
cation. Diversification and small size or quality of the individual re-
ceivable act as mutually offsetting factors: small size and relatively
poor quality of the receivable is offset by greater diversification, and
vice versa.
5. Maturity composition of the receivables.—Generally, in pass-through
structures, meaning a structure where the receivable is passed over to
the investors as it is recovered (see later for details), the maturity com-
position of the portfolio should be sufficiently long to create a medium-
weaad out ois waa of securitised product would obviously be
dot x wi tenteateerence to the a verage e (or
Gf out maturi
( lowest) ) maturity composii.

_ However, incase ofpay-through structures, there isnodirect match-

ing between the date of realisation of the receivable and the date of it
being passed on tothe investors. That is, the receivable iscollected and
reinvested by the issuer before it is paid on the pre-fixed date to the in-

The maturity ition of the portfolio becomes ir-

relevantima
clasof
securitisation known a:
revolving assetsecur
 Features of Securitisation of Receivables i Syn. 11 37

6. Periodicity of payments.—Generally, the payment on account of the

underlying assets should be periodic, and not one time. Periodically
paying assets are more conducive to securitisation as they have a
smooth regular cash flow, and give enough money for regular servicing
of the investors.
Homogeneity of the assets.—The underlying assets should be by and
large homogenous. For example, car loans of the same or similar type -
let us say, for the same maturity, similar risk features etc. The advan-
tage in homogenous assets is that the pooling, and the analysis of the
pool will be easier, since historical data can be applied to projecting the
risks in the portfolio. For example, car loans and equipment leases will
not be fit to be pooled together as the features of the two are totally dif-
ferent.
9° No executory clauses.—The underlying contracts to be securitised
must work, even if the originator goes bankrupt. Certain clauses are
therefore difficult to include in a securitisable contract example in a
photocopier lease, the inclusion of a clause stating that the Originator
will maintain the photocopier would make that lease difficult to secu-
ritise. These sorts of contract are normally referred to as “executory
contracts”. In other words, the underlying contract should not contain
an obligation on the part of the originator or issuer. For example, in
case of securitisation of loans, the loan should not be a partly disbursed
loan.
This feature has a legal dimension to it - rights can be transferred;
obligations cannot be. If the underlying contract has an obligation on
the part of the issuer that cannot be divested from the rights of origina-
tor, the rights cannot be transferred independent of the obligation, in
which case securitisation will not work. For more on legal issues of se-
curitisation, refer to Vinod Kothari's Securitisation: The Financial In-
strument of the Future”’.
9. Capacity to assign.—Securitisation involves transfer of a right to re-
ceive - it is a transfer of a right against a third party to the assignee. It
is, therefore, required that the law of the land or the contract between
the parties should not prohibit the right to assign. Normally, right to as-
sign a receivable is an inherent property right, but there might be legal
formalities required to achieve such assignment.
10. Independence from the originator.—The on-going performance of
the assets and the making of claims against the debtors must be inde-
pendent of the existence of the Originator. This tends to be a wider re-
striction than, the example given above about executory contracts. As
far as possible, the underlying contracts should not require something to
be done by the originator or should depend upon the originator being a
running concern.

Dh am
24. For details, refer to http:// vinodkothari.com/secbook.htm (accessed on 2nd September, 2013).
38 Sya. il Part 1—Chap. 1-—dntreduction to SeOUPULVAON

LL. Assets should be free of withholding taxes/ pre-paid taxes.—The

ld.
iv should generally be free of withholding taxes, It withho
= seme applicable mp payments to be made by the debtors,
re questions will arise, One elementary complication would
1s
be: who would take the credit for the withholding tax, The payment
in turn col-
collected by the originator, but on behalf of the SPV, which
to
lects it on behalf of the investors, lt would be logistically impossible
allow the benefit of set off to the investors directly: therefore, the SPV
or the originator will be forced to take the credit for the pre-paid tax,
which may be technically objectionable.
Another major difficulty would be the time to take the set off, Usu-
ally, withheld taxes only qualify for a refund after the tax assessment is
complete, that may take time, This would create difficulties in securiti-
sation structure by creating a residuary receivable that may be collected
much after the expiry of the scheme.

11.6. Issuer features

1. Receivables as major assets.—Securitisation of receivables obviously pre-
supposes that the issuer has a bulk of its assets or future assets in form of receiv-
ables. Besides, the receivables must satisfy the features discussed above, signifi-
cantl y,
that the receivable should not be for a very short term to frustrate the se-
curitisation exercise. Hence, generally the following companies find securitisa-
tion a viable option:
(a) Real estate finance companies: Securitisation of receivables origi-
suited to go for it, since they satisfy more than anyone else the features
discussed above. They are predominantly a receivable-oriented com-
pany. The receivablesare pretty long-term receivables.
The receivables
are generally secured by way of mortgage over the property finance. In
the U.S.A. where it originated, these mortgages were also secured by
guarantees from the government. The receivables also satisfy the diver-
sification features.
Based on excellent security, viz., unencumbered real estate, itispos-
sible for these companies to part with receivables on non-recourse ba-
sis.
Even as of now, the market for real-estate securitisation ismuch lar-
ger than all other varieties. J =

——e ivhi finance companies)

broadly fulfilled the features in securitisation. The in
 Features of Securitisation ofReceivables Syn. 11 39

Later, leasing companies entered the fray. Consumer assets financi-

ers also found securitisation a possible route, coupled generally with
credit enhancement techniques such as collaterals, recourse provisions,
etc.
(c) Car rental companies: These companies rent out cars on contractual
hiring terms, and so, what they are essentially securitising is not a pre-
contracted car rental, but an estimated rental value based on past ex-
perience. Hence, a future asset and not a pre-contracted receivable is
being securitized here.
(d) Credit card companies: This is an innovative use of the device of se-
curitisation. The average period of credit in a credit card is generally
very short, may be a month. But this credit is generally revolving.
Hence, based on past experience of the credit period, a securitised re-
ceivable is created. The structure in this case is a special revolving
structure, since it is impossible to match the payment made by the card
holder with the payment to the investor.
(e) Hoteliers and real-estate renters: Based on occupancy experience in
case of hotels and estimated rentals in case of real estate, future receiv-
ables have been securitised, generally with either a recourse provision
or a collateral.
(f) Electricity and telephone companies: These companies have an excel-
lent opportunity of securitising electricity meter rentals and telephone
rentals. The receivables in these cases are very widely spread, and de-
linquency record very favorable.
(g) Banks: To overcome capital adequacy problems, banks have resorted to
securitisation of their loan portfolios by issue of participation certifi-
cates or by transferable loan certificates. These certificates are not ex-
actly a mechanism to transfer a receivable, but allow the holder to par-
ticipate in the benefits arising out of the portfolio of loans securitised.
The list is not exhaustive. Wherever a reasonably certain sum of
money will be received over a certain time, not very short, securitisa-
tion possibility exists. Some of the latest applications of securitisation
include securitisation of insurance risk, intellectual property rights,
sports earnings, etc. The applications of securitisation are examined at
length later. ;
2. Financial and organisational strength.—As such, in securitisation, the fi-
nancial strength of the issuer is not important. However, no securitisation (except
those guaranteed by external agencies) is completely independent of the origina-
tor. Originator rating causes a shadow on the securitisation transaction. Hence,
the originator should be a reasonably strong entity, not someone who is at the
very brink of collapse.
his
While the financial strength of the originator may not be very significant,
e to service
organisational strength certainly is, since the originator would continu
the product.
w Sya. il Part L—Chap. 1—dninaducnan te Seourttiisation

11.7. SPV features

The following features of the seouritusation SPV are normally necessary from a
legal viewpoint, that is, tosafeguard the interests of the investors:
Prevention of wading, external funding, etc, so that the SPV cARHOL en
- danger the transaction by introducing new and different risk factors, the
SPV is known as a single purpose entity as i cannot engage In any ac
tivity other than holding and maintaining interest inthe seouritised port-
folios.
> Sub-contracting all services required to maintain the SPV and its assets,
example administering its receivables, company secretarial work,
>» SPVS are not permitted to have any employees or (normally) to have
general fiduciary responsibilities to third parties (example acting as a
trustee);
>» Any person who contracts with the SPV is required to agree not to sue
the SPV in the event the SPV fails to perform under the contract (called
“not petition agreement”);
> All of the SPV's liabilities (present and future) should be quantifiable,
and shown to be capable of being met out of the resources available to
it, including corporation tax, advance corporation tax and any value
added tax; the extent to which the SPV is reliant on third parties to meet
its obligations should be minimised (and in some circumstances limited
to a reliance on either AAA-rated or on other bankruptcy remote com-
panies only); funds which are due to the SPV have to be separated and
ring-fenced as soon as they are received (to the extent this is possible).
Typically, SPVs use the services of a servicer, for carrying out collection and
servicing functions, and for investor relationship. The servicing function is a
broad basket of activities, illustrative list as follows:
e the collection of cash each day;
@ operating bank accounts;
. enforcing agreements with the underlying debtors (example collecting
on security and chasing borrowers who are in arrears);
© company secretarial matters (in jurisdictions where the SPV is a com-
pany; in other cases, regulatory compliances):
@ accounting;
* taxation (depending upon the jurisdiction concerned, the taxes may in-
clude income-tax, VAT, stamp duty,);
© reporting - to investors, rating agencies and trustees:
¢ pool management (dealing with requests for additional funds, changes
tothe asset contracts):
® management
of related insurance
tracts). upon the underlying con-
(depending
 Securitisation and Ring Fencing Syn. 13 41

Normally, the originator himself may take the servicing function. However, in
some cases, it is also common to engage third party servicers.

11.8. Investor features

(a) Professional investor: Generally speaking, investors in securitised prod-
ucts, except in case of mortgage-backed securities, are institutional investors.
Smal! investors have generally shunned it, primarily on account of the compli-
cated nature of the product and absence of liquid secondary markets.
(b) Fixed, Regular-income investor: Investors in securitisation transactions
are looking at fixed income investment. Unlike equities, there is no potential for
capital gains, except on account of interest rate changes or changes in spreads. In
addition, the investors are mostly looking for regular income, as most securitisa-
tion transactions pay principal periodically.
(c) Hold-to-maturity investor: In view of limited common-investor interest,
secondary markets in securitisation may not be vibrant. Hence, securitised prod-
ucts may not be very liquid. Because of accounting rules, the issuer is discour-
aged from giving any buy-back facility for securitised products, unless the off-
balance sheet accounting treatment is not a serious concern of the issuer. Hence,
the securitisation investor must have the ability to keep his investment locked
over a term.
Securitised products have been favored by most institutional investors includ-
ing savings institutions, asset managers, pension funds, banks, mutual funds, in-
surance companies, etc. Institutional investors need fixed income securities in
their portfolios, for which securitisation is ideal.

12. SECURITISATION AND FACTORING

Factoring is an age-old British concept, where the factor acquires the debts of a
client, pays for the same instantly, and generally manages the same.
Though the device used for securitisation and factoring is the same, viz., trans-
fer of receivables, the nature and the inherent purpose in the two are entirely dif-
ferent. A factor intends to offer services relating to the management of a client's
portfolio, whereas the intention of securitisation is to render the receivable mar-
ketable, while the creditor company (issuer) would continue to manage the re-
ceivables. In case of factoring, financing is incidental. In case of securitisation,
financing is a predominant objective.
Even though factoring involves financing, it is like financing by the debt-
portfolio of the client is taken over. In case of securitisation, the issuer transfers
only carefully selected receivables.

13. SECURITISATION AND RING FENCING

Ring fencing is a term commonly used in bankruptcy statutes. It means segre-
gation of the assets of the debtor in a manner that is acceptable to a bankruptcy
42 Syn. i4 Pant L—-Chap. 1—Atatraduction to Seouritisation

court, such that the ring-fenced assets are outside the estate of the bankrupt for
bankruptcy court's junsdicuion. Ring fencing does not mvolve tansier of assets,
4s is needed in case of securitisation, and the assets continue to stay on the books
of the debtor. The legal process of ring fencing depends on the bankruptcy law of
the country concerned.
As there is no wansfer of assets, ther is noeSPV in ring fencing devices,
Ring fencing devices are essentially devices of secured borrowing: they cannot
achieve the same effect that securitisation can. Being on-the-balance sheet bor-
rowings, they may not achieve the capital relief result that is an important feature
of securitisation. A European ring-fencing device called covered bonds has found
wide acceptance in Europe, and is currently spreading in other countnies too, oth-
er than where there is specific statutory protection against bankruptcy risks, mere
ring fencing or security interest creation may not create absolute bankruptey pro-
tection and hence, may not be acceptable as an alternative to securitisation,
Post the subprime crisis, as securitisation transactions earned bad name, some
countries have thought the solution lies in covered bonds. Hence, covered bonds
have been popularized. The original model of covered bonds is the German
pfandbrief model” which has existed for over 200 years. There are other models
using combinations of structured finance devices and pure covered bonds. Sub-
ject to conditions, rating agencies have accepted covered bonds giving rating im-
provement, and even for regulatory capital purposes, covered bonds have been
given lowerrisk weights. Hence, despite being on-balance sheet source, covered
bonds may also carry some of the benefits of securitisation.
The traditional mortgage funding devices in certain European countries -called
pfandbrief in Germany - are essentially devices of ring fencing as they are
backed by local statutes which permit segregation of assets funded by such bonds
to be applied for the benefit of thebondholders”.

14. ASSET CLASSES

See the accompanying graphic - it very broadly and summarily shows the com-
position of the securitisation market. For a detailed discussion of various securiti-
sation asset classes, see Vinod Kothari's: Securitisation: The Financial Instru-
ment of the Future.
_ One of the key distinctions to make is based on the existence of the asset
- ex-
isting asset securitisation and future flow securitisation differ substantially.
Inan
existing asset securitisation, the cashflows or the asset exists: there
isan existing
claim to value. Ina future flow securitisation, there is noexisti
ng claim or con-
tractual right to a cash flow: such contractual rights will be created
in future. For
example, anairline company securitising its future ticket sales,
where the tickets
25. Prandbriefes areissued under German lawthat gives
tothesecured lender a right apainst both the
1s. Sex Napirowe vance sonbcovered. bonis fastacbenien om 2nd
27. Fordetails, seehttp://vinodkot Jntm
har(accei.c Sepember. 20013)
ssed on
om/
2ndSeptem
sec itser,
boo 2013
k).
 Asset Classes Syn. 14 43

will be sold in future, for flights to take off in future, is a case of a future flow
securitisation.
Future flow securitisation is different from existing asset securitisation in vari-
ous ways - legal nature, accounting and tax implications, structuring features, etc.
The third main type we talk about is risk securitisation where the issuer merely
transfers risks by way of securitisation, with no transfer of cashflows, and hence,
no funding. This is also referred to as unfunded or synthetic securitisation. The
risks commonly transferred are credit risks by financial entities and insurance
risks by insurance companies. Synthetic transactions are discussed at length in
Vinod Kothari: Credit Derivatives and Structured Credit Trading”®.
Within existing-asset securitisation, distinction is often made in the U.S. mar-
ket parlance between mortgage-backed securities and asset-backed securities.
The former refers to the securitisation of mortgage loans including commercial as
well as residential mortgages. The latter is mostly taken to mean securitisation of
non-mortgage assets. Outside the USA, the term asset-backed securities covers
generically all types of asset-backed notes.
The reason why the difference is made lies is the US practices. In USA, mort-
gage market is considered very safe since the mortgages are insured and mort-
gage-backed securities are guaranteed by the agencies such as GNMA, FNMA or
FHLMC. Therefore, these agency-backed mortgage backed securities are nor-
mally not credit-enhanced. Hence, the only risk in these transactions is prepay-
ment risk. However, in case of non-agency mortgage backed securities, or other
asset backed securities. Various methods of credit enhancement are used.
Another type, mostly used as a device of acquisition funding, is securitisation
of all the residual revenues of an operating company, also known as operating
revenues securitisation or whole business securitisation. A whole business secu-
ritisation is a method of leveraging a buyout with external funding.
Based on the length of the term of the paper or securities issued by the issuer,
the security could be referred to as commercial paper or term paper. Commercial
paper commonly refers to paper having a maturity of 360 days or less: so securi-
ties that mature beyond 360 days are commonly referred to as term paper. Thus,
asset backed commercial paper refers to a securitisation program where the secu-
rity issued is commercial paper.
Synthetic securitisation is one that combines securitisation of risk with an issue
of securities to investors. This is discussed at length in Vinod Kothari: Credit
Derivatives and Structured Credit Trading’’. There is some discussion in the fol-
lowing section.

ee
:
i http://w
28. See for details, ww.vinodkothari.com/crebook.htm (accessed on 2nd September, 2013).
d on 2nd September, 2013).
29. See for details, http://www. vinodkothari.com/crebook.htm (accesse
44 Syn. 15 Part 1—Chap. 1—Iatreduction io Securuisation

— yt
asset aie Risk
flows

Figure 1.3: ABC types based on collateral

15. yey TYPES OF SECURITISATION STRUCTU-

Cm,
Cash
Synthetic

=) structure

exon Collateral
structure structure

Master
trust

Figure 1.4: Requis

for Applicat
ite ion of Section
s 115TA
 Broad Types of Securitisation Structures 45

We discuss below the main types of securitisation structures and then take up
some of these structures in detail. See accompanying graphic to get a view of the
branching of these various structural types.

15.1. Cash vs. Synthetic structures

The concept of synthetic asset or synthetic securitisation was briefly referred to
earlier. One can buy and sell assets for cash - in the traditional, commonly under-
stood way, or, using derivatives, one can synthetically buy or sell assets. In a syn-
thetic transaction, the seller does not sell assets for cash - in other words, the sell-
er keeps his title and investment on the asset unaffected. He merely sells the asset
synthetically - that is, transfers risks/rewards relating to the asset by entering into
a derivative transaction. When securities are issued, that carry such embedded
derivative, it becomes a case of synthetic securitisation.
Most securitisation globally follows the traditional cash structure, under which
the originator or repackager sell assets, and gets cash instead. However, synthetic
securitisation forms a growing, a fast growing structure, particularly in Europe
and Asia.

15.2. True sale vs. Secured loan structures

Usually, securitisation transactions are structured as a sale of the subject asset
by the originator. This is obviously intended to protect the assets from the bank-
ruptcy of the originator, because as long as the assets are owned by the origina-
tor, they are a part of this bankruptcy estate. In certain jurisdictions, however, it
is possible to create acceptable protection against bankruptcy by creating a secu-
rity interest that is all pervasive - it covers the whole of the undertaking of the
originator. In such cases, sometimes, secured loan structures are also used.
In a secured loan structure, the originator takes a loan, which is similar to any
other secured lending. Investor rights are protected by creating a fixed and float-
ing charge over the undertaking of the originator in favor of a security trustee.
Obviously, the assets intended to be securitised here are not specific asset pool as
in the case of a true sale structure, but generic assets of the originator. As the as-
sets are generically subject to the security interest of the security trustee, and the
indenture of charge empowers the trustee to do so, the trustee may take posses-
sion of the assets on the happening of certain trigger events and prevent the assets
from being encumbered any further either by the originator or by a bankruptcy
court.
Quite obviously, the ability to use the secured loan structure will depend on the
legal provisions of the country concerned. U.K. is prominent among the countries
that have used this structure, and some people feel that this structure can be used
in several other countries that have the U.K.-type corporate and insolvency laws.

15.3. Pass-through vs. Collateral structure

In a pass-through structure, the investors are made to proportionally participate
in the cashflows emanating out of the specific assets of the originator. The
46 sya. 16 Part }—Chap. 1—Intreduction to Seouritisation

investors are the

special purpose vehicle is simply a distribution device. The
beneficial, rateable owners of pool.
of the orig:
in a collateral structure, the special purpose vehicle buys the assets
d of rateabl y
inator in the same manner as in a pass through structure, but instea
ed
distributing the cashflows among the investors, it issues debt that is collateraliz
l purpose
by the assets transferred by the originator, In other words, the specia
vehicle does what any other corporate would do - acquire assets funded by hi
abilities. The only difference between a regular corporate and the special purpose
entity is the fact that the special purpose vehicle makes only such remvestments
as are required to bridge the mismatch between maturity of the assets and the
liabilities.
Pass-through structure is the most basic and the simplest device of securitisa-
tion. In the mortgage market, most transactions still take the pass-through route,
However, in asset classes where the cashflows are erratic, the pass-through cash
flow structure is not very investor-friendly. Therefore, the collateral method is
more frequently used outside the mortgage market.
The collateral structure can also be called the pay-through structure. In the
mortgage market, this structure is also called the CMO structure or the REMIC
structure.

15.4. Discrete
trust vs. Master trust
Discrete trust implies one SPV for one pool - that is, the investors clearly par-
ticipate in the cashflows of an identified pool. In a master trust, the originator sets
up a large fund, in which he transfers a big chunk of receivables, much bigger
than the size of funding raised from investors. Out of this larger fund, several
security issuances can be created, either simultaneous or successively, such that
all of them together equal the assets in the larger pool, but none of them singu-
larly do. At any point of time, the size of investor funding raised is usually con-
siderably smaller than the total size of assets in the pool - therefore, there is a
residual share that is owned by the originator himself.
The master trust is a device to create mismatch between the repayment struc-
ppp patieinmininndemtraer rdw >| pov year ict hoes cowby
a sort of a going concern to which the originator consistently keeps transferring
assets, andholds a sellershare thatistheunfunded portion oftheassets thatbe
transferred.” Master trusts are more flexible - therefore, they are finding increas-
ing acceptability in several countries.

16. vee” ASSIGNMENTS OR PORTFOLIO TRANS-

_ Direct portfolio transfers, orasset sales, are literally no securitisation, as there

1S No creation of security or conversion of assets into securities. However, it isa
an Mal Pears sets useofmastertruststructore, seeVinod Kothari's Securitisation:
The Finan-
Direct Assignment or Portfolio Transfers Syn. 16 47

common practice, especially in the banking world. Smaller, regional banks often
Sell off their portfolio or individual transactions to larger ones.
No SPV is required for a discrete portfolio sale. We have noted before that an
SPV is essentially a vehicle between the originator and the investors to render
marketability to the assets. Since, in direct portfolio transfers, there is no creation
of security, the target assets may be sold directly to the buyer.
Sometimes a direct portfolio transfer may be a precursor to securitisation - a
bank or repackager might be collecting enough transactions to securitise.
There is yet another common banking practice of syndicated loans that is dif-
ferent from a portfolio transfer. In a portfolio transfer, there is an assignment of
assets from the transferor to the transferee. In syndicated loans, the common
practice is to have one bank acquire an asset and let the members of the syndicate
participate in the same by way of participation rights.
The legal process of assignment of receivables will be necessary in a direct
portfolio transfer, substantially in the same way as in case of securitisation, ex-
cept, however, that the formality of setting up an SPV is avoided. The accounting
consequences of off-the-balance sheet accounting and gain-on-sale are applicable
to direct portfolio transfers as well as the accounting standards do not make any
substantial difference between transfers to an SPV for securitisation, and trans-
fers to an operating company. For bank regulatory purposes as well, a direct port-
folio transfer might have the same impact, with the difference, to the advantage
of the transferor, that the often-stringent requirements relating to SPVs are avoid-
ed in this case.
Quite often, in market practice, a transfer might have a single, or a few, inves-
tors in view with whom the entire collateral will be housed and who will hold it
to maturity. In such cases, there is no need to get into the rigmarole of securitisa-
tion as the intended purpose can be achieved by a direct portfolio transfer. On the
other hand, if the objective of the investors is to buy a liquid, capital market in-
strument, they should not opt for a portfolio transfer.
The Table below juxtaposes direct portfolio transfers and securitisation:

Table 1.5
Direct portfolio transfers — Securitisation

Objective To transfer one or more asset To convert a portfolio of assets

to another entity, normally in into capital market securities so as
an over-the-counter, negoti- to offer them to capital market
ated transaction investors - institutional or retail.

Likely investors Usually entities in the same Usually institutional investors in

business as the originator investment business.

Parties to the Does not need any SPV - bi- SPVs are needed to hold the re-
transaction lateral transfer between the ceivables while the resulting secu-
transferor and the transferee rities are made tradable, to avoid
4% Sya. 17 Part 1—Chap. 1—tntroduction to Securitisation

| Direct portfolio wansfers | __‘Securitivation

. trading in the assets thomaclves
Assignment of receivables to the
: _ T 4 7 7. . _ .

_the transferee of receivables

to SPV: issuance of beneficial inter
Legal process | Assignment est certificates/ debt securities by
the SPV
Achieves off-balance —sheet Achieves off-balance sheet ac-
| Accounting
treatment |accounting for the onginator counting for the originator, subject
| subject to necessary precondi- to necessary preconditions
tions on)

Regulatory if Grants capital relief, subject |Grants capital relief, subject to

treatment ns.
to conditioNo gions
the condit
SPV condi- |conditions, Amon

ae eee

Direct portfolio transfers were very common among European banks. Recent
advances in securitisation structures have made direct portfolio transfers less
common as the originator might achieve better pricing through securitisation. In
India, due to the difficultiesin securi causedtis ati
by regulatory on the
guidelines,
market had almost entirely shifted to direct portfolio transfers or bilateral as-
signments between 2006 to 2012. See Chapter 2 for details.

17. PASS-THROUGH STRUCTURE

As discussed earlier, the pass through method is the easiest and the most basic
form of securitisation. Though it is commonly believed that the pass-through
method originated in the US mortgage markets, there has been use of participa-
tion certificates in bank loan sales for a fairly longer time. Participation certifi-
cates are a slightly advanced form of loan trading, and loan trading is the precur-
sor to securitisation.
The name pass-through is derived from the nature of securitisation: the issuer,
that is, the SPV is merely a pass-through vehicle: it passes to the investors the
entire interest in and cashflows from the securitised portfolio. The investors are
rateable beneficial owners of the assets transferred to the SPV in proportion to
the value of pass through certificates held by them. During the servicing period

tors. For example, if there are 1,000 pass through certificates in a particular issue,
and for any particular month, the SPV collects USD 15,406,000, each certificate
will be entitled to USD 15,406. In the next month also collection will be distrib-
uted accordingly. In other words, what the investors get, and when the investors
get, is what the SPV receives, and when the SPV receives.
The investors’ entitlement in a pass-through transaction is night
participate inthecashflows: therefore. thesecurities issued ina pave
through
 Pass-through Structure Syn. 17 49

transaction is known as a pass through certificate. Since these certificates are

evidence of beneficial interest held by the investors, these are also known as
beneficial interest certificates.
From US taxation perspective, the pass through SPV is also known as a gran-
tor trust Or non-discretionary trust, as the trustees in such trust do not have any
discretion as to application of the cashflows.

17.1. Steps in a pass through transaction

The steps in a pass through transaction are enumerated below:
AT THE INCEPTION:
>» The originator selects the receivables to be securitised.
>» The originator/author of the SPV sets up a special purpose vehicle
(SPV). This is generally a pass through trust, with the single purpose of
holding the selected receivables on behalf of the investors. The trust is
passive: it does not reinvest the cashflows.
>» The originator transfers the receivables to the SPV, and in turn, the SPV
issues the pass through certificates to the owner. [Alternatively, the
SPV might issue pass through certificates to the investors directly, in
which case, the offer for sale of the pass through certificates by the
originator is not required]. The certificates represent undivided benefi-
cial interest (denominated in terms of money) in the pool of receivables
held on behalf of the investors by the SPV.
>» The originator now has the pass through certificates instead of the re-
ceivables. The originator makes an offer for sale of these pass through
certificates to the investors.
>» A servicer is appointed to collect the receivables and service investors.
In most transactions, originator may be the servicer.
AT THE TIME OF PAYMENT FOR RECEIVABLES:
>» The payment is collected on due date by the servicer.
> After deducting service charges, if any, the instalment collected is
passed through to the investors.
> The amount received by the investors has as much interest and principal
elements as the gross total of the instalments collected by the issuer.
Before remittance to the investor, certain time may be allowed for ag-
gregation of all collections and for compilation of records.
> If there are any prepayments or curtailments*', that is, premature clo-
sures or advance payment of the contracts, the amount received as a re-
sult will be passed-through to the investors.

31. The term “prepayment” usually refers to full prepayment of a loan. Curtailment refers to reduction
of the loan liability by prepaying a part of the outstanding principal.
SO Sya. 17 Part i—Chap. 1 Introduction te Seouritisation

AT THE TIME OF DEFAULT;

> If there is a limited recourse or substitution provision, the SPV will re
quire the originator to pay up, and in that case, the defaulted receivable
will be reassigned to the originator
> If there is no recourse to the issuer, the servicer will proceed against the
defaulting borrowers. Net losses will be allocated to the first loss piece
of the transaction, that is, the first layer of credit enhancement in the
transaction.
¥ On collection, the SPV will remit the funds to investors.

17.2. Nature of pass through certificates

By structure and intent, a pass-through structure transfers interest in the receiv-
ables in favor of the investors through the SPV, The investors in a pass through
transaction acquire the receivables subject to all their fluctuations, prepayment
etc. This not to say that there cannot be a layer of credit enhancement provided
by the originator. But the material risks and rewards in the asset portfolio, such as
the risk of interest rate variations, risk of prepayments, etc. are transferred to the
investors. In pass-through transactions, the receivables are not reconfigured or
altered — they are passed-through as they are.
Note that pass-through or pay-through (discussed in next section) pertains to
the manner of distribution of cashflows at SPV level. As between the originator
and the SPV, the legal nature of the transaction is not affected by whether the
distribution of cashflows is pass-through or otherwise. However, in pass-through
transactions, as the interest acquired by the investors is a proportional interest in
the receivables, the investment may be taken as a see-through investment in the
underlying portfolio of receivables. In pay-through transactions, on the other
hand, the investment is more akin to investing in corporate bonds, backed by the
portfolio of receivables.
From a legal perspective, issuance of a pass-through certificate may be taken as
passin of beneficial
g interest to the investors. That is, the SPV does a propor-
tional redirection ofcashflows toinvestors, retaining only legal interest and not

treatment in case of pass-through transactions at SPV level as well.

In the hands of the originator, the legal nature of amount raised by sale of re-
ceivables is the same whether itis a pass-through or pay-through transaction.

32. See para 19 ofIAS 39.

 Pass-through Structure Natione Syn. 17 51

transfer of receivables not taken place. For accounting purposes, it may be diffi-
cult for the investors to know exactly how much is the interest and principal col-
lection every month based on the sum totals of the actual pool: therefore, often,
the accounting is based on the weighted average coupon (WAC) and the
weighted average maturity (WAM) of the pool - that is, for the investor, the
amount invested in the pass through is taken as if it was one single investment
made for the WAM at the WAC, and the payments received every month are
broken into interest and principal based on the WAC applied on the principal
amount outstanding.
The SPV in a pass through transaction is merely a collective device, a compen-
dious way of the investors pooling their funds to acquire the receivables. If the
investors were to be presumptively taken as one single block, it is like a transac-
tion directly between the block of investors and the originator, with the SPV be-
ing merely a pass through and a trustee holding legal title over the receivables.
For tax purposes, the pass through certificates are treated at par with equity or
ownership interests, since the holder of the pass through certificate is the benefi-
cial owner of the assets of the SPV. Therefore payments to pass through certifi-
cate holders do not amount to payments in relation to a debt: hence, for tax pur-
poses, the distribution of income on a pass through certificate is not treated as a
charge against income but an allocation of income - the distinction is the same as
in case of a payment to a bondholder and that to an equity owner.

17.3. Advantages and Difficulties in the pass through stru-

cture
The pass-through structure is, from legal, tax and accounting viewpoint, the
most clean structure, and economically, the most efficient structure. Hence, in
most retail pools of assets, the pass-through structure is the common structure
used. It may be noted that whether the transaction will be classified as a pass-
through or bond-type transaction depends on the way local legislation would de-
fine it. The definition becomes most significant from (a) taxation and (b) ac-
counting viewpoint. From tax viewpoint, if a transaction qualifies as a pass-
through transaction, then the existence of the SPV as an entity legally entitled to
and receiving the cashflows is ignored, that is to say, the investors are taxed and
not the SPV. The underlying rationale is that the SPV is legally entitled to the
cashflows but does not have any beneficial interest in the same. If the transaction
is not a pass-through, then the SPV acquires assets and income, and creates li-
abilities and incurs expenses to finance the same. This is akin to any corporation
~ hence, the SPV is subjected to corporate or entity-level taxation. As this dis-
tinction is based on tax principles, whether the transaction qualifies for pass-
through treatment or not will depend on such tax principles.
From accounting standards viewpoint, Para 19 of IAS 39 lays down three pre-
conditions for pass-through treatment. These are:
@ The entity (in this case, the SPV) has no obligation to pay amounts to
the eventual recipients (investors) unless it collects equivalent amounts

Wud ad
J
52 Sya. 17 Part 1—Ohap. 1 —dntraduction io Seourtisation

ongunal Short-term advances by the entity with the nght

a oftheamount lent plus accrued interest al market fates
do not violate this condition.
sell.
@ The entity is prohibited by the terms of the transfer contract from
al
ing or pledging the original asset other than as security to the eventu
recipients for the obligation to pay them cash flows.
@ The entity has an obligation to remit any cash flows it collects on behal!
of the eventual recipients without material delay, In addition, the entity
is not entitled to reinvest such cash flows, except for investments in
cash or cash equivalents (as defined in IAS 7 Cash Flow Statements)
during the short settlement period from the collection date to the date of
required remittance to the eventual recipients, and interest earned on
such investments is passed to the eventual recipients,
While retail pools paying principal and interest periodically will be amenable
to pass-through structure, pass-through transactions often fail to meet investor
needs. Pass-through transactions not only amortise principal every month, they
pay erratic amounts of principal month after month, Incin reaprepaymese
nt rates
in any month mean investors get unscheduled principal payments. Investors are
more attuned to bond-type cashflows with certainty of principal repayment.In
addition, different classes of investors expect different payback periods. Hence,
strict pass-through transactions have never been able to meet investor interest,

17.4. Refinements
in the pass through structure
Senior and junior pass through certificates.—In strict sense, a pass through
structure would mean each investor has the same undivided interest in the portfo-
lio. Therefore, the pass through certificates in a simple transaction have homoge-
nous risk attributes.
However, one of the commonest credit enhancement techniques in securitisa-
tion transactions is to have securities of different classes, such as senior and jun-
ior, or more generically, Class A securities, Class B securities, and so on. As-
sume 90% of the securities are senior, and 10% are junior. This would mean the
claim of the junior investors to the underlying cashflows is subordinated to that
of the senior securities. Any loss in the underlying pool of receivables will first
be allocated to the junior securities. Hence, while both the senior and junior cer-
tificate holders are beneficial owners of the portfolio, the interest of the junior
securities remains subordinated. Creation of such classes does not militate
against the pass-through principle, and is an extremely common practice...

Stripped interest pass throughs.—As is easily understandable, simple mort

gage pass throughs are affected by prepayments and delayed payments. Delayed
payments may not be a payment in case ofreceivables guaranteed by government
agencies, but prepayments could affect the returns of the investors. If the
 Pass-through Structure Syn. 17 53

underlying loans or mortgages prepay (under a right granted under the originat-
ing agreement), the entire (or a part of, depending upon the option available) out-
standing principal would have been passed over to the investors. Since these
mortgages would not earn interest for the future, it would mean a loss of oppor-
tunity for the investor, unless the investor is able to plough back the principal so
repaid at effectively the same rate.
Prepayment risk is significant when rates of interest decline: existing borrowers
find it worthwhile to prepay an existing fixed rate mortgage, and take another
mortgage at reduced rates. While the investors in the pass throughs receive pre-
payment of principal, they are unable to reinvest the prepaid amount at the origi-
nal rate, since the rates of interest have come down. Thus, prepayment risk is es-
sentially interest rate risk —as interest rates go down, prepayment rates increase,
and vice versa.
As US mortgage-backed transactions, particularly the agency-backed transac-
tions, do not have credit risk, most analytical attention has gone into the prepay-
ment risk. Hence, several products have been designed to differentially allocate
the prepayment risk — mortgage strips are an example of creation of securities
which are differentially sensitive to prepayment rates.
To achieve the objective of differentially allocating the risk of interest rate
losses due to prepayments, stripped pass through certificates were devised. A
stripped pass through structure would issue undivided interest certificates sepa-
rately for the principal part (principal only or POs) and separately for the inter-
est part (interest only or IOs). The holders of POs are proportional owners of
the principal collected every month, and holders of IOs are holders of interest
collected every month. To be more precise, the PO and IO strips may be created
with reference to a certain amount of principal, rather than the whole of the pool
of receivables.

It is now easy to understand that the risk of interest rate movements is taken
differentially by the POs and IOs. If interest rates move down, causing prepay-
ment rates to go up, the IO holders would face loss of. future interest to the extent
loans get prepaid. On the other hand, the holders of POs would stand to a benefit
on account of prepayment, since they would get back the principal faster than
projected. Thus, the value of IOs declines, and the value of POs gains.
On the other hand, if interest rates increase, the prepayment rate is slower than
projected. This would cause exactly inverse impact on the value of IOs and POs.
As the prepayment speed is lesser than projected, the value of IOs goes up, and
that of POs declines.

Thus, POs and IOs are inversely sensitive to prepayment rates. Between the
POs and IOs, IOs are rhore sensitive. PO and IO strips are normally created out
of senior interest in the pool of receivables. Hence, both are usually AAA-rated.
The higher yields offered on IOs make them attractive for investors looking for
yield enhancement, though with an AAA rating. Besides, investors investing 1n
POs and IOs are in fact making a bet on movement of interest rates. Those
4 Sya. 17 Part 1—Chap. |—Intraduction te Seouritisation

in
st rates g ne would long POs and short 1Os, and those
to decli ex
expe ct
intere
POs.
pecting interest rates to goup would long 1Os and short
risk
It is possible to think of a variety of differential allocations of prepayment
entire
to different classes of investors. For instance, it is possible to transfer the Class
other
range-bound prepayment risk to one class (Support class) keeping the
yment risk. It is
(planned amortization class or PAC) protected against prepa
s
also possible to differentially allocate prepayment cashflows to different classe
of investors over different penods.

17.5. Pay-through structure

We have discussed above several difficulties of a pass-through structure which
make it unpalatable for fixed income investors ~ monthly repayment of principal,
and that too, of irregular amounts, difficulties in creating different pay-back peri-
ods ,on. Pass-through structure is based on direct associat
and so recoy-
ion
of the
eries with payments to the investors. That is, pass-through structure creates a per-
fect match between the cash inflows of the pool of receivables, and cash outflows
to investors. On the contrary, investors need a financial intermediary to create
and manage mismatches in cashflows, so that the same are re-shaped, re-
configured and smoothened to suit investor needs. In a bid to create securities
which are look-alikes of bonds, securitisation structures have tried to create and
manage cash flow mismatches at the SPV level — hence, the pay-through struc-
ture was born.
The pay-through structure is based on super-imposition of a loan structure on a
securitisation device: the SPV instead of transferring undivided interest on the
receivables would issue debt securities, normally bonds, repayable on fixed
dates, but such debt securities in turn would be backed by the receivables trans-
ferred by the originator to the SPV. In other words, as in case of the pass through
structure, the originator would transfer the receivables to the SPV. ,

there would not be a direct matching between the cash inflows and outflow -

There are several ways to reconfigure the cashflows from investor viewpoint.
The easiest way is to create several sequential paying tranches of securities. For
instance, Class A may be split into Class A-1, A-2, A-3 and so on. All cashflows
available for Class A would be directed to pay class A-1 until A-1 gets fully paid.
Then, all Class A cashflows would go to pay Class A-2, and so on. That is, put-
sd opetineasont on to ee
structure the cash outflow
however, s:
looking at each individu-
ally, there is a mismatch. a

Another way of creating and managing mismatches is what

does — reinvest excess cashflows not required imedatly for investor
woe Mme. nay
and redeem such reinvestments as may be required to repay investors when need-
ed. Thus, in this case, the SPV would make temporary reinvestment of such cash
 Pass-through Structure Syn. 17 55

through” indicates that as against pass throughs were the payment on account of
the mortgages is simply passed through the SPV to the investors, in the present
case, it is paid through the SPV to the investors. Here the SPV is not merely a
passive conduit, but it receives, reinvests and pays money.
The following are the features explaining the pay-through process:
AT THE INCEPTION:
> The originator selects the receivables to be securitised.
>» The originator sets up a special purpose vehicle (SPV). This is gener-
ally an owner trust (a US tax term) or a corporation, with the single pur-
pose of holding the selected receivables on behalf of the investors. The
trust is empowered to make reinvestment of the cashflows.
>» The originator transfers the receivables to the SPV, and in turn, the SPV
issues the asset-backed notes, or asset backed bonds to the originator.
[Alternatively, the SPV might issue the notes or bonds to the investors
directly, in which case, the offer for sale of the securities by the origina-
tor is not required]. These bonds or notes (securities) represent debt of
the SPV backed by the pool of receivables held on its own behalf by the
SPV.
> The originator now has the securities instead of the receivables. The
originator makes an offer for sale of these securities to the investors.
AT THE TIME OF PAYMENT:
> The payment is collected on due date by the originator/servicer, who
has also agreed to service the receivables.
> After deducting services charges, if any, the instalment is passed over to
the SPV.
> The SPV reinvests the amount so collected, normally in a guaranteed
investment account or other specified modes of investment.
> On the dates of scheduled payment to the investors, the payments are
released from the bank account.
> The amount received by the investors has as much interest and principal
element as in a regular bond or loan structure.
> If there are any prepayments, that is, premature closures of the con-
tracts, the amount received as a result will be deposited in the Rein-
vestment account, and repaid as per scheduled payment dates.
Though the repayment structure in case of a pay-through looks as if it were a
normal debt instrument, but it is to be noted that it is the debt of the SPV, and not
of the originator. As far as the originator is concerned, he transfers absolute in-
terest in the receivables. Thus, from the viewpoint of the originator, there is no
difference between the pass through and pay through structure as long as the
originator makes a transfer of significant risks and rewards on account of the re-
ceivables.
© Sya. i? Part i—Chap. 1—tnirad ion
Seourtiyain
to ucto

There is, however, 4 significant difference on the pole and structure of the SPY,
While 4 pass through trust was a mere collective and distributive instrumentality ,
the SPV in a pay through structure is almost like an investment conduit, with the
only difference that it has a limited purpose and business. Ltcollects and invests
cash flows-trying to smooth the repaym toent ss, By issuing
investor debt seouri-
ties repayable on fixed dates, ittakes upon itself an obligat ion similar to a liabil-
ity.
The nature of an investors’ interest in a pay through securitisation is also clear-
ly different: the invest right to receive interest and principal on fixed dates,
hasor
even though such interest and principal is backed by the payments on the assets
trans held by thed
ferre
to it SPV, Investors’ interest and principal receipts do not
necessarily coincide with the interest and principal collections of the SPV,
Table !.6: Pass through and pay through structure: Main differences
 Pass-through Structure Syn. 17 57

17.6. Collateralised mortgage obligation bonds

- As the pay through structure had already mixed and matched an element of tra-
ditional debt with securitisation, the next logical development was to add an ele-
ment of financial engineering: resulting into creation of sequentially paying col-
lateralised mortgage obligation (CMO) bonds. The CMO structure was first tried
in the mortgage market in 1983. Replication of the same has been done in several
other asset classes over time - the CDO device has used the CMO technique.
Though pay-through mechanism solved one of the difficulties of the pass-
through: that is, mismatching the recoveries and repayments, it still did not allow
the investors the facility of differing tenure choice and differing repayment
choices. Some of the investors, for example, may prefer a short-term investment,
whereas some others may invest for longer period. Passing on equal payment to
all is to ignore their differing needs.
The Collateralised Mortgage Obligation (CMO) bonds solved this difficulty.
Notably, the term “mortgage obligation” is only to use the usual jargon for these
bonds, and there is no reason why the application of this device should be limited
only to mortgage obligations. For example, when these bonds are backed by a
portfolio of loans transferred by the originator, they may be called collateralised
loan obligation bonds or collateralised debt obligation bonds, or CLO/ CBOs
for short.
What the CMO structure does is to break the investors into different tranches,
or different series of investors based on the duration for which they would want
to invest. The CMO structure proceeds on the principle of paying interest to all
investors (excluding zero coupon bond holders) but principal is paid sequentially
based on the priorities of different investors. For example, the A series of inves-
tors would be repaid the first - so the entire principal collected, including pre-
paid principal, is first used to fully pay off the A class investors. Once A class is
fully retired, repayments are made to B class. There may be as many sequential
classes as required. The last in the list is Z class, which is would receive a bullet
payment right at the end of the transaction. In the meantime, it may be noted that
the interest collected may be passed on to all the investors as per their out-
standing investment.
As would be obvious, this structured investment option allows the investors to
invest as per their investment objectives. Short term investors would carry lesser
of risk, get paid back first, and hence, would expect a lesser rate of return. Me-
dium term investors have more risk to shoulder, as their investment will be sub-
ject to all risks that remain after paying off the A class investors. It is Z class in-
vestors (normally it is the originator himself) who takes all the risk, and can tar-
get the highest rate of return.
In addition to the Z class, there might also be an equity class in a CMO
scheme. Although the Z bond is substantively no different from equity, the equity
class is brought to justify the debt classification of the other classes. Obviously
enough, one cannot have a debt unless one has an equity in any vehicle.
58 Sya. 17 Part lL—-Chap. |tntreduction to Securitisation

The CMO structur e

is generically a variant of the pay-thro The ex.
method,ugh
tent of the A, B, C and Z are all determined by mode the
llin g
cashflows which by
itself is a reiterative, involved exercise but nevertheless very significant. The
overall economics of the transaction for the originator is directly governed by the
segmentation of the investments. Class A bonds are the best rated, and hence the
cheapest. The later classes will have a lower rating and higher cost, The 7 class,
for example, will either not be rated at all or will be rated below investmen t
grade. There is an interesting wade-off between the rating of the senior classes
and the cost of the transaction. Each junior class is a protection for the senior
class, and the junior-most class, that is, the Z class, is a credit enhancement for
all others. Hence, more the amount of Z class, the rating of the senior classes im-
proves and therefore the cost of the senior classes comes down, However, the
cost of the junior classes goes up. The objective of the originator being to work
through the least weighted average cost of the transaction, the structuring of the
various Classes ass ume
a great sce.
significan
The other very important aspect of structuring of these various Classes is the
taxation of the SPV. The payments to the various debt classes is a tax deductible
charge, as the payments coming into the SPV are taxable income, The objective
of the SPV is to minimise or neutralise the impact of taxation on the transaction
by as near match between the incomes and expenses as to leave the least possible
taxable income into the SPV.
The following are the features that explain the CMO structure:
AT THE TIME
OF CREATION:
» Similar to pay through structure.
AT THE TIME OF PAYMENT:
» The payment is collected on due date by the originator/servicer,
who
has also agreed to service the receivables.
> he SP ne Srvices charges, if any,theinstalment ispassed overto

» The SPV first uses the collections for servicing interest to all bond
holders, except the zero coupon holders (if any).
» The remaining amount is first used to retire A class bond holders
portionately 9
» starts,
When A class bonds are fully amortised, the amortisation of B class
and so on. ,
» The final remaining cash flows are used to off Z class or zero cou-
ponbond holders. If theZ -classisdifferent fromtheequity class the
residual cash is taken over by the equity holders.
The bond structure represents a sizeable
inormuntonel rr Part of |
of asset-backed transactions in
 Pass-through Structure Syn. 17 59

17.7. Refinements in CMO structure

The CMO, and its equivalent in other asset-backed securitisations, has been
quite widely used. The above tranched CMO structure, which pays back to inves-
tors in a sequential manner, is known as plain vanilla structure or sequential
structure. Over a period of time, various add-on features have been introduced in
the CMO structure, essentially from the viewpoint of meeting the investors' need
to seek repayment of their investments in a particular fashion. Some of these re-
finements are discussed below:

17.8. Planned amortisation class

This variety was introduced around 1986 in US mortgage markets. Essentially,
planned amortisation class (PAC) bonds are also bonds which are protected
against prepayments, but protection comes not by sequencing payments but by
transferring the fluctuations in prepayments to a class of bonds, called support
class or support bonds (also called companion bonds). Thus, while a simple
tranched CMO structure would make sequential payments to different classes of
bond holders, the PAC structure would essentially have two parts in the issuance:
the PAC bonds and the support bonds. The PAC bonds have a planned amortisa-
tion schedule. If the principal available for allocation for a month is more than
the required amount as per the plan, the excess is diverted and paid to the support
class. If the principal available is less than the required amortisation, the shortfall
is drawn out of the principal available for the support class. Thus, if the prepay-
ment speed is more than the projected speed, the support class gets repaid over a
shorter maturity, and conversely, the support class gets repaid over longer matur-
ity. In other words, the increases or decreases in prepayment speed are negotiated
to the support class. Normally, there is a band of such increase or decrease fixed
for being borne by the support class, so that any increase or decrease in excess of
the band is absorbed by the PAC bonds and not transferred to the support class.
The PAC structure has been the most widely used structure of CMOs - the
PAC class has the advantage of cash flow certainty, and the support class is at-
tractive to investors looking for higher yields.

17.9. Targeted amortisation class

Yet another variant of the CMO structure is the targeted amortisation class
(TAC) bonds. These bonds are substantially similar to the PAC class, with the
only difference that that TAC bonds do not provide protection against a drop in
prepayment rates compared to the expected speed. Thus, if the prepayment ex-
ceeds the projected rate, the excess principal is repaid to the support class. But if
the maturity extends due to decline in prepayment rate, the support class is not
affected. The purpose is, thus, only to protect against acceleration of a targeted
amortisation.
60 Sya. 17 Part 1—Chap. 1—Intreduction to Securitisation

17.10. Acerual bonds or accretio n

bonds
An accrual bond or Z-bend is a zero coupon bond that has a principal and in-
terest locked out for a certain number of years. Itis only towards the end of the
structure that the bond starts paying coupon and repaying interest.
Normally the Z-bond is used as a shock absorber for sequen tial
class CMOs, 7-
bonds could also be used to support PAC or TAC bonds,

17.11. Floaters and inverse floaters

There is yet another innovation in CMO structures, which is to break up the
CMOs into floaters and inverse floaters. Floaters, or floating rate CMOs are those
whose rate of return will vary as per variations in a base rate, The base rate could
be a representative rate, say, LIBOR or treasury
rate, etc,
The interesting part is that the fluctuations in interest rates are not absorbedby
a swap counterparty, but by the other section of CMOs, viz., the inverse floaters.
For every floater, there is an inverse floater. It is the inverse floaters who absorb
the variations that are passed on to the floating class. For example, if the rate of
interest goes up, the floating class will have an increase in interest ;
which will be compensated by reducing the rate of interest payable on the inverse
floating class. In case of declining interest rates, the floating class payments will
come down, and the inverse floating class will benefit thereby.
Evidently, there is a section of investors who believes in interest rates going
up: they will prefer a floating rate investment. But then, those who are bearish
about interest rates will prefer an inverse floater, to benefit from the decline in
interest rates on the floating class. The inverse floating investors might also be
Rene nn MIVEMINEH 0 6 Reape emia ether Coming clare iavenannats Mele by
m.
This structure eliminates the costs that would otherwise have been payable on
buying an inter rate
estswap.

17.12. Revolving securitisation structure

Revolving assets securitisation is used for short-lived assets such as credit card
receivables, trade receivables, short-term lease rentals, microfinance receivables,
etc. It is understandable that the use ofthe usual pay-through or
pass-through
structure will be inappropriate as it would not be economical to
match the maturi-
theinvestan ayandthesecurities. Insuchcases, theoriginator
passes interest to
investors in a i of asse where
tsassets
,
inemand byfouthstock ofneeceanin
fh ed yi
The best instance totake iscredit cards. Credit card
s receivables typically
offwithin a month orso.Theentireprincipal alon
g withtheinterest ispaidoff
within thistime. Onthe other hand, the investor
s would like tolock intheir mon-
ey fora reasonably long period, say3 years otso.
The money ispooled with the
SPV which buys therequisite amount ofcredit
card receivables from theorigina-
‘oF,andonce these receivables arepaidoff,itreta
ins theinterest forservicing the
 Pass-through Structure Syn. 17 61

investors, but releases the principal to buy fresh receivables for replenishment.
The structure keeps revolving unless the targeted amortisation period comes.
When it is time to amortise the receivables, the principal collected is used to
pay off the principal to the investors. The principal can be repaid either in several
instalments or in a single bullet payment. If it is a bullet repaying structure, there
would be some accumulation and reinvestment of the principal, since it is unlike-
ly that the entire principal will be collected in one stroke.
Most revolving assets securitisation have a right to acceleration of principal re-
payment: in case of certain events, the SPV may use the principal repayments in
any month not for acquiring fresh receivables but in paying off the investors be-
fore the scheduled repayment date. This is a basic protection needed, given the
fact that the assets are of a revolving nature, and every month or so, the investors'
asset cover in form of receivables is being depleted, until it is replenished. This
results into an originator's performance risk: if the originator exits business, or
does not produce enough of new receivables to replenish those that are paid off,
the investors may have no asset-backing for their investments. In order to take
care of such contingency, there might be a trigger event, say a decline in receiv-
ables generation over a certain period, which would lead to acceleration of re-
payment to the investors, that is to say, the SPV will, instead of releasing the col-
lections to the originator, pay off principal to the investors.
Besides, the level of over-collateralisation in revolving assets securitisation is
usually higher.
Credit card receivables apart, revolving securitisation device is also used for
securitisation of consumer credits which also typically pay off over a short ten-
ure. There are a number of lease securitisations which also use the revolving de-
vice for some time before they turn into a bond structure - that is, all the cash
collected during a part of the transaction will be revolved back before the cash is
released for principal repayment.

17.13. Future flows securitisation

Over the past few years, another interesting application of the securitisation
device is future flows securitisation. Future flows securitisation is very different
from traditional securitisation applications: as against a normal securitisation of
receivables, a future flows securitisation is one where the entity does not have
any identifiable receivables as of date. From the past conduct or by way of a rea-
sonable expectation, it is likely that the entity will have a certain amount of cash-
flows arising over time, but there is no debtor, against whom there 1s any claim,
either payable immediately or payable in future. In other words, the basic subject
to
matter of the securitisation transaction, viz., the receivables, are yet to come
existence.
This feature will obviously make a substantial difference to the motive, eco-
nal secu-
nomics and structure of such transactions. While the motive in a traditio
on the
ritisation would be to source funds against a portfolio of receivables
originator, future
strength of such portfolio without any performance risk of the
62 Sya. 17 Part }—Chap. |—Iniroduction to Seourttisation

case ot
5 transactions are highly dependent on onginator performance, In
pare asset wove te gh risks of the portfolio are detault risk and pre:
payment risk, in case of future flows, the risks are all those factors that imuraduce
volatility in the cashflows. Traditional seouritisations can be motivated by an off.
balance-sheet objective: future flows securitisation will never be oft the balance
sheet, as no transfer of assets has taken place as of date,
Therefore. the economics of future flows securitisation are totally different, Pu.
ture flows securitisations are of two types — cross border future flows and domes:
tic future flows. Cross-border future flows transactions have been originated
from countries where domestic economic conditions have resulted into very low
sovereign ratings, and therefore, an investor would either not be comfortable in
lending an entity in such country at all, or if he does, the premium demanded
would be abnormally high considering the rating of the country, In other words,
the rating of the sovereign casts its shadow on the borrowing costs of the entities.
Take an example: say a Mexican company needs to borrow against future re-
ceivables, say, earnings out of exports. The receivables have not been generated
still as the exports are yet to be made. If the company resorts to traditional fund-
ing, it is likely to pay heavy costs due to the poor rating of the country. However,
the earnings of the entity are to come from hard currency countries, say, exports
to USA.
This creates opportunities for a future flows securitisation. If the earningsof
the company in doliars, from hard currency areas, could be trapped outside of
Mexico, such that the company creates a lawful obligation for an at-source de-
duction in favour of the SPV, the investors would have a legally enforceable right
over earnings of the company which would be in dollars. The investors would not
be affected by the exchange risk, as the earnings are in dollars. The investors
would not be affected by the political or other sovereign risks, as the earnings are
being lawfully sourced from outside of Mexico. The only risk is the risk of the
company not exporting at all: as a protection, the SPV could have a sizeable
over-collateralisation. That is to say, if the transaction is sufficiently over-
collateralised, say, 3 times (meaning, the average dollar earnings received outside
Mexico by the SPV is thrice the amount of servicing required for the investors),
the investors can be reasonably sure of return of interest and principal. Besides,
there could also be a provision for acceleration of principal repayment. As such,
the transaction can achieve a rating which is far superior to the rating of the sov-
ereign, and hence, be able to borrow at much finer costs.
ayi Evident from this,thebasic objective ofa future flows securitisation isto
avail a rating improvement over the rating of the sovereign, and hence, source
international financing. Accordingly, opportunities for a future flows securitisa-
tion arises, when:
» There is an entity in an emerging market
> Having a steady receivable from hard currency areas in
hard currency
> Out of an asset or framework which exists
Pass-through Structure Syn. 17 63

» The sovereign is rated below investment grade

> It is legally permissible to create an at-source payment in the country of
origin or another hard currency country.
Domestic future flows transactions are simply devices of leveraging expected
cashflows. A straight balance sheet debt would have achieved the same purpose;
however, the difference is that the originator in this case is not borrowing against
assets on the balance sheet, but against cashflows which are not on the balance
sheet. Consequently, originators may find future flows securitisations more effi-
cient than straight balance sheet debt.
The legal, accounting and tax considerations applying to future flows securiti-
sation are quite different from those applicable to normal securitisation transac-
tions.

Table 1.7: Asset-backed securitisation and future flows securitisation: Main

differences

Asset-backed securitisa- Future flows securitisation

tion
Legal nature Sale of existing receiv- |Agreement to sell future receiv-
ables ables
Nature of receiv- | Receivables for something | Any receivables from a hard cur-
ables done or service rendered rency country
Intent of the transac- | To sell a right in receiv- |To provide investors with a
tion ables and to pass on risks/ |mechanism of trapping receiv-
rewards in the receivables | ables at the source, thus eliminat-
to investors ing exchange rate risk and sover-
eign risk
Nature of amount Consideration for sale of | Advance against an agreement to
received by origina- receivables sell receivables
tor

Accounting __ treat- Normally off-the-balance- On the balance sheet

ment sheet (subject, of course,
to accounting standards
which have made off-
balance sheet treatment
increasingly difficult)
Typical usage Developed/ emerging Emerging markets
markets
Typical ratings AA/ AAA BBB, A-

Extent of over- | Usually low Usually very high

collateralisation
 Part 1—Chap. |—Intreduction to Securitisation

Collections
(Net of servicing)
Pass-through Structure Syn. 17 65

am oe:
Sale of receivables eoiaiask

Proceeds Servicer
(servicing
2 fees)
S
oO
& Other fees
>
SS
a. 1 Trustee
1. Master Proceeds
servicer
collection
Payment account

proceeds Principal & Noteholders

interest to
Legends: paying agent
— Funds
Excess cash
Documents
flow to
Monthly servicer
report issuer

Figure 1.10: Cash and Data flow chart

Illustration of Sequential pay CMOs

Originator/servicer

Principal Interest

Obligors/debtors

First paid _.. Ao

Next
paid

Last paid

Figure 1.11: Illustration of Sequential pay CMOs

66 Syn. 18 Part 1—Chap. /—dnireduction to Securitisation

18. ADVANTAGES OF SECURITISATION FOR THE

ISSUER

18.1. Lower cost

Secu-
Cost reduction is one of the most important motivations in securitisation,
ritisation seeks to break an originating company's portfolio into echelons of risks,
trying to align them to different investors’ risk appetite, This alchemy supposedly
works - the weighted overall cost of a company that has securitised itsassets
seems to be lower than a company that depends on generic funding. It is impor-
tant to note here thone atof the most tangible effects of securitisation is to reduce
the extent of risk capital or equity required (being off balance sheet - for regula-
tory purposes, off balance sheet requirements are dealt with separately) for a
given volume of asset creation, Assuming that equity is the costliest of all
sources of capital, lower equity requirements do result into lower costs.
Securitisation enables the originator to achieve a rating arbitrage - obtain a rat-
ing that a generic funding could not have. Such a rating is possible due to the
structural enhancements in securitisation - senior/junior structures, or a Z-bond
structure, as discussed earlier.
The direct impact of lower borrowing costs is on lower lending costs. Mort-
gage rates in many countries fell after securitisation was introduced or became
popular. Many banks also claim to be running on lesser lending costs due to se-
curitisation.
A study was published in journal Real Estate Economics in Spring 2001. This
study, relating to mortgage markets, states as follows: “In the case of adjustable-
rate mortgages, we find no evidence that securitisation lowers coupon rates.
Moreover, we find no association between securitisation and the coupon rates on
fixed-rate mortgages. Instead, securitisation appears to lower mortgage loan orig-
ination fees, resulting in substantial savings for homebuyers. A 1% increase in
the monthly level of pass-through creation is associated with a 0.5-basis-point
reduction in loan origination fees. In 1993 alone, securitisation likely produced
consumer savings of more than $2 billion in loan origination fees.”
_ There are also applications such as future flows securitisation, where the objec-
tive of the originator is to achieve ratings higher than the rating of the entity or
the rating of the country to which the originator belongs. As securitisation makes
such higher ratings possible, it enables the originator to borrow at lower costs.

18.2. Alternative investor base

Without disturbing the existing lenders, securitisation extends the of
available funding sources toanentitybybringing ina new classofinvestore, For
many entities, typical securitisation investors such as insurance companies, asset
managers, pension funds and the like may not just be available for access, other
than for investment in a securitisaprogram
tion.
Advantages of Securitisation for the Issuer Syn. 18 67

18.3. Perfect matching of assets and liabilities

~ Asset liability mismatch is a serious issue for financial intermediaries such as
banks and finance companies. It refers to the maturity mismatch between assets
and liabilities. Mismatch spells either higher risk, or higher costs, and therefore,
wf pie try to strike a near perfect match between maturities of assets and
iabilities.

18.4. Makes the issuer-rating irrelevant

Being an asset-based financing, securitisation may make it possible even for a
low-rated borrower to seek cheap finance, purely on the strength of the asset-
quality. Hence, the issuer makes himself irrelevant in a properly structured secu-
ritisation exercise. One of the common statements rating companies have to make
is: in a normal debt issuance, we rate a product. In structured finance issues, the
issuer dictates the rating and the structure is worked out accordingly. In other
words, it is possible to obtain a AAA rating for securitised products, irrespective
of the rating of the originator - all that is required to be ensured is that there is
adequate legal protection against the bankruptcy of the originator, and adequate
level of credit enhancement.

18.5. Maultiplies asset creation ability

Securitisation makes it possible for the issuer to create any amount of asset
with given equity. The securitiser creates assets and then parts with the same. In
essence, therefore, the issuer acts as a manufacturer and inventorisor of assets.
The extent of assets he can create is therefore solely dependent on his “conver-
sion cycle”, that is, the period that elapses between the date an underlying receiv-
able is created and is marketed. While in a traditional borrowing case, the amount
of capital restrains the maximum amount of assets that can be generated: capital
adequacy requirements normally put an upper limit of 12.5 times of risk capital
(8% requirements, assuming 100% risk weight). However, if securitisation at-
tains off-balance sheet treatment for regulatory purposes, the amount of capital
required is limited by only the extent of credit enhancement provided by the orig-
inator. Thus, if the originator provides an enhancement of 5% out of his capital, a
$ 1000 of capital can enable him to create $ 20000 of assets.

18.6. Allows higher funding

A traditional financier looks at the assets on the balance sheet and lends a frac-
tion thereof. For example, a typical bank funding working capital will look at the
working capital gap and fund a certain percentage. Securitisation investors look
at the cashflows in future, which are not necessarily on the balance sheet. So the
issuer might end up getting a higher amount of funding through securitisation
than by conventional funding methods.
6s Sya. 18 Part 1—Chap. 1—lainaductan to Seourtisation

18.7. Off-balance sheet financing

an off-balance:
Financial intermediaries look al seountisahon essentially as
either from
sheet funding method. Off balance sheet feature could be looked at
latior is rele
accounting standards viewpoint, or from regulatory viewpoint, The
vant for computation of regulatory capital or capital adequacy requirements, Wath
ng
en up as the next point, The present point concerns off-balance-sheet fundi
from accounting standards viewpoint.
The tendency of financial institutions and others to prefer off balance sheet
funding over on-bal anc
sheet e ts beca
funding use
the former allows highere- r
turns on assets, and higher returns on equity, without affect ing
the debt-eq uity
ratio. As tools ofmanagerial performathese nce,have a definite relevan ce,
Subj accounting standards, securiti
to ect sati
allows a firm 10 createonassets,
make income thereon, and yet put the assets off the balance sheet the moment
they are transferred through securitisation device. Thus, the income from the as-
set is accelerated and the asset disappears from the balance, leading to an im-
provement in both income-related ratios as also asset-related ratios. balance-
sheet treatment for securitisation transactions is getting increasingly difficult, as
accounting standards have become more stringent post the sub-prime crisis. Re-
vised IAS 39/ FAS 140 would permit off-balance sheet treatment only where the
originator either surrenders control or does not have a continuing involvement in

18.8. Helps in capital adequacy requirements

Capital adequacy requirements are the requirements relating to minimum regu-
latory capital for financial intermediaries. One of the very strong motivations for
securitisation is that it allows the financial entity to sell off some of its on-
balance-sheet assets, and thus, remove them from the balance sheet, and hence
reduce the amount of capital required for regulatory purposes. Alternatively, if
the amount raised by selling on-balance-sheet assets is used for creating new as-
et ee ato eee a ee

_ Motivated by this, large commercial banks have made extensive use of secu-
ritisation. This has led to formation of regulations on capital requirements for
securitisation in different countries. Basel II also prescribes conditions for capital
relief
for securitisation transactions. These regulatory requirements define the
conditions subject to which securitisation will be given regulatory off-the-
balance-sheet treatment, and, if off the balance sheet, the required capital deduc-
tion for the risks retained by the originator.
Inspite of these guidelines, it is a common experience that in securitisation
enabled banks eithertoreduce thelevel oftheiron-balance sheet assets aras
achieve a higher amount of asset-generation with a given amount of
 Advantages ofSecuritisation for the Issuer Syn. 18 69

18.9. Improves capital structure

By being able to market an asset outright (while not losing the stream of profits
therein) securitisation avoids the need to raise a liability, and hence, it improves
the capital structure. Alternatively if securitisation proceeds are used to pay off
existing liabilities, the firm achieves a lower debt equity ratio.
The improvement of capital structure as a result of lower debt-equity ratio may
not be a mere accounting gimmick - if securitisation results into either transfer of
risks inherent in assets, or capping of such risks, there is a real re-distribution of
risks taking place, leaving the firm with a healthier balance sheet and reduced
risk.

18.10. Better opportunity of trading on equity with no incre-

ased risk
This point is a re-statement of the accounting and capital-adequacy-related
benefits of securitisation, discussed above. The ability to create assets, as a result
of off-balance-sheet treatment and regulatory freedom, results into more profits
and hence a stronger firm.

18.11. Extends credit pool

Securitisation keeps the other traditional lines of credit undisturbed; hence, it
increases the total financial resources available to the firm. Securitisation has
been tried by many firms in addition to regular borrowings, not in place of.

18.12. Not regulated as a loan

Corporate laws in some countries have laws regulating borrowing abilities of
financial companies, since financial companies are taken as para-banking com-
panies. Securitisation does not suffer borrowing-related fetters, as it is not taken
by regulation to be debt. For example, a regulation relating to borrowings from
public will not be attracted, since a securitisation is not a case of borrowing.
From the point of view of law, often, the distinction between securitisation and
borrowing is based on a strict interpretation of the word “borrowing”: thus, secu-
ritisation with a recourse may not qualify for off-balance-sheet purposes or for
capital adequacy requirements, but when it comes to a borrowing-related legisla-
tion, the same is not to be taken as a debt. In India, for example, securitisation
will escape regulation pertaining to raising of deposits by financial companies, as
such regulation is a part of the law, not a prudential regulation.

18.13. Reduces credit concentration

Securitisation has also been used by many entities for reducing credit concen-
tration. Concentration, either sectoral, or geographical, implies risk. Securitisa-
tion by transferring on a non-recourse basis exposure by an entity has the effect
of transferring risk to the investor.
70 Sya. 15 Pant /—Chap. 1—iniveduction to Seourttisation

18.14. Avoids interest rate risk

vables wasto
One of the primary motives in securitisalion of mortgage recei
ct to the risk
transfer interest rate risk to the investors, The lenders were subje
the
since the mortgages carried a fixed rate of return while the loans taken by
r
lenders had a variable rate. When the mortgages were seouritised, the lende
made an instant spread on the basis of a fixed rate, and therefore, completely
avoided the price risk.

18.15. Arbitraging by repackaging

Securitisation has been used by number of banks and finance professionals for
arbitraging purposes: that is, buy up assets from the market at higher spreads,
accumulate them, provide or organise enhancements and securitise them. These
transactions are sometimes called repackaging transactions ~ giving @ net arbi-
trage profit to the repackager. Most CDOs, in their good days, were refinancing
transactions,

18.16. Arbitraging on liquidity and term structure

A significant aspect of securitisation structures, particularly related to long-
term receivables, is that the originator or the conduit manager makes profits by
arbitraging on the yield differences in term structure of interest rates. In CMO
tranches, for example, long term mortgages were de-composed into shorter term
securities each paying successively. In the process, the securitiser was able to
lower down his cost, and the arbitrageur was able to make profits. Commenting
on the arbitrage possibility, a commentator writes: “In the early 1980s, monetary
policy eventu ally
pushed short-term rates below long-term rates (partly because
capital-short financial intermediaries became unwilling to make long-term loans).
In that environment, securitisation made it possible for stand-alone non-recourse
structures to buy long-term mortgages and pay the purchase price by selling
shorter term CMO securities. The earliest CMOs, for examp couldle,
be created
by acquiring mortgages at about 98% of par, spending 0.5% on structuring and
selling 100% of par worth of debt, with no retained risk. That's a, 1.5% profit
with 0% capital cost. Thus, the only limit to converting “lead” (mortgages) into
“gold” (highly-- rated and liquid securities) was the price of “lead.”
18.17. Improves accounting profits
This point might have well come on the top of the list: securitisation allows
frontrecognition ofprofits. Theprofitisthedifference between the averape
spread inherent in the financial asset and weighted average return provided to the
investors. Where a securitisation transaction qualifies for off-balance sheet treat-
ment, accounting standards permit the upfronting of this profit ifthe securitisa-

33. leniion
Prederick
—F ieuon-
in Securitisation: ‘
The Alchemist's Dream: International Financial Law Review.
 Advantages to the Investors Syn. 19 71

tion transaction satisfies certain requisites. For details, see Vinod Kothari: Secu-
ritisation: The Financial Instrument of the Future™.

19. ADVANTAGES TO THE INVESTORS

Needless to emphasise, advantages to the originating entity would not carry
much relevance unless securitisation made an attracting option to the investors
too. All over the world, investors, particularly institutional investors, have shown
active interest in investing in securitised products. Rating agencies have helped in
promoting these interest levels since most securitised products have obtained
good ratings, and in several cases, even with the downgrading of the entity, the
structured finance offerings have not been downgraded.
Securitisation offers three features that investors will love to have in any in-
vestment option: good ratings, rating resilience, and good spreads.
Many of the classical investor benefits of investing in securitisation transac-
tions seem to have come under challenge during the subprime crisis and ensuring
downgrades and default. Excessive leverage and quality of collateral were the
chief reasons accounting for the fragility of these transactions. These transactions
were aberrations and do not define or describe the mainstream securitisation
transactions. Hence, in the discussion below, we have not taken into account the
exceptional downgrades that happened in 2008-10 period.
Accordingly, we review some of the advantages that investors look at:

19.1. Better security

Securitised instruments are devices of asset-based finance. The investors have a
direct claim over a portfolio of assets, often diversified and reasonably credit-
enhanced. Investors are not affected by any of the risks that beset the originator.
Thus, securitisation investments are far safer than investing directly in debt or
equity of the originator. This point is well proved by history. Securitisation has
withstood the SE Asian crisis of 1997, the Mexican crisis and so on. Companies
in Thailand or Mexico that had securitised their assets either restructured during
the crisis or went bad, but securitisation investors were left largely unaffected. In
the wake of the subprime crisis too, several originators went out of business or
were acquired, but securitisation transactions originated by them remained unaf-
fected. :

19.2. Good ratings

As already noted, many structured finance offerings have obtained good rat-
ings. With increasing institutionalisation of investment function, investments are
being managed by professional managers who would prefer a formally rated in-
strument to an unrated one. Rated investments are now preferred all the more
because of a regulatory advantage conferred by a new capital adequacy frame-

34. For latest edition information, go to http://vinodkothari.com/secbook.htm. (accessed on 1" Septem-

ber, 2013).
72 Sya. 19 Part 1—Chap. 1 introduction 40 Seouritisation

ements, Therefore, investment

work proposed by the Bank for internauonal Settl
products.
managers have preferred rated structured finance

19.3. Rating resilience

ofa rat
is very significant, Rating resilience stands for the stability
is AAA today,
Pig Lap teen, other words, if you buy an investment which
is, be down-
what is thelikelihood thatitwillmotdeteriorate over Lime, that downgrades
graded, Thelikelihood ofdowngrades is mirrored Dypasthisto Di ry of
or upgrades (collectively called rating migrauion ) urilisation issuance,
R Ror
both Moody's andStandard andPoor's ecgularly ae POE PEE

up substantially |
sub-prime crisis. med pgs issuances would have either paid off or
defaulted in 2012 — hence, the future may not reveal the mistakes of the past,
Barring the exceptional build-up of poor quality assets, and exceptionally high
levels ofleverage, in theyearsleading up tothesubprime crisis, securitisation
has generally demonstrateda rating stability.

Table 1.12 :Default rate ofstructured finance securities”

ate
Mah
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Cl Sn Ea
fe TE) a 016
Cs Oe F_ tel -]
Ce) ee ee
a ee
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a
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an) OR
35. http://www standardandpoors.com/ratings/a
articlerticles/en
Type=HTML AcassetiD=
/us/
1245331158575 (accessedon 2nd September, 2013).
Advantages to the Investors Syn. 19 73

19.4. Better matching with investment objectives

Securitised instruments have a great flexibility to match with the investment
objectives of the investors. Investors looking for a safe high-grade investment
can pick up senior most AAA-type product, while those looking for a mediocre
risk but with higher rate of return can opt for a BBB-type option. Even AAA in-
vestments may be fetching higher rate of returns if they have significant interest
rate or prepayment risk — for example, IO strips. Similarly, investors can look at
investing over a short-term, medium term or long term. It is even possible for
investors to go for a fixed rate investment, floating rate investment or inverse-
floating rate investment.

19.5. Good spreads

Securitised offerings have offered good yields with adequate security. Empiri-
cal data about securitisation offerings reveal that an investor who maintained a
good balance of emerging market and developed market offerings has been able
to come out with good rates of return. In the good days of CDOs, there were sev-
eral structured finance and high-yield CDOs structured by repacking riskier por-
tions of asset-backed securities. In these cases, with AAA ratings too, there may
be substantially high returns.

19.6. Few instances of default

History provides far lesser incidents of default and loss in securitisation than in
corporate debt. In Europe, for example, there is no instance of default at all so far
in almost a decade of securitisation issuance. This statement excludes the excep-
tional volatility occurring during the subprime crisis.
74 Sya. 0 Part l—Chap. | Antraduction to Seouritisation

19.7. Moral responsibility

This is something which cannot be guaranteed in the long ran, but in the past,
all concerned agencies: rating agencies, investment banks and the like, have tried
hard to prevent securitisation transactions from running into trouble, Some time
back there was a case of a Mexican company called Ahmsa which after issuing
securitised debt backed by export receivables, tried to outwit the investors by
redirecting the exports. It is reported that the investment banker owned mora!
responsibility and paid 25% of investors’ outstanding,
Bankruptcy of LTV Corp. in the USA is another example of the originator try
ing to ruin the legal features of the transaction by litigation, Mere again, the entire
industry rose) up in arms, and without letting the sensitive legal issue being de-
cided by the Court, got the matter resolved by replacing the securitisation by a
DIP funding.

20. THREATS IN SECURITISATION

It would be important to appreciate the significant limitations of seouritisation:

20.1. Costly source

The aggregate cost of securitising assets is theoretically expected to be lower
than the cost of mainstream funding. However, in actual experience, securitisa-
tion has been shown to be a costly source, primarily in emerging markets, Being
a new product, the investors place a penalty for their own lack of understanding.
Besides, the costs of rating and legal fees also tend to be huge.

20.2. Uneconomical for lower requirements

Since there are huge upfront costs in the form of rating fees and legal costs, in-
cluding stamp duties where applicable, which would add up to a heavy initial
payment, securitisation in order to be cost effective has to be limited to large
sourcings.

20.3. Passes on data-bas to investors

e
One of the most important limitations of securitisation is that the entire data
about the receivables is passed on to the SPV. The SPV may technically be under
thecontrol oftheoriginator himself, butbeneficiaries have a legal tight toinspect
the books of the SPV. Hence, in a competitive environment, a competitor may
corner the company's portfolio and push the originator out of the market.

20.4. Leaves the entity with junk assets

One of the common concerns about securitisation is: ifthe investors have pref-
cree Tro enyPicked assets, securitisation willleave theoriginator with
assets. Ii one imagines an entity as a composite of good, medium
if the good assets are chipped off, what remains is junk aset. and poor assets.
 Threats in Securitisation Syn. 20 75

The Bank for International Settlements in a 1992 publication titled ASSET

' TRANSFERS AND SECURITISATION had the following to say on this:
It is sometimes contended that banks in seeking a good market recep-
tion for their securitised assets may tend to sell their best quality assets
and thereby increase the average risk in their remaining portfolio. In-
vestor and rating agency demand for high quality assets could encour-
age the sale of an institution's better quality assets. Moreover, an ongo-
ing securitisation programme needs a growing loan portfolio and this
could force a bank to lower its credit standards to generate the neces-
sary volume of loans. In the end a capital requirement that assumes a
well-diversified loan portfolio of a given quality might prove to be too
low if the average asset quality has deteriorated.
Such arguments are not easy to support with empirical evidence.
Banks that have securitised large amounts of assets do not exhibit signs
of lower asset quality. It should also be noted that banks which con-
stantly securitise assets are necessarily interested in maintaining the
quality of their loan portfolio. Any asset quality deterioration would af-
fect their reputation and their rating and indeed the capital adequacy re-
quirement imposed by their supervisors.

20.5. Excessive leverage

The subprime saga is an adequate witness to the fact that securitisation transac-
tions promote excessive leverage in the system. Presence of successive structured
investment vehicles investing in securitised products meant that the total leverage
in the system became huge.

20.6. Loosening of credit standards

Yet another critique of securitisation is that banks abdicate responsibility and
loosen credit underwriting standards given the fact that they would not be hold-
ing the assets on their balance sheet. Several people have contended that banks
were encouraged to originate pool quality assets since their retained risks were
small. In response to this, international regulators have proposed regulations
which require (a) minimum holding period for securitised assets; and (b) mini-
mum originator risk retention in securitisation transactions.
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 CHAPTER 2

INDIAN SECURITISATION MARKET

SYNOPSIS
1. Market Overview and Volumes ............. 79| 3. Securitisation guidelines of the RBI...... 100
1.1. Market activity ...................02 79| 4. Regulatory capital and Basel II.............. 101
1.2. Form of security ..................0. 84| 5. Listing of asset backed securities........... 103
Boe. Asset classes:fy Oailanccs 85} 6. Invesments by mutual funds................... 104
1.4. Transaction structures .............. 87| 7. Regulatory compliances: stamp duty
1.5. Transaction structures post Cia fate Bee aha bes Eee P ets certahs et Pee 105
RBI Guidelines:..................0. O23) as (Taxation. 28..2) 0 e228. Ais 106
1.6. “Direct assignments” replace 9. ACCOUNONE TUNES ..a.s7ecjecsecs eames -Lares 108
“SECUTILISALION” «0.0... eeeeeeeeeeeeee 92 9-TiiGuidanhcée Note ...1...2.800s. 8 108
1.7. Priority Sector Lending............ 93 9.2. Accounting for Financial
1.7.1 Report of the Nair Instruments AS 30: ..............«+- 108
Committee on Priority App. 1 Stamp notifications in some
Sector Lending.................. 94 States incite ches 208
1.7.2 RBI’s Master Circular on App.2 Guidance Note on _ Secur-
Lending to Priority Sector.. 94 itisation Accounting ................. 208
1.8. Motive for securitisation:......... 93 App.3 Recommendations of Patil
1.9. Investors and investor Committee Report: Asset
MOGIVESs 050.7545). .11b..cdA)4 96 Backed Securities Market....... 208
1.10. Nature and form of credit App.4 Securities Contracts
CNINAMCCTICUER: fir. 206. ssse aren. -oghee 96 Regulation (Amendment)
Zoe RA BURCNNIE coo sos ee Seton ecdetontastsa
doonoratiders 96 Bil 2001. Gate leeae hth 208
2.1. The RH Patil Committee re- App.5 Extract of report of the Parlia-
| eenee an ae ee ae 98 mentary Standing Committee
2.2. Amendment of the definition of Finance on Securitisation... 208
of “securities” under the App.6 Securities and Exchange
Securities ACt ..............csccceseseee 98 Board of India (Public Offer
2.3. Recommendations of _ the and Listing of Securitised
Capital Account Debt Instruments)
Convertibility Committee ........ 99 Regulations, 2008.............:::0 208

Securitisation as a financial instrument has been in practice in India since the

early 1990s — essentially as a device of bilateral acquisitions of portfolios of fi-
nance companies. As would be the case elsewhere too, securitisation in its initial
form found its way in loan sales. There were quasi-securitisations for quite a
while where creation of any form of security was rare and the portfolios simply
ended from balance sheet of one originator over to that of another. Most of these
transactions were backed by extensive originator support. As there were no rules
as to regulatory capital requirements, most of the so-called securitisation inves-
tors were actually taking exposure on the balance sheet of the originator.
While credit support levels granted by the originator remain very high, the
transaction structures evolved over time. From unstratified pass-throughs, the
market has several types of multi-tranche paper now, including prepayment pro-
tecting, and prepayment-protected classes. These innovations continued upto

77
78 Sya. l Part I—Chap. 2—Andian Securitisation Marke

lines, creating a dis:

2006. whereafter the RBI came with securitisation guide
by constraining the
crimination between securitisations and direct sales, there
have been a
market mostly to direct sales. Needless to say, the RBI guidelines
on, and is dis-
very important theme all over the landscape of Indian securitisati
cussed at lots of places in this chapter, and the following.
s have
Having started sometime in 1996 or thereabouts, securitisation volume
In early
been scaling new peaks every year, The party continued till about 2005,
2006, the RBI came out with guidelines on regulatory capital treatment for secu-
ritisation — these dealt a severe blow to the securitisation market, Subsequent to
the 2006 guidelines, the market turned almost entirely into bilateral assignments
mode, since the Guidelines, the way they were drafted, were not applicable to
bilateral sales. Thus, the Guidelines sent the securitisation market back to the
primitive stage — into bilateral loan sales. Barring securitisation of microfinance
portfolios, most other rated securitisation transactions di ared, However, 6
years later, in 2012 RBI issued revised Guidelines that exten the regulation to
bilateral assignments as well, in fact, barring credit enhancements in case of bi-
lateral assignments.
The RBI Guidelines, 2006 as well as 2012, are discussed at length in a later
Chapter, along with clause-by-clause impact. The overall impact of the Guide-
lines on the securitisation market is discussed in this Chapter.
Thus, in 2006, after the RBI guidelines laying down strict discipline in case of
securitisation transactions, but completely leaving bilateral assignments out of its
scope, the market took several steps backwards, and from esoteric structures that
had started developing by then, went to simplest forms of bilateral assignments.
In 2012, as the RBI imposed restrictions on direct assignments, and ruled out
credit enhancements there, there were strong indications that the market was
moving back towards securitisations. However, the Finance Act 2013 introduced
distribution tax on securitisation transactions, which might leave the market in a
quandary as to how to choose between securiti sations
and direct assignments.
_ Another factor, also regulation-driven, is the existence of priority-sector
lend-
ing requirements in India. Banks in India need to dedicate a substantial percent-
age of their loan book into so-called priority sector advances. As several banks
lack the network or infrastructure to create priority sector lending book them-
selves, they are left with no choice but to acquire priority-sector qualifying port-
folios, orto invest in asset-backed securities, originated typically by non-banking

to such priority-sector-lending eligible loans.

 Markat Overview and Volumes Syn. 1 719

whereas the idea, admitiedly, was to encourage securilisation transactions by

granting a pass-through status to SPVs.
In future too, it is expected that the market will continue to search its way
through the rugged regulatory landscape.

1. MARKET OVERVIEW AND VOLUMES

1.1. Market activity

After the collapse of the Lehman Brothers in September, 2008, the world wit-
nessed a sharp decline in economic activity and shattered investor confidence.
The recession in the USA had a contagion effecton several leading economies of
the world. Several people associated this with securitisation — that US banks went
vehemently originating “toxic assets” as they would still be able to securitise the
same and pass on the risks to investors, retaining minimum risks to themselves.
International regulators blamed the originate-to-distribute model. where \oans
were simply bundled up to be converted into securities without considering the
quality of the assets backing these securities, exposing the investors to higher
credit risk. This meant that the loan underwriting standards were lax, the origina-
tor kept creating bad assets and the credit risk was transposed to the investors. To
add to the complexity in the transactions, not only there were plain securitisations
but also synthetic transactions embedding credit default swaps. The role of the
credit rating agencies was frowned upon as was the very essence of securitisa-
tion. Also the public disclosures made by the financial institutions on the magni-
tude of the risk associated with their on and off balance sheet exposures were not
transparent calling for need for addressing these regulatory shortcomings. Over-
all, the global environment of securitisation was full of hate, suspicion and nega-
tive vibes.
Securitisation market in India was never strong; some Indian banks had expo-
sures to global CDO transactions but domestic volumes were never big enough to
be impacted by the global meltdown. The economy of the country seemed to be
affected for sometime, but then India emerged out of recession soon enough.
Hence, Indian securitisation market has been affected more by internal issues
than by external shocks.
There has been, however, decline in volumes. As per an ICRA report on the
Indian Structured Finance Market, issuances volumesin FY 2008-09 fell by 18%
over the previous fiscal. In FY 2009-10, the volume fell by 22% in value and
41% in terms of number of transactions. This fall in the volumes and numbers
during FY 2009-10 was largely due to the reduction in securitisation of single
corporate loans or Single Loan Collateralised Loan Obligations (CLOs) and Loan
sell-offs (LSOs). However, in FY 2009-10, volumes of securitisation of retail
assets which included ABS and RMBS improved by a 61%. The negative trend
continued during FY 2010-11, when the issuance volumes in the Indian securiti-
sation market fell by 29%. The fall was marginally because of securitisation of
retail loans that dropped by 6% only, major contributors to the fall were CLOs
80 Sya. | Part 1—Chap. 2—Indian Securitisation Market

volume
and LSOs again.’ The FY 2011-12 saw a trend reversal: the issuance
of
grew by 15% over the previous fiscal owing to 26% rise in securitisation
n
ma lene Tesaati,Sees hees‘ofenedmemeactions a.tednia

2012-13,
It is notable that the data above includes securitisation as well as so-called di-
rect assignments, that is, bilateral portfolio transfers.
As discussed earlier, most of securitisation or bilateral assignments in India,
lately, have been in asset classes that qualify for priority sector loan transactions.
Hence, the Indian market is not driven by economics of securitisation — it is more
a device of selling down portfolios that presumably qualify for priority sector
treat For ment.
the originators — it is the classic motivations such as off-balance,
reduced equity infusion, and stripping of a spread; however, for the investors, it
is simply building up a book of priority-sector compliant loans.
The following data, assimilated from several ICRA reports, shows the growth
path:

Table 2.1: Number of securitisation transactions

 Market Overview and Volumes Syn. 1 81

Table 2.2: Volume of securitisation transactions

Volumes | |
| (Rs. In |
billions)
— - bait dard . ~ --}-——__+—___1__ — ;

FYO2 FYO3 FY04 | FYOS | FYO6 FYO7 | FY06 | FY09 FY1O | FY J] |FY 12
}
ze 129 | 364 | $09 |222.9 |1785 | 2342 | 313.2 | 135.8 |214.97|218.19| 260.71.
amps | 08 | 148 | 296 aera | 16.1 | 9 | 329 | 625 |5029 |76.280
CDO/LSO) 19.1 | 243 | 263 |258 | 210 |119.0|3182 E351.2 |145.8 |44.41 | 22.17
PG | 40 | 19 | 0 ion | | Pr SSH |
Others | 00 | 04 | 05 | 100 68 | | 19 |54. |63
|

36.8 | 77.7 | 139.2 |308.2 |256.5| ) 425.9

Table 2.3: Rating downgrades and average extent of downgrade in

ABS and LSO3 ratings since 2004-05

NA: Not Applicable

Looking at the history of securitisation transactions, the market for securitisa-

tion had zoomed from 2002 to 2005, with a cumulative growth rate of nearly
100%. In financial year 2004-05 and larger part of 2005-06, volumes continued
to surge. Innovative transactions with prepayment protected tranches, etc kept on
emerging in the market. The scenario became really heated up with the Finance
Minister announcing in his Budget Speech that (a) the definition of the term ‘se-
curity” under the Securities Act will be amended to allow trading of securitisation
instruments’; (b) a committee, to look into all aspects of bonds and securitisation
transactions will be appointed”.
Thereafter, the slowdown started, once the RBI proposals were announced, and
finally, the February 2006 Guidelines were issued. Post 2006 Guidelines, the

4. We discuss this amendment later in this Chapter.

5. The R H Patil Committee report is discussed later in this Chapter.
82 Syn. | Part 1—Chap. 2—indian Securitisation Market

market got directed towards direct assignments. Then, in 2012, the RBI came up
with revised Guidelines on Securitisation’. The revised Guidelines intoduced
regulations on direct assignments prohibiting credit enhancements on direct as
signments. These developments, including the introduction of undreamt-of distr
bution tax in 2013, have taken the economic rationale of securitisation almost
completely off, leaving it only to the necessity-driven priority-sector loan sales,
Even as the volumes over the years have been volatile, the market has been un-
able to grow in its reach. ICRA’s report on the Indian Structured Finance Market,
April 2009 points out that the ABS market, dominant part of the structured f)-
nance market has been driven by handful of issuers. In 2009, the top five ongina-
tors accounted for about 80% of the issuance volumes, The scenario remained
almost the same in FY 2010, when the top five originators accounted for about
81% of the issuance volumes.In FY 2011, six players in the market remained the
key originators. FY 2012 showed a slight spread: the five largest originators al-
together contributed to over 60% of the total numbe ofr ABS issuances, In PY
2013, a single originator accounted for more than 1/3” of the total issuance. All
issuances came from NBFCs and MFIs, and all buyers were banks — thereby in-
dicating that the market is almost entirely dependent on the priority-sector activ-
ity.
Amendment in the Securities Contract Regulation Act in 2007 included securi-
tized instruments issued by special purpose vehicle in the definition of “securi-
ties”, thereby permitting listing and trading of securitized instruments. The text
of the Amendment Act is reproduced below:
2. In section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
(hereinafter referred to as the principal Act), in clause (h), after sub-clause (id),
the following sub-clause shall be inserted, namely:—
“(ie) any certificateor instrument (by whateve name called),
r issuedto
an investor by any issuer being a special purpose distinct entity which
posses any debt or
sesreceivable, including mortgage debt, assigned
to such entity, and acknowledging beneficial interest of such investor in
such debt or receivable, including mortgage debt, as the case maybe:”.
KKK
Further new section 17A was inserted with regard to the issue and listing ofthe
securities issued referred in Section 2(h)(ie) above and the section as inserted
vide the amendment act is reproduced as below—
After section 17 of the principal Act, the following section shall be inserted,

17A. “Public issue and listing of securities referred to in sub-clause

(ie) ofclause (h) of section 2.—(/) Without prejudice to the provisions
contained in this Act or any other law for the time being in force, no
se-
curities of the nature referred to in sub-clause (ie) ofclause (h) of sectio
n

6 Guidelines forBanks dated 7 May, 2012: Guidetines for NBFCs, dated

21"August, 2012
 Market Overview and Volumes Syn. 1 83

2 shall be offered to the public or listed on any recognised stock

exchange unless the issuer fulfils such eligibility criteria and complies
with such other requirements as may be specified by regulations made by
the Securities and Exchange Board of India.
XX X

Thereafter Securities Exchange Board of India came out with its regulations in
2008 called SEBI (Public Offer and Listing of Securitised Debt Instruments),
Regulations, 2008 with regard to listing and trading of Pass Through Certificates
(PTCs). (The Regulation has been discussed in detail later in this Chapter). It was
expected that SEBI guidelines would have promoted the securitisation market —
however, that was not to happen. Till early 2013, there has only been one listed
asset-backed security’.
SEBI came out with its guidelines on Real Estate Mutual Funds in 2008 ena-
bling the retail investors to access the realty market. REMF was expected to fa-
cilitate the growth of RMBS and CMBS market. However, this also has not reg-
istered any expected growth rate.
Mutual funds were permitted specifically to invest in securitized paper, which
they were doing, till FY 2010. Thereafter, there were tax issues on taxation of
SPVs — some tax officers sought to impose tax on all incomes distributed by
SPVs where mutual funds were investors, which drove away mutual funds as
investors.
As we will be discussing later in this Chapter, the motives of the originators
prior to the issue of Feb 2006 Guidelines have been (a) booking of gains on sale,
taking advantage of the very minimal accounting rules and no rules from the reg-
ulators; (b) full capital relief, as there were no regulatory guidelines requiring
capital for the originator’s credit support to securitisation transactions; (c) liquid-
ity, particularly in case of non-banking financial companies. There has been very
little arbitrage activity in the market. There have been CLOs, but many of them
are either single borrower transactions, or transactions with low diversity score,
and hence, backed by substantial extent of credit enhancements.Post the RBI
2006 Guidelines, booking of upfront gain by the originators was prohibited in
case of “securitisation” transactions. Stringent capital norms were also laid down,
as first loss and second loss support provided by originators called for full capi-
tal. Hence, profit booking and capital relief disappeared as motives, for “securiti-
sation” transactions. As we said before, since bilateral sales of portfolios or loans
were not covered by the Guidelines, those motivations still remained in case of
bilateral sales.
Since gain-booking and capital relief ceased to be applicable, much of the mo-
tive for proper securitisation transaction died down. Arbitrage motive remained
as the only possible reason—as one can see in some of the securitisations of mi-
crofinance pools.

XXII (multi-originator
7. In January, 2013, IFMR Capital listing the senior securities of Mosec™
the first instance of listing of securitiz ed debt in India.
securitisation) on BSE marked
84 Sya. | Part Chap. 2—dndian Securitisation Market

Several of the drivers that have cleanly boosted volumes in global markets ane
still not present in India — there is virtually noCMBS activity”, There is no activ:
ity in respect of credit cards, probably either because the eosts in terms of stamp
duty are prohibitive, and/or because originators do not have sufficient volumes to
think of securitisation. There are no arbitrage CLOs. There is virtually no CBO
transaction to date. There are scattered future flows transactions, but there could
be lot more given the size of the country’s economy. There are several transac:
tions originated by infrastructu re which are almost replicas of future
operators,
flows securitisations, but it does not seem if they are structur rated ored,
reported
as proper future flows securitisat ion transaction s, It is also doubted whether
proper structured finance principles are applied to such future flows transactions.
Thus, the Indian market has clearly seen three phases:
e Upto 2006 — phase of rapid expansion, innovation, structured, rated
deals.
e@ From 2006-2012 - the era of direct assignments, mostly of priority-sector
assets
e@ From 2012 — the market will continue to explore and find new avenues.
Priority sector deals will possibly take direct assignment route, Securiti-
sation transactions will possibly focus on real economics of structured fi-
nance, and will possibly atiract mutual fund investors.

1.2. Form of security

In the later part of 1990s, creation of transferable securities in the form of pass-
through certificates (PTCs) became common. The word PTC has almost become
synon ymous
with securitisation in India and most market practitioners do not
envisage issuance of notes or bonds as a securitised product. A typical Indian
PTC does not abide by any specific structural features — there are PT'Cs which
have a specific coupon rate, there are structured PTCs and there are PTCs that
have different payback periods. In other words, many such PTCs are essentially
debt instruments — it is only that they are not called as such.
forueSsnance ofPTC hassointensely been associated with themarket that even
completely bilateral deals, which are reall ing loan sales,
used trusts and PTCs. ee Pascal sr

s There are,however, realestate investment trustsin

thegarb ofventure capital funds.
 Market Overview and Volumes Syn. 1 85

. Since SPVs are universally organized as trusts, counsels have commonly be-
lieved that trusts may issue and certify beneficial interest (which is what a pass
through certificate is), but cannot issue debt. This notion is not correct.
The other belief is that having issued beneficial interest certificates, SPVs may
claim to have passed to investors beneficial interest in the asset, and therefore,
the income, such that there is no entitlement to income left to the SPVs. Again,
this is a misnotion, as whether the issuance of PTC amounts to transfer of benefi-
cial interest in the underlying assets to the investors, or amounts to creation of a
fixed rate debt, depends on the nature of the instrument, and not its nomenclature.
Be that as it may, the issuance of PTCs is so common in Indian securitisation
space that the word “asset backed securities” is hardly used in Indian securitisa-
tion conversation — the market commonly refers to PTCs as equivalent of asset
backed securities.
Also, the practice of issuing PTCs in almost all securitisation transactions in
the past has founded a belief, though without any basis, that trusts cannot issue
debt securities or bonds at all. With the distribution tax affecting PTCs (as dis-
cussed in a separate chapter), the market will be forced to explore alternative
forms of securities, particularly debt securities.
The SARFAESI Act deals with an instrument called “security receipt’, but
since security receipts can only be issued by securitisation or asset reconstruction
companies under the SARFAESI Act, these are limited to asset reconstruction
companies only. Note, as discussed later in this Chapter, that the SARFAESI Act
has not been used at all for securitisation transactions.

)ae Asset classes

Over the history of the market in the three phases of existence as discussed
above, the market has experimented several asset classes: auto loans, personal
loans, residential housing loans, gold loans, etc. There were several cases of cor-
porate loans, including single-loan sell-offs, future flows, project receivables, toll
revenues, etc. CMBS transactions that are characteristic of the Western world —
where the commercial real estate itself is the real collateral, are still not common.
However, lately, the market has almost entirely shrunk to asset classes that
qualify as priority sector loans in the hands of the buying banks. For tax reasons,
mutual funds had disappeared as investors between 2010 to 2012; of course, with
tax clarity as far as mutual funds are concerned introduced by Finance Act 2013,
there are strong reasons for mutual funds to start investing in securitisation trans-
actions now.

Early attempts to bring CLOs/ CDOs to the market by ICICI did not succeed.
However, subsequently, there have been several private placement deals where
either single corporate loans, or single corporate bonds, have been brought to the
market. Some of them have highly questionable structures — for example, where
being
the risk weight applicable on a corporate bond (100%) is supposedly
ng
brought down to 20% due to a put option being given by the sponsori
86 Sya. i Part 1—Chap. 2—Andian Securitisation Market

bank. These aberrations are there in amy market, and the sooner they die down,
the better.
During 2004-05, several CLO transactions have surfaced, essentially from
viewpoint of capital relief. However, arbitrage CDOs are yet to emerge in the
market.
The asset classes in the Indian market are typically classed into RMBS, ABS,
CLOs and LSOs. Residential mortgage backed securities (RMBS) and hon.
mortgage backed retail loan securitisations (ABS) are well known in international
markets. CLOs in India are pools of corporate loans ~ they do not resemble the
typical diversity features of international transactions; they are not reinvesting
type transactions, and they do not have several rated tranches as international
CLOs have. If it is sell-down of a single loan, it is called loan sell-off or LSO.
The so-called LSO lacks economic essence as a securitisation deal, as the buyers
take a direct exposure in the single borrower in question, There is no reason as to
why such a transaction should be called a securitisation transaction, as the pur-
pose could have been achieved by a simple loan sale. However, if the underlying
loan is transformed into securities, it may be easier for asset managers to invest
in the same, as they cannot buy loans as such,
RMBS was a major asset class in early years of securitisation. It almost com-
pletely disappeared in 2007 and 2008. In FYs 2009, 2010, 2011 and 2012 there
seems to be a revival of the RMBS market:the overall shareofRMBS issuances
(in terms
of value) in total structured finance issuances
has been 6%, 14%, 16%
and 21% in the four consecutive FYs respectively’. In FY 2010, RMBS issuances
(essentially bilateral assignments of residential mortgage loans) registered a
strong growth, the issuance volume getting almost doubledas against thatin FY
2009. The issuance volume declined in FY 2011 by 20%. In FY 2012, the RMBS
increased too along with an increase of 53% in value terms. Reasons for slack in
RMBS transactions are very difficult to understand, except that the mortgage
market is dominated partly by banks and partly by a few large housing finance
companies. Banks do not have reasons to sell their housing Joan portfolios; larger
mortgage originators have significant liquidity alternatives, and therefore, may
not have the motivation to securitise. Even with higher issuances in recent years,
RMBS segment continues to be highly concentrated with few issuers.Till 2008
ABS continued to dominate the market volumes, thereafter itwas taken over by
the Collateralised Loan Obligations (CLOs) and Loan Sell-offs (LSOs) which

and the Second Quarter Monetary Policy Review for 2009-10 proposing revisi
the securitisation guidelines’. Almost 75% of the total LSO issuances ng
FY2010 were made till October, 2009 and there was a substantial for
fall in the vol-
umes ofL-SO issuances for the year. However ABS issuances
picked up again
during FY 2010 and the share of RMBS also improved to
15% of the total issu-

9. ICRA Update on laos Securitisation Market, 2012, savuilaite

TeeDannn/Files/ Articles/igaian'® 0Securtisation we September 2013). «
Paper of I Agri 2040ininpursue oftoePobey
10. The Discussion
Market Overview and Volumes Syn. 1 87

ances in FY 2010. The surge in the volumes can be explained because of the
regulatory factors like the ‘priority sector lending’ targets for the banks and ac-
quisition of such loan pools by the banks from the non-banking financial compa-
nies,
In FY 2011, a wide gap could be seen between the share of ABS and
CLOs/LSOs (in terms of value)-where ABS issuances constituted 68%, LSOs
had only 14% share. The gap became broader drastically in FY 2012 with ABS
having 71% share in issuance values and LSOs getting only 6% share.
Revolving structures are still not there. ABCP conduits also do not exist.
Transactions are both rated and unrated. Transactions are mostly unlisted, but
SEBI regulations allow listing. Considering the newfound interest in project fi-
nance, securitisation of toll receivables and other receivables from infrastructure
projects may increase.
Another important growth area is the securitisation of lease receivables, promi-
nent lease finance companies and the Indian Railway Finance Corporation
(IRFC, a Central Government organization) securitised their lease receivables. A
lease receivable transaction originated by IRFC was executed in FY 2009, 2010
and 2011.

1.4. Transaction structures

Prior to the RBI Guidelines of Feb 2006, the market was trying various innova-
tive structures. Besides simple structures, there were evolving varieties of inno-
vations emulating international transactions. For example, pre-2006, one might
have noticed:
e Simple, one class structure with substantial extent of residual interest
retained by the seller
e Time tranching of cashflows, with some classes taking all payments dur-
ing first few months
e Prepayment protected classes and prepayment protecting classes
e Re-securitisation of securitised receivables
A notable feature of the market is the dearth of rated mezzanine tranches of-
fered to investors. Until the RBI Guidelines 2006, there was no reason for the
mezzanine market to exist, as the originators could retain a sizeable chunk of first
loss piece without any capital consequences. The RBI Guidelines were expected
to force a mezzanine market to emerge since retention of mezzanine piece by the
originator would lead to a substantial loss of regulatory capital. However, the
RBI Guidelines 2006 simply led to the securitisation market moving into the
more convenient bilateral route. The Revised Guidelines of 2012 impose re-
quirement of an originator retention of 5% or 10% depending on the original ma-
turity of the loans; however, the actual enhancements required by rating agencies
a
are substantially higher. Once again, there is an opportunity for development of
AAA tranches
mezzanine piece market.There are scattered deals where less than
53 Sya. i Part b—Chap. 2—dadian Securitisation Market

have been sold to imvesters; however, the market has a marked preference tor
AAA twanches.
Evolution of the market over period of time shows that the credit enhancements
have so far been sized extremely conservatively, particularly aller the subprime
crisis. The sizes have ranged from 8% to as high as 30%, Credit enhancements
have come in form of residual interests retained by the OFLBANALONS, cash collat-
eral, excess spread, etc. In some cases, originators have provided pul options on
the securities offered to investors, thereby virtually ending up into a case of full
recourse,
Another typical feature of the Indian market is the existence of the so-called
“premium structure” where receivables get sold at more than their outstanding
principal value, This is usually avoided in global securitisation transactions, be-
cause selling receivables at higher than par value amounts to encashing a part of
the excess spread, which actually would not materialize if there was a prepay-
ment. There are several other reasons for not selling receivables at more than par.
However, in India, probably due to a wrong notion that booking of gains on sale
would not be possible unless receivables are sold at higher than par, the practice
of premium structure came up. In FY 2010, preference for premium structures
came down to 37% of the total ABS issuance as against 60% in FY 2009. In case
of RMBS transactions also all transactions were structured at par, The preference
for premium structures is declining even now: premium structures accounted for
only 10% of the total ABS and RMBS issuan during thecesyear in FY 2012, as
against 18% in FY 2011.

1.4.1 The extent of form of credit enhancements .

Several transactions have used a “staggered payment” structure where the
payments collected in a particular month are staggered in a certain ratio and re-
leased in the next, or next to next month. Possibly, the objective of this structure
is to avoid the fluctuations in monthly collections affecting investors, but these
structures introduce commingling risk and by allowing the originator to create a
reetre eden ae MeCoats sad whet fe pameen:qver, male iptage
structure weak.

Assuming that the mark of maturity of the securitisation market isthe declini: ng
levels ofcredit enhancements, the market has not come of age and in fact, rating
 1) Cash Collateral 1) 11.75%
nited 2) Principle Subor- 2) 15%
dination
3) Subordination
of
1) Cash Collateral 1) 11.83%
2) subordination of 2) 15.00%
15.00%

| 1) 11A5%
| 2) 15.00%

1) Cash Collateral | 1) 15.5%

2) Subordinationof | 2)7.4%
EIS
1) Cash collateral 1) 12.75%of
2) Subordination the pool princi-
3) Subordinationof | PA!
2)13.04%
Market Overview and Volumes Syn. 1 91

Month Originator Transaction Form of Credit

Enhancement
March 2010 Bank of Baroda Bank of Baroda 1) Cash collateral
Mar-03 MBS | 2) EIS
PTC Series A

March 2010 Canfin Homes Lim- | Pass Through 1) Cash collateral

ited Certificates 2) EIS
(PTC) MBS 1

Table 2.5: Credit enhancements in some older transactions

Month Originator Transaction Form of Credit En- Size

hancement
Dec 09 Share Microfin | Share Microfin Loan Pool Cash Collateral 9%
Ltd. D.A. Dec-09 Subordination 18.75%
EI S 7.43%
Dec 09 Reliance Capital |RCL CV, Car and CE | Cash Collateral 13.5%
Ltd. Loan Pool D.A. Dec-09
Reliance Capital |ILSS 5 Trust 2010 Cash Collateral
Ltd.
Oct 09 Reliance Capital | ILSS 6 Trust 2010 Cash Collateral 13.8%
Ltd. E IS 5.15%
Sep 09 Reliance Capital | ILSS 2 Trust 2010 Cash Collateral 13.20%
Ltd. EIS 1.85%
Sep 09 Reliance Capital | ILSS 4 Trust 2010 Cash Collateral 12.75%
Ltd. E IS 2.09%
Aug 09 Reliance Capital | ILSS 1 Trust 2010 Cash Collateral 12.30%
Ltd. EI S 1.31%
May 09 Manappuram Gen- | MAGFIL Loan Against | Subordination 30%
eral Finance and | Gold Pool D.A. Jun-09 Cash Collateral 5%
Leasing Ltd.
Apr 09 Sundaram Finance | Sundaram Finance Ltd. | Cash Collateral 13.50%
Ltd. CV Pool D.A. Mar 2009
Sundaram Finance | Sundaram Finance Ltd. | Cash Collateral 15.00%
Ltd. CV Pool D.A. Mar 2009
I

Mar 09 Share Microfin Share Microfin Loan Pool Subordination 12.00%

“tt Ltd. D.A. Mar -09 Cash Collateral 8.50%
EIS 9.60%

Sundaram Finance Sundaram Finance Ltd. Cash Collateral 11.70%

Ltd. CV Pool D.A. Feb 2009

Sundaram Finance Sundaram Finance Ltd. Cash Collateral 13.75%

Ltd. CV Pool D.A. Feb 2009
I

SREI _ Infrastruc- Construction Equipment Cash Collateral 15.13%

Feb 09
ture Finance Ltd. Loan Pool D.A. February EIS 4.33%
2009
 Form ofCredii Bn
hancement

Kothari’s of
A}l the above are basedon press reports on ICRA website, compiled by Vinod
fee
_ The dates above are dates of the ratings
4. References to EIS in the form of credit enhancement are to excess spread.

1.5. Transaction structures post RBI Guidelines of 2006;

Clea there is a change in both the form and the extent of credit enhancement
rly,
subsequent to the RBI guidelines.
e The first change is that several originators have shifted from a securitisa-
tion structure to what is termed as “direct assignment” structure (see be-
low for more). A direct assignment is a bilateral portfolio sale — there is
no SPV here as the buyer is an operating company or investor. In view of
the language of the RBI Guidelines, it is felt that these transactions will
not be coveredby the RBI Guidelines, which explicitly define securitisa-
tion to mean transfer of assets to SPVs. In the opinion of the author, this
is a flagrant avoidance device and it would be clearly unfortunate if the
regulators allow this to happen for long. In retrospect, one sees that the
RBI took good 4 years to realize it mistake — it is only in the Discussion
Paper of April 2010 that the RBI proposes to extend the regulatory re-
nts
gime to direct assignmeas well.
e The second perceptible change, for some of the earlier deals, was that in
several deals, instead of credit enhancements provided by the originator,
there is a “third party guarantee”, typically from a bank. This seems to
have gone away in later deals — as seen in the Table above.

1.6. “Direct assignme

vs. “Securitis
nts” ation”
’
In what was clearly a reaction to the RBI’s Guidelines on securitisation of

option.
 Market Overview and Volumes Syn. 1 93

During FY 2010, 90% of the retail loan transactions were bilateral assignment
pools. These are largely driven by the regulatory requirements for the banks re-
quiring them to have certain portion of their advances in the “priority sector.”
Banks usually acquire these portfolios from NBFCs as the priority sector lending
guidelines do not apply to NBFCs sector. As per the ICRA Update on the Indian
Structured Finance Market 2010'', out of 117 ABS and RMBS transactions, 103
transactions pertained to direct assignment of retail loan receivables. Further,
ICRA Update of April 2011 reflects that in FY 2011, about 80% of the total
number of ABS and RMBS transactions has been in the nature of direct assign-
ment transactions. In terms of value, the bilateral assignments accounted for
about 90% of the issuances during FY 2011. In FY 2012, direct assignments ac-
counted for about 75% of the ABS and RMBS transactions in India, as per ICRA
Update of May, 2012”.
In the 2010 edition of this book, this author had commented: “The market view
that assignments will not be covered by the RBI guidelines would also be only
short-lived. Therefore, capital requirements will still have to be based on first
layer of loss support and not on the legal form of the transaction”. In retrospect,
the RBI took good 4 years to understand this and it was only the April 2010 Dis-
cussion Paper’ that sought to extend the regulations to direct assignments too.
Finally, RBI issued revised Guidelines on Securitisation in May 2012 for banks
and in August 2012 for NBFCs, covering prudential treatment of transfer of as-
sets through direct assignment of cash flows and the underlying securities, if any.
Pursuant to RBI’s revised Guidelines on Securitisation in 2012, there was a sig-
nificant shift from the assignment route to the conventional securitisation route’.

1.7. Priority Sector Lending

Since most of the securitisation transactions in India are priority-sector loan se-
curitisations, it is important to understand the norms on priority-sector lending in
India. Banks in India are required to direct at least 40% (32% in case of foreign
banks with less than 20 branches) of their bank credits to certain sectors, catego-
rised as priority sectors, The sectors are as follows:
. Agriculture
Micro and Small Enterprises
Education
Housing
Export Credit
SDAWP
WN Others

11. In April 2010, available at http://www. icra.in/Files/Articles /A

pril%2026-
2010%20Indian%20SF%20Market%20Update.pdf (accessed on 2nd September 2013).
12. Available at http://icra.in/Files/Articles/Indian%20Securitisation.pdf (accessed on 2” September
2013).
pdf
13. The Discussion paper is available at http://rbidocs.rbi.org.in/rdocs/Conten/PDFs/DPDG 190410.
accessed on 2nd September 2013).
pdf
14. ICRA Update at http://www icra.in/Files/ticker/SH-2013-1-ICRA-SF%20Market%20Update.
(accessed on 2nd September 2013).
oS Sya. | Part Lb—-Cheap. 2—Jndian Securitisation Market

to mandatorily park
Banks failing to achieve the prianity sector targets have
funds of NABARD.
funds into Rural Infrastructure Development Funds or other
or by way
Buying securitised portfolios, whether by way of direct assignment
priority sector
of securitisation, is one of the avenues for banks to achieve their
targets, as discussed below.

1.7.1 Report of the Nair Committee on Priority Sector Lending

As proposed in Paragraph 94 of the Monetary Policy Statement 2011-12, the
ex-
Reserve Bank of India in August 2011 set up a Committee to re-examine the
isting classification and suggest revised guidelines with regard to Priority Sector
lending classifieation and related issues (Chairman: Shri MV Nair), The Commit-
tee submitted its report in February 2012'°. In the Report, theCommittee recom
mended that bilateral assignment of loans and securitisation should continue to
be allowed to be classified as priority sector provided the underlying asset is eli-
gible for classification under priority sector advances,

1.7.2 RBI's Master Circular on lending to Priority Sector

RBI, vide its Master Circular on lending to Priority Sector dated 2" July,
2012'°, clarified that investments by banks in securitised assets, representing
loans to various categories of priority sector, shall be eligible for classification
under respective categories of priority sector (direct or indirect) depending on the
underlying assets, provided the securitised assets are originated by banks and
financial institutions and fulfil the Reserve Bank of India guidelines on securiti-
sation. Further, outright purchases of any loan asset eligible to be categorised
under priority sector, shall be eligible for classifica under thetion
respective cate-
gories of priority sector (direct or indirect), provided the loans purchased are eli-
gible to be categorized under priority sector.
The above Guidelines were revised vide RBI’s Circular dated 20"July, 2012",
wherein it was stated that investments by banks in securitised assets, representing
loans to various categories of priority sector, except ‘others’ category, are eligible
for classification under respective categories of priority sector (direct or indirect)
depending on the underlying assets, provided that the securitised assets are origi-
nated by banks and financial institutions and are eligible to be classified as prior-
ity sector advances prior to securitisation and fulfill the RBI guidelines on secu-
ritisation. Similar revisionswere made for assignments/direct purchases.

1S. The Report is available at http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pafs/PRNC2

(accessed on 2™ Sepunadber 2013). es ——
" - ’ ' . / 4 hy iF} 7 PDP: ORMPO1071

2013).: alsoseethe2013Master Cireular a shar Soe

SO ay meiniscripts/BS_ViewMasCirculardetails aspx7id=8191 (accessedon2” Septeriber
17. The Revised Guidelines available at:
— idocs.rb g in/rdocs/notification/PDFs/1907201 2RGpat (accessed on2™Sepnenther
 Market Overview and Volumes Syn. 1 95

1.8. Motive for securitisation

Since the prominent originators of transactions in the marketplace are banks
and financial intermediaries, the primary motives in case of banks and financial
intermediaries are essentially capital relief, profit stripping and liquidity.
Capital relief as a motive will possibly hold for NBFCs and some highly lever-
aged banks. Capital relief is also a strong motive for microfinance entities. How-
ever, if capital relief was the stronger motive, synthetic transactions would have
provided a better solution. Synthetic transactions have not emerged as yet, as the
RBI came with draft guidelines on credit derivatives twice, but never finalized
the same.
In case of proper securitisation transactions, the amount of capital relief will
depend on the originator credit support. As the Table above indicates, for most
transactions, first loss levels are high enough, and are originator-retained. Hence,
the question of any capital relief does not arise.
In case of direct assignments, prior to 2012, in absence of any Guidelines, ori-
ginators might be taking their own convenient view. Some might only be keeping
on books the retained portion, and computing capital requirement on the same.
Profit booking has been a strong motive for several transactions, and this could
be the only reason for prevalence of the premium structure. Once again, the Feb
2006 guidelines of the RBI called for “amortization” of the profit over the tenure
of the transaction. However, as there was no apparent rule applicable to direct
assignments, originators used their own arbitrary rules. In most cases, originators
went about booking profit based on the difference between the sale price and the
carrying value of the receivables, no matter what extent of risk the originator still
retains in the transaction.
Since in the recent past, securitisation transactions have mostly been confined
to securitisation of gold loans, loans against properties, micro finance receiv-
ables, personal loans, and so on, the primary motive of the originator is ability to
leverage. Thus, liquidity beyond what is available by way of on-balance sheet
sources has been a strong motive.
As the market around 2010-2012 was concentrated almost entirely on the prior-
ity sector loans, where NBFCs were originators, and banks were investors — the
motives on either side are very clear. For sellers, it is the lower cost of funding
that they can dictate from investing banks, who have no options, particularly to-
wards the end of the financial year. In fact, to quite an extent, the sharp pace of
growth of several asset finance companies owes itself to securitisation. Securiti-
sation became a business model for several NBFCs.
The RBI Guidelines of 2012 specifically bar synthetic securitisations. We are
of the view that synthetic securitisations would have been an excellent device of
risk management for banks, where liquidity may not have been the motive, and it
is sad that the RBI, taking an over-cautionary approach since the subprime crisis,
has put a total bar on synthetic transactions.
96 Syn. 2 Part |—Chap. 2—Indian Securitisation Markei

1.9. Investors and investor motives:

CoOMpA-
Investments in securitisation transactions mostly come from Insurance
nies, mutual funds and banks. The life insurance companies find the AAA rating
and higher spreads as particularly attractive. Kor a life insurer, the prepayment
risk is a significant risk, as life insurance companies need to maintain invest:
ments in order to make their embedded profits. Nevertheless, these companies
have been significant investors in securitisation transactions,
Investors are clearly driven by yield motives. Several prepayment protected is-
suances have come up in the market recently — making it easier fixed income and
fixed maturity investors to pick up asset backed securities,
Some recent SEBI notifications have widened the scope of securitisation invest-
ments by mutual funds — see later in this Chapter. However, as we discussed ear-
lier, mutual funds went out of the market due to tax uncertainties on tax treatment
of special purpose vehicles — see discussion in our Chapter on taxation issues,
As we have noted earlier, in 2010-2012 period, almost the entire issuance of
securitised paper (or direct assignments, in fact, most of it was direct assignment)
was lapped up by banks — who bought these receivables for priorit y
sector classi-
fication.

1.10. Nature and form of credit enhancements:

In global markets, subordination is the most commonly used form of credit en-
hancement. In India, for some strange reason, cash collateral is the most com-
monly used form — as seen in the Table above. Cash reserve is appropriately a
tool of liquidity enhancement. There is no reason to make vigorous use of cash
collateral as a form of credit enhancement. Cash collateral makes the transaction
unduly burdensome, as any cash collateral implies negative carry.
Since asset backed securities are relatively new, investors have a preference for
AAA instruments. In case of asset backed securities backed by pools, there have
been very few less than AAA deals that have been placed with investors. Of
course, in case of CLOs, particularly those backed by singular loans, lower rat-
ings have been common. Most transactions in the market, therefore, end up with
a couple of senior classes. Multi-class issuances with several rated tranches are
uncommon.

Apart from subordination, over-collaterlisation, guarantees, recourse personal

guarantees of promoters, etc. are used as other forms of enhancement. The extent
oot macements isrelatively veryhigh. which, incaseofdirect assignments,
is
very pain , as there are no capital consequences of providing such
en-

2. LEGAL STRUCTURE
In 2002, India enacted a law that reads Securitisation
Reconstruction
nancial Assets and Enforcement of Security ay
ey2002 (SARFAESD
 Legal Structure Syn. 2 97

(see later part of this Book). Though masquerading aS a securitisation-related

law, this law does very little for securitisation transactions and has been viewed
as a law relating to enforcement of security interests, as a very narrow avatar of
personal property security laws of North America. In commercial practice, the
SARFAESI Act has been very irrelevant for real life securitisations.
Hence, securitisation transactions in India rely almost entirely on common law.
Most securitisations in India adopt a trust structure — with the underlying assets
being transferred by way of a sale to a trustee, who holds it in trust for the inves-
tors. A trust is not a legal entity in law — but a trustee is entitled to hold property
that is distinct from the property of the trustee or other trust properties held by
him. Thus, there is an isolation, both from the property of the seller, as also from
the property of the trustee. The trust law has its foundations in UK trust law and
is practically the same.
Therefore, the trust is the special purpose vehicle. All transactions
to date have
used discrete SPVs — master trusts are still not seen.
The trustee typically issues PTCs. A PTC is a certificate of proportional bene-
ficial interest. Beneficial property and legal property is distinct in law
— the issu-
ance of the PTCs does not imply transfer of property by the SPV but certification
of beneficial interest.
In absence of the securitisation law not coming to the help of securitisation
transactions, India is at par with several common law countries which do not
have specific securitisation statutes, but rely on the rich and flexible common law
traditions to carve owt securitisation transactions. However, absence of a legal
regime significantly affects legal thinking on the following:
e True sale. On the face of it, it is futile to write a law on true sale, because
the whole concept of “true sale” is a “sale” which is “true”. While the
law may easily define a “sale”, whether such sale is truly a sale or not is,
by definition. 2 question of examination and observation. Hence, true
sale is a question of determination, and nota subject matter of law. The
RBI guidelines of Feb 2006 made the mistake of laying down at least
some features of what will be true sale. For instance, the RBI guidelines
said that retention of residual interest in a pool of assets will not be in-
consistent with true sale, whereas caselaw suggests to the contrary. This
and other prevailing notions in the marketplace have prejudiced legal
thinking, which continues to affect transactions.
e While law may not define a true sale, law may surely define whether
fractional transfers of assets, transferof future receivables, etc are legally
recognized, and how the same will documented. There is significant con-
fusion at present about these also.
More than the common law of securitisation, the larger stumbling blocks in In-
dia are stamp duty, and an age-old registration law.
Stamp duty arises from the fact that a transfer of “actionable claims” (which
term includes most receivables) will require 2 written instrument, and such
 on Marke!
Sya.2 Part 1—Chap. 2-—dndian Securitisati
9s
whereby
ce” in law, meaning a document
instrument is treated as a “conveyan
A conveyance is a stampable document,
legal interest is conveyed in property. the value
ranging between 3% 10 15-16% on
and most states impose stamp duties tely
conveyance. Since this would comple
of the property being transferred in a r duti es
several states have relaxed thei
rule out any securitisation transaction,

Chapter.
will come in the way of sev~
Registration requirements also, literally applied, gage o!
era! securitisation transactions, A transfer of receivables backed by mort
sferring immovable prop-
immovable property is itself taken as a document tran cost and a bother, As 4
is both
erty, and hence, requires registration. Registration
retained with the seller, who
way out, in many cases, the mortgage interest is
continues to hold the same as trustee for the buyer.

2.1. The RH Patil Committe rt:

repoe
need to de-
The Finance Minister, in his Budget 2005 speech, emphasized the
y, a commit-
velop market for bonds and securitized instruments, and accordingl
manship of R
tee High Level Expert Committee was constituted under the Chair
H Patil to make recommendations. Among other things, the Committee made
secu-
several recommendations about ironing out the legal difficulties relating to
on
ritisation transactions. The committee dedicated a whole section to securitisati
transactions. The report of the Committee was released in Dec. 2005.
Since the recommendations are relevant for securitisation markets in India, ex-
cerpts from the report are appended to this Chapter.

2.2. Amendment of the definition of “securities” under the

Securities
Act
_ The Securities Contracts (Regulation) Amendment Bill, 2005 was introduced
in the Lok Sabha on 16" November, 2005 pursuant to the announcement in
Budget 2005-06 regarding provision of a legal framework for trading of secu-
seCriamuhacs onThence’ Te tealofhe Bl bsOD A notin. 4 8
ommittee on Finance. text ill is reprodu ced
in Appendix 4 to
this Chapter. In view of the report of the Standig Committee, itseemed
Bill wouid be substantially revised. Ms a
The Standing Committee on Finance has done a thorough review of the amend-
ing Bill, and the report of the Committee contains some remarkable discussions
on the relevance of securitisation to India. Extracts from the report of the Stand-
ing Committee are also reproduced in Appendix 5 to this Chapter.
The Bill subsequently became an Act of Parliament and received the assent of
the President on 28th May, 2007 and was called The Securities Contracts (Regu-
lation) Amendment Act, 2007 (Act No. 27 of 2007).
 Legal Structure Syn. 2 99

The Act has inserted a new section 17A to the Securities Contract Regulation
Act whereby public issue and listing of the securitised debt was permissible
thereby infusing more liquidity into the markets
Pursuant to the said Act. SEBI has come up with regulations for listing of asset
backed securities. These are discussed later in this chapter.

73. Recommendations of the Capital Account Convertibility

Committee
The spate of committees that recommended healthy legislative environment for
securitisation continued in 2006. Soon after the RH Patil Committee report and
that of the Standing Committee on Finance, even the report of the Tarapore
Committee on Full Capital Account Convertibility'* had something to say on
preparing a healthy and permissive legal environment for securitisation transac-
tions. Much of the recommendations of the Committee echo those of the RH Patil
Committee, which is not surprising as Mr Patil was himself a member of this
Committee.

The recommendations of the Committee on securitisation were:

(1) Stamp duty at the time of bond issues as also on securitised debt should
be abolished by all the state governments.
(ii) The FII ceiling for investments in corporate bonds of US$ 1.50 billion
should in future be linked to fresh issuances and the present absolute lim-
it should be retained for the year 2006-07 and be fixed at 15% of fresh
issuances between 2007-08 and 2008-09 and at 25% between 2009-10
and 2010-11. The allocation by SEBI of the limits between 100% debt
funds and other FIIs should be discontinued.
(iii) Corporate bonds may be permitted as eligible securities for repo transac-
tions subject to strengthening of regulatory and supervisory policies.
(iv) In the case of the securitised debt market, the tax treatment of special
vehicles that float the securitised debt has to be materially different.
Government should provide an explicit tax pass-through treatment to se-
curitisation Special Purpose Vehicles (SPVs) on par with tax pass
through treatment granted to SEBI-registered venture capital funds.
(v) Securitised debt should be recognised under the Securities Contract and
Regulation Act (SCRA), 1956 as tradable debt.
(vi) The limitations on FIIs to invest in securities issued by Asset Recon-
struction Companies should be on par with their investments in listed
debt securities.
[Para 6.31]

18. Report dated 31” July, 2006.

LUO Sya. 3 Pant l—Chap. 2—Andian Securitisation Market

3. SECURITISATION GUIDELINES OF THE RBI

One of the most significant developments relating to securitisation was the is-
suance of securitisation guidelines by the RBI in Feb 2006. Subsequently, there
was a major amendment in the 2006 Guidelines, videGuidelines on Securitisation
issued in 2012.
There is no question that regulatory guidelines on securitisa most nec-
were tion
essary, and that the market was making rampant misuse of securitisation with
substantial first loss support provided to most transactions without bothering at
all about regulatory capital. However, the RBI Guidelines of 2006 had several
shortcomings. Detailed comments on the RBI guidelines, along with text thereot,
have been pul as a separate chapter in this book.
In April 2010, RBI issued Discussion Paper titled “Emerging Trends in Regu-
lation and Supervision of Securitisation Activities of Banks”"”, proposing re-
placement of the existing guidelines, The Discussion paper proposed minimum
holding period and minimum retention of risk in securitisation transactions, The
financial crisis in US had made the regulators tighten up the regulatory strings
and of the several proposed changes; one of the changes they proposed was of
minimum retention of risk by the issuer in every securitisation to ensure that
there is alignment of interest of the investors and the issuer. Another significant
point made in the Discussion Paper was of minimum holding period; wherein the
assets backing the securities should be few months seasoned before they can be
securitised. The Discussion Paper intended to ensure that enough due diligence is
carried out while assessing the credit risk backing these securities. Howeverin
case of retail loan backed transactions, that are short term in nature, the minimum
seasoning of 9 months would disincentive the issuers. The Discussion Paperis
reproduced as Appendix | in Chapter 3 in this book.
012 that guidelines on resetting of credit enhancement
ately. In the Monetary Policy 2013-14 announced on
proposed to issue the final guidelines on reset of credit
sation by end-June 2013. The Reset Guidelines were is-
1ese have also been discussed in Chapter 3.

RY CAPITAL AND BASEL FRAME-

orate provisions pertaining to securitisation transactions.

the time of preparation of Basel II document, there were
yns and debates about securitisation transactions.
ential and operational guidelines for capital relief, Basel
ased risk weights in case of securitisation transactions, as
yosure. However, unlike in case of corporate bonds, the
securitisation are higher for the originator compared to

prime crisis, Basel II regulations were amended, primar-

risk weights in case of re-securitisation transactions. Re-
CDOs that package asset backed securities or synthetic

*ntation of the Basel Il Accord was carried out in the

minimum capital to risk weighted asset ratio (CRAR) in
) basis points above the Basel II requirements. Under the
inks were to adopt Standardised Approach for credit risk
yproach for operational risk and as per the Prudential
dequacy and Market Discipline - New Capital Adequacy
issued in 2009. For latest text, see Master Circular
06.001/2013-14 dated 2™July, 2013”.

‘or NBFCs at
»cs/Content/PDFs/SETNBF030610.pdf (accessed on 2™ September,
‘ca
 102 Sya. 4 Pant 1—Chap. 2—Andian Securitisation Markei

30"December, 2011. Pursuant to the Monetary Policy 2012-13, finalbppagplions

March, 2018. However, RBI rescheduled the start date for implementation of
Basel III to 1“April, 2013 from 1“January, 2013”, Again, RBI, vide Notification
dated 28March, 2013” clarified that the Credit Valuation Adjustment (CVA)
risk capital charges (as indicatedin Annexure 2 of the Guidelines on Basel II]
Capital Regulations) would become effective as on |"January, 2014.
In the Master Circular dated 1"July, 2013"°, as per Para 5.16.1, a securitisation
transaction which meets the minimum requirements under February, 2006 Guide-
lines and Revised Guidelines of May, 2012 would qualify for the specified pru-
dential treatment of securitisation exposures for capital adequacy purposes.
Banks’ exposures to a securitisation transaction, referred to as securitisation ex-
posures, can include, but are not restricted to the following: as investor, as credit
enhancer, as liquidity provider, as underwriter, as provider of credit risk miti-
gants. The risk weights applicable for securitisation exposures are as below:

<= in ld fel ed ae
AAA | AA pep | SB |B end teowo

he
unrated

Riskweightfororiginator | 20% |30%|50%|100% |Dedwcion®™

*governed by Para 5.16.2

One may notice that India has carved out a 30% risk weight for AA, whereas
under international regulations, the risk weight is 20% for both AAA and AA

In case of Commercial Real Estate Securitisation Exposure, the fi F

are as below: tisk weights

26. Draft Guidelines available at

on” Squeaben, 2A. http:/hrbidocs..rbi orgin/rdocs/coment/pdfs/DRA 301pdf
211(accessed
27. Final Guidelin
are available
es at
rr _— AICI0205
121S pdf (accessed on 2™ Sepnemiber,
(accessedon2” Septenties, 7013), ae _PressReleaseDisplay
aspx Yprid=27862
http://www
2013)
in/scripts/NotificationUser
aspx 7id=7911&Mode=0)
(accessed on 2™ September.
3. Seethe 2013 Master Circular rbidocs.rbi.org.in/rdocs/coment/pdfs
2BI01071
/7 3FA. a
(accessed on2”Sepeember. 2013). _ 3F Apat
 Listing ofAsset Backed Securities Syn. 5 103

or unrated
Risk weight for banks other 100 % 100 % 100 % 150 % 400 % Deduction*
than originators
Risk weight for originator 100% | 100% | 100% | 150%
* governed by Para 5.16.2

However, according to the Master Circular on Based III Regulations dated 1*

July, 2013°', certain securitisations which were earlier required to be deducted
are to be risk-weighted at 1111%. Consequently, the risk weights applicable for
securitisation exposures are as follows: (see Para 5.16.5 of the Master Circular on
Basel III Regulations)

Domestic rating agencies AAA AA A BBB BB B and below or

unrated
Risk weight for banks other | 20% 30% | 50% | 100% | 350% | 1111%
than originators
Risk weight for originator 50% | 100% | 1111%

In case of Commercial Real Estate Securitisation Exposure, the risk weights

are as below:

Domestic rating agencies AAA AA A BBB BB B and below

or unrated
Risk weight for banks other 100% 100% 100% | 150% | 400% 1111%
than originators

5. LISTING OF ASSET BACKED SECURITIES

In May 2008, SEBI came out with regulations on listing of securitised debt in-
struments, known as Securities and Exchange Board of India (Public Offer and
Listing of Securitised Debt Instruments) Regulations, 2008°’. These Regulations
provide for listing of asset backed securities. The unique feature of the Regula-
tions is that they allow listing even in case of asset backed securities that are pri-
vately placed, based on certain disclosures. The text of the Regulations is given
in Appendix 6 to this Chapter.
In January, 2013, IFMR Capital listed the senior securities of IFMR Capital

31. The Master Circular on Basel Il Regulations is available at

-/[rbidocs.rbi.in/rdocs/content/PDFs/7OIIMC010713_A.pdf (accessed on 15th september, 2013.
The notification dated 1™ July. 2013 on the Basel III Regulations stated that the Basel II guidelines
contained in the “Master Circular on Prudential Guidelines on Capital Adequacy and Market Disci-
pline- New Capital Adequacy Framework (NCAF)” dated 1" July, 2013 may be referred to during
the Basel III transition period for regulatory adjustments/deductions up to March 31, 2017.
_p.pdf
32. The Regulations are available at http://www.sebi.gov.in/cms/sebi_data/commondoes/sdireg
(accessed on 2™ September, 2013).
1U4 Syn. © Part lL Chap. 2—tndian Securuivanon Market

debtdin
Mosec'™ XXII oa BSE. This was the first instance oflisting ofseouritise
india. The Mosec™ XXII pool was diversified across 10 states and 94 distnots
across India. CRISIL assigned a rating of A+ (SO) to the semor SDIs of R
Capital Mosec XXII, while the junior anche received a rating of BB. ( S O ) " ,

6. INVESMENTS BY MUTUAL FUNDS

SEBI (Mutual Funds) Regulations, 1990" regulate the right of mutual funds to
make investments in debt securities in general, including asset backed seoun-
ties/mortgage backed securities. Regulation 43(1) allows the mutual fund to in-
vest moneys collected under any of its schemes in securitised debt instruments,
which are either asset-backed or mortgage backed securities.
The Seventh Schedule to the Mutual Fund Regulations 1996 lays down the re-
strictions on investments. It provides:
|. A mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer which are rated not below invest-
ment grade by a credit rating agency authorised to carry out such activity
under the Act. Such investment limit may be extended to 20% of the
NAV of the scheme with the prior approval of the Board of Trustees and
the Board of asset management company.
Provided that such limit shall not be applicable for investments in gov-

Provided further that investment within such limit can be made in

backed securitised debt which are rated not below investment
grade by a credit rating agency registeredwith the Board.
1A. A mutual fund scheme shall not invest more than 10% of its NAV in un-
rated debt instruments issued by a single issuer and the total investment
in such instruments shall not exceed 25% of the NAV of the scheme. All
such investments shall be made with the prior approval of the Board of
Trustees and the Board of asset management company.
On 29" March, 2006, SEBI came out with a clarification. The exact wording of
this Circular
is as under:
Re: Applicability of Investment Restrictions for Securitised Debt.—
This has reference tothe e-mail dated February 25, 2005 on the cap-
tioned matter.
The applicability of restrictions on investments in Debt Securities in-
cluding securitised debt are specified under Clause 1 of Schedule
the SEBI (Mutual VII to
Funds) Regulations,
1996.

= eer
am befSelstisedon10°ame.2013, tfrmr-capital-lists-securitised etn omthe-
Regulations are available http://www
mutuaifundregu 1996 _ppdf. " ‘Sebigov an/oms/sebi_datalcommendocs/SEBI-
exact meaning of the above circular but possibly, what it
lat in reckoning the limit of 15% of NAV as for debt se-
r, the word “issuer” shall not refer to the “originator” in
urities. This sounds quite logical — for instance, if ICICI
fferent transactions, the investments put by a mutual fund
- investments in the pool of assets, which are mutually
nator is the same.
e above circular whether, in case of single obligor secu-
is will be applicable with reference to the obligor.
forms a part of the Master Circular for Mutual Funds*
ircular of 2006) issued by SEBI on 11"May, 2012 and is

trictions for Securitised Debt

For investments made in Securitised Debt (mortgage
backed securities and asset backed securities), restric-
tions as per Clause | of Seventh Schedule shall not apply
at the originator level.
vere permitted to invest in asset backed securities, and
sting, there were tax issues in 2011 and 2012 — which
vay. The tax issues have been discussed separately in

RY COMPLIANCES STAMP DUTY

costs, stamp duty is a major hurdle. The instrument of

ts is, by law, a conveyance, which is a stampable instru-
t distinguish between conveyances of real estate and that
the same rate of stamp duty on the two. The rates would
ing up to 10% of the value of the receivables. Some 5
concessional rates of stamp duty on actionable claims,
.1%, but there is an unclarity as to whether this conces-
ssets situated in multiple locations.
106 Sya. 5 Part }—Chap. 2—Indian Securitisation Market

out unbearable stamp duty costs. The SARFABS! law intended to resolve the
stamp duty problem, but owing to its flawed language, did not succeed.

8 TAXATION
Till now, the tax laws had no specific provision dealing with securitisation,
Hence, the market practice was entirely based on generic ax principles, and since
these were never crafted for securitisations, experts’ opinions differed,
The generic tax rule is that a trustee is liable to tax in a representative Capacity
on behalf of the beneficiaries — therefore, there was a prima facie taxation of the
SPV as a representati ve Howe
of all end investors. representative tax is
the ver,
not applicable in case of non-discretionary trusts where the share of the benefic-
aries is ascertainable. The share of the beneficiaries is ascertainable in all secu-
ritisations — through the amount of PTCs held by the investors, Though the PTCs
might be multi-class, and a large part might be residual income certificates in
effect, the market believed, though with no reliable precedent, that there would
be no tax at the SPV level and the investors would be taxed on their share of in-
come.
The author in the last edition of this book commented, “The scenario is, how-
ever, far from clear and the current thinking may be short lived.” The scenario, in
fact, lived short. There were, at first, assessment, re-openings and demands by
tax officers, and thereafter, an amendment of the law. The amendment of the law
was admittedly done to resolve the problems that mutual fund investors were fac-
ing. As it quite often happens with regulatory drafting, a measure that supposedly
remedies one issue creates several other issues.
The Finance Act, 2013*has amended the Income Tax Act, 1961 and tax secu-
ritisation trust on the amount of any income distributed to investors. Accord-
ingly.Chapter XII-EA has been inserted containing special provisions relating to
tax on distributed income by securitisation trusts. The provisions pertaining to
securitisation have been inserted at three different places:
i. Section 10(23DA) exempts the income of a securitisation trust from the

The term “securitisation” has been annexed the sane meaning asithas
Geiiles) Regilclon lacict WySet oFtar
curiti
ritiees oe owensis | I; or under RBI's Guidelines on secu -

The term “securitisation trust” has been defined under Explanation be-
ee, nection 11STC. Explanation toSection 115TC defines a
securitisa-
mean a trust being an special purpose distinct entity under
Regulation 2(1)(u) of SEBI (Public Offer and Listing of Debt
Securities)
Regulations or an i Vehicle
Semanal rv pao under RBI Guidelines
on se-

36. Income Tax amendments in the Finance

14/fb/bilI3 pat (accessed on2” Septemiber 2013) 2013 at bittp://indimicin/ib201t3-
studge
Taxation Syn. 8 107
ze
i. Section 10(35A) seeks to exempt any income by way of distributed in-
come referred to in Section 11STA received from a securitisation trust by
any person being an investor of the said trust.
ase
m1. Under Chapter XII-EA, Section 11STA imposes tax on any amount of
income distributed by the securitisation trust to its investors and the secu-
ritisation trust shall be liable to pay additional income-tax on such dis-
tributed income at the rate of 25% on income distributed to any person
being an individual or a Hindu undivided family; and 30% in other cases.
Proviso to the section makes the section inapplicable in respect of any
income distributed by the securitisation trust to any person in whose case
income, irrespective of its nature and source, is not chargeable to tax un-
der the Act.
iv. There are several implications of these new provisions as discussed here-
under:three important conclusions from the provisions: there will be no
tax on the income of the trust by virtue of Section 10(23DA); there will
be no tax on the income of the investors, by virtue of Section 10(35A):
and there will be a tax on “distributed income”, in terms of Section
115TA.
. Tax is applicable only on income distributed by the trust, and not the
whole of distribution. Therefore, any distribution of principal will not be
liableto tax u/s 115TA. In simple words, the amount has to be “income”
and has to be “distributed”.
There is a tax on income distributed not on income accumulated. While
revolving securitisation structures are not very common in India, but it is
quite possible, and permissible within RBI guidelines too, to do a revolv-
ing securitisation structure. In such a case, the income may just get ac-
cumulated. There is nothing in the law, unlike in case of venture capital
funds under Section 115U, to say that there will be a tax on income re-
tained by the vehicle too.
The rate of tax will depend upon the category- of the recipient. The de-
termination of category is relevant only at the time of distribution of the
income — hence, irrespective of who was the holder of the asset backed
security over time, the tax rate will depend on the category in which the
recipient falls at the time of receipt of the income.
The language of the newly inserted Sections 115TA to 115TC resemble
that of Sections 115R to 115S (pertaining to mutual funds). It seems that
the lawmakers have simply applied the mutual funds template to securiti-
sation, that is inappropriate. The author opines that a securitisation trans-
action is not comparable to individuals pooling money into banks/mutual
funds. Where financial transactions run through a series of financial in-
termediaries, securitisation trust is merely a passive conduit; where there
is a hard core business called mutual fund business, there is no substan-
tive business called securitisation business. As long as income is taxed in
the hands of a substantive tax payer, there is no drain on revenue. Hence,
108 Sya. 9 Part |—Chap. 2—Indian Securitisation Market

focus should be on taxing the substantive tax payer rather than a fovional
entity called an SPV.
For detailed discussion on the taxation part and the new scheme, refer to a sep:
arate Chapter on “Taxation of Securitisation Transactions im india”.

9 ACCOUNTING RULES

9.1. Guidance Note

a Guidance Note
The Institute of Chartered Accountants of India came out with
on Accounting for Securitisation. Guidance notes are issued by the Research
Committee of the Institute and are recommendatory rather than mandatory, But
where a method is recommended, it is expected to be followed, unless there are
reasons not to. However, the Guidance Note has been withdrawn from the date
“AS 30: Financial Instruments: Recognition and Measurement,” became rec-
ommendatory in nature, i.e., 1“April, 2009.
The guidance note was a mix of FAS 140 and FRS 5 approach. Generally, off
balance sheet treatment was allowed, if risks and rewards were transferred, Gain
on sales was computed based on the components approach underlying the US
accounting standard. Originators were required to estimate the fair value of re-
tained interests, and retained liabilities and apportion the carrying value of the
asset in proportion of such retained and transferred interests.
The guidance note also made a reference to accounting for SPVs — without car-
ing for whether the issuance of securities by the SPV led to a transfer of benefi-
cial interest. Literally interpreted, the accounting rule suggested that assets trans-
ferred to SPVs should stay on the balance sheet of the SPV in all cases, which is
neither the international practice nor an understandable accounting rule.

9.2. Accounting for Financial Instruments “AS 30”:

ce he uc sccvmnting Mandand AS 30: Acoounting CorPimaacial lasin-
ments, came into effect in respect of accounting periods commencing on or
after 1“April, 2009 and the AS was recommendatory in nature for aninitial pe-
riod of 2 years. The AS was initially made mandatory for i
OI ne ne epee 201lLBowevet, iaview oftheMotiicasen issued
y Al, IAS 39 will apply to entities to which converged Indian accounting
AS 30willapply. Pen ats en Londen inward byMCA. taallother cases,
-30 will apply. again accounting treatmen
as envisaged
t in other existing
notified AS, and regulatory ipti iden al
to override AS-30.
_Since there isno regulatory instrument on off-balance sheet treatment for
ritisation transactions, theauthor isoftheview thatthede-recognition principle
s

37. ag
Notificati available at http://220.227.161.86/21. 944announ! 1021 lapdf (acces
sed on 2™ Seem.
 Accounting Rules Syn. 9 109

of AS W are applicable already. It is only the recognition of profit, which will be

guided by the RBI's prescriptions. Therefore, the discussion below provides
guidance on application of AS 30.
The accounting standardAS 30 is virtually a replica of IAS 39. In addition, the
ICAI has also issued
AS 31 corresponding to IAS 32 and AS 32 correspondingto
IFRS 7.
With the adoption of IAS 39 as AS 30, India will be implementing global ac-
counting standards for treating securitisation transactions. Accordingly, the prin-
ciples of de-recognition in AS 30 are the same as those in IAS 39. Notably, these
principles will be applicable whether the case is one of “securitisation” or bilat-
eral transfer, as in either case, there is a financial asset sought to be de-
recognised.
The broad rule on de-recognition under AS 30 is that in orderto de-recognise
financial assets from the books of the seller, a mere legal sale of the asset is not
enough, it should be backed by either transfer of risks and rewards, or surrender
of control by the seller. For example, Bank A sells a portfolio of loans either to
Bank B or to the capital market. It is quite commonplace for the seller to continue
to retain risk, or retain rewards, or both — for example, typical credit enhance-
ment may be a first loss risk retained by the seller. Residual profits, that is, the
actual returns from the asset minus a predetermined rate normally flow back to
the seller. In such a case, a transfer of risks and rewards has not taken place, and
that brings us to step 2 in the analysis.
Step 2 is even if a transfer of risks/rewards has not taken place in entirety, has
the seller surrendered control over the asset the way it would happen in a com-
mercial transaction of sale? In 2 commercial transaction of sale, a sale would pass
on to the buyer the right to freely transfer or pledge the acquired asset. If the sel-
ler has restrained that right of the buyer, or the buyer does not have a practical
ability to re-sell the asset, then the sale is disregarded, and the asset does not get
de-recognised from the books of the seller.
It is not difficult to understand that if an asset is not removed from the books of
the seller, there is no sale treatment at all, and hence, there is no questionof
booking a gain or loss on the sale. The asset continues on the books of the seller,
and to the extent of money received by the so-called sale, a loan liability is
brought up.
Itis also important to understand that if the seller has not been able to put an
asset off the balance sheet, then the buyer will not be able to put the asset on the
balance sheet and that would mean the buyer will continue to reflect a loan-type
receivable from the seller.
 APPENDIX |

STAMP NOTIFICATIONS IN SOME

STATES™

Karnataka
Stamp Act, 1957
Order dated 30” April 1997 No. RD 184 MUNOMU 97(P).—In exercise of
the powers by clause (a) of Sub-Section (1) of Section 9 of the Karnataka
Stamp Act, 1957 (Karnataka Act 34 of 1957), the Government of Karnataka, be-
est
so to do,
ing of the opinion that it is necessary in the public inter hereby re-
duces with effect from 1" April, 1997, the duty with which the instrument of se-
curitisation of loans or of Assignment of debt with underlying Securities is
chargeable under Clause 91) of Article 20 of the Schedule to “Fifty Paise” for
every Rs. 500/- or part thereof the loan securitised or debt assigned with underly-
ing securities.
Bombay Stamp Act.
Order dated 11" May, 1994 No. STP. 1094/CR-369/C)-M-1.—1n the exercise
of the powers conferred by Clause (a) of Section 9 of the Bombay Stamp Act,
1958 (Bom.LX of 1958), the Government of Maharashtra hereby reduces with
effect
from 1“ April, 1994 the duty with which an instrument of securitisation of
Loans or Assignment of Debt with underlying securities is chargeable under
Clause (a) of Article 25 of Schedule 1 to the said Act, to “Fifty Paise” for every
rupees 500 pr part thereof of the loan securitised or debt assigned with underly-
ing securities and in case of instrument of Assignment of Receivables in respect
of use of credit cards to “Two Rupees and Fifty Paise for every rupees 500 or
part thereof.
Bombay Stamps Act, 1958 (As applicable to the State of Gujarat)
Order Dated 25™ February, 1998 No. GHM - 98-221.STP/1096/2527/H.1.—
In exercise of the powers conferred by Clause (a) of Section 9 of the Bombay
Stamp Act, 1958 (Bom.LX of 1958), the Government of Gujarat hereby reduces
the duty with which an instrument of securitisation of Loans or the
of Debt with underlying securities is chargeable under Article 20(a) of Schedule
I tothe said Act, to ten paise for every rupees 100 or part thereof of the
loan se-
curitised or debt assigned with underlying securities.

38. Information about stamp duty and relaxations inseveral States may
mittee Report, xtracted later inthis Chapter. However, notificationsbe found inthe RH Patil Com-
pertaining stamp
on changing too often, therefore. readers are advised to check for keep
latest ~ =

110
 Stamp Notifications in Some States App. 1 111

Tamil Nadu: Indian Stamp Act, 1899

Notification Dated 17/2/1997.—In exercise of the powers conferred by clause
(a) of sub-section (1) of section 9 of the Indian Stamp Act, 1899 (Central Act II
of 1899), the Governor of Tamil Nadu hereby reduces the duty chargeable under
the said Act to 0.1% in respect of any instrument of securitisation of housing
loans executed by housing finance institutions in favour of refinancing or inter-
mediary investments institutions evidencing assignment of debt, whether with or
without the security of mortgage of immovable property, pledge or hypotheca-
tion, including any instrument issued by the assignee or his agent which purports
to evidence and/or transfer any interest in the debt and/or underlying security
therefore and/or any transfer or transfers thereof.
It will be pertinent to reproduce the order of the Government of Tamil Nadu
explaining the rationale behind the notification dated 17/2/1997
G.O.Ms. No. 58 dated 17/2/1997
ORDER:
1. Government have examined the suggestion of Government of India for
reduction or remission of stamp duty on instruments of securitisation of
housing loans by Housing Finance Institutions like Housing Develop-
ment Finance Corporation etc. with a view to implement the objective of
the National Housing Policy to increase the liquidity of the housing fi-
nance system by establishing a viable secondary market. As per the pre-
sent provisions of the Indian Stamp Act, 1899, an instrument of securiti-
sation of housing loans executed by Housing Finance institutions in fa-
vour of refinancing or intermediary investment institution is chargeable
to duty as a deed of conveyance at 13% of the loan value in the State of
Tamil Nadu.
2. Government considers that the levy of 13% stamp duty on such instru-
ments of securitisation will render the whole process unviable. It is felt
that unless the stamp duty on such instruments is at a token level, instru-
ments of securitisation cannot be traded in secondary capital market, par-
ticularly for housing, would not be possible. It is observed that the Gov-
ernment of Maharashtra had issued a notification specifying that the
stamp duty payable on instruments of securitisation transactions would
be 0.1%.
3. Taking into consideration of the above, the Government have decided to
reduce the stamp duty payable under the Indian Stamp Act, 1899 in re-
spect of securitisation of housing loans by Housing Finance Institutions
to 0.1% of the securitisation value.
West Bengal Government of West Bengal
Finance Department—Taxation—No. 1975 - F T Calcutta the 7th July, 1999—
Notification.—In exercise of the powers conferred by clause 3 (a) of sub-section
(1) read with clause (b) of sub-section (2), of section 9 of the Indian Stamp Act,
duty
1899 (2 of 1899), the Governor is pleased hereby to direct that the stamp
112 App.t Part 1—Chap. 2—indian Securitisation Market

chargeable on any instrument evidencing assignment of debt (whether unseoured

or secured by movable or immovable property) for the purpose of securitisation
of such debt shall be reduced to one-tenth of one per centum of the amount in-
volved.
By order of the Governors
T K Basu
Deputy Secretary to the Govt of West Bengal
 APPENDIX 2

GUIDANCE NOTE ON SECURITISATION

ACCOUNTING*

Author’s Comments
The Institute of Chartered Accountants of India issued a Guidance Note on Ac-
counting for Securitisation, which essentially adopts the IAS 39 approach. The
accounting standard is applicable only in case of securitisation transactions, and
not in case of a bilateral sale of financial assets.
The Guidance Note provides for de-recognition as well as computation of gain
on sale in certain conditions. The conditions for gain on sale are as under:
e Surrender of control by the originator
e Acquisition of control by the SPE
e@ Derecognition not allowed where:
O Creditors of the originator can attach the transferred assets
O SPE does not have the right to deal with the transferred assets
O Originator has a call option and obligation
Illustration of computation of gain on sale is given, modelled on FASB 140 il-
lustrations.
The guidance note also provides for accounting by SPVs and requires assets
and liabilities to be recorded by the SPV. Notably, the accounting standard is si-
lent on pass-through transactions. However, as a matter of basic accounting prin-
ciple, if a transaction amounts to a pass through, the SPV conveys beneficial in-
terest to the investors and has therefore no assets left to record on its balance
sheet. More importantly, the beneficial interest certificates are not certificates of
liability, but merely an indication of beneficial interest.
The accounting standard clarifies that in case of future flow transactions, the
financing will be recorded as a liability on the balance sheet.

* The Guidance Note stands withdrawn from the date AS 30 became recommendatory in nature, i.e.
from 1“April, 2009.However, it has been retained in the book from viewpoint of the situation pre-
vailing prior to FY 2009-10, and some of the notes of the author.

113
114 App.2 Part 1—Chap. 2—Indian Securitisation Market
For elaborate discussion on global principles of accounting tor seouriisauion
transactions. see Vinod Kothari: Securitization: The Financial Instrument of the
Future.
INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
Guidance Note on Securitisation Accounting
Introduction
|. Securitisation is the process by which financial assets such as loan receiv-
ables, mortgage backed receivables, credit card balances, hire-purchase debtors,
lease receivables, trade debtors, etc., are transformed into securities, Securitisa-
tion is different from ‘factoring’ in that ‘factoring’ involves transfer of debts
without transformation thereof into securities. A securitisation transaction, nor-
mally, has the following features:
@ Financial assets such as loan assets, mortgages, credit card balances,
hire-purchase debtors, trade debtors, etc,, or defined rights therein, are
transferred, fully or partly, by the owner (the Originator) to a Special
Purpose Entity (SPE) in return for an immediate cash payment and/or
other consideration. The assets so transferred are the ‘securitised assets’
and the assets or rights, if any, retained by the Originator are the ‘re-
tained assets’.
@ The SPE finances the assets transferred to it by issue of securities such as
Pass Through Certificates (PTCs) and/or debt securities to investors.
e A usual feature of securitisation is ‘credit enhancement’, i.e., an ar-
rangement which is designed to protect the holders of the securities is-
sued by an SPE from losses and/or cash flow mismatches arising from
shortfall or delays in collections from the securitised assets. The ar-
rangement often involves one or more of the following:
O Provision of cash collateral, i.e., a deposit of cash which in
specified circumstances can be used by the SPE for discharging
its financial obligation in respect of the securities held by the in-

© Over collateralisation, i.e., making available to the SPE assets in

excess of the securitised assets, the realisation of which can be
used in specified circumstances to fund the shortfalls and/or
mismatches infulfilment of its financial obligations by the SPE.
© Recourse obligation accepted by the Originator.
© Third party guarantee, ie., a guarantee given by a third
SPR tnoctine eaten Wo fend‘anyshortfall onthepart Md
E in meeting * financial obligations inrespect ofthesecuriti-

© Structuring of the instruments issued by an SPE into senior

and
subordinated securities such that the senior securities (issve
d to
mvestors) are cushioned by the subordinated securities
(issued
 Guidance Note on Securitisation Accounting App. 2 115

normally to the Originator) against the risk of shortfalls in reali-

sation of securitised assets. Payments on subordinated securities
are due only after the amounts due on the senior securities are
discharged.
e The Originator may continue to service the securitised assets (i.e., to col-
lect amounts due from borrowers, etc.) with or without servicing fee for
the same.
e The Originator may securitise or agree to securitise future receivables,
i.e., receivables that are not existing at the time of agreement but which
would be arising in future. In case of such securitisation, the future re-
ceivables are estimated at the time of entering into the transaction and the
purchase consideration for the same is received by the Originator in ad-
vance. Securitisation can also be in the form of ‘Revolving Period Secu-
ritisation’ where future receivables are transferred as and when they arise
or at specified intervals; the transfers being on prearranged terms. A dia-
grammatic presentation of a typical securitisation transaction is given in
Appendix I.”
2. This Guidance Note deals with accounting for securitisation transactions in
the books of Originator, specially addressing issues such as when to derecognise,
fully or partly, the securitised assets; treatment of securitisation of future receiv-
ables; measurement of consideration received in the form of securities; etc. The
Guidance Note also deals with accounting for securitisation transactions in the
books of SPEs. Another issue dealt with relates to accounting for investments in
the securities such as PTCs and/or debt securities issued by the SPE, in the books
of Investors.
Definitions

3.The following terms are used in this Guidance Note with the meanings speci-
fied:
Call Option is an option that entitles the Originator to repurchase the financial
assets transferred under a securitisation transaction from the SPE. The Option
may be at a predetermined price or at a value to be determined, for example, fair
value on the date of exercise of Call Option.
Clean-up Call Option is an option held by the servicer (who may be the Origi-
nator) to purchase the remaining transferred securitised assets or the remaining
beneficial interests in the SPE if the amount of securitised assets or beneficial
interests falls to a level at which the cost of servicing those assets or beneficial
interests becomes burdensome in relation to the benefits of servicing.
Interest Strip is a contractual arrangement to separate the right to all or part of
the interest due on a debenture, bond, mortgage loan or other interest bearing fi-
nancial asset from the financial asset itself.

poles A: 2 EA hd! tates eS

39. Not reproduced here; it is a simple process graphic.
116 App. 2 Part i—Chap. 2—tndian Securisanion Market

Investor is the person who finances the acquisition of the SEOUFILISEE asSels OF
of benefi cia
interest l by subscribing to PTCs and/or debt securities issued
therein
by an SPE.
Originator is an entity that owns the financial assets proposed to be securitised
and initiates the process of securitisation in respect of such assets,
Pass Through Certificates (PTCs) are instruments acknowledging a beneficial
interest in the securitised assets such that the payment of interest on such instru.
ments and the repayment of the principal are directly or indirectly linked or re.
lated to realifrom satio ns assets,
the securitised
Principal Strip is the right to the remainder of the financial asset net of all
rights that have been stripped ther efro
by one m
or more contractual arrangements
such as by an Interest Strip.
Recourse Obligation is the obligation of the Originator to reimburse or com-
pensate, fully or partly, the investors for, or otherwise bear the risk of, shortfalls,
such as those, arising from:
® failure of debtors to pay or to pay when due, or
® pre-payments;or
® other defects in securitised financial assets.
Servicing asset is a contract to service financial assets under which the esti-
mated future revenues from contractually specified servicing fees, late charges
and other related revenues are expected to more than adequately compensate the
servicer (who may be the Originator) for performing the services. A servicing
contract
can be either:
® undertaken together with selling or securitising the financial assets being
wed: or
® purc assumed separately.
or hase d
Special Purpose Entity (SPE) is an entity which acquires the financial assets
under securitisation and normally holds them till maturity. SPE is an
entity, usually constituted as a trust though it may be constituted in other forms,
for example, as a limited company, formed with small capital for the specific
purpose of funding the transaction by issue of PTCs or debt securities.
Accoun
in the Books
tin of Originato
g r
Derecogni
of securiti
tio sed asset
n

benefits specified in the contract. Determining whether the Origi

nator
control ofthesecuritised assetdepends bothontheOrigi
nator’s position wadda
ofthe SPE. Consequently, ifthe position ofeither the
Originator orthe SPE indi-
 Guidance Note on Securitisation Accounting App. 2 117

cates that the Originator has retained control, the Originator should not remove
the securitised asset from its balance sheet.
5. The Originator has not lost control over the securitised asset, for example,
where
(a) the creditors of the Originator are entitled to attach or otherwise deal
with the securitised assets;
(b) the SPE does not have the right (to the extent it was available to the Ori-
ginator) to pledge, sell, transfer or exchange for its own benefit the secu-
ritised asset;
(c) the Originator has the right to reassume control of the securitised asset
except
(i) where it is entitled to do so by a Call Option, where such Call
Option can be justified on its own commercial terms as a sepa-
rate transaction between the SPE and the Originator, for in-
stance, where the Call Option is exercisable at fair value of the
asset on the date of exercise of the Option; or
(ii) where it is entitled to do so by a Clean-up Call Option.
6. Whether the Originator has lost control over the securitised asset should be
determined on the basis of the facts and circumstances of the case by considering
all the evidence available. It would be incorrect to hold that the derecognition
criterion prescribed in paragraph 4 is not met in the following cases:
(a) The Originator continues to service the securitised asset. Such servicing
by itself would not lead to a conclusion that the Originator has not lost
control over the securitised asset.
(b) An obligation is cast on the Originator to repurchase the securitised asset
at a predetermined price. Such an obligation is not an entitlement to reas-
sume ownership available to the Originator. Notwithstanding such an ob-
ligation the securitised asset would be beyond the control of the Origina-
tor. The obligation accepted by the Originator should be accounted for in
the manner indicated in paragraph 10 of this Guidance Note. However,
where the Originator is both entitled and obligated to repurchase the se-
curitised asset at a pre-determined price, the Originator is not considered
to have lost control over the securitised asset and, therefore, the same
should not be removed from the balance sheet of the Originator.
7. On derecognition, the difference between the book value of the securitised
asset and consideration received should be treated as gain or loss arising on secu-
ritisation and disclosed separately in the statement of profit and loss. On the other
hand, if the derecognition criterion as prescribed in paragraph 4 is not met, the
asset should continue to be recognised in the books of the Originator and consid-
eration received for the asset so transferred, should be accounted for as a borrow-
ing secured there against.
8 The consideration received in a form other than cash, e.g., securities issued
by the SPE, should be measured at the lowest of the
118 App. 2 Part —Chap. 2—Indian Securitisation Market

(a) the fair value of the consideration,

(b) the net book value of the securitised assets; and
(c) the net realisable value of the securitised assets.
in case the consideration has been received partly in cash and partly in a form
othe cash, the non-cash component of the consideratio
than r shouldnbe measured
at the lowest of the
(a) the fair value of the non-cash component,
(b) the net book value of the securitised assets as reduced by the cash re-
ceived; and
(c) the net realisable value of the securitised assets as reduced by the cash
received.
The fair value is the price that would be agreed upon between knowledgeable,
willing parties in an arm's length transaction. Quoted market price in an active,
iquid and freely accessible market, if available, is normally the best evidence of
fair value. If quoted market price is not available, estimate of fair value may be
based on the market prices of assets similar to those received as consideration, In
case the market prices of similar assets are also not available, the estimate of fair
value may be based on generally accepted valuation techniques such as the pre-
sent value of estimated future cash flows. These techniques would require esti-
mates and assumptions about various matters such as estimates of future reve-
nues, future expenses and assumptions about interest rates, defaults and likely
prepayments. Some of these estimations, e.g., estimation of future cash flows and
discount rates may present significant difficulties. It would be necessary to make
the best estimate based on reasonable and supportable assumption s
and projec-
tions. All available evidence should be considered in developing the requisite

9. In case the securitised assets qualify for derecognition, the entire expenses
incurred on the transaction, say, legal fees, etc., should be expensed at the time of
the transaction and should not be deferred. Where the securitised assets do not
qualify for derecognition and, therefore, the consideration received in respect
Fed ia mated asa secured borrowing, such expenses should either beamor-
over the term of the secured borrowing or recognised immediatelyi
statement of profit and loss. aches

Originator has accepted recourse or similar obligation, e.g., the has

granted a Put Option ata predetermined price tothe SPE, then the contingent loss
arising therefrom, should be accounted for as per Standard (AS) 4,
 Guidance Note on Securitisation Accounting App. 2 119

Future Receivables / Revolving Securitisation

11. Any purchase consideration received by the Originator on the securitisation
of future receivables should be accounted for as an advance, since the assets pro-
posed to be securitised would not be existing at the time of the agreement, but
would arise in future. The cost of bringing these assets into existence would also
be incurred in future. In such cases, the criterion for derecognition prescribed in
paragraph 4 should be applied as and when the relevant assets come into exis-
tence. Till such time the amounts received, if any, on account of the proposed
securitisation should be reflected as an advance. The other requirements of the
Guidance Note also apply, mutatis mutandis, in case of securitisation of future
receivables.
12. In case of revolving period securitisation where financial assets are trans-
ferred as and when they come into existence or at specified intervals and the pur-
chase consideration is paid to the Originator at the time of such transfer, all re-
quirements of this Guidance Note, except paragraph 11, apply.
Partial Derecognition
13. An Originator may transfer only a part of the financial asset in a securitisa-
tion transaction instead of transferring the complete asset. Such transfer may oc-
cur in two ways. One way is where a proportionate share of the asset is trans-
ferred. For example, the Originator may transfer a proportionate share of loan
(including right to receive both interest and principal), in such a way that all fu-
ture cash flows, profit/loss arising on loan will be shared by the Originator and
the SPE in fixed proportions. A second way of transferring a part of a financial
asset arises where the asset comprises the rights to two or more benefit streams,
and the Originator transfers one or more of such benefit streams while retaining
the others. For example, the Originator may securitise the Principal Strip of the
loan while retaining the Interest Strip and Servicing Asset.
14. If the Originator transfers a part of a financial asset while retaining the oth-
er part, the part of the original asset which meets the derecognition criterion as
set out in paragraph 4 should be derecognised whereas the remaining part should
continue to be recognised in the books. Similarly, if any new interest has been
created as a result of securitisation transaction, such as a Call Option, the new
interest should be recognised in the books in accordance with the relevant ac-
counting principles.
15. If the Originator transfers a proportionate part of the asset, the previous car-
rying amount of the asset is apportioned among the part transferred and the part
retained on the basis of proportion transferred and proportion retained. For ex-
ample, if the originator transfers 75% of an asset to the SPE, 75% of the carrying
amount of the asset should be considered as securitised. Where the securitised
part of the asset qualifies to be derecognised as per the requirements of paragraph
4, the entity would continue to recognise the remaining part of the asset at 25%
of the carrying amount.
 120 App. 2 Pant i—Chap. 2—indian Securitisation Markei

16. ln case the asset Comprises the nghts to bwo or more benefit sweams and
one or more of such benefit streams is/are transferred while retaining the others,
the carrying amount of such financial asset should be apportioned between the
part(s) transferred and the part(s) retained on the basis of their relative fair values
as on the date of wansfer. The fair values of the parts should be determined on the
basis described in paragraph 8. If fair value of the part of the asset that is retained
cannot be measured reliably, that part should be valued at a nominal value of
Re.|. Similarly, if any new financial asset, e.g., a call option, has been created as
a result of securitisation transaction and its fair value cannot be measured relia-
bly, initial carrying amount of the asset should be recognised at a nominal value
of Re. 1.
17. An example illustrating the computations and accounting treatment in Case
of partial derecognition is given in Appendix II to this Guidance Note.
Accounting in the Books of Special Purpose Entity.
18. The SPE should recognise the asset received under a securitisation transac-
tion, if the Originator loses control over the securitised asset on the basis of the
criterion prescribed in paragraph 4. The asset so received should be recognised at
the amount of consideration, if the consideration has been paid in cash. In case
the consideration has been paid in a form other than cash, e.g., securities, the as-
set so received should be recorded either at its intrinsic value or at the fair value
of the consideration, whichever is more clearly evident. If both the values are
equally evident the asset shouldbe valued at the lower of the two values.
19. If the beneficial ownership in the securitised asset has not been transferred
to the SPE or the Originator has not jost control over the asset as per the require-
ments of paragraph 4, the SPE should not recognise the asset received. In such a
case, the consideration paid should be recorded as a lending secured against the

20. The amount received by the SPE on issue of PTCs or other securities
should be shown on the liability side of the balance sheet, with appropriate de-
scription, keeping in view the nature of securities issued.
Accoun
in the Books
tinof the Investor.
g
21. The Investor should account for the PTCs and/or debt securities acquired
by it as an investment in accordance with Accounting Standard (AS) 13,
‘Ac-
counting for on aren' However, where in case of an Investor, AS 13 is not
because Investor being specifically exempted fr the
omapplica-
tion of AS 13, the investments in PTCs and/or other securities should be
valued
and accounted for asper the relevant accounting principles applicable to
the In-
Disclosures
22. In addition to the disclosures arising from recommen
dations made in
graph 10, the following disclosures should be made in the finan
cial cuaaenter
the Originator
 Guidance Note on Securitisation Accounting App. 2 121

(i) The nature and extent of securitisation transaction(s), including the fi-
nancial assets that have been derecognised.
(ii) The nature and the amounts of the new interests created, if any.
(iii) Basis of determination of fair values, wherever applicable.
23. The following disclosures should be made in the financial statements of the
SPE:
(i) The nature of the securitisation transaction(s) including, in particular, a
description of the rights of the SPE vis-a-vis the Originator whether aris-
ing from the securitisation transaction or a transaction associated there-
with.
(ii) Basis of determination of fair values, wherever applicable.
24. The Investor should make disclosure of investments in PTCs and/or debt
securities as required by Accounting Standard (AS) 13, ‘Accounting for Invest-
ments’. However, where in the case of an Investor, AS 13 is not applicable be-
cause the Investor is specifically exempted from the application of AS 13, the
Investor should make such disclosures as per the relevant requirements.
Appendix I
(This Appendix does not form part of the Guidance Note and is
merely illustrative.) [not reproduced here]
Appendix IT
Illustration of Computation and Accounting in Case of
Partial Derecognition
(This Appendix does not form part of the Guidance Note and is
merely illustrative.)
1. Suppose Company ‘C’ holds Rs. 1,000/- of loans yielding interest @ 18%
p.a. for their estimated lives of nine years. Considering the interest rate the fair
value of these loans is estimated at Rs. 1,100/-. The company securitises the prin-
cipal component of the loan plus the right to receive interest @ 14% to an SPE
for Rs. 1,000/-. Out of the balance interest of 4%, it is stipulated that half of such
balance interest, namely 2%, will be due to the company as fees for continuing to
service the loans. The fair value of the servicing asset so created is estimated,
after taking into account the costs likely to be incurred in servicing the loan, at
Rs. 40. The remaining half of the interest is due to the company as an interest
strip receivable, the fair value of which is estimated at Rs. 60.
2. Since the company has securitised the principal and a part of the interest, it 1s
necessary to compute the cost attributable to various components assuming that
the securitised components meet the derecognition criteria. This computation can
val-
be done by apportioning the carrying amount of the asset in the ratio of fair
ues as follows:
122 App.2 Part i—Chap. 2—Indian Securitisation Market

Less: Pair value of servicing asset om

Fau value of mterest
simp Bs
_Fair valueofseouritised componentof town 00
2. Apportionment of carrying amount based on relative fair value
Paruculars Fair Val- Percentage Carrying Amount/Cost
ues based on
Total Pair
Value
Securitised component of 1000 91 910
loan
Servicing Asset 40 3.6 46

Interest Strip Receivable 60 54 54

1,100 100 ‘ 1,000

3. The profit arising on securitisation should be computed as follows:

Rs.
Net proceeds of securitisation 1,000
Less: Cost (apportioned carrying amount) of securitised component of loan 910
Profit on securitisation 90

4. Based on the above, the following journal entries would be passed in the
books of theOriginator:
Rs. Rs.
(a) To record securitisation of principal plus
right to 14% interest
Cash A/c Dr 1000
To Loans A/c (cost of securitised compo- 910
nent)
To Profit on Securitisation
(b To record the creation of servicing asset
—

and intereststrip receivable

Servicing asset A/c Dr 36
Interest strip A/c Dr 54
To Loan A/c 0”
 APPENDIX 3

RECOMMENDATIONS OF PATIL COMMITTEE

REPORT:ASSET BACKED SECURITIES
MARKET

1. Securitisation in its basic form is the process by which assets or interests in

assets are sold, or otherwise transferred, to a SPV, which is funded by the issue
of securities secured primarily by these assets. It is the process of pooling and
repackaging of homogenous illiquid financial assets into marketable securities
that can be sold to investors. The process leads to the creation of financial in-
struments that represent ownership interest in, or are secured by a segregated in-
come producing asset or pool of assets. The pool of assets collateralizes securi-
ties. There are four steps in a securitisation: (i) SPV is created to hold title to as-
sets underlying securities; (ii) the originator or holder of assets sells the assets
(existing or future) to the SPV; (iii) the SPV raises funds, with the help of an ar-
ranger / investment banker, by issuing securities which are placed with investors;
and (iv) the SPV pays the originator for the assets with the proceeds from the sale
of securities. The touchstones of securitisation are:
e Legal true sale of assets to an SPV with narrowly defined purposes and
activities
e Raising of funds by the SPV by issue of securities to the investors, either
representing beneficial interest in the underlying assets (“pass through
securities”) or representing a senior or subordinated interest in the cash
flows realized from the underlying assets (“pay through securities’)
e Reliance by the investors on the performance of the assets for repayment
rather than the credit of their Originator (the seller) or the issuer (the
SPV)
e Consequent to the above, “Bankruptcy Remoteness” from the Originator.
2. Apart from the above, the following additional characteristics are generally
noticed:
e administration of the assets, including continuation of relationships with
obligors
© support for timely interest and principal repayments in the form of suit-
able credit enhancements
e ancillary facilities to cover interest rate / forex risks, guarantee, etc.
e formal rating from one or more rating agencies.

125
124 App. 3 Part —Chap. 2—Indian Securitisation Market

3. A securitisation transaction generally involves some or all of the following

parties: (i) the initial owner of the asset (the originator or sponsor) who has# loan
agreement with the borrowers (obligors); (ii) the issuer of securitized instru:
ments, who also is the SPV (iii) the arrangers / investment bankers who assist in
structuring the transaction and marketing the securities, and who may also un
derwrite the securities for a fee; (iv) the rating agencies, who assess credit quality
of certain types of instruments and assign a credit rating for a fee; (v) thecredit
enhancer, possibly a bank, surety company, or insurer, who provides credit sup-
port through a letter of credit, guarantee, or other assurance, it 1s not UNCOMMON
for the originator to provide a cash collateral to enhance the rating; (vi) the ser-
vicing agent, usually the originator, who collects payments due on the underlying
assets and, after retaining a servicing fee, pays them over to the security holders;
(vii) the trustee, who deals with issuer, credit enhancer and servicing agent on
behalf of the security holders for a fee; (viii) the legal counsel, who participates
in the structur ingon for a fee; and (ix) the swap counterparty who
of the transacti
provides interest rate / currency swap, if needed,
Securitization:
The Global Scenario
4. Securitisation has emerged as one of the dominant means of capital forma-
tion through out the world, and particularly in the US, Canada, Burope, Latin
America and South-East Asia. Each year billions of dollars of securitisation
transactions are structured by a wide range of entities like financial institutions,
auto financiers, leasing companies, credit card issuers, infrastructure and insur-
ance companies, governments and local authorities. Total market value of all out-
standing MBS at the beginning of 2004 was reported to the National Secondary
Market Conference at over USD 2.75 trillion. This is much larger than the market
value of outstanding asset-backed securities The MBS market overtook the mar-
ket for US Treasury notes and bonds in 2000.
5. According to Thomson Financial League Tables, US issuanc was:
e
(a) 2004: USD 729 billion (1,121 issues)
(b) 2003: USD 904 billion (1,203 issues)
(c) 2002: USD 767 billion (980 issues)
(d) 2001: USD 586 billion (837 issues)
6. More than 75percent of global securitisation volumes are accounted far by
the US. Both institutional and individual investors partake inthis vast market.
US
investors also participate inthe securitisation issues of other major market
s such
as Europe and Japan. The US markets are very liquid, innovative
and sophisti-
cated. In the US, the market for CDOs had grown phenomenally
from $ibn in
1995 to $234.5bn in2002. The US securitisation market has grown beyond $5
 Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 125

Securitisation in India

7. Securitisation as a financial instrument has been existing in India since the

early 1990s — essentially as a device of bilateral acquisitions of portfolios of fi-
nance companies. There were quasi-securitisations for quite a while where crea-
tion of any form of security was rare and the portfolios simply moved from bal-
ance sheet of one originator over to that of another. These transactions often in-
cluded provisions which provided recourse to the originator as well. Now, loan
sales is common through the direct assignment route, which is structured using
the true sale concept. Securitisation of auto loans was the mainstay of the Indian
securitisation market through most the 1990s. Since 2000, residential mortgage
backed securities has fuelled the growth in the market.
Form of security
8. In the early stage of securitisation in India, creation of transferable securities
in the form of pass-through certificates (PTCs) was the most common form of
securitization. PTC has almost become synonymous with securitisation in India
and most market practitioners do not envisage issuance of notes or bonds as a
securitised product. There are PTCs which have a specific coupon rate, there are
structured PTCs and PTCs have different payback periods. Many PTCs are es-
sentially derived debt instruments but they are not called as such. For bilateral
deals, which take shape through direct assignments, there is usually an investors’
representative.
Asset classes
9. Over time, the market has spread into several asset classes — while auto loans
and residential housing loans are still the mainstay, there are corporate loans,
commercial mortgage receivables, future flow, project receivables, toll revenues,
etc that have been securitised.
Motive for securitisation

10. For most cash transactions, capital relief does not sound like a very signifi-
cant motive since the volumes are too small to have any tangible impact on the
regulatory capital of the securitisers. Banking sector is an active investor though
some of the new private sector banks have become originators for securitisations.
Thus the primary motive for most securitisers would be the skimming of excess
spreads; for some, liquidity needs are obvious.
Indian Structured Finance Market Trends

11. Issuance of structured finance products grew by 121 percent in 2004-05

over the previous year. Only asset backed securities grew by 176 percent to
Rs.22300 crore during the year and it accounted for 72 percent of the structured
finance market (Rs.8100 crore in 2003-04).
12. The average deal size (Rs.290 crores in 2004-05) in the issuance market has
increased substantially as the number of deals grew only by 41 percent (Rs. 150
cars,
crore in 2003-04). The ABS deals were mainly backed by assets such as
126 App. 3 Part I—Chap. 2—indian Securitisation Markei

loans.
commercial vehicles, construction equipments, two-wheelers and personal
This market grew substantially due to the growth of bank lending during the year.
13. About 64 percent of the ABS issuances involve multiple tranches of PTs,
each with a different tenure. Time tranching is an effective means of structuring
PTCs with different tenures. This helps the issuer address the needs of different
investors with different investment horizons. Certain structures also involve allo-
cation of the monthly pool principal/cashflow to various PTC tranches im a
round-robin fashion.
14. The mortgaged backed securities market grew by 13 percent in 2004-05.
The MBS issuance deals worth of Rs.3340 crore were reported during the year.
The long tenure of the MBS paper together with the lack of secondary market
liquidity deters certain investors from investing in it, Also, the stamp duty issues
have had an adverse impact on the growth of the MBS market in vie wdit-
of the
ferential stamp duty implications in the event of a liquidation of a property in a
securitisati on state,
— unfriendly
15. Corporate loan securitisation has been lower than the retail securitization.
Table— IV-1 gives the trend in structured
finance volumes.
Table-IV-1: Trend in structured finance volumes (Rs. Crore)

16. Subordination is a commonly used form of credit enhancement though cash

reserves is equally popular. Since asset backed securities are still new, investors
have a preference for AAA or AA rated instruments. Most transactions in the
market are either AAA or AA. Multi-class issuances with several rated tranches
CDO/LSO - Corporate Debt Obligation and Loan sell-Off Partial Guarantee
Structures are uncommon. Apart from subordination and cash reserves, over-
collaterlisation, guarantees, recourse etc are used as the other forms of enhance-
ment. The extent of enhancements is relatively very. However, of late most ori-
ginators are providing dollar for dollar on all credit enhancement.
serves do not amortise in line with the
 Recommendations ofPatil Committee Report: Asset Backed, etc. App. 3 127

Legal structure:
17. In 2002, Securitisation and Reconstruction of Financial Assets and En-
forcement of Security Interests Act, 2002 (SARFAESI Act) was enacted. This
law has basically been viewed as a law relating to enforcement of security inter-
ests and has been used for sale or securitisation of non-performing loans (NPLs)
by banks and financial institutions in favour of asset reconstruction companies
(ARCs) registered with RBI under SARFAESI Act, or in favour of trust estab-
lished by such ARCs.
18. Most securitisations in India adopt a trust structure — with the underlying
assets being transferred by way of a sale to a trustee, who holds it in trust. A trust
is not a legal entity in law — but a trustee is entitled to hold property which is dis-
tinct from the property of the trustee or other trust properties held by him. Thus,
there exists isolation, both from the property of the seller, as also from the prop-
erty of the trustee. Therefore, the trust is the special purpose vehicle (SPV). The
SPV issues securities which are either “pass through securities” or “pay through
securities”. In case of pass through securities, the investors holding them acquire
beneficial interest in the underlying assets held by the trustee. Whereas, in case
of pay through securities, investors holding them acquire beneficial interest only
in the cash flows realized from the underlying assets, and that too in the order of
and to the extent of the obligation contracted with the holders of the respective
senior and subordinated tranches of pay through securities. Under either scenario,
the legal ownership of the underlying assets continues to vest in the trustee.
Regulatory compliances:
19. Legal Issues: Stamp duty is one of the major hindrances to the develop-
ment of securitisation in India. Stamp duty is payable on any instrument which
seeks to transfer any rights or receivables, whether by way of assignment or no-
vation or by any other mode. The instrument of transfer attracts stamp duty at an
ad valorem rate, which ranges from 0.1 percent to 8 percent, and this varies from
state to state. Therefore, the process of transfer of the receivables from originator
to SPV involves an outlay on account of stamp duty, which can make securitisa-
tion commercially unviable in several states. Besides this, depending on how the
transaction is structured, there is a risk of stamp duty being levied on issue of
securitized instruments to investors by the SPV. If the securitized instrument is
issued as an instrument evidencing indebtedness, it would be a debenture or a
bond and would consequentially be subject to stamp duty. On the other hand, if
the instrument is structured as a pass-through certificate that merely evidences
title to the receivables, such instrument itself would not attract stamp duty since it
is not an instrument provided for specifically in the charging provisions. Regard-
less of this position, the ambiguity that can arise as more and more complicated
instruments get structured is a deterrent to the growth of this market. The pros-
pect of a levy of stamp duty twice on the same underlying receivables can make
intro-
securitisation deals uneconomical. States that seek to earn revenue could
to cover such
duce new Articles in the charging provisions of Stamp Duty laws
to the inter-state
instruments. There needs to be a consensus across states akin
is not impeded. In addi-
agreement on value-added tax to ensure that this market
128 App. 3 Part I—Chap. 2—Jndian Securitisation Markei

ra
tion to stamp duty, the instrument must be registered under the Indian Regist
tion Act, 1908, which imposes additional costs to the transaction,
0. The varying duty rates on assignment of loans or debts, in various states
have been sursmarized in the Annexure tothis Chapter, Most PTOs and SRe are
now issued in dematerialized form with NSDL or CDSL, upon payment of stamp
duty on the PTC/SR allotted, and thus, the PTCs and SRs are credited to the De-
mat account of the allottees. Thereafter, in terms of the section 8A of the Indian
Stamp Act as substituted by the Finance Act, 2000, transfer of dematerialized
PTCs and SRs held through the depositories under the Depositonies Act is ex-
empt from Stamp Duty, not withstanding anything contained in any central or
state law. the issueof stamp duty incidence is limited to the instrument of
assignment of loan or debt and the issuance of PTCs and SRs (at the time of their
dematerialization).
21. Among the regulatory costs, the stamp duty on transfers of the seouritized
instrument again can prove to be a major hurdle. The instrument of transfer of
financial assets is, by law, a conveyance, which is a stampable instrument. Many
states do not distinguish between conveyances of real estate and that of receiv-
ables, and levy the same rate of stamp duty on the two. Some States have an-
nounced concessional rates of stamp duty on actionable claims, limiting the bur-
den to 0.1 percent, but there is no clarity as to whether this concession can be
availed for assets situated in multiple locations. The lack of clarity relating to
stamp duty has in a way shaped the market — players have limited transactions 10
such receivables as maybe transferred without unbearable stamp duty costs. The
SARFAESI law intended to resolve the stamp duty problem, but owing to its
flawed language, did not succeed. Inherently, stamp duty being a concurrent sub-
ject, specifically calls for a consensual legal position between the Centre and the
States. To promote healthy growth of securitisation market, the central govern-
ment should consider establishing an appropriate institutional process to evolve a
consensus across States on the affordable rates and levels of stamp duty on debt
assi gnme
PTCs, nt,
security receipts (SRs).
_ 22. Another important aspect that hinders the growth of securitisation inIndia
is the lack of effective foreclosure laws. The existing foreclosure laws are not
lender friendly and increase the risks of mortgage-backed securities by making it
difficult to transfer property in cases of default.

24. The Issue in Current M

formi ngI (NPL) Mortgage Backed Securi
Se j
tisati on (MBS) & Non Per-
Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 129

(a) The tax treatment of MBS SPV Trusts and NPL Trusts is unclear. Cur-
rently, these SPV trust structures are proceeding on the basis that the in-
vestors (that is, PTC and SR holders) would pay income-tax on the in-
come distributed by the SPV Trust, and on that basis, the trustee would
make income pay outs to the PTC holders without any payment or with-
holding of tax. This view is based on legal opinions regarding assessment
of investors instead of trustee in representative capacity under sec.160 of
the Income-tax Act and on the basis that the trust deeds provide for the
possibility that a super majority of investors (usually, 7Spercent in value)
can revoke their contributions to the SPV Trust, thereby assuming that
the provisions of section 60 to 63 of the Income tax Act would be at-
tracted.
(b) However, the above view is yet to be judicially adjudicated, and there-
fore does not represent the final position on law. This leaves open an ar-
guable possibility of the SPV Trust being taxed as an Association of Per-
sons (AOP) on the premise that, by agreeing to participate in the SPV
Trust conceived solely for the purpose of inviting such participation for
an investment in MBS/NPL Trust, the investors “come together for a
common purpose of earning income”. This could be viewed as giving
rise to an AOP that is taxable as a distinct tax entity. As an AOP, the ap-
plicable tax rate on all the income of the SPV Trust would be the maxi-
mum marginal rate applicable to any of the PTC holders under the Fi-
nance Act for the relevant year. And, thereafter, the share of such income
distributed to the PTC holder would not form a part of their taxable in-
come [in accordance with the provisions of proviso (a) to section 86 read
with section 67A read with section 167B (2) of the Income-tax Act,
1961].
(c) A limited life vehicle such as the MBS SPV Trust or the NPA SPV Trust
cannot live with such basic tax uncertainty particularly when it can give
rise to tax litigation that can last for many years beyond the life of the
SPV Trust, exposing the Trustee to contingent tax liabilities that it has no
viable means to recover from the beneficiaries once the life of the SPV
Trust has expired and the PTC holders or SR holders paid off.
25. Trust Taxation under Income tax Act: Historically Single Level Tax

(a) It needs to be emphasized that Indian Income Tax Law has always envis-
aged taxation of an unincorporated SPV such as a Trust at only one level,
namely either the Trust SPV level, or the Investor/Beneficiary Level.
Hence, any explicit tax pass through regime if provided in the Income
tax Act does not represent conferment of any real tax concession or tax
sacrifice, but merely represents a position that the Investors in the trust
would be liable to tax instead of the Trust being held liable to tax on the
income earned by the SPV Trust.
These tax uncertainties would be satisfactorily resolved in the following ways:
SPVs and
(a) Provide an explicit tax pass through treatment to securitisation
NPA Securitisation SPVs (namely, trust SPVs set up by ARCs registered
130 App. 3 Part }—Chap. 2—Andian Securitisation Market

through teatment
with RBI under SARFABS!) on par with the tax pass
re Capital Runds un
applied under the tax law to SEBI registered Ventu tix Act. hor
Income
der section 10 (23FB) read with section 1150 of the
tering Se
this purpose, SEB! may frame appropriate regulations for regis n
s for registravo
curitisation SPVs. RBI may frame appropriate regulation
of NPA Securitisation SPVs, and
Reg-
(b) SEBI should consider the possibility of modifying the Mutual Fund
ulations to it wholesale investors (to be defined to mean an investor
who invests not less than Rs 50 lacs in the scheme) to invest in and hold
units of a closed-ended passively managed mutual fund scheme whose
sole objective is to invest its funds into PTCs and SRs of the designated
MBS SPV Trust/ NPA Securitisation Trust. Under this structure, there
would be certaint y it is the investors, as hold
that erof
of units sthe mu-
tual fund scheme, who would be liable to pay tax on the incom e distrib-
uted by the mutual fund. Further, there would be no tax dispute about the
MBS SPV Truor st NPA Securi Trust sati
tibeing treateon
d as an AOP as
the mutual fund scheme would be the sole PTC holder of all the PTC is-
sued by the MBS SPV Trust (and a single investor cannot give rise to an
“associat ofion s). Also, there would be no ambiguity about the
person”
tax exempt character of income accruing to the mutual fund scheme as
the sole PTC and SR holder, in view of the provisions of sec.10 (23D) of
the Income-tax Act; and
(c) recognizing the wholesale and QIB character of investors in securitisa-
tion Trusts, there should be no withholding tax requirement on interest
paid by the borrowers (whuse credit exposures are securitized) to the se-
curitisation Trust. Similarly, there should be no requirement of withhold-
ing tax on distributions made by the securitisation Trust to its PTC and/or
SR holders. However, the securitisation Trust may be required to file an
annual return with the Income-tax Department in which all relevant par-
suddaiveneatapentnediiatmaradiedmetmn caida
~ s may be included. This will safeguard against possibil-
ity of revenue leakage. m4
Accounting rules:
26. The Institute of Chartered Accountants of India has issued a guidance note
on accounting for securitisation. Guidance notes are issued by the Research
Committee of the Institute and are | rather than mandatory. But
seameiee nen00,
’ Gonmnedly,, wilehaney”sheet
) treatment
aoateis allowed, if risks >
wards are transferred. Gain on sales rd 4

car) meValue oftheasset inproportion ofsuch retained and transferred imter-

 Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 131

Securitisation in NHB
_27. Support to Mortgage Backed Securitisation has been a major policy initia-
tive of the Government as manifested in its National Housing and Habitat Policy
announced in 1998. The policy has enjoined upon National Housing Bank (NHB)
to play a lead role in starting mortgage backed securitisation and development of
a secondary mortgage market in the country. A major milestone in creating a
framework for such transactions has been the amendment of the National Hous-
ing Bank Act, 1987 by the Government of India. The National Housing Bank
(Amendment) Act, 2000 has come into force from June 12, 2000, which, inter
alia, provides for creating Special Purpose Vehicle (SPV) Trust by NHB for tak-
ing up such transactions and issuing MBS in various forms.
28. NHB has been playing a lead role in starting up Mortgage Backed Securiti-
sation and development of a Secondary mortgage market in the country. NHB
launched the pilot issues of Mortgage Backed Securities (MBS) in August 2000
in the Indian financial market, followed by other MBS issues cumulating to
Rs.664 crores.
Mortgage Backed Securities in India
29. The transactions between parties in the housing finance sector can be
broadly classified as those relating to ‘primary residential mortgage market’ and
‘secondary residential mortgage market’. The primary mortgage market activity
mainly comprises creation of mortgages as a result of transactions between the
borrowers and primary lenders. The primary lenders create mortgages against
loans provided by them to the purchasers of houses. The mortgages held as as-
sets, generate cash flows represented by repayments of both principal and inter-
est, on the loans.
30. The secondary mortgage market mainly involves the conversion of mort-
gages into tradable financial instruments and the sale of these instruments to pro-
spective investors. The cash flows which come as repayments from the borrowers
to the originators, can be transferred to a third party with simultaneous transfer of
assets to an intermediary agency (SPV) designated for the purpose of managing
the bought over pool of mortgages. These cash flows are passed on to the inves-
tors by the SPV. In the process, the mortgages are converted into securities which
are tradable financial instruments and sold to investors. The secondary mortgage
market is thus made up of securities which are backed by mortgages (MBS) and
refers to the transactions between the issuers and investors.
31. Once the securitised mortgages are sold by the originators viz., the primary
lending institutions, they are either de-recognized in the originator’s books of
account or presented in a specific manner. All future transactions in the mortgage
backed financial instruments then take place in the secondary mortgage market,
depending up the depth of the market. The overall liquidity in the capital market
and housing finance system would increase with the number of transactions
among investors in the secondary mortgage market.
132 App. 3 Part Chap. 2—Andian Securitisation Market

32. Supportive fiscal measures and the policies ofReserve Bank of India (RBI)
have established a systemic framework for specialised mortgage finance in the
country and the sector has been witnessing steady growth in recent years. IORA
estimates the existence of securitized debt to the extent of about Rs30820crores
as of March.05. In the recent past, with the emergence of the capital marketas
the central pool of resources for sectoral development, securitisation not only
offers a viable and sustainable market onented sourcing mechanism with the po-
tential of integrating housing market with the domestic as well as the interna
tional capital markets, but also brings in a range of specializauions, resulting wn
efficient and cost effective structures and practices. A vibrant securitized debt
market would help in:
e improving Capital Adequacy Ratio (CAR) through transfer of risk
weighted assets;
e Aiding Asset Liabilities Management and helps long term source for de-
ployment in housing sector;
e Enabling better spread management, and facilitates improvement of re-
turn on assets and return on equity;
e Enabling new source of fee based income;
Enabling Provisions in NHB Act for Mortgage Backed Securitisation and
Secondary Market Development:
33. In terms of Section 14 (ea) of the said Act, NHB has been specifically au-
thorised to purchase, sell, or otherwise deal in any loans or advances secured by
mortgage or charge on the immovable property relating to Scheduled Banks or
Housing Finance Institutions (HFIs);
34. Section 14 (eb) of the NHB Act allows NHB to create one or more Trusts
and transfer loans or advances together with or without securities therefor to such
for consideration:
Trust (s)
35. As per Section 14 (ec), NHB is authorised to set aside loans or advances,
and issue or sell Mortgage Backed Securities (MBS) based on such loans or ad-
vances so set aside, in the form of debt obligations, Trust Certificates of benefi-
cial interest or other instruments whatever name called, and to act as Trustee for
the holders of such securities.
36. Section 18A of the NHB Act facilitates the transfer of MBS issued by Na-
tional Housing Bank to securitise the loans granted by Scheduled Banks and
HFIs, without Compulsory Registration, both atthe time ofissue ofsecurities
NHB and at the time of their transfer by the investors.
by

mds Further. inorder to instil confidence among the investors in

the securities
issued by NHB. the Bank acting as a trustee or otherwise in the
transaction relat-
ing to securitisation ofloans has been authorised torecover the
dues as arrears of
land revenue in terms of Section 18B of the NHB Act.
 Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 133

Speedier Foreclosure Mechanism:

38. To provide for introduction of a speedier recovery mechanism a new chap-
ter (VA) has been added to the NHB Act. This chapter provides for appointment
of recovery officers of approved institutions and procedures for the recovery of
housing loan dues from defaulting borrowers. This chapter also proposes for es-
tablishment of appellate tribunal to hear appeals against the orders of recovery
officers.
39. The dues of defaulting borrowers of Scheduled Banks are also included for
the purpose of recovery process under Chapter VA of the NHB Act. Besides, in
terms of Section 36C of the NHB Act, Scheduled Banks have been defined as
approved institutions, which imply that officers of scheduled banks would also be
eligible for being appointed as recovery officers. There is no reason why a simi-
lar generic provision cannot be provided for to cover securitisation of various
classes of assets.
40. Securitized assets only make up small portion of the Indian debt market but
their popularity is on the rise. securitisation is one of the latest financial innova-
tions in Indian markets. In the framework for securitization, Banks and FIs are
not permitted to create special purpose vehicles (SPVs) or special purpose estab-
lishments (SPEs) for undertaking such transactions. The law contemplates estab-
lishment of a securitisation company or reconstruction company and its registra-
tion with Reserve Bank of India (RBI). Such a company in turn formulates
schemes, and sets up (scheme-wise) separate trusts. A securitisation company can
also act aS an asset reconstruction company, and vice versa.
41. The purpose of securitisation is to avoid mismatch between assets and li-
abilities of Banks/FIs. The lending company sells its loans to the investors
through the SPV. The company securitizing assets can acquire financial assets
from Banks/FlIs, by issuing debentures, bonds or entering into any arrangements
with the lenders/issuers. Once the company takes over the financial assets, it will
be treated as lender and secured creditor for all purposes. It may then devise a
separate scheme for each of the financial assets taken over. Qualified institutional
buyers (QIBs) will invest in such a scheme. The QIBs include FIs, banks, insur-
ance companies, trusts, asset management companies, provident funds, gratuity
funds, pension funds and foreign institutional investors (FIIs). The company will
issue security receipts to QIBs, which represent undivided interest in such finan-
cial assets. The company will realize the financial assets and redeem the invest-
ment and payment of returns to QIBs under each scheme. Any disputes among
banks, FIs, securitisation or reconstruction companies and QIBs shall be compul-
sorily referred for conciliation or arbitration under the Arbitration and Concilia-
tion Act, 1996.
42. RBI issued draft guidelines to securitisation companies and reconstruction
companies on 18 December 2002, soliciting views of banks, FIs and others. RBI
subsequently finalized the guidelines taking into account the feedback received
The guidelines and directions provide for different aspects of securitisation and
asset reconstruction relating to registration, owned funds, permissible business,
134 App. 3 Pari Chap. 2—tndian Securitisation Market

operational structure for giving effect to the business of seourisation and asset
reconstruction, deployment of surplus funds, internal control systems, prudential
norms, disclosure requirements etc. for the smooth formation and functioning ot
securitisation and re-construction companies. In addition to the guidelines and
directions, which are mandatory, RBI also issued guidance notes of a recommen:
datory nature covering aspects relating to acquisition of assets, issue of security
receipts, etc.
oftin
Lis Stock Exchanges : Issues & Suggestions
PTCs ong
43. Currently, the SCRA definition of “securities” does not specifically cover
PTCs. While there is indeed a legal view that the current definition of “seouri-
ties” in the SCRA includes any instrument derived from, or any interest in seouri-
ties, the natureof the instrument and the background ofthe issuer ofthe instru-
ment, not being homogenous in respect of the rights and obligations attached,
across instruments issued by various SPVs (unlike shares that are standard in-
struments under company law), has resulted in a degree of discomfort among
exchanges listing the instruments. However, this issue is limited to PTCs only
and does not extend to SRs. [Notably, SRs are specifically included in clause (ic)
of section 2 (h) of the definition of “securities” in SCRA]. With a view to remove
any ambiguity in this regard, the Central Government should consider noti
PTCs and other securities issued by securitisation SPVs / Trust as “securities”
under SCRA, in exercise of its parts under section 2 (h) (id) of SCRA.
Issues under SARFAESI and Suggestions
44. Until recently, there was some ambiguity about whether or not ARCs and
Securitisation Companies (SCs) registered with RBI could establish multiple
SPV Trust (of which the ARC or SC is a trustee and manager). This iguity
has been removed through a specific provision in the form of sec.7 (2A) of SAR-
FAESI inserted by the Enforcement of Securities Interest and Recovery of Debts
Laws (Amendment) Act 2004 with effect from 11 November 2004. In view of
this, it should now be possible to unambiguously adopt the trust SPV structure
even under SARFAESI Act for MBS, ABS or NPL securitization.

thecurrent definition ofa “Security Receipt” may prove legally inadequate. Itis
therefore suggested thattheCentral Government mayconsider possibility of pre
posing an appropriate amendment to the definition of “Security Receipt” in sec.2
(zg) of SARFAESI Act. The amendment should enable the SR
dence of the right ofits holder tothe cashflows from realizationtoof
also be an evi-
the financial
wie ion (as differentiated from a right in the financial
as-
 Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 135

46. The construct of the SARFAESI Act is such that it enables SRs to be issued
to and held by qualified institutional buyers (QIBs) only. Currently, the definition
of QIB in Sec.2 (u) of SARFAESI Act includes banks, insurance companies,
Public Financial Institutions (PFIs), SFCs, SIDCs, MFs, FIIs, PFs, Gratuity
Funds, and Pension Funds. The definition, however, does not include NBFCs or
other bodies corporate, unless they are notified either by Central Government as
“financial institution” u/s 2 (m) (iv) or by SEBI u/s 2 (u) of SARFAESI Act. In
order to deepen the market for SRs, there is a need to broad base the “buy side”
investor base that qualifies to invest in SRs. Currently, due to the lack of depth,
the NPL Trusts set up by ARCs mobilize funds by issue of SRs to the very banks
and institutions which eventually sell the NPLs to the NPL Trust and receive
back the amount invested in SRs, as a consideration for assignment of the NPL.
The recent announcement of permitting FIIs to invest into SRs subject to an ag-
gregate limit of 49 percent in each tranche may help to somewhat deepen the
market. At the policy level, investment in SRs could be viewed on the same foot-
ing as investment in private equity, with perhaps relatively lower risk return trade
off than that in private equity investment.
In the light of the above, with a view to deepen the investor base of QIBs
which can invest in SRs, it is suggested that large sized NBFCs and non-NBFCs
bodies corporate established in India with net own funds in excess of, say, Rs.50
crores, may be permitted to invest in SRs as QIBs. Similarly, private equity funds
registered with SEBI as venture capital funds may also be permitted to invest in
SRs within the limits that are applied for investment by venture capital funds into
corporate debt instruments. These changes could be brought about through ap-
propriate notification by the central government in exercise of its power u/s 2(m
(iv)) of SARFAESI Act or through notification by SEBI in pursuance of its pow-
ers u/s 2 (u) of SARFAESIT Act.
47. For securitisation SPVs other than NPL securitization, on account of the
amendments to Sec.7 (2A) of SARFAESI Act with effect from 11 November
2004, it should now be possible to utilize the Trust SPV structure by securitisa-
tion companies being established and registered with RBI under SARFAEST Act.
As suggested at para 25(b) above, SEBI should consider the possibility of modi-
fying the Mutual Fund Regulations to permit wholesale investors (to be defined
to mean an investor who invests not less than Rs 50 lacs in the scheme) to invest
in and hold units of a closed-ended passively managed mutual fund scheme
whose sole objective is to invest its funds into PTCs and SRs of the designated
MBS SPV Trust/ NPA Securitisation Trust. This, coupled with the ability of se-
curitisation trust SPVs (whether set up by the securitisation company registered
under SARFAESI or otherwise) to issue PTCs and SRs to mutual funds would
enable development of a wholesale market for securitized assets outside QIBs.
Annexure: Stamp Duties Across States
STATE RATE OF STAMP DUTY REMARKS

Andhra Pradesh Registration Fees: Stamp Duty al-

| Registration fees shall be reduced ready reduced
Assignment: The Govt of A.P. has re-
duced the stamp duty with which an in- | to 0.025percent in respect of in-
 ee a ee ee Ne SS Sale eee Es Shr GeEe

securitised or debt on housing loan as-

signed.
The stamp duty payable on assignment for
other kinds of debt shall be five rupees for
every one hundred rupees for the first Rs.
1,000, and for every Rs. 500 or part the-
reof in excess of Rs. 1,000 twenty- five
rupees.
Assam 8.25 percent
:

Union Territory of Delhi Assignment: 5 percent of the co;

sideration amount set forth in tt
instrument
Declaration of Trust:
5 percent of the consideratic
amount set forth in the instrument

Goa 8 percent

Gujarat Registration fee:

Assignment: The stamp duty with which Maximum of Rs. 20,000/-
an instrument of securitisation of loans or
of Assignment of Debt with underlying Declaration of Trust: Subject to
securities is chargeable is reduced to, maximum of Rs. 100/-
subject to maximum of Rs. 1,00,000/-,
seventy-five paise for every Rs.1000/- or
part thereof the loan securitised or debt
assigned with underlying securities

Haryana Declaration of Trust:

Assignment: Approx 12.5percent for Rs. 45/-
conveyance amounting to sale of immov-
able property and 6.25percent for other
conveyances
Himachal Pradesh
8 percent

Karnataka a. istration Fees:

Assignment: If relating to Assignment of | percent
Receivables by the originator to the SPV,
or by whatever name they are called, in b. Declaration of Trust:
the process of securitisation, the stamp Rs.500/-
> fae niarT:, 6 6)h6—+>Fre
Recommendations of Patil Committee Report: Asset Backed, etc. App. 3 137

RATE OF STAMP DUTY REMARKS

Kerala Declaration of Trust: =
Assignment: Six rupees for every Rs. 100 Rs. 6 for every Rs 100 or part the-
or part thereof of the amount or value of reof of the amount or value of the
the consideration for such conveyance. consideration for such conveyance.
However, conveyance of immovable However, conveyance of immov-
property situated within the Municipal able property situated within the
Corporations or Municipalities shall be Municipal Corporations or Mu-
stamped at Eight rupees fifty paise for nicipalities shall be stamped at
every Rs. 100 or part thereof of the Eight rupees fifty paise for every
amount or value of the consideration for Rs. 100 .or part thereof of the
such conveyance. amount or value of the considera-
tion for such conveyance.

Madhya Pradesh/Chattisgarh Declaration of Trust:

Assignment: Stamp Duty Of 7.5 Percent If there is disposition of property, 4
Of Amount Of Debt Assigned percent on the market value of the
Registration Fees: 0.8 Percent Of Market property settled. In any other case,
the stamp duty is Rs.500/-

Manipur 7 percent On market value

of property or the
agreement value
whichever is
higher.

Maharashtra Registration Fees:

Assignment: The duty with which an | 1 percent or subject to a maximum
instrument of securitisation of loans or of | of Rs.30, 000/-.
Assignment of Debt with oa eo aa Declaration of Trust:
rities is chargeable under clause (a) 0 ; :
article 25 of Schedule I to the said Act, is si ~ eae on Pia Rag ethics
; mi position of property, the decla
reduced to fifty paise for every Rs. 500 ration to be stamped at Rs.
or part thereof, of the loan securitised or | | og gogy-
debt assigned with underlying securities, yor
subject to maximum of Rs. 1,00,000/-,
and in case of instrument of Assignment
of Receivables in respect of use of credit
cards to Rs. 2.50/- for every Rs.500/- or
part thereof.
Upto Rs.50, 000/- - 4.6 percent agreement
More than Rs.50, 000/- and upto
Rs.90, 000/- - 6 percent
More than Rs.90, 000/- and upto
Rs.1, 50,000/- -8 percent
More than Rs.1, 50,000/- - 9.9
percent

; t
Of Agreement

Declaration of Trust: ine Oe

Punjab
Assignment: 6 percent in case of immov- Rs. 45/-
able property and 3 percent otherwise
 Tamil Nadu
Assignment: Stamp duty on securitisation Registration Fees:
is available only for housing finance at 1 percent on value of asset
0.1percent subject to maximum of
Declaration of Trust:
Rs.1, 00,000/-.
Rs.180/-
For conveyance of immovable property
situated within the Chennai Metropolitan
Planning Area and the Urban agglomera-
tion of Madurai, Coimbatore, Salem and
Tiruchira-palli and the City of Tirunelveli,
the stamp duty shall be Eight rupees for
every Rs. 100/- or part thereof of the mar-
ket value of the property which is the
subject matter of conveyance.
For conveyance of any other property, the
Stamp duty shall be Seven rupees for
every Rs. 100 or part thereof of the market
value of the property which is the subject
matter of conveyance.

5 percent
Uttar Pradesh/Uttaranchal Declaration of Trust:
Assignment: Stamp duty of 8 percent of 1 percent
amount of debt assigned
‘Registration Fees:
2 percent of market value, subje
to a maximum of Rs. 5000/-
West Bengal
Registration Fees:
Assignment: The stamp duty chargeable The registration fee payable on an
under the said Act on any instrument instrument evidencing assignmet
evidencing assignment of debt (whether of debt (whether unsecured
unsecured or secured by any movable or secured by any movable or in
immovable property) for the purposes of movable property) for the purpose
securitisation of such debt, shall be re- of securitisation of such debt, sha
duced to one-tenth of one per centum of be reduced to one-tenth of one pe
the amount of stamp duty by which such centum of the registration fee pay
instrument is chargeable, or Rs. 1,00,000/- able for such instrument, or R:
whichever is less. 30,000/-, whichever is less.
Declaration of Trust:
Rs. 25/
 APPENDIX 4

SECURITIES CONTRACTS REGULATION

(AMENDMENT) BILL, 2005*°

[Bill No. 162 of 2005]

A
BILL
PREAMBLE
Further to amend the Securities Contracts (Regulation) Act, 1956.
BE it enacted by Parliament in the Fifty-sixth Year of the Republic of India as
follows:—
1. Short title—This Act may be called the Securities Contracts (Regulation)
Amendment Act, 2005.
2. Amendment of Section 2.—(1) In section 2 of the Securities Contracts
(Regulation) Act, 1956(42 of 1956) (hereinafter referred to as the principal Act),
in clause (h), after sub-clause (id), the following sub-clause shall be inserted,
namely:—
“(ie) any certificate or instrument (by whatever name called),—
(a) Issued, to an investor by any special purpose distinct entity which
possesses any financial asset representing debt or receivable by such en-
tity, and, acknowledging the beneficial interest of such investor in such
financial asset; and
(b) Which may, by general or special order, be specified as such by the
Securities and Exchange Board of India;”’.
3. Insertion of new section 17A.—After section 17 of the principal Act, the
following section shall be inserted, namely;—
“17A. Approval of Securities and Exchange Board of India for securities
referred to in sub-clause (ie) of clause (h) of section 2.—(1) Without prejudice
to the provisions contained in this Act or any other law for the time being in
force, no securities of the nature referred to in sub-clause (ie) of clause (h) of

OT Anal
a
aa(Amendm Act Otovi.
ent)RM 2007,
40. The Bill was subsequently amended ass Securi ities Contracts R egulation
Text of the amending Act is available at http://ww w.sebi.go v.in/
sions of the Act are in line with those in the Bill.

139
 tisation Market
in” Ape. 4 Part Chap. 2-—tndian Securi
isedS stock ex-
de On any TECOBNISE
A Ue 7 be issued to any investor or tra Bx
nie s eac hsecu riti es hav e boo n approved by theSeourities and
seem ;
change Bowsd of badia
e)
rred to in sub-clause (iof clause
(2) Every spectal purpose distinct entity refe |
(h) of section 2
(a) Make an for specifying any certificate orinstrument under
ties
sub-clause (ie) ofclause (h) of section 2, as securities, toshe Securi
and Exchange Board ofIndia, in such form and manner as may be speci-

aealong withian application made under clause (a) the draftt of the cer-
(b) File
tifleate or instrument which such entity proposes to issue to the investor
as securities of the nature referred to in sub-clause (ie) of clause (h) of
section2
(3) The Securities and Exchange Board of India may, to protect the interest of
investors in the securities of the nature referred to in sub-clause (ie) of clause (h)
of section 2, specify by regulations,—
(i) The contents of the certificate or instrument to be filed under clause (b)
of sub-section (2) and to be issued as securities of the nature referred to
in sub-clause (ie) of clause (h) of section 2, to the investors;
G) ihe manner inwhich such coments hallbedisclosed intheconificae or
instrumentto be issued as securities of the nature referred to i -
clause (ie)ofclause (h)ofsection 2”. need
4. Amendment of section 31.—In section 31 of the |
section (2),thefollowing sub-section shall be substi — Act for sub-
 Securities Contracts Regulation (Amendment) Bill, 2005 App. 4 14]

(Regulation) Act, 1956 (the SCK Act) so as to provide a legal framework for
of securitised debt including mortgage backed debt.
2. Securitisation is a form of financing involving pooling of financial assets
and the issuance of securities that are re-paid from the cash flows by the assets.
This is generally accomplished by actual sale of the assets to a bankruptcy re-
mote vehicle, that is, a special purpose vehicle, which finances the purchase
through the issuance of bonds. These bonds are backed by future cash flow of the
asset poof. The most common assets for securitisation are mortgages, credit
cards, auto and consumer loans, students loans corporate debt, export receivables,
off-shore remittances, etc.
3. Besides other advantages, securitisation (a) allows banks and financial insti-
tutions to keep these loans off their balance-sheet, thus reducing the need for ad-
ditional capital; (b) provides the hanks and financial institutions with alternative
forms of funding risk transfer, 2 new investor base, potential capital relief and
capital market development; (c) can reduce Sending concentration, improve li-
quidity and improve access to aliernate sources of funding for banks and finan-
cial institutions; (d) facilitates attainment of funding at lower cost as a result of
isolating the assets from potential Bankruptcy risk of the originator; (e) facilitates
better matching of assets and liabilities and the development of the long-term
debt market; (f) provides diversified pools of uniform assets; and (g) has the ad-
vantage of converting non-liquid loans or assets which cannot, be easily sold to
third party investors into liquid assets or marketable securities. Lower funding
costs are also a result of movement of investments from less efficient debt mar-
kets So more efficient capital markets through the process of securitisation.
4. In India, the securitisation market remains underdeveloped. Although two
major legislative initiatives, namely, (a) the amendment to the National Housing
Bank Act, 1987 (NHB Act) in the year 2000; and (b) the enactment of the Secu-
fitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, (SARFAESI Act), have been taken, the market has not picked
up because of the absence of the facility of trading on stock exchanges. The po-
tential buyers get discouraged by the possibility of having to hold the certificate
or instrument in respect of Securitisation transactions till maturity. This. in turn,
restricts the growth of business of housing finance companies and banks.
5. The Securitisation transactions under the NHB Act are not covered under the
definition of “securities” under the SCR Act. As such, trading in certificates or
instruments relating to such tramsactions cannot take place on stock exchanges
and buyers of such securitised financial certificates or instruments are left with
few exit options. Under the SARFAESI Act, while “security receipts” have been
covered under the definition of “securities”, the provisions of the said Act restrict
sale and purchase only amongst qualified institutional buyers. Besides, the “secu-
rity receipts” under the SARFAESI Act can be issued only by a Securitisation
company or a reconstruction company registered with the Reserve Bank of India.
This obviously limits the interest in such receipts and the market has not taken
off at all.
 kei
.4. Ape. 4 Part }—Chap. 2—Indian Securitisation Mar
the certificates or
Keeping potential f the securities market for

h maj or ins tiu uio nal par tic ipa nts an d markel experts, it has Pecn
aa ae et
a~—
decided to amend the SCR Act, ier ali
instrument under the definition of
») Include Securitisation certificate or new sub-clause (ie) in
7 “secur and toit the said purposae,
t fors”
inserie
clause (h) of section 2 of the SCR Act, 1956;
T ide for obtaining approval from the Securities and Exchange
orinstrument and
Meee rev tndie for auc oftheproposed certificate
therefor and insert for the said purpose a new section 17A in
the Act, 1956; and
(iii) To provide for the manner in which contents of such certificate or in-
strament, being the securities” and acknowledging beneficial interest
shall be disclosed.
7. The Bill seeks to achieve the above objectives.
P. CHIDAMBARAM
NEW DELHI,
The 7th December, 2005.

MEMORANDUM REGARDING DELEGATED

LEGISLATION
Clause 4 of the Bill proposes to amend section 31 of the Securities Contracts
(Regulation) Act, 1956 so as to confer power upon the Securities and Exchange

sectionnITA,
(3)ofio
sect cate OFinstrument under clause (ii)ofsub-
2.Theregula
lid,
bythe Securit
made tio shallbe
assoonasmaybe,aftertheyaremade.beforecactisais
nsies

a
Trem raced andadministrative be ies
detailsanditisnot emo Je

mal character. of power is, therefore, of a nor-

 APPENDIX 5

EXTRACT OF REPORT OF THE PARLIAMENTARY

STANDING COMMITTEE OF FINANCE
ON SECURITISATION

Author’s comments: The Report below has discussed securitisation, its prob-
lems and potential for development at substantial length. In time to come, legisla-
tion will possibly try to give effect to the recommendations of the Committee. In
view of its significance, the Report makes a very interesting reading.
STANDING COMMITTEE ON FINANCE
FOURTEENTH LOK SABHA
MINISTRY OF FINANCE
(DEPARTMENT OF ECONOMIC AFFAIRS)
THE SECURITIES CONTRACTS
(REGULATION) AMENDMENT BILL, 2005
THIRTY FIFTH REPORT
LOK SABHA SECRETRIAT
NEW DELHI
May, 2006/Jyaistha, 1928 (Saka)
THIRTY FIFTH REPORT
STANDING COMMITTEE ON FINANCE
(FOURTEENTH LOK SABHA)
MINISTRY OF FINANCE
(DEPARTMENT OF ECONOMIC AFFAIRS)

. THE SECURITIES CONTRACTS

(REGULATION) AMENDMENT BILL, 2005

Presented to Lok Sabha on 22 May, 2006

Laid in Rajya Sabha on 22 May, 2006
LOK SABHA SECRETRIAT

143
 ation Market
= Ape 5 Part I—Chap. 2-—Indian Securitis
i
NEW DELHI
May, 2006/Jyaistha, 1928 (Saka)
TEE ON
COMPOSITION OF STANDING COMMIT
FINANCE, 2005-2006
Maj. Gen, (Retd,) B.C. Khanduri - Chairman
MEMBERS
) LOK SABHA
Singh Bishnoi
Shri Jaswant
Shn Gurudas Dasgupta
Shri Bhartruhans Mahtab
Shri Shyama Charan Gupta
Shn Gurodas Kamat

eee
CRNA
 Extract of Report of the Parliamentary Standing Committee, etc. App. 5 145

28. Shri Mangani Lal Mandal

29. Shri Santosh Bagrodia
30. Smt. Shobhana Bhartia
31. Vacant
SECRETARIAT
. Dr. (Smt.) P.K. Sandhu - Additional Secretary
. Shri A. Mukhopadhyay - Joint Secretary
. Shri S.B. Arora - Deputy Secretary
NO
Ww
—

4. Shri T.G. Chandrasekhar - Under Secretary

Introduction

I, the Chairman Standing Committee on Finance having been authorised by the

Committee to submit the Report on their behalf present this Thirty-Fifth Report
on the Securities Contracts (Regulation) Amendment Bill, 2005S.
2. The Securities Contracts (Regulation) Amendment Bill, 2005 introduced in
Lok Sabha on 16 December, 2005 was referred to the Committee on 23 Decem-
ber, 2005 for examination and report thereon, by the Hon'ble Speaker, Lok Sabha
under Rule 331E of the Rules of Procedure and Conduct of Business in Lok Sab-
ha.
3. The Committee obtained written information on various provisions con-
tained in the aforesaid Bill from the Ministry of Finance (Department of Eco-
nomic Affairs), who also briefed them at their sitting held on 19 January 2006.
4. Written views/Memoranda were received from the Reserve Bank of India
(RBI), Securities and Exchange Board of India (SEBI), Indian Banks’ Associa-
tion (IBA), National Housing Bank (NHB), State Bank of India (SBI), Housing
Development Finance Corporation of India (HDFC), ICICI Bank Ltd., Life In-
surance Corporation of India (LIC), Prognosis Capital Advisors, Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE).
5. The Committee, at their sitting held on 20 April 2006, heard the views of the
representatives of Reserve Bank of India and Securities Exchange Board of India.
6. At their sitting held on 1 May 2006, the Committee heard the views of the
representatives of Indian Banks’ Association, State Bank of India, Life Insurance
Corporation of India and Housing Development Finance Corporation.
7. The Committee took oral evidence of the representatives of the Ministry of
Finance (Department of Economic Affairs) on 10 May 2006.
and
8. The Committee, at their sitting held on 19th May 2006 considered
the same and
adopted the draft report and authorised the Chairman to finalise
present it to Parliament.
of the Ministry
9. The Committee wish to express their thanks to the Officers
tatives of the RBI, SEBI,
of Finance, (Department of Economic Affairs), represen
 | — Market
}—Ohap . 2-— and ian Sec uri tisation
. Part
“eo 0 =A , hd
| |
jm s and
BA. NHB, LIC, SB
I HDI,
th em then considered view .
~
ms , ) pork my o
an d for fu rn is hi ng written nee ~ -
2 hey Aad ~~ Bill th theexis
ePe en mi ti oe ha dde sired in connection wi
; l ee oe a
foe ta
.
rvations/recom mendations of the Commit
10.d Foe faceli
ce y af reference, . the obse
shtty
tee have been prunted in thick type.
ANDURI
MAJ. GEN. (RETD.) B.C. KH
New Delhs
19 May, 2006 |
Chairman
29 Jyaistha, 1928 (Saka) Standing Committee on Finance

REPORT

Rackground
The Finance Minister inthe Budget Speech, 2005-06, proposed to:
Amend the definition of ‘securities’ under the Securities Contracts (Reg-
* lation) Act,1956 soastoprovide a legal framework fortrading ofsecu-
ritized debt including mortgage backed debt; and
© Appoint a high level Expert Committee on corporate bonds and securiti-
seren wotooktennGeeVeg, cogihahery, tanindwanstant Gute tana t
the deveoflo pm
the corpo rate en t t.
bond marke
2. The report of High Level Expert Committee on Corporate Bonds and Secu.
ritisation appointed by the Government was submitted on December 23, 2005.
3. The amendments to the Securities Contracts (Regulation) Act, 1956 pro
posed through the Securities Contracts (Regulation) Amendment Bill, 2005 are:
(i) To imclude securitisation certificates or instruments under the definitio
of “securities”. Accordingly, a new sub-clause (ie) is to be in
serted inclause (h) ofsection 2 of the SCR Act, 1956. This bringsan
certificate or instrument (by whatever name called),—

nc ia l re pr es
deen or rec eiv e
(a) Issued to an investor by any special purpose

s na at
sate ity whic

rn fi
vestor insuch financial asset: and inter est of such ii
(6) Which may, by gener al orspecial order, be
carities and Exchange Board ofIndia” _ pecified by the S
~ within thedefinition of“securities” under
the SCR Act,
(i) Further. the Bill provides for
theproposedceificae or may te wybore v her
Act. 1956, ~ forthesaid purpose a new section 17/A
Extract of Report of the Parliamentary Standing Committee, etc. App. 5 147

(iii) It also provides for the manner in

i which
i contents of such ifi
instruments are to be disclosed. cee use
4. Securitisation is a form of financing involving pooling of financial asset
and the issuance of securities that are re-paid from the cash flows Por raied By
the assets. This is generally accomplished by actual sale of the assets to a od
ruptcy remote vehicle, that is, a Special Purpose Vehicle, which finances the pu :
chase through the issuance of bonds. These bonds are backed by future cash Aw
of the asset pool. The assets for securitisation transactions include, mortgages
credit cards, auto and consumer loans, student loans, corporate debt ex sy :
ceivables, off-shore remittances, etc. ge ae
A. Residential Mortgage Backed Securitisation (RMBS) Transactions
5. Residential Mortgage Backed Securitisation (RMBS) Transactions are the
more common of the securitisation transactions. The stages or processes involved
in such transactions are delineated as follows from the information furnished to
the Committee:
(i) Assignment and Transfer of a pool of housing loans along with the un-
derlying mortgages, from the primary lending institution to Special Pur-
pose Vehicle (SPV).
(ii) On acquiring the pool along-with the underlying mortgages, the SPV
packages the cashflows of the pool of mortgages and designs instruments
of securitisation such as Residential Mortgage Backed Securities
(RMBS) which may be in the form of Pass Through Certificates (PTCs),
Debt Obligations or any other forms.
(iii) The SPV then issues RMBS to potential investors in Capital Market.
(iv) The investors in the RMBS then rely on the repayments in respect of the
underlying mortgage loans for redeeming their investments and realising
the returns thereon.
:
6. Details of the activities involved in the securitisation process include
(i) Selection of Pool of Housing Loans:
Lending Institution
The pool of housing loans is selected by the Primary
selection criteria’ sti-
from its existing housing loans based upon a ‘pool
pulated by the purchaser i.e. the SPV.
(ii) Due Diligence Audit:
is conducted by a firm of
A due diligence audit of the loan accounts
each of the housing loans in the
Chartered Accountants to ensure that
criteria laid down by the SPV.
pool conforms and satisfies the se lection
:
(iii) Rating and Credit Enhancements
ci-
the level of probability that the prin
Rating of the instruments reflects the in-
and inte rest will be paid /rep aid in time and in accordance with
pal up in-
is considered necessary to build
dentures of the transaction. This oci ated
con fid enc e in the ins tru men t and help them assess risks ass
vestor ing grades on
ing Agencies accord their rat
with the instrument. The Rat
 mortgage
mendationof the credit rating agency.
(av)
 Extract of Report of the Parliamentary Standing Committee, etc. App. 5 149

mortgage documents), Loan Administration and Recovery operations,

Appropriations of the Payments to Investors and Service Providers,
Management Information System and Reporting, Maintenance of Ac-
counts and Records.
7. The SPV finances the financial assets transferred to it by the issue of securi-
ties/agreements which may be in the form of Pass Through Certificates (PTCs),
Debt obligations, or other forms of mortgage backed securities which are gener-
ally monitored by Trustees or the Managers of the SPV.
8. The SPV may issue two or multiple classes or tranches of RMBS, sliced
from cashflows of the same underlying pool of residential mortgages.
9. As seen from the information furnished to the Committee, the National
Housing Bank’s (NHB) RMBS issues typically involve two classes of PTCs viz.
the “Senior Class” and the “Subordinated Class” sliced from cashflows of the
same underlying pool of residential mortgages. The PTCs are in the nature of
trust certificates of beneficial interest. Each PTC represents a proportionate undi-
vided beneficial interest in the pool of housing loans and in the securities thereof,
issued pursuant to the various documents entered into by and between different
parties to the transaction of securitization.
10. From the information delineated above the touchstones of securitisation can
be listed out as under:

e Legal true sale of assets to an SPV with narrowly defined purposes and
activities.
e Raising of funds by the SPV by issue of securities to the investors, either
representing beneficial interest in the underlying assets (“pass through
securities”) or representing a senior or subordinated interest in the cash
flows realized from the underlying assets (“pay through securities’’)
e Reliance by the investors on the performance of the assets for repayment
- rather than the credit of their Originator (the seller) or the issuer (the
SPV)
e Consequent to the above, “Bankruptcy Remoteness” from the Originator.
B. Disclosure Requirements and Credit Enhancement Facilities:
11. In February, 2006, the Reserve Bank of India, issued comprehensive
d as-
Guidelines providing the regulatory framework on Securitisation of standar
financia com-
l
sets as applicable to banks, financial institutions and non-banking
ies or headings
panies. The guidelines have been grouped under various categor
ement facili-
viz. true sale, criteria to be met by SPV, Provision of credit enhanc
ties, disclosures etc.
the SPV/ trustee, as per
12. On the disclosure requirements to be fulfilled by
entities are required to make
the information furnished by the Ministry, ‘such’
when required, a Copy of the trust
available to the regulatory authorities, as and
of affairs, its constitution, sigpean
deed, the financial accounts and statement
issue, terms of offer including interes
capital structure, size of the securitisation
 ket
Maron
Pant i-—Chap. 2-—Indian Securitisati
asset pool and its perform:
bout aniginator, ion structure, Service aT
rangement, credit enhancement details, riskfactors ele”.
‘fies ofthedisclosures to be made by the SPV/Trustee par-
alia
ntiom See saphen ee the Reserve Bank's Guidelines inter
-oe
provasid ews
follo
“The SPVArust ee toprovide continuing disclosure
isrequired s
by way
of a Disclosur e Memorand um, signed and certified for correctne ss of in-
contained therein jointly by the servicer and the trustee, and

in a national financial daily newspaper. In addition to the above, data

may be made available on websites of the SPV/trustee, The contents of
the memora ndu
would m
be as under:
(a) Collection summary of previous collection period;
(b) Asset pool behavior - delinquencies, losses, prepayment etc, with

(c) Drawals from credit enhancements;

(d) Distribution summary:
— In respect of principal and interest to each class of secu-
rity holders;
— In respect
ship of servicing
theete: servicing and administrati
stration fee, trustee-

(e) Payments
in arrears:
(f) oy
Current rating 5 of the securitiesand
opere ar any migration
igrati of rating dur-

(g) prnnory
Any other material // informati
information relevant to the performance of

int anyte teed caste ne ra

e ethastication of investors to this
14.Asregards the‘Originator’, the eet ee
presenting a comparative position fortwepont i HOsUTes, 28notesto
 Extract of Report of the Parliamentary Standing Committee, etc.
App. 5 151
(iii) Form and quantum (outstanding value) of services provided by way
of
credit enhancement, liquidity support, post-securitization asset servicing,
etc.
15. In addition to the above, balance sheet disclosures, Originating institutions
of the securitisation transactions are required to provide the various disclosures
as Stated in the Guidelines to the Audit Sub-Committee of their Board, on a quar-
terly basis.
16. On the credit support that a SPV may require as protection against potential
losses, and for ensuring uninterrupted cash flow for yielding the indicated coupon
interest to the purchaser or subsequent investors in ‘securitization instruments’ ,
the ‘guidelines’ inter alia provide for:
e A “first loss facility” which represents the first level of financial support
to a SPV as part of the process in bringing the securities issued by the
SPV to investment grade. The provider of the facility bears the bulk (or
all) of the risks associated with the assets held by the SPV;
e A “second loss facility” which represents a credit enhancement provid-
ing a second (or subsequent) tier of protection to an SPV against poten-
tial losses;
C. Securitization: International Trend and Indian experience:
17. The evolution of Residential Mortgage Backed Securitisation in USA — as
seen from the information furnished - has been facilitated by large scale Gov-
ernment intervention in the initial stages to increase the volume of loan origina-
tions from primary market financial institutions, bringing about market discipline
and the development of the market in an organized manner. In USA, the Gov-
ernment is said to be playing a defining role in creation of Specialized forms of
Secondary Market Intermediation through the creation of Secondary Mortgage
Market Institutions (SMMIs) viz. Federal National Mortgage Association (Fannie
Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (both are
better known as Government Sponsored Enterprises (GSEs)) and Government
National Mortgage Association (Ginnie Mae) which is a department of the Gov-
ernment.

18. On the development of residential mortgage based securitisation in the

USA vis-a-vis, the policy measures pursued in this direction in India, a written
note furnished by the Ministry, inter alia reveals as follows:
“NHB has in its promotional role been actively involved in building up
long term stakes in this segment, exploring appropriate institutional me-
chanism for supporting, sustaining and expanding the secondary mort-
gage market. Keeping in view the specific Charter on securitisation as
(as
envisioned for the Bank under the National Housing Bank Act, 1987
recommenda-
amended till date), and in the light of various reports and
in India,
tions in the context of securitisation of residential mortgages
ced con-
NHB is in the process of commissioning a study by an experien
ation operation s
sultant on developing a road map for promoting securitis
iS2 Ape.>
LSA
ger sca le ak into th e mo de l of Fannie Mac/Ginnie Maeofthe
onlar ious
ake # detailed analysis ofthevar
The ahove Study proposes toundert
cs pert aumi ng to sco urt sal ion and evolve a model for securitis on
ati
issu
India supported by a Secondary
mechanism for issuance of RMBS in
es asGSEs inUSA.”
Mortgage Institution along similar lin
of the representatiof the Min-
ves
2 The Committee, in the course of evidence
pointed out inter alia that in
istry of Finance and the National Housing Bank
gage backed seouritized
countries such asthe United Sustes and Canada, mort

the Executive
tending guarantees on mortgage backed securitized instruments,
DireNHB ct or
respo , by stating inter alia as follows:
nded

have Ginnie Mae, which is100percent government sponsored and all

their papers are 100 per cent and explicitly insured by the Federal Gov-
ernment. They are serving a public housing programme. Then, their pri-

size loans.”
20. Elaborating further on the role being played or sed to be
NHB onensuring th
a>Obshasesnaes cheval tilied Mine
“...[ may submit that we have structured different desi
struments over a period of time and learning rae apt rama
issue, about a back, we i ee
 Extract of Report of the Parliamentary Standing Commitice, etc. App. 5 153

21. On the issue of following the US and Canadian system of providing the
— A guaranice to the investors, the Executive Director informed as fol-
$s:
“As regards those entities, we are working on those models, but those
entities have an implicit or explicit guarantee from the Federal Govern-
men”
22. On issues relating to extending government guaranice on returns to the in-
vesiors
in securitized debt instruments, a representativeof the Ministry stated as
follows during evidence:
~_.. The idea is not to give a guarantee because here the State does
come into the picture. There is an individual private entity, which is se-
curitizing its receivables, and it is making an issue, which is complete]
based on disclosure exactly like an equity issue. Therefore, any potential
investors does an assessment of the risks and the conditions of this par-
ticular instrument, and then buys or does not buy based on his assess-
ment of that risk.~
D. Initiatives for development of Securitisation Market:
23. Two major initiatives for development of the securitisation
market, which
have been taken in the past are, the amendment of the National Housing Bank
Act, 1937 (NHB Act) in 2000; and enactment of the Securitisation and Recon-
struction of Financial Assets and Enforcement of Security Interest Act, 2002.
(a) National Housing Bank Act, 1987
24. The National Housing Bank (Amendment) Act. 2000 has, inter alia en-
trusted NHB to undertake securitisation of residential mortgages originated by
different housing finance institutions and banks and ensure the development of
secondary market for residential mortgages. The enabling provisions in NHB Act
— as they presently stand - for Mortgage backed Securitisation and secondary

(i) Section 14 (ea) of the Act. which specifically authorises NHB to pur-
chase. sell, or otherwise deal in any loans or advances secured by mort-
gage or charge on the immovable property relating to Scheduled Banks
or Housing Finance Institutions (HFIs)-
(ii) Section 14 (eb), which allows NHB to create one or more Trusts and
transfer loans or advances together with or without securities therefor to
such Trust(s) for consideration;
(iii) Section 14 (ec), which authorises NHB to set aside loans or advances,
and issue or sell Mortgage Backed Securities (MBS) based on such loans
or advances so set aside, in the form of debt obligations, Trust Certifi-
cates of beneficial interest or other instruments whatever name called,
and to act as Trustee for the holders of such securities.
l
(iv) Section 18A. which facilitates the transfer of MBS issued by Nationa
Housing Bank to securitise the loans granted by Scheduled Banks and
 tisation Markei
0 6Appe5 Part | Chap. 2—dndian Securi
ist
y Reg | ration, both atthe ti
ist ime me of iss| ue of Secu
HPs, ith owt Com pul sor ;
their transier by theinvestors,
hities by NHB andatthetime of
. NHB Act, the Bank acting as 4
Further, im terms of Section isalion of loans
~ Wustee ee m the Daa beeen A to seourt
asarrears of land revenue fOrin-
sas pcen authorised torecover thedues ties issued by NHB.
Securi
stilling confidence among the investors in the
—
(b) SARFAES/ Act
ed the enactment
amendments in the NHB Act were follow
and Reconstruction of Financial Assets Enforcement of Secu-
wt te, interalia, the
nityInterest Act,2012(SARPAESI Act),anactenacted toregula , er alia
business of securitization. The provisions under the SARFAESI Act int
y ced in
provide that on securitisation ofanasset, the securitisation compan ispla d
the same position as ifitwas the original lender. Besides this, the Ac t amende
tion Act.
the definition of “securities” as given inthe Securities Contract Regula
1956 to include security receipts issued by a securitisation Company.
26. The legislative measures cited above are said to have not fully helped in
achieving the desired result of securing a deep and liquid securitised debt market
owing to the absence of the facility of trading on stock exchanges. The securitisa-
tion instruments under NHB are not covered under the definition of “securities”
in the SCR Act. Under the SARFAESI Act, while “security receipts” have been
covered under the definition of “securities”, the Act restricts sale and purchase of

company or a reconstruction company registered with the Reserve Bank of India.

This is . to limit the interest in the instrument
and the market
has not
taken at ail.

E. Constraints to the development of securitisation market:

definition of‘securities’ under theSecurities Contract ib Ad ton
permi dtd (Regulation 1956,
instrumen aretsnot
quently, thewading isrecone. intheMock exchanges, andconse-
na
shed to
furnitjon
28. As per the_inf. ormati the Com it e . °
the NHB has, til] date
o
completed

amounting to Rs. 763 crore. Currently iiedapaed 38,000 housing Joans

s forsecur itisa -
tionisconfined tosixstates,which have frondtheCosine loan ct of“in-
struments ofsecuritisation’ at0.1% ofthesizeoftheeeneanne, mtTespe
 Laract of heport of the Parlicmentary Standing Commitice, ci. App-S5 155
WO, The varying stamp duty tates on “seomtssaiion transactions’ , which range
from O.1 pex cent wo 6 percent and vasies from sae w sate, the segsasaion
Chaiges appcdihe ender the intaan Kegeirawn AG. \AK. a wel as maues 1e-
lating to taxation A income A various entities A sccuilisation uzmactiom have
2 disect bearing on the econommcs of morigaze backed securitisation market.
¥. The Securities Contracts (Regulation) Amendment Bill, 2005
31. The Securities Contracts (Regulation) Amendmen Bill, 2005 wes itro-
duced in Lok Sabha on 16.12 2005 and refered to the Standing Commnitice on
Finance on 23.12.2006 fox examumatioon and report. The trtiondle betind the
ancmimnes popsals A the Bill, whack seek w euable eomdary mars Taped
ity for secanitised dett instruments. as farmashed by the Ministry we dclincatad zs

G3) Under the existing Seed framework. Seomtisation tramsactions cams be

issted and traded on stock exchanges as these uaacios we nt in
(= peg ape pegemcnd pedeag rpms gaye: =real
lation) Act. 1956.
(3) Al presem. scomilitdion Umsactioms ac being srucmed wader Trev

wider participation of investors. both of retail and institutional invesions

(3) Im the absence of the facilsty of trading on stock exchanges. potential
beyers of sccartized tmstruments ect discourased by the posssbiity of
having to hold the certificate oF Iestreent m respect of scomilisation
transactions till mxatersty. This. m tern. restricts the growth of business of
housing fimance companies and banks.
(iv) The entire msttutional. supervisory aad regulatory architecome of scomi-
thes law could be made applicable to scoumilisation transactions also.
(v) Investment by mstttutional investors seck would be possabic only when
these imstruments are clistble instruments for investmicat witch m Gen
fequires an active sccondary market and appropriate regula disclosure
about the quality of assets including recovery mechanism m case of de-
fault. The mstitutional participation would heip in further developing the
securtti deit zed
market
32. The amendments to the Securities Contracts (Regulation) Act. 1956 pro-
posed throug the Billhae-
@) To imciude securitisation certificates or mstruments under the definition
of “securities”. Accordingly. 2 new sub-clause (ic) is proposed to be m
serted in clause (h) of section 2 of the SCR Act. 1956. This brings any
ee ee bee coh oe
 ket
%o Ape 5 Pant }-~-Chap. Indian Securitisation Mar
theSe-
special order, ibespecified by
(>) Winich may, by general or ”
cunmes and Board of india,
under the SCR Act,
within the definition of“securities”
ing approval from SEBI for issue of
(i) Further, the Bill provides for obtain

tio
on the
¥.. The Committee received written views/sugges nsus
vario provi-

[a SEBI, IBA, ICICI, SBI, LIC

 Extract of Report of the Parliamentary Standing Committee, etc. App. 5 157

AMENDMENTS PROPOSED BY GOVERNMENT:

— 2 (Amendment of Section 2) and Clause 3 (Insertion of new section

36. Clause 2, which seeks to include ‘securitisation certificate or instrument’

under the definition of ‘Securities’ by inserting for the purpose, a new sub-clause
(ie) in clause (h) of Section 2 of the SCR Act, 1956 reads as under:
(1) In section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956)
(hereinafter referred to as the principal Act), in clause (h), after sub-clause (id),
the following sub-clause shall be inserted, namely:
“(ie) any certificate or instrument (by whatever name called),—
(a) Issued, to an investor by any special purpose distinct entity which
possesses any financial asset representing debt or receivable by such en-
tity, and, acknowledging the beneficial interest of such investor in such
financial asset; and
(b) Which may, by general or special order, be specified as such by the
Securities and Exchange Board of India;”
37. Clause 3, which stipulates the ‘due process’ or lays down the legal frame-
work by way of which the ‘certificates’ or ‘instruments’ (securities) referred to in
Sub-clause (ie) of Clause (h) of Section 2 are to be issued provides as follows:
After section 17 of the principal Act, the following section shall be in-
serted, namely;—
“17A. Approval of Securities and Exchange Board of India for securi-
ties referred to in sub-clause (ie) of clause (h) of section 2(1) Without
prejudice to the provisions contained in this Act or any other law for the
time being in force, no securities of the nature referred to in sub-clause
(ie) of clause (h) of section 2 shall be issued to any investor or trade on
any recognised stock exchange unless such securities have been ap-
proved by the Securities and Exchange Board of India.
(2) Every special purpose distinct entity referred to in sub-clause (ie) of clause
(h) of section 2 shall—
(a) Make an application, for specifying any certificate or instrument under
sub-clause (ie) of clause (h) of section 2, as securities, to she Securities
and Exchange Board of India, in such form and manner as may be speci-
fied by regulations;
(b) File along with an application made under clause (a) the draft of the cer-
tificate or instrument which such entity proposes to issue to the investor
(h) of
as securities of the nature referred to in sub-clause (ie) of clause
section 2
t the interest of
(3) The Securities and Exchange Board of India may, to protec
sub-clause (ie) of clause (h)
investors in the securities of the nature referred to in
of section 2, specify by regulations,
 wrttisation Marke!
Pan | Chap > indian Seo
ss Apes
be filed underclchause (b)
cueteats ceruticate or instrament to erred to
e an y er po y iss ued as seourities of the neture ref ,
- ppl sec tio n 2, to the Investors, 7
) of cla use (h )of
sneub-clause (ie te or
er in wh ic h su ch con ten ts sha ll bedisclosed in thecertifica
The mann ineub-
o eer uen eat tobe is su ed as sec urities of the nature referred to
D
clause (ie) of clause (h) of section 2 : al
investor by a a
‘8. An instrument orcertificate issued to an

—- be construed a security’ interms of the proposed Section 2 (h)

‘special
(ie) he condition thatitisspecified assuch by a ‘general or
order of SEBL.
thepurpose of‘issue’ andtrading onanystock exchange, dieSnainy-
a esnertifinans (Security) _ referred tointheproposed Section (h) (ie) — has
to beapproved by SEBI in terms of the proposed Section 17 (A) (1). The
cg aren prselton oe tecnees Dead Gay wSat
along
thereto, the of the

the certificate or instrument. i

Section 17 (A) (2) ve

posed Section 17 (A) (3), SEBI may, in the interest of the investors, specify by
regulations, the “Contents of the certificate or instrument’ proposed to the issued
and the manner in which such contents ‘shall be disclosed in the certificate or
— ‘

40. With the amendments proposed separately to Section 31 (2) of the SCRA
Act (Clause 4), SEBI is to be conferred with powers to make regulations

¢ The form and manner in which an aplicaton shall be made under clause
(a) of sub-sect (2) of section
ion 17A:
¢ The contents of the certificate or instrument under
section (3) ofsection 17 A: ae dices
. The manner in which such contents shall be
disclosed in the certificate
or mstrument under clause (ii) of sub-section (3)
of section 17 A.”
ossible only with SEBI’s approval, the> Ministry of Fi-
nter alia stated as follows:
ified in the legal drafting of the Bill that issue of secu-
tor “through public issue” will be possible only after

ibsequent reply, specified the changes proposed in Sec-

17 (A) (1) to mandate that the issue of securtised debt
slic offer will need SEBI’s approval, meaning thereby
securitised can continue to take place without such ap-
ges in the provisions as proposed by the Ministry, read

Clause2):
e or instrument (by whatever name called)-
an investor through a public offerby any special pur-
nct entity which possesses any financial asset repre-
bt or receivable by such entity, and, acknowledging
cial interest of such investor in such financial asset;

iy, by general or special order, be specified as such by

ties and Exchange Board of India.”
(Clause 3) — without prejudice to the provisions con-
or any other law for the time being in force, no securi-
referred to in sub-clause (ie) of clause (h) of section 2
any investor through a public offeror traded on any
xchange unless such securities have been approved by
Exchange Board of India.
SUGGESTIONS ON THE PROPOSALS OF THE

- relating to the perception that the Bill, as introduced,

nt of ‘securitised debt’ too would require SEBI’s ap-
ought to be rectified with the changes proposed, as in-
iragraphs - SEBI, in a written memorandum raised cer-
<= Ueeeeene ee eee ee ey ag
— - See. 3 eee Se ee. Pe
 eer CC OO YES OW NY 2 OZ NZ 2 S248 S SE ww VV SEER ZS Ot 8 esl 2

sues’, which are disclosure based;

(iii) As per the proposed provisions, the disclosures to |
would appear on the ‘certificate’ or ‘instrument’ it
unworkable inter alia by hindering ‘transferability
and disappearance of the disclosures in the event of
(iv) Regulation making power should be conferred on
matters such as, eligibility criteria of issuers, procec
public offer, minimum size of the offer for public et
45. SEBI also furnished to the Committee, a modified v
proposed by them to address inter alia the concerns expre
above in brief.
46. The Chairman, SEBI as well as a representative of SI
evidence, dwelt at length inter alia on the issues raised on
sioning of the Bill as contained in the memorandum submitte
47. The suggestions made/ issues raised by SEBI on the
Bill vis-a-vis, the response/perception of the Ministry of Fin:
cussed in brief in the subsequent paragraphs.
48. The view-point expressed to enable for enumerating the
ritised debt instruments’, instead of providing for SEBI
to
ments in terms of a ‘general’ or ‘special order’, as envisaged
tion 2 (h) (ie), has been responded to as under by the Ministry
“Securitised debt is a special class of security as it
of both debt and equity. Since securitisation structun
innovation, it is not conceivable to think about a
products.”
“...The attributes of securitisation instrument woul
regulations. However, SEBI will still have powers
securitised debt instruments on the same analogy «
proves specific derivative contracts, as there can be
tion structures. The main statute should be time inva:
try to conceive of all possible products.”
. ‘49. Asked to clarify the framework envisaged for deci
ding.
Extract of Report of the Parliamentary Standing Committee, etc. App. 5 161
Since the securitized instruments are innovative products, one cannot, in
an exhaustive manner visualize what attributes it would have. In case
such a new instrument is envisaged by market players which is not coy-
ered under the rubric of “general” order of SEBI, it is being granted
powers under the “special order” route to provide legal sanction for its
trading.”
50. The principal contention of the regulator has been that the ‘due process’
envisaged for listing of the ‘securities’ — which, as per the ‘memorandum’ sub-
mitted involved a double approval, one under Section 2 (h) (ie) read with Section
17 (A) (2) and the other under Section 17 (A) (1) — was not in consonance with
the Guidelines/Regulations governing issues, which were mainly disclosure
based and not approval based. In this regard, the Ministry, in a written reply con-
tinued as follows:
“Presently there could be some simple vanilla type products, which
may be subsumed under a category and could be issued to investors as a
part of some generic category of securitisation. On the other hand, there
could be some highly structured products which may require specific ap-
proval before these are offered to investors. The word approval has been
used deliberately in the Bill so that only “securities” which could be con-
strued as liquid securities or have other desirable attributes of good credit
rating or credit enhancement etc. only pass the SEBI approval test. Since
the securitised debt is not pure equity, there is a need to have some kind
of quality check before these securities are offered to investors. The ap-
proval involved by SEBI is not double, but only single. Only single proc-
ess is stipulated whereby the special purpose entity, which wants to issue
securitised debt to instruments, applies to SEBI with a draft of the cer-
tificate or instruments giving the salient features of such instruments.
SEBI, with a view to protecting interest of investors would specify by
regulations the contents of the certificates or instruments and the manner
in which such contents shall be disclosed to investors in the form of
regulations. If the securitised debt passes the general approval test under
the regulations, it can be deemed to have been approved by SEBI. How-
ever, in other cases, where a new instrument is offered to investors, SEBI
will have specific power to approve of such instruments.”
51. The Ministry also added as under in this regard:
of
“Even under the existing SEBI Act, 1992 though SEBI allows issue
to disap-
shares subject to disclosure based regulation, it eXeFCISes power
of the SEBI Act.
prove a public issue under sub-section (4) of Section 11
al of secu-
So the present scheme of the Bill allows both general approv
as specific ap-
ritised debt through disclosure based regulation as well
specific derivative
proved based regulation.SEBI has been approving
on the stock exchanges.
contracts and securities, which are being traded
not approve of the securities,
So, it is not correct to say that SEBI does
approval for derivative
which are traded on the stock exchanges. SEBI’s
are complex contracts and they
securities is necessary only because these
 “T think it is a question of what it is that we app.
and options segments come, subject to certain elis
certain stocks are allowed to be traded and that is |
the exchanges that we have not been objecting if
not that every instrument gets cleared by us. The
nascent stage. There could be a situation where eve
20 to 25 applications filed with us saying that we
you please give us approval for these documents.”
53. In this regard, the Chairman, SEBI, also stated as und
“When the Ministry talks in terms of our approvir
the F&DO segment which is relatively new in Ind
which we initially started in the stock futures, and
index futures and stock options, etc. But these are
products that we approve. If we have to approve th:
institution will come with an application requesti
this and somebody else will come with an applicati
ply and we will be doing just that.
...If we prescribe what ought to be the qualities ¢
ought to be the category underlying disclosures, if
derlying consists of so many assets of this quality, t
which is in the document that is filed with us. We s
the case of IPOs that all disclosures are in place.”
54. When asked whether SEBI were in a agreement with t
jects of the Bill viz., to provide a legal framework for tradir
the Chairman, SEBI responded by saying as follows:
“As far as the Statement of Objects and Reasons i:
fully details the felt need we fully subscribe to that :
these people an exit option. It also adds further -
Therefore, it is clearly something that SEBI supports
55. Questioned about the interactions that SEBI may have
try in formulating the legal framework envisaged in the Bill
ritised debt’, the Chairman, SEBI said:
“No... When the Arat Cakhinat naAta «tac nracnnas,)
 Extract of Report of the Parliamentary Standing Committee, etc. App. 5 163

56. As regards the perception that the Bill gives that the ‘disclosures’ to be
specified would appear on the ‘offer document’, which, as per SEBI, would be
unworkable, the response received from the Ministry, reads as under:
“This is true of the existing equity shares also as all the disclosures are
given by the issuer company in the form of prospectus. However, after
this there are mechanisms of continuous disclosure in the form of regular
filings by the company and dissemination of this information through the
stock exchanges. The equity shares also dematerialized so initial disclo-
sure on the certificate and continuous disclosure there are exchanges run
two mechanisms of disclosure for equity shares. The same mechanisms
would be used for disclosures for the securatised debt also.”
57. Questioned whether it was not essential to specify in the Bill the aspect of
the SPV proposing to issue a ‘Securitization instrument’ requiring to file an offer
document (apart from making an application) disclosure requirements relating to
which are to be determined by SEBI, the Ministry, in reply, stated as under:
“The contents of “offer document” of a company going in for public
issue of “securities” are mentioned in the SEBI (Disclosure and Investor
Protection) (DIP) Guidelines. These Guidelines have been framed in ex-
ercise of SEBI’s powers under Section 11 of the SEBI Act, 1992. The
same power can be used by SEBI to provide for disclosure requirements
in the offer document incase of securitisation instruments. These may not
be specified in the Act as securitized debt would be subsumed under the
9 99
word ‘securities’.
58. As per the Ministry’s response, the initial disclosures would be made in the
offer document and the ‘special purpose entity’ issuing the certificates and the
stock exchanges would be continuously giving disclosures about such instru-
ments to investors as is the case with shares.
59. As informed by SEBI, matters pertaining to continuous disclosure and
other continuous listing requirements are proposed to be covered in a new listing
agreement that would be devised for such instruments under the general provi-
sions available under section 11A(2) of the SEBI Act, 1992 and Section 21 of the
Securities Contracts (Regulation) Act, 1956.
60. As regards the disclosure requirements to be fulfilled by the SPVs in terms
of Reserve Bank’s Guidelines on ‘Securitisation of Standard Assets’, the Deputy
Governor, Reserve Bank, in the course of evidence, stated as under:
“What should be the structure of the SPVs and what would be the obli-
gations, what would be the transparency and disclosure requirement of
the originating institutions as well as the SPVs. We have laid down disl-
use-
cosure requirement for both the banks and the SPVs. These could be
d legisla-
fully adopted even when framing regulations under the propose
tion.” .
representatives of
61. The Committee, in the course of evidence of the
tives on the variation
Ministry of Finance, specifically questioned the representa
 similar to this. In fact, in our written response to the
mentioned this. SEBI approved in the case of deriv
futures as a category in May, 2001; index option a
2001; single stock options in July, 2001 single stoc
ber, 2001; interest rates futures in June, 2003. So, t
identical regime. The actual issue will be disclosure
struments need not be approved. The idea here is a
instruments. That is why we have used both genet
and that has been clarified in our response.”
62. Asked to specify whether it was not essential to have a
sioning of the Bill, as proposed to assess the need for cat
tions/changes to clearly bringing out the aspect of each secu
not requiring the approval of SEBI, the representative of the
will do that”, The Secretary, Department of Economic Aff:
Committee that the matter would be examined by holding wi
63. Subsequently, the Ministry of Finance, in a post evide
dated 15 May, 2006 informed the Committee that the matter ;
of securitized instruments, as proposed in the Bill was dis.
with SEBI on 13 May, 2006. The communication from the
reveals as follows:
“After detailed discussion, it was felt that the isst
struments would be subject to disclosure based regul
SEBI. Since the issue process would be supervised |
be necessary for SEBI to specify or approve each suc
general or special order. Hence part (b) of the clause
dropped. This would, however, require consequent
17A and 31 to enable SEBI to govern the issue and
struments by Regulations.”
VIEWS OF THE RESERVE BANK ON THE PROPOSA]
64. The Reserve Bank in a Memorandum submitted to the (
suggested that the word ‘possesses’ in Clause 2 (A) (a) nee
with the words ‘has acquired’. The substitution of the word ha
per the memorandum, as the ‘assets or receivables are usua
Trust or SPE’ owing to which. it has been felt that the ex
 Extract of Report of the Parliamentary Standing Committee, etc. App. 5 165

“We had suggested that the word ‘acquired’ could be used instead of
“possessed” because possession could mean constructive possession. We
will then get into issues whether how do you possess all financial loans
and if a loan is to be transferred how do you possess a loan etc. The word
‘possession’ has something to do with tangible assets. We do feel that
probably the word possession does not fully reflect the range of assets or
the securities that could be securitised. Therefore, we have suggested the
word ‘acquisition’ rather than ‘possession’.’ 99

66. Questioned on the viewpoint expressed by the Reserve Bank, the Ministry,
in reply stated as under:
“The word “possesses” appearing in Clause 2 (1) (a) need not be re-
placed by the words “has acquired” as the Special Purpose Vehicle, when
it issues the securitised debt papers to investors, is already in possession
of the financial assets. The stage of acquisition gets over when the secu-
rities are issued to investors. So, the expression “possesses” is an appro-
priate expression.”
67. The Reserve Bank also suggested that it may be appropriate to empower
the Central Government to make rules to provide for the contents of both the
documents to be filed with SEBI {by Trusts or SPV for listing the certificates or
instruments to be issued by them} and the documents to be issued to the investors
by such Trusts or SPV as the requirement to be complied with for listing.
68. In response to a query posed in this regard, the Ministry responded as under
in reply:
“The suggestion of prescribing listing conditions for securitised debt is
valid. However, the contents of the securitised debt or manner in which
these contents would disclosed to investors are already provided for in
clause (c) and (d) of the sub-section (2) of Section 31 of the proposed
Securities Contracts Regulations (Amendment) Bill, 2005. Since secu-
ritised debt is a form of “securities,” listing requirements can be stipu-
lated by SEBI under SEBI Act, 1992 and Section 21 of the SCRA by the
stock exchanges. There is no need to prescribe the listing requirements
under rules framed by the Government.”
69. The Reserve Bank also suggested that the essential difference between ‘se-
curitised paper’ and other corporate debt securities needed be addressed while
designing the listing and disclosure requirements; and that care should be taken
to ensure that no restriction was placed — while designing the listing requirements
—on the OTC transactions in such instruments.
alia
70. In response to the related issues, the Ministry, in a written reply inter
stated as follows:
securities
“The difference between securitised paper and corporate debt
sure require-
would be addressed while designing the listing and disclo
the proposed
ments by SEBI under the regulation making power under
 date. The listing requirements would be framed by
keeping in mind the broad policy framework of th
Neither SEBI nor stock exchanges have any regulat
the transactions, which are outside the exchanges |
(OTC). Again, this issue is not connected with th
ments.”
71. By way of giving the rationale for expressing the need
ence between ‘securitised paper’ and other corporate debt s
ing that no restrictions were placed on OTC transactions wh
ing requirements, the Reserve Bank, in a post-evidence reply
“...The disclosure and reporting requirements fron
Suitable for securitisation issues since such requirem
levant information about securitisation issues. For ir
management, financial or business structures in the c
issues on which information to the market regulator
be of relevance. There would be rather information al
underlying asset pools, securitisation structure, servic
ing of different tranches of the securitisation issues
more relevant. Therefore, the registration and disclost
required to be distinctly designed for securitization.”
72. It was also added:

“Since the securitisation market is essentially driv

investors like banks, it may be advisable not to limi
trading to any specific platform like exchanges. All
tions also in OTC market would go a long way in de
ritisation markets.”
73. The Committee note that the stipulations of the prop
whereby no such securities (securitised instruments) can be is
tor unless approved by SEBI’ could be inferred to mean that
transaction inclusive of private placement deals would nec
approval of SEBI. The Ministry have, in response to the que
gard, sought to address the issue by specifying in the proposec
and 17 (A)] that the issue of securitized debt to investors ‘thr
will need to be approved by SEBI. Incorporation of the word:
zed on a regulatory framework which would be in
closure based guidelines/regulations governing issue of

f the Committee, the Ministry of Finance have, after hav-

1s with SEBI, informed in clear terms that the issue of
yn the stock exchanges would be subject to ‘disclosure
nsequently, it has been proposed to drop Section
pecification of the tradable securitized instruments by
neral’ or ‘special’ order. As the issue process of securi-
9 supervised on the basis of ‘disclosure based regula-
yte that it would not be necessary for SEBI to specify or
iment by a ‘general’ or ‘special’ order. The Committee,
ement with the proposal to drop Section 2(h)(ie)(b).
owever, note that for enabling SEBI to govern the issue
ed instruments by regulations, consequential changes
in Sections 17A (approval process) and 31 (regulation
on account of witnessing varied interpretation of the pro-
Bill, the Committee are inclined to recommend that the
e carried out by holding wider consultations, particularly
regulator, and by taking into consideration the specifics
nts vis-a-vis other securities traded on the stock ex-

‘ion furnished, the Committee also note that SEBI pro-

relating to continuous disclosures relating to securitised
a new listing agreement. The disclosure norms and rating
on the viability and performance of securitised instru-
teserve Bank’s guidelines on ‘securitization of standard
yanks etc. the disclosure requirements to be fulfilled in-
ng a summary account ofcolleetion of receivables, draw-
ment, details of asset pool behavior etc. The disclosure
lated by the Reserve Bank could serve as an aid for de-
rms for securitized instruments traded on the stock ex-
d out by the Reserve Bank, the Committee feel the need
ig that the specific characteristics of securitised instru-
orporate bonds are taken into consideration while stipu-
 ee ES FS a en ee Oe) ee ee eeeee Or ar he ee eae

tization, the Ministry, in a written reply inter alia stated as un

“The rates of stamp duty and registration have a ¢
economics of mortgage backed securitisation transa
the securitisation transaction unviable. The viability
depends upon the extent to which these transaction ¢
and the amount of spread that is available to the trans
The stamp duty and registration charges being Sta
nificantly across the country. Currently, there are o
have lowered the stamp duty in respect of instrument
0.1% of the size of the securitized assets. Selection |
securitisation is done specifically from these above
the process costs to the minimal. This significantly
the housing loans to be taken up for securitization.
In order to facilitate the growth of securitized debt
vestors point of view, fiscal incentives by way of ta
interest income on the securitized instruments or the
sale may be considered which can effectively be pa
mate borrowers in terms of lower cost funds. These
investors will result in lower coupon on the instrume:
er cost of funds. Such tax concessions may be consi
of public policy programmes where the funds mobiliz
struments (with tax incentives) are deployed only fc
housing etc. Several countries have adopted the fisca
ing the public programmes for housing.”
81. While the outstanding housing loans of banks and HFC:
tune of Rs. 1,48,000 crore, less than 5% of this amount has
far. As brought out earlier, NHB has securitized housing |
HFCs to the order of Rs. 763 crore. Further, there have been c
the order of Rs. 2000 crore. The quantum of outstanding hous
tive of the potential of MBS in the Country.
82. Questioned specifically about the recommendations of |
pert Committee on Corporate Debt and Securitisation on m
resolution of taxation and stamp duty issues for enabling the
backed securitization. the Ministrv. in a written renly ctated a<
 Extract of Report of the Parliamentary Standing Committee, etc.
App. 5 169

(a) The Central Government should consider establishing an appro-

priate institutional process to evolve a consensus across the
States on the affordable rates and levels of stamp duty on debt
assignment, Pass Through Certificates (PTCs) and security re-
ceipts (SRs).
(b) The Central Government should provide an explicit tax pass
through treatment to securitisation Special Purpose Vehicles
(SPVs) and NPA Securitisation SPVs (namely, trust SPVs set up
by ARCs registered with RBI under SARFAESI) on par with the
tax pass through treatment applied under the tax law to SEBI
registered Venture Capital Funds under section 10(23FB) read
with section 115U of the Income tax Act. RBI and SEBI may
frame appropriate regulations in this regard.
(c) Recognizing the wholesale and Qualified Institutional Buyers
(QIB) character of investors in securitisation trusts, there should
be no withholding tax requirement on interest paid by the bor-
rowers (whose credit exposures are securitized) to the securitisa-
tion trust and on distributions made by the securitisation trust to
its PTC and/or SR holders.”
83. The Committee note that the stamp duty and registration charges applicable
on mortgage backed securitised instruments significantly impact the economics
of such transactions. As mortgage debt is regarded as ‘immovable property’, its
transfer can be effected only by way of a ‘transfer deed’, which attracts stamp
duty at the rates prescribed under the stamp laws of the States as well as registra-
tion charges under the Indian Registration Act. Less than 5% of the total out-
standing housing loans of banks and HFCs, which is currently estimated to be of
the order of Rs. 1,48,000 crore have been securitized thus far, with the transac-
tions restricted to six States which have lowered the stamp duty applicable on
securitisation instruments to 0.1% of the size of securitized assets. The recom-
mendations made by the ‘High Level Expert Committee on Corporate Bonds and
Securitization’ for resolution of stamp duty and taxation issues to further the
growth of mortgage backed securitisation include, establishing an institutional
process by the Central Government for evolving a consensus across the States on
rationalizing the stamp duty rates to an uniform level, and according favorable
tax treatment to securitised instruments. The Committee expects the Government
to urgently act on the recommendations of the High Level Expert Committee,
whichwould give an impetus to the growth of the securitized debt market.
84. As brought out in the Statement of Objects and Reasons of the Bill, secu-
ritisation is a complex process of pooling of financial assets, which may or may
driven,
not have the same characteristics. The market is presently institutional
in such 1n-
who perform their internal due diligence procedures before investing
struments.
regard is that on the
85. An issue brought before the Committee by SEBI in this
ctions, where an investor
lines of the restrictions applicable to derivatives transa
than Rs. 2 Lakhs — in the inter-
cannot enter into a transaction whose value is less
 _—_ ee aS a ee ae eer

“... The issue of contract size of ‘securitization tra

specified in the trading rules/circulars or guidelines o
ter of detail which can be stipulated outside the m:
case with derivatives transactions”
87. Keeping in view the complexities of the securitisation |
that this market is mainly institutionally driven, as pointe
Committee feel that it may be preferable to fix a threshold 1
such securities, which an investor may trade in the stock ex
mittee, therefore, expect that on the lines of the restrictions a
tive transactions where an investor can not enter into a tran
Rs. 2 lakhs, serious consideration be given to the need felt fo
the value of securitisation transactions that an investor may tr
changes.
New Delhi: MAJ. GEN. (RETD.
19 May, 2006
29 Vaisakha, 1928 (Saka) Standing Co

NOTE OF DISSENT
Submitted by Shri Rupchand Pal, MP
Since the Finance Minister in his Budget Speech 2005-06
the definition of securities under the Securities Contract (A
order to provide a legal framework for trading of securitised d
gaged debt, the situation in the Indian capital market has char
are serious fluctuations in the market largely influenced by ext
The Indian capital market by all indications has not matur
any healthy space for the proposed instruments and in Spite o
by two important JPCs pertaining to two previous Scams — one
variety and other Ketan Parekh variety, the Indian capital m.
flicted by scores of manipulations and influence of foreign ins
operating through dubious routes.
Despite the limited endeavors to monitor and continue sur\
as regulator has not been successful enough and even the step
urbed situation, the proposed venture to facilitate trad-
luding mortgage etc. is not welcome measure at least

nt.

Sd/-
(Shri Rupchand Pal)
 SECURITIES AND EXCHANGE BC
INDIA (PUBLIC OFFER AND LI
OF SECURITISED DEBT INSTRU!
REGULATIONS, 2008

THE GAZETTE OF INDIA, EXTRAORDINARY, PART

PUBLISHED BY AUTHORITY, NEW DELHI, M
SECURITIES AND EXCHANGE BOARD OF
NOTIFICATION
MUMBAI, the 26th MAY, 2008
SECURITIES AND EXCHANGE BOARD OF INDIA (
AND LISTING OF SECURITISED DEBT INSTR
REGULATIONS, 2008
No. LAD-NRO/GN/2008/12/126567 - In exercise of the
section 31 read with section 17A of the Securities Contrac
1956 (42 of 1956) and section 30 read with sections 11 anc
and Exchange Board of India Act, 1992 (15 of 1992), th
change Board of India hereby makes the following Regulatic

CHAPTER I
PRELIMINARY
S. 1 Short title and commencement.—(1)These Regula
the Securities and Exchange Board of India (Public Offer ;
ritised Debt Instruments) Regulations, 2008.
(2) They shall come into force on the date of their public
Gazette.
S. 2. Definitions.—In these Regulations, unless the contex:
(a) “Act” means the Securities Contracts (Regulation
4nrw gS
SEBI (Public Offer and Listing, etc.) Regulations, 2008
App. 6 173

(c) “Board” means the Securitiesé and Exchan ge Board of India established
tan section 3 of the Securities and Exchange Board of India Act
(15of

(d) “certificate” means a certificate of registration granted to a trustee under

these regulations;
(e) “clean-up call option” means an option retained and exercisable by the
originator to purchase the debt or receivables assigned to a special pur-
pose distinct entity, if the residual value of such debt or receivables falls
below a specified percentage of the price at which it was assigned;
(f) “credit enhancement” means any arrangement intended to decrease the
likelihood of default on the securitised debt instruments, including sub-
ordination, insurance, letter of credit, over-collateralisation, undertakings
and guarantees;
(g) “debt” or “receivables” means any right that generates or results into a
cash flow and includes
(i) mortgage debt ;
(ii) receivables arising out of securities as may be specified by the
Board
(iii) any financial asset within the meaning of clause (1) of sub-
section (1) of section 2 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act,
2002 (54 of 2002);
(h) “investor” means a person holding any securitised debt instrument which
acknowledges the interest of such person in the debt or receivables as-
signed to the special purpose distinct entity;
(i) “issue” means an offer of securitised debt instruments by a special pur-
pose distinct entity or under any scheme of such entity to the public or to
any person(s), which is proposed to be listed on a recognised stock ex-
change;
Q) “liquidity provider” means a person who agrees to provide funds to the
special purpose distinct entity for settlement of payments due to investors
in accordance with the schedule of payments contained in the terms of is-
sue of the securitised debt instruments issued to them, in the event of any
short term cash flow shortfalls of the special purpose distinct entity;
(k) “obligor” means a person who is liable, whether under a contract or oth-
erwise, to pay a debt or receivables or to discharge any obligation in re-
spect of a debt or receivables;
electronic document
(I) “offer document” means any document including anctus and includes any
described or issued as an offer document or prospe
subscription
notice, circular, advertisement or other document inviting
ents of a
from the public or purchase of any securitised debt instrum
scheme formulated under these regulations;
 these regulations and includes making a public of
instruments, making disclosures in connection wit
formance of obligations relating to public offer or |
of such instruments, management and administrati
der which such instruments are issued, valuation a
counts which have a bearing on value of such instr
related activity as may be specified by the Board;
(p) “scheme” means a scheme for issue of securitise
accordance with these regulations;
(q) “Schedule” means a Schedule appended to these re;
(r) “securitisation” means acquisition of debt or recei
purpose distinct entity from any originator or origi:
of issuance of securitised debt instruments to inv
debt or receivables and such issuance;
(s) “securitised debt instrument” means any certific:
whatever name called, of the nature referred to
clause (h) of section 2 of the Act issued by a speci
tity;
(t) “servicer” means any person appointed by the sp
entity and who is responsible for the management o
set pool or making allocations or distributions to k
tised debt instrument in accordance with these reg
include a trustee for the issuer if the trustee receiv
distributions;
(u) “special purpose distinct entity” means a trust wh
receivables out of funds mobilized by it by issuan
instruments through one or more schemes, and incl
by the National Housing Bank under the Nationa
1987 (53 of 1987) or by the National Bank for A
Development under the National Bank for Agricult
opment Act, 1981 (61 of 1981);
“sponsor” means any person who establishes or pre
pose distinct entity;
ads
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 175

1992) or the regulations made thereunder or the Companies Act, 1956 (1 of

1956) or the Securitisation and Reconstruction of Financial Assets and Enforce-
ment of Security Interest Act, 2002 (54 of 2002) or any statutory modification or
reenactment thereof, shall have the same meaning as have been assigned to them
by or under those enactments, unless the context requires otherwise.
S. 3. Applicability—These regulations shall apply to—
(a) public offers of securitised debt instruments; or
(b) to listing of securitised debt instruments issued to public or any per-
son(s), on a recognised stock exchange.

CHAPTER II
REGISTRATION OF TRUSTEES
S. 4. Criteria for trustees—(1) On and from the commencement of these
regulations, no person shall make a public offer of securitised debt instruments or
seek listing for such securitised debt instruments unless—
(a) it is constituted as a special purpose distinct entity;
(b) all its trustees are registered with the Board under these regulations; and
(c) it complies with all applicable provisions of these regulations and the
Act.
(2) The requirement of obtaining registration shall not apply to the following
persons, who may act as trustees of special purpose distinct entities, namely:
(a) any person registered as a debenture trustee with the Board;
(b) any person registered as a securitisation company or a reconstruction
company with the Reserve Bank of India under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (54 of 2002);
(c) the National Housing Bank established by the National Housing Bank
Act, 1987 (53 of 1987);
(d) the National Bank for Agriculture and Rural Development established by
the National Bank for Agriculture and Rural Development Act, 1981 (61
of 1981):
Provided that the aforesaid persons and special purpose distinct entities in re-
spect of which they are trustees shall comply with all other provisions of these
regulations:
to the
Provided further that the provisions of these regulations shall not apply
Rural Devel-
National Housing Bank and the National Bank for Agriculture and
their respect ive Acts.
opment to the extent of inconsistency with the provisions of
oard
trustee to the Board 1
in
3) An applicatio n for registration shall be made by the
cation fees as specified in
en A of °SSchedul e I along with non-refundable appli
Form
Schedule II.
 (5) The Board may require the applicant to furnish such -
explanation as is necessary in the opinion of the Board to 1
application.
S. 5. Factors for consideration.—While considering an
der regulation 4, the Board may have regard to all relevant
following, namely:
(a) the applicant’s track record, professional competenc
tion and, where applicable those of its promoters an
(b) where the applicant is a body corporate, its objects
dum of association or other constitutional docume!
board of directors and other relevant matters;
(c) whether the applicant has adequate infrastructure to
ing of the securitisation transaction; adherence to tt
action documents by the originator, underwriter,
provider, liquidity provider, and other parties to the
action, and ensure compliance with the provisions
regulations;
(d) whether the applicantand the special purpose distit
plied with or in a position to comply with the require
lations;
(e) whether any previous application for grant of cert
person directly or indirectly connected with the appl
the Board;
(f) whether the applicant, its promoters and directors
at
sons in terms of the criteria specified in respect of th
istered under the Securities and Exchange Board of
of 1992).
S. 6. Procedure for granting—(1) Except as otherwis
e pro
lations, the provisions relating to procedure of consider
ation
of registration, powers of the Board including the powe
r to s
tion, verify the information furnished by the applicant,
condi
effect of refusal of grant of certificate, etc.; as appl
icable
shall apply to an applicant under these regulations.
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 177

(3) Upon payment of registration fees, the Board shall grant a certificate to the
applicant in Form B of Schedule I.
(4) Subject to the provisions of the Act, these regulations, conditions of certifi-
cate and the obligations of payments of fees the registration granted by the Board
to a trustee shall be permanent unless suspended or cancelled by the Board.
S. 7. Conditions of registration.—Any certificate granted under regulation 6
shall be subject to the following conditions being complied with by the trustee,
namely:
(a) where it proposes to change its management or, control , it shall obtain
prior approval of the Board for continuing to act as such after the change;
(b VS it shall pay the registration fees and annual fees in the manner provided
in Schedule II;
(c) it shall take adequate steps for redressal of grievances of the investors
within one month of the date of the receipt of the complaint and keep the
Board informed about the number, nature and other particulars of the
complaints received;
(d — it shall abide by the provisions of the Act and these regulations in respect
of the regulated activities carried on by the special purpose distinct en-
tity;
(e) it shall forthwith inform the Board, if any information or particulars pre-
viously submitted to the Board is found to be misleading in any material
respect or false;
(f) it shall forthwith inform the Board, of any material change in the infor-
mation or particulars furnished, which may have a bearing on the certifi-
cate granted to it;
(g) it shall abide by the Code of Conduct specified in Schedule III.
S. 8. Procedure where Application isrejected.—(1) Where an application for
grant of a certificate does not conform to the eligibility criteria and other re-
quirements as set out in these regulations, the Board may reject the application
and communicate the decision with reasons in writing:
Provided that before rejecting the application, the applicant shall be given an
opportunity to remove within a reasonable time specified by the Board, such ob-
jections as may be indicated by the Board to the applicant in writing.
(2) Where an application is rejected for the reason that it contains false or mis-
t shall
leading information, no such opportunity shall be given and the applican
under these regu-
not make any application for grant of certificate of registration
date of such
lations or any other regulations for a period of one year from the
rejection.
 OPN EGE PMEPUOY VISUTIVE CHULY Sildit OC COMSULULCOQ Il Ue |
stitutional document whereof entitles the trustees to issue
ments:

Provided that originator or any of its associates shall nc

the special purpose distinct entity and its trustees.
(2) The instrument of trust, whether trust deed or any ot
ument, shall be executed by the sponsor in favour of the |
instrument.
;
(3) The instrument of trust shall contain such clauses as :
dule IV and such other clauses which are necessary to pro
vestors in the securitised debt instruments.
(4) No instrument of trust shall contain a clause which ha
(1) limiting or extinguishing the obligations and liabil
the special purpose distinct entity in relation to an
or interests of investors;
(ii) limiting or restricting or waiving the provisions of
tions and circulars or guidelines issued by the Boar
(iii) indemnifying the trustees or the special purpose dis
damage caused to the investors by their act of negl
or Omission.
(5) The special purpose distinct entity and the trustee sh
cedures designed to avoid conflict of interest.
(6) A special purpose distinct entity shall not raise any
r
debt or issue any debt securities other than through issue
«
struments:
Provided that the restriction contained in this subregulat
issue of security receipts.
(7) A special purpose distinct entity shall be entitled, in t
or other constitutional document, to segregate the debt
or 1
asset pool for the purpose of servicing of any securitised
¢
cordance with the scheme.
+ Pate ome
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 179

(9) Trustees who are nominees of the sponsor or the originator or who are associ-
ated in any manner with the sponsor or the originator or with a company in the same
management as the sponsor or originator shall not constitute more than one half of
the Board of Trustees of the special purpose distinct entity, as the case may be.
(10) Where the special purpose distinct entity proposes to launch multiple
schemes,
(a) it shall be capable in terms of the trust deed or other constitutional doc-
ument, of segregating multiple securitisation schemes; and
(b) the terms of issue of securitised debt instruments proposed to be issued
under each scheme or each series of such instruments shall restrict the
rights of investors therein to the relevant asset pool alone.
(11) The special purpose distinct entity shall not carry on any activity other
than regulated activities and those incidental thereto and it shall not engage in:
(a) business of lending or investment except making passive financial in-
vestments required in accordance with the scheme;
(b) activities of an asset management company or portfolio manager or a
mutual fund:
Provided that the restriction provided in clause(a)shall not apply to
(i) any trust or other body promoted by the National Housing Bank,
in respect of activities undertaken by it in terms of the National
Housing Bank Act, 1987 (53 of 1987);
(ii) any trust or other body promoted by the National Bank for Agri-
culture and Rural Development, in respect of activities under-
taken by it in terms of the National Bank for Agriculture and Ru-
ral Development Act, 1981 (61 of 1981);
(iii) any trust set up by a securitisation company or reconstruction
company in respect of activities undertaken by it in terms of the
Securitisation and Reconstruction-of Financial Assets and En-
forcement of Security Interest Act, 2002 (54 of 2002);
(iv) any securitisation undertaken by a special purpose distinct entity,
which involves private placement of any instruments represent-
ing securitised debt which-are not proposed to be listed on any
recognised stock exchange.
S. 10. Assignment of debt or receivables.—(1) The originator andthe trustee
purpose
shall ensure in respect of the debt or receivables assigned to the special
distinct entity that the following conditions are fulfilled:
ted to generate
(a) the debt or receivables generates or is reasonably expec
the securitised debt
identifiable cash flows for the purpose of servicing
instruments in accordance with the scheme;
est in the assets and in the cash
(b) the originator has a valid enforceable inter
flow of the assets prior to the securitisation,
 {rom the originator to the special purpose distinct er
(e) the originator has not done or omitted to do anythi.
of his debtors to exercise the right of set-off in relati
(f) the debt or receivables is transferred at a price a
arms’ length transaction and solely on commercial ¢
(g) any representations and warranties made by the ori
debt or receivables are duly adhered to.
(2) The special purpose distinct entity and the originator
sary steps to ensure that the debt or receivables acquired b’
distinct entity are duly assigned in its name and are legally re
(3) No special purpose distinct entity shall acquire any det
any originator which is part of the same group or which is |
agement as the trustee. :
Explanation- For the purposes of sub-regulation (3), (a)t
deemed to be “part of the same group” if they belong to th
the meaning of clause (ef) of section 2 of the Monopolies
a
Practices Act, 1969 (54 of 1969) or if they own “inte
r-contr
within the meaning of clause (g) of section 2 of that Act;
(b
der the same management” shall have the meaning deriv
ed ft
of section 370 of the Companies Act, 1956 (1 of
1956).
(4) The securitisation transaction shall be structur
ed in suc
minimise the risk of the asset pool being consolidated
with |
ginator or the sponsor, in the event of insolvency
or winding |
(5) The special purpose distinct entity and its trus
tees shall
and receivables assigned to it are through a genu
ine transac
true sale and are legally realizable by it and
the special pu
shall be remote from the risk of bankruptcy,
insolvency anc
originator, sponsor and any other entity.
S. 11. Obligations of trustees.—(1) A trus
tee shall Carry
perform his functions under these regulati
ons, the trust deed
with due care and diligence.
(2) The trustees shall ensure that the covenantc in the te
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 181

CHAPTER IV
SCHEMES OF SPECIAL PURPOSE DISTINCT ENTITIES
a Pe Launching ofschemes.—(1) A special purpose distinct entity may raise
funds by making an offer of securitised debt instruments through formulating
schemes in accordance with these regulations.
(2) Where there are multiple schemes, the special purpose distinct entity shall
maintain separate and distinct accounts in respect of each such scheme and shall
not commingle asset pools or realisations of a scheme with those of other
schemes.
(3) A special purpose distinct entity and trustees thereof shall ensure that reali-
sations of debts and receivables are held and correctly applied towards redemp-
tion of securitised debt instruments issued under the respective schemes or to-
wards payment of returns on such instruments or towards other permissible ex-
penditure of the scheme.
(4) The terms of issue of the securitised debt instruments may provide for exer-
cise of a clean -up call option by the special purpose distinct entity, subject to
adequate disclosures.
(5) No expenses shall be charged to the scheme in excess of the allowable ex-
penses as may be specified in the scheme and any such expenditure, if incurred,
shall be borne by the trustees.
S. 13. Obligation to redeem securitised debt instruments.—(1) The trustee
and the special purpose distinct entity shall ensure timely payment of interest
and redemption amounts tothe investors in terms of the offer document or other
terms of issue of the securitised debt instruments out of the realisations from the
asset pool, credit enhancer or liquidity provider.
(2) The trustee shall ensure that the servicer adopts such prudent measures as
may be expected under the origination documentsto recover the dues from the
obligors in the event of any default in any portion thereof.
(3) The expected period of maturity of each scheme and the possibility of ex-
tension or shortening of such period shall be disclosed in the offer document to-
gether with the likely circumstances in which such extension or shortening may
take place.
S. 14. Credit enhancementand liquidity facilities—(1) A special purpose
to mak-
distinct entity may opt for credit enhancement of the asset pool, subject
particulars
ing full disclosures of the arrangements in the offer document or the
submitted to the recognised stock exchange.
ces of a liquidity pro-
(2) A special purpose distinct entity may avail the servi
gements in the offer docu-
vider, subject to making full disclosures of the arran
stock exchange.
ment or the particulars submitted to the recognised
 \O) tle Wustees shall ensure that the servicer has adeq
tems and resources to administer the asset pool in re
tion transaction.
(2) Servicer may be appointed by the special purpose disti
any of the following, namely:
(i) to coordinate with the obligors, manage the asset
therefrom;
(ii) administer the cash flows of such asset pool, distri
and reinvestment, if any, in accordance with the sche
(iii) manage incidental matters.
(3) Where a special purpose distinct entity appoints the ori
shall adopt internal procedures designed to avoid conflict of j
S. 16. Accounts.—(1) Without prejudice to provisions of
1956 (1 of 1956), or any other applicable law, a special pu
shall maintain or cause to be maintained proper accounts
an
true and fair view to be formed of its assets, liabilities,
incc
and those of all its schemes and to comply with the disclo
s
these regulations and other applicable laws.
(2) The accounts of a scheme shall be maintained in
such a
close as on the most recent pay out date, the financial
positio
shall in particular give a true and fair view of the state
of affai
(3) The accounts of the special purpose distinct enti
ty and.
be maintained in accordance with generally acce
pted accou
having regard to the guidance issued by the Institute
of Chart
India or as may be specified by the Board in resp
ect of accour
S. 17. Audit.—(1) The accounts of the sch
emes formulate
pose distinct entity shall be audited by a char
tered accountar
the meaning of the Chartered Accountants Act,
1949 (38 of
quency as may be specified in the listing agreemen
t or conditi:
(2) Such audit shall be conducted in acc
ordance with gener
ing standards.
(3) The scope of such audit may be specifie
d by the Board.
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 183

Provided that the register of beneficial owners maintained by a depository in

respect of securitised debt instruments held in dematerialised form with it shall
be deemed to be a register of holders of securitised debt instruments for the pur-
poses of these regulations.
(2) A special purpose distinct entity shall intimate to the Board the places
where the records and documents maintained under sub-regulation (1) and the
accounts maintained under regulation 16 are kept.
(3) The special purpose distinct entity shall maintain its books of account, re-
cords and other documents in respect of its schemes for a minimum period of
eight years from the redemption of all instruments issued under the scheme.
S. 19. Holding of originator.—(1) No originator shall at any time subscribe to
or hold securitised debt instruments in excess of twenty per cent of the total secu-
ritised debt instruments issued by the special purpose distinct entity in a particu-
lar scheme.
(2) Nothing contained in sub-regulation (1) shall apply to the holdings of an
originator acquired on account of underwriting of a public issue of securitised
debt instruments or in pursuance of an arrangement for credit enhancement:
Provided that the possibilities of such holdings are disclosed in the offer docu-
ment or in the listing particulars.
(3) For the removal of doubts, it is clarified that sub regulation (1) applies only
to the classes of securitised debt instruments which are offered to the public or
listed.
S. 20. Winding up of schemes.—A scheme may be wound up in the event of
the following:
(a) when the securitised debt instruments have been fully redeemed as per
the scheme;
(b) upon legal maturity as stated in the terms of issue of the securitised debt
instrument:
Provided that if any debt or receivable is outstanding on legal maturity, the
trustees shall dispose off the same in accordance with the scheme and distribute
the proceeds;
(c) by vote of investors by a special resolution as provided in regulation 34.
CHAPTER V
PUBLIC OFFER OF SECURITISED DEBT
, INSTRUMENTS
to offer of secu-
S. 21. Offer to public.—(1) This Chapter shall be applicable
ritised debt instruments to the public.
itized debt instruments
2) Any reference in these r egulations to offering secur
offering them to any
d ic shall be construe d as including a reference to
the publ
to eda
section of the public.
 de0?x wrlivalion Ma
rket
7he p > dn di an
Part 1-4
Ap e ©
is laion
tO th e pu bl ic by vertue ul sub-regu
weaied as mde eciCuEnARPS®
a.
4) No offer shall be ga nd ed , i na l lt h
property beno
Wy. bNo offs ao in the ——
to re su lt , di re ct ly oF indirectly, se by perso!
a ma Deng likely
4’ ai la bl e fo r su bsompaon OF purcha ee
MUn,
* instruments Deco qje! VINE the offer, |
other than those re er o fdepersons SANE |
re
ingth edo me st ic co nc ¢
tp) aberwise asbe |
cerving the offe r —
on (2 ), an y of fe r ol eoousitions G0
(4) Notwrthstanding
sub-regula ti
na nc ia l ye ur sh al l al ways deemed tc
repersons in a fi
acne fiftyofmo 7 re oe
th e pu bl ic :
have been mace to securitl . in
on (3) app lie s on ly in respect -
roviuded sub-regul ati
e sa me t wh ic h are pari passu in all re
th
provided ‘nich belong 10 regulation (4), theten
epurposes ofsub-
urumertxplanation: Forth of twelve months commencing from the Ist day of
year” shall mean the period

s. anof-
No special purpose distinct entity ortrustee thereof shallmake
ment.—(1) docu-
the publicunless it files a draft offer
fer of crectioed dottinstrumentsto days before theproposed opening of
reoath theBoard at leastfifteen working
the issue.
ng with the minimum filing feeas
(2)Such offer document shall befiled alo
mentio ne
in Sche duledII:
II shall be paid to the
Provided that the balance filing fee provided in Schedule
Board within seven days of closure of the public offer.
ent within
(3) IftheBoard specifies anychanges tobemadeintheoffer docum
the said period offifteen working days, the special purpose distinct entity and
trustee thereof shallcarry out such changes inthedraft offer document prior to
filing itwith the designated stock exchange under regulation 35 orissuing it.
(4) The final offer document shall befiled with the Board and with every rec-
ognised stock exchange to which anapplication forlisting ofthe securitised debt
instruments is proposed to be made prior to its issuance to public.
S. 23. fordematerialisation.—( 1) Prior to submitting the draft
offer document with the Board under regulation 22, the special purpose distinct
eS itory fordemateri-
~ the securitised debt instruments that are proposed to be issued to the

e spe cia l pur pos e dis tin ct ent ity sha ll g i | on to the investorsto
(2) Th e d debt j
securitise shal give an opti
rece the iv
debt instruments either inthe physical form or indetate-
ralised form.
(3) The holders of dematerialalised instruments shall have the same rights and li-
abilities asholders of physic
 SEBI (Public Offer and Listing, etc.) Regulations, 2008
App. 6 185
S. 24. Mandatory Listing.—A special purpose distinct entity desirous
of mak-
ing an offer of securitised debt instruments to the public shall make an
applica-
tion for listing to one or more recognized stock exchanges in terms of sub-sec
tion
(2) of section 17A of the Act.
S. 25. Credit Rating.—(1) No special purpose distinct entity shall offer securi-
tized debt instruments to the public unless credit rating is obtained from not less
than two registered credit rating agencies.
(2) All credit ratings obtained by a special purpose distinct entity on the secu-
ritised debt instruments shall be disclosed in the offer document, including unac-
cepted credit ratings.
(3) A credit rating agency rating the securitised debt instruments issued by a
special purpose distinct entity shall include reference to the following in the rat-
ing rationale:
(a) quality of the asset pool and the strength of cash flows;
(b) payment structure;
(c) adequacy of credit enhancements;
(d) originator profile;
(e) risks and concerns for investors and mitigating factors;
(f) quality and experience of the servicer;
(g) terms of the servicer contract;
(h) provision for appointment of back-up servicer, if any;
(i) any other relevant information.
S. 26. Contents of offer document.—(1) An offer document issued by a spe-
cial purpose distinct entity or trustee thereof shall contain all material informa-
tion which is true, fair and adequate for an investor to make informed investment
decision and shall also disclose the matters specified in Schedule V.
(2) An offer document shall not include a statement purporting to be made by
an expert unless—
(a) he has given his written consent to the offer document being issued with
the statement included in the form and context in which it is included;
(b) such consent is not revoked by him prior to its filing with the Board; and
(c) a statement that he has given and has not withdrawn his consent as afore-
said appears in the offer document.
Explanation: For the purpose of this regulation “expert” shall have the
same meaning as in sub-section (2) of section 59 of the Companies Act,
1956 (1 of 1956).
An offer
S. 27. Prohibition of misstatements in the offer document.—(1)
distinct en-
document or any report or memorandum issued by a special purpose
 e!
2 In di an Se curitisation Mark
Part t--Cha p.
t contain
ti se d de bt in st ruments shall no
Yer of soouri ease
7
eading stakement
anyfalse ormisl sclosure ofany"
AT ac
it vsment sh al ln o rom it di
th e ci re um st an ce s un r which they
de
ght of
n made theren, 1 li a
a protynrchene | —_
ae mae, uusieati
ng y a spect purpose
blic offer ma
v of the issue.—A pu
de rw ri ter registered with
the Board.
en by an un
be underwriti all re-
Po entity may ri ti ve d Ae instruments sh
fe rof se cu
ed—No public of
«.29.Otter pert
1) Th e of fe r do cu me nt shall disclose the
iption.(
5. 0. Minimum subscr

cu-
en re ce iv ed in re sp of
ec ttheminimum number of se
less subscriptions have be h will constitute minimum subscription.
ic
ritised debt instruments wh Male ty
tof no nre ce ip tof mi ni mu m subscription orrefusal of
"> ta theeven
ch an ge , al lap pl ic at io n mo neys received énthePUPS
«an ws icodstockex
tothe applicants.
offer shall berefunded forthwith
sregulation andSchedule “minimum
Explanation.—For thepurposes ofthi ch, in theapinion ofthedireslons Ot
subscript ion ref erstoth eam ou nt whi Py
pose distinct entity, must beraised
winator andtrustees ofthespecial pur
issue of securi rumed
instse
debtti nts.
) The securitised debt instruments
§.31. Allotment and other obligations —(1
following time periods:
chail beallotted tothe investors within the
nts within five days of
(a) incase ofdematerialized securitised debtinstrume
clos ofur e :
the offer
cal form - the certifi-
(b) incase ofsecuritised debt instruments inthe physie
ots useag
bsanypene ole. entity retain any over subscription re-

r-subscri
of ovets
In the eventctend
(3)of pti
the
dom on,
oallot ment shall be made as per the ba-
sis nized stock exchanges to
etetie adaiaed |
inatent finalized the recog

(4)uié ;
enti y shall dis
The special purpose distinct entit chnd
patrefu orders to un-
onn
iin. ofpartially successful applicants within eight days of closure of the

loaresmade theoffercument.thespecialpurponedt
h dic
dancewithe
edt die im Ore ee
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 187

(6) Where the allotment is not made within the time period mentioned in
clause (a) of sub-regulation (1) or where the certificates are not dispatched within
the time mentioned in clause (b) of sub-regulation (1), the special purpose dis-
tinct entity and every trustee thereof, and where any such trustee is a body corpo-
rate, every director thereof, who is in default shall, on and from the expiry of
such period, be jointly and severally liable to pay interest at the rate of fifteen per
cent. per annum to the concerned applicants.
(7) Where the refund orders are not dispatched within the time mentioned in
sub-regulations (4) or (5), the special purpose distinct entity and every trustee
thereof, and where any such trustee is a body corporate, every director thereof,
who is in default shall, on and from the expiry of the eighth day, be jointly and
severally liable to repay that money with interest at the rate of fifteen per cent per
annum.
(8) Sub-regulations (6) and (7) shall have effect without prejudice to any other
provisions of these regulations or any other law.
S. 32. Post issue obligations.—The special purpose distinct entity shall file
such reports and furnish such information to the Board or to the investors, as di-
rected by the Board from time to time.
CHAPTER VI
RIGHTS OF INVESTORS
S. 33. Transferability of securitised debt instruments.—Subject to the pro-
visions of regulation 38, the securitised debtinstruments issued to the public or
listed on a recognizedstock exchange in accordance with these regulations shall
be freely transferable.
S. 34. Rights of investors in securities issued by special purpose distinct en-
tity—(1) The trust deed or other instrument comprising the terms of issue of the
securitised debt instruments issued by a special purpose distinct entity shall pro-
vide that investors holding such securitised debt instruments have such beneficial
interest in the underlying debt or receivables as may have been conferred by the
scheme.

(2) In the event of failure of the special purpose distinct entity to redeem any
securitised debt instruments offered through an offer document or listed, within
or
the time and in accordance with the conditions stated in the offer document
cent in nominal
other terms of issue, the investors holding not less than ten per
a meeting of all
value of such securitised debt instruments shall be entitled to call
such investors.
to—
(3) In such meeting, the investors may move a motion
ct entity to wind up the
(a) call upon the trustee and the special purpose distin
scheme and distribute the realisations;
(b) remove the trustee,
on removed under clause (b):
(c) appoint a new trustee in place of the
 p 2 In di an Se curitisation Marke!
Part b—-Cha
is 46 Ap p © res lution
ta ke n by me an s of a speciarial l reso
th al su ch decisi| on shall be 9 an d 18 9 of th e Companies Act,
ide cuions 17
e o i e o fthescheme and se
d
anon,
la ti on s oF 1s ex em pt ed from such regist
these regu
with the Board under e di st in ct en ti ty sh alltakeallrensonar
purpos on (3)
pa ss ed » th e in ve st ors under sub-regulati
solutions
stepstocarry outthere in ca ll in gandholding 8 mee
n te
penc es in cu rr ed
7 Ca ble ex
tPoo!
ve rre im bu rs ed ou to f re alisations fromtheas¥e
usc, a8Ue co in st ru me nts shall not be adversel
y
sec uri tis ed deb t
(6) The terms of issue of
ofthe investors,
varied without the consent ve given
sub -re gul ati on (6) , inv estors shall be deemed to ha th
(7) For purpos es of
non e
t ydays notice is givto enem of
if and onl y if t w e
their consent to vaniation pr ov ed bya special passed by them
var iat ion an d it is ap
theproposed
through postal ballot. and)
56 the
and 192 A of the Com pan ies Act, 1956(1 of 19 i a l res olu tio n
(8) Sections 189 to the
mutatis mutandis poe
mules framed thereunder shall
(7). apply
referred toinsub-regulation

st de ed oroth er con sti tut ion al doc ume nt, asthe case may be::
(a) tru of all offer document SURE
(b) copies mes anhadvestoomuene ia
srpten <iolofleeGo ct entity
by the special purpose distin
or its trustee at any time; |
eve
ofi e ryd material fy
i
cop
(c) cert yf
torte
eer acs tyr tote
(d) certified copies duaabl ne.
auunhdidenah de
sopiiien obquupenh acq orrec eiv es frot afi
uis iti on of bt
institution or
cial
. .
(e) certified copy of certificate :
ase marten rega in,
: strument :
sp ec im en ofan yottyher sec
whi
uritise4 debt in issued
Purpose distinct enti
nisdepeee
 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 189

(g) any other document or particular as may be required by the stock ex-
change.
(2) Asa condition for listing, the securitised debt instruments issued by a spe-
cial purpose distinct entity shall have the following characteristics:
(a) free transferability;
(b) being in the nature of such undivided beneficial interest of the investors
in the asset pool as is specified in the scheme, and not constituting debt
of the special purpose distinct entity or originator;
(c) maintenance of a record of the holders thereof, whether holding the same
in physical form or dematerialized form.
(3) The special purpose distinct entity shall enter into a listing agreement with
the recognised stock exchanges where the securitised debt instruments are pro-
posed to be listed.
(4) In exercise of the powers conferred by sub-rule (7) of rule 19 of the Securi-
ties Contracts (Regulation) Rules, 1957, the Board hereby waives the strict en-
forcement of sub-rules (1) to (3) of the said rule in relation to listing of secu-
ritised debt instruments issued in terms of these regulations, subject to compli-
ance with these regulations.
S. 36. Minimum public offering for listing.—(1) In respect of public offers of
securitised debt instruments, the special purpose distinct entity or trustee thereof
shall satisfy the recognised stock exchange to which a listing application is made
that each scheme of securitised debt instruments was offered to the public for sub-
scription through advertisements in newspapers for a period of not less than two
days and that applications received in pursuance of the offer were allotted in accor-
dance with these regulations and the disclosures made in the offer document.
(2) In case of a private placement of securitised debt instruments, the special
purpose distinct entity shall ensure that it has obtained credit rating from a regis-
tered credit rating agency in respect of its securitised debt instruments.
(3) In case of a private placement of securitised debt instruments, the special
purpose distinct entity shall file listing particulars with the recognised stock ex-
change along with the application made under sub-regulation (1) of regulation
35, containing such information as may be necessary for any investor in the sec-
ondary market to make an informed investment decision in respect of its secu-
ritised debt instruments.

(4) All credit ratings obtained pursuant to sub-regulation (2), including unac-
cepted ratings, if any, shall be disclosed in the listing particulars filed with the
recognised stock exchange under sub-regulation (3).
t entity
S. 37. Continuous listing Conditions.—(1) The special purpose distinc
al information
or trustee thereof shall submit such information, including financi
and comply with
relating to the schemes, to the stock exchanges and investors
the listing agreement.
such other continuing obligations as may be stipulated in
 rke!
. 2— Jn di an Securitisation Ma
Part 1—Ch ap
under sub-
yse distinet entity shall
>) of regulanon 30
th e re gi credit rauing
) review ed by ial
y (n ot later than one year be y di sclosed by the spec d
be sion in the rating the seouritise
agency and amy revi
lation 36
a re co gn is ed st oc k exchange (3) of regu stors
(3) information filed with tion shall be promptly disseminated to inve
this regula
and sub (1) and (2) of s ieerch manner astherecognised stock
or
and prospective invest s— TW e SECURES Tt,
de bt in st ra me nt
cr nding ofSecuritieed privateplacement basis,whichaeHersin
n
_S.36. Tending ofPublico o traded and such trades shall be cleared and
s, shall be e
recognised stock exchange k exchanges subject to conditions specified by th
in recognised stoc

oci ate d wi thsec uri tis ati on oranyrepulaled ac:

Droviders oranyother personass
out prejudice to provisi
S.40, Right ofinspection bythe Board.—(1) With et 1
oSctomt a Ca Sees acne Brof ad
moreDemons i tal purpow
f 1992),theBoardmayappointoneot
ofthespecial puapese
spection the books ofaccount, records and documents
ick cay otyo ts schon orHewees (SO arpooes epeciaedi
Board or n on any other agent for any of the purposes specified in

namely:
(2) The purposes referred toinsub-regulation (1) may be asfollows,
(a) toverify whether the books of account are being maintained alua-
: Sem uz Ulta Gee neat aa ‘e
) to verify whether the» provisions
ist of the Act, the Securities Exchange
Domrd ofnda Act1992(15 of1990), teralesondsegelations eame
Pepe : br hice a:with;

con : any pb specie any matter having a bearing on th

winquireinoaffairsof the specialpurposedistinctentitysuo-mat

a a hiaheen ote
investor protection
ion orOF the integrity of the market in so fi:

asperprovisions oftheActandthese regulations: F

 SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 191

(f) to inquire whether the Code of Conduct has beenobserved.

S. 41. Notice before inspection —(1) Before undertaking an inspection under
regulation 40, the Board shall give a reasonable notice to the special purpose dis-
tinct entity or other person.
; (2) Notwithstanding anything contained in sub-regulation (1), where the Board
is satisfied that in the interest of the investors no such notice should be given, it
may by an order in writing direct that the inspection of the affairs of the special
purpose distinct entity or other person be taken up without such notice.
(3) During the course of inspection the special purpose distinct entity and other
persons shall be bound to discharge its obligations as provided under regulation
42.
S. 42. Obligations of special purpose distinct entities on inspection.—(1) It
shall be the duty of every director, trustee, officer, employee, servicer or any oth-
er agent of the special purposedistinct entity who is being inspected to produce to
the inspectingauthority such books of accounts and other documents in his cus-
tody or control and furnish him with such statements and information relating to
regulated activities of the special purpose distinct entity as he may require within
the specified time.
(2) The persons mentioned in sub-regulation (1) shall allow the inspecting
authority to have a reasonable access to the premises occupied by such special
purpose distinct entity or by any other person, on its behalf and also extend rea-
sonable facility for examining any books, records, documents, computer systems
and computer data in the possession of the special purpose distinct entity or any
such other person and also provide copies of documents or other material which
in the opinion of the inspecting authority are relevant for the purposes of the in-
spection.
(3) The inspecting authority shall in the course of inspection, be entitled to ex-
amine or record statements of any principal officer, director, partner, proprietor
and employee of the special purpose distinct entity or the other person whose
records or other documents are being inspected.
(4) It shall be the duty of every director, proprietor, partner, officer, employee,
servicer or other agent of the special purpose distinct entity or the other person
whose records or other documents are being inspected to give to the inspecting
authority all assistance in connection with the inspection which the special pur-
pose distinct entity may reasonably be expected to give.
appoint a
S. 43. Appointment of auditor or valuer.—(1) The Board may
affairs of the
qualified auditor to inspect the books of account or inquire into the
special purpose dis-
special purpose distinct entity, servicer or other agent of the
tinct entity in so far as it concerns its regulated activities:
the same powers of the in-
Provided that the auditor so appointed shall have
40 and the dearer of He
specting authority as are mentioned in regulation be appli-
s in regulation 42 shall
special purpose distinct entity and its employee
.
cable to the investigation under this regulation
 rket
|— Ch ap 2 —A nd ia n Securitisation Ma
Part
—o 060lApee “qualified
su b- re gu la ti on , the expression
yes of th is
se ch on 22 6 of the Companies Act,
om
meanies derived tr os
audiion ioe Oe
1956 (1 of 1950) a va lu er toPeSPP yinted, a,if 80 |Te-
er or di re ct valuation
2) The Board ma appoint a valu me fo r th e purpose ol proper
tofinvestors un a sc he 88
and inthewseres orheldby # special purpose distinc! S
od
quiredinteWequir la ti on (1 ) o rvaluation under sub-
b- re gu
ch audit under su ifso spec:
(3) The expenses of su bytheoriginator “trustee
, orother person
(2) shall beborne
fied by the Board. 1) The inspochg authorit
y
po rt t ot h e Bo ar d- —<
© ad,Subeniedion ofre ib le , cu bm it an in sp ection report tothe Board,
po ss
shall, as soon as may be n
e ins pec tio n re po rt , th e Board may takewachaCho
>) Onsubenission ofth
d appropriate.
thereon as itmay deem fit an
CHAPTERIX
CASE OF DEFAULT
PROCEDURE FOR ACTION IN
cel lat ion or sus pen sio n of reg istration —(1) The registration
<.48.Can o—
steewh
granted under regulation 6 toa tru
fai lstocom ply wit h any cond itio ns subject towhich certificate has been
(a)
, the Securities and Ex-
() contravenes any oftheprovisions ofthe Act ortheregulations made
change Board ofIndia Act, 1992 (15 of1992)

may be cancelled or suspended by the Board:

s the
Provided that nosuch registration shall be cancelled or suspended unles
rusesTsbeengivenstopportenity ofbeinghead inOSee ay imate
ary under the Securities and Exchange Board of India Act, 1992. at
pen sion or cancellation of registration of
(2) While passing an order of suspen
trustee, the Board may also direct winding up of schemes of the special ;
distinct entity within such period and in such manner as may be ,
ieieaaandiamiereen tae oo
ialach ngeieine dl
ceieeieniennel . asset repayment of the proceeds thereof to

cial
destin : trustee isappointed in his place or the spe
is
catia, Winds upitsschemes and repays totheinvestors,
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 193

) (4) Nothing contained in this regulation shall be deemed to prejudice the opera-
tion of sections 12A, 21A, 23, 23A, 23C, 23E, 23H and 23M of the Act, sections
11, ALB, 11D and 24 and Chapter VIA of the Securities and Exchange Board of
— oe ara (15 of 1992) and rule 19 of the Securities Contracts (Regulation)
ules,
S. 46. Directions.—Without prejudice to actions under the Act, the Securities
Exchange Board of India Act, 1992 (15 of 1992) and regulation 45, the Board
may in the interest of the securities market, in the interest of the investors or for
the purpose of securing the proper management of any special purpose distinct
entity or trustee (whether registered with the Board or not), pass, any or all of the
following directions:
(a) directing the originator or any other persons associated with securitisa-
tion or regulated activity to refund any money collected under an issue to
the investors with or without requisite interest, as the case may be;
(b) directing the persons associated with securitisation or regulated activity
concerned not to access the capital market or not to deal in securities or
securitised debt instruments for a particular period or not to engage in se-
curitisation or regulated activities;
(c) directing the recognised stock exchange concerned not to permit trading
in the securitised debt instruments;
(d) directing the recognised stock exchange concernedto suspend trading in
securitised debt instruments;
(e) any other direction which the Board may deem fit and proper in the cir-
cumstances of the case:
Provided thatbefore issuing any directions the Board may give a reasonable
opportunity of being heard to the person concerned:
Provided furtherthat if any interim direction is required to be passed, the Board
may give post decisional hearing to such person.
S. 47. Appeal.—A person aggrieved by an order of the Board or Adjudicating
Officer under the Act, the Securities and Exchange Board of India Act, 1992 (15
of 1992) or these regulations or refusal of listing by a recognised stock exchange
may prefer an appeal to the Securities Appellate Tribunal in accordance section
Contracts (Regulation) 23L of the Act read with the Securities (Appeal to Securi-
and Ex-
ties Appellate Tribunal) Rules, 2000, or section 15T of the Securities
Appellate
change Board of India Act, 1992 (15 of 1992) read with the Securities
Tribunal (Procedure) Rules, 2000.
CHAPTER X
MISCELLANEOUS
ns.—In order to remove any
S. 48. Power of the Board to issue clarificatio
these regulations, the Board may
difficulties in the application orinterpretation of
of circulars.
issueclarifications and guidelines in the form
 Marke!
h a p . 2 In di an Seourtisation
Part C
under
sable by the Board whom
Boato rd
bymeans of an orde (15 of 1992).
powers delegated A ct!992 (iS<
nd Ex tan
ch Board of India
ege — aegenee are
= ~
ote " co ca sions of these So y or
inct
5a} special purpose dist of 1882) or
82 2
at io n un de r th e In dian Trusts Act, 18
to the securmus
"
SCHEDULE I
c O*Ner
ti es an dEx ch an ge Board ofIndia(Publi ons, 2008
securi btInstruments) Regula
ti
Securities cmuritised De d 6(2)\
[See regulations 4(3) an
FORMS
FORMA
SEEKING REGISTRATION
APPLICATION FORM FOR

Fax No. 9p0006 0299009202700)

77°°

Instruction for filling up form:—

e-mail. Website:................65
1. Applicants mustsubmit a completed application form together with appro:
priate supporting documents tothe Board.
befilled in accordance with
2. Itisimportant thatthis application form should
the regulations.
ils may begiven on
3. Information which needs tobesupplied inmore deta
separate sheets which should beattached tothe application form.
4. The application must be signed by the competent person having authority “
do so and all signatures must be in original.
OFIL
DETA SR
SPONSO
1. Name of the sponsor
addreess
2. Address of the registered office/correspondenc
Telephone Nos. Telex Nos. Fax Nos E-mail address
.
Website add:

4. Date and place ofincorpor ofat nr

sponso
theio
(Enclose a copy ofcertificate ofincorporation)
5. Objof ethe
ct nsor.
spos , '
(Enclose copy of the Memorandum
SEBI (Public Offer and Listing, etc.) Regulations, 2008
App. 6 195
6. Capital structure and shareholding pattern.
7. Present line of business activities
Number of years in that line
8. Condensed financial information.
(Enclose balance sheets and profit and loss account for five years) 9. Ac-
counting policies.
(Furnish description of significant accounting policies) 10. Systems and
procedures
(Furnish description of systems and procedures in the company and es-
sential internal controls in order to carry on the business of the company)
11. Names of the associate organisations/group companies/subsidiaries, etc.
12. Management of the sponsor Board of the company with names, ex-
perience, qualification, and profession of the Directors.
Names of key personnel
Organisational structure
Board of Directors of associate organisations, companies and subsidiaries.
13. Names and addresses of the bankers of the sponsor.
14. Names and addresses of the auditors of the sponsor.
15. Court cases/litigations in which the sponsor may have been involved in
the last three years.

CONDENSED FINANCIAL INFORMATION

(A) Income statement
Years (Rs.)

Income:
Dividend Trading
Management Fee Other income
Total
Expenses:
Director’s remuneration Trusteeship fees
Custodian fees Registrar’s fees Other expenses
Total
Gross Profit '
Depreciation
Net profit before tax Tax
Profit after tax Dividends
Retained earnings
 p. 2> Jn di an Se ouruisahon Markel
Pant b—-Cha
iyo App. ©

o Years (Rs.)

Fined Assets Gross

Depreciation Net value
Investments*
Curent assets

Othels (please specify) Cash andbank balances

s
Current liabilities and Provision
Net worth EE
Represented by-
e reserves
Issued and paid up capital Fre
*Provide full
Total _
(excluding revaluation reserves)
particulars of investments.
FORMB
Format of letter of registration
17A of the Securities Contracts
In exercise ofthepowers conferred bysection
the Securities and Exchange
(Regulation) Act, 1956 read with regulation 6 of
Debt Instruments) Regu-
Board of India (Public Offer and Listing ofSecuritised tration to... . 8 @
lations. 2008 made thereunder, the Board hereby grants regis i
trustee entitled to act as a trustee to a isti
instru-
curitised debt instruments to the public and / or seeking listing for such
exchand
ise
stock
ments on a recogn ge.

By order
Sd/
For and on behalf of the
Securities and Exchange Board of India
SCHEDULEIl
Securities and Exchange Board of India (Public Offer and Listing
of Securitised Debt Instrument Regulations,s)
2008
[See regulations 4(3), 6(1), 7(b) and 22(2)}
FEES
|. The fees payable
. : under these regulations by an applicant or
purpose distinct entity shall be as follows: ee
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 197

A. Application fees Rs. 25,000/- (twenty five

thousand

Pies
B. Registration fees Rs. 50,000/- (fifty thou-
sand rupees)
C. Annual fees Rs.10, 000 (ten thousand rupees)
D. Filing fees for offer | 0.03 per cent of the
documents amount raised in

the public offer, subject to a minimum of ten thousand rupees and a maximum of
twenty five thousand rupees.
Z. The fees mentioned in paragraph 1| shall’be paid by means of a demand draft
ia in favour of the ‘Securities and Exchange Board of India’ payable at
umbai.
SCHEDULE Iil
Securities and Exchange Board of India (Public Offer and Listing of
Securitised Debt Instruments) Regulations, 2008
[See regulation 7(g)]
CODE OF CONDUCT
1. Schemes of a special purpose distinct entity shall not be organised, operated,
managed in the interest of the originator or sponsor or a special class of investors.
Interests of all classes of investors of the scheme shall be taken into account in
such organisation, operation and management.
2. A special purpose distinct entity and its trustee shall ensure the dissemina-
tion to all investors of adequate, accurate, explicit and timely information fairly
presented in a simple language about the asset pools, transactions & arrange-
ed
ments with originator, credit enhancer, underwriter, liquidity provider, securitis
of the
debt instruments, financial position, credit ratings and general affairs
scheme or any other party to the securitisation or regulated activity.
cts of inter-
3. A special purpose distinct entity and its trustee shall avoid confli
activit ies and shall
est in managing the affairs of the schemes and other regulated
keep the interest of all investors paramount in all matters.
nsure scheme-wise seg-
4. A special purpose distinct entity and its trustee shalle
debt instruments holders’
regation of bank accounts, asset poo Is and securitised
entity and its trustee shall carry
accounts or folios. 5.A special purpose distinct
stated in the offer documents and
out the business in accordance with objectives
take decision solely in the interest of investors.
its trustee shall not use any unfair or
6. A special purpose distinct entity and 1n-
to sell or market the securitised debt
unethical means, directly or indirectly,
buy such instruments.
struments or induce any investor to
 Markel
rt 1—C ha p. 2 dn dian Securvisalion
Pa
e
te e sh al l no l employ any g
ir us
4 enuity and its of as se t pools oF 1 the co
urse
conv er si on
vn valuation and
uncthus a! tie lsal
d aotuivily.
si ti na ti on os am y other regulate
secu its trustee Shall maintain high om
cond uct of thei r s nen®
Duc
ere Ee ey } ba y Aa
ect entity and rt
its and eein the
trust shall rend er at all time
of £.ey and fairness
A
en t professional ju
dg
% A special distine e an d in de pe nd
duc diligenc ns.
a of service, exercise d sk il l in performing its funcho
able ca re an
ment and take reason l not make any exag
ger
| its trustee shal capa-
purpose di
g : ab ou t th eir qualificaions OF
_ h
o Anes whether —their achievements OF in respect of asset pool
s,
OF
oat to render services e shall always ensure tha
t the
tinct ent ity an d its tru ste ing
Ll. A special purpose dis by it are through a genuine transaction amount
ired
debt and receivables acqurealizable by tt.
toa true sale and legally
SCHEDULEIV
ch an ge Bo ar do fIn di a(P ublic fersgLa ©
SecuritiesandEx 2008
Securitised Instruments) Regulations,
9)
(See regulation
st
Contents of Instrument of Tru
,
Tru st Dee d or oth er con sti tut ion al document shall contain the following
The
namely:—
ody, orunder their control the
s. That thetrustees shalltake into their cust purpose distinct entity
debts orreceivables ofthe schemes ofthe special
and hold it intrust for the benefit of investors.
s have such benefi-
2. That the investors inthe securitised debt instrument
been con-
cial interest in the underlying debt or receivables as may have
scheme.
by theed
ferr
_ ‘That the trustees themselves do not have any beneficial interest in the
yin
debts or
underl g
receivab les.
_ The duties and obligations of the trustees shall be clearly specified.
_ The particulars of interest or association of the trustees which f
sePete doeciguallr obGtUpeleat, Tuewaliees dnl WNWTEE-
the board oftrustees ortrustee company particulars of interest or associa
tion which they may have in originator or sponsor.

See et te. eee aa Men Giliees ab tae

es to i
The trustees shall act in the interest of the investors and they shall pro-
vide orcause toprovide information and disclosur
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 199

8. The trustees shall take reasonable and due care to ensure that the funds
raised under the schemes launched by the special purpose distinct entity
are in accordance with the provisions of the Act and these regulations.
9. The details of the Trust Property.
10. The trustee shall issue certificate or instrument (by whatever name
called) evidencing the beneficial interest of the investors in the debt or
receivables assigned to the special purpose distinct entity.
11. Declaration that the trustees and the special purpose distinct entity shall
not make or guarantee loans or take up any activity which is not a regu-
lated activity in terms of these regulations.
12. Broad policies regarding allocation of payments
13. The trustee shall furnish annual report about the pool performance and
the investor servicing to the investors.
14. Trusteeship fee, if any, payable to trustees
15. No amendment to the Trust Deed which prejudicially affects the interest
of investors shall be carried out.
16. The removal of the trustee in all cases would require the prior approval
of the Board.
17. The Trust Deed shall lay down the procedure for seeking approval of the
investors under such circumstances as are specified in the Regulations.

SCHEDULE V
Securities and Exchange Board of India (Public Offer and Listing of
Securitised Debt Instruments) Regulations, 2008
(See regulation 26)
DISCLOSURES TO BE MADE IN THE OFFER DOCUMENT
The offer letter shall contain all material information which shall be true and
adequate so as to enable the investors to make informed decision on the invest-
ments in the issue.
1.0 Cover Page Requirement
docu-
1.1 The front and back inside and outside of the cover pages of the offer
pages.
ment shall be white and no patterns or pictures shall be printed on these
contain the fol-
1.2. The front outside cover page of the offer document shall
lowing details:
r including its registered
(a) The name of the issuer, the address of the issue
office, if any;
(b) Name of the trustee, addres s of regis
tered office, along with its telephone
number, fax number, contac t person,
website address and e-mail address;
 yalion Markel
Puri | hep 2 dndiah Seowrili
Ape &
aa
«
s of its re gi
) st ered of.fice along
tor _ the addr es address
pein of the Onguna tan number, Contact person, website |
number, =
.- L us telephone
ONS,
and ¢ unail ackiress. wa st ru me nt s ex pe cted maturity, COUP
secunitused debt
id) The title of the -
ou nt an d is su e si ze of securitised debt in
, pnoe , am
(e) tole naturethrough the offer document, | }
struments offered th th e na tu re of Wansachon , p)is
sue
curitise d al on g wi
(f) Asset type beng se
Schedule |
su e (b )D at e of th e cl os ing oftheIssue
is
) Date of opening ofthe e listing of thesecuritive
d 26% °P-
oc kex ch an ge s wh er
an anes otthests ,
strumis eprnoptosed geOF
di sc la im er sh al l b e ma de prominently inthefirstPa
(i) revvctlowing
the offer document’

of
areresponsible forthecorrectness
Neither SEBI northestock exchanges ument.
closures contained inthisoffer doc
anystatements, opisions orother dis
stee should notbetaken asanindica:
The registration granted bySEBI tothetru
thesecuritised debtinstruments,”
sien ofthemerits oftheissuer, theoriginator or
s.
2.0 Table of Contents, definitions and abbreviation insid
ar immediately after the front
21 Table of Contents shall appe pote
page.
22 The definitions and abbreviations, ifany, shall appear after the Table of
Contents
ofc
3.0 Obje ser.
thetOff
A brief descri pt
abou io
t the ncts of the offer
obje of funds
ment . and proposed end use
docu
shall be given in the offer
4.0 Summary information
The foll owin g info rmat ion may be provided in succ to enab
formin ct le the
4.1stor yet aquick i deta inthe
ils
inve
oflerGoce idea ofthetransaction, followed byelaborate

des cri of
pti the
on rhe at tabla syn-
Brie f
(b) din deemadattpaninten sme oa. acca

ies to the ,
transactionfacilioriginat
es of prin cipa l part
(c) Nam enhancement provider — idit y or, ag
issuer,
; , liqu -
aes
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 201

counterparty, servicer, depository, principal underwriter, collection and

payment account bank, etc.
(d) Nominal amount of each class/ tranche of the securitised debt instru-
ments and the issue and redemption prices and nominal interest rate, in-
terest type - fixed or floating;
(e) Any class tranche not being offered to the public through offer document
(f)Ratings of each class/tranche
(g —— Credit enhancements for each class of securitised debt instruments
(h —_— Expected interest and principal payment dates;
(i) Expected maturity date of each class of securitised debt instruments
(j) Legal final maturity of the scheme;
(k) Optional redemptions, if any; (1)Description of underlying asset pool;
(m) If there is a possibility of extension or shortening of such period, then it
shall be disclosed;
(n) Declaration about the possibility of premature winding up of the scheme
in case of prepayments;
(o) Liquidity support, if any
(p) Terms of payment and cash flow, distinguishing, where appropriate, al-
location of revenue receipts and principal receipts;
4.2 One standard financial unit shall be used in the offer document.
5.0 Risks involved
(a) Description of the Assets and Debtors. b)Default Risk / Credit Risk re-
lated to the assets. c)Delinquency Risk.
(d) Dilution Risk, that is to say, any possible changes in the credit quality of
the pool, excess spread or other factors over time.
(e) Correlation Risk.
(f) Servicing risk, including risks and costs involved in any transition of the
servicer g)Prepayment Risk..
(h) Liquidity Risk.
(i) Currency, Interest and Other Risks.
special purpose dis-
(j) Potential loss on securities due to limited assets of
tinct entity.
of receivables, if any.
(k) Risks arising out of geographic concentration
asset class.
(1) Any other risk specific to the transaction and
factors shall be disclosed together
5.1. The issuer’s perception about such risk
if any that have been taken or that are
with detailed descriptions of the measures
mitigate such risks.
proposed to be taken by the issuer to
 ni
Ape ©

a
we debt in-

2 mas
itised
its
e
in th e Gu id el in es oF Regulations of th
oe as mentione d
a
“ mv - 3 Oe

tneOFF C2
.

snboiasontial
. -

er s sh al at
l eob ema de
somewing diciaian
eg

deposits, liabilities
securitt instruments do not represent ey
ic er or sp ec ia l pu rp os e distinct entityandthatth
- thatthesecuriterv ee om

secede te
8 } sie
are not insured,

at he pel ar of the asset pool.

7.0 Details about public offer r
lic offer shall bedisclosed intheoffe
+ | Thefollowing details about thepub
document
(a) Minimum application.
ofcalculation and disclosure
(b) Minimum subscription—disclosure ofmethod expenditure mentioned
ofthesources offunds ifthe whole oranypart ofthe eeds.
inregulation 31 aretobe metotherwise than outofissue proc
(c) Interest rate on applicati ony.
mone
(d) Period of offer - opening and closing dates.
(e) Manner of making appl ication for certificates andd inst ruments and the
es where the applications woul be accepted.
addresses of the plac
(f) Manner of declaration of results of the public offer.
(g) Methods and time limits for delive ry of securitised debt instruments to
nal |
successful applicants and of refunds of application moneys to unsuccess-
ful applicants.
icants to
(h) Option of the applrm n allotment in the physical an
d
fo . ch oo se be tw ee
dematerialised
ion ofthebasis ofsallotment and procedure which wil. l be
(i) Brief descriptcas
fol loew
in ofe r-sulbacriat
oved |
subscription andthe
(j) Amount ofminimum
received. steps that would be taken if
minimum subscriptionnsfiseranot
(k) Listing details and tra bility.
8.0The disclosures regarding Securitised debt instruments
8.1 The following
struments offend ee omres Shalllbemade regarding thesecuritised debt in-
SEBI (Public Offer and Listing, etc.) Regulations, 2008 App. 6 203
(a) An indication as to, where potential material liquidity shortfalls may oc-
cur, the availability and details of any liquidity support and plans to cov-
er potential shortfalls.
(b) Information regarding possible accumulation of surpluses in the issuer
and an indication of the investment criteria for the investment of any li-
quidity surpluses.
(c) Details of any other arrangements upon which payments of interest and
principal to investors are dependent.
8.2 The tax treatment of the various transactions at the hands of the investor,
special purpose distinct entity and originator shall be disclosed.
9.0 Disclosures about the Issuer
(a) A brief description of the issuer along with its history ;
(b) A statement whether the issuer has been established as a special purpose
vehicle or entity.
(c) Details of the settlor, initial corpus, place of registration, if any, along
with any identification number.
(d) To the extent known to the issuer, state the name of the person(s) who
directly or indirectly controls the issuer, along with the nature of such
control and the measures in place to ensure that such control is not
abused.
(e) The person(s) holding residual beneficial interest in the trust.
(f) Financial Information concerning the Issuer’s assets and liabilities, fi-
nancial position, and profits and losses, if any.
(g) Names, address, nationality, professional experience, other directorships
and academic qualifications of the trustees.
(h) Management of the issuer.
10.0 Disclosures about the Trustees
1. Name of the trustee, organizational form, management. 2.Experience.
j Duties & responsibilities of the trustee under the trust deed. 4.Principal
powers of the trustees. .
a Procedure for appointment, removal and replacement of trustees
6. Other material terms of the trust deed.
11.0 Disclosures about the Originator
history of op-
1. Name, description, principal business activities and brief
eration of the originator.
operates.
2 Principal business segments in which the originator
sh , if
et presence, market share
Description of the origi nator’s business, mark
osed to be securitized.
: rience etc. in re lation to the asset class prop
any, expe
 Marke!
_ 2)—Jndian Securitisation
‘ elites ,
- as se ts an d la b
concern! the originator’s
Financial Information rpose of which the
~ losses for thepu
s within
© 800
o fth eap pl ic at io n for segisiration of“
te
yearsaad eine da
s ts ma de effective.
hacked securitie securitised.
of th e pr oc es s of ori gin ation oftheassetbeing
5. presview
ti ng pra cti ces concerning the asset being securitised.
6. Ma jo r un de rw ri
rvicer
12.0 Disclosures about the Se ivities,
ional form and its principal act
Name of the Servicer, organizat
2. Expenence. -
ial Inf orm ati on: Th e ser vic er should possess the financial re
+ Financ theservicing agreement and/or tru
st
seamces necessary toperform under

lo
4. Discabou su
t defa re
ults if any.
duties, with
of the servicing agreement and the servicer’s
ris al
5. Mateterm
the servicing agreement filed as an exhibit.
6. Servicing fees.
thereof.
7. Events of default ofthe servicer and consequences
8. Replacement ofthe servicer, particulars about whet
her any backup ser-

13.0 Disclosures about the Transaction Structure & Cash Flow

a
Description of the structure of the transaction, including, if necessary,
structure diagram.
ent n
iti es partic ipatin g in theis e d asian ofthe
and
su
2. Descriof pttheio
functions, risks associated to be performed by them.
a Excess spread and the treatment thereof. 4.Credit enhancement and li-
quidity support.

structural trigge rs in the transcio such

. Important : amortisation.
redirection of the cash f
apage tecieweer 6. ee
e,
Cash reservif any, including
the rei ned
of§nctam
securities/mades Gi te nveun
ts
rei ment
stment of the eu
tmsar
nenecatment ofcashflows,ifany,andthemodes where thesame may
 SEE (Public Offer and Listing, etc.) Regulations, 2008 App. 6 25
g. Any material contracts with the originator ofthisd parties such 2s swaps,
pul of call options including any such options in respect of the secu-
riti deit instruments
sed .
10. Clean up call option, if any.
IL, Priority of distributions and allocation of funds. An illustrative schedule
of prio isrity
given below:
© Servicing Fee, Trusice Fee etc.
@ Class A Securities Interest
© First allocation of principal
© Class B interest
© Second allocation of principal
© Reinsiaiemem of reserve account, if any
© Eatly amortisation events, trigger clauses cic.
© Events of default and events entailing change in priority of dis-
tributions
12. Description of the method and date of the sale. transfer or assignment of
the assets or of any rights and/or obligations in the assets to the issuer or.
where applicable. the mannex and time period in which the proceeds
from the issue will be fully invested by the issuez.
13.. Material features of the asset pool such as default rate. loss rate, recovery
rate, delinquency rate (by buckeis such as 30 dpd; GO dpd; 90 dpd. <ic).
prepayment rate. cic.

changes in the above assumptions, including expected maturity.

15. Major representations and warranties contained im the document whereby
the debt or receivableshave been assigned. _
16. Any other particulars as are necessary to understand the transaction
structure.
14.0 The Underlying
Assets
In any such information as below, where an average information is being giv-
en, the minimum, maximum and the standard deviation must also be disclosed:
(a) the legal jurisdic tion
where the (s)
assets are located:
(b) the nature of and ttle of the assets:
(c) the expiry or maturity date(s) of the assets:
(d) the rate of ret from the assets:
(e) the criteria for the selection of the assets;
(ff) the number and value of the assets in the pool:
(g) the method of origination
jon or creation of the assets;
 curitisation Market
Part }—Chap. 2—Indian Se
totheextent allowed in law, 1
igh e
warranties giventoth
pooumse aBsite ! representations wand
-haha J
; | hw
suer relating wotheassets yi ng OF aaanerek
as
e se tsan dth equ al if
(i) rights1osubstitute th epayment penslics ® :
ing pr | |
«> anaym prepayment rightinclud
—_ obli
of the obligors 1 ao
(k) level of concentration nt or more
r ce asset
.
that ac co un t fo r te n pe
en tr at io n o fob li go rs ab ove aonpercent, theBen
»y chorethereisnoco nc |
ri st ic s an d de sc ri pt io ns of the obligors, |
: ral charac te @ definite
ts ta nd in g pr in ci pa l ba la nc e/anticipated collections over
(m) the ou
period from the eligible assets,
p n bal anc e/a nti cip ate d collections over a definite
outstanding amount of as-
riod from @e assets as a percentage of the total
r as @
generated the eligible assets in the last financial yea of-
ments being
© Sm aerate ectamount ofsecuritised debtinstru

credit enhancement,
eligible assets indefault asa percentage ofthe
not es whe re the re is exp ect ed mat eri al difference between
(r) explanatory h flows and any actions being taken to
correct the
l and cas
situtea
ation:

(s) a description of what constitutes a default; sin g from

tan t’s rep ort onth e ca sh fl ow p r o j e c t i n s ari
a cha
(t) th rtered accoun
e eligible assets which are the basis ofthe securitisation together with
15.0 Static Pool Information

allrea ior nt
isate
past br i e eo
don cance
with refere
eran ow
gesto the same originator:

yment rates,theerosion of credit efi

.yineld. pases
petio
ferm. asansey talltyoca of los toany class of investors, etc.

tutory Di ; .
17.0 Other regulatory and Sta
 SEBI (Public Offer and Listing, etc.) Regulations, 2008
App. 6 207
18.0 Fees & expenses
Any fees paid to trustee, servicer etc. and the tax paid should be disclosed.
19.0 Declarations.
(1) The offer document shall contain the following declaration by trustees of
the special purpose distinct entity at the end:
Bd: 423 Re oe ee eg Bt Of ae AS ke ae oe being the trustees of
the issuer NaMelY:y 2, 45. cae e9 52 45-E He SERS: accept responsibility for the
information contained in this offer document. To the best of our knowledge and
belief and we have taken all reasonable care to ensure that the information con-
tained in this document is in accordance with facts which are true , fair and ade-
quate and does not omit anything likely to affect the import of such information.
In our opinion, the issuer does not have any debts, liabilities or other claims
which may increase the likelihood of the issuer being subjected to dissolution,
voluntary or compulsory winding up or insolvency proceedings.
In our opinion, the expected cash flow from the asset pool is sufficient to meet
the obligations on the securitised debt instruments.”
(2) The offer document shall also contain a declaration made by the directors of
the originator in the following terms:
OO Ge ef... SOU PUM rc oc oe non. Lester svete Sandee see ee being the directors of
em fui ago5ape banal ell ata ania nada accept responsibility for
the information contained in this offer document. To the best of our knowledge
and belief and we have taken all reasonable care to ensure that the information
contained in this document is in accordance with facts which are true, fair and
adequate and does not omit anything likely to affect the import of such informa-
tion. In our opinion, the originator is a going concern.
In our opinion, the expected cash flow from the asset pool is sufficient to meet
the obligations on the securitised debt instruments.”
20.0 Undertakings.
(1) The following undertakings shall be made by all trustees of the special pur-
pose distinct entity,
(a) that in the event minimum subscription is not received, the special pur-
pose distinct entity shall forthwith refund the application moneys col-
lected under the offer and in the event of delay beyond eight days from
closure of the offer in making such refund, the special purpose distinct
severally to
entity and its directors or trustees shall be liable jointly and
per cent per
repay the application moneys together with interest at fifteen
annum;
application moneys
(b) that in the event of over-subscription, the excess
partially successful ap-
shall be refunded forthwith to unsuccessful and
eight days from finalisation of
plicants and in the event of delay beyond
the special purpose distinct
the basis of allotment in making such refund,
 rket
an Securitisation Ma
Part Chap. 2—Indi

es sh al lb eli ab lejo intly andsevere to

jcctoes ortruste entmi HANaanBaFCSF
imon
moony wager with
cay nadi sian
is
ch an ge to wh ic h an application for listing
stack ex per:
(c) that in the event any
n (2) of se cv io n 1 7 Athe Act rejects listing
of
made under sub-sect io
ne ce ss ar y, it s dir ect ors or trustees, shall refund
missithoe n iss,uer and, if sub-section (3) thereof.
for thw ith in ter ms of
application moneys
21.0 Material documents rred10in theoot
in g do cu me nt s an danyotherdocument refe pro-
toon
+1) Th efo ll ow
do cu me nt ’ sha ll be ma de available for inspecti
document as a* ferperiod attheregistered office ofth
eissu oF
er
docuifee investors duringtheof
at office of themercha nt
ban ker:
of the issuer,
(a) the constitutional documents er,
ofagr eem ent bet wee n th eiss uer andtheservicer, credit enhanc
(b) copies

eholders resolution, if applicable,

(f) theoriginator’ board resolutions, sharwhe
and approval by existing debt holders, re applicable,
ations and statements by any
(g) allreports, letters and other documents, valu r document,
expert any part ofwhich isincluded orreferred tointhe offe
(h) the audited accounts of the originator or, where it has subsidiaries the
for
consolidated audited accounts oftheoriginator anditssubsidiariesoffer
each ofthefive financial years preceding the publication ofthe
document, including, all notes, reports or information required by the
Companies Act, 1956 (1 of 1956) to be annexed or attached thereto.
i ‘
(2) Detailed disclesures shall the man ner in which the above
be given as to
documents may be inspected.
uments
lis
(3)
Eng Whe
h re
mu stany
st of
so
be the
ava abo
ila ve doc
ble fo r spection -— a oe
 CHAPTER 3

RBI’?S GUIDELINES ON SECURITISATION

OF PERFORMING ASSETS
SYNOPSIS
1. international regulatory guidelines on 4. BasEL NORMS and RBI Guidelines..... 216
net) Ssh Aas eae et es eR 210} 5. What if the Guidelines are not com-
2. Originator risk retention in securitisa- pliedawith? os tvors oS 2uo3 ts Sela 217
pa itr. cy 5 Spear ieSeeley feline 211| 6. Comments on the February, 2006
Fok CVE SUIAGIONS sooo oats. a8-s-niee-sae 211 NEC 0 11 a ee 218
2.2 Four options of risk retention... 212] 7. Comments on the Revised guidelines
2.3 CEBS report on supervisory for DaBks..200k. 220 Le. 267
PS PBICOSS 6 nS SfechSdacrdedady
.kigt 213| 8. Comments on the Revised guidelines
2.4 New CRR and EBA’s Draft for NON-BANKING FINANCIAL
RTS on Securitisation COMPANIES (NBFGS) 0.253223, 331
Retention Rules and Draft ITS. 214] 9. Comments on Guidelines on Reset of
2.5 US rule making proposals........ 215 Credit Enhancements in Securitisation
2.6 Risk Retention requirements TEAMSAGHONSA. c6, 2...5.5.5.5 20Bote ceeoness 368
in other jurisdictions................. 216 App 1 Discussion paper on emercing
3. RBI’s revised guidelines ON securitisa- trends in_ regulation and
tion transactions for banks and NBFCs.. 216 supervision of securitisation
activities of banks..............:.005 388

The Reserve Bank of India issued draft guidelines on securitisation in April

2005 and finalized the Guidelines, below, in February 2006 [Read commentary
on the Guidelines later in this Chapter]. These guidelines relate to securitisation
of performing assets by banks, financial institutions and non-banking financial
companies (NBFCs). Guidelines on securitisation of non-performing assets have
separately been issued by the RBI which have been dealt with elsewhere in this
Book.

Later, on19" April, 2010, RBI came out with a Discussion Paper titled “Emerg-
ing Trends in Regulation and Supervision of Securitisation Activities of Banks’
on the regulatory framework for securitisation transactions by banks. This was in
tune with the regulatory developments happening world-over, as reaction to the
subprime crisis. The Discussion Paper provided an update of the work-in-
progress in the international scenario, discussed the background for proposals
Reten-
regarding Lock-in Period/Minimum Holding Period (MHP) and Minimum
the el
tion Requirements (MRR) for Indian banks; and outlined
India. Meanwhile,
extant guidelines proposed to be issued for banks operating in

1. See Chapter 9.
dated 19" April, 2010: :
on 2nd Septem
ReleaseDisplay.aspx?prid=22358 (accessed
A ee yiusow 1b.org.in/scripts/BS_ Press
ber, 2013).

209
 Securitisation, ete.
Chap. 3 RBI's Guidelines on
Sya. ! Part
210
Wa ki ng pl ac e worl dwide, the draft
wids
tory chan ge s nsid
’ of the various regula ng wi th th e Di sc us sion Paper ), were co
lo
celine fey Apri
l 2010° (a
be r, 20 1 1*. Th e re vised draft guidelines
ed on 27" Septem signment ol
orabl revised and issu ent of wansfer of assets through direct as
tm the earlier
imchaded prudential trea ying securities, Which was not covered i
rl ctions
cash flows and the unde e Revised Guidelines on Securitisation Transa
th cial
draft guidelines, Finally, 12°, however, covering only Scheduled Commer
20
were issued on 7 May, in g an d Refinancing Institutions
.
di a Te rm Le nd
Banks and All In well,
the Feb rua ry 20 06 Gu id elines included NBFCs as not
A ards NBFCs, and the draft guidelines the
rewith did
i o n Pap er of 20 10 s per-
newevers e
ref ore , in Jun e 201 0, RB I came up with draft guideline
include NBPCs. The
r sec uri tis ati on tra nsa cti ons undertaken PyNBUCS ;
inca MARR and MHP fo zed on 21" August, 2012’,
The GuidelinesonNBFCs were finali pter.
d com men ts of the aut hor on the revised Guidelines later in this Cha
Rea e
r, ver y rece ntly , as was ind ica ted in the May 2012 Guidelines, RBI cam
Purthe nt’ in Securitisation Transac-
Enhanceme
out with Guidelines on Reset ofCredit

INES ON
1. INTERNATIONAL REGULATORY GUIDEL
SECURITISATION
market, thefinan:
‘Inalmost every country thathasa significant securitisation
e that
ofthese regulations istopreserve the health ofthe banking system, toensur
banks donotdocherry-picking ofassets, andtoensure that banks have adequate
capital against retained risks in securitisation transactions.
speaking, itis not the business of the financial supervisors
deingeoceridesion mane
uonteniashodbe
down operationalack sd
reper nepee ng amply iemp ater, od
the subprime crisis. There are atleast three concerns of the regulators, to
address which regulations have been framed. First, banks should hold adequate
Ee eee ee ee
by capital regulations. Second, that banks should have sufficient “skin in the

3. Former
Draft Guidelines
1i.org.n/Scripts/os_view714 em(act.cesassedpxon
mt34
co=21
2° September, 2013).
- _Pre
Preah,ssRe
2011: leasaspx
eDis?prid=2
play 5 137 (accessedon 2nd Septem-
WapSrorww 2. oremiatadOl

22
(accessed
TIS BS_PressReleaseDisplay aspx?prid= 4 m
2ndSepie
on58
ber OTS
 Originator risk retention in securitisation transactions Syn. 2 21

game’”’, that is, adequate exposure in loan pools originated and sold by them and
that a pure originate-to-distribute approach does not provide adequate protection
against origination risks. This is a new-found regulatory concern, and many
countries have tried to impose minimum originator risk retention requirements to
address this risk. Third, securities regulators impose disclosure requirements for
asset backed securities offered by way of prospectus or offer for sale.
The first type of regulations, that is, capital norms, are a part of Basel norms
and are found in capital rules in almost every country.
As for the third type of regulations, again, it is very commonplace for regula-
tors to lay down disclosure norms for any securities being publicly offered. In
case of asset backed securities, complexity of the transaction demands more dis-
closures — hence, the need for special rules. For example, the US SEC has come
out with Regulation AB, which is a comprehensive operational control on secu-
ritisation transactions. For details, refer to Vinod Kothari’s Securitisation: The
Financial Instrument of the Future.*
However, it is the second type of requirement that has become the latest in the
regulatory initiatives, discussed below.

2. ORIGINATOR RISK RETENTION IN SECURITISA-

TION TRANSACTIONS
In India, the securitisation guidelines have been formulated taking into account
international practices and regulatory framework existing in several other juris-
dictions, as mentioned earlier. Hence, by way of a background, we discuss the
international regulations below.

2.1. EU regulations
One of the early such regulatory requirements was the resolution by the EU
Parliament, on 5" May, 2009, inserting Art 122a in the Capital Requirements
Directive. Art 122a did not apply to originators — it applied to European credit
n
institutions investing in securitisation transaction. The reason why this regulatio
securitisation
was applied to investors may be two fold — one, several of the
where
transactions may be jurisdictionally domiciled in offshore jurisdictions,
concern was more
EU may not have its sway, and two, in Europe, the immediate
ngIn US transac-
from viewpoint of European banks having burnt money investi
disciplining European
tions. Hence, the focus was investment-oriented, not much
is in Para 6 of Art 122a—
originators. As for originators, the only requirement
for their securitised expo-
that originators will maintain the same credit standards
.
sures as they maintain in case of self-retained exposures
in stitution from investing in any
he regulation debarred a European credit
: ion unless the originator was expo
se d at least to the extent of 5% to
A transact
such
e
eer ae ee

see www.vinodkothari.com/secbo
ok.htm (accessed on 2™ September,
8. For lates t editi on info rmat ion,
2013).
 eh.
on Seourisalion,
RBi » Guidelines

8 requires
basis, To elaborate, Artthe122seo
“net economic imserest” minimum 5% of all uritised
a
oe ey
. selected exposures, Where

of tot al;or(c) ret ent ion offiretLosspiece DeIng

retuned oe eet | ence
ic int erest,
atleast 5% of the net eoomam involve
pl ic ab le uo scc uri tis ation ¢yansactions, WH
These requirements ar eap
eiv abl es. Th e | save not applicable to 4
pooling ofpa ck ag in g of rec nins
fe r of a si ng le lo an ,Th at is tosay, » bank may oo
pooling oF Pete uans ole ofa
Saaeaher bank. A bank may synthetically transfer thewh
whole of a if the origi-
n to ba nk by ent eri ng in to a credit default swap. However,
loa
nd le s se ve ra l lo an stog eth er, th erequirements getattracted.
ting bank bu
siua-
ements areapplicable tofollowing
Questions remain whether therequir
ons.
Bank A transfers the whole of
(a) A repackaging transaction: For example, h exposures from different
+ loan toBank B. Bank B acquires several suc
a securitisation transac-
banks. and now repackages these exposures into st on the originating
tion. The idea of originator risk retention was to insi
or — so, is Bank
institution retaining exposure. Bank B is not the originat S re-
B required toretain minimum risk mandated by Art 122a? Then CEBtrans-
of
port (quoted inthe next section) recommended clear exclusio
ing.
actions where the underlying motive is not risk transfer but fund
Multi-seller transactions have been recommended for exclusion.
(b) As the requirements are related to “securitisation”, how exactly does one
define a securitisation? For example, if an originator transfers several
joans on a single loan basis to a special purpose vehicle, and the latter is-
sues a bond, is that a case of securitisation?
Besides minimum risk retention, Art 122a requires investing institutions to as-
sure regulators that they have understood the risk characteristics of the underly-
ing assets, reputation of the originator/sponsor, disclosures made, etc. Investing
promreteeaa esbeing hook te thy bd og
SS beveaiten ete hae dine conte ished vi
risk weights of 250% for the first violation, progress
met ively increasing~ in case of
continuing ones.

2.2. _ Four options of risk retention

BS rep ort .dis cus sed pel ow. Th ethr ee we
an nyli near 2.ta
proposed byCE
:
© ee arical piece: Thefirstoption under theEU ion is retentionof

Class B $ 5 million, Class C$ 5 million, andClass D$°3

 Originator risk retention in securitisation transactions Syn. 2 213

million), the originator holds 5% of each of the 4 classes. This is the

same as the originator holding 5% of the entire pool, or having a pari
passu 5% seller’s share in the total pool. Note that a pari passu 5%
seller's share is not the same thing as over-collateralisation of the pool by
5%, as the over-collateralisation amounts to a subordinated interest.
However, the vertical risk slice is not subordinated, but parallel interest
in the pool.
(b) 5% horizontal piece: The retention of a first loss piece of 5% implies re-
tention of a horizontal, bottom piece in risk of the transaction. As in the
example above, the originator would hold the whole of Class D in the
transaction. It is clear that there is a huge difference between holding a
vertical slice and a horizontal slice. In case losses eat 3% of the assets in
the pool, in case of vertical risk, the originator would lose only 5% of the
3% loss, as the remaining 95% of Class D is with external investors. In
case of horizontal piece, the originator would absorb 100% of the loss.
(c) Holding back loans worth at least 5%: This is a crude form of over-
collateralisation. Over-collateralisation, strictly speaking, creates a sub-
ordinated interest of the seller to the extent the Over-collateralisation.
However, holding back identified loans, amounting to at least 5%, would
expose the originator to losses only if such loans go bad. This is not a
form of credit support at all. Of all forms of risk retention, this is the
least subservient to the purpose of originator risk.
(d) The fourth option is so-called L-shaped risk slice. The interesting name
suggests that the originator holds some part of the first loss piece, which
may not be 5%, and in addition holds a vertical slice too.
Surprisingly enough, the CEBS report on adequacy or equivalence of the forms
of credit support (cited below) has recommended the vertical slice, which, ac-
cording to it, ensures originator risk from “cradle to grave”, that is, until the last
of the loans has been paid. The observation is based on the misnomer that the
performance of loans would worsen if originators do not have a continuing expo-
sure on the loans. In fact, the horizontal 5% piece amounts to 100% exposure to
1s far
the extent of the first loss piece — hence, the originator’s skin in the game
of
more than in case of vertical slice. Credit risk is more relevant at the point
origination; subsequently, the loan only has to be properly serviced.
cannot make it
But if at origination, a loan is bad, however effective servicing
good.

2.3. CEBS report on supervisory practices: f

advice of the Committee o
As a part of Art.122a, EU parliament had asked of would
on whether Art. 122a
Baripean Banking Supervisors (CEBS) to report
and whether supervisory practices In
meet the purpose for which it was intended,
requirement of the EU parliament.
respective EU jurisdictions matched with the
 sation, eh. |
-Ch ap. 3 RB I» Gu idelines on Securiti
Part t-—
li“ sya -;
ess of
su bm it
| es o y io e an the effeactaivpen
BSBS
, theCE
On 4” Oxtober 2009 fi
th
, eve rt ic al fo rm oforedit suppor
Ta eaeeng toit ement right
orig! 's
ap
e riate!
propo ee

10
me ou t wit h a Con sul tat :
ion Paper (CP 40) on
Then, i 10. CEBS ca
uirements Directive (CRD), pur-
te aac 122a of the Capital Req
eee
to whi ch inDec emb er 201 0, fin algui delines ontheapplication ofAsuitic
aot

ritisation
2.4. New CRR and EBA’s Draft RTS on Secu
Rete nt
Rule io
s and t ITS
Drafn
into the EU
The CRD IV package which transposes the Basel II framework ts
framework, entered into force on 28" June, 2013 (Capital Requitsremen
Regulation) and 17" July, 2013 (Capital Requir em
Direc en
tive TV) and will
become applicable asof1* January, 2014. Articles 393 to399 inthe new CRR™
replace Article 122a in CRD I.
The final compromise on the CRR and CRD provides a mandate for the EBA
to further specify the securitisation retention rules and related i as
well asthe measures tobetaken inthe case ofa breach ofthe obligations relating
to the retention. due diligence and disclosure requirements. In accordance with
the same, the European Banking Authority (EBA) on 22™ May, 2013 launched a
jon paper “on (i) draft Regulatory Technical Standards (RTS) to i
the securitisation retention rules and related requirements and (ii) draft

9. http-/Awww cha. europa.en/documents/101 80/16106/ Advi

= ious eba_europa.eu/documents/101 80/106237/CP40 edttaceceeed on
mere A
2013). suropa.eu/documents/ 10180/106202/Guidelines pat (accessed o a Semiember
12. See also Q &2011;
Sepmates, A taparwertenmn oe aeCa Directive, dated 29°
1. Se ant ree tan22a.pa (accessed on 2013). , sorh aia
aie, isk-Articles
393 to399:
2013). ‘earopa.cw/pdf/en/ |3/st07/st07747
en! 3 pdf (accessedon2“ Sepremiber,
14. hitp:/feww
cha enropa.
»pa.eu/d 11
oc 80/2
um 09701 /EBA-
Satie retention-rales-clean pf(accessed en ts BS-20
/ 1 3-091 rew?-RTS-ITS-
om2”September Yoiae
 Originator risk retention in securitisation transactions
Syn. 2 205
menting Technical Standards (ITS) to clarify the measures to be taken i
of non-compliance with such obligations. wig hasta sis
While drafting RTS and ITS, the EBA has taken into account: i) the changes in
the level | text of CRR compared to CRD I]; ii) the current Guidelines on Article
122a and the associated Q&A published in September 2011 and iii) relevant
market developments.

2.5. US rule making proposals

In the USA, several legislative proposals have been mooted mandating a mini-
mum risk retention in the hands of originators. Directly on the issue on credit risk
retention a bill was enacted called HR 1731: Credit Risk Retention Act, 2009.'°
This Bill proposeda minimum risk retention of 5% in all securitisation transac-
tions; but the bill was not enacted. Several other Bills, such as HR 4173 (spon-
sored by Barney Frank) called Wall Street Reform and Consumer Protection Act
2009), Restoring American Financial Stability Act of 2010 (Dodd Bill), etc also
propose minimum originator risk retention of 5%. The Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act)'°was signed into law on
21“July, 2010.
Section 941 of the Dodd-Frank Act"’ provides for regulation of credit risk re-
tention. The said section amends the Securities Exchange Act of 1934 by insert-
ing Section 15G “Credit Risk Retention” therein. Section 15G, so inserted, re-
quires OCC, Federal Reserve Board, FDIC, SEC, FHFA, and HUD to jointly
prescribe rules for credit risk retention in ABS transactions that require a sponsor
to retain an economic interest equal to at least 5 percent of the credit risk of the
assets collateralising an issuance of ABS (other than synthetic ABS structures).
In pursuance of the same, the proposed rules were issued on 29'""April, 2011°°,
which have not been finalized as yet.
Also, in April 2010, the SEC came up with a 667-page proposal’ to amend
Regulation AB pertaining to asset backed securities. Apart from many new re-
quirements for disclosures, the proposed rules required a minimum risk retention
in all shelf-offered asset backed securities. The US SEC proposal required only
5% vertical piece. As we have discussed above, the horizontal 5 percent piece
would have anyway been much more painful for originators; hence most origina-
tors would elect to have a vertical 5% slice. This is what the SEC was mandating.
However, taking into view the risk retention proposals being considered by the
joint regulators as stated above, the SEC, while issuing re-proposal of shelf
eligibility conditions for ABS” , preferred not to have different risk retention

nd
ss/bi ill= = 11-1731 (accessed on 2” September, ber, 2013).
15. http://www. ovtrack.us/congress/bill.xpd?bill=h1 2nd September, 2013). :
(accessed on
16 httos//www.sec.gov/about/laws/wallstreetreform-cpa.pdf I (accessed on 3 September, 2013).
17. http://www.fdic.gov/regulations/reform/dfa_selections.html#94 pdf (accessed on 3rd Septem-
1/1 lproposedAD74.
18. http://www.fdic.gov/regulations/laws/federal/201 ‘ $8013)
ber, 2013). (acces sed on 3 Septe mber, 2013).
: sec.gov/rules/proposed/2010/33-91 17.pdf
3 “ Septe mber, 2013).
1/33-9244.pdf (accessed on
20. Hite www sec.gov/rules/proposed/20
 Securisalion, el.
Past i-—Chap. 3
RBIs Gu: idelines ot
216 sya. 5
, the visk rolenton
uently
s lus sh el i ol ig ib ility rules. Conseq
cyuuscmeni ,
ted from the proposal
requisement gut chauna
jurisdictions 4
2.6. Risk Retention requirements inotdhethreTask Rove oi, Aas
ducted by AOBCO an
according toa wurvey con
tated Markets and Products on —_ ey ee , ther jurisdic-
on
tireg ,s nisk rote
ard ntic rem ents
tice in securitisaas ie segullory Se QW iENG ston
wh et he rhe rear sp
e ec
Momsarya»
or are
isi de th e US an d th e EU fe w jurisdictions have +
practice Hwu
s
ation of standard asset ©classe 1s
tisll
anada. the structure ofsecurijusa
of a po olof ass ets ret ain s th ri
e skofexpected lossthrough merne
ina eiginater set
ess spread allocation toinvestors 10
viatna euch asovercoliateralisation, exc
t service shortfalls and/or subordinated
earn swash reserve accounts 10cover deb :
notes issued to onginators.
issue ofsenior and junior
tnBrazil, the most common market practice is forthee junior shares are under-
d th
shares. Senior shares are taken up by investors an
written by the originator/sponsor.
InJapan, originators tend tohold subordinated tranches of RMBS.
German view that an increased retention requirement of 10% would
be necessary for a prudent ABS market.

3. RBI'S REVISED GUIDELINES ON SECURITISA-

TION TRANSACTIONS FOR BANKS AND NBFCs
Repetitive revisions in the draft guidelines were taking place in respect of
MRR and MHP. In the draft guidelines, the MHP was not expressed in terms of
number of instalments due, rather it was expressed in terms of months; however
the final Guidelines express MHP in terms of number of instalments due. The
revised Guidelinesput a bar on securitisation of revolving credits, re-
securitisation structures, and synthetic securitisations. The author is of the view
that a bar on synthetic structures isunreasonabie.
_ Read detailed comments of the author on the Revised Guidelines on Securitisa-
tion for Banks and those for NBPCs later inthis Chapter.

4. BASEL NORMS AND RBI GUIDELINES

to have a mix of Basel Il risk been synchronized with Basel Il_India continued
weights. asalso the conditions forsecuritisation
Rn. Se the finai report dated 16° 12:
:
pubdocs/p,df/IOSCOPD
http: /Nerww itosco.org/labrary/November
394 pdf(accessed on 3 Sepneriber, 2013)
What if the Guidelines are not Complied with? Syn. 5 217

laid down by the 2006 Guidelines. Basel II provided for deduction from capital
based on ratings; the 2006 Guidelines provide for deduction from capital based
on whether the credit enhancement is first loss or second-loss piece. The 2006
Guidelines have no connection with the ratings of the tranche, except that the
meaning of the first-loss piece is connected with investment-grade ratings.
India, now, is moving progressively towards Basel III. RBI, being a member of
Basel Committee on Banking Supervision (BCBS), and intending to implement
the proposals put forward by BCBS, came up with draft guidelines on implemen-
tation of Basel III Capital Regulations in India**on 30" December, 2011. Pursu-
ant to the Monetary Policy 2012-13, final guidelines on Basel III Capital Regula-
tions were issued by RBI in 2° May, 2012”°. The Guidelines so issued had been
made effective from 1* January, 2013 in a phased manner and the Basel III ratios
were sought to be fully implemented as on 31“ March, 2018. However, RBI re-
scheduled the start date for implementation of Basel III to 1“ April, 2013 from 1°
January, 2013”*. Again, RBI, vide Notification dated 28" March, 2013” clarified
that the Credit Valuation Adjustment (CVA) risk capital charges (as indicated in
Annex 2 of the Guidelines on Basel III Capital Regulations) would become effec-
tive as on 1* January, 2014. See the comments under the Guidelines.
Very recently, RBI has come up with a Master Circular on Basel III Capital
Regulations”.

5. WHAT IF THE GUIDELINES ARE NOT COMPLIED

WITH?
The major fallout of non-compliance with the whole or a part of the Guidelines
is that the transaction will not achieve capital relief — in other words, the bank
will continue to hold capital against the assets securitised. These Guidelines can-
not be taken as laying down a law on securitisation — the worst case under the
the
Guidelines is disapproval of the securitisation transaction, which only denies
capital relief.
they do not
If the assets are not off the balance sheet for regulatory purposes,
ines relating to
qualify for any profit recognition. Therefore, the part of the Guidel
recognition of profits is automatically complied with.

s/content/pdfs/DRA30121 1 pdt (accessed on 3rd

22. Draft Guidelines: http://rbidocs.rbi.org.in/rdoc
September, 2013). fia
. Final Guide lines are availa ble at: mber,
B AICIO205 121S.pdf (accessed on 3rd Septe
- http://rbidocs. rbi.org.in/rdocs/notification/PDFs/
prid=27862 (accessed
n/scripts/BS_PressReleaseDisplay.aspx
24 Re palsies http:/Awww.rbi.org.i
on 3rd September, 2013). G
i 1/2012-13/460, available at: ode =0 (acc esse d on 3" September,
t acwr errb i.or g.in /scr ipts /Not ificationUser.aspx?Id=791 1&M
ine Nou
2013). d on 3™ September,
bi.o rg.i n/rd ocs/ cont ent/ P DFs/70BIIIMC010713_A.pdf (accesse
26. http://rbido cs.r
2013).
 tion, @t.
es 0 Securitisa
_ RBI's Guidelin

FEBRUARY, 2006
ON THE
COMMENTS

| -2-2006,
OD .N O. BP ._ BC .6 0/ 21 .04.048/2005 -06, Dated
DB
xcluding RRBs)
. All Commercial Banks (e

Dear Sir
Standard Assets
Guidelines onSecuritisation of
issued draft on securitisa-
As you are aware, Reserve Bank hadDBOD.No.BP 21.04.048/ 2004-05
tion of standard assets vide letter
all stake-
the basis of the feedback received from

lines are appli-

Guides,
theie
Scope of Applicability —As the text above specif Inows
tobanks, financial institutions andnon-banking financial companies. well.
as
the Guidelines will beapplicable to housing finance companies

Itisclear from the text of the Guidelines that the Guidelines are applicable
to a “securitisation ofthe assets. Securitisation is different from sale ofthe
only
“ — ~ tad oo

Ne ee aii eee of ie nae kee

hte y. with no subsequent securitisation of the assets. In a trans-
— . one party sells assets to another — the latter may simply hold on to
omedf0takeofeatin ake Ra Another significant
ania or RE i ; ee
'

_ As the Guidelines clearly talk about transf assets special purpose

tity,theydonotseemtobeapplicable todirectsales we a
 Comments on the February, 2006 Guidelines Syn. 6 219

should be no scope for a contrivance where the applicability of the Guidelines is

scuttled by mere two-tier structures.
. However, conduit structures, where an SPV buys assets of several sellers, and
issues securitised products from such conduit, do not seem to be covered by the
Guidelines, since these Guidelines are applicable only to securities based on the
portfolio of assets transferred by a bank.
2. These guidelines come into force with immediate effect. The Reserve
Bank would take a view on the treatment for the securitisation transactions
undertaken in the prior period on a case-by-case basis with the objective of
ensuring adherence to basic principles of prudence.
COMMENTS
Date of Applicability—As clear from the text, the Guidelines are applicable
immediately.
Retroactive application.—At the time of inception of the Guidelines, the big-
gest concern in the market is the retroactive applicability of the guidelines.
Something like Rs 600 billion of securitisation deals have been done in the past,
mostly by banks and NBFCs, and the first loss portion in most of the past deals
ranged anywhere between 10% to 20%. The present guidelines require 100%
capital while existing practice of banks is to hold only 9% capital. While the RBI
intends to examine these cases on “principles of prudence”, it would be surpris-
ing if the RBI would let banks go with 9% capital on past deals, as prudence is
not something which is drastically different for past deals. The only saver would
be the extent to which these deals have been paid off, increasing the level of
credit enhancement.
Generally speaking, regulations contain a grandfathering clause for past deals —
as these deals have lived a larger part of their life, they would soon become im-
material, if not irrelevant.
ANNEXURE
GUIDELINES ON SECURITISATION OF
STANDARD ASSETS
covers
1. Scope.—The regulatory framework provided in the guidelines
g and Re-
securitisation of standard assets by banks, All India Term Lendin
nies (including
financing Institutions, and Non-Banking Financial Compa
to ‘bank’ in the guidelines would include all the
RNBCs). The reference
above institutions.

COMMENTS
es are ap-
idelines.—As clear from the text, the Guidelin
Coverage of the Guidelines institutions an d non-banking financing
plicable to banks, all India term lending
companies.
 on, et.
3— RB I' s Gu id el ines on Securitisati
Part Chap.
20 Sya. 6
several state
nc in g in st it ut ions apart, there are ly
sly not covered direct
and re fi na
All incha term lending ets . Th ey are ob vi ou
uritise ass o will
level institutions who sco idelines — however, it is expected that they to
y gu
by the RBI's supervisor
follow Une sate

tron.

nee cette enform emas :

pupest whisle, SoGcabdian dbedooune secur ed loan of se
loan do not apply to a
ntisation. In a secured
assetand
thenator trans
notlatte
s arethe ferred to the SPV- rather.
provides
the SPVasset a loan| toform, r rf
onthe s. Ring the origi
ome 30 tha the
t ate ema aad fo
g ingof ase
on thease. Rinfenc for
as such In several _countnes,
there is no legal trans fer
the secured loan form ofsecuritisation is prevalent, andwithreforms in laws re-
laine toe rhaem form of isonly
interests,” rittim
loan form will find j secur ity
iMcreasing acceptance ove e expected that the secured
,
Maile a,
cl

also see mm m this Book itself #

efer
in dif
y Imer ts
sem comn
Comments on the February, 2006 Guidelines Syn. 6 221

_Itis also the opinion of the author that the Guidelines do not apply to conduit
form of securitisation—please see comments earlier.
Whole loan transfers, that is, transfer of a loan from one bank to another, or
any other buyer, also is not covered by the Guidelines.
3. Banks’ exposures to a securitisation transaction are referred to as “se-
curitisation exposures”. Securitisation exposures include, but are not re-
stricted to the following: exposures to securities issued by the SPV, credit
enhancement facility, liquidity facility, underwriting facility, interest rate or
currency swaps and cash collateral accounts.
COMMENTS
Securitisation exposures.—The definition above dwells on the concept of
“exposures” —which obviously means exposures to risks of a transaction. Prop-
erly speaking, exposure to returns is also an exposure as the variability of the re-
turns is then an exposure. For instance, if the originator retains a residual interest
in a securitisation transaction, the fact that such residual interest is subordinated
is by itself an exposure. However, the meaning of exposure above does not seem
to have taken into account holding of residual interest positions.
The listing of various forms of exposures above may be viewed as (a) credit
exposures; (b) liquidity exposures; (c) interest rate and currency risks. The list
above also includes underwriting exposure, but underwriting of securities being
offered to investors should not be viewed any differently from credit exposures.
Liquidity exposure in securitisation transactions.—It is common for the
originating bank, or other banks, to provide liquidity support to securitisation
transactions. The need for liquidity support is more relevant in case of conduit
structures, reinvesting structures, future flows or other cases where there might
be temporary cessation in cashflows.
There is yet another liquidity concern in securitisations - in case of revolving
transactions, the application of the early amortisation trigger. Revolving transac-
tions provide continuing funding to an originator, but where the transaction en-
ters into an early amortisation phase, the funding is curtailed and the assets come
back on the originator’s balance sheet. There are elaborate requirements in Basle
risks
Il for capital for the off-balance sheet exposure that relates to the liquidity
Guidelines are com-
due to early amortisation provisions. However, the present
the revolving struc-
pletely silent about the early amortization risk. It seems that
ture has not at all been considered by the draftsman.
under the following
4. Structure—The guidelines have been grouped
headings:
(i) Definitions
(ii) True sale
(iii) Criteria to be met by SPV
(iv) Special features
 ation, etc.
. 3— RB I' s Gu id elines on Securtis
Part }—Chap
222 sya ©
en t facilities
ion ofcredit enhancem
iv) reticy onprovis cilities
ion ofliquidity fa
(vi) Policy on provis cilities
Po li cy o npr ov is io n ofunderwriting fa
(vil)

COMMENTS
places below.
of the Gui del ine s. —Se e our comments at relevant
Structure
tions of various terms used in these
Definitions. —The broad defini e termshave beensupplemented a
uldelines arefurnished belopor w. Thes
tions ofthese guidelines.
ropriate atvarious relevant
ote ” mea ns th e unl ike lih ood ofanentity being sul
(i) “Bankruptcy rem
ted tovol unt ary or inv olu nta ry bankruptcy proceedings, includ:
jec

concept ofbankruptcy remote

Meaning ofbankruptcy remote entities —The
tantial net worth, business, in-
entity isanentity which does nothave any subs
r than one specifically en-
comes orexpenses. Itdoes not issue anyliability othe
s carrying remote
visaged in the transaction. Bankruptcy remoteness mean
typically done
changes ofbeing declared bankrupt. Bankruptcy declaration is h filing s
.
only when someone filesforbankruptcy oftheentity inquestion Suc
done if some creditor sees that the entity has assets which may be liquidated to
realize the claims of the creditor.
ed for the pur-
Linger heteoong. to begin with, except the assets transferr
ll ey e ar ealr ead y bei ng ser vic topae
ed e yoffthein-
- oo t bo wa
feres
ci fideforbenkregecy ofthe 56 SRG AcSe V
entities are not i res
e
In other words, special purpos
e a r a c h e ch an ce so me on ebannke fcy" hre-e
ae y
pee..cs hareeloww, and therefore, these entiti es ar e kn ow n as ru pt
aot

fe What Rr ewe teeny eland

prie meat,Treo.
eee Stee nny Cahepi Cele =
ad ee
, neither be triggered, nor will trigger the default on assets.

tion, etehave tobeputintheconstitutional documents ofthe

isting agen
 Comments on the February, 2006 Guidelines
Syn. 6 223
cies have detailed requirements for bankruptcy remoteness of the special
entities. See Appendix 3 of Part II of the book. 0 eNpORe
Constitution of Special purpose entities.—A special purpose entity may have
any constitutional character that allows it the status of a legal entity and hold and
protect its assets. See also notes below under Para 8.
(ii) “credit enhancement” is provided to an SPV to cover the losses asso-
ciated with the pool of assets. The rating given to the securities is-
sued by the SPV (PTCs) by a rating agency will reflect the level of
enhancement;
COMMENTS
Meaning of Credit Enhancement.—Across the Guidelines, the concept of
credit enhancement has been misunderstood as some kind of a guarantee or ex-
ternal support to absorb the losses of the SPV.
However, the generic concept of credit enhancement is no different from equity
in corporate finance. Essentially, wherever there is a reallocation of risks among
two classes of claimants, the result is the credit enhancement of one class, of
course at the cost of the other. The meaning of equity in corporate finance is to
protect the lenders against losses — equity keeps absorbing losses unless it is fully
wiped out. The fact that the claims of the equity holders are subordinated to those
of the lenders provides a credit enhancement to debt.
Likewise, the most generic concept of credit enhancement is the subordination
of some claims on cashflows to other claims. For example, the residual profits of
the originator flowing back to him are usually subordinated to external claims.
This provides a credit enhancement to such external claims. The rights of differ-
ent external claimants may also be organized in the form of a hierarchy, such that
some claimants have a senior claim on the cashflows. Thus, it is seniority of a
claim that provides credit enhancement to such claim.
Notably, the concept of credit enhancement pervades the entire field of finance
and it is not limited to securitisation.
In securitisation, the most essential form of credit support, for most retail loan
pools, is the excess of income over expenses, which is obvious where there is an
element of excess spread in the pool. However, the definition of the term here,
and the meaning transpiring from the rest of the Guidelines do not seem to have
considered retained profit as a form of credit enhancement.
the rat-
Credit enhancement and ratings.—In structured finance instruments,
the relevant
ing of the security is a reflection of the credit rating available at
— Class A, B and C,
level. For instance, suppose there are 3 classes of securities
of class C provides
with sizes of Rs 80, Rs 10 and Rs 10 respectively. The size class B
at
credit enhancement to Class B — hence, the credit support available
available at Class A level is
level is 10% of the total liabilities. The credit support
A will higher than that of
40% of the total liabilities. Hence, the rating of Class
Class B.
 ete.
RB I' s Gu id el in es on Securitisation,
Part }-—Chap. 3—
224 sa ©
mn struc
hea rin g on securities of all types,
-redst enhancement e o f ra ti ng s is di re ct — since the seourities
ye: ~urmues, the Pe taho se t ri sk s. The assets having he
en 180°
s bu t me re as of credit
— ae sod entity risk as th e as se ts have sufficient extent
sk s as lo ng a
wd phen aye ri cordingly.
ac
support, they get ratings ort
li ty ” re pr es en ts th e first level of financial supp
ii) A “first loss fa ci
e pr oc es s i nbr in gi ng th esecurities issued, b)toy
_ A orient sowMtofth

stlev elcre dit sup por t.— The Gui delines seem tohavethougly
Meaning offir ili ty—for instance, a guarantee, The wor
d
offir st los s sup por t as som e kin d of fac
kind ofa creditorcredit equivalent.
“facility” inbanking parlance is some
sactions, canbetheexcess ofin-
thefirst losssupport, inmost generic tran
that we have referred toearlier.
cae ivr theexpenses - theretained profit con sidered retained profit as a
However, the Guidelines donot seem tohave
credit enhancemen t
at all.
es refer tofirst loss fa-
All therisks associated with the assets—The Guidelin
ed with theassets of
cilityasintended toabsorb “bulk (orall)oftherisks associat
risks. There are
the SPV. Obvious enough, the reference is tocredit risk ~ not all
, pre-
various risks embedded in a pool of assets — credit risk, delinquency risk
payment risk, interest rate risk, etc. For example, a non-credit-enhancing but pre-
payment protecting class will not be taken as a first loss class.
What level of credit support is first loss support.—The very basis of distinc-
tion between first loss and second loss, without reference to rating levels, makes
little sense. For example, if in a transaction, 4% credit enhancement is sufficient
to attain a BBB rating, and 10% enhancement is required to attain AAA rating.
then 4% is the first loss piece and 6% is the second loss piece. But if only the
AAA class is sold, there are only two classes — a rated class with AAA rating,
and an unrated class of 10% - in which case the entire unrated piece may seem
like first loss piece, but then this is illusory.

willberestedas t supp
firslos everysecuritisation transaction.
s ort.Generally im
senior-most securitisation gets a AAA-rating. Quite obviously, the support
revelpequired for AAA-rating ismuch higher than that forinvestment grade rat-
ing. If
e
there are only two classes of securities, the size of what will be considered
enc cs CassWillbequitethick. Therefore, the Guidelin
ines es will motivate
the
mee (COME OnE OFThore mezzanine tranches toreduce the size ofthe firs

(iv) ond ond

loss
A “sec acredit enhancement
facility” represents .
(or subsequent0 Werofprenection WoahSPVegdind Coneaied Consens
 Comments on the February, 2006 Guidelines
Syn. 6 225

COMMENTS
_ Meaning of “second loss facility”.—The whole basis of distinction between
first and second loss facilities under the Guidelines is the product of a miscon-
struction of the sharing of losses in securitisation transactions. A few points will
help to make the issue clear.
First of all, there is no such thing as an absolutely credit enhancing class and an
absolutely credit enhanced class. Each class in a securitisation transaction is li-
able to suffer losses on the assets, since the SPV has no capacity to absorb the
losses. So, all asset losses are allocated to the investors in the assets, albeit in a
particular order. It is the order that distinguishes between the first loss class and
the second loss class.
The word “subsequent” is illusory. In most ABS issuances, there are multiple
classes, and all classes except the senior-most are credit enhancing classes, in a
step structure. Treating all such subsequent classes alike is inappropriate. In fact,
literally, even the senior-most class is a “subsequent” class.
The only possible way of treating an exposure in a securitisation transaction as
“second loss facility” is to relate it to the ratings of the securities. In the absence
of a rating-relation, the distinction does not make sense. For example, if there are
four classes of securities in a transaction — Class A (AAA), Class B (AA), Class
C (A) and Class D (BBB), it is impossible to determine whether Class B should
also be treated as a second loss class. If Class B is not treated as a second loss
piece, it would be unfair for a case where there are only three classes, or only two
classes.
(v) “Liquidity facilities’ enable SPVs to assure investors of timely pay-
ments. These include smoothening of timing differences between
payment of interest and principal on pooled assets and payments due
to investors;
COMMENTS
Meaning of liquidity facilities—Liquidity support is required for mismatches
between the cash inflows and cashflows of a transaction. The mismatch may be
inherent in the very nature of the scheduled inflows and outflows, or may arise
due to delinquency of some or all of the inflows.
un-
Liquidity facilities are typically employed to meet the gap between the
These gaps arise due to
scheduled mismatch between the inflows and outflows.
ng assets, aoe
delinquency of the cashflows, delays in recovery of non-performi
calamit ies, industria
porary cessations in activity altogether (say, due to natural
on the nature of the collat-
unrest, etc.), or for various other reasons depending
eral.
example, if
iquidity support. For exam
liqui
A transaction may employ different forms of
ing of the excess profit, this also
the transaction builds a cash reserve by pool
zero coupon class not entitled to any
provides a liquidity support. If there is a idity enhancer.
serves as a liqu
distributions over the term, this also
 sation, et.
3- RB I' s Gu id elines on Securiti
Part i-—-Chap.
by the
to li qu id it y ta quliues provided
¢ the Guidelines
relate form of
e Ca se s wh er e a liquidity facility, in
rs only thos
bank, & possibly refe it far unstanee, 1 provided by & bank.
cred
an overdraft of cash sfers fromWsble
AS
in at or ” re fe rsvo a bankdattran ,
iw i) ve or ag
of assets toan SPV asa . of
part an
sing le as se t or a po ol

As per the def ini tio n abo ve, anyone who transfers
.—
Originater vs. transferor originator, In fact, the word “originator” in the
l be an
assets into an SPV wil
two reasons.
definition is a misnomer, for Floriw
“or igi nat or” im pl ie s ch eent ity chatoriginated theasset.
coat theword nk thatfirst wrote theloan. If
the loan has
n is ori gin ate d by th e ba
stance. a Joa
nk A to Ba nk B, an d Ba nk B is nottheoriginator oftheloan, but
Mae idbyBa inition here. In all arbitrage transa
ctions OF
l be tre ate d as suc h und er the def
wil
ons , th elo an s af e ori gin ate d by some entities, butactually
vi ee Transacti
edefinition maybesubjected to% I
Theotherflawinthedefinition is thatth
frustrate itspurpose. Forinstance, if
eralinterpretation which may completely
ity (meaning, neither @ balk not
Bank A transfers theassetstoanunregulated ent

ac:
Position onarbitrage transactions —If a bank constructs a pool which
rar
ner as ary ¢=
e mypen originators as they a
can betreated asTan
loar oy "c-
have no conne

act ; be said to be
srcriasmuncr a.teBeek: diyackUringthemotets OntsGue Caanen AST
~ the assets may be directly pooled into the SPV. ah
; ;
In other words, the sponsor
‘mane eee

Soeerd apenas
(vii) “Securitisation”
re
fro
and transfer the
m d
ineahy the originator to the SPV
ussvtamn foranheeedlinb oathged
COMMENTS
Meaning of securitisation. — ofEe
een dincesesd Ghavéheen 14 Gistad. Wee ete
Chapter 1. book. For definitions ofsecuritisation also, se
 Comments on the February, 2006 Guidelines Syn. 6 227
The process of transfer.—The definition looks at only one leg of the securiti-
sation transaction — transfer of assets by the originator, but securitisation is liter-
ally completed only where the SPV finances the asset by issuing its own securi-
os It is when the assets get converted into “securities” that securitisation really
appens.
Immediate cash payment.—The word immediate cash payment is a misnomer
that pervades through the whole of the guidelines. There is an element of retained
interest which is no different from a consideration for the transfer. If the origina-
tor has a retained interest of any form in the transaction, it implies a deferred sale
consideration, and not immediate cash consideration.
Besides, quite often, the SPV issues securities to the originator which is also a
form of consideration. The practice of SPV issuing securities to the originator,
who first buys securities and later resells them in the market is quite common in
most countries.
It cannot be said that where the originator buys some of the securities of the
SPV, there is no immediate cash payment — a payment also implies cancellation
of mutual cash payment obligations. That is to say, if the SPV is obliged to pay
cash to the originator, and the latter is obliged to pay cash to the former for the
securities, cancellation of such mutual obligation is also nothing but cash pay-
ment.
(viii) “Service provider” means a bank that carries out on behalf of the
SPV (a) administrative functions relating to the cash flows of the un-
derlying exposure or pool of exposures of a securitisation; (b) funds
management; and (c) servicing the investors;

COMMENTS
Meaning of “service provider”.—The service provider, or servicer as it is
most commonly called, is a very important functionary in a securitisation transac-
tion. The transfer of the asset from the originator to the SPV merely gives rise to
the legal basis for the transaction. But eventually, the SPV has to repay the inves-
tors, which comes by converting the assets into cash. So servicing includes all
those functions that would convert the assets into cash and finally remit the cash
to the investors. |
Servicing has two very significant legs — servicing the obligors or borrowers
who have taken money from the bank, and servicing the investors investing in the
securitisation transaction. Servicing the obligors is a very significant task by it-
self — as the bank may be required to maintain constant interface with the bor-
rowers. It has to provide them period information, statements, certificates, etc.
The definition above omits out the obligor service but it may be noted that in-
g.
vestor service comes only after obligor servicin
Regulation AB of the US SEC Regulations has laid down extensive servicing differ from
transactions. Servicing standards
standards for securitisation
collateral to collateral.
 .
Seouruivalion, @l
Punt b-(hep 2}- RBI s Ge udelines On
22s >a ©
ab ov e en Te retention of
vaassages the
de fi. ni ti on
Bauk> wer providers.|—hc mo st commonly the Case. Ho
wever,
th th e ba nk , Th is is Oude.
Une oo aay terohwi taken to prechude - possibility ofinter
be
these words should mot I's reg atory ambit
e the RB
1s DANS, Cw
other than banks. Sinc specialized
in g Is ha nd le d by banks. Needless to say, t
tion business and they may no
e se rv ic
Seno enol when th t ra le in se cu ri ti sa
if ic an
servicers have a very sign
ies.
be banks or finance Compan

omp lis hin g th e pur pos e ofthecompany, trust orother

those acc nner
(b)which isstructured In@ ma be,
intity osthecase maybe; and trust orentity asthecase may
aon sadtoisolate thecorporation, r tomake itbankruptcy remotes
from thecredit risk ofanoriginato
COMMENTS
ity—A special purpose entity,
What makes anentity a special purpose ent
it is not a general purpose
like any other entity, is a legal entity. However,
outbusiness activities. it has a lim-
entity - itisnotcreated forgenerally carrying
ose.
ited purpose, and itisanchored tothat specific purp
entities — for exam-
Limitation on business powers are common to all forms of
would invite the
ple, a company cannot travel beyond its “objects clause” - that
ies are often
doctrine ofultra vires. However, the powers of general purpose entit
ts
very wide and the limitation on objects is defeated by broadly defined objec
clauses. In case of an SPV, since itis created for a specific purpose only, it has a
ee nea
1 ire.

SPV is such that the possibility of the SPV itself takeni bankruptcy
ceeding is itself remote. ~ Tae my
Isolation from the risk of consolidation — that is, bankruptcy of the originator
bec aus e weer iary of
i treated as a sub
the SPV is
the ban kru ptc y of the
is toinator — isonly a rare si SPV ' sid
the orig

COMMENTS

8 mderwriting—Underwriting
andreferee guaranteeing isa common capitaltypi market term
the sale of securities. Underwriting is
Comments on the February, 2006 Guidelines Syn. 6 229

to publicly offered securities. Securitised products are normally offered only on

private placement basis. However, underwriting of the securities is a common
practice. Underwriting is done by the arrangers, not by the originating bank. But
the Guidelines are applicable to underwriting done by any bank — whether origi-
nating bank or not.
6. True Sale.—For enabling the transferred assets to be removed from the
balance sheet of the originator in a securitisation structure, the isolation of
assets or ‘true sale’ from the originator to the SPV is an essential prerequi-
site. In case the assets are transferred to the SPV by the originator in full
compliance with all the conditions of true sale given below, the transfer
would be treated as a ‘true sale’ and originator will not be required to main-
tain any capital against the value of assets so transferred from the date of
such transfer. The effective date of such transfer should be expressly indi-
cated in the subsisting agreement. In the event of the transferred assets not
meeting the “true-sale” criteria the assets would be deemed to be on the bal-
ance sheet of the originator and accordingly the originator would be re-
quired to maintain capital for those assets. The criteria of true-sale that have
been prescribed below are illustrative but not exhaustive.
COMMENTS
Transferred assets removed from the balance sheet of the originator.—
This para states: “For enabling the transferred assets to be removed from the bal-
ance sheet of the originator in a securitisation structure, the isolation of assets or
‘true sale’ from the originator to the SPV is an essential prerequisite” The Guide-
lines unfortunately miss a very significant point — under revised IAS 39, true sale
is not a precondition for off-balance sheet treatment. True sale is the legal charac-
ter of the transaction, whereas accounting for a transaction is based on its eco-
nomic substance rather than legal form.
Regulatory Guidelines are not statement of accounting principles — regulatory
accounting, that is, accounting for the purpose of regulators’ reporting, and ac-
the
counting for financial reporting, are understandably different. It is open for
but true
RBI to reject regulatory off-balance sheet unless a true sale takes place,
being question ed in sev-
sale as a precondition for securitisation is increasingly
laws insist on a
eral countries, except the US where the provisions of bankruptcy
true sale.
treatment for
It is not a good th ought for the regulator to lay down accounting
suited for accounting
financial report — th e accounting standard setters are best
laid down accounting rules
discipline. It is not for the firs t time that the RBI has
principles of the Institute of
departing from the generally accepted accounting
tice of laying down accounting prin-
Chartered Accountants of Indi a, but the prac like the one above, 1s
ciples by the RBI, albeit in form of casual statements
avoidable.
Guidelines provide that where
nsfer woul d be treated as true sale.—The sale given below, such transfer
ns of true
a nsfer complies with the conditio
a tra
 ’ on ’ ek
ywidel Mies on Securall
4 7Panaj! 2- RBI ’s ¢,
P wt :
.
? w sa ©

, both without authority

” Qace again, tis statement is
will be weated as “We sale
_ sale of ass
ass ets, , the squestion tha:t
ets
sale is
a e not. The queshon ot wue
a page oe ar spormy persed = on ts tuly what ut
erm ina tio n as to whether the transacti
anal cmin at io n ~det
n, and on appropriate
sale is a substance-over-form quesio
aoe 9 de pe by a court, Deter.
ndg on determination ns
me e wil l hav e
e walerequires understan to din thespiritof« ra action, ithe’ ©
¢pooneraa nec
ible to lay down a few w
tive determination, It is unposs sale, li is almost
— . tha t com pli es with these rules will be| a true
—
say, a

n bythe RBI donothave illustrs

; -

ponflicting therefore, therules laid dow

,

a truesale rather than the indi-

ay ve olueaxwell. Some ofthese aretheresults of
cation of one.
s
case law, see Vinod Kothari's
For a detailed discussion ontrue sale and related
Securitisation: The Financial Instrumen t Future.
of the

7. The criteria for “True Sale” of assets

A saleshould resultinimmediate legal separation oftheoriginator
cine tbe aoncts which aresold toChenew owner vis.the . The
assets should stand completely isolated from the originator, after its
transfer to the SPV, i.e., put beyond the originator’s as well as their
creditors’ reach, even in the event of bankruptcy of the originator.
COMMENTS
Legal Isolation.—If a transfer operates as a sale, every sale has the effect of
distancing the assets transferred from the transferor. A transfer results mto an
isolation—which means the transferor no more has any claim on the asset which

Legal isolation is not the feature of a true sale but its outcome. If there is a sale.
there is an isolation.
The isolation being treated as an indication of “true sale” is more relevant in
cases where a true sale might occur without any “sale™ as such. For example.
novation is not a sale. but since it puts the assets beyond the reach of the trans-
feror, itmay betreated asa true sale. Insome countries, creation of participation
nights by the originator may also be treated as true sale.
Beyond the reach in bankruptcy.—If assets have been transferred,
beyond thereachoftheliquidator. astheliquidator cannot have
claim'on geome
that have been transferred. But significantly. insolvency laws of most
countries,
tions pertaining to the asset and shall not hold any
rest in the asset after its sale to the SPV. An agreement
riginator to any surplus income on the securitised as-
d of the life of the securities issued by the SPV would
1 as a violation of the true sale criteria. The SPV should
fettered right to pledge, sell, transfer or exchange or
ose of the assets free of any restraining condition.

COMMENTS
s and rewards.—The Guidelines expect that a securitisa-
result into transfer of all risks and rewards inherent in the
is completely impractical expectation. Transfer of “all
; only in real portfolio sales — in a securitisation transac-
) think of all risks/rewards in the asset having been trans-
lis is because the idea of securitisation is not a sell-down,
set by way of securitisation. There is no doubt that secu-
s a different form of funding.
why transfer of all risks/rewards never happens in a secu-
issentially, capital market investors expect a rated, credit-
- credit enhancements come by way of a step-structure of
we perceive that junior securities will be offered to exter-
| remain a piece which is like the residual, first loss piece.
f support to the transaction. This piece is almost certain to
d to find takers for this piece — so it stays with the origina-
; layer. The Guidelines have referred to a first loss facility,
overlooked the first loss piece, that is, the junior-most in-
curities of the SPV as a case of retained risks.
irds is even clearer. The originator retains the right to the
‘ing external investors. This is-nothing but a reward — the
erent in the assets over the cost of refinancing the asset.
xpressly permitted the retention of residual profits — but
bout how retention of residual profits may conflict with

of residual profit, that implies retention both risk and re-

gS eee eae eee Oe ee ee eee ree ee ee
 eb
I~ RB I » Gu id el in es On Securisahon,
Part Chap.

all risks for a

ler to *a risk for all periods, oF
— ee eian. fosa sel
muted period and
e Wranster of all risks
standards do not yequir inavons: transier
Notably ible comb
t, LAS 39 sees several poss s, andne\enion ©, Sites
cewards on the asset. infac ation ofall risksandseward
er ds , rc xc e
coward s o nO e we wr
stca so is th emo st li ke ly eoenasio dnsngurilaaiie
la
ofalsinkssmeTe.Intho
Wunsactions.
ard s is als o no t pre -co ndi tio n under Basel Il. 1 only
Transfer of All risks/rew nif ica nt creditriskontheast Whonsd
, Natt
ve con dit ion to sa ~
y sig
suasa positi not‘beinsig-
ts 4pos fam ed. tn ot he r wor ds, thetransfer ofcredit riskshould
pu

The Guidelines require thatthe seller

Should not hold beneficial interest—asset. However, thevery next sentence
should not hold beneficial interest inthe fits in theasset ~ which is a case of
theoriginator tohold residual pro
ial interest.
transfer ofinterest in parts of
The Guidelines also completely seem torule out either a fully proportionate
t~
assets. Transfer ofownership over a part ofanasse , How:
t common practice
share, oranidentifiable interest intheassets ~ ismos
ts have notbeen en-
ever,itseems underthe Guidelines, partial transfers ofasse

is no question of being entitled to residual surplus.

Residual profits arise because the assets are normally transferred alue
totnw toy,ahtoecous Unites inOF La EP
- _ * at 7

Hoag ate wma

* -

Reaver Cama the income on the

- i i .
Tonetne
As

real lif
Inpa uritis
e secin ation transactions recapture of residual profit is one
rame te rs str uct uri jeu
female theShealiea t waneasicn Toatea seve Walysa
e a SS eee e e
een ny
selldeto-oeabten ne
etanes ee a e
uy eddeemed comnsd

sideration Profits by theseller isthepayment ofsuch deferred con-

- i.
residual profits isa
et way of recapturing the
 Comments on the February, 2006 Guidelines Syn. 6 233

These Guidelines provide that the entire consideration for transfer should be
received immediately and in cash — therefore, deferred sale consideration is ruled
out. Servicing fee cannot exceed a certain limit of reasonability. If the originator
has an open-ended right to sweep the residual profits of a securitisation transac-
tion, this may both kill the true sale feature, as also the tax transparency of the
transaction.
SPV’s right to resell assets.—The Guidelines provide that the SPV should
have unfettered right to sell or pledge the assets. In fact, this stipulation is com-
pletely impractical.
Notably, accounting rules etc talk about “surrender of control’, that is, the
buyer’s right to resell the assets, but then, SPVs are never allowed the right to
resell the assets. The effect of being able to resell the assets is achieved by mak-
ing the securities of the SPV freely transferable. In fact, as the Guidelines pro-
vide later, the SPV should be a non-discretionary body. If it has the right to resell
the assets, exercise of such right is nothing but a discretion.
If the SPV has the right to resell the assets, it further goes counter to the nature
of the special purpose entity. The SPE is created only to hold the assets, not to
sell the assets.
It may not be a far-fetched worry that if assets of the originator are sold to an
independent SPV, run by directors majority of whom are independents, there is a
worry that the assets may get sold off against the wishes of the originator. And
that may completely deprive the originator of both his servicing rights as also his
residual profit.
In short, this condition is completely impractical and is a product of miscon-
ceived idea of what is meant by “surrender of control”. This condition is neither
implied by Basel II nor by IAS 39 or FAS 140.
The right to sell down the assets is only an exceptional right - in case of breach
part of
of covenants. If there is a material breach of terms of the contract on the
the transaction, the
the servicer, and where it has become necessary to wind up
the right to sell
SPV has the right to sell down the assets. Another situation where
down the assets occurs is on legal final maturity of the transaction.
ered, but it has many fetters
Thus, the right of the SPV to sell assets is-not unfett
attached to it.
interest in the assets af-
7.3 The originator shall not have any economic
urse to the originator for
ter its sale and the SPV shall have no reco
fically permitted under
any expenses or losses except those speci
these guidelines.
COMMENTS
ly per-
e.—While the Guidelines have explicit
No economic interest after sal seller
ret ent ion of righ t to sur p lus profits, the condition saying the
mitted the he assets sounds strange. The right to
resid-
uld not hol d eco nom ic inte rest in th
sho
economic interest.
ual profit is the surest form of
 Securuisahion, ek.
Part i—Chap. 3 RBI» Guidelines 08
34 Syn. ©
sfer of a
tha l fr ac ti on al wa ns fers of assets, OF tran
mentioned , is a Com
We have carlict
s, for ex am pl e, pr incipal but not interest ch
ific poruon of cashfl ow
tu re of th e ab ov e su ipulahon may make su
mo practice. The sweopine na
wansacuions difficull as condi
ir em en ts si gn if ic an t is that they have been set
What makes these requ ha ve noted above, neither are
these require:
e, th ou gh , as we ses,
tions for true sal
la w or an y cl ea r ju di ci al precedent. In real-life ca
ments laid down by any on ca nn ot be dependent on a single pa
rameter,
n of tru e sal e qu es ti
determinatio
ori gin ato r.— I her e sho uld be no difficulty in a limited re-
No recourse to the o a form of recourse ~ against specif
ic as:
ove r-c oll ate ral isa tio n 1s als
course. An of a trans:
s not go against the true sale nature
sets. A limited recourse surely doe
on this point,
action — there are several rulings

e to demonstrate that a
the time ofsale. The originator should be abl
and that the SPV has
notice tothis effect has been given to the SPV
acknowledged the absence of such obligation.
COMMENTS
igi
No obligation to buy back, substitute or pay for the assets.—That the
buybacktheasc,payforthe assets,oF
a

wane ete havethe obligation to

- . M

eae theasset is merely tosaythat the SPV shall nothave a recourse against
originator. As regards impact of recourse, see our comments above.
on to buyback on breach of j
| representati; ons and warranties,
vaded ia s obligati
As regard ory

ee te tie en Ged ee
ida dts eigen 1 theobligatio n ofthe originator tobuy back the assets is the
ao beHoldotrepnnhes, becuales texAaliie Stan a A ok
repurchase, hecontrolstheprofitsovertheassets.A righ!to
rightto
thatis. cll
wmtay tat whenever there is a potential profit. So itis retention ofthe right
back. which militates against true sale. more than the obligation to buy

7.5 cartaniien
Anoption assets at the end of the se-
to repurchase fully performing
San” Wine cabiual Sammy aianabrentay tineste
gregate, fallen to tessthan 10% oftheoriginal amount suldtothe
SPV (“clean
byGrerignaen ) ” Mivwed vide purngreg CPcusGereuans

- -
 Comments on the February, 2006 Guidelines Syn. 6 235
fi
should not hold 2 call option. In fact, these Guidelines have onl y mentioned
about obligation to repurchase, and not call option.
Clean up call option is 2 mere cleaning up device. In case of static pools, as the
pools continue to amortize and/or prepay, the outstanding value of assets contin-
ues to decline. If it falls to uneconomic levels, continuation of the transaction
thereafter is too costly. Therefore, itmight be thought appropriate to clean up the
by exercising
transa cti the clean
on up call
Clean up call option of the originator also implies an implied call option on the
securi the SPV.
ofties
74 The originator should be able to demonstrate that it has taken all
reasonable precautions to ensure that it is not obliged, nor will feel
impelled, to support any losses suffered by the scheme or investors.

COMMENTS
Moral or legal obligation to pay —That the originator wil] not be required to
pay for the securitics is quite obvious — as the securities are those of the SPV and

This clause also lays down that the originator should not have any moral obli-
gation, or reputational risk. and therefore. should not feel the impulsion to pay
the securities. In other words. the securities should not have been sold as the se-
curities of the originator or bearing the strength of the originator.
In reality, the reputational risk issue may be impelling. If the securities issued
out of someone's transaction have actually defaulted. the market will tend to
frown upon the originator for good time. Therefore, there might be attempts to do
whatever can possibly be done to save the transaction from default.
7.7 The sale shall be only on cash basis and the consideration shall be
received not later than at the time of transfer of assets to the SPV.
The sale consideration should be markei-based and arrived at in a
transparent manner on an arm’s length basis.
COMMENTS
Cash consideration. —The Guidelines require that the sale consideration
and in cash.
should be paid immediately
This condition is also imspractical. In many cases, originators may look for an
opportune time for issuance and keep the securities “on shelf” — that is, do a
transfer to the SPV but hold on to the securities for sale to investors at an appro-
is
priate point of time. The SPV paying to the originator in form of securities
quite a common practice. Provisions having been made about capital mainte-
’s right
nance for first and second losses, there is no reason to limit the originator
— on the contrary,
to hold the securities. Basel II does not put any such condition
it contains elaborate provisions for ratings-ba weights to securities held
risk sed
 sation, et
idelines on Securiti
Part |—Chap. 3-—- RBI's Gu
236 sya a ©
is
it re te nv io n of ri gh t to surplus profit, chat
ines perm
in addition, if the Guidel r than -wamediate cons
ideration,
OF othe
also a case of non-cash

colour
tro lle d by ind epe nde nt tru stees, gives a prima-tacie
an independent, of con
of an independent transaction.
of exc ess spread, or where the| rates ofinterest
a sub sta nti) al amo unt
If the 4 has the pool al par
nt s dow n or gon e up si nc e date of origination, transferring
the
ne
be ind ica tio n tha tth tra
e nsa cti on is notanarm's length transacon.
vaiue might

COMMENTS
trans-
No additional risks.—We have mentioned before that in a securitisation
The
action, all risks/rewards inherent cn the assets are allocated to investors.
originator ishimself a stakeholder and commonly holds the first loss risk and the
residual returns on the asset. Every credit enhancement implies absorption of
credit risk. A liquidity support implies absorption of liquidity risk of the transac-
tion. Likewise, there might be one or more sources of absorbing prepayment risk.
The meaning of the clause above is that other than those that are explicit, there
are no implicit risks inherent in the transaction.
Even in case of servicer obligations, there should not be any credit risks under-
taken by the originator.
7.9 An opinion from the bank’s Legal Counsel should be
kept on record signifying that: (i) all rights, titles, interests and bene-
fits in the assets have been transferred to SPV; (ii) originator is not
assets other than
to investors in any way with regard to these

notcommon
Indian practice itisas
,
.
for
<
—
Opinion ona matter a partoftheregulatory na
 Comments on the February, 2006 Guidelines
Syn. 6 237
Essentially, every legal opinion is only an expression of view by the
counsel
that the requirements of true sale have been complied with. There is no
certainty
than an opinion prevails. Generally speaking none of the legal Opinions are
un-
qualified — they would always contain substantial disclaimers.
Note the last point above — this is obviously subject to the rights of the bank-
ruptcy court to annul a transfer holding the same to be in anticipation of bank-
ruptcy, discussed above.
7.10 Any re-schedulement, restructuring or re-negotiation of the terms of
the underlying agreement/s effected after the transfer of assets to the
SPV, shall be binding on the SPV and not on the originator and shall
be done only with the express consent of the investors, providers of
credit enhancement and other service providers. This should be ex-
pressly provided in the sale transaction documents.

COMMENTS
Restructuring with the consent of investors.—The Guidelines have put up
the condition that restructuring or any variation in the underlying agreements
shall be binding on the SPV and not the originator. This condition is understand-
able, but the next part of the sentence, said with least intention of saying so, does
a substantial damage. The Guidelines require that any modification of the terms
of the contracts can be done with investor sanction. This is also a very casual,
almost thoughtless condition. Seeking the sanction of investors for reschedule-
ment, etc,.is both impractical as also conflicting with the scheme of securitisa-
tion. The SPV buys the assets, not the investors. Restructuring or taking such
efforts at resolution of a debt are common servicing powers — they have been
listed as servicers functions even in Regulation AB of the US SEC.
Investors have simply bought the securities of the SPV — they have not bought
the assets. Legal title on the assets vests with the SPV. Whether beneficial inter-
est in the assets will be transferred to investors or not will also depend on the na-
ture of the SPV. If it is a trust, the SPV holds the assets for the benefit of the in-
vestors — but even in cases of beneficial ownership being with the investors, the
trustee has all such powers to deal with the assets as may be required in normal
course of business. The Guidelines seeking the sanction of investors reflects
flawed understanding of the concept of SPV as holder of the assets, and the in-
vestors as holders of securities of the SPV. Unless in exceptional circumstances,
the SPV
the SPV, through its management or trustees, will carry the business of
without the interference of the investors.
that the investors’ sanction may be
These Guidelines provide, later below,
makes the whole con-
sought at the time of issue of the securities itself — which
cept of sanction redundant.
7.11 The transfer of assets from orig igiinator must no t contravene the terms
ement governing the assets
and conditions of any underlying agre
(including from third par-
and all necessary consents from obligors
obtained.
ties, where necessary) should have been
 ek
3— RB i' s Gu id el in es OF Securitisation,
Part i—Chap.
238 Sya. ©
COMMENTS
not
e an y la w. —T he tra nsfer of assets should
to vielat
Transfer of assets not they also cannot violate
any law,
lat e any con tra ct, but
only vio en
ovo n on tra nsf er is the holding of any charge or
The usual contractual restni ce, if any lender has 4 fixed charge
over the
ass et, For ins tan
cumbrance on the
ted to any att ach men t, the re Is a restrichion on trans
asset, or the assets are subjec
fer the
-of f of the obl igo r als o gO against the transferability of
Can the right of set nt s to an obligation of the originatoly,
r,
off rig ht of the obl igo r am ou
asset? As set Essential
ounts to transfer of obligations.
transfer of any such asset also amns.
rights are transferable, not obligatio
t seck obligor sanction, thesame
consent.—If there is a requiremen to ht over a receivable is simi-
nciples, a rig
should be taken. As per common law pri
erable. Therefore, there is no need in
lar to any other property — it is freely transf
common law to seek obligor sanction.
-requisite; it is only @ perfection
oa fact, even obligor notification is not a pre
vice.
g sets after securiti-
7.12 In case the originator also provides servicin ofas
sation, under an agreement owwi th the SPV, and the pay-
rough it, it shall
ments/repayments from the borr ers are routed th s unless
be under no obligation to remit funds to the SPV/investor
and until these are received from the borrowers.
COMMENTS
-

aman
-S ng of the assets by the origina-
.
Se °
ee
aah Ge bool, Theoo waar is logistically difficult to think of anyone else
to
dotheservicing. does not have the infrastructure or capacity
he c NE aetna ees ee
e s e r v i until same are actual
theshould ly collected by him. An
agr
anal to
eem provid
ent
D prove servicer advances not be frown ed thet te
ee 4
y ofproviding liquidity support tothe transaction
7.13 The originator should not be under
any |

only senior securities may, however, purchase at market price

oa al ey ey
eccurtiies thet purpo ses. Such purchase, along with the
devol
mayexcee ve of of
on account nal commit
ments. should not d 10% the origi t
amoun of the issue.
COMMENTS
Bar on purchase of
—The Guidelines
originator frombuying anyofthebelow taveomen Wake mo
nn me
 Comments on the February, 2006 Guidelines
Syn. 6 239
In fact, the first loss facility spoken of in the Guidelines may, in most
natural cir-
cumstances, mean purchase of subordinated securities of the SPV. Theref
ore, the
condition under this clause should exclude credit enhancements by the origina
tor.
The Guidelines have put this condition as a part of the true sale requirements —
this sounds strange, as there is no way true sale can be affected by purchase of
securities by the originator.
The Guidelines limit the investment in investment grade securities by the
originator to 10% of the total issuance. See our comment above that it is unrea-
sonable to limit the originator’s investment in a securitisation transaction — once
capital requirements have been laid down.
It is notable that in Basel II, there are no such restrictions on the purchase of
securities by the originator — in fact, there are risk weights laid down for pur-
chase of securities by the originator.
7.14 The originator shall not indulge in market-making or dealing in the
securities issued by the SPV.

COMMENTS
No market making.—See our comment above — the regulators should be more
concerned about the capital put in by the originator for the securities that he holds at
any time. After all, the impact of inapplicability of the Guidelines is only inadmissi-
bility of capital relief. If all that matters is capital or capital relief, the stress should
have been more on capital requirements then on what can or cannot be done.
7.15 The securities issued by the SPV shall not have any put options. The
securities may have a call option to address the pre-payment risk on
the underlying assets.
COMMENTS
Call options on the securities of the SPV.—The Guidelines provide that the
securities of the SPV may have a call option to address prepayment risk. This is
clearly a misunderstanding of the nature of asset backed securities. In asset
backed securities, call option is inherent or implicit, not explicit. If the underly-
ing assets repay or prepay, there is no reason for the SPV to retain the cash; in
fact, it cannot retain the cash unless it is a reinvestment type transaction. Hence,
as the cashflows get paid over to investors, which is an unscheduled payment,
this is similar to exercise of a call option in case of callable bonds. Therefore, by
nature, asset backed securities are comparable to callable securities.
provide that the
Put options on the securities of the SPV.—The Guidelines
might, perhaps, have
securities of the SPV shall not have a put option. The idea
the securities of the SPV
been to discourage recourse in form of put options. If
who wrote the put option.
may be put, it is an indirect recourse against the one
independent put options.
However, there should be no problems in case of
i purpose vehi
i a special hicle set up
_ Criteriia to be met by SPV.—SPYV is
which the beneficial interest in
. ee the process of securitisation to
 etc.
eldel
3 — RBI's‘< GuidGui e s on Securitisation,
inine
Part —Chap.
240 Syn. 6

COMMENTS

stay anchored to their purpose, the

specific purpose and domain. Like all entities
basic purpose.
special purpose vehicle remains limited to its
ct
fina but in
nce ur ed several other
The use of SPVs is common not only in stru
or liabilities, the SPV
fields. Wherever it is intended to segregate risks, assets
commonly used.
may be used. For example, in project finance, SPVs are quite

bankruptcy
remoteness, structured finance SPVs have minimal capital, deal with only finan-
i enn

Beneficial interest in the securitised assets are sold.—The Guidelines pro-

vide state: “to which the beneficial interest in the securitised assets are (sic —
should be “is”) sold / transferred on a without recourse basis”. This sentence is
pena gti haga pacha ado pe Ce
interestin the assets. itself issues securities, which might i benefi-
cial interest im the assets. ait

SPV may be a partnership firm—This isalso an error as partnerships do not

have any legal entity oftheir own. The firm is not an entity — itismerely a collective
name for partners. Hence, there is no question of a partnership firm being an SPV.
An eeeeed '®been clothed with
ben ; a legal personality wherever LIP laws have
Trustansettled or declared
. by the SPV.—There is
i a Clear ;
ErSundelines referring toa trust settledoxdeclared bytheSEY Tin SPV axles
settler. ThetrustteclfneTeeo” theseflor. A trustisdeclared orsettled bya
by anSPV. itself . Hence, there is no question of a trust declared
 Comments on the February, 2006 Guidelines Syn. 6 241

either a mistake; if it is not a mistake, then, it is an absurd thought. The SPV does
not assume any securitisation exposure. The SPV holds the assets and issues se-
curities which are paid from out of the assets. None of the liabilities of the SPV
are absolute liabilities. There is no question of application of any prudential
norms or capital norms to SPVs. In fact, as discussed above, SPVs, by definition
have a minimal capital to retain a bankruptcy remote status. If the SPV indeed
has any exposure at all, it cannot be bankruptcy remote, as exposure and bank-
ruptcy go hand in hand. Then, the very difference between an SPV and an operat-
ing entity is frustrated.
8.1 Any transaction between the originator and the SPV should be
strictly on arm’s length basis. Further, it should be ensured that any
transaction with the SPV should not intentionally provide for ab-
sorbing any future losses.
COMMENTS
Arm’s length basis of transactions.—Prima facie, if a transaction is done
with an independent entity, the transaction is presumed to be on arm’s length ba-
sis, unless the contrary is established. The constitution, ownership, management
and control of the SPV are such that an arms-length relation can be established
between the originator and the SPV. Given the above, it is a mere euphemism to
say that the transactions between the originator and the SPV are arm’s length,
since the originator holds residual interest in the SPV, and the SPV is created
solely to serve this transaction.
The second sentence of the above clause does not seem to be giving any meaning.
8.2 The SPV and the trustee should not resemble in name or imply any
connection or relationship with the originator of the assets in its title
or name.
COMMENTS
Question of name.—In a securitisation ruling in the US called Kingston
Square, the question of the name of the SPV came in. If the SPV borrows its
name from the flagship or group name of the originator, it gives an implicit belief
that the SPV is a part of the originator’s estate.
The idea of the above rule is that the SPV should not purport to be a part of the
originator’s estate. It should be demonstrably independent, such that investors
investing in the securities of the SPV do not get the impression that they are buy-
ing the securities of the originator or the trustee.
origi-
8.3 The SPV should be entirely independent of the originator. The
or benefi cial in-
nator should not have any ownership, proprietary
capital in
terest in the SPV. The originator should not hold any share
the SPV.
COMMENTS oe
: - a bora earli er as to W
the orig inat or.— We have disc usse d
SPV independent of
is seh onrgtt the SPV should be independent of the originator. Independence
 .
RB is
I' s GGu id el in es on SeSecuriisavion, etc
s On
Part t-—Chap. 3— -
242 Sya. ©
Owner
wrership, man ement and control, ty.
respects ~ fe rred to as legal equi
s i o n e y re
n — “e ens - for
es phe wey tor ot ho ld in g of ma jo ri ty of management posu
> an, control anses Dy
ct or s oF t h e
bo ardof ersnoes, CORES,as
thepoar
f do fdo nage
Management coms o ra l ma y ex is t wi th out holding equity or ma
co nt
a factual phenomenon ~
ment po int ofowner
e SP Vsh ou ld beind epe nde nt oftheoriginator from theview
Th
l.
ship, management and contro
om the originator
“t he SP V sho uld beindependent notonly fr orphan
!
t po o suc h, The ref ore , SP' Vs are structured as orphans .An
hy ap
th ehol der of leg al equ ity dec laring that theequity is held for
RPV iecreated by
public charitable purposes.
te
al equity ofSPVs is quite thin and
trretevance oflegal equity —The leg aff air s ofthe
have any interest in the
holder oflegal equity typically does not

es provide that the

Originator nottohold beneficial interest—The GuidelinIn fact, theholding
originator should nothold anybeneficial interest inthe SPV. interest. Ifthe
ofinterest inresidual income of the SPV is itself a beneficial toholding of
originator holds anyofthesecurities ofthe SPV, that also amounts
beneficial interest.
8.4 The originator shall have only one representative, withou t veto
power, on the board of the SPV pros vid ed the board has at least four
members and independent director are in majority.
COMMENTS
the origi
from Sine the of SPVs.—The Guidelines
of the SPV.
ond so SPV
Majority of directors of the
should management
be independent — here,

of thean
govern itself — as the
SPV ce taseGaeta
guverunme conatu of ahscomihet
Gave buen oncorpetene

Besides, in case the SPV is a trust, the a

ee
iy ivikioidwantdhwe
8.5 The originator shall not exercise control, direc tlytruorstindir
deed.ectly , over
the SPV andthe trustees, and shall not settle the

Oris ginator not to control the SPV.—We have discussed ;

ficat
of th eSP V.We ha al
ve men
so tio ned ab ov eth co
at nt
at on e of end enc e
depexists or not. 1s impossible to lay down definitive rul es to jud ge
whether cont rol
Comments on the February, 2006 Guidelines Syn. 6 243

Originator not to be settlor.—The settler of a trust surely does not control the
trust — therefore there is reason why the restriction on the originator being a set-
tler should have been laid down.
8.6 The SPV should be bankruptcy remote and non-discretionary.
COMMENTS
SPV should be bankruptcy remote.—We have discussed bankruptcy remote-
ness at length above. There is no guarantee that any one will not file for bank-
ruptcy of the SPV — the structuring of the SPV only minimizes the motivations
for anyone to do so.
SPV should be non-discretionary.—SPVs should be pre-formulated, auto pi-
lot vehicles. They should not have the power to decide. The power to decide
leads to dependence on the decision-making by someone, while an ideal SPV is
simply an incorporated bunch of asset. SPVs should be inanimate — inanimate
bodies do not decide.
Notably, the US FAS 140 lays down comprehensive set of conditions on
“qualifying SPEs” which contain several detailed requirements on what the SPV
may do or not do. Any right of the SPV to retain and reinvest cash, for example,
for a cash reserve creation, also amounts to a discretion and this requirement may
need more detailing.
8.7 The trust deed should lay down, in detail, the functions to be per-
formed by the trustee, their rights and obligations as well as the
rights and obligations of the investors in relation to the securitised
assets. The Trust Deed should not provide for any discretion to the
trustee as to the manner of disposal and management or application
of the trust property. In order to protect their interests, investors
should be empowered in the trust deed to change the trustee at any
point of time.
COMMENTS
for the trust deed
Trust deed to lay down trustee duties etc.—It is common
limitations of trustees. For
to lay down the detailed duties, functions, powers and
Kothari’s Securitisation:
guidance on what these functions should be, see Vinod
Financial Instrument of the New Millennium.
erty.—The trust property
No discretion on disposal or management of prop
itisation. Trustees not to have dis-
is the assets transferred for the purpose of secur
the responses in possible situations
cretion with regard to the assets means, all
is an auto pilot entity. We have
have been pre-envisaged — therefore, the SPV
ing powers.
indicated above the impact of decision-mak
aps
tees at any time.—This ek wr
Investors’ power to change trus
mig ht lead to very seri ous impl icat ions. While investors have ;e haa
statement 0 it :
er trus tees , the rep lac eme nt of trustees 1s an exceptional course
to prop directors a
shareholders cannot just change
Even in case of companies, the
cedures for the same.
discretion - there are detailed pro
 Securilinalion, et
Pant t-—Chap. 3 RBI » Gwidelines OF
~ » ©
Cour
ont as af qo se
urne
estars ooHset
question be quite complicated. Lav 1s» oor a e
fo s a a of rus tees, bul the key Question ¥ -
—— ae inv est ors ? Logically, the subordin
rc en ta ge ol
. sors? And what pe
ref ore , in mos t pre car iou s condition. 1Ne propor
, the
~ the | st loss risk and are sho uld app rop riately not be the same as
between
the ref ore r
= vor nghts,
est ors . Th e po si to n of sub ordinated investors 1s simila
subordinated inv the mght to
=
own ers — in cas e of CO Mp ANIes, equity OWNEHS have
w onerpem e st loss capital,
the fir
o provid
vote because they are the ane wh lationto
tru ste e sho uld onl y per for m trusteeship functions in re
The h theSPV,
ertake any other business wit
un ae PY and should notund
COMMENTS
ees not hav e busi ness with the SPV ,.— Trustees have an inherent obliga-
rust
is, the investors, They cannot set up
R.of loyalty towards the beneficiaries, that , in the transaction, Therefore,
an adverse interest, for example, their own interestness of trusteeship and not take
the trustees should only be limited with the busi
up any other transactions with the SPV
do not put any bar
Trustee’s transactions with the originator —The Guidelines
the originator may
on the trustee’s transactions with the originator. However, with
se loyalty,
create more conflicts ofinterest. If there is any conflict ofinterest or adver
ty.
thetrust principles will prohibit thetrustee from setting up any such loyal
8.9 The originator shall not support the losses of the SPV except under
the facilities explicitly permitted under these guidelines and shall
also not be liable to meet the recurring expenses of the SPV.
COMMENTS
Origi nator not to suppo rt the losses of the SPV.—Other than providing the
credit enhancements, the originator should not support the losses or expenses of
the SPV in any manner.
This also implies that the originator doing a servicing function should charge
fair servicing fees. If he carries out servicing function without fees, he is support-
ing the expenses of the SPV.
8.10 The securities issued by the SPV shall compulsorily be rated
rating agency registered with SEBI and such rating at any 4
not be more than 6 months old. The credit rating should =

to
and conflict of
a timely manner. Commonality
tweentheSPVandtheratingagency shouldalsobedisclosed
COMMENTS
Securities
of the SPV to be rated. —Commonly. some of the securities
rated. not all. There is
taken
to mean all
securities require rating. as that is just unlikely.
 ( mmmtnds ons the Fer maty, VIR: Cuda Sen 6 244

The Guadelene onby seapises tateng fon Gee scones ~ hoses 0st Les Geren whe
Gat [BIE Bae “ee
S11 The Srv tent inform the moreiver: in Ge wour tien nanet yn x
eat Chase securities are set meeret ond Gat Gus OS MSA regret
deport Sabri A Ce reggie werent trees.

CLINAUMENTS
“ot the leabitiies of the origgactor,. 0.—< told Se mate See He ie
\ECIS Oil OE SONS AE a ee gees oe ies oc
wustee. The word “depos Eeaiies” Saori Se sead os “fas os Exes
S12 A copy A the trust deed aad Gee weewnts oad Some oh x:
A the SPV sieowld be made zvziizble ts te REL B required & Gn
so.

COMMENTS
SPV" s accvents sieowld be available for mepection itera rinse =
gqumcmenms have Seen lad ont 25 2 pat of Ge US Beenie AB These Ga
BEES Gop a cadens Gee REI to call fos ee, ad st ey Geet avy
Sopa Tenge Lt
The Gasdelewes bave sofered 1 miomaisos cies oo fe SV - mw fa
equally. i mot moxc. seouiscant ss Ge ation a
iaemed microsts_ TKS Sic
SPECIAL FEATURES
9. Represestzatsems and Warrants: —45 wiser Geet sis anes we
SPV meay meake representztess aud warrastes comers Goss oe

be requared & eld capstal ovens suck reer eseataens aad warra
aes.
(a) Amy representaties o@ warrants & prorated ants bs wa7 2
forunal written 2oresmnes

COMMENTS
Purpose of representations and warrastess SaaS ac waar
Ges ac common a every saic Gamsacmom As Ge one hes osnatet fe
essets aed sells Gee same. be makes Sessions 2s > Ge vee. ew
guaisty. cac. He seas some wery Gmportall scoesscaias aise on De ores oF
sadere tise the assets. A! detaied os of Seca VSS ES WHET
ses has boem descessed m Vinod Kotha s Secormec Tie Fimo fee
mem Of tae ew Malem
The reoecscstaisorms are Commonly cammames mt Ge Gest of esmrmmest

‘bi The erigmater undertake: apprepeim: Gu: Gikeeace deture

provadine or accepGme any reprssestice we warranty.
 Securtiisalion, el.
Part Chap. 3 RBI's Guidelines on
246 sya ©
COMMENTS
of the
of thi s cl au se is tha t the represenladons
aning
Due diligeace.— The mo 4 pr oper duediligence stud
y.
ou ld beba se d on
originator sh o
lo ns ab ou t the ass ets , an originator typically als
Apast making representa we rs , Cle, Obviously, these
do not re
s abo ut bus ine ss, po
makes oessaution
quire any duc diligence ng sats Of
ta ti on orwa rr anty refers toapexisti
ed by the originator atthe
ic) The re pr es en
t is ca pa bl e ofbe in g ve ri fi
oe ra
time the assets are sold.
COMMENTS
e meaning of this clause is
about existing state of facts. —Th
ent ati on sho uld rela te to an exi sti ng state of fact and not a future
that a repres date
resentation that an asset is good as on
state. For example, there may be a rep
on that an asset will remain good.
of sale, but there cannot be a representati
e ofsale might bea pointer tothe
Sometimes, anevent happening after thesam
ple, if J sell a car now, but the
state of an asset as on the date of sale. For exam date
ct that existed asonthe
Yefect isdiscovered after 3 months, it nay bea defe
contrary is proved, that the
of sale. There might also be a presumption, unless the
y that the representation
defect related to the date of sale. Hence, it is not necessar
isenforc ea
only on bl
the date ofesale.
(d) The representation or warranty is not open-ended and, in
particular, does not relate to the future creditworthiness of
the assets, the performance of the SPV and/or the securities
the SPV issues.
COMMENTS
Representation not to amount to assurance of payment.—Whi
expected to make, and normally does make, a re : tales —nchenaphn
ee een ceria, ney Gai a le eee ot
ySay mp a , seller should not warrant the credit worthiness of

(e) The exercise

~ of a representation
or warranty » requiring an
a an ee ne ee reanes Were

— undertaken within 120

totheeSPV: cand days: of the transfer of assets
— conducted on the same terms and conditions as the
original sate,

COMMENTS
_ Replacement within 120
anyrecourse Onaccount ofBreach ofrepresentation.
THis isarcher
 Comments on the F ebruary, 2006 Guidelin
es Syn. 6 247
ranted and thoughtless stipulation. Many of
the warranties relate to representation
of facts and there is no reason to limit the
time within which such facts come to
light. For example, a representation may relate
to the validity of title or registra-
tion of security interest. This may come to light
only when there is an actual de-
fault in the case. But then, the time limit of 120
days having been lapsed, it is
absolutely illogical why the buyer cannot take action again
st the seller.
(f) An originator that is required to pay damages
for breach of
representation or warranty can do so provided the
agree-
ment to pay damages meets the following conditions:
— the onus of proof for breach of representation
or
warranty remains at all times with the party so alleg-
ing;
— the party alleging the breach serves a written Notice
of Claim on the originator , specifying the basis for
the claim; and
— damages are limited to losses directly incurred as a
result of the breach.
COMMENTS
Damages for breach of representation.—The most common consequent of a
breach of representation or warranty is repurchase by the seller, or a substitution.
(g) An originator should notify RBI (Department of Banking
Supervision) of all instances where it has agreed to replace
assets sold to SPV or pay damages arising out of any repre-
sentation or warranty.
COMMENTS
Information about breach of reps and warranties.—The seriousness shown
about exercise of representations and warranties clause is bit curious, as these are
quite common happenings in the world of securitisation. Out of thousands of as-
sets, the assets that go in default are seen to have one or more indications that
violate the representations and warranties. So, repurchase is not uncommon, but
Guidelines have attached a unique seriousness to the issue.
10. Re-purchase of Assets from SPVs.—An option to repurchase fully
performing assets at the end of the securitisation scheme where re-
sidual value of such assets has, in aggregate, fallen to less than 10%
of the original amount sold to the SPV (“clean up calls’’) could be re-
tained by the originator and would not be construed to constitute ‘ef-
fective control’, provided:
(i) the purchase is conducted at arm’s length, on market terms
and conditions (including price/fee) and is subject to the
originator’s normal credit approval and review processes;
and
(ii) the exercise of the clean-up call is at its discretion.
 tion, ek
elines OF Securitisa
Part t-—Chap. 3- RBI s Guid
48 sya. ©
COMMENTS
ou t cl ons befDe ore. :
teean up»ccall optiion
.
e have di scuss
us se d ab s of
lean up call options.—W ler are seen as a device of controlling the profit
cal wart retained by
the sel inciple. How
l op uo ns mil ita te against the true sale pr
the buyer and theref ore , cal are permitted as an @X
6 device for material profil,
ever, clean up calls, beang not
ted
va l- of -a cc ou nt s- pr ov is io ns?— The clause has permit
What about remo acc ounts provisions (ROAPs), Thi
s is essen-
cal ls, but not rem ova l of s
clean up
fle xib ili ty for the bor row er to switch between variou
tially done to ret ain tch over to 4
For exa mpl e, if a fix ed interest borrower wants to swi
scheme s.
acc oun t 1s re mo ve d fro m the transaciion and replaced by an-
floating rate, the S 140,
er acc oun t. Thi s is a co mm on fea ture, and clearly permitted by FA
oth
trol
opti ons of the orig inat or are proh ibited when they are intended to con
Call the purpose of con-
the prof of it ser. A genuine repurchase other than for
the buy
trolling the assets should be permitted.
EMENT
POLICY ON PROVISION OF CREDIT ENHANC
FACILITIES

LL. Detailed Policy —Credit enhanceme nt facilities include all arrange-

orbing
ments provided to the SPV that could result in a bank abs

t
conditions is not satisfied, the bank providing credit enhancemen
facility will be required to hold capi tal the
eniams Gavaeeedi tapsuaraeea aananaSTee eats,

should be clear from the above policy statement. The Guidelines are not about

io
of the
11.1 Provis

i 7n it
facil
ety WFGGibit fieie Gener GME: Oo aaa
Tore pom antotherfacility provided bythebank. The
 Comments on the F ebruary, 2006 Guid
elines Syn. 6 249
COMMENTS
Written agreement for credit enhancement.
—On reading this and the further
provisions of this Para, it transpires that the
draftsman thought of a credit en-
hancement as some kind of a loan or a guarantee. More often
enhancement is in form of the seller retainin than not, the credit
g the seller’s interest in the asset, or
over-collateralisation. There is no question of
either a written agreement, or
“standards of performance” for such credit enhancem
ents.
11.2 The facility is provided on an ‘arm’s length basis’
on market
terms and conditions, and subjected to the facility
provider’s
normal credit approval and review process.

COMMENTS
Arm’s length basis.—As stated before, the Guidelines seem to
have thought
of some facility such as guarantee, etc. While it is understandable that
credit en-
hancements by third party banks are done on arm’s length basis, credit
enhance-
ments by the originator are a part of the transaction of securitisation; there
is
nothing arms-length about it.
Besides, such enhancements, in case of an originator, being approved by the
normal credit review process of the bank does not make sense. A credit en-
hancement is given to make the transaction happen — there is no way by which
taking a first loss position in a transaction can be approved by the normal credit
underwriting process of a bank.
11.3 Payment of any fee or other income for the facility is not
subordinated or subject to deferral or waiver.

COMMENTS
Subordination.—Except in case of third party enhancements, this clause does
not seem logical at all. In fact, if the credit enhancement is by the originator him-
self, it is unlikely that the payments to him will be senior. It is clear from this
language that the Guidelines seem to have been drafted from the viewpoint of a
third party enhancer.
11.4 The facility is limited to a specified amount and duration.

COMMENTS
Limitation of amount and duration.—That the facility is of a limited amount
is understandable, but it cannot be of a limited duration. In fact, the facility
should extend right until the legal final maturity of the transaction. In fact, this is
what is transparent from the next clause.
11.5 The duration of the facility is limited to the earlier of the
dates on which:
(i) the underlying assets are redeemed;
(ii) all claims connected with the securities issued by the
SPV are paid out; or
 TIOR, OFC.
e ines on SeeOcuUrTISA
RBi's'y GuGuididel
Part }—Chap. 2;
2Sw sya ©

as _ it5 really ly speak

.

is pre tty imn

:
ocu
.
oUs _

_—This clause
. ;

Duration of the facilit been redeemed, there ts

ag wh en all securities have all assets have
ing says lithe. Quite ee em en t to rem ain. Likewise, when
en ha nc
no reason for a credit ain ou
reason Lor secures to rem
been paid off, there is no provider tt
anyrecourse tothefacility
116 There should notbe ual obligations, Imparticular, thete
ved thefixedcontract the
ity pro vid er sh ou ld no tbe ar anyrecurring expenses of
| vit
securitisation.
COMMENTS
expect
al terms.—In general, one may
Limitation of liability to contractu rea son for
ilit ies to be lim ite d to the ir con tra ctual terms, and there is no
allliab the
required to do so, under the terms of
anyone to bear a liability unless one is no um-
use is to ensure that there is
contract. However, the meaning of this cla
implicit support earlier - @ support
plicit support. We have mentioned about e it hurts the reputation
ting becaus
_— be,prevent a transaction from defaul
the ,

a does not have the

Legal opinion as to extent ofliability —Once again, Indi deat Ap
tion of aski ng from ce of
a sour
opinions11.6asenh
legalclau Te
tradi
real ly
nodiffe rent se ,” Sera
by the SPV
issuedties
11.8 The SPV and/or investors in the securi
eng ae feeaten a een Ty PIE
COMMENTS

have men-
nature of the “facility”. As we
tioned before. credit enhancements come Se cre
:
ae
t
; no question of any righ of
the assets. There is

io ne d que
ear sti
lie r on of the investors havi; ng the right ofselec-
tion . We have me nt
ght of investors in the admini-
too that the ri
+elf
 Comments on the February, 2006 Guidelines Syn. 6 Zo1

one — therefore, there is really no scope for any right of selection or alternative
enhancer. In fact, the very next clause says that the credit enhancements are
given at the inception.
11.9 Credit enhancement facility should be provided only at the
initiation of the securitisation transaction.

COMMENTS
At-inception credit support.—External as well as internal credit enhance-
ments are lined up at the inception of the transaction, but one should not think
that the amount of credit enhancement remains constant over the term of the
transaction. In fact, in most sequential paying structures, the amount of enhance-
ment automatically keeps increasing over time.
11.10 The amount of credit enhancement extended at the initiation
of the securitisation transaction should be available to the
SPV during the entire life of the securities issued by the SPV.
The amount of credit enhancement shall be reduced only to
the extent of drawdowns to meet the contingencies arising
out of losses accruing to the SPV or its investors. No portion
of the credit enhancement shall be released to the provider
during the life of the securities issued by the SPV.

COMMENTS
Amount of credit enhancement reduced.—lIn the real structure of a securiti-
sation transaction, what might be reduced is the amount of credit enhancement,
not the percentage. What matters most is the percentage and not the amount. For
instance, if Class A is 90% and Class B is 10%, and Class A is paid off partially,
the amount of Class B still being the same, the percentage has automatically in-
creased. In this case, if the amount of Class B is brought down, it still provides
the same or even higher degree of credit support.
Release of credit enhancement.—This is another mindless stipulation. If the
or sub-
enhancement has come, for example, in the form of either a cash reserve
of the
ordination, it is quite common to provide for periodic reduction in the size
e simulta neously
enhancement. For example, a proportional repayment structur
investments. While
pays down the subordinated investments as it pays senior
providing for propor-
there is nothing wrong in such a structure, a structure not
tional paydown may, in fact, be economically unviable.
t enhancement should
11.11 Any utilization / drawdown of the credi
profit and loss ac-
be immediately written-off by debit to the
count.
COMMENTS
hancements.—Isn’t it quite painful to see
Write off of utilization of credit en credit
rules ? Accounting rules require that the the
the regulators writing accounting losses and in fact should writ e off
ect futur e
enhancement provider should proj
 n, ek
elines On Seourtisatio
Part |—Chap. 3-—- RBI's Guid
252 Syn. ©
ht al the
iue s as su me d in COU TSE ot securitisation) rig
anucipaicd losses (ha bal instru
val ue rul es are app lic able to most financial
far tainly apply),
cepuion. Ahernatively, as at thi s tim e, but impairment rules cer
e in ind ia ac
ments (aot applicabl hav e bee n wri tten off much betore the
los s ma)
the amnount of apprehended
wal drawn down
a fir st los s fac ili ty do es no t provide substantial cover
11.12 When rry a disproportionate shar
e of
eeeeet tossfacility might ca ncement
sibility, # credit enha
wah, In order tolimit this pos
ond loss facility only where:
facility willbedeemed tobea sec
substantial first loss
— it enjoys protection given by a
facility;
s facility has
— itcan be drawn on only after the first los
been completely exhausted;
the first
— itcovers only losses beyond those covered by
and
loss facility;
meet
_ the provider of the first loss facility continues to
its obligations.
teria, it
If the second loss facility does not meet the above cri
will be treated as a first loss facility.
COMMENTS
When is a second loss first loss?—This and the next clause should be read
with the definitions Para 5 (iii). In the definitions, a first loss has been defined as
one which is required to bring the securities to an investment grade rating. The
areeyhenner ym ee me subjectivity to the distinction,
nee eens eReaI Ym Pa laid down in the
above, as to when is a second loss a second loss facility and not first loss
are answered bytheinvestment grade rating given tothe securities. .
11.13 jppmnrantaganer nye sealer yess oh Sk
covers some multiple of historic losses or worst case losses
estimated by simulation or other Thee second tovs
ye Provider shall assess adequacy of first loss facility on
cae Oe nn ae eae Center ShGOCeaneany a wea
six months. The following factors may be reckoned
while conducting the assessment as well as review:
(i) the class and quality of assets held by the SPV;
_ PRE eS
on output of any statistical
models used by banks to
oye

(iv) the types ofactsivietymes eee

cheiid
 Comments on the February, 2006 Guidelines
Syn. 6 253

the quality of the parties providing the first loss facil-

ity; and
(vi) the opinions or rating letters provided by reputable
rating agencies regarding the adequacy of first loss
protection.

COMMENTS
Substantial cover by way of first loss\—The Guidelines have referred to sub-
stantial cover for the second loss facility, failing which it will be treated as first
loss. See our comments above about the relevance of the definition of first loss
facility. The Guidelines have referred to the first loss facility covering several
multiples of expected losses in order to treat the second loss facility as second
loss facility. Expected losses refer to cumulative losses on a static pool under the
base case assumptions, that is, assumptions without applying any stresses. The
Guidelines have casually referred to “some multiple of historic losses or worst
case losses” while there is a dramatic difference between historic losses and
worst case losses. Worst case losses are losses after applying stresses, that is
stressing the underlying assumptions. Historical losses are losses based on his-
torical rates, which is without applying any stresses. Expected losses are losses in
an unstressed scenario.
Ongoing review of first loss.—The Guidelines have referred to an ongoing re-
view of the adequacy of the first loss facility. Does this imply that if the first loss
facility is not treated as adequate due to ongoing performance of the pool, the
second loss facility will be treated as first loss? It may be noted that there is a
significant capital implication due to the second loss facility being treated as first
loss, particularly from the viewpoint of a third party credit enhancer. For in-
stance, even if the rating-based definition of the first loss facility as one required
for investment grade rating is taken, if the second class of securities gets down-
graded to below-investment-grade, does it mean there will be a capital conse-
quence? Under Basel II scenario, rating-based capital consequences are very un-
derstandable. However, under the Guidelines, it wiil be a painful consequence.
12. Treatment of credit enhancements provided by an originator
12.1 Treatment of First Loss Facility: The first loss credit en-
hancement provided by the originator shall be reduced from
capital funds and the deduction shall be capped at the
amount of capital that the bank would have been required to
hold for the full value of the assets, had they not been secu-
ritised. The deduction shall be made 50% from Tier 1 and
50% from Tier 2 capital.
COMMENTS
are two approaches for
First loss exposure of the originator.—Globally, there
for dollar capital, and
the first loss exposure retained by the originator — dollar
former approach, capital is
capital capped to that required for assets. Under the same is
loss exposure, even if the
required for the full extent of retained first
 Securuisation, ek
Part }-—Chap. 3 RBI's Guidelines OF
254 sya ©
od.d Under the se
tise morcond
se ts we re no t se ou ni
the as l required
abo apital required nen the fir st los s cover, or the capita
of
———s the capatal
is = hi gh er
, Th e Gu id el in es ha ve taken the latter ap:
secunuisauon
fos the assets prior to | )
proach. very curious SItua
the next clause will reveal a No cap al all
sombined
ne sfir st los s is capped, while there 1s
rng the probe least an invest
, the second loss piece Is al
dently
for the second loss piece. Evi uc h sa fe rth anlo tsof other assetsbaleOy
1s su re ly sn
1 the an and pi
e, andHattt,
tal against thesecond losspiecl for the ong
* ea ui ri ng fu ll ca
bank. al all, Under Basel II, 100% cap
ita
wit hou t any cap ma ke no sen se
investment grade pieces.
nator is required only for below-
on will rev eal that if a cred it enh ancement is provided by the
A little reflecti related to
gin ato r him sel f, dis tin cti on bet wee n the first and second loss, unless
ori o 9%
Notably, the Guidelines require upt
ratings of the pieces, is meaningless. con tra ry,
ital for the second loss. On the
capital for the first loss and unlimited cap
d together, as a first loss piece, by the
if the first and second loss pieces are hel
Inother words, it does notmake
originator, thecapital requirement is only 9%. subordinated interest into first
any sense for the originator tosplit his retained
made to gain capi-
In common securitisation transactions, the distinction is
anine pieces. As
tal arbitrage due to lower risk weights for higher rated mezz and rather, penalize
rage,
the guidelines do not allow for any such capital arbit
em of the originator, there is no reason for such distinction to happen
at al .
t
12.2 Treatment of Second Loss Facility: The second loss credi
en ha provi
nc ded by
em the origi
en nator
t shall be reduc ed
from capital funds to the full exten t. The deduc tion shall be
made 50% from Tier 1 and 50% from Tier 2 capital.
COMMENTS
Second loss piece held by the originator.—See our comments above. Where
thereareonlytwoclasses ofsecurities, we donotseeanyreason toclassify the
retamed lower class into a first loss component and a second loss component —so
the provision of this clause will remain largely inconsequential.
13. Treatment of credit enhancements provided by third party
 Comments on the February, 2006 Guidelines
Syn. 6 255
guidelines too. Note that there is no cap as regards the capital that would have
been required had risk-weighted capital norms been applied to the whole asset.
13.2 Treatment of Second Loss Facility: The second loss credit
enhancement shall be treated as a direct credit substitute
with a 100 per cent credit conversion factor and a 100 % risk
weight covering the amount of the facility.
COMMENTS
Second loss piece held by third parties.—It is quite clear that the Guidelines
have envisaged the second loss facility as an unfunded facility, similar to guaran-
tees, because the Guidelines have talked about a credit conversion factor (CCF).
CCF is applicable in case of off-balance sheet exposures. As we have reiterated
several times here, a mezzanine investment in a securitisation transaction is also
a second loss facility.
POLICY ON PROVISION OF LIQUIDITY FACILITIES
14. Detailed Policy on provision of liquidity support.—A liquidity facil-
ity is provided to help smoothen the timing differences faced by the
SPV between the receipt of cash flows from the underlying assets
and the payments to be made to investors. A liquidity facility should
meet the following conditions to guard against the possibility of the
facility functioning as a form of credit enhancement and/ or credit
support. In case the facility fails to meet any of these conditions, it
will be regarded as serving the economic purpose of credit enhance-
ment and the liquidity facility provided by a third party shall be
treated as a first loss facility and the liquidity facility provided by the
originator shall be treated as a second loss facility.
COMMENTS
Liquidity enhancements and credit enhancements.—Liquidity enhance-
ments are different from credit enhancements, as a liquidity enhancer does not
take the credit risk of the assets. There is nothing uncommon about liquidity en-
hancements. Most banking products provide liquidity enhancements to entitles.
Therefore, there should be nothing to worry about in case of liquidity enhance-
en-
ments, except that, a liquidity enhancements should not tantamount to credit
ensure that what looks like a
hancement. The stipulations below are designed to
nt.
liquidity enhancer does not, in fact, serve the purpose of credit enhanceme
above.
14.1 All conditions specified in paragraphs 11.1 to 11.8
COMMENTS
our comments under the respec-
Conditions of liquidity enhancements.—See
tive clauses above.
The securitised assets are Ccovered
by a substantial first loss
14.2
credit enhancement.
 ation, @tc.
'y Guidelines on Securitis
Sya. 6 Part | —Chap. 3— RBI
256
COMMENTS
order
for liq uidity enhancement.—!1)
‘redit eahaacement vid er doe s nol get willy-nilly caught in
credit
vi di ty pro
om that the sa the re are sufficient credit enha
ncements. In
ess ary to ens ure tha t the
met it is nec
en t of the liq uid ity pro vid er ts normally a senior em 1p
fact, the reimbursem on This automatically ensures cre
dit enhance
wat erf all of the tra nsa cti er
cash flo w
uid ity pro vid er. In oth er wor ds, every investor Is a credit enhanc
ment for the liq
for the liquidity provider.
.3 Th e do cu me nt at io n fo r th e fac ility must clearly define the
14 ility may or may not be
, cireumstances under which the fac
drawn on.
COMMENTS
ntially, a liquidity facility is to be
When can liquidity be tapped.—Esse
shflows. If the transaction has an
tapped whenever there are deficiencies in the ca s are
uid ity so ur ce , fo r ex am pl e, a ca sh reserve, the internal source
internal liq
normally used first.
of being drawn only where
14.4 The facility shouldt be capablenon-
there is a sufficien level of defaulted assets to cover
drawings, or the full amount of assets that may turn non-
performing are covered by a substantial credit enhancement.
COMMENTS
Sufficiency of non-defaulted assets—The typical conditions put in by liquid-
ky provider a>salir > ovesaanes-seaahes PahangIona ten®banefe
right to stop releasin gthe asset covers falls, or there are adverse material
credit if
se,
changes. Likewi the liquidity provider should have the ability to withdraw the
facility if the defaults have risen above a particular level. The extent of credit
enhancement is not a problem for the liquidity provider as he has sufficient en-
hancement from the investors, but the real point of worry for the liquidity pro-
vider istheilliquidity ofdefaulted aset.
14.5 The facility shall not bedrawn for the purpose of
iitdenh
cred
(a) prov gnt:
neme
ianc
(b) cove lossri the SPV;
es of ng
permanen
as ain gt revolving f ane
(c) serv
(d) covering any loss es incurreddowin the undertying pool of
exposures prio r to a dra w n

Hest y COMMENTS
What aa liquidit
be—We have noted above that the li-
- factiny dhenta ae ee eet
vances provided in
 Comments on the February, 2006 Guidelines
Syn. 6 257
month’s collections, but they are used in the next month as well
so as never to
actually end up in a recovery.
14.6 The liquidity facility should not be available for (a) meeting
recurring expenses of securitisation; (b) funding acquisition
of additional assets by the SPV; (c) funding the final sched-
uled repayment of investors and (d) funding breach of war-
ranties.

COMMENTS
_What the liquidity facility should not finance.—The use of the liquidity fa-
cility is essentially for paying investors in case of temporary shortfalls. The li-
quidity provider cannot be making the final payment as there is no chance of re-
covering the liquidity advance in case of final shortfall.
14.7 Funding should be provided to SPV and not directly to the
investors.

COMMENTS
Funding should be to investors.—The liquidity facilitator provides an ad-
vance to the SPV and has the first right to recover the same from the next
month’s collections. Hence, question of funding investors does not arise, though
the investors are the direct beneficiaries of the advance provided.
14.8 When the liquidity facility has been drawn the facility pro-
vider shall have a priority of claim over the future cash flows
from the underlying assets, which will be senior to the claims
of the seniormost investor.

COMMENTS
Liquidity provider’s place in the waterfall.—As we just mentioned, the li-
quidity provider has the right to reimburse himself from the succeeding cash-
flows. Normally, reimbursement of the liquidity facilitator is one of the first
items in the waterfall.
14.9 When the originator is providing the liquidity facility, an in-
dependent third party, other than the originator’s group en-
tities, should co-provide at least 25% of the liquidity facility
that shall be drawn and repaid on a pro-rata basis. The
originator must not be liable to meet any shortfall in liquidity
support provided by the independent party. During the ini-
tial phase, a bank may provide the full amount of a liquidity
to
facility on the basis that it will find an independent party
originator
participate in the facility as provided above. The
third
will have three months to locate such independent
party.
 Sex UPTASaTiOn, ete
ysGuidelines on JeC
sya © Part | —Chap. 3— RBI sG
258
COMMENTS

most CoN
qui te out -of -rea lit req uir ement, Liquidity facilities are
strange
CP m e x whi ch do not exi st in India today, But expecuing
mon iA _- of AB ty, will
le liq uid ity faci lity , bot h fro m the originator and from 4 third par
a multip
be an unrealistic expectation.
l Il.
There is no such requirement under Base
Guidelines, even servicer advances
in addition, based on a strict reading of the e is no question of having
ther
will be treated as a liquidity facility, However,
well.
such facility backed by a third party facility as
1S. Treaof tm en
liquidity tity
facil
extent
15.1 The commitment to provide liquidity facility, to the act
not drawn would be an off- balance sheet item and attr
100% credit conversion factor as well as 100 % risk weight.
The extent to which the commitment becomes a funded facil-
ity, it would attract 100 % risk weight.
COMMENTS
Conversion ot iiquidity facility —Credit conversion factor is, obviously, ap-
plicable only to the extent of unfunded commitment of the liquidity facilitator.
That is to say, if the facilitator has committed to provide a total funding of upto
Rs | crore, but the actual amount drawn up by the SPV is only Rs 10 lacs, the
balance Rs. 90 lacs will be converted as an equivalent of an on-balance sheet as-
set by applying the Credit Conversion Factor (CCP).
Itis not understandable as to how the CCF could be 100%. With the precondi-

cama moana aa , Lon COMMER OF

essen
as on-balance sheet assets by applying
are
CCF of 100%
ee ee OF ender Basel Ilis25% fora facility upto 1 year and50% for
Comments on the February, 2006 Guidelines Syn. 6 259

for more than 90 days. This will also make any liquidity facility for a securitisa-
tion transaction completely impractical. The only way out of this is an evergreen-
ing device whereby the facilitator recovers the facility from out of the next
month’s collections, and then provides the facility again.
POLICY ON PROVISION OF UNDERWRITING FACILITIES
16. General Policy.—An originator or a third-party service provider may
act as an underwriter for the issue of securities by SPV and treat the fa-
cility as an underwriting facility for capital adequacy purposes subject
to the following conditions. In case any of the conditions is not satisfied,
the facility will be considered as a credit enhancement and treated as a
first loss facility when provided by a third party and a second loss facil-
ity when provided by an originator.

COMMENTS
When underwriting becomes a credit enhancement.—The purpose of the
above stipulation is that banks do not use underwriting in the guise of buying up
subordinated pieces of securitisation paper. The clause is applicable without dis-
tinction to both senior and junior pieces. While capital consequences are applica-
ble to first loss, second loss and senior pieces, there is no reason to have specific
consequences for securities bought as a result of underwriting commitment.
16.1 All conditions specified in paragraphs 11.1 to 11.8 above.
COMMENTS
Conditions for liquidity facilities—Please see our comments below the rele-
vant clauses above.
16.2 The underwriting is exercisable only when the SPV cannot
issue securities into the market at a price equal to or above
the benchmark predetermined in the underwriting agree-
ment.

COMMENTS
is “applicable” but the
When is underwriting exercisable.—The word above
nt.
meaning is, perhaps, evoking of underwriting commitme
and to termi-
16.3 The bank has the ability to withhold payment
rrence of speci-
nate the facility, if necessary, upon the occu
or defaults on as-
fied events (e.g. material adverse changes
sets above a specified level); and
COMMENTS
s il
ility—Termination of the vrai
Termination of underwriting fac
of adv ers e mate rial cha nge 1s understandable, but cai gpa i
cility in case only a Pe dae
loss es in the asse ts sou nds strange. The pool is commonly the dé
on
date of issu ance , and is gen erally fully performing as on
pool as on the
 ete.
ines an SeCUPHINAHON,
Part }-—Chap. 3-— RBIS Guidel
La) sya ©
ly based
al of anderwrunhy tacili
of issue of secumties. The quesuan ol wathdraw
s does not arise
on losses on the secure ,
The re is a mar ket for the type of securities underwritten
16.4
COMMENTS
the existence
exi ste nce of a mar ket .— Ihi s clause is purely innECUOUs — if not
The
mea nt a rea dy dem and fol the securities, the underwriting was
of a market riting was
n, as noted above, that the underw
required at all. Lt ought probably mea do not have any market acceptabil.
as a gui se to lap up sec uri tie s whi ch
not used
ity in the given situalions.
originator miaty under-
17.1 Underwriting by an originator.—An
es issued by the
write only investment grade senior securiti
ough underwrit-
SPV. The holdings of securities devolved thr
th period
ing should besold tothird parties within three-mon
limit,
following the acquisition. During the stipulated time
the total outstanding amount of devolved securities will be
to a risk weight of 100 per cent. In case of failure to
g in ex-
off-load within the stipulated time limit, any holdin

COMMENTS
vit consequences for the originator.—The
Capital — originator
origi may provide un-
Saat end ukaaniok cidiis danas hiFirst OFafi,tetonigiatior thay
> ne y investment Se akams bad As clear from the guidelines, even
vestment
; ps sear pape- not be retained in excess of 10%. If so re-
The ' Pi’ '
a whole idea of the originator facing capital deduction in case of holding of
pr cence ey aga i ayo >mp Under Basel II, the capi
re ema a for the originator holding senior securities are not differen
aah yone obmgcioes senior securities. For example, an originator buyi
ime bet0k an, needs to provide a 20% risk weight. Under the Guidelines, i
weight, which is completely impractical. ie
Comments on the February, 2006 Guidelines Syn. 6 261

which are below investment grade will be deducted from

capital at 50% from Tier 1 and 50% from Tier 2.

COMMENTS
Underwriting by third parties.—There is no difference between the capital
consequences for securities held by third parties, whether due to underwriting
commitment or otherwise.
POLICY ON PROVISION OF SERVICES
18. A servicing bank administers or services the securitised assets.
Hence, it should not have any reputational obligation to support any
losses incurred by the SPV and should be able to demonstrate this to
the investors. A bank performing the role of a service provider for a
proprietary or a third-party securitisation transaction should ensure
that the following conditions are fulfilled. Where the following condi-
tions are not met, the service provider may be deemed as providing
liquidity facility to the SPV or investors and treated accordingly for
capital adequacy purpose.

COMMENTS
Servicing facilities—The servicing of the assets by the originator is almost a
necessary part of the securitisation transaction. Servicer does not undertake an
obligation to repay, but practically, the servicer is a very important functionary in
the process of securitisation.
18.1 All conditions specified in paragraphs 11.1 to 11.8 above.
COMMENTS
Conditions for servicing facilities—See our comments under the relevant
paras above.
18.2 The service provider should be under no obligation to remit
funds to the SPV or investors until it has received funds gen-
erated from the underlying assets except where it is the pro-
vider of an eligible liquidity facility.
COMMENTS
an agent and does not ob-
Servicer’s obligation to pay.—The servicer is only
most transactions, servicing ad-
ligate himself to pay. However, in reality, in
des regular advances for the
vances is a common feature. The servicer provi
liquidity support as also eliminat-
monthly collections,’ thus providing necessary
The para above should not be seen
ing the risk of commingling of the cashflows.
as ruling out servicer advances.
i provid
18.3 The service
i trust, on be half of the in-
i er shall hold in
m the underlying and
vestors, the cash flows arising fro
 etc.
3— RB I 'y Gu id el in es an Seourlinahon,
Syn. 6 Part |} —Chap.
262
eir own
d co -m in gl in g of th ese cash Mows with th
should avoi
cash flows.
COMMENTS
:
k. —C om mi ng li ng ris k ref ers to the risk that the collec
Avoid commingling ris of the transaction gel commingled
with his
ser vic er On beh alf r,
uons done by the SP V onl y has a claim against the originato
the ref ore , the
own collections, and analysis of
cas hfl ows . Whi le co mm in gl ing risk 1s emphasized in legal
aot on the Afier all, there
avoid a degree of commingling.
the transaction, it is impossible to by the
som e tim e gap bet wee n the dat e of collection of the cashflows
might be
SPV's bank account.
originator, andtheir placement into the
the Securities issued by SPV
19, Prudential Norms for Investment in
ld be in the nature of
19.1 As the securities issued by SPVs wou urities
securities, banks’ investment in these sec
e to non-SLR
would attract all prudential norms applicabl
e.
investments prescribed by RBI from time to tim
COMMENTS
me
securities. —Since investin nt
secu riti-
one fee ee
he is a vol unt ary in vestme thent ous regulauions of
vari,
yee ymap in ts. : sn
the RBI on non-SLR investments apply to such investmen
19.2 Limits on investmert in securities by the originator
The aggregate investment by the
pi dle wert 7 aml
COMMENTS
Limits
ediouah on investment
gun door. by the originator —Please see our comments under the
19.3 Exposure norms for investment in the PTCs—The counter-

e
Whis the e
rexp osure
t einvestmems inse-
corities ofanoriginator isnotactually an cenies tha th
oS en oe . but in the
assets. Itshould be seen asin
 Comments on the February, 2006 Guidelines
Syn. 6 263
cant borrowers in the pool, the same should be considered in workin
g out con-
centration limits also.
19.4 Income recognition and provisioning norms for investors in
the PTCs
As the securities are expected to be limited-tenor, interest
bearing debt instruments, the income on the securities may
normally be recognised on accrual basis. However, if the in-
come (or even the redemption amount) on securities remains
in arrears for more than 90 days, any future income should
be recognised only on realisation and any unrealised income
recognised on accrual basis should be reversed. In case of
pendency of dues on the securities appropriate provisions for
the diminution in value of the securities on account of such
overdues should also be made, as already envisaged in the ex-
tant RBI norms for classification and valuation of investment
by the banks.

COMMENTS
Pass through certificates as debt securities.—A statement has casually been
made in the above para that the pass through certificates issued by the SPV are
interest being debt securities. This is, in context, only a casual statement. Actu-
ally, there is a basic difference between pass through certificates and bonds —
pass through certificates are ownership type instruments and are not debt securi-
ties. They also do not carry a rate of interest — they have a pass through rate, but
that is not interest. However, as the purpose of the above para is to provide for
NPA treatment, this statement may not be taken seriously.
When are asset-backed securities non-performing.—Like any other instru-
ment, asset backed securities will be treated as non-performing if income thereon
has not been distributed for 90 days. The Guidelines have completely missed the
write off of the principal value of asset backed securities, which may happen be-
cause of distribution of losses. While interest may be paid, the principal may suf-
fer a write down. International bodies have spent a lot of time defining when is
there a need to write off asset-backed securities. For example, International
Swaps and Derivatives Association (ISDA) has come up very detailed rules as to
recognition of defaults on asset backed securities,
20. Accounting Treatment of the Securitisation Transactions
20.1 Accounting in the books of the originator
In terms of these guidelines banks can sell assets to SPV only
d
on cash basis and the sale consideration should be receive
Hence, any
not later than the transfer of the asset to the SPV.
ted ac-
loss arising on account of the sale should be accoun
for the
cordingly and reflected in the Profit & Loss account
period during which the sale is effected and any
should be amor-
profit/premium arising on account of sale
 Securuisahon, eh.
:> RB » Cawidelines OF
P wt Chap.
Beod »a ©
2?
esocurisies innned or anineinnwed
sed overtietiteofwh
for de-
~uritised assets quality
iginator, the n-
0... i ome thebooks ofthe or l
e ex pe ns es in cu rr ed on the transaction, say, lega
Lir :
ed atthetime ofChe Gans
feos, etc,, should beexpens
deferred
action and should not be
assets do not ~ for de-
~
(i) Where thesecurities
a
treas at ing.
rowd
bore

COMMENTS
it is neitneither
To mentioned that itis
earlier
RBI writing accounting rules.—We have
the domain of accounting standard
necessary nor proper for a regular to step into of Chartered
the Institute
setters and write accounting rules, particularly when
Accountants of India already has relevant rules.
and FAS,
Amoritisation of gain on sale—Accounting standards, both IAS
provide for recognition of gains on sale immediately and not by way of amortiza-
tion. The RBI has taken the unexpecied measure of requiring banks to amortise
the profit. This might take away one of the major incentives of banks to securitise
their assets. A whole loan transfer may work much better than a securitisation.
20.2 The accounting treatment of the securitisation transactions
in the books of originators, SPV and investors in securities
will be as per the guidance note issued by the ICAI with ref-
erence to those aspects not specifically covered in these
guidelines.

COMMENTS
. RBI, and if not, the ICAI—In plain English,‘ this rule means, the
Follow the
ICAI's guidance note has been overridden by the RBI by making its own rules
The ICA's rules arerelevant only where the RBI is silent
21. Disclosures
21.1 Disclosures
to be made by the SPV/Trustee

terest including in-

derlying instruments, details of
derlying asset poolanditsperformance history, in-
Comments on the February, 2006 Guidelines
Syn. 6 265

(ii) Investor should be informed in writing that:

(a) their investments do not represent deposits or
other liabilities of the originator, servicer,
SPV or the trustee, and that they are not in-
sured;
(b) the trustee / originator / servicer / SPV does
not guarantee the capital value of securities
and/or performance of the securities issued,
or collectability of receivables pool; and
(c) their investments can be subject to invest-
ment risk, including prepayment risk, inter-
est rate risk, credit risk, possible delays in re-
payment and loss of income and principal in-
vested.
(iii) The SPV/trustee should provide continuing disclo-
sures by way of a Disclosure Memorandum, signed
and certified for correctness of information contained
therein jointly by the servicer and the trustee, and
addressed to each securities holder individually
through registered post/email/courier/fax at periodic
intervals (maximum 6 months or more frequent). In
case the securities holders are more than 100 in
number then the memorandum may also be pub-
lished in a national financial daily newspaper. In ad-
dition to the above, data may be made available on
websites of the SPV/trustee. The contents of the
memorandum would be as under:
(a) collection summary of previous collection pe-
riod;
(b) asset pool behaviour - delinquencies, losses,
prepayment etc. with details;
(c) drawals from credit enhancements;
(d) distribution summary:
(i) in respect of principal and interest to
each class of security holders;
(ii) in respect of servicing and admini-
stration fee, trusteeship fee etc;
(e) payments in arrears;
any mi-
(f) current rating of the securities and
gration of rating during the period; and
relevant to
(g) any other material / information
the performance of the pool.
 ec.
. j 3> RB I' s Gu id el ines an de: wrisalion,
ult
Par }—Chap

re ’ . .

i theterms ofthe agreeme nt, effected af-

. of dis-
the transfer ofassets tothe SPV, as# part
veeures toallthe Quartersly/Half
participants atinvestor 1
vearly intervals. Theauthorisation of
ofissuanc e OFse-
rect may beobtained atthetime
aobtain saptineacknowl read andtrom
in4
under
(vy) SPV should s have edgment
stood the required disclosures.
to be made
21.2 Disclo sur es or
by the originat
The originator should make the following disclosures, as
position for two
notes toaccounts, presenting a comparative
years:
assets secu-
(i) total number and book value of loan
ritised;
assets
(ii) sale consideration received for the securitised
and gain/loss on sale on account of securitisation; and

In addition to the above balance sheet disclosures, originating banks of the se-
curitisation transactions should provide disclosures to the Audit Sub-Committee
of their Board, on quarterly basis, as per the format prescribed in the Attachment.
ATTACHMENT
Format of Quarterly Reporting to the Audit Sub Committee of the Board by
originating banks of the Securitisation Transactions
1. Name of the originator:
2. Name and natureof SPV & detailsof relationship with originator
and
ow providers (including constitution and shareholding pattern of

3. Descri
and naturepti
of asset transferr
on ed:
Carrying cost of assets transferred
earn bates and percentage of such assets to total
. Method of transfer
of assets:
Amount and nature ofconsideration
received:
Objects of the securitisation
offer:
- Amount
onwtnw and nature of credit enhancement and ity es provided
(give details
by the originator _ other faciliti
duration, tories ahdcondidonsy. facility provided viz., nature, amount,
Comments on the Revised Guidelines for Banks Syn. 7 267

9. Information regarding third party service providers (e.g. credit enhance-

ment, liquidity Support, servicing of assets, etc.) giving the details, facil-
ity-wise, viz. name & address of the provider, amount, duration and
terms and conditions of the facility:
10. CRAR of transferor: Before transfer After transfer
Tier I
Tier I
Fi Type and classes of securities issued by SPV with ratings, if any, of each
class of security, assigned by a rating agency:
|
ue Name and address of holders of 5% or more of securities (if available):
13. Investment by the originator in the securitised paper, issuer wise:
Name of the issuer Class_of securityNo. of securities heldTotal
amount
14. Details of hedging arrangements (IRS/ FRAs), if any, giving amount
/maturity date, name of counter parties, etc.:
Ty. Brief description (including diagrammatic representation of the structure)
of the scheme denoting cash and process flows):
16. Date and method of termination of the scheme including mopping up of
remaining assets:

7. COMMENTS ON THE REVISED GUIDELINES FOR

BANKS
Presented herein below is the text of the revised guidelines for banks and
commentary thereon. The text of the revised guidelines is in bold, while the
comments are in plain text.

The Circular

RBI/2011-12/540
DBOD.No.BP.BC-103/21.04.177/2011-12
May 07, 2012

utive Officer of
The Chairman and Managing Director / Chief Exec
All Scheduled Commercial Banks
|
(Excluding RRBs and Local Area Banks) and
Institutions
All-India Term Lending and Refinancing
BI)
(Exim Bank, NABARD, NHB and SID
 et.
. 3— RB I' s Gu id el in es on Securitisation,
Part t—Chap
268 Sya.7

ctions
s onSecuritisation Transa
Revisions totheGuideline Statement 2012-13
107 of the Monetary Policy on.
Please refer to the
17, 201 2 on iss uan ce of fin al guidelines on securitisati
announced on April ord erl y and healthy securitisation ma
rket and en-
dev elo pin g an I
With a vie w to
ent of the int ere sts of the originators and the investors,
suring greater ali gnm snisimuny
ae re d nec ess aty 10 pre scr ibe a minimum lock-in-period «and
ig nks and
ans originated andpurchased byba
was consiiereria for securitised lo ation
s. Acc ord ing ly, a dis cus sio n pap er and draft guidelines on securitis ng
NBFC for public comments. After consid
eri
transactions were issued in April 2010 eni ng pe-
fee dba ck rec eiv ed an d int ern ati onal developments during the interv
the
ed from various stakeholdersth ,e
DOL. Taking into account comments receiv
losed in Annex. These guidelines
guidelines have now been finalised and are enc ugh direct assignment of
‘iso cover prudential treatment oftransfer ofassets thro
cash flows and the underlying securitie any.
ifs,

3. All other guidelines on securitisation of assets including those contained in

our ‘Master Circular on New Capital Adequacy Framework’ dated
remain unchanged. . ” a

Yours faithfully,

(Deepak Singhal)
Chief General Manager-in-Charge

Encl.: as above

COMMENTS

estagr
s ty sta
ByAsecle ers cular, allother guidel
arl ted inpar aph 3 oftheCir
will remain unchanged. Therefore, theF ne a
sation ofassets
in
 Comments on the Revised Guidelines for Banks
Syn. 7 269
revised Guidelines will constitute a new regulatory measur
e in itself, since the
2006 Guidelines do not cover direct assignments.
At the same time, it should be noted that in case of any inconsistency,
the re-
vised Guidelines will prevail over 2006 Guidelines. This is clear from the
fact
that the 2012 have been referred to as the Revised Guidelines, and
para 3 of the
covering letter states that all other guidelines including those in the Master Circu-
lar shall prevail.

REVISIONSTOTHEGUIDELINESON
TRANSFEROFASSETSTHROUGH SECURITISA-
TIONANDDIRECTASSIGNMENT OF CASH FLOWS

INTRODUCTION

Securitisation involves pooling of homogeneous assets and the subsequent

sale of the cash flows from these asset pools to investors. These curitisation
marketis primarily intended to redistribute the credit risk away from the
originators to a wide spectrum of investors who can bear the risk, thus aid-
ing financial stability and provide an additionals our ceoffunding. There
cent crisis in the credit markets has called into question the desirability of
certain aspects of securitisation activity as well as of many elements of
the‘originate to distribute’business model, because of their possible influ-
ence on originators’ incentives and the potential misalignment of interests of
the originators and investors. While the securitisation framework in India
has been reasonably prudent, certain imprudent practices have reportedly
developed like origination of loans with the sole intention of immediate secu-
ritisation and securitisation of tranches of project loans even before the total
disbursementis complete, thereby passing on the project implementation
risk to investors.

With a view to developing an orderly and healthy securitisation market, to

ensure greater alignment of the interests of the originators and the investors
as also to encourage the development of these curitisation activity in a man-
ner consistent with the aforesaid objectives, several proposals for post-crisis
reform are being considered internationally.Central to this is the idea that
a
originators should retain a portion of each securitisation originated, as
of
mechanism to better align incentives and ensure more effective screening
prior to securiti-
loans. In addition, a minimum period of retention of loans
investors regarding
sation is also considered desirable, to give comfort to the
in view the above
the due diligence exercised by the originators. Keeping
accounts, guidelines have
objectives and the international work on these Mini-
Holding Period (MHP) and
been formulated regarding the Minimum
mum Retention Requirement (MRR).
 , etc
3- RB I' s Gu id el in es on Securitisation
Part Chap.

COMMENTS

al i
wit t h h i
int ern ati ona l ris k retention requirements. 3
is do he the theme of global Foe ropayon
objectivehon
ide line . pager.
Guidelines
igi nate -to-distribute m came un nd
the sub pri me cris is, as the “or
cae the game
Therefore - the origin ators should have @ ‘skin in
pad
c .

.
"
in
the Gui del ine s is “misalignment of incentives”.
Another | _— 1 international regulations, Essen-
nen 1s we re nt = recu rrin g
This capeee thedavedtors,
ots
interests oftheoriginator and
lally itmeans conflict between

eantenety also gi a background of the MHP requirement, which

ble practices intheIn-
ae eee mernationally -references totheundesira
dian market is notable from this perspective.
Mean in
of secur g
itisa tion:
ondescribing the overall ob-
Though the focus oftheintroductory paragraph is
seoursiaation. « he
revisions, theparastartsbywritingthemeaning of
jectiveof

sale. Pooling simply implies that several assets, sharing some risk attributes, are
pooled together and sold. Pooling of assets, and their sale, cannot be the essence
of securitisation. Securitisation, as may be observed literally by the word, is
transformation of a pool of assets into securities, so that the securities are paid off
from out of the cashflows of the pool, without relying on the credit of the seller.
Second. the definition wrongly makes reference to subsequent sale of cash-
flows to investors. There is no sale of cashflows in the pool of assets to the inves-
tors. The pool of assets remains with the SPV - the SPV only sells or issues the
securities representing either beneficial interest in, or debt backed by, such cash-

Gb
‘Cautinnet,; Cnionn,. pnathe wiatennk
the problem with a
eeeam
instrument site |
wong orpartiallycorrectstatementis thatsechfrewed
nesae,
eseteeetieee

2B. betp
bis
-/
ore/pFe
abljoint26
wwpdt, (accessed on 3 September, 2013). page 13
onwards.
 Comments on the Revised Guidelines for Banks
Syn. 7 271
the formof a definition) is widely referred to, by users and sometimes
even by
Courts, and may even become the basis for market practices.
In practical terms, the definition of “securitisation” as stated in 2006 Guide-
lines will continue to be in force. The same has been discussed earlier in “Com-
ments on the February, 2006 Guidelines”’.
Subsequent sale of cashflows to investors:
Again, the expression “subsequent sale of cashflows to investors” is actually a
mistaken expression. There is no sale of cashflows that happens from the SPV to
the investors. The SPV issues its own securities having loans as underlying. The
cashflows from the loans move along with the loans — as the loans are sold; the
cashflows naturally come along with the loans. The loans as well as the cash-
flows stay with the SPV — they are not sold from there to the investors.
Homogenous assets:
The expression “homogenous assets” should not be stretched beyond reason-
able limits. For example- all car loans are homogenous assets; one cannot say
that new car loans and old car loans are two different pools. In general, assets
that share risk attributes are said to be homogenous assets. Reliance must be
placed on the risk management systems of the originator as to what assets are
pooled together and managed alike. In essence, therefore, assets which have
same/similar collateral, which are originated under a common underwriting pol-
icy, and which are managed as a single pool by originators should be treated as
homogenous.
The idea of homogeneity cannot be taken to the underlying asset — for example,
in case of funding of plant and machinery or office equipment, none of the under-
lying assets are expected to be homogenous.
See also notes below.
SECTION A

GUIDELINES ON SECURITISATION OF STANDARD ASSETS

1. REQUIREMENTS TO BE MET BY THE ORIGINATING BANKS

1.1 Assets Eligible for Securitisation
In a single securitisation transaction, the underlying assets
s pool
should represent the debt obligations of a homogeneou
balan ce sheet
of obligors”” Subject to this condition, all on-

gh OD cidsber ee ea

tizations do not involve any

the Guidelines: The single as set securi
29. This note is from the text of tent with the economic objec-
of risk, and therefore, are n ot consis
credit tranching and redistribution
tives of securitisation.
 etc.
ines on Securitisation,
|—Chap. 3— RBI's Guidel
3 4 =
> a Part

Underlying assets

: at
by banks dated |
ification, Valuation and Operation of Investment Portfolio
july. 2011". In the said Master Circular, under Para 2.1(vii), the bonds are
treated in the nature of advance when:
e
l. The debenture/bond is issued as part of the proposal for project financ
and the tenure of the debenture is for a period of three years and above,
or
The debenture/bond is issued as part of the proposal for working capital
finance and the tenure of the debenture/ bond is Jess than a period of one
year. and
2. The bank has a significant stake i.c.10% or more in the issue; and
3. The issue is part of a private placement, i.e. the borrower has
the bank/FI and not part of a public issue where the has sub-
scribed in response to an invitation.

these guidelines the term loans/assets

have been used
ofMaster Crodlen Prose, Hands which areinthenature ofadvances asdefined in 2.1(vii)
echo by tanksdatcd1" TI Classification, Valuation and Operation
3. dsforagricul seri theGoidelines: Loans withtenorwpto24 extendedto
cake ~ defined by ——
by Rural and ‘in eeanaee
are due onty on and trade receivables with
tenor up to 12 months
Sal becantheirborrowers willbeeligible for
, only those
millGn can neforsecuritization where a borrower (incase ofagricultural
loansy/a
drawee ofthe
(oneloan.in case ofaenctvables) hasfully repaid theentire amount oflast two loans/receivabiles
aeaeen. agricultaral loans with maturity extending beyond one yearjwithin
90 days of
32. See the Master Circular here
http:/Mwrerw
chiore im/scripts/BS
 Comments on the Revised Guidelines for Banks
Syn. 7 273

““Homogenous pool of obligors”’

See above for comments on the meaning of “homogenous”. The use of the ex-
pression “homogenous pool of obligors” is perhaps a casual language — it is not
obligors who are homogenous. It is assets which are. This para also means to say,
what is being securitised must be a pool — single assets/exposures cannot be secu-
ritised.
However, repeated stress has been laid on the term “homogenous’’, but it is dif-
ficult to stretch the reference beyond a certain point. Every homogenous pool is
intrinsically heterogeneous, constituted by diversified assets. The extent of diver-
sification in the pool is the measure of heterogeneity. For example, a pool of
residential mortgage loans is a homogenous pool, but that does not mean all bor-
rowers are alike.
Homogenous pool contains same type of collateral, e.g. car loans, home loans,
corporate loans, etc. and indicate the loans sharing similar risk characteristics
from viewpoint of internal classification by the bank.
On balance sheet standard assets
Only on-balance sheet assets may be securitised. The reference to on-balance
sheet obviously implies the balance sheet of the originator - that is, the exposure
in question must be an on-balance sheet exposure and not an off-balance sheet
one.

In addition, the exposure must be standard. As regards securitisation of non-

performing assets, see below.
Transfer of non-performing assets:
The Guidelines contemplate on securitisation of performing assets only; trans-
fers of non-performing assets are covered by separate guidelines. The Guidelines
were originally propounded in July 2005 and are subsequently subsumed in mas-
ter circulars issued in the first week of July every year. Certain restructured loans
are treated as sub-standard. Hence, such loans also will not be eligible for secu-
ritisation under these Guidelines.
In the past, several transactions of securitisation or portfolio sales have taken
place where the pool consists of a mix of performing and non-performing loans.
Question arises — is such a sale permissible under the Guidelines? As we discuss
can or
later, the Guidelines cannot be taken as setting a regulatory rule of what
capital relief — if
cannot be done. The Guidelines explicitly make a reference to
why such a sale ts
the parties do not desire any capital relief, there is no reason
not permissible.
The excluded assets
Single Loans
rlying assets should represent the
Single loans cannot be securitise d-the unde
of obligors. In other words, a single loan
debt obligations of a homogenous p ool
 Securuisanon, ele.
Part |—C hap. 3 RBI's Guidelines on
274 sya?
ct as-
gle joa n ma y be su bject matter ol a dire
ough a sin
is na securmusadle - th nB
vee
co ve re d by Se ct io
sigoment '
ti sa ti on is to us est ru ct ure’ fiennce enna
ri
Theessential ideaofsecu a si ng le lo an into yers does wise
e ri sk of 8
question of slic th
at th e Gu id el in es do no tpermit securitisation O°
le th
heme n ofslicing Wjab

m of credit facilities, & ;

) facilities arethe most common fordit where the meeendig
symbolize a line of cre
B. par bpenrtcards. These stheliberty torepay thecredit any tim
e.
ha
Cashcrn diaw upto a limit anedcre re-
is paid back, th
Onee thecredit dit limit gets restored. Securitisation of
g cre dit faci liti es 1s com ple x, and reg ulatory capital standards world-over
volvin a:
ets throw a liquidity risk on the origin
realize that the securitisation of these ass ecalled “controlled or “committe d
tor, Under Basel II language, these assets ar
facilities.
elines donot impose any
An important point to benoted here is that the Guid
Revolving structures may
restriction on revolving structure’ of securitisation.
es byway ofminimum
hea good answer totheproblems created bythe Guidelin
holding period (MHP).
Purchased Assets
TheGuidelines have prohibited securitisation of purchased assets, Coupled with
restriction on securitisation ofMBS/ABS, purchased whole loans, or fractional
interests, the Guidelines contain a total restriction on re-securitisation.
As far as the exclusion of assets purchased from other entities are concerned,
the straight bar seems to be unreasonable. There may be cases where the bank
had bought the entire portfolio long time back, and might have even added its
own funding: or a bank might have bought different loans from different sellers.
and may now want to resell the pool. Therefore, proper recourse would have
been to impose MHP requirements for these assets instead of a straight-away re-
striction on securitisation of the purchased assets. To add to the rigour of the re-
straint, the prohibition becomes retroactive; since the assets bought prior to the
new Guidelines cannot be securitised post the Guidelines.
Itmay be also be quite often difficult to identify what exactly are as-
Sets.Theoriginator mayhavelentitsown money toanasset acquired a long time
However, there is no bar on securitisation
of
Participation rights, or
|

33. To know about the revolving of securit

Struct isation
ure
a
TheFinancial Instrument oftheFuture boyVinod Katha Pee 9) thebook Securitization:
 Comments on the Revised Guidelines for Banks Syn. 7 275
Securitisation exposures: ABS/MBS
Securitisation of Asset-backed securities and Mortgage-backed securities is
barred. This, in effect, rules out re-securitisation.
During the boom-time of CDO pre-2007 crisis, there was a huge activity in the
market called structured finance CDOs - these were repackaging of ABS/MBS
exposures, basically mezzanine or lower tranches.
The Guidelines do not leave any scope for pooling together of mezzanine
tranches. However, the restraint is not absolute — it is only applicable to
banks/financial institutions or other entities covered by the Guidelines. This does
not stop entities other than the entities in financial system to acquire, pool and
securitize mezzanine tranches.
Loans will bullet payments
Loans with bullet payments have been defined under the Guidelines to mean
loans where both interest and principal are payable on maturity. However, in
general terms, a bullet loan is one where only principal is payable on maturity
while interest may be serviced regularly. The idea of excluding the bullet loan
from the allowed category of assets is understandable-in the absence of any prin-
cipal/interest payments during the MHP, there is no demonstration of the quality
of the loan; hence seller has not taken any risk at all.
It may also be noted that the prohibition has been fraught with too many excep-
tions and sub-exceptions. For example, agricultural loans of upto 24 months ma-
turity where the borrower has paid, within 90 days of due date, past two loans of
maturity upto 1 years or past one loan with maturity of more than | year: such
loans are outside the purview of exemptions. Further, trade receivables of tenure
upto 12 months, discounted or purchased by banks are also non-exempted pro-
vided the obligor/drawee has paid last 2 receivables within 90 days of due date.

The Transferee
The Guidelines do not specify any transferee; however an implicit understand-
ing is that the transferee is a Special Purpose Vehicle. In other words, where the
transferee is a special purpose vehicle, securitisation guidelines are applicable;
where the transferee is an entity other than-a special purpose vehicle, the guide-
lines on direct assignment will apply
1.2 Minimum Holding Period (MHP)
after
1.2.1 Originating banks can securitise loans only
perio d
these have been held by them for a minimum
ion
in their books. The criteria governing determinat
to en-
of MHP for assets listed below reflect the need
sure that:
passed
* the project implementation risk is not
on to the investors, and
2716 Sya.7

COMMENTS
. ~—
Object ive of MH P
es likeHKe
ticces securitisa:
rod uct ory para grap h also talk : s about imprudent practi e,
The int
po e joa ns eve n bef ore the total disbursement iscomplet
one oe ation risk 10 Investors, MHP requir
e-
y pas sin g on the pro jec t imp lem ent
thereb
ment seeks to address such issues.
od” is referred to as “seasoning pe-
Internationally, the so-called “holding peri
ement internationally — it is Just im-
riod”. Seasoning is not a regulatory requir
ratings, and regulatory requirements
posed by the rating agencies for favorable
pool.
mandate disclosure of the seasoning of the
~ during the seasoning
Essentiall _ seasoning is also a form of risk retention
, andareoften funded
period. theloansareonthebalance sheet oftheoriginator
by regular balance sheet sources.
on to ex-
MHP is. in essence, the lock-in-period. To reiterate, where the decisi
tend credit is taken while intending to transfer the same instantly via securitisa-
tion, there are risks pertaining to ineffective screening of credits. Therefore, a
requirement to keep the loans originated in its own books for a certain period of
time will ensure effective screening of the risks, and effective exercise of due
diligence by the originating banks. The longer the period during which the under-
lying assets are held on the books of the originator before being securitised, the
less the risks should be. This is the rationale behind the MHP requirements.
As the 2010 Discussion Paper puts it, MHP would contribute towards ensuring
that the asset has actually been created; andthe borrower has begun to service the
SE ee

s can
Bankee
1.2.2 ii secu riti se loan s onl y afte r counted
a MHP an
dmaaeaarnd on of lo forsan
Comments on the Revised Guidelines for Banks Syn. 7 7)i |

Table 3.1

Minimum number of instalmentsto be

paid before securitisation
Repayment | Repayment Repayment Repayment
frequency—__| frequency-— frequency— frequency—
Weekly Fortnightly Monthly Quarterly
Loans with original
maturity up to 2 Twelve Three Two
years
Loans with original
maturity of more
Eighteen Nine Three
than 2 years and up
to 5 years
Loans with original
maturity of more Twelve Four
than 5 years

COMMENTS

Commencement of MHP
As per the Guidelines, MHP runs from the date of full disbursement or pur-
chase of the asset (in case of asset-backed loans) to the date of transfer. MHP
requirements have been laid down with reference to the number of instalments to
be paid prior to securitisation-therefore, the instalments payable before full dis-
bursement or purchase of the asset are to be ignored.
Applicability of MHP to the loan and not to the borrower
MHP has been made applicable to loan and not to borrower. For example, if
the borrower repays the existing loan and takes a new loan, the new loan cannot
instance, the
be sold. There may be, at times, difficult questions involved. As for
question
borrower takes a loan, and before maturity, an add-on loan is given. The
answer should be
may arise as to whether the whole loan can be securitised. The
in positive.
extension or an add-
What will determine whether the loan is a new loan, or an
with reference to the
on to a new loan? Certainly, the same cannot be determined
ment or the existing loan
documentation —whether there is a new loan agree
a question of substance— if the
agreement has been used. It should essentially be be
g amount, it should substantively
new loan forms a bulk of the total outstandin facility.
add-on to an existing
taken as a new loan, even if it is shown as an
ructured loans. A restructured loan iS
Questions will also arise in case of rest
rd which is the objective of the Guide-
not a new loan — the benefit of track reco
lines would have been served.
 Securliisation, el.
Part t—Chap. 3 RBI» Guidelines on
7%
27 Syn?
a tis
ue or innainenenpens
” .

me nt sd
,

se d on in st al
frack record — whether ba
'
:

'
wh et he r the nu mb er of instalments menor
to Note the lan
sluts
in at ah mo nt s du e or ins talments actually paid, n
\ MP a in
r of ins tal men ts io be paid prior to securiusatio
| 2.2 — “numbe whether the
as
el in es is to giv e the ben efit of wack record ~ not
The uleswytheGuid nts due
e, the ref ere nce is to the number of instalme
xd or bad. Henc of missing
beet
yment the reo!. Of course, the number
for on and not actual pa d,
men ts sho uld not be suc h as to make the asset substandar
instal
|
MHP in case of tra de rec eiv abl es:
MHP
ines, it appears that the condition of
From Note 3 to the text of the Guidel deb tor has paid at least 2 receivables
d in cas e of tra de rec eiv abl es if the
is satisfie
prior to the date of securitisation.
ividual loans inthe
1.2.3 The MHP will be applicable to ind icable
pool ofsecuritised loans. MHP will not be appl
to loans referred to in foot note 3 of para 1.1.
COMMENTS
ab
of MHP
Applic toil y s
itasset
individual
been
MHP has to be calculated on as asset-to-asset basis, ic. the same has
made applicable to individual loans in the pool of securitised loans. In other
words, all the assets in the pool must comply with the MHP requirements. There-
fore, assets not complying with MHP are to be filtered out.
Inapplicabil MHP
ofity
_MHP is not applicable to bullet loans that are eligible for securitisation, viz. ag-
ricultural loans extended to individuals having a tenor upto 24 months where
both interest and principal are due only on maturity; and trade receivables with
up to 12 months discounted/pur
tenor chased
by banks from their borrowers. In
suum. Hovcvcr, iisi cbverety inpenats that
yever, it tonieSeatearmakios ekg
13 Minimum Retention Requirement (MRR)
1.3.1 The MRR is
Comments on the Revised Guidelines for Banks Syn. 7 2m

should adhere to the MRR detailed in the Table be-

low while securitising loans:

Table 3.2: Minimum Retention Requirements at the Time of Securitisation

Type of Loan Descriptionof{MRR
5% of the | (i) Where securitisation Investment in the securi-
book value of | involves neither credit ties issued by the Special
the loans | tranching nor any first loss | Purpose Vehicle (SPV)
being secu- | credit enhancement byo- equal to5 % ofthebook
ritised riginators value of the loans being
securitised.
(ii) Where securitisation The originator would be
involves no credit providing the required
tranching, but involves credit enhancement.
originators providing first If the first loss credit
loss credit enhancements enhancement required is
e.g. Off-balance sheet sup- less than 5%, then the
ports, cash collaterals, balance should be in the
over-collateralization etc. securities issued by the
SPV.
(iii) Where securitisation 5% in equity tranche.
involves credit tranching If equity tranche is less
but no first loss credit en- than 5% then balance
hancement from originator pari passu in remaining
tranches.

(iv) Where securitisation If the first loss credit

involves credit tranching enhancement is less than
and first loss credit en- 5%, then balance in eq-
hancements by originator uity tranche. If first loss
(off-balance sheet supports, credit enhancement plus
cash collaterals, over col- equity tranche is less
lateralization etc.) than 5%, then remaining
paripassu in other
tranches.

10% of the (i) Where securitisation Investment in the securi-

Loans
book value of involves neither credit ties issued by the SPV
original ma-
the loans tranching nor any first loss equal to 10% of the
turity of more
credit enhancement book value of the loans
than 24 being secu-
being securitised.
months ritised
(ii) Where securitisation The originator would be
involves no credit providing required
tranching, but involves credit enhancement. If
credi t enha nce- this is less than 10%,
first loss
from origi nator s, then balance in the secu-
ments
rities issued by the SPV.
e.g. off-balance sheet sup-
ports, cash collaterals, over
collateralization etc.
5%in equity tranche or
(iii) Where securitisation
 ele
on Securlivalion,
Cheap. RBi s Guadelines
sya? Part
lw

e scrytionwt MRK " Faced

SS ee
| De
5%
en: trancheis less than
but nafirstiosscredit
ator The balance“ (10%
-
hancement trom or

tranche) pari passe in

other (ranches by
the SPY.
|

plus equity tran che is

u
eqto 5%a
. l
Ba lance
pari passu in other
tranches (excluding eq-
uity tranche) issued by
the SPV so that the total
retentis io10n%.
inme
Invest securi-
the nt
edSPV
by the
tiesissu
equto
al 10%of the book
Comments on the Revised Guidelines for Banks Syn. 7 281

Type of Loan Descriptionof{MRR

hancements byoriginator ance is greater than eq-
(off-balance sheet supports, | uity tranche, then re-
cash collaterals, over col- maining pari passu in
lateralization etc.) other tranches.

COMMENTS
Categories of Minimum Retention Requirements
The Guidelines impose Minimum Retention Requirements (MRR) on the basis
of original maturity of loans. MRR has been fixed at 5% of the book value of the
loans being securitised, for transactions with original maturity of 24 months or
less and 10% of the book value of the loans being securitised for transactions
with original maturity exceeding 24 months. Higher MRR for longer duration
loans is due to greater risk in such loans and need for long time involvement of
originators in such securitisations as servicers. These are further sub-categorised
into four categories-
i. Where there is neither tranching nor first loss credit enhancement.
-
ii. Where there is no credit tranching but there is first loss credit enhance
ment from the originator.
e-
iii. Where there is credit tranching but there is no first loss credit enhanc
ment from the originator.
t.
iv. Where there is tranching as well as first loss credit enhancemen
Meaning of “tranching” and “first loss credit enhancement”’
” to mean different
The Guidelines appear to have used the word “tranching
s typically signify differ-
classes of securities issued by the SPV. Different classe
an “equity tranche” is not
ent levels of priority in loss absorption. For example,
loss class, it is economically the
legally the equity of the SPV, but as it is the first
creation of multiple classes of se-
equity of the transaction. See Chapter | on the
curities, and the sizing up of credit enhancements.
ses (or several classes, such as A, B,
The tranches refer to senior vs. junior clas
sation may involve several tranches at
C etc). Complicated structures of securiti
securities may be classed into several
senior level too — for example, senior-most
tran ches , impl ying diff eren t pay- back periods. Sometimes, there may an
time e the
ly tranche and so on. However, sinc
interest-only tranche, or principal-on ention requirements, the tranching
the Gui del ine s is to imp ose risk -ret
intent of
credit risk perspective.
referred to here is tranching from a
st loss
s see m to be d isti ngui shin g between “tranching” and “fir
The Gui del ine For example, a
dit enh anc eme nt” . The dis tin ction is completely unnecessary.
cre ties Bh the
and Jun ior sec uri tie s, the retention of junior securi
there are Senior the ea i
is not hin g but firs t loss support. However, as used in holding
originato r
enh anc eme nt inc lud es ret ention of risk other than by
the first loss credit
the equity tranche.
 et.
3- RB I » Gu id el in es on Securitisation,
Part t-—Chap.

mnooniey
er eis me te r wa nc hi ng Horfirstlossoueditclew or 10%
+ casewinene th 1.€. 5%
be nv ja te d at th e suraight rate prescribed,
MRK wo
may be.
(RMRR “) as the case t, bul no
the ori gin ato r pro vid es first loss credit enhancemen R will be
Where n MR
securitisation Wansacuon the
ranching is involved in the t. if first loss supportis lower
than 5%
h o oflth e
e fir st los s sup por
the w
—First Loss)% of
or 10%, then MRR=( RMRR yfirs
e is tra nch ing , bu tth e ori ginator doesnotprovide an
«case th er
RR% ofthe value of securi tised pool
loss credit enhancement, MRReRM ta nche is lee chan DORR,
Letee eq ui ty tra nch e. if eq ui ty

originator in firstloss s equit

MRR= Total exposure ofthe
5%, bala nc
is to provi
be e Ei colnervoaiel-
~m If this isless than
Figure 3.4: RMIRR andForm
SceFigure3.3 Maturity ofLoansandMRR and
ents.
for diagrammatic representation of MRR requirem

and MRR
Figure 3.3: Maturity of Loans
 Comments on the Revised Guidelines for
Banks Syn. 7 283

Determine Maturity
and RMRR

Yes
Tranching

Yes Yes

MRR = First loss CE; First loss CE + Equity Equity

if First Loss CE < Tranche upto 5%; Tranche = upto 5%;
Securities of RMRR, then Balance upto RMRR ifequity tranche
SPV = RMRR% Securities of pari passu < RMRR&%,
in remaining balance pari passu
SPV = (RMRR-
tranches* in remaining
First Loss CE) %
tranches

* If 5 < first loss CE < 10%, balance to the pari-passu in securities including equity

Figure 3.4: RMRR and Forms

It should be noted that the Guidelines does not mandatorily expose the origina-
tor to first losses upto RMRR%. The only principle involved is that a first loss
support must necessarily come from the originator; likewise, equity tranche at
least upto RMRR% must be held by the originator.
That is to say, there is no bar in the Guidelines in the originator holding a com-
bination of horizontal + vertical tranche — the so-called L tranche. A horizontal
slice is the bottom, first loss piece of the transaction. A vertical slice is a propor-
hori-
tionate holding of the senior securities. An L-tranche is combination of the
zontal and vertical slices.
 etc.
ines on Securitisation,
Part |—Chap. 3- RBI's Guidel
25+ Sya.7

About the first loss piece an

firs t los s pie ce is the jun ior-most security, other th
Under the Guidelines, the por t are tre ated as first loss support Ho
wever,
of ong ina tor sup
iO strip. All forms por t, the n the firs t loss plece Is only the junior
els of sup
if there are 2 or more lev ty per mitting originators to MINIMI
SE first
s lea ve lot of fle xib ili
piece. Guideline regulations under
ret ent ion , whi ch is unl ike EU regulations or even the
loss
Frank Dodd
Meaning of the 10 strip: to
strip quite frequently. It is Important
The Guidelines have used the term 1O @ non -cr edi t
strips are of two types ~
understanding the concept of 1O strip. 10
JO strip. A non-credit enhancing or
enhancing 10 strip, and a credit enhancing
interest only, fromthe receivables.
senior IO strip is a senior security that takes
ip — it takes interest only, com-
There is no principal repayment in case of JO str y the notional principal may
puted with reference to a notional principal. Typicall
ing. Normally, the rating of
be equal to the sum total of all the securities outstand
create a differen-
a senior IO strip is AAA. The purpose of senior 10 strip is to
tially prepayment sensitive security.
the resid-
There is a credit enhancing or junior IO strip, which typically sweeps
ual profit or excess spread of a transaction.
Most transactions provide for the originator to sweep the residual profit. How-
ever, usually this is done is a tricky way, by using a combination of methods — JO
strip being one ofthem. In India, thepractice in thepast has been just to provide
inthe documentation that the excess spread will bepaid back to the originator, or
to have a subordinated class that takes the entire left-over amount in the pool.
Ee ee ee ee ae bane
spreada ha:stater 17 Gai
ily.coven to in the Guideline i It cannot,
Guideli s as IO strip.

COMMENTS
Who has to retain?

“Originator” as defined under

bank and also includes February, 2006 Guidelinesrefers to the transferor
is mean the ne
t iforA originati :
‘owevr, is retai
that the MRR ned MRR
the by other entit Oe ane

principa
esent the st l cash flows.
banksld’ repr
wi Therefore. shou invein me nt
the Interest Only
 Comments on the Revised Guidelines for Banks
Syn. 7 285

Strip representing the Excess Interest Spread/ Future

Margin Income, whether or not subordinated, will
not be counted towards the MRR.

COMMENTS
What all may count as MRR?
MRR should be based on percent of the principal value. Therefore, banks’ in-
vestment in Interest Only strip is not to be counted.
A proper construction of this requirement is that the bank should continue to be
exposed to at least the MRR% of the principal inherent in the pool. For example,
if the outstanding principal in the pool is Rs 100, and the pool is being sold at a
price of Rs 105 (that is, at a premium of Rs 5), the originator should at least make
an investment of Rs 10.
Also note that the reference is to the book value of the loans being securitised.
In case of over-collateralisation, the transfer of extra collateral is itself by way of
a credit enhancement — that amount cannot be included in determining the MRR.
Investment in the IO strip
The Guidelines make a reference to investment in the IO strip. In case of junior
IO strips, typically, the transaction structure allows for the excess spread to flow
to the seller, without the seller having to make any investment for the same.
However, even if the originator were to make any investment in the IO strip, such
investment shall not be counted as a part of MRR.
1.3.4 The level of commitment by originators i.e.. MRR
should not be reduced either through hedging of
credit risk or selling the retained interest. The MRR
as a percentage of unamortised principal should be
maintained on an ongoing basis except for reduction
of retained exposure due to proportionate repayment
or through the absorption of losses. The form of
MRR should not change during the life of securitisa-
tion.
COMMENTS
Maintenance of MRR
g of credit
The Guidelines clearly prohibit reduction of MRR through hedgin
ines stipulate is that
risk or selling the retained interest. However, what the Guidel
One of the big con-
RMRR has to remain constant as percentage, not as amount.
loss support had to remain
fusions in the Feb 2006 Guidelines was that the first
Guidelines make it very er
constant through the term of the transaction. The
k of RMRR, not faster ae u e
that amortisation of the RMRR is possible- paybac
le. It is to be noted that the form
payback of the senior classes, is therefore possib
the life of securitisation.
of MRR is not allowed to be changed during
 Securitisation, ei
Part i-—Chap. 3 RBI's Guidelines on
280 Sya.7
ting
ca me wi th so -c al le d Reset Guidelines permit
in mid-2013, the RBI en t. Th is is an exception to the
global prac:
cr ed en ha nc em level of
resetting of her in cr easing OF decreasing the
qu es ti on of eit on, as per
tice. as there is no ch on has been done. In additi
nc em en t aft er a tr an sa in:
credit enha ab ov e par a, MRR ts required to be ma
ng ua ge of the
the very clear la As principal
on ly as a pe rc en ta ge of the unamortised principal.
tained ought down,
te amount may be naturally br
amortises, MRR as an absolu guide
not be re du ce d in pe rc en tage terms, Fven under the reset
it wil l i Is
s cannot be brought down, Hence, r,
tines. the MRR in percentage term we ve
vance of the reset guidelines — ho
difficult to understand the rele
ter,
see comments later in this Chap
er these guidelines
1.3.5 For complying with the MRR und umentation tn
banks should ensure that proper doc
accordance with law is made.
COMMENTS

What constitutes Proper Documentation?

— for example, pur-
MRR refers to the retention of interest by the originator
such matters.
chase of the equity tranche. There is no law as such dealing with
Hence, proper documentation depends on the nature of MR.
1.4 Limit on Total Retained Exposures
1.4.1 At present, total investment by the originator in the
securities issued by the SPV through underwriting
aranenten beestaetiae ante tenneteh eoceatineed ‘a>

exposures
pete hy tng tle eg he recom ee
oate hetna es ar oe
oe tae Rowing Torms shoud pet excerd
in lgubordi - ;
@ Investments
tranches of securities issued the SPV
dauting Garveguantaredtingestsniintite
Comments on the Revised Guidelines for Banks Syn. 7 287

COMMENTS
Maximum Risk retention
The maximum exposure of the bank should be 20% of the total securitised in-
struments issued, including credit enhancements whether funded or non-funded
and equity tranche; any investments in senior tranche; and any liquidity support.
The Basel II Connection
. Basel II Standard requires substantive transfer of risk associated with the secu-
ritized exposures to the third parties for recognition of risk transfer. The Guide-
lines seek to impose a limit to the extent of originator’s retention of ABS/MBS,
keeping in view the Basel II requirement. However, there is a basic difference
between Basel II and the Guidelines, i.e. Basel II is a capital standard and not a
regulation. Moreover, Basel II concept is founded on “substance over form”, i.e.
if there is no in-substance transfer of risk, then there is no capital relief.
1.4.2 If a bank exceeds the above limit, the excess amount
would be risk weighted at1111%”.

COMMENTS
What if the limit is breached?
If the maximum limit is breached, the excess over the limit will be deducted
from capital. The Guidelines provide that the excess amount would be risk-
weighted at 1111%. The treatment is very much different from that under
Baselll. As stated earlier, under Basel II requirements, if there is no substantive
risk transfer, the transaction does not qualify for capital relief. Not qualifying for
capital relief does not necessarily mean capital deduction.
1.4.3 Credit exposure on account of interest rate
swaps/currency swaps entered into with the SPV will
be excluded from this limit as this would not be
within the control of the bank.
COMMENTS
entered into with
Credit exposure owing to interest rate swaps/currency swaps
kept out-
the SPV would be outside the control of bank; as such these have been
side the boundary of maximum limits.
be deemed to
1.4.4 The 20% limit on exposures will not
to amortisa-
have been breached if it is exceeded due
d.
tion of securitisation instruments issue

es
ae
with minimum
ecuritization exposures, consistent
risk weight for secu
35. As per Basel III, the maximum nce in India mini mum capital requ
irement is 9%, the risk weight
3%capital requirement, is 1250%.Si as to ensure that capita | charge does not exceed the exposure
o
has been capped at 1111% (100/9)s
value.
 uritisation, etc
Part t—Chap. > RBI's Guidelines on Sec
85 Sya.7
COMMENTS
on instruments ts:
uritisati
due to amortisation of sec
if the limit gets exceeded delines will not be
res ult unt o mno rea sc of ongin ator interest, the Gui
sued and that
deemed to be breached
i
kPro
1.5 Booof gront
fitnUpf
para 21 0 060of «(our cireular
iS) In terms of
5- 06 dated 1"
DBOD.No.BP.BC.60/21,04.048/200

ing proposed in these guidelines, ith has been decided

during a
allow higher recognition of cas profits
toyear based on amortisation of principal
and losses

incurred as well as specific pro vision requirements

on the securexp iosu is
tres asa laii
expt now:
nedobel
The amount of profit received in cash may be held
underanaccounting headstyledas “Cash Profiton

poole pee weryee Bl

sa
of cash
The amorti ti
profit on
arisin g out of se-
curitisation transaction will be done at the end of
every financial year and calculated as under:
Pro m to be amortiend « Max {L, [(X*(Y/Z))\,
[(X/n)]}
ed
X = amount of unamortiscash
:

Pending Recognition’ at the

Transfer Transactions
beginning of the year
Y = amount of principal amortised during the year
amthou
uiZng= of ntof
ese nr unamortised principal at the begin-

,. The .
i any, ans
teeeenan
etexposures tf
s be
to ma de ontheMIRRandanyoth
directwrite- off
to the
esDo securitisati on transaction
zat ion for mul a onl y str sho
ip)Gua t uldsebe
Gie Ac hi ne nn La e
ever. the amo rti wou ld cus ure
 Comments on the Revised Guidelines for Banks
Syn. 7 289

the exposures to the particular securitisation transac-

tion + direct write-off) excluding loss incurred on
credit enhancing interest only strip’
n = residual maturity of the securitisation transac-
tion

COMMENTS
Recognition of gain on sale is an accounting issue
Off- balance sheet treatment and gain on sale recognition are accounting issues.
In principle, it is not proper for a regulator to lay accounting rules in this respect
particularly when they materially differ from accounting standards.
What do accounting standards say?
Accounting standards relate off balance sheet and gain on sale together — latter
being the consequence of the former. If there is a sale, there is a gain/loss on sale.
Since gain/loss is the logical consequence of a sale treatment; one cannot justify
the recognition of gain/loss being deferred if the sale has been recognised al-
ready.
The accounting standards relevant to securitisation are IAS 39, adopted as In-
dAS 39. An AS version of IAS 39 has been adopted in India as AS 30. IAS 39/
AS 30 lay down conditions for profit recognition under the accounting standards.
AS 30 is currently in a recommendatory state in India. However, it is difficult to
understand how a regulator can write a rule conflicting with the requirements of
AS 30 on a matter which is completely an accounting issue, and not a regulatory
issue.
Note that pursuant to Dodd Frank Act in the USA, US regulators have come
with a requirement called “premium capture cash reserve account”. This re-
quirement is not the same as amortisation of profits under the Guidelines. By far,
the amortisation approach under the Guidelines does not have an international
parallel.
Recognition of Cash Profits
Guidelines allow recognition of cash profits only- cash profits arise when the
sale price of the pool exceeds its par value. However, it is difficult to understand
the expression “cash profit”. Guidelines require the originator to invest RMRR%
of the securities of the SPV. Now, there is no cash profit to the extent of origina-
profit
tor’s contribution to such securities and it would be illogical to limit cash
to only consideration paid by third parties.
to absurd re-
This situation gives tise to two extreme scenarios, both leading
sults:
PPB a eateries 0)Sui, x.vn whey thepark reveives intmass otk
Transactions
balance in “Cash Profit on Loan Transfer
lines of RBI without taking into account oer ye Snge eenw aeds
j cognition Account”. st only strip, pleas e see para |
intere
37 ed ok a of losses in respect of credit enhancing
 Securitisation, etc.
Part }—Chap. 3- RBI's Guidelines on
»’w Sya.7
n the
thi rd pa rt yon co nsideration, then give
; if “cash profit” means OM) transactions would lead to 4
st se cu ri us al l
RMRR requirements, mo .

cash loss
he origin| ator too, then
in cl
j ud es co ns
2on siid er at ion paid by th
ii Wf cash profit ng equity tranche and
a free hand in increasi
ibe ongimator will have
generating & cash profit
ourse?
What should be the proper rec ount
acc oun tin g rul e mus t be all owed to prevail, Under the acc
Eventually, the owed to be
ng fair va lu ofethe ret ain ed interest of the originator 1s all
per imated losses.
booked upfront and fair value takes into account est
Amortisation of Profit
Types of Profit
types of profit- realised profit (so-
Guidelines make a distinction between two of unrealised profit, Guidelines
called cash profit) and unrealised profit. In caseext, most Indian transactions have
make a reference to IO strip. in the Indian cont its have flowed back to
not had anything called 10 strips; though residual prof certainly not the only for
p is
originators on sweep-all-left basis. Moreover, IO stri
unrealised gains but Guidelines have envisa ged only JO strip- hence the guide-
ived .
lines provide for profit to be recognised only when actually rece
Spreading the Profits
Incase ofrealised profits, Guidelines require amortisation of theprofits by
spreading the profits. Spread should be based on higher of:
i. Propsplittin org, ti on
in proport ionat e al amortised
to princip
ii. Equal splitting, in proportion to number of months
The Formula
The way the formula has been framed seems illogical. The formula given i
Guidelines puts a number L (mark to market loss) within the brackets with :
*. . $ a

“Max” formula. Since “L” represents mark to market loss, it will be a negativ
number. As such, the “Max” Formula will always ignore the loss.
1.5.2 The above method of amortisation of profit can b
securitisation transactions 2

This
ing Para
secur od d of
tion the metho
itisasays of profit recogn itio
above “can”nbe to
tramactions. Mostof uctions
Geetrmns inGioguetta tatont
 Comments on the Revised Guidelines for Banks Syn. 7 291

direct assignment route, for which profits might have been booked already. How-
ever, if at all profit was being amortised, the formula above may be used.
1.5.3 At times, the originating banks retain contractual
right to receive some of the interest amount due on
the transferred assets. This interest receivable by the
originating bank represents a liability of the SPV and
its present value is capitalised by the originating
bank as an Interest Only Strip (I/O Strip), which is
an on-balance sheet asset. Normally, a bank would
recognise an unrealised gain in its Profit and Loss ac-
count on capitalisation of future interest receivable
by way of I/O Strip. However, consistent with the in-
structions contained in circular dated February 1,
2006 referred to above, banks should not recognise
the unrealised gains in Profit and Loss account; in-
stead they should hold the unrealised profit under an
accounting head styled as “Unrealised Gain on Loan
Transfer Transactions’. The balance in this account
may be treated as a provision against potential losses
incurred on the I/O Strip due to its serving as credit
enhancement for the securitisation transaction’* The
profit may be recognised in Profit and Loss Account
only when Interest Only Strip is redeemed in cash. As
banks would not be booking gain on sale represented
by I/O Strip upfront, it need not be deducted from
Tier I capital. This method of accounting of Interest
Only Strip can be applied to outstanding securitisa-
tion transactions as well.

COMMENTS
Accounting for the IO strip:
This para provides the method for bringing on books the value of the excess
spread, referred in the Guidelines as IO strip.
Guidelines
Logically, since the IO strip is anyway an unrealised gain, and the
great benefit by recog-
do not permit recognition of unrealised gain, there is no

ey Pe ee ee

ising. In the case of amortising I/O strips,a bank

38. The I/O Strips may be amortising or non -amort
th e amoun t which is left after absorbing losses,if any, sup-
would periodically receive in cash, only at the
t may be credited to Profit and oh sche
ported by the I/O strip. On receipt, this amoun d
alisesed
stt the “Unrereali Gainon Loan
ount equivi alent to the <
he amort isati on due may be wri itten-off again
isati s books. In the
the book value of the I/O strip in the bank’
Transfer Letnaacions” A/cbringing down the é
bank ecel
recei ves intima
intim ti
ation OFf Chat ing-off of
charg
is i as and when Unrec alised
“Unre
amoun t agains t
ee aay cectst the
V again he I/O strip, it may write-off equiv alent
VO.
the I/O sti ip ft the
the book value of
” and bring down
onsA/c
ie Be ee cer Transacti Strip recei ved In cash may
in final redemption value of the I/O
Gaal abooks The amount received
be taken to Profit and Loss account.
 curvisation, etc
Pant i—Chap. 3-— RBI's Guidelines on Se
w2 sya?
ed gain ave. Ul
co mr es pa nd in g lak e the very asset to af unrealis
aisimg am assct, am d asset.
va nu lt an co us ly FO OO gR IS IAg and de-recognising the
1s ke
10 strip = this
s ref er to com pul lng the present value of the able
t valuabon principles applic
The Guidel ine
d as the fait val ue. Pre sen
should actually be rea as the 10 strip predicate that the
cashflows
ina ted cas h flo w suc h
for a subord def aul ts and prepayments. In adition, the
aft er con sid eri ng
should be estumated ess of the
ng rate for suc h cas hfl ows sho uld be appropriate lo the riskin on:
discounti cus sed in VinodKothari Securitizati
iss ues hav e bee n dis
cashflows. These .
anc ial Ins tru men t of the Fut ure , see Chapter on Accounting Issues
Fin
Banks
1.6 Disclosures by the Originating
vicer/Investor/Trustee
1.6.1 Disclosures to be made in Ser
Report
to investors
The originating banks should disclose
ts se-
the weighted average holding period of the asse
securitisa-
curitised and the level of their MRR in the
ld ensure that pro-
tion. The originating banks shou e acce ss toall
spective investors have readily availabl quality and
materially relevant data on the credit

exposure as well as such information that is necessary

and
to conduct compre well-informe
hen siv d stress
e
ral values support-
tests on the cash flows and collate
ing the underlying exposures. The disclosure by an
originator of its fulfilment of the MHP and MRR
should be made availa ble publicly and should be
appropriately
 Comments on the Revised Guidelines for Banks Syn. 7 293

disclose various matters as specified including all the material information rele-
vant to the performance of the pool, details of the originator, etc. Therefore, the
details relating to the retentions by the originator, the holding period will get ca -
tured in the SPV disclosures. : ‘
Initial and Continual Disclosures
Initial disclosure is required at the time of origination of the transaction: there-
after continual disclosures are required at a minimum half-yearly (i.e. at least
twice a year). Intermittent disclosure may also be required at times whenever
there is a breach of any of requirements is breached.
1.6.2 Disclosures to be made by the Originator in Notes to
Annual Accounts
The Notes to Annual Accounts of the originating
banks should indicate the outstanding amount of se-
curitised assets as per books of the SPVs sponsored
by the bank and total amount of exposures retained
by the bank as on the date of balance sheet to comply
with the MRR. These figures should be based on the
information duly certified by the SPV’s auditors ob-
tained by the originating bank from the SPV. These
disclosures should be made in the format given in
Appendix 2.

COMMENTS
No comparative data needed
The disclosure requirements are in addition to those specified under the Febru-
ary 2006 Guidelines. The figures, viz.the outstanding amount of securitised assets
as per the books of the SPVs, and total amount of exposures retained are to be
shown as on the balance sheet date. However, unlike the February 2006 Guide-
lines, there is no demand for a comparative data presentation (in respect of past
years).
Auditor’s Certification
has been
The figures so presented should be based upon the information that
ed by the SPV S
obtained by the originator from the SPV and then duly certifi
but the information
auditors. So the auditors are not to certify the stated figures
on which the figures are based.
s on specified intervals to
Further, there is no need to pr ovide these disclosure
under the February 2006 Guide-
the Audit Sub-committee, as has been stipulated
lines.

Format of Disclosure
the number of SPVs sponsored; however
Disclosures are required in respect of needs
disclosures SPV-wise. The format just
there is no requirement of making
-SPV segregation is needed.
details of “totals” and no SPV-to
 Securitisation, etc
ut
Par —Chap. 3-— RBI's Guidelines on
2ee syua?

exposures to
criteria for credit underwriting tohel donthelr
theyapplytoexposures tobe
besecuritised as ’
sare
and monitoring of cred-
book. To this

where relevant, amending,

ors.
its should be applied by the originat
COMMENTS

Loan origination standards:

herein are purely based on prudent
The loan ongination standards as stipulated
ciples, The standards areto be the
commercial practices and sound business prin
books. This is a very important
same as those followed for credits to be kept on
rime crisis was abdication of
requirement, as one of the issues during the subp
were due to be secu-
responsibility and lax underwriting by banks for assets that
ritised.
It is impo rt
that an
origina torsthave a clear demarcation between their origina-
tion teams and their treasury teams, so that the loan origination desk cannot cor-
relate the origination of an asset toits securitisation.
1.8 Treatment of Securitised Assets not Meeting the Require-

All instructions contained in this paragraph will be appli-

stated

ritised
™ ances: tales SS per
ofi Fara 2.11. investing banks
‘ shall
; not invest in secu P
quirements. This is well may ge Ay, has a with MHP and MRR re-

Gui dif-
Me Guidelines isstillanappreciable
ferencefromthepreviousGuntclinns
 Comments on the Revised Guidelines for Banks
Syn. 7 295
2. REQUIREMENTS TO BE MET BY BANKS OTHER THAN
ORIGINATORS HAVING SECURITISATION EXPOSURES
2.1 Standards for Due Diligence
2.1.1 Banks can invest in or assume exposure to a securiti-
sation position only if the originator (other
banks/FIs/NBFCs) has explicitly disclosed to the
credit institution that it has adhered to MHP and
MRR stipulated in these guidelines and will adhere to
MRR guidelines on an ongoing basis. The overseas
branches of Indian banks should also not invest or
assume exposure to securitisation positions in other
jurisdictions which have not laid down any MRR.
However, they can invest in such instruments in the
jurisdictions where the MRR has been prescribed,
though it may be different from that prescribed in
this circular.
COMMENTS
Pre-requisite to making investment
Originator’s explicit disclosure as to adherence to MHP and MRR is the pre-
requisite to make investment by the investing bank. Certainly investing banks
cannot be held accountable if the originator gives an undertaking to comply with
the MRR requirements, but actually fails to do so. However, an upfront undertak-
ing forms the basis of the investor investing in the securitised instruments.
Note that EU regulations have also been issued for investors — that is, EU
banks shall not invest in securitised debt instruments if the risk retention re-
quirements are not followed.
Investment by overseas branches of Indian Banks
The overseas branches have been restrained from investing in jurisdictions
where there are no MRR requirements; no restrictions have been put in case the
MRR requirements are different than those stipulated under the Guidelines.
2.1.2 Before investing, and as appropriate thereafter,
banks should be able to demonstrate for each of their
individual securitisation positions, that they have a
comprehensive and thorough understanding of risk
profile of their proposed / existing investments in se-
curitised positions. Banks will also have to demon-
strate that for making such an assessment they have
implemented formal policies and procedures appro-
analys-
priate to banking book and trading book for
ing and recording the following:
 Securiiivahion, ek
l Rep. 2 RB/ s Guidelines On
Syn. 7 Punt
29

by the originators re-

information disclosed sation,on at
ine the MRR in the securiti
least half yearly basis;
b) the risk characteristics
of the individual secu-
structural
all the
ritisation position including
t can materi.
features of the securitisation tha the investing
ally impact the performance of ., the senior-
bank’s securitisation position (/.¢
subordinate
ity of the tranche, thickness of the
ent risk and
tranches, its sensitivity to pre- paym
of repay-
credit enhancement resets, structure
rs, the
ment water- falls, waterfall related trigge
ent
position of the tranche in sequential repaym
of tranches (time-tranching), liquidity en-
e-
hancements, availability of credit enhanc
ments in the case of liquidity facilities, deal-
specific definition of default, etc.);
c) the risk characteristics of the exposures
un-
derlying the securitisation position (Le., the
credit quality, extent of diversification and ho-
mogeneity of the pool of loans, sensitivity of the
repayment behaviour of individual borrowers
to factors other than their sources of income,
volatility of the market values oftheofcollat erals
supporting the loans, cyclicality the eco-
nomic activities in which the underlying bor-
rowers are engaged, etc.);

d) the reputation of the originators in terms of

e)
Comments on the Revised Guidelines for Banks Syn. 7 297

the collateral supporting the securitised expo-

sures; and
g) where applicable, the methodologies and con-
cepts on which the valuation of collateral
supporting the securitised exposures is based
and the policies adopted by the originator to
ensure the independence of the valuer.

COMMENTS
The paragraph requires the investing bank to make a self-assessment of the risk
appetite, simultaneously analysing and recording the information/ statements/
disclosures provided by the originator; track record/reputation of the originator;
risk characteristics of the securitisation position as well as those of the exposures
underlying the securitisation. This requirement is to ensure that the investing
bank exercises due care and diligence before making the investment so that a
well-informed and analysed decision can be taken.
The factors to be examined by the investor are discussed briefly below:
(a) MRR: The originators’ risk retention, on a continuing basis, least 6-
monthly. Ideally, this may be made a part of the servicing report, as the
servicer has information about the originators’ risk retention too.
(b) Risk characteristics of the securitisation position: Some of the terms
used in this para are drawn from Basel II norms. The terminology is
briefly explained below:
a. The seniority of the tranche: For example, if the investor is
buying the senior-most class, the ranking of the tranche is senior-
most
. Thickness of the subordinate tranches: This refers to the size
of the subordinated classes. For example, if the investor is in-
vesting in Class A, and there are two classes B (3%) and C (4%)
below A, the size of the subordinated classes is called the thick-
ness.
Cc. Its sensitivity to pre- payment risk and credit enhancement
resets: Sensitivity to prepayment risk of any particular class
need not be uniform. For example several classes have differen-
tial prepayment risks. For example there may be a shifting per-
may
centage of prepayment taken to a particular class, or there
reference
be an IO or PO class taking the prepaid cashflows. The
in which
is to the prepayment sensitivity of the particular class
transaction
the investor is investing, and not that of all the entire
in general.
structure refers to
Structure of repayment waterfalls: waterfall
Of particular interest
both the interest and the principal waterfall.
investor 1n the waterfall,
to the investor must be the place of the
 etc
ap. 3-— RB Is Gu id el ines on Securitisation,
Syn?
Part | —Ch
a)
that on
re la te d Uni gge rs: tr ansactions often provide
e. waterfal l
n tng ger s, the wat erf all will get modified, Kor
happe cer tai lraee
p i e rat es ex ce ed a certain percentage, the
on ch
classes will be stopped, Ba
of pmacipal to subordinatednt to the investor. _
these mod ifi cat ion s is rel eva
tranche sequential repaymtoentcreate
position oT are created
tm -en e
k periods. This 1s usually don
securities with different paybac
y in cas e of the sen ior cla ss For example, a senior class A
onl
ch is paid off first, A-2 paid
may have 3 ume tranches, A-1, whi
‘off next, and A-3 paid last,tedThe se tranches are sequential
tranchas esthe payment alloca to the senior class is first pay-
fter A-3,
ment to A-1 only. andthen A-2,and therea
credit support, @ tans:
Liquidity enhancements: inaddition to orb periodic
abs
action may have liquidity support as well, to
form of liquid-
fluctuations in the cashflows, The most common
ity support is servicer advances.
availabilityof credit enhancements in the case of liquidity fa-
facil-
cilities: normally, credit enhancements cannot tap liquidity
ity for seeking credit enhancements. Liquidity facilities are not to
be used to meet defaults.
i. deal-specific definition of default: defaults lead to loss alloca-
tion. Therefore, a clear definition of default is important.
(c) Risk characte underlyin
rist
of the g loans: This refers to the loans in
ics
the pool. The following information should be obtained by the investor:
a.
may or may not
the credit quality: the borrowers in the poo] most origi
have any formal credit assessment. However,
have in-house grading or rating of assets. Hence, an idea about
al,de-
collaterpast
the spread of the internal ratings, underlying
fault rates, etc.,
may be bt . q

loans: one of the major indicators of diversification is ss

Gitpou, Dead eaten
iy.tt1,naber ofeflective cAMagery Wr
ee nS e os fj aa
Sas Vienne ea
in
¢ measured in term
s, etc .
s of
ex po su re in particular sectors, geo-
graphi cal reg ion
sensitivity of the repayment behavior of individual
borrow-
ers to factors other than their sources of income: This ref
1
to the externalities that affect the particu-
larly thedefault rates inthepool. repayment behaviour,
y of the market values of the
thloa isream
elons,ans:forthex e epri
tohomth
ferspl e, rketinvacaluseesofofsect
maces ,
 Comments on the Revised Guidelines for Banks
Syn. 7 299

e. cyclicality of the economic activities in which the underlying

borrowers are engaged: during the subprime crisis, the high
level of correlation during a business cycle became very evident.
However, the reference in this clause is not to business cycles,
but cyclicality of the particular business to which the borrowers
may be belonging.
2.1.3 When the securitised instruments are subsequently
purchased in the secondary market by a bank, it
should, at that point in time, ensure that the origina-
tor has explicitly disclosed that it will retain a posi-
tion that meets the MRR.

COMMENTS
This is in accordance with the requirement of Para 2.1.1, just that it pertains to
purchases from secondary market.
2.2 Stress Testing
Banks should regularly perform their own stress tests ap-
propriate to their securitisation positions. For this purpose,
various factors which may be considered include, but are not
limited to, rise in default rates in the underlying portfolios in
a situation of economic downturn, rise in pre-payment rates
due to fall in rate of interest or rise in income levels of the
borrowers leading to early redemption of exposures, fall in
rating of the credit enhancers resulting in fall in market
value of securities (Asset Backed Securities/Mortgage Backed
Securities) and drying of liquidity of the securities resulting
in higher prudent valuation adjustments. The results of
stress test should be taken into account in Pillar II exercise
under Basel II framework and additional capital be held to
support any higher risk, if required.
COMMENTS
As a measure of internal risk management, the bank has been asked to perform
in
regular stress tests. The Guidelines lay down some illustrative factors like rise
value of
default rates, rise in pre-payment rates, etc. that may affect the market
are to be taken into Pil-
the securities. In such cases, the results of the stress tests
risk has been per-
lar II exercise under Basel I framework” and in case a higher
same.
ceived, then additional capital is to be held to support the

ao
ae ne
ae
phase of Basel II and Be ey eebyby
39, The Pillar II process is essentially the 2™thosese risrisks that , are not adequately covereded
ly cover Fil ar 2.The
itigeate
i required to mitig
i tal that is
ti assessment and the regu
pm a oho Ps one that involves a firm carrying out an internal
lator reviewing and evaluating this.
 wrHisation, eh
Part i—Chap. 3 RBI's Guidelines on Sec
MA)
|
tin g Sue ss sce nar ios | and observving the perform
dune by genera stress
Sires
e un de r ~* sce nar ios . Kor general guidance on
of penne te r sting
BS do cu me nt set tin g the broad principles of stress te
_—— see BC
2.3 Credit Monitoring
and in a timely
Banks monitor on an ongoing basis
exposures underly-
BA owt tee information on the
and take appropriate action,
ingtheir securitisation positions

ransaction,
should establish
originators etc. For this purpose, banks book and
formal procedures appropriate totheir banking

scores or other measures of credit worthi nes

across s-
underly
ing exposures, industry and geographical diversification, fre-
quency distribution of loan to value ratios with bandwidths
that facilitate adequate sensitivity analysis. Banks may inter
alia make use of the disclosures made by the originators in
the form given in Appendix 1 to monitor the securitisation
exposures.
COMMENTS
Banks must be regularly reviewing the servicing reports and monitoring delin-
quency rates. Of course, there is nothing much that an investor can do if the col-
lateral starts performing adversely — there are no remedial measures that inves-
tors can take. However, it is important to keep a con watch so that the inves-
tor is not taken by surprises. a stant
2.4 Treatment
of E
Stipulated a ae Eeeiag Be Rega
assign
Winpo
thesenvtaalion ex weight
a tiskrequ sof
irem
1111% to
ents
e the re
whersu
paragraphs 2.1to2.3shove areaotentt. Wome tamte aeehe
make serious efforts to comply with the
contained
he naeraphs 2.1to2.3, thehigher risk weight of1111% will
applicable with effect from 01" October, 2012. Banks
meena Place necessary systems and procedures to im-
plement — in paragraphs 2.1 to 2.3 before 30”
en
Sa
cue http- roarw his ore/pabi/hch
s 155 pdf (accessed on
.
2° September. ’ 213
3).
 Comments on the Revised Guidelines for Bank
s Syn. 7 301
COMMENTS
Risk weight of 1111% is the same thin
g as deduction from capital. The mean
ing of this is that investments made by banks which fail to -
ly wi
Guidelines will be penalised with full deduction from Capital eompningn die

SECTION B
GUIDELINES ON TRANSACTIONS INVOLVING
ASSETS THROUGH DIRECT ASSIGNMENT OF CAS TRANSFER OF
THE UNDERLYING SECURITIES H FLOWS AND
1. REQUIREMENTS TO BE MET BY THE ORIGINATING
BANKS
1.1 Assets Eligible for Transfer™

(i) Revolving credit facilities (e.g. Cash Credit

accounts, Credit Card receivables etc.)
(ii) Assets purcfrom
ha other
se entiti
d es
(iii) Assets with bullet repayment of both princi-
pal and interest®.
COMMENTS
Specific regulations
on direct assignments:
As discussed earlier, it is for the first time that the RBI enacted specific rules
pertaining to direct assignments. The earlier Guidelines of 2006 were inapplica-
ble to such direct assignments.
Transfer
The term “transfer™ here includes direct sale, assignment or any other form of
transfer of assets. The transfer can be of a single asset, or a part of such asset or a

would mean transfer of assets through direct sale. assignment and any
purchase

“a Sesiesk Phaeton, toedCit: Diepeashentet alfondlapece Sanh. of Sadie, inthnMfoasen, Commies

Lending to Priority Sector) where both interest and pnncipal are due only on maturity and trade re-
ceivables with tenor upto 12 months discounted/purchased by banks from thei borrowers will be
eligible for direct transfer trough assignment. However. only those loans/receivabies will be eligible
for such transfer where 2 borrower (im case of agricultural loansWa drawee of the bill (in case of
trade receivables) has fully repaid the entire amount of last two loans/receivables (one loan .in case
of agricultural loans with maturity extending beyond one year) within 90 days of the due date.
 etc.
ines on Securuisation,
Part }-—Chap. 3- RBI's Guidel
we sya?
er is to be nec ess ari ly eff ected by an assignment
transf
portiohe of such asset. The
deed.
Ineligible assets s,
tisation- revolving credit
same as in case of securi on such assets, er
ref
cha sed lo an s an d bul let re payment loans, For discussion
pur 1.1 of the Guidelines.
wocommentary on Para

lhav eto mak e a sen sit ive cho ice between direct assignments Sone
Entities ay wil ow makes a
poner different viewpoints The Table bel
Comments on the Revised Guidelines for Banks
Syn. 7 303

Subordination of | Not common Yes, possible

servicing fee
Cap on the extent | 20% No such cap
of investment

Exposure of the | On the underlying loans On underlying loans

investor for con-
centration norms
Accounting in the Purchase of a security Purchase of loans
books of the inves-
tor

MTM requirements | Applicable Not applicable

Capital relief Capital eaten up to the ex- | Full capital relief, as originator
tent of first loss support provides no credit enhancement
Pricing Based on the rating of the | May be worked out after consid-
resulting securities ering losses and prepayments
upto a certain level
Simplicity Not usually very simple to | Very simple to execute
execute
Tax issues Tax issues currently faced | No tax issues at all, as direct
on taxation of SPVs transfer of the asset
Distribution tax Applies Does not apply
Off balance sheet | Yes, subject to conditions Yes, subject to conditions
treatment

1.1.2 However, these guidelines do not apply to:

(i) Transfer of loan accounts of borrowers by a
bank to other bank/FIs/NBFCs and _ vice
versa, at the request/instance of borrower;
(ii) Inter-bank participations;
(iii) Trading in bonds;
(iv) Sale of entire portfolio of assets consequent
upon a decision to exit the line of business
completely. Such a decision should have the
approval of Board of Directors of the bank;
ents
(v) Consortium and syndication arrangem
and arrangement under Corporate Debt Re-
structuring mechanism;
 s on Securitisation, etc
Part |—Chap. 3-— RBI's Guideline
“ 86Sye?
ransactions, spec
- otherarrangement/iRes ifi-
” aitiy exempted bythe erve Bank ofIndia,

COMMENTS

Inapplicabiity vfGuidelines
Borrower
Transfers with the request of the
tha t hap pen wit hthe req ues t of the borrower have been excluded
ransfers
ld mean novation transactions will also
a the purview of guidelines. This wou
be excluded. ,
|
Inter-bank participations
the transferable participation
Along with Inter Bank Participations, arguably
excluded.
rights envisaged by Nair committee have also been
Trading in bonds:
a replacement
By excluding bonds, Guidelines will promote issue of bonds as
bonds
of loans, particularly in case of corporate lending. However, due to this,
hecome an easy rout e the entire Guidelines.
to escape
Sale of entire portfolio upon exit decision
The stress is on “entire portfolio”, which should mean a portfolio sharing risk
features. For example, portfolio in a particular region may be seen as a portfolio.
Consortium or syndication arrangements in case of CDR:
Interest in assets acquired by banks under consortium arrangements, in case of
CDR, also remain out of the Guidelines.
Specific exemptions
This is a power reserved with the RBI to come out with specific exemptions.
Endorsement
of negotiable instruments
Itisto be noted that endorsement of a negotiable instrument is also not a case
oi aierment. Hence, where a trade debtisbacked bya negotiable instrument.
Dank endorses thetrade billinfavour ofanother bank, thisisnota case of

Ensuring Liquidity for corporate loans:

The RBI'srestricton ions
direct as i , il quid — that
cannot be transf, assi me
loans make
of gn nt
loans
aohek ete tae unless they have been held on the balance sheet of
wate fem ate - However, banks may desire that their loans are liquid. The
so-calted leveruged loans. a liquid market internationally, he
wetowel re oanmarket.Manysuch writento
loansare besold.CDSi
how dobanks ensure thattheirlowe Se Tansters. Sothequestion iv-
Comments on the Revised Guidelines for Banks Syn. 7 305

One probable answer is by transforming a loan into a transferable instrument.

Bonds are transferable instruments, but are excluded assets. One downside is-
bonds require MTM valuation; under IFRS 7, even loans require MTM valua-
tion.MTM does not necessarily mean volatility of reported profits. In case of
AFS assets, the gains/losses on MTM are parked in “other comprehensive in-
come”’.
1.2 Minimum Holding Period (MHP)
Same as in para 1.2 of Section A.

COMMENTS
MHP is the same in case of securitisation. See comments earlier on MHP.
1.3 Minimum Retention Requirement (MRR)
3.4 The originating banks should adhere to the MRR detailed in the Table
below while transferring assets to other financial entities:

Assets with original maturity of Retention of right to receive 5% of the

24 months or less cashflows from the assets transferred on
paripassu basis.
i) Assets with original maturity of
above 24 months; and Retention of right to receive 10% of the
cash flows from the assets transferred on
ii)Loans’ referred to _ in_ foot pari passu basis.
notellofparal.lofSection B.

COMMENTS
Though MHP is the same in case of securitisation, MRR becomes curious.

Retention of Cashflows
The Guidelines require retention of right to receive 5%/10% cashflows. This
would mean a fractional transfer.Fractional transfers under common law systems
lead to joint ownership.
Legal validity of the proportional transfer
become co-
Fractional transfer may be held valid- just that the seller and buyer
off” sale. The
owners. In essence, the direct assignment business is fully “hands
length in Vinod
legal issues on partial assignment have been discussed at
.
Kothari: Securitization: The Financial Instrument of the Future
the portion re-
1.3.2 In the case of partial sale of assets, if
required
tained by the seller is more than the MRR
the portion re-
as per para 1.3.1 above, then out of
valent to 5% of
tained by the seller, the portion equi
ion sold, as the
the portion sold or 10% of the port
as MRR. However, all
case may be, would be treated
 Securuivation, ek
Pant i—Ohap. > RBI s Guidelines On
MUO sya?

COMMENTS
k continues to
this req uir eme nt Is that while the selling ban
The mea nin g of
tio n of the tra nsf err ed loa n/p ool , such retained risk 1s @ par!
hold a 8% of 10% par Ht Is, 1m fact, not a “risk” retained,
as the
nch e. Sin ce tt pro -ra ted risk ,
passu tra of risk
m the transferred risk, The purpose
retained risk is in no way different fro MRR is formulated, 1s retention of first
which
retention requirements, based on
loss risk by the onginator
if the RBI exempted the require:
ft would have been highly recommendable,
as the direct assignments obviously
ment of MRR in case of direct assignments,
h in the financial sector, Unlike
take place between two discerning entities.bot
market product. If the buying
securitisation, direct assignment is not a capital
e a difference if the buying
hank is taking 90% pro-rated risk, it would not mak
r the Guidelines), de-
bank, after doing due diligence (which is mandatory unde
take 100% of the risk.
to s
cide
 Comments on the Revised Guidelines for Banks Syn. 7 307

COMMENTS
Credit enhancement not to be offered
Banks are not allowed to offer credit enhancements. It would imply the re-
tained risk is a pari passu risk, i.e., the seller sells 90% of the loan, retaining 10%
of the loan, on a proportional basis. This indicates that the originator only has
10% of the risk, not risk upto 10%.
IO Strip not to be held back
The Guidelines provide for the interest spread, that it, the excess spread not to
be retained by the seller.
Legal opinion on partial assignment
Legal counsels in India have typically expressed reservations on partial as-
signment. This author has discussed partial assignments at length in Vinod
Kothari: Securitization: The Financial Instrument of the Future The author’s
views are that there is nothing illegal about partial assignments — it is just that the
transferee becomes a co-owner with the transferor.
1.3.4 MRR will have to be maintained by the entity which
sells the loans. In other words, it cannot be main-
tained by other entities which are treated as ‘origina-
tor’ in terms of para 5(vi) of the circular dated Ist
February, 2006 containing guidelines on securitisa-
tion of standard assets.

COMMENTS
This is the same as in securitisation. See our notes on MRR under the previous
section.
1.3.5 The level of commitment by originators i.e, MRR
should not be reduced either through hedging of
credit risk or selling the retained interest. The MRR
as a percentage of unamortised principal should be
maintained on an ongoing basis except for reduction
of retained exposure due to proportionate repayment
or through the absorption of losses. The form of
MRR should not change during the life of transac-
tion.

COMMENTS
ion A) pertaining to mainte-
The requirement is the same as in Para 1.3.4 (Sect
That the MRR should not change re-
nance of MRR in securitisation exp osures.
t refer to MRR in absolute terms.
fers to MRR in percentage terms, an d canno
these guidelines,
1.3.6 For complying with the MRR under
ntation in
banks should ensure that properdocume
accordance with law is made.
 etc.
ines on Securuisation,
Part i—Chap. 3- RBIs Guidel
be) sya?
COMMENTS
A). See
eme nts are the sa me as in Para 1.3.5 (Section
Documentaiion requir
vious soon
comments under Une pre

,
and
sing out ofloan as-
The amortisation of cash profit ari every
the end of
signment transaction will bedone at
financial year and calculated as und er:
(V/Z)),
Profit to be amortised = Max {L, (X*
{(X/n)})
the
X = amount of unamortised cash profit lying in
acc sh u
‘Cao non
Profit tLoan
Transfer Transactions Pending Recognition’ at the

Z = amount of unamortised principal at the begin-

ni the vear
ofng

COMMENTS
The profit recognition
cogni rule is the same
an as in case of securitisations.
itisati This
is 1s,
i
Soe Geencioned nee taCee ee ETT 90.e Ce
nsferred pool incase of direct assignments, the question of the seller not
recognising aot gore motarise atall.Parther, theseller holds only « pari
passu interest- so, if the seller transfers 90% of the pool, there is no reason for
seller not to recognise 90% of the profit, whether realised or unrealised.
See our notes under Section A.
Comments on the Revised Guidelines for Banks Syn. 7 309

1.4.2 Accounting, Asset Classification and _ provisioning

norms for MRR
The asset classification and provisioning rules in
respect of the exposure representing the MRR would
be as under:
a) The originating bank may maintain a con-
solidated account of the amount representing
MRR if the loans transferred are retail loans.
In such a case, the consolidated amount re-
ceivable in amortisation of the MRR and its
periodicity should be clearly established and
the overdue status of the MRR should be de-
termined with reference to repayment of such
amount. Alternatively, the originating bank
may continue to maintain borrower-wise ac-
counts for the proportionate amounts re-
tained in respect of those accounts. In such a
case, the overdue status of the individual loan
accounts should be determined with reference
to repayment received in each account.
b) In the case of transfer of a pool of loans other
than retail loans, the originator should main-
tain borrower-wise accounts for the propor-
tionate amounts retained in respect of each
loan. In such a case, the overdue status of the
individual loan accounts should be deter-
mined with reference to repayment received
in each account.
cing
c) If the originating bank acts as a servi
trans -
agent of the assignee bank for the loans
s of
ferred, it would know the overdue statu
the basis
loans transferred which should form
vidual
of classification of the entire MRR/indi
the books
loans representing MRR as NPA in
upon the
of the originating bank, depending
expl ained
method of accounting followed as
in para (a) and (b) above.

COMMENTS
have been laid
acc oun tin g, asse t clas sif ica tion and provisioning norms
The
and not for any oth er asp ect s of direct transfers. In case of
down only for MRR k has been given an option to
maintain
il loa ns, the ori gin ati ng ban
transfer of reta
MR R or bor row er- wis e acc ount for proportionate MRR.
consolidated account for loans other than retail loa
ns, maintain-
er of a pool of
However, in case of transf ed.
ts is requir
ing borrower-wise accoun
 etc.
ines on Securuisahon,
Part t—Chap. 3- RBI's Guidel
310: Sya.7

Ketruspectave effect t n B, see

ve in mat ure a cla rif
lari fiedied in | Para, 1,7 (Sectio
Pura 1.4.2 is rewosp ec ti ssiflfication
Classi
| , ussset el cla
> ountng
gui delines in respect of acc
.
are app lic ati on for new as well as existing Uransactions,
ds eb bs

Provisioning aerms for MRR:

rea ds as ~ cla ssi fic ati on and provisioning”, in fact, the para
Whale this para , All it
and says nothing on provisioning
’

ves gui dan ce onl y on clas sifi cati on, n

MRR will be tracked ~ whether on loa
provides is,how theperformance ofthe the
tracked the performance, how will
by loan basis, or pool basis. But having
loanwMRR be taken for provisioning’?
the provisioning norms will be
The most clear intuitive answer to this is that
books ofthe bank, That 1s, if, on
exactly the same asincase ofloans held on the
e are 90 days or more of over-
pool basis or loan basis as the case may be, ther
non-performing and provi-
dues. the loan or the pool in question will be taken as
sioning requirements will apply.
1.5 Disclosures by the Originating Banks
Same as in para 1.6 of Section A.
COMMENTS
er
to commentary
Ref for Para 1.6 of Section A, with appropriate modifications

1.6 Lean Origination Standards

Same as in para 1.7 of Section A.
COMMENTS
Refer to commentary for Para 1.7 of Section A for securitisation transactions
with appropriate modifications for direct assignments. sage
en
of Asse
1.7 Treatm sold
ts t
Requirem
the in
not Meet g ents
stipulated above

in
fails to
bank at
tions. Ifanorigin gthe
meet
siddowni paragraphs 1 to.16 above,i wilhaveto
books of the bank (a —ua eee

Aa

SS. For exist

od expocarce | 1 Para14.2 would apply tocredit exthancemette or
anyether typeofse.
Comments on the Revised Guidelines for Banks
Syn. 7 311

COMMENTS
The treatment required is the same as in securitisation transactions
(See com-
mentary for Section A- Para 1.8).
2. REQUIREMENTS TO BE MET BY THE PURCHASING BANKS
2.1 Restrictions on Purchase of loans
Banks can purchase loans from other banks/FIs/NBFCs in
India only if the seller has explicitly disclosed to the purchas-
ing banks that it will adhere to the MRR indicated in para
1.3 on an ongoing basis. In addition, for domestic transac-
tions, purchasing banks should also ensure that the originat-
ing institution has strictly adhered to the MHP criteria pre-
scribed in the guidelines in respect of loans purchased by
them. The overseas branches of Indian banks may purchase
loans in accordance with the regulations laid down in those
jurisdictions.

COMMENTS
Again, adherence to MRR and MHP criteria by the originating bank has been
made a pre-requisite for the purchase of loans by the purchasing banks (as has
been done for securitisation transactions).
The overseas branches have been given the liberty to purchase loans in other
jurisdictions in accordance with regulations laid down in those jurisdictions. It is
to be noted that for securitisation transactions, the Guidelines require that the
other jurisdiction must have prescribed MRR , however no such stipulation has
been laid down in respect of direct transfers.
2.2 Standards for Due Diligence
2.2.1 Banks should have the necessary expertise and re-
sources in terms of skilled manpower and systems to
carry out the due diligence of the loans/portfolios of
loans before purchasing them. In this regard the pur-
chasing banks should adhere to the following guide-
lines:
a) Banks with the approval of their Board of
Directors, should formulate policiesregarding
the process of due diligence which needs to be
exercised by the banks’ own officers to sat-
isfy about the Know Your Customer re-
quirements and credit quality of the underly-
ing assets. Such policies should inter alia lay
down the methodology to evaluate credit
quality of underlying loans, the information
requirements etc.
 b) The due diligence of the purchased loans

©)
;F | ||
ments ete,, then this should be
: :to the
ekrof e
vInd ia ( ) quide-
extant ResBan
activities by
lines on outsourcing of non-core
ly that
banks, which would inter alia imp
responsi-
banks would continue to retain full
pur-
bility in regard to selection of loans for
Cus-
chase and compliance with Know Your
tomer requirements.
COMMENTS
assignment is that
The significant difference between securitisation and direct
e loan, This in-
in the latter case, the bank has to do due diligence of every singl
the originat-
cludes the KYC requirements too, though, at the time of origination,
ing entity would have done the KYC as well. Due diligence carrie d by the buyer
is understandable, but there does not seem to a reason for carrying second round
of KYC checks.
The responsibility of conducting due diligence lies on the purchasing bank it-
self, and the same cannot be outsourced. Due diligence is to be conducted with
specific focus on KYC norms and credit quality of the underlying assets. The
methodologies for such due diligence are to be provided by formulating appro-
priate policies in this regard.
The Guidelines do allow out-sourcing of some preliminary/non-core work re-
lating to due diligence, like collection “ofieformaton und dovumiratss coy ane
too subject to the prevailing guidelines of RBI in this regard. Banks are therefore
supposed to bear full responsibility in respect of selections of loans.
 the economic activities in which the underly-
ing borrowers are engaged, etc.);
c ~— the reputation of the originators in terms of
observance of credit appraisal and credit
monitoring standards, adherence to MRR
and MHP standards in earlier transfer of
portfolios and fairness in selecting exposures
for transfer;
d) loss experience in earlier transfer of
loans/portfolios by the originators in the rele-
vant exposure classes underlying and inci-
dence of any frauds committed by the under-
lying borrowers, truthfulness of the represen-
tations and warranties made by the origina-
tor;
e ~~" the statements and disclosures made by the
originators, or their agents or advisors, about
their due diligence on the assigned exposures
and, where applicable, on the quality of the
collateral supporting the loans transferred;
and
f) where applicable, the methodologies and con-
cepts on which the valuation of loans trans-
ferred is based and the policies adopted by
the originator to ensure the independence of
the valuer.

COMMENTS
| in securitisation transactions, tefer to commentary on
> notes under the previous section.
‘esting
should regularly perform their own stress tests ap-
te to the portfolios of loans purchased by them. For
pose, various factors which mav he considered to in-
 Securilisahion, eh
Chap. 3.9 RBIs CGwidelines on
sya? Part
si4
k and
der Basel I framewor
ia Pillar U cercise un t any Wnigher risk, I
b ehe ld t osu pp or
account i apital
required.
COMMENTS
of higher
hud
y On Par a 2.2 of Sectioou n A In case em| ergence
com men tar l have
Refer to
of the res ult s of str ess tes ts, the purchasing banks wil
sah is qneittl out
vide for such risks.
w hold akhuenal capital lo pro
24 Credit monitoring

cedures appropriate
profile of the purchased loans. Such procedures
should be as rigorous as that followed by the bank for
ginated by it. In
portfolios of similar loans directly ori
tate timely de-
particular, such procedures must facili

per RBI guidelines as soon as loans are 90 days past

due. The information collected should include the ex-
than 30, 60
posure type, the percentage of loans more

Same asforsecuritisation. Refer tocommentary on

Para 2.3 ofSection A
2.4.2 Depending upon the size

maybyinclude
formation submitted verification
cor of the in-
the bank’s
 Comments on the Revised Guidelines for Banks
Syn. 7 315

internal auditors. The servicing agreement should

provide for such verifications by the auditors of the
purchasing bank. All relevant information and audit
reports should be available for verification by the In-
specting Officials of RBI during the Annual Financial
Inspections of the purchasing banks.

COMMENTS
Use of the word “may” initially, then repetitive use of the word “should” seems
to be contradictory. At one place, the Guidelines say that the credit monitoring
procedure may include verification of the information submitted by the concur-
rent and internal auditors; while the next line says that the servicing agreement
shouldprovide for such verifications by the auditors (statutory). Then again, such
audit reports should be available for verification by the RBI’s inspector during
annual inspections. Inference in short: the statutory auditors must verify the in-
formation submitted by the internal and concurrent auditors.
2.5 True Sale Criteria”
2.5.1 The ‘sale’(this term would here in after include direct
sale, assignment and any other form of transfer of as-
set ,but does not include loan participation through In-
ter- Bank Participation Certificates, bill rediscounted,
outright transfer of loan accounts to other financial
entities at the instance of the borrower and sale of
bonds other than those in the nature of advance)
should result in immediate legal separation of the
‘selling bank’”’(this term hereinafter would include di-
rect selling bank, assigning bank and the bank trans-
ferring assets through any other mode),from the as-
sets*which are sold. The assets should stand com-
pletely isolated from the selling bank, after its trans-
fer to the buyer, i.e., put beyond the selling bank’s as
well as its creditors’ reach, even in the event of bank-
ruptcy of the selling/assigning/transferring bank.
COMMENTS
a in securitisation
The sale in question should be a true sale. For true sale criteri
given to Annex 7 of the
transactions (as the footnote says), reference has been
fact, the said Annex 7
Master Circular on New Capital Adequacy Framework. In
ated under February, 2006
is nothing but the extract of true sale criteria elabor
Guidelines.

OP alee nh
onli ig Mes
—
to Annex 7of our Master Circular
Fortrue sale crite riacy for secur itization panseruey Paré refer ; lh e its Beit
46. ‘talAdequa Fram ewor k dated OL July,
ng loans to banks.
ude other financial entities selli
47 die the eee “asiliiid bank’ will incl y to the part of theas set sold.
,true sale criteria will appl
48. Incase of sale of a part of an asset
 Securitisarion, etc.
i—Chap. 3 RBIs‘'s Guidelines on
Sya.7 Part
416
e purpose
ar at io n of the selling bank (for th
najyor essential es as well, selling —_
Dak . - ere all other entiti ling
‘on
wnp |
lete isolation of the ass8 ets from ¢he sel
hank ass et ¥ a © and Para
pr e Be nDa re s sam e, see commentary On Par
beak - po e on true sale, in Vir
s See detailed discussion
2006 Guideline
LA : ee February, _-

ly transfer allrisks/
selling bank should effective
ns pertaining totheas-
= ane tis andrights/ obligatio

Refer to commentary on Para 7.2 of the February, 2006 Guidelines. Except

that. the revised Guidelines allow the selling bank to hold beneficial interest in
the assets after their sale (MRR). Such a case will not violate the true sale charac-

What about securitisation transactions?

However, in case of securitisation, the February 2006 Guidelines completely
prohibit the originator from holding any beneficial interest
in the asset. Now,
when the revised Guidelines have laid down MRR requirements, there should
debind tadfonOren wake taeinet eaamanan hi b teen ta
actions
oly (as hoves 1 made for direct as i
direc ae ing “ except those specifi
ifi-

2.5.3 There shall be no obligation on the selling bank to re-

purchase or fund the re- payment of the asset or any
eme.
srevide obfiiinnsh auto toGe bate taao
cept those arising out of breach of warranties or rep-
Comments on the Revised Guidelines for Banks Syn. 7 317

COMMENTS
Same as Para 7.4 of the February 2006 Guidelines. See comments under those
Guidelines.
2.5.4 The selling bank should be able to demonstrate that
it has taken all reasonable precautions to ensure that
it is not obliged, nor will feel impelled, to support any
losses suffered by the buyer.

COMMENTS
This is to address possibilities arising out of reputational risks involved in
transactions. Say if the borrowers default in repayment, the market may look
down upon the seller as the one who actually took up the transaction; and out of
the fear of such reputational risks getting crystallised, the seller may feel im-
pelled to support losses suffered by the buyer. Also see commentary on Para 7.6
of the February 2006 Guidelines.
2.5.5 The sale shall be only on cash basis and the consid-
eration shall be received not later than at the time of
transfer of assets. The sale consideration should be
market-based and arrived at in a transparent man-
ner on an arm's length basis.
COMMENTS
Immediate cash consideration and execution of the transfer on an arm’s length
tary on
basis are also the essentials for securitisation transactions (see commen
Para 7.7 of February 2006 Guidelines).
s, in international
One of the common ways of seller drawing his excess spread
n”. The Guide-
transactions, is a practice called “deferred purchase consideratio
eration. However, noth-
lines clearly prohibit any such deferral of purchase consid
tisation, a bullet paying
ing stops the originator from holding, in case of securi
ction. This is, in effect,
tranche, that would pay only at the end of the entire transa
nothing but deferred sale consideration.
icing agent for the
2.5.6 If the seller of loans acts as the serv na-
the ‘true sale’
loans, it would not detract from
service obliga-
ture of the transaction, provided such
it risk on the sold
tions do not entail any residual cred
them beyond the
assets or any additional liability for
ons in respect of
contractual performance obligati
such services.

COMMENTS
Bg
iga tio ns of the sell er in the capacity of the servicer should
The service obl eee yi
add iti ona l ris k on the sell er. In case it so happens, the 2 ruary
lead to any
ue sal e”. Als o ref er to com mentary on Para 7.8 of Feb
no longer remain a “tr
2006 Guidelines.
 cuUruisation, ek
eCu
Part —Ch: ap. 3- RBI'ss GuOwidelines on Se
Sya.?

COMMENTS
requirement is of an “opinion” and
Just as for securitisation transactions, the
is that these are most often qualified
not “certification”. Problem with an opinion on in
and disclaimers are not uncomm
(as in the nature of advice or just a view) es.
these opinions. See commentary on Para 7.9 of February 2006 Guidelin
ver, use of the word
Though giving a negative opinion is also possible. Howe
then the Legal coun-
“whether” instead of “that” has been more appropriate. But
on is a remote (in
sel is that of the selling bank itself; therefore a negative opini
cast upon
fact, impossible) possibility. So, indirectly, the responsibility has been
the legal counsel to ensure that the requirements have been met and thereafter
give a positive opinion.

after the transfer of assets to the buyer, shall be bind-

ing on the buyer and not on the selling bank except to
ofnt
the exte MRR.

COMMENTS
_Any change as mentioned shall be binding on the buyer and not the seller -
cific dispensation has been given for MRR. Satie Sch teanlemnaall teGabetor
securitisation transactions (see Para 7.10 of the February 2006 Guidelines), how-
ever, nothing has been said explicitly in this regard.
2.5.9 The transfer of assets from selling bank must not
contravene the terms and conditions of any underly-
ing agreement governing the assets and all necessary
Comments on the Revised Guidelines for Banks Syn. 7 319

Coming to the consent of the obligors, loans (receivables) are freely transfer-
able under common law and do not require consent of the borrowers. However
agreement may require prior notification/post-notification/prior consent of the
borrower being taken. In such cases, the terms of the agreement has to be com-
plied with. The Guidelines require necessary consent to be taken from the obli-
gors. It is possible that the term necessary has been used in the context of “neces-
Sary under the underlying agreement’; so if the agreement does not necessitate
obtaining the consent of the obligor for transferring the loans, the same may not
be obtained.
Anyways, to be on a safe side, the consent should be taken. See our comments
on Para 7.11 of the February 2006 Guidelines.
2.5.10 In case the selling bank also provides servicing of as-
sets after the sale under a separate servicing agree-
ment for fee, and the payments/repayments from the
borrowers are routed through it, it shall be under no
obligation to remit funds to the buyer unless and un-
til these are received from the borrowers.

COMMENTS
Refer to comments on Para 7.12 of the February 2006 Guidelines.
2.6 Representations and Warranties
An originator that sells assets to other financial entities may
make representations and warranties concerning those as-
sets. Where the following conditions are met the seller will
not be required to hold capital against such representations
and warranties.
(a) Any representation or warranty is provided only by
way of a formal written agreement.
(b) The seller undertakes appropriate due diligence be-
fore providing or accepting any representation or
warranty.
an existing
(c) The representation or warranty refers to
ied by the
state of facts that is capable of being verif
seller at the time the assets are sold.
not open-ended
(d) The representation or warranty is
to the future cred-
and, in particular, does not relate
borrowers.
_ itworthiness of the loans/underlying
on or warranty, requir-
(e) The exercise of a representati
t (or any parts of
ing an originator to replace asse
in the representation
them) sold, on grounds covered
or warranty, must be:
of the transfer of
+ yndertaken within 120 days
assets; and
 s “a

the following condi-

agreement to pay damages meets
tions:
of
° the onus of proof for breach
es with the
or warranty remains at all tim
par tegi
so all yng;
a written
° the party alleging the breach serves
ying the
Notice of Claim on the seller, specif
basis for the claim;and
ctly in-
* damages are limited to losses dire
curred as a result of the breach.
Banking
(g) A seller should notify RBI (Department of
Supervision) of all instance where it has agreed to re-
place assets sold to another financial entity or pay
or war-
damages arising out of any representation
ranty.
COMMENTS
Same as in Para 9 of the February 2006 Guidelines. See comments thereunder.
2.7 Re-purchase of Assets
In order to limit the extent of effective control of trans-
ferred assets by the seller inthe case of direct assignment

COMMENTS
Amidst so many similarities, comes this dissimilarity. Clean up calls are per-
Set Coben te eee ee comments on Para 10 of the February
06 Guidelines). To reiterate, call options retained by the seller may lead to
nehrh pes Ganthe buyer, going against the true sale principle. So even
aoe : Prohibited. There is a clear “no-no” to repurchase the

aoa of Capital Adequacy and other Prudential

 Comments on the Revised Guidelines for Banks
Syn. 7 32]

plicable to retail portfolios directly originated by

banks except in cases where the individual accounts
have been classified as NPA, in which case usual capi-
tal adequacy norms as applicable to retail NPAs will
apply. No benefit in terms of reduced risk weights
will be available to purchased retail loans portfolios
based on rating because this is not envisaged under
the Basel II Standardized approach for credit risk”’.
However, banks may, if they so desire, have the pools
of loans rated before purchasing so as to have a third
party view of the credit quality of the pool in addition
to their own due diligence. However, such rating
cannot substitute for the due diligence that the pur-
chasing bank is required to perform in terms of para
2.2 of this Section.

COMMENTS
The same has been incorporated in Master Circular on Prudential Guidelines on
Capital Adequacy and Market Discipline- New Capital Adequacy Framework
(NCAF)” [Para 5.16.5 (viii)].
The second part of the Para is quite unrelated to the first one, it deals with
credit rating of the pools of the loans before purchasing so as to have an inde-
pendent third party view. However, due diligence is mandatory and cannot be
done away with, even if credit rating is obtained.
2.8.2 In purchase of pools of both retail and non-retail
loans, income recognition, asset classification, provi-
sioning and exposure norms for the purchasing bank
will be applicable based on individual obligors and
not based on portfolio. Banks should not apply the
asset classification, income recognition and provision-
ing norms at portfolio level, as such treatment is
likely to weaken the credit supervision due to its in-
ability to detect and address weaknesses in individual
accounts in a timely manner. If the purchasing bank
is not maintaining the individual obligor-wise ac-
counts for the portfolio of loans purchased, it should
have an alternative mechanism to ensure application
of prudential norms on _ individual obligor basis,
especially the classification of the amounts corre-
sponding to the obligors which need to be treated as
NPAs as per existing prudential norms. One such
eee
22S SS lS ee

capital adequacy and other prudential norms

49. Investment in tranches of securitised loans, will attract
i ritization transactions.
on 3" September,
a Pd /ebid oes.r bi.or g.in/rdocs/contenUPDFs/9SIIMFO20712_A.paf (accessed
 Secwurvisation, etc
Part t-—Chap. 3 RBI's Guidelines on
?
Con-
y statements
could be to seek monthl g agent
taining account-wise s from the servicino differ:
ofthe portfolio int
safacititate classification es, Such details should
categori
asset classification

by the servicing agent. The servicing

maintained
such verifications by
agreement should provide for k. All relevant in-
ban
the auditors of the purchasing
formation and audit report s sh ould be available for
als of RBI during
verification by the Inspecting Offici the purchasing
ns of
the Annual Financial Inspectio

COMMENTS
of retail as well as wholesale
This para is applicable in case of a pool consisting
s.
loans. See comments earlier in case of retail loan pool
income recognition,
In case of pools having retail as well as corporate loans,
individual basis
asset classification and provisioning norms are to be applied on
portfolios
and not portfolio basis, so as to ensure effective credit supervision. The
by the
are to be verified with reference to the records maintained by the servicer,
hank’s concurrent auditors, internal auditors and statutory auditors. Ultimately,
all the records should be available for verification by RBI’s inspecting officials.

in
the accounting treatment of the loans purchased
tenne ofbe chasi
ene ek
ontheacqui-
e y
€ interest
sition canbe
og Purtain
—_od.
meth
ee
her t any disi
count/premium
port basis or ca
located on individual basis.
2.9 Treatment of Exposures not
:
Stipulated Above Meeting the Requiremen
Comments on the Revised Guidelines for Banks Syn. 7 323

The investing banks will assign a risk weight of 1111% to

the assignment exposures where the requirements in para-
graphs 2.1 to 2.8 above are not met. While banks should
make serious efforts to comply with the guidelines contained
in paragraphs 2.1 to 2.4, the higher risk weight of 1111% for
non-compliance of these paragraphs will be applicable with
effect from October 01, 2012. Banks should put in place nec-
essary systems and procedures to implement the require-
ments in paragraphs 2.1 to 2.4 before 30" September, 2012.

COMMENTS
Same as in Para 2.4 of Section A. See comments thereon.

SECTION C
SECURITISATION ACTIVITIES/EXPOSURES NOT PERMITTED
1. At present, banks in India including their overseas branches, are not
permitted to undertake the securitisation activities or assume secu-
ritisation exposures as mentioned below.
1.1 Re-securitisation of Assets
A re-securitisation exposure is a securitisation exposure in
which the risk associated with an underlying pool of expo-
sures is tranched and at least one of the underlying exposures
is a securitisation exposure. In addition, an exposure to one
or more re- securitisation exposures is a_re-securitisation
exposure. This definition of re- securitised exposure will cap-
ture collateralised debtobligations (CDOs) of asset backed
securities, including, for example, a CDO backed by residen-
tial mortgage- backed securities (RMBS).
COMMENTS
regu-
The proposed bar on re-securitisation is also unreasonable. International
re-secu ritisat ion. In fact,
lators have only put additional risk weights in case of
in India is
the only reason why a market for mezzanine tranches does not exist
due to absence of re-securitisation potential.
1.2 Synthetic Securitisations
at least two
A synthetic securitisation is a structure with
that reflect dif-
different stratified risk positions or tranches
risk of an underly-
ferent degrees of credit risk where credit
in whole or in part,
ing pool of exposures is transferred,
inked notes) or un-
through the use of funded (e.g. credit-l
it derivatives or en
funded (e.g. credit default swaps) cred
risk of the portfolio. ;.
antees that serve to hedge the credit the
risk is dependent upon
cordingly, the investors’ potential
pool.
performance of the underlying
 urtisation, etc
Part i—Chap. 3 RBI» Guidelines on Sec
$24 sya?
=n
COMMENTS
1 of Part-l of this
“Syathetic securitisation”, refer to Chapter-
t no la n’ “ bar on syn the tic seouritisaliod 18 URTEASON
wa.n nn le Nal tha ed its mi nd set on portfolio credit epe
e
Me mB ! ha s ac tfo rm ul at reason WHY
but if a por tfo lio can be sec uritised in cash form, there is no
ae
form.
it cannot be securitised in syathetic

amortising assets such as credit card receivables, trade

receivables, dealer floor- plan loans and some leases that
would support non-amortising structures, unless these are

See comments under Para 1.1 (The excluded assets).There is absolutely no rea-
son to bar revolving securitisation transactions. There is no regulation anywhere
in the world barring such transactions, and there is not even any thinking any-
where in the world in this direction. The only additional risk in case of revolving
transactions is the liquidity risk that might arise on account “early amortisation
triggers” which is adequately answered by credit conversion factors for the off
balance sheet part of revolving transactions.
_ In fact. in India, some transactions currently being done are uneconomical, and
se, MCI Framed ablearenotresorting totherevolving structures. Forexam-
ouldfinance
tesechv
receiva
engbles are short term - the ideal structure for these trans-

are securitised on a revolving structure, the restr

iction above does not

Se

Si. The CDS guidetines permit

only single hond CDS
 Comments on the Revised Guidelines for Banks Syn. 7 325

2. The appropriateness and suitability of transactions prohibited in the

above guidelines would be revisited in due course.
COMMENTS
The reasonability of transactions like synthetic securitisation, securitisation
with revolving structures and re-securitisation will be considered in due course.
As opined by the author, prohibitions on such transactions are unreasonable and
should be done away with, of course with required regulatory grip wherever
needed
Appendix1
Format for Disclosure Requirements in offer documents, servicer report,
investor report, etc.”
N Identification No. of ae tion”:

ritised assets’ [asset sccurttised’ may be imterpreted to securitisation and direct transfers sepa-
a = oo droid bemade separately foreach securitisation transaction throughout thelife
of the tramsactios.
 an Seouritisatian, etc.
Part -—Chap. 3-~ RBI's Guidelines

ih fig
~ ayelest
l:
s
SE
~
Fit

$4. This item isnot direct transfer of loans. asthere will be no credit enhancement, hauidity
Comments on the Revised Guidelines for Bank
s Syn. 7 32Y
Nature of disclo-
Amount/
percent-
age/ years
guarantees, cash
collateral, over
collateralisation

Credit quality of
the underlying
loans

a) Percentage of
loans overdue up
to 30 days
b) Percentage of
loans overdue
between 31-60
days
c) Percentage of
loans overdue
between 61-90
days
d) Percentage of
loans overdue
more than 90 days
Details of tangible
security available
for theportfolio of
underlying loans
(vehicles, mort-
gages, etc.)

Extent of security
cover available
for the underlying
 ion, el
Part 1-—-Chap 3— RBI s Guadelines on Secwrunat
32 sya?

ICt
& rae
Tai Ua
il 2
im ;
bs

gr
rt

EH
<= tf
A
ult
Comments on the Revised Guidelines for Bank
s Syn. 7 329
Nature of disclo-
sure Amount/
percent-

b) Amount writ-
ten-off as a_per-
centage of NPAs
in the beginning
of the year (aver-
age of last five
years)
c) Amount recov-
ered during the
year as a percent-
age of incremental
NPAs during the
year (average of
last five year)
Frequency distri-
bution of LTV
ratios, in case of
housing loans and
commercial _ real
estate loans)
a) Percentage of
loans with LTV
ratio less’ than
60%
b) Percentage of
loans with LTV
ratio between 60-
715%
c) Percentage of
loans with LTV
ratio greater than
75%
d) Weighted aver-
age LTV ratio of
the underlying
loans(% )
Other characteris-
tics of the loan
pool
 ines on Securitisation, etc.
Part 1—Chap. 3— RBI's Guidel

Disclosures to be made in Notes to Accounts by banks

No of SPVs sponsored by the bank for securitisation

transactions”
 Comments on the Revised Guidelines
for Non-banking, etc. Syn. 8 331

No./Amount
in Rs. crore
ii) Exposure to third party securitisations
* First loss
¢ Others
b) On-balance sheet exposures
i) Exposure to own securitisations
* First loss
* Others
ii) Exposure to third party securitisations
* First loss
* Others

COMMENTS ON THE GUIDELINES AS A WHOLE

The authorhas criticised the Guidelines as it virtually kills the
direct assignment
business. The provisions of the Guidelines about direct assignment
are inconsis-
tent. But this adverse impact of the guidelines on the direct assig
nment business
should not be lamented upon, because direct assignments are not somet
hing that
was the first love of the market and the market shifted to direct assig
nments fol-
lowing the Feb 2006 guidelines only. So, if we are forced to move back
to “secu-
ritisation” structure, that is a forward move, not backward. However, the Guide-
lines have been unduly harsh on direct assignments, as simpler bilateral sales
don’t have to follow the complex structure of “securitisations”.

8. COMMENTS ON THE REVISED GUIDELINES FOR

NON-BANKING FINANCIAL COMPANIES (NBFCs)
Revised guidelines as issued for NBFCs are very similar to those for banks
(May 2012 Guidelines). The Guidelines lay down MRR and MHP requirements
exactly the same as those for banks. Guidelines have been issued for Direct trans-
fer of loans by NBFCs.

The Circular

RBI//2012-13/170
DNBS.PD. NO. 301/3.10.01/2012-13 August 21, 2012

All NBFCs excluding Primary Dealers (PDs)

Dear Sir,

Revisions to the Guidelines on Securitisation Transactions

 etc.
t t—C hap . 3— RBI 's Gui delines on Securitisation,
332 Sya. 5 Par
ued to NBKCs
del ine s of Sec uri tis ati on of Standard Assets were iss
Detailed Gui 2005
vide | » NO. 60)?
on Viz, Orgh
wo prevent unhealth tices surrounding securitisati
In« in-
2
be oe th e sal e ma nd or sec uri tisation and i order to align the
& 2.ofro istribute
the investors and with a view to red
terest of the originator with that of ors , it was felt necessary that originato
rs
k to @ wid e spe ctr um of inv est
credit ris ective
ation originated and ensure more eff
should retain a portion of each securitis m period of retention of loans prior to
screening of loans. In addition, a minimu ,
ble to give comfort to the investors re-
securitisation was also considered desira
din g the due dil ige nce exe rci sed by the originator, Keeping in view the above
gar
s were formulated and placed in
objectives, draft guidelines for banks and NBEC Bank
public domain for comments in April 201 0 and June 2010 respectively.
3/21.04. 17 7/ 20 11 -1 2 dated May 07,
vide its circular DBOD.No.BP.BC-10
ks. The Guidelines also
012 has issued the final guidelines in this regard to ban
been decided to
cover the regulatory aspects on direct assignment of loans. It has
extend the guidelines to NBFCs also as given in the annex.
3. The guidelines are organised in three Sections. Section A contains the provi-
sions relating to securitisation of assets. A separate circular would be issued in
due course onreset ofcredit enhancements in case ofsecuritisation transactions,
Section B contains stipulations regarding transfer ofstandard assets through di-
rect assignment of cash flows. Section C enumerates the securitisation transac-
tions which are currently not permissible in India.
4. All other guidelines on securitisation
of standard assets remain unchanged.

Yours faithfully,

(Uma Subramaniam)
Chief General Manager-in-Charge

COMMENTS
These guidelines have been issued as additions to the exiisting guidelines
gui issued
on February, 2006. See the comments on the Circular for May 2012 Guidelines
securitisation - meaof
for the meaning ofassets” g n “sale of cashflows”
the expressio
nin
and “homogenous
 Comments on the Revised Guidelines
for Non-banking, etc. Syn. 8 333
of obligors”®. Subject to this conditio
n, all on-balance sheet
standard assets ‘except the following,
will be eligible for se-
curitisation by the originators:
i) Revolving credit facilities (e.g., Credit
Card receiv-
ables)
ii) Assets purchased from other entities
iii) Securitisation exposures (e.g. Mortgage
-backed / as-
set-backed securities)
iv) Loans with bullet repayment of both princ
ipal and
interest’.

COMMENTS
Refer to comments on Section A-Para 1.1 of May 2012 Guidelines.
1.2 Minimum Holding Period (MHP)
1.2.1 Originating NBFCs can securitise loans only after
these have been held by them for a minimum period
in their books. The criteria governing determination
of MHP for assets listed below reflect the need to en-
sure that:
“* the project implementation risk is not passed
on to the investors, and
“* a minimum recovery performance is demon-
strated prior to securitisation to ensure better
underwriting standards

COMMENTS
The Para is about the objective behind laying down MHP requirements. Read
the author’s comment earlier.
1.2.2 NBFCs can securitise loans only after a MHP
counted from the date of full disbursement of loans
for an activity / purpose; acquisition of asset (i.e., car,
residential house etc.) by the borrower or the date of
completion of a project, as the case may be. MHP
would be defined with reference to the number of in-
stalments to be paid prior to securitisation.

56. The single asset securitizations do not involve any credit peeking and redistribution of risk, and
therefore, are not consistent
i i the economici objectives
with jecti of securt tisation. rng
57. In these guidelines the term loans/assets have been used to refer to loans, advances and bonds which
are in the nature of advances. . is
58. Trade receivables with tenor up to 12 months discounted/purchased by NBFCs from their borrowers
will be eligible for securitisation. However, only those loans/receivables will be eligible Ora
vables
sation where a drawee of the bill has fully repaid the entire amount of last two loans/recei
within 180 days of the due date.
 uritivation, etc,
+44 Sya. 8 Part Chap. 3 RBI» Guidelines on Sec

COMMENTS
The MHP requirements are exactly the same as laid down for banks. See com-
ments on Para Section A-Para 1.2.2 of May 2012 Guidelines.
1.2.3 The MHP will be applicable to individual loans in the
pool of securitised loans. MHP willnot be applicable
to loans referred to in foot note 3 of para 1.1.
COMMENTS
MHP is required on individual basis, so filtering of assets may be required.
MHP is not required for bullet loans eligible for securitisation. Read comments
under Section A-Para 1.2.3 of May 2012 Guidelines.
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 335
performance of securitised assets for the entir
e life of
the securitisation process.
The originating NBFCs should adhere to the
MRR
detailed in the Table below while securitizing
loans:
Minimum Retention Requirements at the Time of
Securitisation
Type of Loan [MRR | Description of MRR
Where securitisation in-|Investment in the
volves neither credit|securities issued by
tranching nor any first/the Special Pur-
loss credit enhancement! pose Vehicle (SPV)
by originators equal to 5% of the
book value of the
loans being securi-
tized
Where securitization in- The originator
volves no credit would be providing
tranching, but involves the required credit
originators providing first enhancement
loss credit enhancements If the first loss
e.g. off-balance sheet sup- credit enhance-
ports, cash _ collaterals, ment required is
over collateralisation etc less than 5%, then
the balance should
be in the securities
issued by the SPV.
Where securitization in- 5% in equity
volves credit tranching tranche. If equity
but no first loss credit en- tranche is less than
hancement from origina- 5%, then balance
tor. pari passu in re-
maining tranches.
Where securitization in- If the first loss
volves credit tranching credit enhance-
and first loss credit en- ment is less than
hancements by originator 5%, then balance
(off-balance sheet sup- in equity tranche.
ports, cash _ collaterals, If firstloss credit
over collateralisation etc.) enhancement plus
equity tranche is
less than 5%, then-
remaining pari
passu inother
tranches.
Loans with|10% of |i) Where securitization in- Investment in the
original matur-|the book- volves neither credit securities issued by
ity of more than|value of tranching nor any first the SPV equal to
24 months the loans- loss credit enhancement 10% of the book
being se- value of the loans
curitised being securitised.
 tisation, etc
Part }—Chap. 3 RBI's Guidelines on Securi
336 Sya 5

yeay
ant
ic
:
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 337
Minimum Retention Requirements at the Time
of Securitisation
Type of Loan Description of MRR
the total re-
tention is
10%.
Bullet repay-|10% _ of |i) Where securitization in-|Investment in the
ment loans / re-|the book- volves neither credit|securities issued by
ceivables re-|value_ of tranching nor any first/the SPV equal to
ferred to in foot-|the loans losscredit enhancement/10% of the book
note 3 of para/being se- by originators value of the loans
L2 curitised being securitized
Where securitization in- The originator
volves no credit would be providing
tranching, but involves the required credit
originators providing first enhancement
loss credit enhancements
If the first loss
e.g. off-balance sheet sup- credit enhance-
ports, cash _ collaterals, ment required is
over collateralisation etc. less than 10%, then
the balance should
be in the securities
issued by the SPV.
Where securitization in- 10% in equity
volves credit tranching tranche. Ife quity
but no first loss credit en- tranche is less than
hancement from origina- 10%, then balance
tor paripassu in re-
maining tranches.
Where securitization in- If thefirst loss
volves credit tranching credit enhance-
and first loss credit en- ment is less than
hancements by originator 10%, then balance
(off-balance sheet sup- in equity tranche.
ports, cash _ collaterals, If balance is
over collateralisation etc.) greater than equity
tranche, then re-
maining pari passu
in other tranches.

COMMENTS
Same as that for banks under May 2012 Guidelines, refer to the relevant Para
for comments
1.3.2 MRR will have to be maintained by the entity which
securitises the loans. In other words, it cannot be
maintained by other entities which are treated as
‘originator’ in terms of para 5(vi) of the circular
dated February 1, 2006 containing Guidelines on Se-
curitisation of Standard Assets.
 tisation, etc.
Part }—Chap. 3— RBI's Guidelines on Securi
$38 Sya.ve 5
COMMENTS
ang nof
ress,, and
exposusure
NBC that has ig inated the loan is to retainnme
orig
2012 Guide
aoecomments — Section A-Para 1.3.2 of the May
oS.
lines
the principal cash flows.
13.3 The MRR should represent Interest Only
Therefore, NBPCs' investment inthe Fu-
Strip the Excess Interest Spread /
ordinated,
ture Margin Income, whetheror not sub
will not be counted towards the MRR.
COMMENTS
ipal value, so NBHC's
MRR is to be determined as a percentage on the princ
investment in /O strip is not to be counted.
1.3.4 The level of or selling the retained interest commit-
ment by originators i.c., MRR shouldnot be reduced
either through hedging of credit risk. The MRR as a
percentage of unamortized principal should be main-
tained on an ongoing basis except for reduction of re-
tained exposure due to proportionate repaymentor
through the absorption of losses. The form of MRR
should not change during the life of securitization.
COMMENTS
Reduction of MRR is prohibited through hedging of credit risk or sell-off of
the retained interest; MRR has to remain constant as percentage, not as amount;
therefore amortization of MRR is possible. For details, refer to the comments on
corresponding Para of May 2012 Guidelines.

Same as for banks.

1.4 Limit onTotal Retained Exposures
1.41 At present, total investment the
securities issued by neSPY an ye ga
otherwise is limited to 20% of the total securitised in-
struments issued. It has been decided that the total

lowing forms should not exceed 20% of the total se-

Ines
~ tranch ve me
in equity
st /nt inate /senior
subords
ofsecurities issued bytheSPV
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 339
including through underwriting commit-
ments.
- Credit enhancements including cash
and
other forms of collaterals including, but ex-
cluding the credit enhancing interest only
strip.
- Liquidity support.

COMMENTS
The Para seeks to limit the extent of originator NBFC’
s retention of
ABS/MBS, keeping in view the Basel II requirement. See Sectio
n A-Para 1.4.1 in
May 2012 Guidelines.
1.4.2 If an NBFC exceeds the above limit, the excess
amount would be risk weighted at 667%.”
COMMENTS
Risk-weight in case of banks is 1111%, keeping in view the minimumcapital
requirement of 9 %. See comments on Section A-Para 1.4.2 of May 2012 Guide-
lines. In case of NBFCs, if the exposure limits are breached, the excess is to
be
reduced form the capital and would be risk-weighted at 667%, which is the same
as 1/capital requirements, or 1/15%.
1.4.3 The 20% limit on exposures will not be deemed to
have been breached if it is exceeded due to amortisa-
tion of securitisation instruments issued.

COMMENTS
Relaxation has been provided in case, if the limit gets exceeded due to amorti-
sation of securitisation instruments. Under the May 2012 Guidelines for banks,
credit exposure on account of interest rate swaps/currency swaps entered into
with the SPV has also been excluded from the limit. There is no corresponding
provision in case of NBFCs perhaps because extant norms do not envisage
NBFCs getting into currency swaps.
1.5 Booking of Profit Upfront
1.5.1 In terms of para 20.1 of circular
DBOD.No.BP.BC.60/21.04.048/2005- 06 dated Feb- i
a

ruary 1, 2006, any profit / premium arising on ac-

count of securitisation of loans should be amortised
over the life of the securities issued or to be issued by
the SPV. These instructions were inter alia intended
to discourage ‘originate-to-distribute' model. Now

has been capped at 667%

60. The minimum CRAR requirement for NBFCs is 15%. Hence risk weight
value.
; so as to ensure that the capital charge does not exceed the exposure
 ISAHON, @C-
Pes t i-—Chap.
u/s
:3 RBIs Guidelines On SEOUTH
St) sya 5

the exposures as explained below:

amount of profit received in cash may be held
B. ps head styled as “Cash Profit on

year and calculas ate d:

under
Profit to be amortised = Max{L, [(X*(Y/Z))],
{(X/n)]}}
X = amount of unamortised cash profit lying in the
account ‘Cash Profit on Loan Transfer
Transactions Pending Recognition’ at the beginning
of the year
Y = amount of principal amortised during the year
Z = amount of unamortised principal at the begin-
ning of the year
L = Loss °'(marked to market losses incurred on the
portfolio + provisions,if any,made against
the exposures to the particular transac-
tion + direct write incurred on
credit enhancing interest only strip”
a, “Smiual maturity ofthesecuritisation transac-

COMMENTS
Proper for a regulatory authority to lay down
the same differ to a large extent from the ac-
comm on theencorrespond
ts ing Para in May 2012

would ensure that these debite 12 Profit and Loss account. How-
Tansactions
ofRBI without
taking into accoua een ean Securitisation imter
of extant ms
guidelines
62.
Recognition Account”
For accountingof losses a
manee im“Cash Profit on Transfer Transactions
Pending
SE “Sspect ofcredit enhancing imerest onl
ystrip,please scepara 1.5.3.
 Comments on the Revised Guidelines for Non-
banking, etc. Syn. 8 34]
Guidelines Note that AS 30, the accounting
standard on securitisation, has been
Kept in abey ance — see comments under heading Accounting
in Chapter 3.
1.5.2 The above method of amortization of profi
t can be
applied to outstanding securitisation transactions
as
well. However, the method can be applied only with
respect to the outstanding amortisable profit and un-
amortized principal outstanding as on the date of is-
suance of this circular.

COMMENTS
See comments on in resepct of the May 2012 Guidelines.
1.5.3 At times, the originating NBFCs retain contractual
right to receive some of the interest amount due on
the transferred assets. This interest receivable by the
originating NBFC represents a liability of the SPV
and its present value is capitalised by the originating
NBFC as an Interest Only Strip (I/O Strip), which is
an on-balance sheet asset. Normally, a NBFC would
recognise an unrealised gain in its Profit and Loss ac-
count on capitalisation of future interest receivable
by way of I/O Strip. However, consistent with the in-
structions contained in circular dated February 1,
2006 referred to above, NBFCs should not recognise
the unrealised gains in Profit and Loss account; in-
stead they should hold the unrealised profit under an
accounting head styled as 'Unrealised Gain on Loan
Transfer Transactions". The balance in this account
may be treated as a provision against potential losses
incurred on the I/O Strip due to its serving as credit
enhancement for the securitisation transaction® The
profit may be recognised in Profit and Loss Account
onlywhen Interest Only Strip is redeemed in cash. As
NBFCs would not be booking gain on sale repre-
sented by I/O Strip upfront, it need not be deducted
from Tier I capital. This method of accounting of In-
terest Only Strip can be applied to outstanding secu-
ritisation transactions as well.

63. The I/O Strips may be ‘amortising or non-amortising. In the case of amortising I/O strips, an NBFC
would periodically receive in cash, only the amount which is left after absorbing losses, if rape a
ported by the I/O strip. On receipt, this amount may be credited to Profit and Loss account oF the
amount equivalent to the amortisation due may be written-off against the "Unrealised Gain rise
4 .
Transfer Transactions" A/c bringing down the book value of the I/O strip in the NBFC s boo
I/O Strip, as and when the NBFC receives intimation of fe ed fe
the case of a non-amortising
amount against ge othe
losses by the SPV against the I/O strip, it may write-off equivalent
V0 strip in ( < Bes
on Loan Transfer Transactions" A/c and bring down the book value of the
received in final redemption value of the I/O Strip received in cash may
books. The amount
taken to Profit and Loss account.
 n, etc
Part +-—Chap. 3— RBI's Guidelines an Securuisatio
42 ya.
sa 5

COMMENTS
shal
same sha
‘the same rans
be trans
» shal! not be realized in P/L, A/c,fr rather the
Para of May 2012
A wb mbm — Seecomments on corresponding
|
CGunie lines.
Cs
1.6 Disclosures by the Originating NBIF
/ Investor / Trus-
1.6.1 Disclosures to be made in Servicer
tee Report
The originating NBFCs should disclose to investors
the weighted average holding period of the assets se-
curitised and the level of their MRR in the securitisa-
tion. The originating NBFCs should ensure that pro-
spective investors have readily available access to all
materially relevant data on the credit quality and
performance of the individual underlying exposures,
cash flows and collateral supporting a securitisation

tests on the cash flows and collateral values support-

ing the underlying exposures. The disclosure by an
origin ato
of its fulfillm ent r
of the MHP and MRR
should be made available publicly and should be ap-
propriately documented; for instance, a reference to
the retention commitment in the prospectus for secu-

COMMENTS
Disclosures are required initially as wel
l as continually. Same as for banks.
1.6.2 Disclosures
Annual Account: nau bYthe Originator inNotes to

amount
curitised assets
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 343
by the NBFC as on the date of balance
sheet to com-
ply with the MRR. These figures should
be based on
the information duly certified by the SPV'
s auditors
obtained by the originating NBFC from
the SPV.
These disclosures should be made in the form
at given
in Appendix 2.

COMMENTS
There is no requirement of comparative data. The audit
or’s are to certify the in-
formation on which the figures are to be based. Read
comments under Section A-
Para 1.6.2 of the May, 2012 Guidelines.
1.7 Loan Origination Standards
The originating NBFCs should apply the same sound
and
well-defined criteria for credit underwriting to exposures
to
be securitised as they apply to exposures to be held on their
book. To this end, the same processes for approving and,
where relevant, amending renewing and monitoring of cred-
its should be applied by the originators.

COMMENTS
Loan origination standards are to be the same as those followed for loans to be
kept on books.
1.8 Treatment of Securitised Assets not Meeting the Require-
ments Stipulated above
All instructions contained in this paragraph will be appli-
cable only to the new transactions unless explicitly stated
otherwise. If an originating NBFC fails to meet the require-
ment laid down in the paragraphs 1.1 to 1.7 above, it will
have to maintain capital for the securitised assets as if these
were not securitised. This capital would be in addition to the
capital which the NBFC is required to maintain on its other
existing exposures to the securitisation transaction.

COMMENTS
The above guidelines are prospective and do not apply to existing transactions,
unless there is a specific requirement as such. Non-compliance with the Guide-
lines will take away the capital relief. Also seethe comments on the similar re-
quirement for banks under the May 2012 Guidelines.
2. REQUIREMENTS, TO BE MET BY NBFCS OTH ER THAN
ORIGINATORS HAVING SECURITISATIONEXPOSURE:
2.1 Standards for Due Diligence
i
2.1.1 NBFCs can invest i or assume exposure to a secu-
in
ritisation position only if the originator (other NBFCs
 Ok
Pant b-—Ohap. 3-- RBIs Guidelines an Seouruivahon,
14 Sve. 5

closed to the credit in-

/ Pils / bamks) has explicitly dis
to MEP and MRR stipo-
stitution that ithas adhered
will adhere to MRR
lated in these guidelines and
guidelines on an ongoing basis.
COMMENTS
to
s. However, for banks, 10 addition
The requirement ts the same as for bank
seas branches of banks to invest or
this, prohubition has been lad down for over
i) other jurisdicuons which have
assume exposure to securitisation posilons a
ent for NBFCs, where such
oot laid down any MRR. The prohibition is not pres
situation does mot arise

thorough
of risk profile of their proposed / existing investments

have
"iat for analysing and recording the follow-
a) information disclosed by the .
pusding thebtm Anthecoonelatbals ta
‘as

rist
of the
b) the risk characte ics
individual secu-
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 345
collaterals supporting the loans, cyclical
ity of
the economic activities in which the underly-
ing borrowers are engaged, etc.);
d) the reputation of the originators in term
s of
observance of credit appraisal and credi
t
monitoring standards, adherence to MRR
and MHP standards in earlier securitisations
,
and fairness in selecting exposures for secu-
ritisation;
e) loss experience in earlier securitisations of the
originators in the relevant exposure classes
underlying the securitisation position, inci-
dence of any frauds committed by the under-
lying borrowers, truthfulness of the represen-
tations and warranties made by the origina-
tor;
f) the statements and disclosures made by the
originators, or their agents or advisors, about
their due diligence on the securitised expo-
sures and, where applicable, on the quality of
the collateral supporting the securitised expo-
sures; and
g) where applicable, the methodologies and con-
cepts on which the valuation of collateral
supporting the securitised exposures is based
and the policies adopted by the originator to
ensure the independence of the valuer.

COMMENTS
NBFCs need to be self-assured regarding each and every aspect of the transac-
tion before making the prospective investment. The NBFCs areto lay down for- |
mal policies and procedures top analyse and record the information obtained dur- |
ing the due-diligence process. The requirement is same for banks. |
2.1.3 When the securitised instruments are subsequently
purchased in the secondary market by an NBFC, it
should, at that point in time, ensure that the origina-
tor has explicitly disclosed that it will retain a posi-
tion that meets the MRR.

COMMENTS
Due diligence is also required to be exercised in case of secondary market pur-
chases.
 ation, et.
Part t-—Chap. 3-— RBI's Guidelines an Securitis
+40 »a 5
.
esting
22 Strelss
's should regulart orm their own stress Lests ap:
a bold ean . For this purpose,
atess inthe underlying portoliosin
:
limited to,rise indefault rate rates
« situat of econ n downturn, rise in pre-payment
ioomic
in income levels of the
due tofall inrate ofinterest orrise

resulting in higher prudent valuation adjustments

COMMENTS
Unlike banks, there is no requirement to hold additional capital if
higher risks are perceived from the results of stress testing,
which is surprising. See also comments under the corresponding
para in case of bank guidelines. Credit Monitoring
NBFCs need to monitor on an ongoing basis and in a timely

sure ceilings to certain type of asset class underlying securiti-

sation transaction, modification to ceilings applicable to
originators etc. For this purpose, NBFCs should establish

the percentage of loans more than 30, 60, 90, 120 and 180
days past due, default rates, prepayment rates, loans in fore-
closure, collateral type and occupancy and frequency distri-
scores or other measures of credit worthiness

Credit monitor) ng. aS 4 ris

; k management tool to
be used by NBFCs as well.
24 T
Stpelaten ait,Exposures not Meeting the Requi
The investing
thesecuritisation exposes ncanian ® riskweight of667% to
exposures where the requirements
in the
 Comments on the Revised Guidelines
for Non-banking, etc. Syn. 8 347
paragraphs 2.1 to 2.3 above are not
met. While NBFC
should make serious efforts to com
ply with the sali iines
contained in paragraphs 2.1 to 2.3, the
higher risk weight of
667% will be applicable with effect from
October 01, 2012.
anh srobett put in place necessary
systems and proce-
ures to implement the requirements in para
2.3 before October 31, 2012. rts thathsadionn
COMMENTS
Same as that for banks, except that the risk weight is 667%.

SECTION - B
GUIDELINES ON TRANSACTIONS INVOLVING TRAN
SFER OF
ASSETS THROUGH DIRECT ASSIGNMENT OF CASH
FLOWS AND
THE UNDERLYING SECURITIES
1. REQUIREMENTS TO BE MET BY THE ORIGINATING NBFCS
1.1 Assets Eligible for Transfer™
1.1.1 Under these guidelines, NBFCs can transfer a single
standard asset or a part of such asset or a portfolio of
such assets to financial entities through an assign-
ment deed with the exception of the following:
i) Revolving credit facilities (e.g., Credit Card
receivables)
ii) Assets purchased from other entities
iii) Assets with bullet repayment of both princi-
pal and interest™

COMMENTS
The eligible assets and the excluded assets are the same as stipulated for banks.
Read Section B-Para 1.1 of May 2012 Guidelines.
1.1.2 However, these guidelines do not apply to:
i) Transfer of loan accounts of borrowers by an
NBFC to other NBFCs / FIs / banks and vice
versa, at the request / instance of borrower;
ii) Trading in bonds;

any
64. In these guidelines, transfer would mean transfer of assets through direct sale, assignment and
of transfer of assets. The generic term used for transfers would be sale and purchase. on
other form
/purchased by NBFCs from their see ebb
65. Trade receivables with tenor up to 12 months discounted 3 sd
sup consti
will be eligible for direct transfer through assignment. However, only those of last (wo
fully repaid the entire amount
be eligible for such transfer where a drawee of the bill has
loans/receivables within 180 days of the due date.
 ation, etc
Part }—Chap. 3— RBI's € widelines on Securitis
sya 5
assets consequent
iii) Sale of entire portfolio of business
of
upon a decision to exit the line
on sho uld have the
completely, Such a decisi
approval of Board of Directors ofthe NBEC;
ements;
iv) Consortium and syndication arrang
v) Any other arrangement / transactions, spe-
cifically exempted by the Reserve Bank of In-
dia.
COMMENTS
es,
See comments on Section B-Para 1.1.2 of May 2012 Guidelin
1.2 Minimum Holding Period (MHP)
Saas mein para 1.2 of Section A.
COMMENTS
MHP is the same as needed in securitisation transactions.
1.3 Minimum Retention Requirement (MRR)
3.6 The originating NBFCs should adhere to the MRR detailed in the Table
below while transferring assets to other financial entities:
 Comments on the Revised Guidelines
for Non-banking, etc. Syn. 8 349

COMMENTS
See notes under corresponding para for banks.
1.3.3 NBFCs should not offer credit enhancements
in any
form and liquidity facilities in the case of
loan trans-
fers through direct assignment of cash flows
, as the
investors in such cases are generally the insti
tutional
investors who should have the necessary expe
rtise to
appraise and assume the exposure after carrying
out
the required due diligence. NBFCs should also not
re-
tain any exposures through investment in the Interest
Only Strip representing the Excess Interest Spread /
Future Margin Income from the loans transferred.
However, the originating NBFCs will have to Satisfy
the MRR requirements stipulated in para 1.3.1
above. NBFCs' retention of partial interest in the
loans transferred to comply with the MRR indicated
in para 1.3.1 should be supported by a legally valid
documentation. At a minimum, a legal Opinion re-
garding the following should also be kept on record
by the originator:
a) legal validity of amount of interest retained
by the originator;
b) such arrangement not interfering with as-
signee's rights and rewards associated with
the loans to the extent transferred to it; and

c) the originator not retaining any risk and re-

wards associated with the loans to the extent
transferred to the assignee.

COMMENTS
Refer to comments on Section B-Para 1.3.3 of the May 2012 Guidelines; there
is a similar restriction on offering credit enhancement by the banks.
1.3.4 MRR will have to be maintained by the entity which
sells the loans. In other words, itcannot be main-
tained by other entities which are treated as 'origina-
tor' in terms of para 5(vi) of the circular dated Feb-
ruary 1, 2006 containing guidelines on securitisation
' of standard assets.

COMMENTS
Same as in securitisation.
 ation, et
Part }—Chap. 3— RBI's Guidelines on Securitis
5 sya a 5
1.0, MRR
level ofcommitment by originators ng of
hedgi
ae ee nid not bereduced either through est, The
redit risk or selling the retained inter

tionate yment or through the absorption of

during
losses. The form of MRR should not change
the life of transaction

COMMENTS
Same as in securitisation.
1.3.6 For complying with the MRR under these guidelines,
NBFCs should ensure that proper documentation in
accordance with law is made.

COMMENTS
See comments under the corresponding para in case of banks.
1.4 Booking of Profit Upfront
1.4.1 The amouni of profit in cash on direct sale of loans
may be held under an accounting head styled as

X = amount of unamortised
cash
account 'Cash Profit on Loan Profit lying inthe
Transfer Transactions Pending ;
beginning ofthe year mocap’ otthe
¥=amount ofprincipal amortised during theyear
ait= = principal at the begin-

tobe made
T gned28 (specific provisions
exposures forcreditlossesplusdirect write.
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 351
off plus any other losses, if any)” incu
rred on the
portfolio
a = residual maturity of the securitisati
on transac-
ion

COMMENTS
The profit recognition rule is the same as in securitisation;
however this seems
to be illogical. There is similar rule for banks, see comments
of the author on cor-
responding Para of May 2012 Guidelines.
1.4.2 Accounting, Asset Classification and provisioning
norms for MRR
The asset classification and provisioning rules in
respect of the exposure the MRR would be as under:
a) The originating NBFC may maintain a con-
solidated account of the amount representing
MRR if the loans transferred are retail loans.
In such a case, the consolidated amount re-
ceivable in amortisation of the MRR and its
periodicity should be clearly established and
the overdue status of the MRR should be de-
termined with reference to repayment of such
amount. Alternatively, the originating NBFC
may continue to maintain borrower-wise ac-
counts for the proportionate amounts re-
tained in respect of those accounts. In such a
case, the overdue status of the individual loan
accounts should be determined with reference
to repayment received in each account.
b) In the case of transfer of a pool of loans other
than retail loans, the originator should main-
tain borrower-wise accounts for the propor-
tionate amounts retained in respect of each
loan. In such a case, the overdue status of the
individual loan accounts should be deter-
mined with reference to repayment received
in each account.

if ay tat He
66. The specific provisions to be made as well as direct write-offs and other losses,
In addition NBFCs wie nee
tained exposures should be charged to Profit and Loss account.
part of MRR as required in terms of extant quidesnes
capital against the exposure retained as
Transfer Fahd icearaat
RBI without taking into account balance in "Cash Profit on Loan BaD ia AEORAE St a
to separate ly maintain
Recognition" account. NBFCs will also be required the "Cash Profi é
tions which should not be charged to
sions on MRR as per existing instruc
Transfer Transactions Pending Recognition" A/c.
 ation, etc
Part }—Chap. 3— RBI's Guidelines on Securitis
452 sya 5

bank/NBPC for the

agent of the assignee
the overdue
joans transferred, it would know
uld form
status of loans transferred which sho
ire MRR /
the basis of classification of the ent
NPA in
individual loans representing MRR as

upon the method of

ae cain pen and (b) above,
COMMENTS
Same as for direct assignment by banks.
LS Disclosures by the Originating NBFCs
Same as in para 1.6 of Section A.
COMMENTS
Same
as for securitisation transactions.
1.6 Loan Origination Standards
Same as in para 1.7 of Section A.

COMMENTS
Same as for securitisation.
1.7 Treatment of Assets sold not Meeting
M the Requirements
stipulated at
All instructions contained in this in para
except

actio
1.4.2 will beapplicable toboth existing and new trans
parans®” If an originatiNBF
ngC tulle €.anent thewoquive-
downalin
laidcapit
menttain
main
para grap hs 1.1 to1.6 above, itwill have to
for the assets sold as if these were still on the
hooks ofthe NBFC (originatNBFC ing).
COMMENTS
; sioning norms for MRR are . retro-
-

and provi
saineande Asset Clas ifj

spective and will apply to existi

above guidelines will seve Ga transactions as well. Non-compliance with the
NBFC ofthecapital relief.
Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 353
2. REQUIREMENTS TO BE MET BY THE PURCHASING
NBFCS
2.1 Restrictions on Purchase of loans
NBFCs can purchase loans from other NBF
Cs / FIs / banks
in India only if the seller has explicitly disc
losed to the pur-
chasing NBFCs that it will adhere to the MRR
indicated in
para 1.3 on an ongoing basis. In addition, for
domestic trans-
actions, purchasing NBFCs should also ensure that
the origi-
nating institution has strictly adhered to the MHP
criteria
Pisce bie in the guidelines in respect of loans purc
hased by
them.

COMMENTS
Same as for purchasing banks under the May 2012 Guidelines.
2.2 Standards for Due Diligence
2.2.1 NBFCs should have the necessary expertise and re-
sources in terms of skilled manpower and systems to
carry out the due diligence of the loans / portfolios of
loans before purchasing them. In this regard the pur-
chasing NBFCs should adhere to the following guide-
lines:
a) NBFCs with the approval of their Board of
Directors, should formulate policies regard-
ing the process of due diligence which needs
to be exercised by the NBFCs' own officers to
satisfy about the Know Your Customer re-
quirements and credit quality of the underly-
ing assets. Such policies should inter alia lay
down the methodology to evaluate credit
quality of underlying loans, the information
requirements etc.
b) The due diligence of the purchased loans
cannot be outsourced by the NBFC and
should be carried out by its own officers with
the same rigour as would have been applied
while sanctioning new loans by the NBFC.
c) If an NBFC wishes to outsource certain ac-
tivities like collection of information and
documents etc., then NBFCs would continue
to retain full responsibility in regard to selec-
tion of loans for purchase and compliance
with Know Your Customer requirements.
 on, ek
Part Chap. 3— RBI's Guidelines on Securitisati
ss 4 Svea. 5

COMMENTS
ourced , and is to be car ied by own officers of the
Due diligence cannal be outs
re activities related to due diligence can be out
NBPC. However, certam non-co
sourced
2.2.2 purchasing individual loans or portfolio of
as as appropriate thereafter, NBFCs should
be able to demonstrate that they have a comprehen-
sive and thorough understanding of and have imple-
mented formal policies and procedures commensu-
rate with the risk profile of the loans purchased ana-
lysing and recording:
a) information disclosed by the originators re-
garding the MRR, on an ongoing basis:
b) the risk character of theist res con-
exposuics
stituting the portfolio purchased (Le., the
credit quality, extent of diversification and
homogeneity of the pool of loans, sensitivity of
repayment behavior of individual borrowers
to factors other than their sources of income,
volatility of the market values of the collat-
erals supporting the loans, cyclicality of the
economic activities in which the underlying
engaged, etc.);
areers
borrow
c) the reputation of the originators in terms of
observance of credit appr aisal and credit
monitoring standard s, adhe rence to MRR
and MHP standardsin earlier transfer of
portfolios and fairness in selecting exposures
for transfer;
d) loss experience in earlier transfer of loans /
Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 355
the originator to ensure the independence
of
the valuer.

COMMENTS
Same as in securitisation transactions. Refer
to Section A of these Guidelines.
2.3 Stress Testing
NBFCs should regularly perform their own stres
s tests ap-
propriate to the portfolios of loans purchased by
them. For
this purpose, various factors which may be considered
in-
clude, but are not limited to, rise in default rates
in the un-
derlying portfolios in a situation of economic downturn
and
rise in pre-payment rates due to fall in rate of interest or rise
in income levels of the borrowers leading to early redempti
on
of exposures.

COMMENTS
Read comments under section A of these Guidelines.

2.4 Credit monitoring

2.4.1 The purchasing NBFCs need to monitor on an ongo-
ing basis and in timely manner performance infor-
mation on the loans purchased and take appropriate
action required, if any. Action may include modifica-
tion to exposure ceilings to certain type of asset
classes, modification to ceilings applicable to origina-
tors etc. For this purpose, NBFCs should establish
formal procedures appropriate and commensurate
with the risk profile of the purchased loans. Such
procedures should be as rigorous as that followed by
the NBFC for portfolios of similar loans directly
originated by it. In particular, such procedures must
facilitate timely detection of signs of weaknesses in
individual accounts and_ identification of non-
performing borrowers as per RBI guidelines as soon
as loans are 180 days past due. The information col-
lected should include the exposure type, the percent-
age of loans more than 30, 60, 90, 120 and 180 days
past due, default rates, prepayment rates, loans in
foreclosure, collateral type and occupancy, and fre-
quency distribution of credit scores or other meas-
ures of credit worthiness across underlying expo-
sures, industry and geographical diversification, fre-
quency distribution of loan to value ratios with band
widths that facilitate adequate sensitivity analysis.
Such information, if not collected directly by the
NBFC and obtained from the servicing agent, should
 lian, et.
? '
RBI » Gawd dines on Securuisa
»a 5 Pant laa
$50
icials of of the serv icing
vertified by the authorized off icials
ke use of the disclo-
—e NBFCs may inter alia ma
the form given in
sures made by the originators in
res.
Appendix | to monitor the exposu
COMMENTS

Same as for socurlisalion.,

it moni-
142 Depending upon the size ofthe portfolio, cred

COMMENTS
The statutory auditors should verify the information submitted by the concur-
rent auditors and internal auditors. Ali the information and audit report shall be
made available to the RBI's inspecting official.
2.5 True Sale Criteria
2.5.1 The ‘sale’ (tisis term would hereinafter include direct

The features are the | om

earlier
er
comments oftheauthor onthesamenang, netim this Chapter. Refto
Comments on the Revised Guidelines for Non-
banking, etc. Syn. 8 397
2.5.2 The selling NBFC should effectively trans
fer all risks
/ rewards and rights / obligations pertaini
ng to the
asset and shall not hold any beneficial interest
in the
asset after its sale except those specifically permitte
d
under these guidelines. The buyer should have
the
unfettered right to pledge, sell, transfer or exchange
or otherwise dispose of the assets free of any restrain-
ing condition. The selling NBFC shall not have any
economic interest in the assets after its sale and the
buyer shall have no recourse to the selling NBFC for
any expenses or losses except those specifically per-
mitted under these guidelines.

COMMENTS
The Guidelines prohibit holding of any beneficial interest in the assets after
their sale, except as otherwise permitted under the Guidelines (i.e. MRR). Also
see comments on Section B-Para 2.5.2 of the May 2012 Guidelines,
2.5.3 There shall be no obligation on the selling NBFC to
re-purchase or fund the repayment of the asset or
any part of it or substitute assets held by the buyer or
provide additional assets to the buyer at any time ex-
cept those arising out of breach of warranties or rep-
resentations made at the time of sale. The selling
NBFC should be able to demonstrate that a notice to
this effect has been given to the buyer and that the
buyer has acknowledged the absence of such obliga-
tion.
COMMENTS
Refer to comments under February 2006 Guidelines.
2.5.4 The selling NBFC should be able to demonstrate that
it has taken all reasonable precautions to ensure that
it is not obliged, nor will feel impelled, to support any
losses suffered by the buyer.
COMMENTS
Same as that under May 2012 Guidelines.
2.5.5 The sale shall be only on cash basis and the consid-
eration shall be received not later than at the time of
transfer of assets. The sale consideration should be
market-based and arrived at in transparent manner
on an arm's length basis.
COMMENTS

Refer to Section B- Para 2.5.5 of May 2012 Guidelines,

 ete.
Part t—Chap. 3— RBI's Guidelines on SecurWisalion,
ss Syed
nt for the
| seller ofloans acts as the servicing age
ue sale’ nature
Tine ould notdetract from the ‘tr
e obligations
of the transaction, provided such servic as-
do not entail any residual credit risk on the sold
bey ond the
sets or any additional liability for them
respect of
contractual performance obligations in
such services,
COMMENTS
should hol
Che service obligations of the seller in the capacity of the servicer
ction will
lead to any additional risk on the seller. In case it so happens, the transa
no longer remain a “true sale”, Also refer to commentary on Para 7,8 of February
2006 Guidelines
2.5.7 An opinion from the selling NBFC's Legal Counsel
should be kept on record signifying that
: (i) all rights,
titles, interests and benefits in the assets have been
transferred to the buyer; (ii) selling NBFC is not li-
able to the buyer in any way with regard to these as-
sets other than the servicing obligations as indicated
in para 2.5.6 above; and (iii) creditors of the selling
NBFC do not have any right in any way with regard
to these assets even in case of bankruptcy of the sell-
ing NBFC.
COMMENTS
Read comments on Section B-Para 2.5.7 of May 2012 Guidelines.
Comments on the Revised Guidelines for Non-
banking, etc. Syn. 8 359
2.5.10 In case the selling NBFC also provides servicing of
assets after the sale under a separate
servicing
agreement for fee, and the payments / repaymen
ts
from the borrowers are routed through it, it shall
be
under no obligation to remit funds to the buye
r
unless and until these are received from the borrow-
ers.

COMMENTS
Refer to comments on Para 7.12 of the February 2006 Guidelines.
2.6 Representations and Warranties
An originator that sells assets to other financial entities may
make representations and warranties concerning those as-
sets. Where the following conditions are met the seller will
not be required to hold capital against such representations
and warranties.
a) Any representation or warranty is provided only by
way of a formal written agreement.
b) The seller undertakes appropriate due diligence be-
fore providing or accepting any representation or
warranty.
c) The representation or warranty refers to an existing
state of facts that is capable of being verified by the
seller at the time the assets are sold.
d) The representation or warranty is not open-ended
and, in particular, does not relate to the future cred-
itworthiness of the loans / underlying borrowers.
e) The exercise of a representation or warranty, requir-
ing an originator to replace asset (or any parts of
them) sold, on grounds covered in the representation
or warranty, must be:
*yndertaken within 120 days of the transfer
of assets; and
*conducted on the same terms and conditions
as the original sale.
f) A seller that is required to pay damages for breach of
representation or warranty can doso provided the
agreement to pay damages meets the following condi-
tions : *the onus of proof for breach of representa-
tion or warranty remains at all times with theparty
so alleging;
 lion, ete.
Part +-—-Chap. 3 RBI's Guidelines an Seouruisa
ow) sya. 5

in-
“damages are limited to losses directly
curred as a result of the breach
nt of Non-
g) A seller should notify RBI (Departme
it has
Banking Supervision) of all instances where
l en-
agreed to replace assets sold to another financia
or pay damages arising out of any representation
lity
or warranty.\
COMMENTS
Same as in Para 9 of the February 2006 Guidelines, See comments thereunder,
2.7 Re-purchase of Assets
In order to limit the extent of effective control of trans-
ferred assets by the seller in the case ofdirect assignment
transactions, NBFCs should not have any re-purchase
agreement including through "clean-up calls" on the trans-
ferred assets.

COMMENTS
Clean up calls are permitted in securitisation transactions (see comments on
Para 10 of the February 2006 Guidelines). However, have been prohibited in di-
rect assignments.

28 Applicability ofCapital Adequacy and other Prudential

 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 361
2.8.2 In purchase of pools of both retai
l and non-retail
loans, income recognition, asset classifi
cation, provi-
sioning and exposure norms for the
purchasing
NBFC will be applicable based on individual
obligors
and not based on portfolio. NBFCs should not
apply
the asset classification, income recognition and prov
i-
sioning norms at portfolio level, as such treatmen
t is
likely to weaken the credit supervision due to its in-
ability to detect and address weaknesses in individu
al
accounts in a timely manner. If the purchasing NBFC
is not maintaining the individual obligor-wise ac-
counts for the portfolio of loans purchased, it should
have an alternative mechanism to ensure application
of prudential norms on individual obligor basis, espe-
cially the classification of the amounts corresponding
to the obligors which need to be treated as NPAs as
per existing prudential norms. One such mechanism
could be to seek monthly statements containing ac-
count-wise details from the servicing agent to facili-
tate classification of the portfolio into different asset
classification categories. Such details should be certi-
fied by the authorized officials of the servicing agent.
NBFC's concurrent auditors, internal auditors and
statutory auditors should also conduct checks of
these portfolios with reference to the basic records
maintained by the servicing agent. The servicing
agreement should provide for such verifications by
the auditors of the purchasing NBFC. All relevant in-
formation and audit reports should be available for
verification by the Inspecting Officials of RBI during
the Annual Financia! Inspections of the purchasing
NBFCs.

COMMENTS
RBI has specified prudential norms for NBFCs in NBFC Prudential Norms Di-
rections (for deposit-taking and non-deposit taking NBFCs separately)’. The
Guidelines require that the norms are to followed on an individual loan basis and
not portfolio basis. Also read comments for similar such stipulation regarding
banks.
2.8.3 The purchased loans will be carried at acquisition
cost unless it is more than the face value, in which
case the premium paid should be amortised based on

70. For rdNBFC-D: http://www.rbi.o rg.in/scripts/BS_ViewMasCirculardetails.aspx?id=7410 (accessed

. For NBFC-ND: i AQ202
id=7409 (accessed on 3° Septem
On alfa roiove in/scripts/BS_ ViewMasCirculardetails.aspx
ber, 2013).
 on, et.
Part +-—-Chap. 3-— RBI's Guidelines an Securitisati
©. »a 5
ine method or effective interest rate method,
——— appropriate by the individual NBPOs,
not be
The outstanding / unamertised premium need
deducted from capital, The discount / premium on
the purchased loans can be accounted for on portfolio
basis or allocated to individual exposures propor:
tionately.
COMMENTS
Same as for banks.
2.9 Treatment of Exposures not Meeting the Requirements
Stipulated Above
Tho tavesting NBECs willaavign bs risk weight ofG87 to
the assignment exposures where the requirements in para-
graphs 2.1 to 2.8 above are not met. While NBFCs should
make serious efforts to comply with the guidelines contained
in paragraphs 2.1 to 2.4, the higher risk weight of 667% for
of these will be applicablewith
effect from October 01, 2012. NBFCs should put in place
necessary systems and procedures to implement the re-
quirements in paragraphs 2.1 to 2.4 before October 31, 2012.
COMMENTS
Same as Para 2.4 of Section A.

SECTION C
SECURITISATION ACTIVITIES / EXPOSURES NOT PERMITTED
1. At present, NBFCs in India are not permitted to undertake the
secu-
ritisation activities or assume securitisation exposures as
mentioned

: pool
of expo-
Fee ceenauched and atleast one ofthe underlying

See comments given earlier.

 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 363
1.2 Synthetic Securitisations
A synthetic securitisation is a structure
with at least two
different stratified risk positions or tranches
that reflect dif-
ferent degrees of credit risk where credit risk
of an underly-
ing pool of exposures is transferred, in whol
e or in part,
through the use of funded (e.g. credit-linked note
s) or un-
funded (e.g. credit default swaps) credit derivatives
or guar-
antees that serve to hedge the credit risk of the portf
olio. Ac-
cordingly, the investors’ potential risk is dependen
t upon the
performance of the underlying pool.

COMMENTS
See earlier comments on the same topic.
1.3 Securitisation with Revolving Structures (with or without
early amortization features)
These involve exposures where the borrower is permitted to
vary the drawn amount and repayments within an agreed
limit under a line of credit (e.g. credit card receivables and
cash credit facilities). Typically, revolving structures will have
non-amortising assets such as credit card receivables, trade
receivables, dealer floor-plan loans and some leases that
would support non-amortising structures, unless these are
designed to include early amortisation features. Early amor-
tisation means repayment of securities before their normal
contractual maturity. At the time of early amortisation there
are three potential amortisation mechanics: (i) Controlled
amortisation; (ii) Rapid or non-controlled amortization; and
(iii) Controlled followed by subsequent (after the completion
of the controlled period) non control amortization phase.

COMMENTS
The same has been discussed earlier.

2. The appropriateness and suitability of transactions prohibited in the

above guidelines would be revisited in due course.

COMMENTS
The prohibitions on securitisation with revolving structures, synthetic securiti-
sation and re-securitisation can be expected to be lifted up.
 s on Securitisation, etc.
More sya5 Part }—Chap. 3— RBI's Guideline
Appendix|
1

sis
He
reli lib
|

EF a r
a
ifs

:
ip
prareia

aaP
din
-
aa

:
|SHi
Fe
i
Hi
‘| '
i
:
i
 Comments on the Revised Guidelines for
Non-banking, etc. Syn. 8 365
Nature of dis-
closure Amount/ per-
centage/
Sets securitised and outstanding
on the date of disclosure)”
a) Credit Enhancement (i.e.
whether investment in eq-
uity/subordinate tranches,
first/second loss guarantees, cash
collateral, overcollateralization

Breaches, if any, and reasons

there for
Credit quality of Distribution of overdue loans are aes
the underlying
loans a) Percentage of loans overdue
up to 30 days
b) Percentage of loans overdue
between 31-60 days
c) Percentage of loans overdue
between 61-90 days
d) Percentage of loans overdue
more than 90 days

f) Percentage of loans overdue

more than 180 days
Details of tangible security avail-
able for the portfolio of underly-
ing loans (vehicles, mortgages,
etc.)

(iii) | Extent of security cover available Baa ef

for the underlying loans
a) Percentage of loans fully se- (ia |
cured included in the pool (%)
b) Percentage of partly secured ae er
loans included in the pool (%)

liquidity
73. This item is not relevant for direct transfer of loans, as there will be no credit enhancement,
support and tranching.
 ation, etc.
Part }—Chap. 3— RBI's Guidelines on Securitis
soo Sya.5

| :
:
;
|

:
;
 Comments on the Revised Guidelines
for Non-banking, etc. Syn. 8 367
Nature of dis-
closure Amount/ per-
centage/
years
c) Percentage of loans with LTV
ratio greater than 75%
d) Weighted average LTV ratio
of the underlying loans(%)
Other character- (i) Industry-wise breakup of the
istics of the loan loans in case of mixed pools (%)
pool

(ii) 2) eographical distribution of loan

a=)ools (statewise) (%)

Appendix 2
Disclosures to be made in Notes to Accounts by NBFCs
Particulars No./ Amount
in Rs. crore
No of SPVs sponsored by the NBFC for securitisation
transactions”
Total amount of securitised assets as per books of the
SPVs sponsored by the NBFC puso ia
3 Total amount of exposures retained by the NBFC to
comply with MRR as on the date of balance sheet
a) Off-balance sheet exposures
* First loss
* Others
b) On-balance sheet exposures
* First loss
* Others
Amount of exposures to securitisation transactions
other
than MRR
otto 7 a) Off-balance sheet exposures

reported here.
74. 1Only the SPVs relating to outstanding securitisation transactions may be
 ation, etc
Part }—Chap. 3— RBI's Guidelines on Securitis
soa Svea.a 9
‘No/ Amount
unt
‘in Rs,crore
= i) Exposure to own securitisations
* First boss
+ Others
| ii) Exposure tothird party securitisations
) + Pirst loss

9, COMMENTS ON GUIDELINES ON RESET OF

CREDIT ENHANCEMENTS IN SECURITISATION
TRANSACTIONS

RBI/2013-14/111
DBOD.No.BP.BC- 25/21.04.177/2013-14

July
1, 2013

(Excluding RRBs and Local Area Banks)

and All-India Term Lending and
Refinancing Institutions
(Exim Bank, NABARD, NHB and STIDBI)

Dear Sir.

Revi
tosi
the Guid
on elines o

Please refer tothe Paragraph

Statement 2013-14 announced onMer a yemctosed) oftheMonetary Policy
Reset ofCredit Ent ‘ May 3, 2013 on issuance of ‘Guidelines on
 Comments on Guidelines on Reset of
Credit, etc. Syn. 9 369
2. In the draft guidelines issued on secu
ritisation transact
ions in Septem-
ber 2011, the Reserve Bank had pro
posed to permit reset of credit enha
ment subject to certain conditions. How nce-
ever, in view of certain issues, it was
indicated in Reserve Bank’s final guidelin
es on securitization titled 'Revi-
Sions to the Guidelines on Securitisation
Transactions' dated May 7, 2012
that guidelines on resetting of credit enhanc
ements would be issued sepa-
rately.

3. Taking into account the comments received from

various stakeholders
in response to the draft guidelines mentioned above
, guidelines on reset of
credit enhancement have now been finalised and are enclo
sed in Annex. The
original amount of credit enhancement can be reset and
excess withdrawn
by the credit enhancement provider subject to the conditions
prescribed in
this circular.

4. All other guidelines on securitisation of assets including those contain

ed
in our 'Master Circular on Basel III Capital Regulations’ dated July
1, 2013
remain unchanged.

Yours faithfully,

(Chandan Sinha)
Principal Chief General Manager
SS

Extract from Monetary Policy Statement for the Year 2013-14

Guidelines on Reset of Credit Enhancement in Securitisation
83. The Reserve Bank issued guidelines on 'Revisions to the Guidelines on
Securitisation Transactions' in May 2012. The guidelines introduced norms
on minimum holding period, minimum retention ratio, loan origination
standards and standards of due diligence with regard to securitisation
transactions to ensure orderly growth of the Indian securitisation market.
While the extant guidelines do not permit reset of credit enhancements ra:
ing the life of the securities issued by the special purpose vehicle, it was in 4
cated in May 2012 that guidelines on resetting of credit enhancement wou
be issued separately. Accordingly, it is proposed to: |
* issue the final guidelines on reset of credit enhancement in securitisation
by end-June 2013.
a
 Securitisation, et.
7 Mw) Sya.? Part |—Chap. 3— RBI's Guidelines on

COMMENTS

Where does the concept ofreset come from?

There are several ways to increase the percentage size of credit enhancement —
sequential repayment of senior classes, use of excess spread to create over-
collateralisation, trapping of excess spread into a cash reserve, etc.
A transaction structure would, therefore, typically provide for an increase in the
level of enhancement for a certain time, till the step-up is achieved, and then al-
low, the percentage size to remain flat. However, such a transaction will nor-
mally also contain a structural protection — if the pool performance deteriorates
or such similar triggers are hit, the transaction will revert to sequential payment
mode, or stop payment of principal to junior classes, or stop the release of excess
spread etc.
However, there is no question of reduction in the percentage value of credit en-
hancement ever. There is also no question of use of discretion, either on the part
of the originator or by the concurrence of rating agencies, to “reset” the en-
hancement levels.
Itis not certain where did the concept of “reset” at all came into India, but itis
quite likely that itisthe product of the flawed drafting of 2006 Guidelines
which
 Comments on Guidelines on Reset of Cred
it, etc. Syn. 9 371
been clearly undone in the 2012 Guidelin
es. Therefore, the whole concept of re-
Set was not even required.
To render a meaning to the language of 2012
Guidelines which require MRR to
be maintained only as a percentage of unamorti
sed pool value, as also to impart
meaning to the so-called reset guidelines, the auth
or’s interpretation is that the
concept of reset applies only to the “external
credit enhancements” discussed be-
low. As regards the “internal credit enhancements
” (subordinated tranches or
over-collateralisation), the concept is not applicab
le at all, since a natural pay-
down of subordinated tranches, as well as overcoll
ateralization, is allowed in the
2012 Guidelines.
The language of 2006 Guidelines and 2012 Guidelines
As stipulated in Paras 11.9 and 11.10 of the February 2006
Guidelines, the
credit enhancement facility should be provided only at the initia
tion of the secu-
ritisation transaction and the amount so extended at the initiation
should be avail-
able to the SPV during the entire life of the securities issued by the
SPV. No por-
tion of the credit enhancement shall be released to the provider during
the life of
the securities issued by the SPV.
The draft revised guidelines placed 27" September, 2011’°, contained guide-
lines as to reset of credit enhancement too, but those guidelines were not final-
ized and therefore not incorporated in the revised Guidelines of 7" May, 2012.
However, with the advent of these Guidelines, reset of credit enhancement,
within the meaning discussed above, is possible now, subject to the conditions
stated in the Guidelines.

Annex

Guidelines on Reset of Credit Enhancements in Securitisation Transactions

1. Credit enhancement is the process of enhancing credit profile of a

structured financial transaction through provision of additional Se-
curity/financial support, for covering losses on securitized assets in
adverse conditions. The enhancements can be broadly divided into
two types viz. internal credit enhancement and external credit en-
hancement. A credit enhancement which, for the investors, creates
exposure to entities other than the underlying borrowers is called the
external credit enhancement. For instance, cash collaterals and
first/second loss guarantees are external forms of credit enhance-
ments. Investment in subordinated tranches, over-collateralisation,
excess spreads, credit enhancing interest-only strips are internal
forms of credit enhancements.

PressReleaseDis-
75. See Press Release dated 27" September, 2011: http://www.rbi.org.in/scripts/BS
play.aspx ?prid=25137 (accessed on 3" Septembe r, 2013).
 Seouruisation, etc.
Part t-—Chap. 3-— RBI's Guidelines an

ent. The present

ther doesei ntly reflect the meaning of credit enhancem
not exac
1 to
Guidelines, though does not specifically state
| uth
more light on the term.
ncing « pro-
the Guidelines say, credit enhancement is a process of enha that the
Reanee wrananetion. The author has pointed out earl ier
floatastruc
concept of enhancement is not specific or exclusive to structured finance,
tly stated,
cather itembraces the all-pervasive area of finance. However, as righ
credit enhancement is essential to secure a high level of credit rating, and to
cover losses in adverse situations. In the context of securitisation transachons,
credit enhancements are means to mitigate the risk of default in the pool of as-
sets, provide cushions to the senior securities for them to attain higher rating, to
enhance the security or the credit of the securitised instrument.
Forms of Credit Enhancement
The words “through provision of additional security/financial support” point
towards the various forms in which credit enhancement may be provided. Provi-
sion of additional security is nothing but over-collateraand sati
licash on
coll at-
eral; financial support may come in the form of credit tranching (first loss/second
loss faciexce li ssty ),etc.
spread,
Internal/External
Credit Enhancement
The classification of credit enhancement as internal and external has been

from | i
above the cashflows of the underlying asset. Where the exposure is to under
borrowers (i.e. cashflows from the asset), itisinternal credit enha lying
ncement (itre-
spective of whether theoriginator isextending the same ot any third party), e.g.

thirdparty.Theclasification canbeshown inPiece Yor tS Originator ora

 Comments on Guidelines on Reset of Credit, etc.
Syn. 9 373

Credit
enhancements

Exposure to Exposure to
other entities underlying
borrowers

Cash First loss Second loss Subordinated * goto Excess eet

collateral
e g
guarantee guarantee tranche aahianeee
ain spread enhancing
[Gstap

Figure 3.6: Classification of Credit Enhancement

In India, typically, the first loss guarantee is usually by way of fixed deposit
provided by the originator himself and second loss guarantee is by way of bank
guarantee, however both these are subordinated to the senior security, hence
while they may not be a subordinated security or tranche per se, but are subordi-
nated in the transaction.
2. Resets can be applied to external forms of credit enhancement pro-
vided by a third party or the originator, which is in first or second
loss position. The original amount of external credit enhancements
provided at the time of initiation of securitisation transaction can be
reset by the credit enhancement provider subject to the conditions
enumerated below.

COMMENTS
Reset is allowed only for external forms of credit enhancement (extended by
the originator or a third party), that too for those in first and second loss position.
Then again, there are certain conditions required to be fulfilled to avail the reset
facility. We have discussed earlier that reset is not even necessary in case of in-
ternal forms of enhancement.
However, there is no restriction on the number of times that reset can be done.
i. At the time of reset, all the outstanding tranches of securities
should be re-rated (other than equity tranches which are not
rated). The first reset of credit enhancement will not be per-
mitted if the rating of any of the tranches has deteriorated
vis-a-vis the original rating of these securitisation positions.
Subsequent resets would not be permitted if the rating of any
 etc.
Syn.a 9 Part t—Chap. 3- RB's Guidelines an Securviisation,
;
i/4

a-vis the rating at the

of the ranches has deteriorated vis-
time of previous reset.
COMMENTS

. ) enhane rating are intimately connected, As such,

: ne ae pene ay significant impact on the rating of secu
nt ol credit
Seren alti becomes necessary so as to determine the amou
the
positions,
pnb net Though the reset is allowed for first and second loss
y tranches
ane is required for all the outstanding tranches (except the equil
g
not rated). Pusther, reset is prohibited if there has been deterioration i the ratin
of any of the trdnchestrom its ummediately preceding rating .
is permissible in terms of (i) above, the amount of
- heat A ar
mcener required for retaining the original or
current outstanding rating, whichever is higher should be de-
termined by the concerned rating agency for” the first reset.
Similarly, for subsequent resets, the amount of credit en-
hancement required for retaining the higher of the rating at
the time of previous reset and current outstanding rating
should be determined by the concerned rating agency.
COMMENTS
The words “whichever is higher’ or ‘higher of the rating...” seem to be non-
functional, because the question of reset of credit enhancement will not ariseif
the rating of any of the tranches has deteriorated vis-a-vis the immediate prior
rating. The current outstandin g will in any case, be either
rating, equal or above
the immediate previous rating (original or at the time of previous reset).
As regards the rating agency, it shall bethe same that undertook initial rating
of

iii. The reset of credit enhancement would be subject to

the con-
sent of trustees.

COMMENTS
Consent oftrustees isrequired tocarry out
Mycae af never. as canbeseen inthenex the reset, andnot the consen oftin-
t para,consent ofinvestors is i
ede pe ae «

" terms ofRevised Guidelines ofMay 2012,

mn
*
* *

contractual terms of th
e
of the transaction should
resets. In respect of the tra
nsa
terms of circular DBOD.No. ctions entered into in
BPeC-laviLesie

76. Only therating agency which

PDO oFresetoFcreditenhancement SCCwitization transaction initially shallre-rte it
forthe
 Comments on Guidelines on Reset of
Credit, etc. Syn. 9 375
dated May 07, 2012, reset can be carr
ied out subject to the
consent of all investors of outstanding
securities. In respect of
the transactions entered into prior to
May 2012 guidelines,
the stipulation pertaining to MRR will
also have to be com-
plied with in addition to other conditio
ns for reset of CE
mentioned in this circular.

COMMENTS
The contractual terms of the transaction shall specifical
ly allow resetting of
credit enhancement. The initial rating shall also consi
der the possibilities of fu-
ture resets. However, the manner of considering the same has
not been indicated,
SO most probably, the same has been left to the discretion
of rating agency.
The Reset Guidelines can be applied retrospectively to securi
tisation transac-
tions already entered into in accordance with May2012
Guidelines, provided
consent of all the investors of outstanding transactions is obtain
ed alongwith con-
sent of the trustees. The reason behind the unanimous consent of
investors is that
in case of transactions entered into before the Reset Guidelines, the
contractual
terms would not have contemplated reset. In order to address the absen
ce of such
express enabling clause in the contract, it becomes necessary that all theinv
estors
give their consent to the reset.
Even in case of transactions entered prior to May 2012 Guidelines, reset is
permissible, provided the transactions meets MRR stipulations under May 2012
Guidelines, consent of all the investors is obtained (for the same reason as indi-
cated before), and consent of trustees, too is obtained.
v. The reset may be carried out simultaneously between First
Loss Credit Enhancement (FLCE) and Second Loss Credit
Enhancement (SLCE) in a proportion such that the reset
maintains the outstanding rating [as envisaged in Para 2(ii)
above] of Second Loss Credit Enhancement (SLCE). How-
ever, reset of equity tranche is not allowed as it would tanta-
mount to internal credit enhancement.

COMMENTS
The important point above is the reset of equity tranche is not allowed. Never-
theless equity tranche may amortise over time.
3. The pool of underlying loans must demonstrate satisfactory per-
formance before reset is permitted. Accordingly, the reset of credit
enhancement and release of collateral/guarantee/ any other exposure
constituting external credit enhancement should be based on the
compliance with all the terms and conditions/triggers defined as un-
der:
 eb
Part i—Chap. 3— RBI's Guidelines on SecuPUuiyadhon,
3]0} ~?
Sa

COMMENTS
e for
isitite
alis
s!t pert orma nce of o f the pool of underlyin| g loans ; is the the prepre- requ
Sati subse:
performance has been laid down in
reset The deeen oftrode we
quent paragraphs

COMMENTS
The performance of the pool has to be assessed taking into consideration the
extent of repayment and write off of the principal only, and not the payment of
interest. First reset can be carried out only if minimum 50% of the original prin-
cipal amount has been amortised, and subsequent resets are possible only if the
extent of amortisation reaches the levels of 60%, 70% and 80% of the original
leve l
of principal.
Though there are no restrictions as to the number of resets with respect to a
particular securitisation transaction, yet limit has been imposed on the frequency.
For transactions of tenor upto 5 years, there should be a minimum gap of 6
months; and for transactions of tenor of more than 5 years, there should be a
minimu gap of |m year.
, 1.
b. No reset should happen if the rigge r’
breached. The Delinquency Tri for this

to32 years’ es" up to

tenor) 365days (forf tran
or 180
sactionsofup
ctions of
more than 2 years’ tenor) days (for transa
Plus
Total value at risk (overdue plus future principal
outstanding) ers and
than
at 180
365 days for sacter
trandeep
g) in buck
ions of ets (g
teno re
r up to2 year
 Comments on Guidelines on Reset of Cred
it, etc. Syn. 9 377
Other losses” not captured in above
two categories
(irrespective of whether they are
written off or
not),exceed 50% of the ‘amortisation-adjusted
amount of first loss and second loss position cove
r’® .
and
The total amount of:
All overdues up to 180 days (for transactions
of up to
2 years' tenor) or 365 days (for transact
ions of more
than 2 years' tenor)
Plus
Total value at risk (overdues plus future principal
outstanding) in deeper buckets (greater than 180 or
365 days for transactions of tenor up to 2 years and
exceeding 2 years, respectively)
Plus
Other losses not captured in above two categories
and not written offexceed 50% of the ‘available first
loss and second loss position cover’®'.

COMMENTS
Reset is not allowed if “delinquency trigger” is breached. The formulae for
“delinquency trigger” can be presented in a compact form as in Figure 3.7 (ie.
the trigger is breached if):

All overdues Total Value at Risk Other losses 50% of amorti-

upto 180/365 (overdues) + Future (irrespective of sation adjustment
days Principal Outstanding) whether written off) amount of
in deeper buckets FLCE/SLCE

AND

j
Total Value at Risk Bip Rees 50% of
etic amorti-
atisitsteas
All overdues
upto 180/365 (overdues) + Future ; |
semalGhitatandinc) not written off amount of
days Principal f in
Outstanding gees
in deeper buckets

Figure 3.7: Breach of Delinquency Trigger

79. ‘Other Losses’ refer to all losses/shortfalls that might have ky a Kies pict atpe on age‘i
repossessed assets or other events rendering i the accoun ts irrecoverable in| th
siting agency even prior to the completion of the specified overdue period of 180 days or 365 days
as the case may be.
80. Amortisation adjusted amount of f firstfi loss and second position cover is ‘the original amount of first
loss and second position cover aval lable at the time of undertaking securitisation transaction’ multi-
a
plied by ‘percentage o rincipal already amortised’.
is the amount of first loss and second position cover
81. Available first loss an Astave ssp nota
remaining after any prior reset or absorpt ion of losses.
 vion, en.
Part i—Chap. 3 RBIi s Guidelines on Securuisa

~ | “ ct of credit enhancement
would be subject to a re»
ant) me of the initial credit enhancement

COMMENTS
nes
A minimum level of credit enhancement is to be maintained, i.e. the Guideli
stipulate a reserve floor, expressed as a percentage of the initial credit enhance-
ment. Credit enhancement can be released, however, the reserve floor should not
be lower than 30% of the initial credit enhancement.
b. A maximum of 60% of the credit enhancement in excess of
that required to retain the credit rating of all the tranches as
referred to in para 2 (ii) above assigned to them can be con-
sidered for release, at any point of time subject to fulfilling
the reserve floor indicated at Para 4(a) above.

COMMENTS
This para puts an upper limit to the credit enhancement eligible for release. A
maximum of 60% of the credit enhancement that is in excess of the same re-
quired to maintain ratings, can be released. At the same time, the reserve floor
too is to be maintained.
c. The reset should not lead to exposures retained
torsalong withcredit cuhamewmomte offered byteas felling
below the level of MRR prescribed in Section A Para 1.3.1 of
RBI's Securitisation Guidelines dated May 7, 2012. In re-

of May 2012, the MRR requirement

oftherevised guidelines
must befulfilled foravailing thereset facility.
COMMENTS
Fe Canny guidelines shallinnoway, hamper the
2012 Guidelines. The MRR stipulations under May
auae, level of MRR shall be maintained under any circum-
The May 2012 Guidelines di ;
provisions. andsoMRRrequirements werenenooprctive effect, except forfew
Comments on Guidelines on Reset of Credi
t, etc. Syn. 9 379
5. In order to facilitate a common understa
nding amongst stakeholders
and to allow the market to understand
the linkage between good
pool performance and CE reset, CRAs may
disseminate information
pertaining to CE reset via press release and
may confirm that rat-
ings will be unaffected by such reset.

COMMENTS
The para is self-explanatory.
Based on the above Guidelines and comments thereunder
, the overall condi-
tions required to be fulfilled for reset of credit enhancemen
t can be shown as:

Post-Reset Post 2012 No

Before 2012
Guidelines Guidelines Guidelines
Reset NOT
Permissible
Yes

enabling
reset

No

Yes

Reset
PERMISSIBLE

Figure 3.8:
 Transaction |

Senior Liabilities
Tranche
Senior
Second Loss Tranche
Credit En-
hancement (PTCs)
(SLCE) FLCE+SLCE
First Loss
Credit En-
hancement
(FLCE)

Sr. Compliance
No.

ferred
(Original Pool
Principal Bal-

tranche
b. SLCE

itEnhancement
Amount of 150
OFIEMA- |50% 25
third |50% 25

nent by
lor as
f MRR

; of

= 2
 in
on Secu sation, ek
rities
Part | —Chap 3— RBI's Guidel

“Alte

aii
hele
TALE
wll
Wis
i
Comments on Guidelines on Reset
of Credit, etc.
Syn. 9 383

Compliance Non-compliance

Whether reset
is being car-
ried out sub-
ject to the con-
sent of trus-
tees
a. Whether the
reset was con-
templated in
the _ original
terms of the
contract
b. In case No
(existing con-
tracts), is reset
being carried
out subject to
the consent of
all investors of
outstanding
securities
Amount of
credit en-
hancement
required to
retain the rat-
ing of the
tranches as
determined by
the Rating
Agency (pro-
vided by
CRA)
Amount of 600
principal am- [(1-6)/1]
ortised(pool
amortisation)
(i)Trigger 1
a. Loans 15
Overdue (De-
linquencies up 35
to 365 days)
(10+25)
b. Value at
risk for delin-
[9(b)+10]
quencies in 5
deeper buck-
ets
 Securitisation, etc
Part |—Chap. 3— RBI's Guidelines on

is;
sat

=
&
é
x

delin-

be
x
 Comments on Guidelines on Reset of
Credit, etc. Syn. 9 385

2a yo i
Sane
Amount which
can be with-
“Ege (150-100 ) |50
x ess 4,
credit en- [18(4
h 16] i) (e)-
ancement
b. With-
drawable 30
amount

a. MRR re- 42 Com-

quired plied
(10% of 7) with as
b. Amount | 100-20= | 29 42<S57
that can be/ 80 (See 21
released from [8 At (j))
FLCE, — such 21(b)]
that rating of
SLCE is main-
tained (pro-
vided byCRA)
e Amount 50% of 80
available after [50% of
withdrawal 21(c)]
from First loss
d. Share of | 39-20
originator
[20(b)-
21(b)]
e. Amount to 50-10
be released
from SLCE
[8 B-
21(e)]
50% of 40
f. Amount
available after
[50% of
withdrawal
21(f)]
from second-
loss

g- Share of [(40/1000)
originator +420]
[(5(b)/1)*7
]

: ; ; é
cont
84. The excess amount available for reset will be computed subject to the Mod amuiuaal teak 60
So even if Credit Enhancement required to retain the ratings as per this circular 1s less
c
40), the reserve floor requirement of 60, as calculated in thisthis 5 example,
in atria
MT Pepee will still have to be adhered
to i.e. the excess amount available for reset would be 150-60=
 Sl il7

{21h
pe2H

:
iit
A

The illustration provided inthereset guidel

ine isfaulty
in several ways:
* je {istlosscredit enhanceme
nt (FLCE) andsecond loss
hancement (SLCE) have credit en-
bee
balance sheet which isunclear.n shown as
 Comments on Guidelines on Reset of Credi
t, etc. Syn. 9 387
2. As per the Securitisation Guidelines of
2012, MRR may also include a
vertical tranche of securitised paper in addition
to equity or subordinate
tranche to ensure that the originator has stake in
the performance of secu-
ritised assets for the entire life of the securitisation
process. In the illus-
tration, for MRR purposes, FLCE is considered but
SLCE is not consid-
ered, even though SLCE is partly provided by the
originator as well (See
pt. 5 of the illustration).
3. In the calculation of reserve floor, 30% of 200
is considered and the 40
held by the originator as credit enhancement is not consi
dered (See pt 19.
4 (a) of the illustration).
4. The Securitisation Guidelines of 2012 mention that MRR
of the unamor-
tised principal is to be maintained on an ongoing basis except for
reduc-
tion of retained exposure due to proportionate repayment or throug
h the
absorption of losses. In 21. 4, (c) MRR is required is shown as 42, this
would mean that the total MRR to be maintained would be 42 irrespec-
tive of being a vertical or subordinate tranche or FLCE or SLCE. Here
RBI is making it clear that the MRR requirement is 10% of the
unamortised principal in the transaction, which is what the intent of
the Securitisation Guidelines of 2012 state as well.
5. In 21.j. the total investment by the originator eligible for MRR considers
the senior tranche and FLCE. SLCE has been omitted here.
6. As per the May 2012 Guidelines the total exposure of the originator 20%
of the total securitised instrument. The investments made by the origina-
tor shall include equity/ subordinate/ senior tranches of securities issued
by the SPV including through underwriting commitments, credit en-
hancements including cash and other forms of collaterals including over-
collateralization, but excluding the credit enhancing interest only strip. If
this requirement of the 2012 securitisation guideline had to be complied
with, as per the illustration in the reset guidelines all transactions are
breaching the requirement and hence shall require the NBFC to attach
the risk weight of 667% to the excess amount.
The illustration leaves one confused about what exactly MRR is, credit en-
hancements are and what we are trying to reset and for what purpose. India may
be the only country having any such guidelines on the reset of credit enhance-
ments. Even before the industry settles to understand the complexity of the regu-
lations, there is another one thrown towards the market to leave it unsettled for
some more time.
 APPENDIX |

DISCUSSION PAPER ON EMERGING TRENDS IN

REGULATION AND SUPERVISION OF
SECURITISATION ACTIVITIES OF BANKS*
PRESS RELEASE
Date: 19" April 2010

RBL invites comments on proposals regarding Minimum Holding

Period and Minimum Requirement for loans originated

The Reserve Bank of India has, today placed on its website, a Discussion Paper
on ‘Emerging Trends in Regulation and Supervision of Securitisation Activities
of Banks’. The Discussion Paper seeks to provide an update of the ongoing inter-
national work in regard to minimum holding period and minimum retention re-
quirement for loans originated for securitisation, the rationale behind differing
opinions and set the background for proposals regarding minimum Lock-in Pe-
riod/Minimum Holding Period (MHP) and Minimum Retention Requirements for
Indian banks.
The Paper is divided into three Sections. Section I discusses the issues and
posals relating toLock-in Period/Minimum Holding Period (MHP). Section IIis
devoted tothe issues surrounding Minimum Retention Requirement
(MRR) and
related proposals. Section III outlines the modifications to existing guideli
proposed to be issued for banks operating in India.
nes

ft may be recalled that in the Second Quarter Review

announc
of the
RBIwill edissue
by Reserve
deta Bank ofIndiaj on October 27, 2009, ‘ :
itwas indicat ed that

Draft Guidelines proposed tobeissued to

banks inthematter arealso ann exed.
nailed ByMay 1d cussion Paper
aswellasDraftGuidelines mayple
emat , ase be
Manager-in-Charge. Department
als o sent by po/st
courier Chief General
of = ' andOe Re-
 Discussion Paper on Emerging Trends in
Regulation, etc. App. 1 389
Press Release2009-2010/1412
RBI/2009-10/
DBOD.No.BP.BC. //2009-10, April 19, 2010

The Chairman and Managing Director/

Chief Executive Officers
All Scheduled Commercial Banks
(Excluding RRBs and Local Area Banks)
Dear Sir,
Second Quarter Review of Monetary Policy for the Year 2009-
10—
Securitisation Transactions- Draft Guidelines
Please refer to paragraph 161 of the Second Quarter Review of the
Monetary
Policy for the year 2009-10 announced on October 27, 2009 (copy of the
para-
graph enclosed), wherein it was proposed to stipulate minimum retenti
on re-
quirement (MRR) and minimum holding period (MHP) for securitisation transac
-
tions.
2. Securitisation involves the pooling of assets and the subsequent sale of the
cash flows from these asset pools to investors. The securitization market is pri-
marily intended to redistribute the credit risk away from the Originators to a wide
spectrum of investors who can bear the risk, thus aiding financial stability and to
provide an additional source of funding. The recent crisis in the credit markets
has called into question the desirability of certain aspects of securitization activ-
ity as well as of many elements of the ‘originate to distribute’ business model,
because of their possible influence on originators’ incentives and the potential
misalignment of interests of the originators and investors. While the securitiza-
tion framework in India has been reasonably prudent, certain imprudent practices
have reportedly developed like origination of loans with the sole intention of
immediate securitization and securitization of tranches of project loans even be-
fore the total disbursement is complete, thereby passing on the project implemen-
tation risk to investors.

3. With a view to developing an orderly and healthy securitization market, to

ensure greater alignment of the interests of the originators and the investors, as
also to encourage the development of the securitization activity in the country in
a manner consistent with the aforesaid objectives, several proposals for post-
crisis reform are being considered internationally. Central to this is the idea that
originators should retain a portion of each securitization originated, as a mecha-
nism to better align incentives and ensure more effective screening of loans. In
addition, a minimum period of retention of loans prior to securitization Is also
considered desirable, to give comfort to the investors regarding the due diligence
exercised by the originator.
4. Keeping in view the above objectives and the international work under pro-
g
gress on these accounts, the following guidelines have been formulated regardin
the Minimum Holding Period and Minimum Retention Requirement:
 Securuisalion, ee.
wo Apel Part t-—Chap. 3— RBI's Guidelines on

4.1 Miminawm Hobding Period (MHIP)

repayment schedules, the
@ @ In the case of loans with periodic ;
MHP would be nine months from
+ date of full disbursement of loans tor an rae:
date of acquisition of asset by the borrower (.€ car, >
tial house, etc.); date of completion of project, as the case
may be
OR
+ date of first instalment of interest/principal/EMI which is
due
whichever is later
(b) In case of bullet repayment loans, twelve months from the rele-
vamt dates specified in (i) (a) above.
(a) In the case of loans with periodic repayment schedules, the MHP
would be twelve months from
* date of full disbursement of loans for an activity/purpose,
dateof acquisition of asset by the borrower (i.e car, resi-
dential house, etc.); date of completion of project; as the
case may be
OR
. res of first instalment of interest/principal/EMI which is
whichever
is later
(b) No securitization of loans with maturity exceeding 24 months
and bullet repayment is envisaged.
 adt| itd ‘dna
i eat i
Discussion Paper on Emerging Trends in Regulation, etc.

IT | "
Hall
nin
atl
ifs age
letil
| fie thts
| iff tnefil eei:
5 rr ayage? | eR ; PES: a
ootiaiee
= — —_ — TR NRRE CR SST SS . MCR OS POET
 Seouruinalion, eh
2 Ape | Part }—Chap. 3-— RBI's Guidelines on

DISCUSSION PAPER

Dyby Re Xe
Secoad Quarter Review of the Monetary Pol Policy announced noed
to ensure thattheoriginators
eee eee orIndia on October 27, 2009, in order
do not compromise oa due dil of assets generated for the purpose of secu-
n period of one year
ritisation, itwas proposed to stipulate (i) a minimum lock-i
um reten-
for all types of loans before these can be securitised and; (ii) & minim
tion bythe originators of 10 per cent of the pool of assets being seouritised. It
keeping
was indicated that detailed guidelines, on these aspects would be issued
in view the work currently in progress, especi all
the Europe anyUn-
ion and the USA.
0.2 Securitisation involves the pooling of assets and the subsequent sale of the
cash flows from these asset pools to investors, The securitization market is pri-
marily intended to redistribute the credit risk away from the originators to a wide
spectrum of investors who can bear the risk, thus aiding fi stabil ityto
and
provide an additional source of funding. The recent crisis in the credit markets
has called into question the desirability of certain aspects of securitization activ-
ity as well as of many elements of the ‘originate to distribute’ business model,
becof aus e
their possible influenc es’ incentiv
on originator es
and the potential
misalignmentof interestsof the originator s
and investors. While the securitiza-
tion framework in India has been reasonably prudent, certain imprudent
iuve supeunediy developed Wz origiaslion of\aeas Wak Wa Oe EGIROE Ot
immediate securitization and securitization of tranches of project loans even be-
fore thetotal disbursement iscomplete, thereby passing on the project implemen-

whicsc
fielsdDi Pap‘
h i us on
er see
si ks to
the Thi
im0.4
ker oun y all in
l Prog ress . rat
the ion ale beh ind dif fer ing opi nio ns and
setstheBac
rounding MRR and rclans ‘ cti | ! devoted to the issues sur-

tobeisouedforbanks opersting nla

 Discussion Paper on Emerging Trends in Regul
ation, etc. App. 1 393
SECTION I—HOLDING/ LOCK-IN PERIOD
1. Rationale for Lock-in period
When an originator makes a decision to extend credit
for the purpose of trans-
ferring it instantly to an SPV via securitisation, there
is the risk of credits being
screened less effectively. The longer the period during
which the underlying as-
sets are held on the books of the originator before being
securitised, the less this
risk should be. According to CEBS, the holding period befor
e the assets can be
securitised is connected with the business model of the origi
nator viz. (i) case of
some investment banks where large portfolios are procured for
the sole purpose
of securitization (ii) case of traditional banks/FIs that know the
end borrowers to
a greater extent and wish to use securitisation as a way of secur
ing additional
funding/freeing up capital for doing further business. In reality, of
course, there
will be multiple institutions whose business models are a hybrid betwe
en these
two extremes.
2. Generally, a requirement to keep the originated loans in its own books at
least for some period until full disbursement of loans for an activity/purpose, ac-
quisition of asset by the borrower, completion of project, as the case may be; OR,
observing a minimum servicing of the loan by the borrower should ensure exer-
cise of due diligence by the originating banks.

SECTION II—ISSUES SURROUNDING MINIMUM

RETENTION REQUIREMENT
2.1. Work Initiated by European Union Commission
The major work in regard to minimum retention requirements is being under-
taken by the European Union (EU). CEBS has on October 30, 2009 issued tech-
nical advice to the European Commission on the four alternative proposals for
implementing the minimum retention requirement of 5% for the investors in se-
curitization instruments. It may be mentioned that in view of the fact that signifi-
cant investments were made by the EU banks in the instruments issued by non-
EU forms on which EC cannot impose the retention requirement, the EC had de-
cided to impose the requirement on the investing credit institutions. The require-
ment states that no credit institution would invest in a securitised instrument if
the issuer has not retained a minimum of 5% exposure.
2.1.1 Gist of CEBS Advice 2.1.1.1 General Observations
(i) CEBS believes that minimum risk retention would contribute towards
alignment of incentives. However, they are also of the view that increas-
ing it beyond appoint would be futile as the originators would shed off
the exposure by higher pricing. 3 |
(ii) CEBS acknowledges that minimum retention might conflict with Expo-
sure Draft 2009/03 issued by IASB on De-recognition of Assets.
lil i
iction to be applied to investors
i , rather than originat
igi ors. The reason
>. ney EU banks A invested significantly in the securitized instru-
ments issued by non-European banks.
 s on Seourvisation, eh
we) = Appt Part t-—Chap. 3— RBI's Guideline
|
2.1.1.2 Four Options
on provides four methods of meet
The Directive issued by European Commissi
ing the 5% retention requirement:
d 10 investors, |
(a) retention ofeach tranche sold ortransferre
iusations of revolving expo-
(b) retention of an originator’s interest in secur
onses:
d. retention of a
(c) retention ofequivalent exposures onbalance sheet; or
first loss tranche.
(1) Opti(@) on ands(b)
* These option s ‘pari passu’ exposures with the investors.
would create
* The main argument in support of the ‘vertical slice’ in the case of
tranched structures and ‘originators’ interest’ in the case of revolving ex-
posu re
as retentio exposures is their ability tocreate ‘oradle to grave’
n s,
exposures. The originator is bound to remain interested in the securitised
assets till last amount due is recovered, as it would share the losses pro-
portionately.
* However, major shortcoming of this option is that a 5% pari passu inter-
est does not provide a strong amount of economic exposure to the assets;
for instance, if the underlying assets suffer a 5% loss, the seller would
only suffer a 5% loss on its 5% vertical slice (compared to a 100% lows
under option (d), i.e. first loss retention). Second, to the extent that the
assets in a vehicle are of sufficiently low quality and to the extent that the
excess spread from such assets can still flow to the originator after mak-
ing payments to both the bondholders there may still be an incentive for
Se nae SOcEngNO mr quality aoemy aan Glave Gem. a iees-

single-handedly guard
* Consequently, a vertical slice may not :
against thepotential origination of| necessarily
tee hae
(ii) Option (c)
2. a "
* This option requires the
on its balance sheet. originator to retain 5% of equivalent exposures

type s s. ree
of issue a ay
Subjective judgement of what isan “equivalent”
mina
tal e
tion
ite of whet her theorig inat or's non-invo lvement pap
aar
: be detr imen tal toinve stor s even thou gh the sail tne
assegts. Iti ) —
Xposure tosimilar underlyin

* On the other hand, there are ,

alignment ofinterest. Forinstance. tothe
offsetting omit option interms of
benefits to
Discussion Paper on Emerging Trends in Regu
lation, etc. App. 1 395
is holding an equivalent retained exposure outside
of the structure it will
have fewer incentives to influence or tamper with
certain events (for in-
Stance, breaches or avoidance of triggers) within
the structure in order to
optimise cash flows to the positions or tranches it has
retained itself.
This option is effectively already prevalent in the busin
ess and funding
models of many European lenders, in particular those
in which the origi-
nator is not originating assets purely for onward distribution
of risk to in-
vestors, but instead is undertaking securitisation as
one element of a
broader funding strategy.
It would be possible to mitigate many of the risks that arise
from this dif-
ferentiation. Such mitigants include:
(a) ensuring that the selection process of assets from among the
eli-
gible pool is truly random;
(b) having a third-party examine and attest to the equivalence of the
securitised pool and the assets remaining on balance sheet both
in quantitative terms (for instance, weighted averages and strati-
fication tables of collateral) and in qualitative terms (for in-
stance, that both pools of assets arose from an origination proc-
ess that is demonstrably similar);
(c) ensuring simultaneous disclosure of the collateral attributes of
the securitised pool and the assets remaining on balance sheet at
the time of securitisation;
(d) ensuring on-going disclosure of the collateral performance of the
securitised pool and the assets remaining on balance sheet post
securitisation; and
(e) ensuring that the management and servicing process of the secu-
ritised pool is the same as that of the assets remaining on balance
sheet post securitisation.
(iii) Option (d)
* Where the originating institution retains a share (e.g. vertical slice) in the
transaction, it should always have an incentive to ensure a more optimal
performance of the assets until the very last loan has either defaulted or
paid off. This is clearly not the case with retention of the first loss piece,
which has the potential to be eroded due to realised losses on the assets.
The alignment (or misalignment) created by the first loss option will de-
pend greatly on the firm’s loss expectation, the regulatory capital treat-
ment of the underlying assets, how control is aligned with seniority in the
structure and the servicing approach to the underlying assets. On the
other hand, retention of a first loss piece creates greatest alignment of in-
terest in economic terms. Therefore a uniform approach across all assets
that does not consider the different degrees of risk within each pt ay
tion and the impact on the alignment may not always be appropriate
when applying option (d).
 ec,
uritisation,
wo 0 «App! Part |—-Chap. 3— RBI's Guidelines onSeo
e
Ori gin ato r wou ld los e imt ere st in proper servicing of loans once th
+
oe
losses caceed the first loss piece.
trad to ebe - o
mad ef ween the vertical sce —
betf
¢ There is probabl n the incentives
may alig
the hed 2 ar whereas the vertical slice
nt decisions during the
with respect toservicing and arrears manageme
ctive than the first-loss
lifetime of the transaction, it may be less effe |
oforigination,
piece inguaranteeing asset quality atthe point
loss piece,
To offset the greater degree of risk that is assumed by the first-
in a
it frequently benefits from any excess spread (i.e. residual cash flows
It may conse -
transection after all other payments have been made),
quently beargued that the greater degree of risk assumed by the first-loss
piece isoffset to some extent by the greater potential rewards itcan ac-
crue, thus negating any potential benefits in terms of incentive alignment

spread to flow to any tranche or to a vertical slice holder.

2.1.1.3 “L- shaped Option”
CEBS in its advice to EC, suggested another alternative, called “L-shaped Re-
tention. It involves retention of two types of exposure from among those listed
above, and more specifically to require the retention of both a first loss piece and
a vertical slice.
(a) This has the advantage of ensuring the optimal form of retention, as the

vertical slice option generate disappear when the combination of both is

employed.
(b) The disadvantage
is that it effectively dictates an L-shaped retention
structure (first loss plus vertical slice) across the market regardless of
capital structure and asset class, as opposed to allowing the market to de-
cide which of the options is most suitable according to the capital
struc-
ture and asset class of individual transactions.
2.2 Work done i
Foundation ©°YUS Government: Financial Regulatory Reforms: A New
need foreee ofTreasury issuedthecaptioned document in2009 wherein the
pan mre ; retention by banks was recognised. Relevant proposals
2.2.1 The federal banking :
exposures,” SPONSOFS toretain five percent Ofthe ano require

2.2.2 Theregulations
Sing This
oFotherwise
lations. iscriticaltransferring
to
 Discussion Paper on Emerging Tren
ds in Regulation, etc. App. 1 397
2.2.3 The federal banking agencies shou
ld have authority to specify the permis-
sible forms of required risk retention
(for example, first loss position or pro
vertical slice) and the minimum duration rata
of the required risk retention. The agen-
cies also should have authority to prov
ide exceptions or adjustments to these
quirements as needed in certain cases, incl re-
uding authority to raise or lower the
five percent threshold and to provide exe
mptions from the “no hedging” re-
quirement that are consistent with safety and soun
dness.
2.2.4 The agencies should also have authorit
y to apply the requirements to se-
Curitization sponsors rather than loan originat
ors in order to achieve the appropri-
ate alignment of incentives contemplated by this
proposal.
2.3. Consultative Paper on Asset-Backed Secur
ities Issued by Securities and
Exchange Commission, USA SEC, USA issued
the captioned paper on April 7,
2010 wherein it has articulated the following stanc
e regarding the MRR:
2.3.1 SEC proposes a minimum risk retention of 5%.
2.3.2 SEC believes that the proposed risk retention requi
rement for shelf eligi-
bility would distinguish the types of securities that are of
a sufficient quality and
character to be shelf eligible while avoiding the possibility
of undue reliance on
ratings.
2.3.3 SEC gives two options:
* Vertical Slice: Retention of a minimum of five percent of the nomina
l
amount of each of the tranches sold or transferred to investors, net
of
hedge positions directly related to the securities or exposures taken by
such sponsor or affiliate; or
* in the case of revolving asset master trusts, retention of the originator’s
interest of a minimum of five percent of the nominal amount of the secu-
ritized exposures, net of hedge positions directly related to the securities
or exposures taken by such sponsor or affiliate, provided that the origina-
tor’s interest and securities held by investors are collectively backed by
the same pool of receivables, and payments of the originator’s interest
are not less than five percent of payments of the securities held by inves-
tors collectively.
2.3.4 SCE considered option (c) of CEBS but felt that itwould be both difficult
and potentially costly for investors and regulators to verify that exposures were
indeed selected randomly, rather than in a manner that favoured the sponsor.
2.3.5 “Horizontal risk retention” in the form of retention of the equity or resid-
ual interest could lead to skewed incentive structures, because the holder of only
the residual interest of,a securitization may have different interests from the
holders of other tranches in the securitization and, thus, not necessarily result in
higher quality securities.
2.3.6 Different forms of risk retention, such as retention 0 f the equity piece,
may lead issuers to screen assets that go into the pool differently. sa and
Mitchell observe that if the equity piece is too thin or down turn is more likely in
 s on Seouritisanon, etc.
Part +-—Chap. 3-— RBI's Guideline

.
create good incentive.
e is unlikely to provide enough
2.3.7 SCE feels a small horizontal equity piec
incentives to the onginators to do proper due
ecognition of seou-
2.4 Conflict between minimum retention criteria and de-r
ch 2009
ritised assets asper ED 2009/03 issued by IASB in Mar
2.4.1 As per ED-2009/03-Derecognition of Assets,
in para
2.4.2 The ED makes it clear from the undernoted example given
AGS2L that retention of interests in the form of investments in the securities 1s-
sued by SPV including that as credit enhancements would disallow the de-
recognition:
However, it is not clear whether the credit enhancements through off-balance
sheet exposures would also constitute retained interest/continuing involvement,
2.4.3 Perusal of comment letters on the IASB’s website on ED 2009/03 re-
vealed that:
(i) Almost all the comments have rejected the criteria of ‘practical ability of
the transferee to transfer the assets’ as the basis for inferring control and
thus deciding on thederecognition.
(ii) It appears from para 17(c) of the ED that intention of IASB is not to base
the derecognition on complete absence of continuing involvement. How-
ever, in the situation of continuing involvement, it wants to be sure that
the entity does not have any control on the assets and this absence of
control it wants to be demonstrated the practicalability of the
transferee to transfer the assets further. the general impressions
among the market participants seems to be that in many cases it would be
difficult to demonstrate that the transferee has ability totransfer the as-
sets and, therefore, only the cases where there isno continuing involve-

(iii) BCBS and CEBS, in their ear bation b

the direct
et cage the ED 2009/ 03 andtothe
comments retenhighlighted
LASBEUhave tion requirement of
Discussion Paper on Emerging Trends in Regu
lation, etc. App. 1 399
ganizations have not highlighted this issue, perh
aps placing reliance on
para 17 (c) which allows continuing involvement
subject to demonstra-
tion of the transferee’s ability to transfer the
assets. These entities have
accordingly chosen to attack the test of ‘‘practica
l ability of the trans-
feree to transfer the assets’ rather than attacking
‘100% absence of con-
tinuing involvement’.
2.4.4 Implications of the Conflict
(i) Given the firm move towards stipulation of minimum
retention require-
ment in USA and European Union, it is felt that the mini
mum retention
requirement is going to be put in place at least in these countr
ies, and
there is high chance that other countries would also follow suit.
(ii) The 5% seems to be the most agreed level of retention requir
ement.
(iii) LASB’s intention is not to disallow any form of retained interes
t. It would
also not be practicable. There is very little chance that the minim
um re-
tention requirement would be dropped, because:
* Para 17 (c) of ED/2009/03 does allow scope for continuing in-
volvement. It is only the replacement of the notion of ‘risk and
reward’ with the ‘practical ability of transfer the assets by the
transferee’ to establish control which has spurred the debate.
Based on comments and suggestions received, this issue is ex-
pected to be sorted out.
There is substantial difference between the risk profile of a bank
when it has assets on its balance sheet and when it has trans-
ferred assets through securitization and has retained some risk
through credit enhancement etc. In the former case, even where
capital requirement may be a few percentage points of exposure
say 8%, the bank can potentially lose the entire exposure. How-
ever, in the case of latter, its loss is capped by the amount of its
exposure to the securitised assets, even though the capital re-
quirements may be the same, slightly more or slightly less. Thus,
banks have to be given benefit of securitization, at least, by not
consolidating the transferred assets.
* If the proposal, as it is understood, is implemented by IASB, it
would disallow credit enhancements and underwriting by origi-
nators. This would almost certainly kill the securitization market
the world over, as the originators would not like the assets to be
consolidated back. This may also encourage revival of the secu-
ritization market by encouraging third parties to give credit en-
hancements. Then, the originators will not have a ‘skin in the
game’ and in that case the issues raised by the crisis are not be-
ing addressed.
At present, it is the investors who are considered to be SRG):
ling the SPV. In an SPV structure the 75% investors can fake
many crucial decisions about the underlying assets. This 1s also a
 Securtisavion, ele.
400) App. | Part t-~Chap. 3— RBI's Guidelines on
s,
nowunal in all fund/wust structures such as Mutual fund
ting standard con:
VCPs, AJ In that case, how can any accoun
would be deemed to
chade that the originator holding 5% assets
be controlling the SPV?
to ad-
Apparently, both [ASB and EU's minemum retention seek
dress the deficiencies highlighted in the crisis, Then why so
much conflict? The main issue is to take a view as to whether the
crisis is attributed to — ‘originators not having skin in the game”
or ‘transferring assets, getting capital relief but actually retaining
the substa nti
amoun al
t of risk of assets’, It is felt that the crisis
has highlighted both the issues, OTD model leading tocreation
of CDOs with poor assets as underlying suggests that originators
should have skin in the game. On the other hand, failure of
Northern Rock suggests that extreme care needs to be taken be-
fore allowing de-recogniti ons. It needs to be appreciated
of asset
that the problem similar to that faced by Northern Rock cannot
be avoided merely by absence of credit enhancement or liquidity
support. Such situations are rightly being addres amendd
by se ing
IAS 27 where control is being defined carefully to cover the
situations when there is no equity investment but still 100% de-
pendence of the sponso on r
the STV’s functioning.
SECTION III—PROPOSALS FOR INDIA
In the backdrop of the international work as discussed in the preceding two
reece sesearched pvt ede ono. rem rhe
as per circular annexed. RBI’s approach in formulating these guidelines
is summarized below:
3.1 Minimum Holding Period (MHP)
The main concern in India has been very quick securitization of loans after
origination, sometimes within a week. This practice raises doubt about
the qual-

inve
It is
st felt that
or MHP
s. would
(a) the asset hasactually been created: and
__t esd cet parsewan
originators mainthe MHPwou nin
ld helpinalignment oftheinc
entives ofthe
3.2 Minimum Retention Req
uirement (MRR)

322%
PS he omer omaexpe af A oe
al 9%
vet
 Discussion Paper on Emerging Trends
in Regulation, etc. App. 1 401
on the pool is just Rs. 5. In the case of
the latter, Rs. 5 will be lost by the origina-
tor, if the entire Rs. 100 is lost. Therefor
e, this needs to be kept in view while
allowing choices.
3.2.3 Equity piece is more suitable when the
horizon is short and the origina-
tor’s long term involvement is not envisaged.
However, for long term exposures
where originators act as Servicing agents, verti
cal slice will be more appropriate.
Though Fender and Mitchell argue that the
appropriateness of option depends
upon whether the downturn is more likely or not
in the near future, it is not pos-
sible to predict the down turns correctly. Then why
to base the option on such a
prediction?
3.2.4 There is no agreement on the appropriate metho
d of retention which can
be mandated uniformly. It is likely that in European Union
more than one options
may be permitted. However, in USA, considering the
SEC Paper the inclination
seems to be towards vertical retention.
3.2.5 It is intended to base the minimum retention requiremen
ts for banks in
India on the following principles:
* The MRR should vary as per maturity of the loan, and MRR
should be
higher for longer duration loans due to greater risk in such loans and
need for long time involvement of originators in such securitisations
as
servicers.
* For securitisation not involving any tranching or credit enhancements,
the retention has to be in the form of paripassu investments.
* For short term securitisations involving tranching, the MRR in the form
of investment in equity/subordinate piece is more appropriate. However,
for long term securitisations additional layer of a pari passu exposure(L-
shaped retention) suggested by CEBS) seems to be more appropriate.
* The total MRR is being capped at 10% and total exposure to SPV in all
forms except interest rate swaps and currency swaps at 20%. As ex-
plained later, it is being done in view of the I[ASB’s preference to ‘no
continuing involvement of originators’ with the securitised assets if they
want to avoid consolidation of the SPVs with them.
3.3 Total exposure to SPV and/or underlying assets
3.3.1 At present, total investment by the originator (including its group entities)
in PTCs through underwriting or otherwise is limited to 20% of the total PTCs
issued, Credit enhancement, liquidity support, and counterparty credit exposures
in the case of interest rate swaps/currency swaps with the SPV are outside this
limit. However, though not stipulated, it is expected that to comply with the
Basel II requirements ( para 554 (a) - there should be a transfer of significant
credit risk associated with the securitised exposures to the third parties- a bank
should not retain total exposure exceeding 50% of the loan amount.
iS giving
3.3.2 Given that IASB (ED 2009/03) is givi a lot of importance of f reducing
r
continuing involvement of originators with the securitised assets as discussed
above, it is likely that in the final standard, strict limits are placed for such reten-
 on Securuisation, eb
2 Ape. | Part i—Chap. 3— RBI's Guidelines

iate to Limit the total exposure of banks

uons. Therefore, u is considered
the following forms to 20%:
to the SPV and/or securitised assets in
r nches of securities issued by
+ Investments in equity/subordinate/senio tra ments,
mit
the SPV including through underwriting com
forms of collaterals i-
* Credit enhancements including cash and other
cluding over-collateralisavon
* Liquidity support
rency swaps may be
3.3.3 Credit Exposure on account of interest rate swaps/cur
k.
excluded as these would not be within the control of the ban
4 HedgingofMinimum Risk Retention not permitted
fanks should not hedge the credit risk in the retained exposu re
counti ngsto-
wards the minimum retention requirements.
1.5 Securitisation Activities/Exposures not permitted in India
Itis proposed to clarify that the banks in India are not permit te
to und ertdake
the securitisation activities or assume securiti sati on exp osu res as men tio ned in
para 3.5.1 to 3.5.3 below. Therefore, all banks operating in India should not un-
dertake above transactions.
3.5.1 Re-securitisation of Assets
A re-securitisation exposure is a securitisation exposure in which the risk asso-

of re-securitised exposure will capture collateralised debt obligations (CDOs) of

‘dential

A synthetic securitisation is a structure with at least two different j ed risk

:
a stratifi
Prswons oFtranches thatreflect different degrees ofcredit risk where credit risk
 Discussion Paper on Emerging Trends in
Regulation, etc. App. 1 403
tisation (iii) Controlled followed by a subs
equent (after the completion of the
controlled period) non- controlled amortisation phase.
3.6 Other related issues (not addressed in this
Discussion Paper and the pro-
posed circular)
3.6.1 Capital Adequacy and other Rules for Trans
fer of Loans through Modes
other than Securitisation
It may be recalled that RBI’s guidelines on securitisati
on of standard assets
were issued on February 1“ February, 2006. These guide
lines define securitisa-
tion as a process by which a single performing asset or a
pool of assets are sold to
a bankruptcy remote SPV and transferred from the balan
ce sheet of the originator
to the SPV in return for an immediate cash payment. Hence
, these guidelines are
applicable to those transactions which involve bankruptcy remot
e SPV. The in-
tention of securitisation by a bank may be transfer of credit risk,
regulatory capi-
tal relief, raising of funds, liquidity etc. All these objectives
may well be
achieved by a bank by assignment/sale of a whole loan/ portfolio of loans
to an-
other bank without any SPV coming into picture. It has been observed
that banks
in India are resorting to such sales of loan assets. The applicability of
RBI’s
guidelines on securitisation to such transactions is not directly established since
definition of securitisation and criteria of true sale are laid down only in case of
transfer through SPV. Provisioning and capital adequacy requirements become
open to interpretation in such cases of loan transfer without SPV route. Since
these transactions also raise issues concerning true sale, retention of residual risk
for the originator and also need for laying down proper risk management frame-
work, there is a need to evolve explicit capital adequacy norms for such transac-
tions.

There is considerable merit in applying the same capital adequacy framework

to other modes of credit risk transfer as is applicable to securitization transac-
tions, albeit with suitable modifications to take care of certain specific aspects of
transfers to SPVs.
Separate instructions would be issued to address these issues.
3.6.2 Applicability of guidelines to investors in securitised instruments and
foreign subsidiaries/branches of banks
As discussed in para 2.1 in the EU the MRR is being imposed on the investing
banks, not the originating banks considering the specific situation faced in that
market (most EU banks had invested in the securitized paper issued by entities
over which EU has no regulatory authority). A similar situation would be faced
by all regulators in the context of internationally active banks. Perhaps, it ae Bs
appropriate to apply the restrictions both at the originator and investor es am
also the origination and investments made by the foreign subsidiaries/branches 0
banks. However, a careful thought needs to be given to this issue.
 Seouruisahon, etc.
Part L—Chap. 3-— RBI's Guidelines an

remove undesirable arbitrage oppor

tnorder tohave thelevel playing field and
the MHP and MIRR restric:
tunities, prima facie itappears appropriate toapply
ined further keeping inview
aoe NBFCs also. However, thisneeds tobeexam
specific situations of NBFCs.
 CHAPTER 4
TAXATION OF SECURITISATION
TRANSACTIONS IN INDIA
SYNOPSIS
1. Conceptual Overview .0..0......ccccccccccseee. 405 | 3. Representation by the Indian
1.1. SPV Status and Taxing Securitisation Foundation..............0000..-. 410
Oi. 2 ae ee ean 405 | 4. Union Budget Proposals..........ccccecccccsse.. 410
1.2. Global Practices ...............0.00... 406 | 5. Analysis of the Provisions Inserted by
1.3. Indian Scenario......................... 407 the’Finance’ Act, 2013...2.000..1........... 411
2. Income Tax Department’s Demand and 5.1. Commentary on __ Specific
Appeal Rulings .j... 2338..8
ees kee... 408 Broyisions'32-52h:20%.2.1..
Ras 411

1. CONCEPTUAL OVERVIEW

1.1. SPV Status and Taxing Options

In India, almost all the securitisation transactions have been done through
Special Purpose Vehicles (SPVs) organised as trusts. The trusts raise funds by
issuing Pass-through Certificates (PTCs)'. The PTC being a certificate of
beneficial interest makes the holder thereof the beneficial owner of the assets of
the trust. So, in respect of the assets, the trust is the legal owner while the PTC
holder is the beneficial owner. Therefore, PTC is an ownership instrument:
though it does not witness the ownership of the entity, it indicates beneficial
ownership in the assets of the entity. Since, in securitisation transactions the SPV
(a trust) is the legal owner of the pool of loans (the assets); it receives the income
which it passes to the PTC holders.
As the income is received by SPV, there are three options available for taxing
the SPV:
i. Taxation as a regular tax-paying entity: This is also known as entity
level taxation or corporate tax principle, since the manner is similar as In
the case of a company. The recipient of the income is taxed as if the
income was the income of the entity. Against this, the entityseeks to
offset whatever is admissible as “expenses”. If the securities that the SPV
issues are treated as debt of the SPV, the SPV may still be tax-neutral, as
SPVs do not retain any income — they distribute all that they receive.
However, if the securities of the SPV are treated as ownership

ion to Securitisation.
1. Details about the SPVs and PTCs have been included in Chapter 1: Introduct

405
 on Transactions in India
6060 Syn. Part }—-Chap. +—Taxanon of Securitisati
2 made by the SPV are
instruments akin to equit) y, then the payments
lax deductible, leaving the SPV to
weated as “distribuuen”, which 1s not | }
have to pay of ts eAlire NOONE,
u Taxation as a representa ti
tax ver: In this case, Wir is paid by the
paye
S, 1. the investors
vehicle or the entity as representative of the INVESLOP
tax principle or the
do not pay tax, This may be called the AOP
representative tax
partnership firm tax principle. There are principles of
eable from the
io india. but ithas been believed that if the tax charg

have alre ad
been yed to tax,
charg
iii. Taxation as a see-through or pass-through entity: The principle here
is the conduit-tax princi ple
or pass-th rough principle, whe re
the taxing
authority sees through the SPV and taxes the investo rs and not the
recipient SPV. SPV is treated as merely a distributive device, passing
through all what it receives; therefore the SPV should qualify as a
ntivel
dormant, substaneutral y . Such vehicles cannot be
tax vehicle
taxed.

1.2. Global Practices

Therefore, .RMBS
must proportionally distribute all its income.route
entity -thr
the pa ou
have common
a gh
ssvehicle and
“pass throughthat forexemp
seek
rate” allthe securiunder
tion ties issued bythe
ell, oF trust’ tules. The other option is to structure the transaction as a
residual income class,
sineniy acento Teen moome classes, and a
based on clear rules. ce, the US taxation of securitisation vehicles is

Countries otherthan UK also

thetaxrules have specifically exempted s a wewoe eae

exem pt SPVs from alMah S toentity-level taxation, itwillnormally

voor
thincapit
amount ofequity andmainlyfinance itselfbydebt nt Yat BANE & nominal
Conceptual Overview
Syn. 1 407
1.3. Indian Scenario
The market in India in general believed that SPVs
in India will be treated as
see-through or pass-through vehicles. Reliance has
been placed on Section 61 of
the Income-tax Act, 1961 which Says:
“61. All income arising to any person by virtue of a
revocable
transfer of assets shall be chargeable to income-tax as the
income
of the transferor and shall be included in his total income.”
That is, in case of a revocable transfer of an asset, the income from
the property
will continue to be taxed in the hands of the transferor.
Thus, the trust deeds
provided that the beneficiaries of the SPVs had made a “revoc
able transfer”.
Therefore, the income was taxed in the hands of the beneficiarie
s and not the
trust. All the income of the securitisation trust was offered to tax by
its investors
(unless the investor is tax exempt viz., a mutual fund)
However, during 2011 and onwards, tax officers sent tax notices to various
trusts demanding tax contending the following:
i. The trust is a smokescreen only. It is actually an Association of Persons
(AOP) having mutual funds and other investors as members. Therefore,
the interest income earned shall be assessed as “income from business
and profession” of an AOP, and shall be taxed at maximum marginal
rate.
[The total income of the AOP/BOI is taxable, either at the rates
applicable to an individual, or at the maximum marginal rate or at a rate
higher than maximum marginal rate depending on whether the individual
shares of members in the whole or in any part of the income of the
AOP/BOI are determinate and the total income of the member. Relevant
Sections are 67A and 167B of the Income Tax Act.]
ii. Even if the trust is regarded to be so, and not an AOP, still Section
161(1A) will apply. Section 161(1A) says,
“(1LA) Notwithstanding anything contained in sub-section
(1), where any income in respect of which the person
mentioned in clause (iv) of sub-section (1) of Section 160 is
liable as representative assessee consists of, or includes,
profits and gains of business, tax shall be charged on the
whole of the income in respect of which such person is so
liable at the maximum marginal rate”
By virtue of Section 160(1)(iv), a trustee is a representative assessee of
the trust. In such a case if the income of the trust consists of or includes
profits and gains of business, the income will be taxed at the maximum
marginal rate.
The issue became a big issue then as discussed hereafter.
 ons in dndicd
a ee, ee Faxation of Securitisation Transacti

DEMAND AND
2 INCOME TAX DEPARTMENT’S
APPEAL RULINGS
tax authoriies issued
During half of 2011 and afterwards, the income
SPV, stating that the gross income of such SPVs was liableto
mnt
claim a pass-through status, the
tax Tax officers comtended that the trusts cannot
issued by the trusts
AOPs having investors as members, and the certificates
similar to equity,
cannot besaid tobethe debt ofthe SPV as PTCs are essentially for taxation as
e
The interest income of the securitisation trust would be liabl
me of the
business income of an AOP and consequently, the entire inco
on is to be subjected to tax at the maximum marginal rate, Fven
securitisatitrust
if the trusts are assessed not as an AOP, the assessment would be under Section
16101 A) and tax would be chargeable at the maximum marginal rate.
The trusts filed appeals before CIT(A) and applications under Section 220(6)of
the Act for holding recovery in abeyance. The applications filed by the trusts
were rejected. Thereafter, the income tax authorities sent notices to mutual funds
calling them to pay certain amounts invoking Section 177(3) of the Act stating
that the assessment of the trust had been completed and the trust had failed to
make the payment and that the trust was not in existence as on date so no
recovery could be made. So, the mutual funds were asked to pay the outstanding
demand to the extent of their share of the investment in the trusts, in their
capacity as contributor or beneficiary of the trust. It is to be noted that there were
no independent assessments against the mutual funds since income of the mutual
funds are exempted under Section 10(23D) of the Act.

against
the taxing officers.
In UTI Mutual Fund v. Income Tax Officer & Others’the Bombay High Court
while dealing with similar issue as depicted, indicated the nature of
the
not called upon to adjudicate on the issue and an appeal w
CTT(A). Inthecase,UTIMutual Fund(thepetitioner) wasa pending before
beneficiary ofIndia
orporate Loan Securitisation T 2008 Series 14 constituted by IL & FS Trust

ei
2. [2012] re TAXMAN?2
50 (Bombay). 345 ITR
71 (Bom)
 Income Tax Department’s Demand and Appe
al Rulings Syn. 2 409
There was no separate assessment made against
the petitioner, but it was asked
to make a payment of Rs. 9.63 crores, whereby
the AO invoked Section 177(3)
of the Act. The petitioner immediately moved
the AO for stay of demand and
CIT(A) seeking immediate intervention. Before the
letter of AO disposing off the
application could reach the petitioner, the AO taking
action under Section 226(3)
of the Act, sent a garnishee notice to the petitioner’s banke
rs calling for payments
of all amounts due. The notice of demand issued by the
AO asking the petitioner
to pay Rs. 9.63 crores and the garnishee notice were challeng
ed before the Court.
The Court, after going through rival contentions obser
ved (but did not
conclude) that:
“Prima facie, the submission of the petitioner that the Trust itself cannot
be regarded as being an association of persons finds support
from a
judgment of a Division Bench of this Court in Commissioner of Income
Tax v. Marsons Beneficiary Trust. The Division Bench of this Court
in
that case held that the beneficiaries of a trust cannot be construed as
having set up the trust nor had they authorised the trustees to carry on
business. The beneficiaries who are named in the trust as recipients of
the income of the trust cannot be considered as an association of persons.
Therefore, ruled the Division Bench, the trustees also cannot take on the
character of an association of persons. The judgment of the Division
Bench was followed subsequently by another Division Bench of this
Court in L.R. Patel Family Trust v. Income Tax Officer”
The Revenue’s steps were held to be “an unfortunate and hasty attempt” to
make a recovery of the demand which has been imposed on the trust pursuant to
the order of assessment, against the petitioner without enabling the petitioner to
take reasonable recourse to the remedies available in law.
Similar such decision was rendered in UTI Mutual Fund v. Income Tax (No. 2)
Officer vide judgment dated 6" March, 2013.
Parallel to such cases by mutual funds, there are cases going on/pending before
Income Tax Appellate Tribunals, where appeals have been filed by different
securitisation trusts against the orders passed by the Revenue authorities. For
example, in Indian Corporate Loan Securitisation Trust 2008 v. Income Tax
Officer’ (the Trust), ITAT Mumbai has granted a stay. In this case, the trust has
put forward certain arguments in its favour: .
i. Taking recourse to Section 61 of the Act, in case of a revocable transfer
of asset after the dissolution of the trust, the income shall be chargeable
to income tax as the income of the transferor and in such a case the
mutual fund beneficiaries at the most can be held to be chargeable to
income tax. But income of mutual funds is exempted under Section
10(23D), so demand cannot be enforced.

5, (2013) 260 CTR ; (Bom) 56. , / ht

i lable from the website of Income Tax Appellate Tribunal ( tp.//itat.nic.in/) at thei
¥ eae dass atereySeatontiig Ih BOSDibai/t load/7582518310561 16426813 SASEIREFNOSA
158 + 4 - AS + RS - INDIAN CORPORATE LOAN SECURITIONSATIO
TRUST 2008 - OK.pdf (accessed on 15” September, 2013).
 sation Transactions in dndia
4h J 0=Part | —-Chap. 4—Taxation of Securiti
Sya3
the decisions taken in
annot be weated as an AOP, relying on
ily Trust v,
» on Ay Beneficiaries Trust, and LR. Patel Fam
es
=~ inc) ome ved by the Trust as per the statutory guidelin
t cannot be held liable
¥: eed w onan funds. Therefore, the Trus

7 not covered by Section 161(1A) ) butbut byby Section on 16101) '

The Trust is
- 4
representative
‘4 Section 161(1) says that the tax shall be levied upon the able
assessee in like manner and to the same extent as it would be levi
upon and recoverable from the person represen ted by him.
inspite of several pending cases, during April, 2013, the IT Department sent
s.
fresh notices tomutual funds asking them topay taxes on income from PTC

3. REPRESENTATION BY THE INDIAN

SECURITISATION FOUNDATION
In December 2012, on behalf
of the Indian Securitisation Foundation (ISF)’,
Vinod Kothari Consultants along with KPMG made a representation to the
Government seeking pass-through status for SPVs. What was represented was
that the securitisation vehicle is nothing but a conduit, or a mere distributive
device. There is no aggregation of income, investment of income or reinvestment
of income at the SPV level. The SPV is a mere legal device in the whole
exercise, and not a real life entity such as a mutual fund carrying on a substantive
business activity. Hence, the representation was to completely exclthe udetax on
the SPV, and tax the recipients. 4

4. UNION BUDGET PROPOSALS

__itthebudget speech of 2013-14*, the Finance Minister P. Chidamba
Inorder tofacilitate finan ram stated.
cial institutions to securitise their
assets through a
special Purpose vehicle, | propose toexempt the
securitisation trust from income
were nell belevied only atthe time of distribution
wate of35 ernest attherate of30percent inthe of income by the
case ofcompanies andatthe
ontheincome tecened: ye individual orHUF.
to Aeon Nofurther taxwillbe
received by investors from the securitisation trust.

S. [1991] 188 ITR 224 (Rom

: (2003)262
TTRSon
, IS2 not-for-profit company
© Budget 2013-14
hrtp:
Speesh>
om3rdSepeemi
: a
(acc on3rd
es
body of the securitisation
Sepnemi
se ber,d2013), SY Indie:
ber ebruary,
2013: http://indiaboudget sicim/db201 3-1Afvs/ivs.pat
 Analysis of the Provisions Inserted by the Finance Act, 2013 Syn. 5 411

/ In pursuance, the Finance Bill, 2013’ sought to insert provisions in the Income
Tax Act to give effect to the scheme: Section 10(23DA) was inserted to exempt
any income of a securitisation trust from the activity of securitisation; Section
LO(35A) was inserted to exempt the income received by an investor by way of
distributed income from the securitisation trust; and a new Chapter-XII-EA was
inserted containing special provisions to tax distributed income by securitisation
trusts.

The Bill has been passed by both the Houses of the Parliament. Relevant
provisions introduced by the Finance Act, 2013 have been reproduced later in
this Chapter, with detailed commentary thereon.
Though the representation made by ISF was to seek a pass through status for
SPVs, and exempt such SPVs from tax, the actual drafting of the proposed
provisions has resulted into a distribution tax on SPVs, which being charged on
the gross income, completely disregards the actual income of the investor.

5. ANALYSIS OF THE PROVISIONS INSERTED BY

THE FINANCE ACT, 2013
Here is an attempt to provide a detailed analysis of the provisions inserted by
the Finance Act, 2013. The text of the provisions is in bold, while the author’s
comments and analysis are in simple text. Some general observations have been
made on the whole new tax scheme after discussing the specific provisions.

5.1. Commentary on Specific Provisions

The Finance Act, 2013'°(extract)

Chapter II
Direct Taxes
Income Tax
“4 In section 10 of the Income-tax Act,—
(II) after clause (23D), the following clause shall be inserted with
effect from the Ist day of April, 2014, namely:—
‘(23DA) any income of a securitisation trust from the activity of

Explanation.—For the purposes of this clause,—

it,—
(a) “securitisation” shall have the same meaning as assigned to

_nic.in/ub2013-14/fb/bill3 | pdf (accessed on

9. The Finance Bill, 2013, Income Tax: http-//indiabudget
September, 20 2013).
download-finance-act-20 13/.
10. hp, /arww.itaionline.org/infofindex.php/
 and
Instruments Regulations, 2008 made under the Securities
Cont ract s
ae nee eard ofIndia Act, 1992 and the Securities
Act, on)
(Regulati 1956; or
s issued
i) under the guidelines on securitisation of standard asset
by the Reserve Bank of India;
the
(b) “securitisation trust” shall have the meaning assigned to itin
Explanation below section 1ISTC;’

COMMENTS
|. The new insertion clause (23DA) in Section 10 exempts any income of a
securitisation trust from the activity of “securitisation”.
The provision will come into effect from 1“ April, 2014.
a Meaning of “securitisation” :“Securitisation” has been defined in
Explanation so as to mean securitisation as defined in Regulation 2(1)(r)

Regulation 2(1)(r)
of the Regulations defines “securitisation” as:
eee

To bequalify as “securitisation” under the Regulations,

ions, it isi necessary the
it
definition requirements of “debt or receivables”, “special purpose distinct
entity — Origmator oT originators”, “Fssuance”’, “ . ti | | t
 Analysis of the Provisions Inserted by the
Finance Act, 2013 Syn. 5 413
The meaning assigned to the term “securitisat
ion” under RBI Guidelines
on Securitisation of Standard Assets, 2006'' is:
“'Securitisation" means a process by which a singl
e performing asset or
a pool of performing assets are sold to a bank
ruptcy remote SPV and
transferred from the balancesheet of the originator
to the SPV in return
for an immediatecash payment;”
A securitisation transaction has to fulfill the conditions
as given in the
RBI Guidelines. Therefore, synthetic securitisations and
secured loan
form of securitisation will not be treated as “securitisation
” under the tax
scheme’.
It can be noted that parts (i) and (ii) of Explanation (a) are
not cumulative
in nature. Securitisation transaction may fall in either of the
categories
(definition under the Regulations or definition under RBI
Guidelines)
and it gets covered under clause (23DA).
Though the tax scheme explicitly covers securitisation within the
meaning of the Regulations and RBI Guidelines, securitisation of
mortgage receivables under NHB norms has been left out. However, one
easy way to have the same covered is to go for listing under SEBI listing
norms, but prima facie, there was no reason to omit out NHB. In fact, in
terms of significance, mortgage backed transactions are far more
important for the nation than securitisation structures.
4. Meaning of securitisation trust: The term “securitisation trust” has been
annexed a meaning under explanation to proposed Section 115TC, as
discussed later.
“[4. In section 10 of the Income-tax Act,—]
(VI) after clause (35), the following clause shall be inserted with effect
from the Ist day of April, 2014, namely:—
‘(35A) any income by way of distributed income referred to in
section 115TA received from a securitisation trust by any person being
an investor of the said trust.
Explanation.—For the purposes of this clause, the expressions
“investor” and “securitisation trust” shall have the meanings
respectively assigned to them in the Explanation below section
LIStC:”

COMMENTS
1. New clause (35A) seeks to exempt the income received by the investors
of the securitisation trust as a result of the distribution made by the trust.

11. Though RBI has issued Revised Guidelines on Securitisation, it has been explicitly ginfed ite
securitisation of as:
eR: guidelines Prin on with Revised Guideline
" Notification that all other 012. remain unchanged. As
standard assets
delines co-exist s of 201:
12 Detailed.Ot cited culdetn icl of securitis ation under RBI Guideline s has been provided under
Chapter 3: RBI Guidelines on Securitisation of Perform ing Assets.
 ons in India
SyaS 3 Past b-Chap + Tasanon of Securtisation Transacti

l, 2014
> The provision will take effect from 1" Apri
must”: The terms have been
3. Definition of “investor” and “securitisation Section
proposed
annexed respective meanings under explanation to ,
ussed later.
LISTC, as disc
tion trust will mean that
4. The exemption to the investors in the securitiza s) in pass
cavestors (other than exempt investors such as mutual fund instead ol
me
through certificates (PTCs) will now earn exempt inco
taxable income as was the case hitherto, This impli es that the investors
earned
would not be able to set-off expenditure/ losses against income
from PTCs in view of provisions of Section 14A which prohibits
deduction of any expenditure incurred in relation to exempt income, This
may result in the entire transaction becoming unviable for investors.
“%. After Chapter XII-E of the Income-tax Act, the following
Chapter shall be insertedwith effect from the Ist day of June, 2015,
namely :—
“CHAPTER XII-EA
SPECIAL PROVISIONS RELATING TO TAX ON
DISTRIBUTED INCOME BY SECURITISATION TRUSTS
1ISTA. (J) Notwithstanding anything contained in any other
provisions of the Act, any amount of income distributed by the
securitisation trust to its investors shall be chargeable to tax and such
securitisation trust shall be liable to pay additional income-tax on such
distributed
income at the rate of —
(i) twenty-five per cent. on income distributed to any person being
anindividual or a Hindu undivided family; d
(ii)thirty per cent. on income distributed to any other person:
Provided that nothing contained in this sub-section shall apply in
respect of any income distributed by the securitisation trust to any
person in whose case income, irrespective of its
not chargeable to tax under the Act. nature and source, is

COMMENTS
|. The provisions ofthe Chapter XII-EA will
2013. Theeffective daterelates toth
come into effect from * June,
edateofdistribution became themy
Even afeh bution ofincome. Theacc
rual ofincome will notmatter.
mmeome was accrue
onorafter 1°June 2013,d pri or to 31% March 2013.
thetaxwill beapplicable. if it is
2. Por applying Sectio
n 115TA(1), there are two
-requisites ; amount
conde ,,come”. andtheamou
nt thastobe“distributed. Born
taeTf whatsees sary. If
whatisdistributed isnotinc
A. meome is not distributed, there is no taxome , thereisno
. The tax ison
 Analysis of the Provisions Inserted by the
Finance Act, 2013 Syn. 5 415
undistributed income. Further, any distributi
on of principal will not be
liable to tax u/s 115TA (since principal is not “inc
ome”),
3. Any distribution of income on and from |“
June, 2013 will be covered
under Section 115TA(1). There might be cases
where an income is
credited by trust before 1“ June, to the account
of the recipient, but
actually distributed on or after 1“' June 2013, the quest
ion here is whether
the “distribution” happened before 1‘ June, or on or after
1 June.The
meaning of the word “distribution” has been discussed
at length by the
Supreme Court in Punjab Distilling Industries Ltd v. CIT,
Punjab’. In
this case, the SC held:
“The expression "distribution" connotes something actual and
not notional. It can be physical; it can also be constructive. One
may distribute amounts between different shareholders either by
crediting the amount due to each one of them in their respective
accounts or by actually paying to each one of them the amount
due to him.”
Therefore, very clearly, crediting an amount to the account of the
recipient will be a case of distribution.However, if the income is held
without crediting to the account of any specific recipient, and is
reinvested, there is no question of distribution tax.
4. There is a conflict between the applicable dates for Sections 10(23DA),
and 10(35A) and Chapter XII-EA. The former two Sections are
applicable from 1*April, 2014 — hence; apply for income year starting
from 1“ April, 2013. However, Section 115TA applies from Ist June,
2013. Therefore, incomes distributed between 1“ April, 2013 and 31"
May, 2013 will get exemption in the hands of the distributor as well as
the recipient.
5. There is a tax on income distributed, but not on income accumulated.
While revolving securitisation structures are not very common in India,
but it is quite possible and permissible within RBI guidelines too, todoa
revolving securitisation structure. In such a case, the income may just get
accumulated. There is nothing in the law, unlike in case of venture
capital funds under Section 115U, to say that there will be a tax on
income retained by the vehicle too.
6. The rate of tax depends on category of the recipient — individual, entity
exempt from tax, and other entities. The rates of distribution tax are as
follows:
a) 0%, in case of an investor whose income is exempt from tax.
b) 25%, in case an investor being an individual or HUF
c) 30% in all other cases.
Obviously, the determination of the category is relevant only at the ae
of distribution of the income — hence, irrespective of who was the holder

13. AIR 1965 SC 1862.

 Transactions in India
Sya S930 Part }-Chap. + Taxation of Securitisation
) Repet
tax rate wiili dep end on the
of the asset backed security over time,thethe
—
time of receipt of the income.
category in which the recipient falls at
is not there Aas a
-ase of recipient bein a mutual fund, the problem
in case of any other
aa bey ts woth befrom tax. However,
mes. The problem ts
assessee, the provision results Into Lax ON Bross inco stors, who,
y intensive in case of banks or corporate imMve
, end up paying tax
without getting any deduction for their own expenses
Athe Act)
at flat rates laid in the law (by operation of Section 14of
on
The use of the term “additional tax” is from the history of tax
distributed income (Section 115R:Tax on distribute d inco me to unit
holders). It is not additional in the sense of being additional to some other
tax.
_ The new scheme of distribution tax is applicable to existing securitisation
transactions too. There is nothing in the provision to exempt existing
structures. Transactions worth Rs. 20000 crores approximately have been
done during this financial year alone. There are subsisting transactions of
securitisation — the total amount of money involved is not less than Rs.
70000 — 80000 crores. Past transactions were covered by RBI] Guidelines
Analysis of the Provisions Inserted by the
Finance Act, 2013 Syn. 5 417
prescribed manner, giving the details of
the amount of income
distributed to investors during the previous
year, the tax paid thereon
and such other relevant details, as may be prescrib
ed.

COMMENTS
This is a procedural requirement. The relevant form,
manner of
providing details will be prescribed by means of Rules.
(4) No deduction under any other provisions of this Act shall be
allowed to these curitisation trust in respect of the income
which has
been charged to tax under sub-section (J).

COMMENTS
The trust has various expenses — such as servicing fees, legal costs,
trustee fees, etc. The language of this sub-section gives an impression
that these expenses will be disregarded, and the tax will be imposed on
gross income. Really speaking, that is not the case. Obvious enough, the
trust will only be distributing the “income” that remains. Hence, there is
no disallowance of expenses.
115TB. Where the person responsible for making payment of the
income distributed by the securitisation trust and the securitisation
trust fails to pay the whole or any part of the tax referred to in sub-
section (1) of section 115TA, within the time allowed under sub-section
(2) of that section, he or it shall be liable to pay simple interest at the
rate of one per cent. every month or part thereof on the amount of
such tax for the period beginning on the date immediately after the
last date on which such tax was payable and ending with the date on
which the tax is actually paid.

COMMENTS
In case there is delay in paying tax within the stipulated time of 14
days, the person responsible shall be liable to pay interest @ 1% p.m. or
part thereof on the amount of tax.
115TC. If any person responsible for making payment of the income
distributed by the securitisation trust and the securitisation trust does
not pay tax, as referred to in sub-section (J) of section 115TA, then, he
or it shall be deemed to be an assessee in default in respect of the
amount of tax payable by him or it and all the provisions of this Act
for the collection and recovery of income-tax shall apply.
 a
of Securinsation Transactions in Indi
ais Sya 5 3=Part }-—-Chap 4— Taxation

COMMENTS
s of default: default in
This section is concerned with two kind seouritisation trust, and
the
making payment of income distributed by
on, As discussed under
default in payment of tax by the securitisati
making payment is
section 115TA92), the person responsible for
be deemed to be
trustee. therefore in the former case, the trustee will explicit, the
an “assessee in default”. In the latter case, as is default,
securitisation trust will be deemed to be the assessee in
Explanation.—¥or the purposes of this Chapter,—
(a) “investor” means a person who is holder of any securitised
debtinstrument or securities issued by the securitisation trust;

COMMENTS
The definition of “investor” is dependent on the definition of
“securitised debt instrument”, “securities”, and “securitisation trust”.
Only if the definition requirements of the stated terms are met, @ person
will qualify as investor.
(b) “securities” means debt securities issued Special
Vehicleas referred to in the guidelines on pt kt of

ot heii gleassetorpooting indsaleOfpoolofusets

ee
ix .<i Mehine. eatsaan inreturn
onincoming ons fee ee ee claims
asset orpool ofassets tothird
esta investors by
Partyn i
by issuan of the
cefrom tradab le debt
omens Ny eye with
us me na
consistently been
ine ts”. APICs
interesPICs. cialbeneficial itmat
benefiae they are surely
Pression Ownership interest” and “ My ieee Spauapessens
Analysis of the Provisions Inserted by the Fina
nce Act, 2013 Syn. 5 419
In view of the definition of the word “debt
securities” in RBI
guidelines, it is quite clear that debt obligation
of the SPV, in form of
bonds or similar instruments will Clearly come
under definition of
“securities”.
(c) “securitised debt instrument” shall have the same
meaning as
assignedto it in clause (s) of sub-regulation (7) of regul
ation 2 of
the Securities andExchange Board of India (Public Offer
and
Listing of Securitised DebtInstruments) Regulations, 2008
made
under the Securities and Exchange Boardof India Act, 1992
and
the Securities Contracts (Regulation) Act, 1956;

COMMENTS
The meaning of “securitised debt instrument” has to be derived from
Regulation 2(1)(s) of the Regulations.
The Regulations define securitised debt instrument as under:
“(s) “securitised debt instrument” means any certificate or
instrument, by whatever name called, of the nature referred to in
sub-clause (ie) of clause (h) of section 2 of the Act, issued by a
special purpose distinct entity”
This again derives its meaning from Section 2(h), sub-clause (ie) of
Securities Contracts (Regulation) Act, 1956 (SCRA); as such the sub-
clause becomes critical in Section 115TA of the Income-tax Act. Section
2(h) of SCRA defines “securities”. Sub-clause (ie) is as under:
“(ie) any certificate or instrument (by whatever name called),
issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable, including
mortgage debt, assigned to such entity, and acknowledging
beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be.”
The securitised debt instrument should be of the nature as referred to in
this sub-clause, i.e. it should acknowledge “beneficial interest” of the
investor in the debt/receivable.It is clear that only “beneficial interest’
can be a securitised debt instrument. There is a clear distinction between
debt and beneficial interest. Debt is an obligation; beneficial interest is
equity or ownership interest. .
(d) “securitisation trust’? means a trust, being a—
i) “special purpose distinct entity” as defined in clause (u) of sub-
nelle arate Pcculasion 2 of the Securities and Exchange Board
ofIndia (Public Offer and _ Listing of Securitised Debt
Instruments)Regulations, 2008 made under the Securities es
Exchange Board of IndiaAct, 1992 and the Securities Contracts
(Regulation) Act, 1956, andregulated under the said regulations; or
ii)it “Special
i Purpose Vehicl i
i e” as defined in, d regulated by,
and—
ds on securitisation of standard assets issued by the
420 Sya5 0|Pu -Chap ¢—Jaranen of Seouruisation Transactions in india
+t

, as may be
ReserveBank of india, which fulfils such conditions
prescribed..

COMMENTS

Guidel)nes.
Regulation 21 u) of the Regulations define an SPDE as:
“(u) “special purpose distinct entity” means a trust which
acquires debt or receivables out of funds mobilized by it by
issuance of securitised debt instruments through one or more
schemes, andinched any as oot Oy Sear tee
Bank under the National Housing Bank Act, 1987 (53 of 1987)
or by the National Bank for Agriculture and Rural Development
under the National Bank for Agriculture and Rural Development
Act, 1981 (61 of 1981)”
The key elements of this definition are that constitutionally, an SPDE is
a trust, and it raises funds by issue of securitised debt instruments, and
acquires debt or receivables with such funds. SPDE also includes any
trust set up by NHB under the NHB Act, or by NABARD under the
NABARD Act.
Coming to SPV, the term has been defined in Para 5(ix) of the RBI
Guidelines of 2006 as follows: nas
“(ix) "SPV" means any company, trust, or other entity
constitutedor established for a specific purpose - (a) activities of

thecorporation, trust orentity as the case be, from the

creditrisk ofanoriginator tomake itbankruptcy remote”
anne feature ofan SPV under RBI Guidelines isthatithas the sole
bankruptcy-remote SPV tna itisso structured astobeoriginator-
form of entity. Bowers, ’& is'te:bp'nued'eel ee

canbeanyformofemties (ore: whileaspertheRBIGuidelines,

anSPV
prOVisiOls Of Sections
Seeuean115TA
teen ey, isrequired
to 115TC isonly a trust.
to comply with the
In addition, the SPV has to
Prescription iscommonly done
byway ofrules. ‘The ules
 Analysis of the Provisions Inserted by the
Finance Act, 2013 Syn. 5 421
will be framed and notified only after the Act
comes into force: hence,
that is opaque as of now. But what if the SPV
does not satisfy one such
condition? Obviously, the entire chapter, that is, sections
A to 115T
L1STC shall be inapplicable in such a case.
This author has quite often contended that the
trust form is not
necessarily the best form for organising SPVs, as trusts
have unlimited
liabilities, while companies have limited liability. Indian transactio
ns
have been using trust structure primarily due to the simpl
icity and lack of
regulation on trusts. But trusts, unlike companies, are not
limited liability
entities. Corporate form with limited liability is said to be
one of the
innovations of the 19th century, comparable to the steam engin
e. Using
the trust form for business transactions may be bargaining
away the
certainty of limited liability for the ease and convenience invol
ved in
trusts. For instance, if the beneficiaries of the trust have chang
ed, and the
trust is called upon to pay taxes on current and past income, the trust
ee
may be saddled with a tax liability that exceeds its assets. Trustees may
still be safe, as they have the right to indemnify themselves. If the right
of indemnity is unlimited — the present beneficiaries face tax liability
exceeding their capital. If the right of indemnity is limited, then the
trustees have to bear the brunt. In any event, there is a scope for
unpleasant consequences. On the other hand, the certainty of limited
liability may make the corporate form preferable — of course, one needs
to live with the regulations that affect companies, including those of the
SEBI and RBI.

3.2. General Observations

From the discussion above it follows that for application of Section 115TA,
there must be “securitisation” as defined under SEBI Regulations or RBI
Guidelines carried on by a “securitisation trust” which can be either a “special
purpose distinct entity” under SEBI Regulations or “special purpose vehicle
under RBI Guidelines, that issues securitized debt instruments defined under
SEBI Regulations or debt instruments under RBI Guidelines to the investors.
Same has been depicted in Figure 4.1.
 tisation Transactions in india
422 SyaS Part L-Chap. 4—Taxation ofSecuri

russes! [ Ouaiing Wie, RB

= :
a Regulatnans ual Securitisation eo

7 am

= Debi Securities issuedbySPV

Para Six) of RBI Guidelines under RBIG

Reg. Niu) of SEBI Regulations

Form

Reg. 2(1)(8) of SEBI Regulations +

Section 2(h\(ie) ofSCRA

Index:
*SEBI Regulations SEBI (Public Oller and Listing
of Securitised Debt
Instruments) Regulations, 2008
* RBI Guidelmes BI Guidelineson Securitisation
of Standard Assets, February

template: The language of sections of 115TA to

base d on the semplate ofSect;ions 115
115TC is
sam oo11et R, 115S and P
115T. Sections
Analysis of the Provisions Inserted by the Fina
nce Act, 2013 Syn. 5 423
persons behind the SPV. There is no asset
manager in case of
securitisation SPVs. The securitisation SPV is a mere
passive conduit.
The money is collected by the servicer, and passe
d-through to the
investors.
Determination of Income: As the trust receives income
in representative
capacity, the income is the income of the beneficiaries, thoug
h received
by the trust. Unlike AOPs, a trust is not an entity of its own
— the trust
receives income as a collective representative on behalf
of its
beneficiaries. By virtue of the exemption granted under Sectio
n 10, it
seems that the scheme of the law is clear that the income will
be
determined at trust level in representative capacity. Hence, “income”
must refer to the income of the trust in representative Capacity.
The determination of whether the amount distributed is the income of
the trust or not will have to be done by the trust, that is, the trustee.
Further, the normative principle of income determination is —income is
excess Over investment. However, income in the hands of the investors is
not the same as income in the hands of the trust. In the present case, by a
special scheme of law, tax is imposed on the distribution by the trust —
hence, income has to be determined in the hands of the trust, after giving
full effect to the provisions of the income Tax Act. Going by this, a
prima facie view can be taken that the tax under Section 115TA is
applicable only in case of pass through instruments. In case of bonds, the
payment of interest on a bond is not a case of “distribution” — it is a
charge against income.
> Withholding tax: Seemingly, when the securitisation trust distributes the
income, there will be no deduction of tax at source, since the income
itself becomes exempt in the hands of the investors.
Taxability of servicing fees: Servicing fee is an income of the recipient,
and an expense of the distributor. Hence, there is no question of
distribution tax on servicing fee.
Bond Structures: In a bond structure, the amount of interest paid on the
bonds is allowed to the trust as an expense, and the trust is charged to tax
only on residual income. The residual income of the trust can be
minimised if the bonds sweep almost all of the income of the trust.
Therefore, the trust pays minimal tax, and thereafter, the investors take
the interest income to their books, and pay tax on their incomes after
deducting their own funding costs. The total tax burden on this structure
is far lesser than under the distribution tax. So, there is a possibility that
the bond structures may find a favour and the pass-through structures
will become less attractive than the bond structures.
Choosing between direct assignments and securitisation: The ne
taxing scheme will once again leave originators in Lara as i
whether to opt for direct assignments or Seige Spee Meee y; i"Gere
of banks being investors, the proposed tax regime will aan ya
banks out as investor class. This will push transactions back into
 tion
ofSecuritis
part bChap. 4nTana ns
inindia
ation Transactio
- dye5
igammcad inate which has atsown problems wader the RBI guidelines,
Direct assignments more of an aberration than something to
emouurage.

allinvestors other than

thamections, but inthe process, creates problems for
orintended tobe limited to
wsatual funds. After all,securitisation isnotlimited
mutual fund investors only.
 CHAPTER 5
NON-PERFORMING LOANS—A
GLOBAL PROBLEM

SYNOPSIS
1. The Global NPL Phenomenon............... 427| 6. The Problem of Non-performing
i ae PRODI Uh ASI enor anss, 438 ERROR ia aR aad ee der acantaen
3. NPL
445
Problem in Japan.............cccececceseee. 440| 7. Stock Problem and Flow Problem..........
4.
445
NPL Problem in China ...............cccccccccs. 440] 8. Systemic Problem vs Problem of Bad
3. NPL Problem in India «..............c.c..cc000: 442 enn a oe ne Sa eens 445

The problem of non-performing loans is a global problem and has been

receiving attention of banks, economists, regulators and the public alike over the
past few years. Non-performing loans arise primarily due to two reasons — bad
lending decisions, and systemic banking crises. As the old adage goes — a fool
and his money are soon parted. As far as bad lending decisions go, loans that go
bad because someone made a hasty, reckless or unduly motivated lending
decision, or simply because the unscrupulous borrower is more witty than the
unprepared banker, would continue to happen. That is not the cause of concern.
The real cause of concern is the loans that go bad because of banking crises.
Banking crises happen in every part of the World, and like any major natural
calamity, leave ravages in form of the bad loans that continue to stay on the
balance sheets of banks.
Non-performing loans are both consequence as well as cause of banking crises.
The Asian Bank document Asian Development Outlook, 2004 says: “NPLs
create problems for the banking sector’s balance sheet on the asset side. They
also create a negative impact on the income statement as a result of provisioning
for loan losses. Ultimately, a riskier loan portfolio combined with lower net
income makes new lending more difficult, often resulting in slower credit
growth. In the worst scenario, a high level of NPLs in a banking system poses a
systemic risk, inviting a panic run on deposits and sharply limiting financial
intermediation, and subsequently investment and growth, in the economy.
In fact, a high ratio of non-performing loans to total outstanding loans is itself
an indication of a banking crisis.
Apart from resulting into systemic problems, non-performing loans also cham
into a moral hazard. Banks become sanguine to the problem of loans going ‘i
complete
Eventually it encourages graft, slackness in credit underwriting and
lack of discipline.

425
 A Global Problem
426 Sya. | Part i—Chap. 5—Non performing Loans—

on the system. In most —_ the —_s

Noa-performing loans are a big drain 0
ms s of
in term
: cted the publicTs at large ~- eleither is
ans as had eventually affe
) banas
ure of banks and the public losing tts
— ‘ated out of taxes, or leading to fail are a social cost Which cannot be
loans
no a in either case, non performing

al Asian
currency crisis of 1997 the banking sector of sever
systemic failure to take care of.
-— tery owe Reon arising out of a
problem: market-led and
Most countries adopted two approaches to address the
it wits largely a state~
state-led approaches. While in case of Malaysia and Korea
initially, In case of
led approach, Thailand had a more market-led approach MCO) to
Korea, the Govt promoted the Korea Asset Management Company (KA
in
deal with the financial institutions’ problem of non-performing loans, whereas
the case of Thailand, four years after the crisis Thailand Asset Manageme nt
s
Company (TAMC) was set up. The state owned asset management Companie
have been successful in bringing down the NPL levels post the crisis, however
countries where market-led approach is being used for NPL resolution, such as
Philippine.s, NPL ratios have been significantly toned down without state

Apart from the banking crises that left huge NPL burdens, one of the reasons
commonly cited for NPLs is the presence of state banking. State-owned banks
have historically heen a common feature in several Asian countries — China,
Indonesia, India, Bangladesh, Pakistan, etc. Statistics shows that the percentage
 NPL Phenomenon
The Global Syn. 1 407

The problem of non-performing loans (NPLs, also known 2s non-performing

assets (NPAs) has assumed gigantic global proportions. According to an
estimate, 112 of systemic banking crises occurred in 93 countries since
the late 1970s.’ it is widely recognised that if left unresolved, the problem of
NPLs can deepen periods of financial crisis.

1. THE GLOBAL NPL PHENOMENON

As mentioned already, the NPL phenomenon, to the extent it merits concerted
action and resolution. relates to NPLs Iefi by banking crises. The history of
banking crises is almost as old as that of banking itself, but with intensified
globalisation of the banking industry, banks have become more susceptible to
global cross currents. International capital movements often create bubbles in
economies that periodically burst, and result into a massive melidown in prices.
Or surging tates of return. and the result is a severe phenomenon loosely termed
as a “crisis”.
In recent past. there has been a spate of such crises — the Japanese bubble
bursting towards 1991-92, leading to Japanese banking crisis that has not been
fully over as yet, the Asian currency crisis of 1997, the Mexican financial crisis
of 1997, the Russian crisis. the most recent sub-prime crisis in the US in 2007-
09. A paper suggests that there have been 124 systemic banking crises over the
period
1970 to 2007".
Global NPL data taken from IMF's Financial Stability Report have been given
in the Tables 5.1 and 5.2 in this Chapter. Table 5.1 provides the ratio of bank
NPLs to total assets in different countries. Table 52 provides the ratio of bank
provisions
to NPLs.

Table 5.1- Bank Non-performing

Loans to Total Loans
(in percent)
Source for this book: Financial Soundness Indicator (FSI) Tables compiled by
IMF's Statistical Department”
(Numbers after country names xe footmote references — sex footnotes 2 he ead of the Tabic)

Year| 2007 |2008 | 2009 |2010 |201i |2012 |Lmen |

Advanced Economies

Banking Crises:
L Daniels Kinmecbick TheUseofAsset Management Companies ixtheRessincion of
A New Deonabase. IMF Working Paper
.. ec Lacven and Fabian Valencia: Systemic Banking Crises:
wPas224. abies
FSRApel2013
-FS ITsed
pa (acces
inf cs/GPSR/G
batp:/ffsi/do
| PSI Table for Apeil, 2013: org
on SthSeptembe2013)r.
 The Global NPL Phenomenon
Syn. 1 429
Year 2007
Bosnia and a 3.0 i
Herzegovina! aN
——

20,21
Bulgaria i) 11.9
—
y491—T 16.9 | December |
Croatia ‘i
Hungay™ [2
BN io<) ee
ee
aohsj)
\o PP} 13.6

2S Se aaa
N Uo
58
lawi a [08 [24 [143 [159 [139 72
Lithuania”? [1.0| 6;3:——-{ 1816
v3)
Montenegro :
Poland=
Nn Nn 18.5

182
24
wz ° ro
1B WwW

~”N Eb) 4-3} 15.7 nic] LEO ercdpe9.0) on} 1806

ies|S:
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fy}
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me)
oo NO £
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be iN we co) ti | December

3 53
a

m—}r
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NA

Ble 37 | December
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=)
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gayeeaN
Ww fon Ww
Ww°
v2) UO QO

2 a } <<° $28) we)foma A} ) 16.4 | 13.3 |10.7

i. | 14.5
“all
vs)c ~”~” ©
5 [38 [95 [82 [66 [60 | December
N

2 = pasf30_ [39 [137 [153 [147 [198 | December

—
r

|.
ine”
a 2.
cC}3E.|
=)

eo)

Urbekistan 28 [30 | 12 [10 [07 [05 | Devember_

Developing Asia

Malaysia” [65 3
3.5 3.4
 1
ns—A Global Problem
40 Sya.! Part |—Chap. 5—Non-performing Loa

che Sai
 The Global NPL Phenomenon
Syn. 1 431

2007 2010
21] 32

Sources: National authorities and IMF staff estimates.

Note: Data definitions follow, to the extent possible, the methodology
of the Financial Soundness
Indicators Compilation Guide. Major deviations from this methodology are
indicated in country specific
footnotes. Due to differences in consolidation methods, national accounti
ng, taxation, and supervisory
regimes, data are not strictly comparable across countries.
Numerator: Gross value of loans on which (1) payments of principal and interest
is past due by 90 days
or more, or (2) interest payments equal to 90 days interest or more have been capitalize
d, refinanced, or
rolled over, and (3) loans less than 90 days past due, which are recognized as
nonperforming under
national supervisory guidance.
Denominator: The total value of the loan portfolio (including nonperforming loans, and
before the
deduction of specific loan loss provisions).
1. Includes both impaired and past due items.
2. Does not include subsidiaries and branches abroad of foreign controlled deposit takers.
3. FSI Compilation Guide methodology from 2008 onwards; previous years may not be
comparable.
4. Nonperforming loans reported net of specific provisions.
5. Loans are classified as nonperforming on the basis of impairment, which is not linked to a 90-
day criterion.
6. Methodological break in 2009 due to changes in the regulatory reporting framework for the
audit of banks.
7. Loans classified as substandard, doubtful, and loss; not necessarily linked to a 90-day criterion.
8. Two largest commercial banks and large savings banks (four in 2007).
9. Ratio of NPLs to assets calculated using the nominal value of claims before their transfer to
new banks. Using the book value (value at which loans were transferred to the new banks) this
ratio stands at 39.9%.
10. All licensed banks.
11. A change in the definition of the Non Performing Loan was made in 2012.
12. Non-performing loans include bad, substandard, restructured and past due loans.
13. Breaks in series since 2009 due to more comprehensive coverage. Unless otherwise indicated,
data refer to the March of the indicated calender year.
14. Domestic banks dealing only with residents.
15. Beginning in 2007, the series have more comprehensive coverage. A new calculation method
for nonperforming loans that follows the methodology of the Financial Soundness Indicators 4
Compilation Guide was introduced in September 2011. Historical annual data have been revise
accordingly, back to 2006. roi Hs
16. Non-bank nonperforming loans to total non-bank loans. Other characteristics may be
considered beyond the 90-day past-due criterion to classify a loan as nonperforming.
Includes loans to private sector, public administration, other credit institutions, and
nonresidents.
i roups. :
eek aan Ai alongside the provisions made against them,m0, were held
. Prior to 2010, assets classified as loss,
loans and the coverag e ratio. Starting
“i off-balance sheet, lowering the reported nonperforming
 Loans—A Global Problem
432 Syn! Part |—Chap. 5—Non-performing
pochaoe
shee
an st
t the
NtT
of SPSepska Emas
x of
banksintheRepublic record on-bal
withtheDovemser 2080deta,
“loss” loans and related
cust record on-balance sheet the series,
h changes resulted in a break in the
ei rucd uterest and prowess Bot
ign bank branches,
Figures from 2008 onwards include fore
Bac takes boams to Credit institutions: |
betore OW days.
Overdue loans declared nanpertorming ired loans overdue more
non- impa
| 2007 oams overdue 60 days and more From 2008 onwards,
pastdueforover90daysand/orfor
< Meee tne loansanedefinedasloansandinterest
which legal proceeding were initiated against theloan ordebtor,
loans that are overdue less than 90 days.
Loan as lows. which are fully provisioned against, were held off-balance sheet,
|
Series revised due toa new loan classification system introduced in 2009,
Not a member of theCommonwealth of Independent States, but included here for reasons of
geography and similarities in economic structure.
Loans with overdue principal or interest for 90 days or more.
Loans classified as substandard, doubtful, and loss.
#253%
=S%2
Principal or interest overdue more than 30 days (legal persons)or more than 60 days
(individuals), ifthe borrower's condition is considered weak or average; 6 to 30 days and 31 to
0 days, respectively, ifthe condition is considered weak.
Nonperforming loans include overdue loans for 1+ days.
a6 Upto 2012, nonperforming loans are those classified as doubtful and loss. From end-2012,
nonperforming loans also include negatively classified loans by IV and V category of quality,
which resulted inhigher NPLs figure at end-2012.
Unless otherwise indicated, data refer to the end of the fiscal year, i.e., March of the indicated
calendar year.
Loans with principal and/or interest past over 180 days; credit card debt and bankers’
acceptances past over 90 days; loans secured by cash and cash substitutes past 365 days.
Thirty days for loans payable in lump sum or payable in quarterly, semi-annual, or annual
installments. 90days for loans payable in monthly installments; as soon as they are past due for
loans payable in daily, weekly or semi-monthly installments.
Interbank
loans are excluded.
Based on data for fiscal year ending June 30 for public sector banks and December 31 for other

Natio
hanks
nal only.
Total loans arethesum ofclaims onthe economy net ofclaims onfinancial institutions,
credits
on government netoftreasury bonds and related instruments (bons
to nonresidents,
and claims
d'équipement),

heoerrorming loansaredefined according toMi on

itsbankYoanswaslifted.
Thoseloan aah atalized andthegovernment suarantce for
at co darincludes alsoloansoverduelesthan90 a a
secured) and loss loans. (past over 180 days uriless well
advances tofotaladvance oe mwatdls,theindicator reflects theratioofimpaired
& After adoption
defanited loans Consistent with pre-2009 definition, ‘.e.,orily includes
with principal and/orj
Loans
Off-shore banks not j imterest past due overt 30 days.
Savings and loans associations
$885
Credit ionsntinctaded. ne mom ONcee
 The Global NPL Phenomenon
Syn. 1 433
51. Includes restructured and refinanced loans.
52. Overdue loans declared nonperforming
before 60 days.
53. State mortgage bank not included.
54. Figures for the United Kingdom are based
on the consolidated global operations of domes
controlled banks reporting in the UK, so may tically
not be representative of the financial soundness
the subgroup of banks that account for the bulk of
of retail activity in the UK.
55. Compiled according to the FSI compilation
guide and therefore may differ from the national
definition.

Table 5.2: Bank Provisions to Non-performing Loans

(In percent)
Source for this book: Financial Soundness Indicator (FSI)
Tables compiled by
IMF’s Statistical Department*
(Numbers after country names refer to Footnotes — see
at the end of the Table)

Year
Advanced Economies
18.3 5721.9.5422.67) 22.0'c4 21.8wa]25.0. |December
Austria” 76.4 September

7 265 Devember
BSS_ oo

Cech Republic’ |600 [574 [498 [479 Septembe r

September
Estonia
57.1 3 _|September
—"i BS N Nn. & : 1ee) aSK r \o aNWw: ~— Oo : December

Lp SO ey, eo ST petal
E
— Wy
Ml
Eb
5
e: =m QO.

2 =} Q i@) ON _— =) Nn OV \o :
Nn— oo Nn\o 7 n oowe) June
Q a’): is)=) sR P
: 62.9
—
e

& Q Oo Nnes)

Hong Kong SAR |784 [715 [583 [850 |.. |. | December

E
&

—@) @ eS)5S Q.
an

P1[1260 75 |770 |...0 | December

ireland® 491
rf attp |200”|September
191d
795 [78.3 832 [83.7 [826 |. _ |September
2052, |1463 ]139.9 |1106 |152.1|140.9|September
\O

—)

139 us| 118 |December| December

PISS Ren Ta) |Sema |

4, FSI Table for April, 2013: http://fsi.imf.org/docs/GFSR/GFSR-FSITables-April2013.pdf (accessed
on 5" September, 2013).
Haai
44 Sya.i
Pan i-—Chap. 5 —Non-performing Laans—A Global Problem

Lad]™
hi
 The Global NPL Phenomenon
Syn. 1 435
2007 _| 2008 | 2009 | 2010 | 2011 | 2012
Ukraine!®
70 [isa [os66t
6 [68
]3] 63.9
120 585
Bg

Developing Asia

70.5 [816 [399 [608

i164
1 [526 [32 susa
[588 [eas [s71 [55 ] 1 [50
Bl

8
Go|
WM]
ON
\O bd
= No

[oo7 [32
i=) £
Indonesia

,
Nn\O

4 [1003
N ©

696
Nn

Philippines
CO}]
O Ww

3
NN}
3 [8
68.7
|
m
bo

58.1
|
ON
\O|
\O
\O pk
Wy] —
io)
~”NSe)

=
) ro)

ay 5 Oe
315
86.5.
[480] 537 [343 [490
|97.9 | 99.4 | 117.0 | 141.2 | 1586
Middle East and North Africa
Egypt’! 100.4 | 92. 5 94.6
B4 [520 [524 [523
95. ~ September
[632
&

eal ea a
74 605
610
December

3
Saudi Arabia! 142.9 | 153.3 | 89. 8 n A-~-|:'132.8
_—

a yo NT)
35.
mC oOoO.
= a>oe
ns

Sub-Saharan Africa

50. 5638
4 [687 708
ON & December

A @) | & eS) |
(nN
Co Ses AeNn ° NnS N 55.6 |g 45.0
~—
9
Lesotho! 193.0 | 195.7 124.0 | 117.7
tt aia [343
— wwON
. i) \oOi) eo)

uo60 iN NO
968 [779 |58.7
E ge.

72_| 64.7 |662

|
3

7 a) . i) Nn

zA = =) . ba)
zi
7
a)
E
NnWw oo

[Swaziland |. [583] 675 [469 [536 [31.0 |December |

Romer, Dae remcompar
across
ablcountrie
e s.
Numerator: Total specific loan-loss provisions, only.
Denominator: Nonperforming loans as defined in Table
3.
1. Spec and gener
if al provi
ic sions.
2. branches abroad of foreign contr
3. FSI CompilatiGuide olled deposit takers.
on methodology from 2008 onwards; previ
comparable.
ous years may not be
4. Methodological break in 2009 due
audit of banks.
5. Two largest commercial banks and large savings banks (four in 2007).
6. All licensed banks.
7. Data refer tothe ratio ofloans
Unless otherwise j
 The Global NPL Phenomenon
Syn. 1 437
12. Prior to 2010, assets classified as loss,
alongside the provisions made against them,
off-balance sheet, lowering the reported nonpe were held
rforming loans and the coverage ratio. Starti
with the December 2010 data, banks in the ng
Republic of Srpska must record on-balance
"loss" loans and related accrued interest and sheet the
provisions. Starting with the December 201
banks in the BH Federation also must record | data,
on-balance sheet the "loss" loans and related
accrued interest and
13. Figures from 2008 onwards include foreign bank branche
s.
14. Impairment losses to non-performing loans.
15. Provisions referent to loans and interest.
16. Not a member of the Commonwealth of Indepe
ndent States, but included here for reasons of
geography and similarities in economic structure.
17. Specific provisions over loans with overdue princip
al or interest for 90 days or more.
18. Starting in 2008, coverage extended to all comme
rcial banks. Previous year data covered only
"major commercial banks" (state-owned commercial
banks and joint stock commercial banks).
19. Unless otherwise indicated, data refer to the end of the fiscal
year, i.e., March of the indicated
calendar year.
20. Individual impairment provisions only.
21. Based on data for fiscal year ending June 30 for public
sector banks and December 31 for other
banks.
22. National banks only.
23. After adoption of IFRS in 2009, nonperforming loans
include defaulted loans and loans overdue
90 days or more, but 2009 figure here is consistent with pre-200
9 definition, i.e., only includes
defaulted loans.
24. Off-shore banks not included.
25. Savings and loans associations and credit unions not included.
26. Credit unions not included.
27. Includes restructured and refinanced loans.
28. State mortgage bank not included.
29. Figures for the United Kingdom are based on the consolidated global
operations of
domestically controlled banks reporting in the UK, so may not be represent
ative of the financial
soundness of the subgroup of banks that account for the bulk of retail activity
in the UK.
30. Compiled according to the FSI compilation guide and therefore may differ from the national
definition.

Note: Due to differences in national accounting, taxation, and supervisory

regimes, FSI data are not strictly comparable across countries.
As is quite clear from the data above, the level of NPLs for most of the
advanced countries nearly doubled in 2009. For example, in the USA, the percent
of NPLs to total advances was 0.8% in 2006, which has shot to 5.4% in 2009. In
the case of UK, the NPL percentage was 1.6% in 2008, which more than doubled
to 3.3% in 2009. Compared to this, India, with its 2.4%, and China, with its
1.6%, are much better. However, in later years from 2011 to 2012, one can see
stability in the NPL ratios in some countries like in Japan, UK, and China. There
have been very narrow variations and countries like New Zealand, Singapore,
Philippines have seen a minor fall in NPL ratio, though in countries like France,
Korea, Italy, there have been minor increases.

A recent estimate put the global size of NPLs at roughly USD 4 trillion. This
number might have significantly gone up in 2009 due to the result of ag
subprime crisis, and the massive surge in NPLs in the Gulf region. wore’ t i
IMF tables give an idea of the percentage of non-performing loans to total ap
loans, in terms of the absolute size of non-performing loans, as per data before
438 Sya. 2 Part |—Chap. 5—Non-performuing Loans—A Global Prablem
China, Korea,
the subprume onsis, Japan topped the list followed by Germany,
Taiwan, India, Poland, Thailand, etc.

2. NPL PROBLEM IN ASIA

The situation of non-performing loans in Asia has shown a marked
improvement over the last few years, primarily due to disposal of NPLs either in
the market or to asset management companies, In fact, several people have cited
Asia as an example — the fact that a substantial chunk of NPLs could be removed
from the banking system and either placed in the market or handed over to
specialised asset management companies is seen as a remarkable achievement.
The remarkable change in the Asian NPL scene may be observed comparing
the highlights of two of Ernst and Yong’s Global NPL Reports ,
The 2002 report
of the firm commented:
“Two years ago Asia had a window of opportunity to finally begin
dealing with its long-festering nonperforming loan (NPL) problem. Most
countries were experiencing strong GDP growth, and international
investors were ready, willing and able to buy portfolios of NPLs. ‘If
Asian governments, asset management companies and banks succeed in
moving nearly $1.5 trillion of nonperforming loans off their books and
into the private sector over the next few years, Asia will emerge as the
world’s growth engine, fueled by eCommerce and foreign investment,’
we wrote at the time.

challenge indealingwithitsNPLcrisis. A global economic slowdown,

 NPL Problem
in Asia Syn.2 49

management companies. While Asia’s banks have approximately $746 billion

remaining in their balance sheets, based on official estimates, the region has
made significam progress in financial system reform and NPL dispositions.”
The following Table shows the series of non-performing
loans over the wial
loans fox selected Asian countries during 2002-201 1°.
Table 5.3: Non-performing Loans Ratio: 2002-2011
Country/1car bangladesh | Hong Indomesia | Korea, Valayia
komt, kip. ff i
China 4
— a] so] wal 0| 241

EE ee) ee E
oS Sa ar a SsSS eee
2s oe et ee 7 ed See 7d
SS SS Se ee es es
142 a7 |
aan
ea
eam
tt est
peas
77d sot ee] as
Oina

72
ee TT 3 NT) aT ) 3 TC)
ES TT] ET TT ke) adel6 a
aS TI ST ae es eed
oma | — —-ss)o~ -25}—s0| ss 79] 15
ES Sy ees eee ces eee cs
Es epee epeeapt slate fee 79 ange pepe
Saas Scam 2RE EZ 2ME 2 BE

Review of Simgapore; Financial System Sizbility Review of Central Bank of Sri Lankz:

ADB Eoomomacs Working Paper. Series No. 333. February. 2013 (Firm levestment. Liquidity and
ieee A Pad Siely Gf Ace Tees is. Gc 2000s) avanble a
health
pdf (accessed on S*Sepuemiber. 2913).
 Global Prablem
Part i—Chap. 5—Non poryornuns Loans-—A
Seal sya. 5
ef Contsal Bankai the
c Bank ol Vic ena es Stat isti cs and Financia) Santistios Monthly
Yiai
non-
er sho ws tha t the re hav e been wide variations of the
— re
ntries in different ume periods.
B. ~ -boone neues different cou
LEM IN JAPAN
d a ny EN
: dedrchapetecanrtehroci
ee
paoning danthawe SelenclaclBT8OS
inancial

100 million yer

62,290

:
(61,090)

STA)

_ Figures arerounded tothenearest billion yen

WN regard © iefigures for“CltyBurts, Loug-ter Cite Bests sndTrustBert” Shinsei Bank and Aozora Bank
are excluded for
March 99. Aozora Bank is excinded for March 00.
These figures inclade Shinsei Bank March 2005 onward. which changed itsstatustoanOrdinary Bank Charter
ceaaainen
onApril 1st,2004.
" _ excluding Shinsei Bank and Aozora Bank from “City Banks, Long-term Credit

corporate revitalization.
Sno
> getesnés
vatencnbehead
— —— na joie en ae.

The reduction in thelevel ofNPLs is primarily due to , in

+ NPL PROBLEM IN CHINA

Standard and Poor's
 NPL Problem in China
Syn 4 44]
withdrew it; however, leaving a trail
of both news and some copies of the
withdrawn report as well. The report
was withdrawn following objections
Chinese regulators about the accuracy of from
the numbers.
The official numbers of NPLs in Chin
a are given by the China Banking
Regulatory Commission. The data as of
March 2006 is reported to be RMB
1,312.47 billion or roughly 8 per cent of
the total outstanding loans and RMB
518.1 billion as of July, 2009 (NPL Asia
, PWC, October 2009) which is
estimated to be less than Japan’s NPL mark
et of US$187 billion during the
period. As of the end of 2011, the outstand
ing NPLs of commercial banks
registered at RMB 427.9 billion yuan, marking
a decline of RMB 5.7 billion yuan
from the beginning of the year. The NPL ratio
stood at 0.96%, down by 0.17
percentage point y-o-y’. The figures are declinin
g steadily (except in the last
quarter of 2012, where the rise is majorly due to
increase in substandard assets),
as is evident from the following table’:

Table 5.5: Major Regulatory Indicators of Commercial

Banking Institutions
(RMB 100 million; %)

11898
278.1%

Details of China NPL market are covered in Chapter 6.

Reduction, whether real or surfacial,
ial, i Chinese bad loans has been brought
in
about largely because of disposal of loans to the AMCs. As regards AMCs and
their activity, see Chapter 6.

7. China Financial Stability Report, 2012 by Financial Stability Analysis Group of the People’s Bank

hitps//wardr pe govica/image_ public/UJserFiles/english/upload/File/China%20Financial%20%20Sta

i i C . . . . ‘

bility%20Report(1).pdf (accessed on 5" September, 2013).

i ing Regulatory issi
Commission 31
website, ai availa
details ilable at:
it aR Kaw EIR LOY OER gdoc View.do?docID=F9374055613D491 O09AA3D76ES56FCSD&86
(accessed on 5"" September, 2013).
 g Loans—A Global Problem
“42060 oe S Part I—Chap. 5—Non-performin

5. NPL PROBLEM IN INDIA

th evol ume s ofnon -pe rfo rmi ng loa ns asreported bybanks aregiven
InIndia.
by thefollowing Table:
led Commercial Banks
Table 5.6: Non- Performing Loans (NPL) ofSch“edu = : _. L
> 4 7"
—

AO Assets
ipa

Pg gt

Banking group-wise break up of NPAs, and movement over the past few years,
isgiven in the Table below’:

Table 5.7 : Bank Group-Wise Classification ofLoan Assets ofScheduled

Commercial
Banks - 2007 to 2012
Amount
(in Rs. billion)
 i
;
NPL Problem in India

Bank
group/Year

caareecaaeal eT
Private sector banks
2007

Foreign banks

2008
2009
2012
Standard Assets

3826.30

2284.17
All Scheduled Commercial Banks
2007 18433.9
97.6

97.4
As on March 31
Sub-Standard Assets

43.68

20,79

196.80 e8
1.1

2.9

“TGo.9e
1|
39.30

168
1004
22.3
Syn. 5

Doubtful Assets

24531 | «3
1
1.0

1.0
1.1
Lo
12

0.5
0.5

|
1.0
443

7
22759.7 97.6 261.13 PRO 242.87 P wah
9

4
2010 31825.6 412.92 326.63 fie |
8
2011 38973.8 398.75 aioe 448.02 meyrel
4
2012 45284.4 675.84 596.20
8
Source: Off-site returns,(domestic) of banks, Department of Banking Supervision, RBI.

The Table below gives group-wise break up of advances, and levels of non
performing assets”:

10. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/701_TSTRO71112.pdf (accessed on Sth

September, 2013).
 Table 5.7: Continues

Bank Group/ Year

1:
E
 Systemic Problem versus Problem of Bad Lending
Syn. 8 445
6. THE PROBLEM OF NON-PERFORMING LOANS
The level of reported NPLs in India is not high as compa
red to some of the
Asian countries. Partly, this is due to the definition of NPIs
and partly due to a
Statistical distortion by transfer of NPLs to AMCs.

7. STOCK PROBLEM AND FLOW PROBLEM

The problem of non-performing loans is both a stock and a flow proble
m. The
stock problem refers to the accumulated volumes of NPLs with banks,
or the
overhand of bad loans, while the flow problem is the incremental bad loans.
While countries are legitimately concerned with both, the stress in NPL
resolution is to help banks to come out of the problems resulting out of a failure
of the system as a whole. Bad loans that arise out of bad lending decisions which
are mostly left to be resolved by the banks themselves. On the other hand, stock
solutions need a centralised attention: "As cross country evidence indicate
s, stock
solutions tend to be necessary, where banking distress is systemic and often
include the liquidation of unviable banks, disposal and management of impaired
assets and the restructuring of viable banks."'' At another place, the learned
author further says: "Cross country evidence suggests that flow solutions are only
successful when banking distress is limited, ie. non-systemic, and the official
safety net is either limited or the supervisory authority is willing to intervene in
those institutions whose capital base is further deteriorating."
Regulators create environment for corporate restructuring to minimise the flow
of bad loans.

8. SYSTEMIC PROBLEM VS PROBLEM OF BAD

LENDING |
A systemic crisis is a market risk — efficient creation and management of the
credit by the bank could not have averted the risk. For instance, the subprime
crisis, and the resulting impact on several sectors of Indian economy, was a
systemic problem.
The other reason for bad Joans is bad lending by banks. Banks err in credit
underwriting, or banks do not manage their credit portfolios well, causing loans
to go bad.
The intention in NPL resolutions, particularly by institutional machinery, is
focused more towards resolving systemic problems.

11. Daniela Klingebiel: The Use of Asset Management Companies in the Resolution of Banking Crises:
Cross-Country Experiences.
12. Ilbid.
 CHAPTER 6
ASSET MANAGEMENT COMPANIES AND
RESOLUTION OF NPLs
SYNOPSIS
1. Asset Reconstruction, Asset manage-
4.14. Acquisition of NPLs by
ment and resolution companies .............. 448
2. Approaches to Resolution: Creditor-led Danaliartaiy 2222.2 mw By 465
4.15. Setting the purchase price for
approach vs AMC approach. .................. 448
NC I teary ag 466
2.1. Bank-led approach.................... 448
4.16. Carrot and Stick Policy:............ 467
2.2. The AMC approach.................. 449 4.07 Rundiig eure
3. Models of enitoel |} 468
Asset management 4.18. Management of the NPLs by
Companies} S2ue so 2 ii: | 451 Danaharta: 11)5.32..... 510W...3) 469
3.1. AMC models based on 4.19. Soft approach alternatives......... 469
Ownexships..2isz.. desicclen..cxf 451 4,20. Hard approach alternatives: ...... 470
3.2, AMC Models: Based on 4.21. Post Danaharta NPLs_ in
UPMICORY coo acctar cece 452 os dk ueeelee cperedepenermateam.
3.3. AMC zp 471
models: Based on 4.22. Philippines.......0..0..0.cccceessesseeses 47]
Resolution approach ................. 452 4.235) Thailand sys.)sii0..2ecsewsisen 473
4. Asset Management Companies: Global 4.24. Indonesia: ..0........cetesssseseeesseeeees 476
CRIMAMMICS crerta tetera 453 =28 jamLs Sonyginetapeel Aiaaheate. separates 477
4.1. United States of America.......... 453 4.26. German y?.......csccccceccccescscssssacsees 478
oe eT | re 456| 5. Factors for the success of aMCS$.e.c........... 480
4.3. Asian Countries ...0...0.0.0.c.cccc0.-: 457| 6. NPLs as investment option: ...............0.0-. 481
Blog DADAM vats teemietea-tdh etnies Boeck one 458 App.1 Important Features of the
G54 KOLA! AG...3i-..00...0lsd.. Ath 460 Thailand Asset Management
4.65" Malaysia: | ae) ad itieen.itcarscs 462 Corporation Law ..............c0.0000. 483
4.7. History of Danaharta ................ 462 App.2 Important features of the
4.8. The AMC model....................... 462 Pengurusan Danaharta
4.9, Danahiatta Act ............--cececee-ese- 463 Nasional Berhad Act 1998 ....... 487
4.10. Vesting of NPLs ............0.00+:.... 463 App.3 Danaharta’s _ Loan
4.11. Special administration .............. 464 Restructuring Principles and
4.12. Special foreclosure rights ......... 464 NGURIO TICS). .Lischelihabaiiinehocc’ 495
4.13. Were these powers extreme or
EXtra-OrdiNAary?..........00cesescereeee 465

The intensity of the problem of NPLs has already been noted in the previous
Chapter.
Obviously in view of the macroeconomic significance, the need to reduce
burden of bad loans from bank balance sheets has been engaging attention of all
concerned parties over the last few years. One of the early attempts world-over,
of a governmental action aimed at reducing system-generated bad loans, was the
Resolution Trust Corporation (RTC), which has become the model for AMCs of
date. We study the RTC and other AMC models in this Chapter.

447
 panies, etc.
Sya.! Part 1—Chap. 6—Asset Managemen! Com
+48
ASSET MANAGE-
1. ASSET RECONSTRUCTION,
ANIES
MENT AND RESOLUTION COMP
agement companies (AMCs), asset
Since the use of various words, asset man
on companies, is likely to confuse,
reconstruction companies (ARCs) and resoluti
ption.
it is necessary to clarify these words at the ince
in the context of non
Globally, the word “asset management companies”
“asset reconstruction
performing assets is used 10 denote the same that
managers are those
companies” is supposed to mean in India, Generically, asset
performing loans
who look after assets of others on a professional basis. Non-
ities, such as
(NPLs) of banks in most cases have involved managing the secur
used,
real estate, and hence, the word asset management companies was
The word “resolution companies” has also been used in several cases. For
example, the first specialised asset management company in the USA was called
Resolution Trust Corporation. The Japanese central AMC is called Resolution
and Collection Corporation.
The word “reconstruction” was preferred in India because of its historical

In this book, we have used the word AMC and ARCinterchangeably.

2. APPROACHES TO RESOLUTION: CREDITOR-

LED APPROACH VS AMC APPROACH:
There are essentially two approaches to resolvin g the problem of bad loans: let
each bank manage its own bad loans, or let there be a central approach to

As any problem is best reso

lved by the
scemthatthe problemloanisbet terhandled bythebankitselffp dm
—— better placed to resolve NPLs than centralized AMCs as they have the
 Approaches to Resolution: C reditor-Led,
etc. Syn. 2 449
advantage that these banks can provide
new loans in the context of debt
restructuring.”
However, individual bank-led approach
to resolving NPLs has several
problems, particularly where the problem loan
s are the result of a crisis. Fearing
the risk of further loans going bad, banks
shun lending, which deepens crisis. In
most cases, in the name of restructurin
g, borrowers take more loans and
therefore, more amounts become non-performing.

2.28 The AMC approach

The AMC approach is based on the premise that
NPLs created by a system
crisis cannot be treated at par with those accumula
ted due to bad lending
practices, and therefore, a focused attention, backed
by appropriate legislation, is
required to resolve the problem. If banks were burdened
with resolving problem
loans, they will not be able to attend to the need to
create new loans, which will
further deepen the crisis. Banks having provisioning requi
rements will also face
the threat of capital erosion and will therefore shun new
asset creation, which is
important to take the country out of a crisis. “AMCs are
established to acquire,
manage, and re-cover illiquid or nonperforming assets from
financial institutions.
Relieving banks of the burden of NPAs should allow them
to focus better on
financing the development of new business Opportunit
ies that strengthen the
economy. The transfer should help restore depositor and inves
tor confidence and
reduce the threat of market disruptions. AMCs should maximize
recovery value
while minimizing costs. They can also help build industry exper
tise in loan
resolution, besides serving as a catalyst for important legal reforms in
bankruptcy
procedures and loan collection.’”
“Evidence suggests that the use of asset management or reconstruction
companies or distinct loan workout units has played an important role in
resolving systemic difficulties in the banking sector and could be considered as
part of best practice.”
“The centralized asset recovery approach permits a consolidation of skills and
resources—centralization of work-out skills and information technology—in debt
restructuring within one agency and may thus be more efficient in recovering
maximum possible value. A centralization can also help with the securitization of
assets as it has a larger pool of assets. It centralizes the ownership of collateral,
thus providing potentially more leverage over debtors and more effective
management. Moreover, distressed loans are removed clearly, quickly and
completely from banks allowing them in turn to focus on their day-to-day
activities. Centralized agencies may also have the advantage of breaking links
between banks and corporates and may thus be better able to collect on

1. Daniela Klingebiel: The Use of Asset Management Companies in the Resolution of Banking Crises:
Cross-Country Experiences. wr. :
2. David Cookse ‘i Jason Foley: The Role of the Asset Management Entity: An East Asian
tive, ADB publication. ‘ : gfe
3 A ieee Bank: Memo on Technical Assistance to India for Developing the Enabling
Environment for and Structuring Asset Reconstruction Companies In India, Oct 2002.
 Companies, etc.
450 Sya. 2 Part 1—Chap. 6—Asset Managemen!

e Economies of scale—i.e. consolidation of scarce work out skills

¢ Can help with the securitisation of assets as it has a larger pool of

assets.
¢ Centralises ownership of collateral, thus providing (potentially)
more leverage over debtors and more effective management,
e Breaks links between banks and corporates and thus could
potentially improve the coliectibility
of loans.
e Allows banks to focus on core business.
e Improves prospects for orderly sectoral restructuring of economy.
e Allows the application of uniform workout practices.
Can be given special powers to expedite loan recovery and bank
* restructuring.
Disad vantages
¢ Banks have informational advantages over AMCs as have
collected information ontheir borrowers. bud
for
* analy an on banks may provide better incentives loan
approval andmonitoring procedures.
) | dmg future
¢ Banks can provide additional financingy which he a
the restructuring process. may be necessary

AMC ayesd gem deere

e If assets transferred to the AMCs are not acti ~~

cence

4. Daniela Klingebiel- The U wi ee ,

Cross - he Use of Asset ManagememC
- Damicla Remo~~ ompamies Resolution ofBanking Crises
 Models of Asset management Companies Syn. 3 45)

3. MODELS OF ASSET MANAGEMENT COMPANIES

3.1. |AMC models : based on ownership:

Different countries have tried different models of ownership of asset
management companies. The options range from asset workout departments or
units of banks, bank-owned subsidiaries or affiliated companies, private
companies, and government-owned asset management agencies.
A separate unit ordepartment with the
inbank is only as good as the bank as a
whole, specially from the viewpoint of legal powers, interests of the shareholding
groups, etc. Therefore, in most countries, this has only been the last choice.
However, bank subsidiaries or bank affiliated companies have been used in
several countries. This includes Australia and several continental European
countries. In China as well, the Big Four banks have set up their own AMCs,
some of which have subsequently been privatized. It is contended that the “bank-
based approach offers several potential benefits: (i) use of in-house experience
and knowledge about the NPA, (ii) maintenance of important banking
relationships, (ili) strengthening of expertise the resolution of bank NPAs, and
(iv) establishment of new business relationships with new investors involved in
asset workouts. Another very important consideration is that a bank-based AMC
is likely to have more operational flexibility than a government entity. This
flexibility can be particularly valuable in retaining qualified personnel and in
structuring transactions.”
Private companies, though set up with substantial shareholding of banks have
been used in Thailand. In India also, the model used is one of private AMCs.
Asian Development Bank has indicated a minor skepticism in this approach:
“Being private, ARCs would naturally look for a quick turnaround for acquired
NPAs and would purchase only the more promising NPAs off the books of
banking institutions. This would defeat the purpose of the Government concept
of an ARC acting as a “nursing home” where distressed enterprises are
restructured or rehabilitated.””
The government-owned company model is the most representative example of
centralized AMCs. Being government-owned, such AMCs can be vested with
special powers and tax incentives. Malaysia, Korea, Thailand, Indonesia, etc.
have adopted this approach. The US RTC is also an example of a government-
owned AMC. “Centralizing NPA problems in a government agency offers certain
advantages. From an operational standpoint, the government AMC should be
able to achieve certain'economies of scale in hiring and training appropriate staff
and building management information systems (MISs). Centralizing asset
management and disposition functions should facilitate asset packaging and
marketing, and ensure consistency and transparency within the AMC. Also, the

- Memo on Technical Assistance to India for Developing the Enabling

 alc.
Part 1—Chap. 0—Assei Management Companies,
>. sya. 5
should
compoting w drive down sale values
nsk of different bank-based AMCs the debtor
institutions, the more extensive
be reduced. The greater the number of
the assets, the greater the need for
inter-relationships, and the more ;similar
To)
government coordinabon and oversight.

3.2. AMC Models: Based on multiplicity

another issue in modelling AMCs is: whether to have a single AMC, or to
sed AMC's have been used
annie AMCs osdhesnartest doniande Centrali
rnment support and
by allthose countries which have floated AMCs with gove
provided special legal powers to the AMCs.
les anyone
The approach in India is one of several AMCs - the Act enab
satisfying the requisite criteria to float asset reconstruction companies . Iftoo
many ARCs come up in course of time, an ARC might just bea bank look-alike.
Worse still, since the price at which the bad loans will be sold is only a paper
price (represented by a bond or debenture), the ARCs will start competing on the
price they offer for the bad loans, leading to artificially inflated values of bad
loans. The problem with too many ARCs could well mean at least some of them
will become as bad as the loans they buy..

3.3. AMC models: Based on Resolution approach

In terms of the approach to resolving the loans they buy, AMCs might adopt
several approaches. A rapid sale approach implies that the AMC tries to sell
down assets soon after acquiring them. A workout approach or
restructuring implies that the AMC tries to nurse the loan back to
health by actively restructuring either the loan or the business of the borrower.
The AMC might either force the borrower to sell non-core assets, or merge, or
dispose of a part of its undertaking,
etc.
More often than not, no single approach can be associated with AMC as all
ofthee willtake a suitable approach based:on thecasc. However, theve have
been international studies on the success of the two approaches mentioned above.
Tae Tesults oftheanalysis oftheseven cases can besummarized asfollows:
Wo out of three corporate restructuring AMCs did not achieve theit natrow
goals of expediting restructuring These
corporate restructuring. Only the
wedist ,

. managed its portfolio, acting in some instances as

 Asset Management Companies: Global Expe
rience Syn. 4 453
that AMCs can be effectively used, but only
for the purpose of asset disposition
including resolving insolvent and unviable finan
cial institutions.”
Daniela Klingebiel makes a very important
point when she Says disposal-
oriented AMCs have worked better than restructur
ing-oriented ones. Even for the
success of the disposal-oriented AMCs, the
learned author puts important
conditions: “ But even achieving these objectives
required many ingredients: a
type of asset that is easily liquefiable—real
estate, mostly professional
management, political independence, a skilled
resource base, appropriate
funding, adequate bankruptcy and foreclosure laws,
good information and
management systems, and transparency in operations
and processes. In the
Philippines and Mexico, the success of the AMCs was
doomed from the start as
governments transferred a large amount of loans polit
ically motivated loans
and/or fraudulent assets to the AMCs which are difficult
to be resolved or to be
sold off by a government agency. Both of these agenc
ies did not succeed in
achieving their narrow objective of asset dispositio
n, thus delaying the
realignment of asset prices.’’!

4. ASSET MANAGEMENT COMPANIES: GLOBAL

EXPERIENCE
Asset management companies to manage the NPLs of banks and similar
financial intermediaries are a global phenomenon. Notable instances of AMCs
in
different countries are Fobaproa (Mexico), APT (Philippines), DGF (Spain)
,
RTC (U.S.A.), Arsenal (Finland), Npart (Ghana), Securum (Sweden), Darnaha
rta
(Malaysia), KAMCO (Korea), IBRA (Indonesia).

4.1. United States of America

Asset liability mismatches and other economic issues led to a major banking
crisis in the mid-1980s in the USA. From 1980 through 1991, around 1,400
banks failed or received government assistance and during the same period,
approximately 1,100 thrifts, also known as savings and loans associations
(S&Ls), failed.
The crisis led to the insolvency of the Federal Savings and Loans Insurance
Corporation (FSLIC), which provided a government insurance guarantee over
thrift retail deposits, and shook the solvency of the Federal Deposit Insurance
Corporation (FDIC), which provided similar insurance over retail bank deposits.
At the end of 1991, the Bank Insurance Fund (BIF) administered by the FDIC
carried a deficit balance of US$7 billion.
The US Government, in response, among other measures not relevant here,
passed legislation for setting up of the Resolution Trust Corporation (RTC) to

9. Daniela Klingebiel: The Use of Asset Management Companies in the Resolution of Banking Crises :
Cross-Country Experiences.
10. Daniela Klingebiel: /bid.
 Companies, etc.
+4 sad Part }—Chap. 0—Asset Management

~ $30 billion ofTARP/FSP

capital
UST equity capital
($10 billion alongside and $20 billion
UST debt $10 billionofprivate
equity capital )
Power = $40 billion
— Total Purchase
 Asset Management Companies: Global Experience
Syn. 4 455
The government through PPIP initiative wante
d to partner with private
investors to purchase the toxic assets. It was a sort
of a ‘bail out’ arrangement
wherein with $75 billion - $100 billion capital, the progr
am intended to generate
$500 billion purchasing power to buy the legacy assets
and expand it to $1
trillion over time. Government intervention was requi
red to hive off the bad
assets from the books of the banks and partnering with
private investors was to
ensure that the government does not end up Overpaying
for the assets and the
private sector investors competing with each other would help
in establishing the
prices of the assets.
PPIP originally consisted of nine PPIFs. The investment period
has now ended
for all PPIFs. Five funds have now been effectively wound down
(i.e., either they
hold no eligible assets or have closed the fund after distributing all
proceeds) and
three funds remain in the program with one fund containing outstanding
Treasury
equity and debt. As of 31° March, 2013, Treasury has fully recovered
its original
investment of $18.6 billion in the PPIP, plus a positive return of $2.6 billion
through equity and debt repayments, interest, and proceeds in excess of origin
al
equity capital, including warrant proceeds. !
TARP — TARP was the government’s largest measure in 2008 to address the
sub-prime crisis, an initiative whereby the government intended to purchase $700
billion of ‘troubled assets,’ which included residential and commercial mortgages
and any securities, obligations or instruments related thereto, that were originated
or issued before 14th March, 2008 and any other financial instrument as the
Federal Reserve may think appropriate, to be purchased from financial
institutions to strengthen the financial sector~and to bring about stability.
Introduced by Treasury Secretary Henry Paulson as a legislative bill, TARP came
into effect through the Emergency Economic Stabilization Act of 2008.
Treasury was to purchase illiquid assets as mentioned above to enable the
banks to recoup the losses incurred on the troubled assets. The assets can be
purchased from an individual financial institution directly or through an auction
process by the Secretary. The program was considered to be a ‘comprehensive
approach’ to address the root cause of the turmoil.
Treasury’s authority to make new commitments under TARP expired on 3"
October, 2010. Since then, Treasury has been winding down TARP’s investment
programs and recovering taxpayer dollars. As of 31° December, 2012, Treasury
had collected through repayments and other income more than $387 billion — or
nearly 93 per cent — of the $418 billion in TARP funds disbursed to date.'~ As per

L Securities
iti Public-Private
ic-Pri Investment Program-Program Update for the Quarter endded 3\st
A March, 2013; dated 8" May, 2013 available at: ae ee eee |
stability/reports/Documents/PPIP%20Report%20033 113%20Final.pdf (accessed on 5” September,
2013). ; ”
13 TARP Four Year Retrospective Report: An update on the wind-down of TARP, available at:
p://www.treasury.gov/initiatives/financial- ae
nape orts/Documents/TARP%20Four%20Y ear%20Retrospective%20Report.pdf (accessed
on 5" September, 2013).
 ‘ CMP MANE ‘ ’ “a
Minune bee vad
l . hands oO A . scl
Furl
> “> 5). .

_ ia

Repost of the US Department

. : of the . Treasury for May 2013
| of the $420 billion
lreasury has recovered almost 95 per cent or
$398.2 billion
eee -

esented below
PARP funds disbursed to date, as can be repr

94.5%

() Housing*
® Credit Market Programs
0 AIG
® Auto Industry Financing Program
® Bank Programs

Total Funds Recovered: $398 Billion

Total Funds Disbursed: $420 Billion

Percent Recovered: 95%

* Fund disbursed under TARP to help homeowners avoid foreclosure were never intended
to be TARP Tracker recovered.

Figure 6.2: TARP Tracker

4.2. Mexico
During the 1995 economic crisis, Mexican banks had major problems of
quality of loans and corporate failures. To revive the banking sector, The
Government received financial assistance from the United States.
the World
Bank and the Inter-American Development Bank. This allowed the Governm
ent
to provide support to banks through the Bank Fund for Savings
Support, El
Fondo Bancario para Proteccion dei
[http://www ..ipab.org.mx/]. ec Ahorro (FPOBAPROA)

dummies a the Asian AMCs discussed here. as it is

by' Dante y 4
desort México
Of a recapit alisation exercis
mar e. POBAPROA
tcise. is a¢ trust establ
-
is ished|
“preventive su P
existence
iain to dates
te colaprior
r dm toteat
the sa
1994
ae'0 banking gel mp
:
crisis. FOB APROA'ge
s statde ed
mNHEs, Except subordinated debt. PFO
a
RBA PRO A
14. Dated
nw ll Tune 2013
201 3. avaniable at:
stability reports/Documents/Ma horwre treasury gov/initiatives/
y% 20201 3% i financial
2OR
< eport%
2no% 20Congress% 2OFinal pa
15. +Sepm
ape embeon
r > Septe
ony! mber, 2072) mi
lative
"ip://www treasury .gov/initiat s ;Hnancial-s
ives/f . tabil1hity/about-tarp/Pages/detauht
aape# (accessed on
 Asset Management Companies: Global
Experience Syn. 4 457
has generally acted as the lead agency in
resolving bank problems since the peso
Crisis.
One of the major FOBAPROA assistance
programmes implemented was the
purchase of impaired loan assets from bank
s at net book value (on the basis of
the Mexican rating system) in exchange
for a requirement for the bank in
question to raise new equity. FOBAPROA
instituted this programme on a case
by case basis. In some instances, FOBAPROA
purchased $2 of loans for every
$1 of equity injected, while in other cases, the ratio
was as high as 5 to 1.

4.3. Asian Countries

Asian countries accumulated bad loans either as
a result of the crisis or over the
years due to state-owned or state-controlled
banking. The position of non-
performing loans in selected Asian countries is given
in the Table below’®:
Table 6.3 East Asia: Nonperforming Loans

1997 1998.1099 2000,2001.20022003 2004 2005 2006! = 2007, | 2008

Der Dec Dec. Dec Dec Dec Det Dec DecDecMar Jun Sep Dec”Mar wn Sep. Dec
China =r nm M4 179/132) 6 | 71| 66 | 65) 62) 62) 58) 56/55) 25°
indonesia / 72 486 920 188 121 75 68 45) 76/61) 60) 8) 62) §2/46)43/30) 39
Korea 2/60 71.3136 88 33) 24) 22) 20/ 13/ 09| 09/08) 08] 07) 08| a7) 08) 11
Mays) 106/110) 97 115 102) 90) 75) 58| 48) a4! 41! 35) 92 30} 26 24) 22)
Phppines 4/47 |104 | 123) 154 17.3 | 180 141|127)82] 57 | 53! 62] §2/ 45] 45) 40) a0] a5
Thailand 5/ ~ 46.0 39.9 19.5 11.5 | 18.1 13.9 11.6 $3 81) 75 129} 80 | 13 68 | 65 1 61) 5.3)
Scurce Nagonal dita source

2 clas KAMCIO
Y Exchides Danaharta This series, usedbyBank Negara Malaysia ts net of proviek $ andexcludes interest In suspense. .
¥ From September 2002 onwards, the ratios axebased onthenew defrition of nonpe vorming bans under BSP
Circular 351 which allows baniks todeduct bad loans with 100 percent provisioning from the

o bride toes 6310 AMDs The pumpin headline NPLs in December 2002 was a one-off increase feflec
achange indefintion and didnotaffectprovitiosing
ting

Table 6.4

Sha Ae ia
8.3

People’s Rep.

Sere
China'’

of

16. ADB Key Indicators for Asia and the Pacific, 2012, available at: http://www.adb.org/sites/default/
b/2012/ki2012.pdf (accessed on 5th September, 2013). areas bhi
17 dap ey as sii doubtful, and loss; not necessarily linked to a 90-day criterion.
 *

4.4,
Japan was one of the largest NPL markets in the World, with almost USD 1.2
trillion of NPLs. The government-sponsored Resolution and Collection
Corporation is essentially a disposal agency which buys NPLs from commercial
banks and sells them to private investors.
On an average, NPLs have been sold at 10 cents to a dollar. This has obviously
 Asset Management Companies: Global Expe
rience Syn. 4 459
balance sheets of corporates. Government purc
hase and sale of NPLs through
these institutions helped banks concentrate
on new loans, restructure their
operations and help in asset price recovery. IRCJ
shut its operations in 2007.
Over the years Japan has been able to bring
down its NPL ratio as
demonstrated in the chart below”:

Credit cost ratio Nonperforming-loan ratio

% %
3 : 12
Major banks E
Major banks
~------ Regional banks 10 Se Regional banks
—O— Shinkin banks —O— Shinkin banks

0
FY200001 02 03 04 05 06 07 08 09 10 11 FY200001 02 03 04 05 06 07 08 09 10 11
Source: BOJ

Figure 6.5 Credit Cost Ratio and Non-performing Loan Ratio

Major banks Regional banks Shinkin banks

%
100
95
90
85
80
75
70
65
60
FY 2007 08 09 10 11 2007 08 09 -10 11 2007 08 09 10 II

@ In danger of bankruptcy and below

BB Special attention
CJ Need attention
[I Normal ;
Figure 6.6 Loans Outstanding by Borrower Classification

i t Report, Bank of Japan,

é Octo ber 2
2012, availableq at
“s HUD rw QERIG oe pli execon ip fie) datalfort?1 0190 pa (accessed on6'' September, 2013)
 s, etc.
4600) Sya.4 Part 1—Chap. 6—Asset Management Companie
since 2003.
the Japanese banks have been decliimni steadilyily s
The NPLs held recession.By the
eee 5008 1c obmiously dueto theimpact ofgl 12.3
the banks was
end ofSeptember 2009, total amount of NPLs held by all
of end- _ 2011. The total amount of NPLs held by all the banks
—— aa Septeee mber ok (based on the definition inPRA) is JPY11.8 trilhon,
which is almost the same level as ofend-March, 2012”,

45. Korea
Korea has adopted a centralised AMC approach, Korea Asset Management
Company (KAMCO) and Korean Depository Insurance Corporation (KDIC)
have earned international acclaim in resolving the Korean NPL problem.

Kamco [www.kamco.or.kr/] surfaced as a major disposal device for non-

performing loans. As of December 2000, KAMCO had purchased W95,1 trillion
of NPLs (at face value) at 38.6% of face value cost, and had disposed of 48% of
the assets purchased. Kamco is widely cited as an international model for AMCs.

In 1998, KAMCO initiated the first international sale in Korea of two

portfolios of nonperforming loans and in 1999 it completed five major loan sales.
KAMCO was able to increase NPL pricing — and the prices that banks got for
their distressed assets — by progressively “salting” its deals with better assets.
Kamco has also been responsible for a cross-border securitisation deal involving
NPLs originated by Korean banks.

The acquisition of NPLs by KAMCO between 1997 and 2002 is given by the
following table. Notably, KAMCO stopped the acquisitions in 2002 and is

Tv [8 8 [o e [a m [a 0 [a on [o a
ee oe E e ee
eweme Jes [us [4a[raefi[19s Josos |sea |
As of Nov 2005, USD 36.3 billion worth
breakup ofthese isasunder: loans were lying unresolved.
The
 Asset Management Companies: Global
Experience Syn. 4 461

Daewoo Companies

*Special Asse
Regular Asset

* Special asset: NPLs of borrowers under compo

sition
or court receivership: Source: KAMCO
KDIC also participates in the workout process
by participating in the workout
of troubled companies.
Apart from Kamco, private AMCs are also allow
ed in Korea. Korea’s first
private bank loan sales began during 2000 as NPLs
with a face value of almost
KRW 9 trillion were sold to investors.
Due to disposals as well as better NPL management,
Korean companies have
brought down their NPL levels significantly over the
past few years, as will be
revealed by the following table:

Table 6.8
(U.S. $ in Billions)

Total Loans
ee ee ko laa
906.5
1,047. 680.8 2.68%
096.6 90%
The NPL market has regained since 2007. KAMCO has purchased NPLs of
around KRW 9.6 trillion in 2009, 3.5 times larger than the previous year as per a
Deutsche Bank report. .
The Korean Government has suggested that the financial institutions should
aim for 1% NPL ratio. The major commercial banks Kookmin, Shinhan, Woori,
Hana, IBK and National Agricultural Cooperative Federation have agreed to
establish a ‘private bad bank’ for the commercial banks to offload from their
balance sheets the toxi¢ assets. Both foreign and domestic investors are showing
interest in the Korean NPLs, resulting in the bid prices showing an upward trend.
Further Korean authorities have set up a $27 billion structural adjustment fund
to buy distressed assets from the financial institutions. The fund intends to
support companies restructuring their financial obligations to banks and
extending new credit lines or rolling over loans to SMEs.
 Companies, eb
46. Sya.4 Part |—Chap. 6—Asset Management

- alaysia’
ution of Malayaysisian
mars a * worked for about 7 42 years on resolution
. Danaharta was a centralised
NPL, ond completed itsassignment inSept 2005
Pengurusan Danaharta Bhd.
AMC, set up by the Govt, on 2ist May 1998.
harta’s primary mission was to
(Danaharta) was a company by structure. Dana ng
s: could focus on maki
remove the bad assets from the system so that the bank
ng the recovery value
new profitable loans. Included in its mission was maximizi
sition agency, nora
of acquired assets. “Danaharta is neither a rapid dispo
aharta will
warehouse agency,” said Azman Yahaya, Danaharta’s CBO. “Dan
ing in order
apply specific expertise in asset management and financial restructur
to maximize the recovery value of the acquired asset s.’

Danaharta had acquired 41% of the total NPLs of the banking system by Nov.
2000. It was reported to have resolved 61% of the assets under its control, Going
by its final report in Sept 2005, over its seven and a half year li Danaharta
dealt with 2,902 NPL accounts, 2,563 borrowers, and from an portiohoof
over RMSO billion, and recovered over RM30 billion, Its final lifetime Loan
Recovery Rate of 58% surpassed the typical 20 - 50% range experienced by
similar agencies in Asia”.
Danaharta can be cited as an illustrious example of an entity formed to resolve
an acute problem, but not to have a permanent existence in the world. Danaharta
remained in existence of roughly 7 /% years, and having done its job, it files its
final report in Sept 2005. As Danaharta forms an excellent case of resolution
entities, we produce below some excerpts from the Danaharta story, based on its
Final Report of Sept 20057’:

4.7. History
of Danaharta
Danaharta was incorpoon
rated
20th June 1998, with the main objective
of
ex maximum recovery value from
the NPLs. The NPL resolution agency,
euphemistically known as the national AMC, was established as a ive
measure toaverta collapse ofthebanking system. Aswithmost national AMCs
in the world”, Danaharta was a finite life agency. Having achieved its mission
innearly the time frame initially envisaged, Danaharta wound up its operations.

4.3. The AMC model

Insetting up Danaharta, one of the first tasks was to decide on the AMC

- BWMwomnarta.com.my (accessed on 6% Sepnember, 2013).

Po seme 2013), onm.gov my/websites/danaharta
com my/defaul html (accessedonSth
2. - ter Srwrw
cue, danaharta.
oe RTC mde nee, (accessedon S” September, 2012),
 Asset Management Companies: Global Expe
rience Syn. 4 463
extreme”, there is the Rapid disposition strategy. RTC
of rapid fire strategy.
in the USA was an example
Such agencies take over the assets of the bank
of them within a short timeframe, usually at s and dispose
fire-sale prices. Typically, they would
have compulsory powers of acquisition. On
the other extreme is Warehousing
agency, which takes over the NPLs of the bank
ing system and warehouses them.
Minimal effort is put in to maximise the recovery
values of the NPLs, while it
waits for the market to recover before commenci
ng the disposition of its assets.
Somewhere between the two extremes, there
is the Asset management
company, an agency that actively manages the
NPLs in its portfolio on an
account by account basis, seeking to maximize recov
ery value. An example of
this type of agency was Securum?” of Sweden.
Danaharta also adopted the same model, for the following
reasons:
e A significant proportion of the NPLs in Malaysia suffer
ed from structural
issues, and required a resolution of the businesses rather
than just the
loans.
e Most of the NPLs in Malaysia at that time were chunky
in nature, with
around 70% of the banking system’s NPLs comprising NPLs
valued at
RM5 million and above. The number of accounts then that
were above
RMS million in value was also relatively small, between 2,000
and 3,000
accounts. The number of borrowers was even smaller as some borro
wers
had multiple accounts. The relatively small number of accounts
and
borrowers made it feasible for Danaharta to adopt the true AMC
approach, as it was able to actively manage the NPLs on an account
by
account basis. It also allowed Danaharta to extract maximum recovery
from each account.

4.9. Danaharta Act

The special powers given to Danaharta by the governing statute were
instrumental in its success. We have given, in Appendix 2 to this Chapter,
significant provisions of the Danaharta law, to understand the extent of legal
edge required for a successful AMC. Danaharta’s final report Sept 2005 agrees
that Danaharta law is sometimes said to be critical behind its success*!,

4.10. Vesting of NPLs

The Danaharta Act allowed Danaharta to buy NPLs from the financial
institutions through statutory vesting. Essentially, it allowed Danaharta to step
into the shoes of the selling financial institution.
Danaharta was then able to take the same interest and enjoy the same priority
as the selling financial institution, subject to registered interests and disclosed

29. See also discussion earlier in this Chapter on AMC types.

30. See later in this Chapter.
31. Final Report, September 2005, page 12.
 anies, ete.
404 Sya. 4 Part |—Chap. 0—Asset Management Comp

_ For example, if the selling financial institution had a first charge over
have a first charge Over the
— security for the NPL, Densharta would also
the land by another financial
land. If a second charge had been registered over
to exist without any change in
institution, that second charge would continue
would remain. In this
priority. Likewise, any caveats lodged over the land
s,
manner, the Act preserved essential third party right

4.11. Special administration

Danaharta had the right to appoint Special Administr over ato rte
a corpora
borrower, or a subsidiary, or a security provider, or a company whose shares
were charged to Danaharta; if the borrower was unable to pay its debts or fulfil
its obligations. In addition, Danaharta had to be satisfied that the appointment
would maximise value or was in the public interest.
Before a Special Administrator coul d
be appointed, Danahart had to seekathe
approval of an Oversight Committee formed for this purpose, This Oversight
Committee was made up of regulators, namely a representative each from the
Ministry of Finance, the Securities Commission and the Malaysian central bank,
Bank Negara Malaysia.
Once appointed, the Special Administrator would take over the control and
management of the assets and affairs of the company under administration. To
preserve those assets until the Special Administrator was able to complete his
task, a 12-month moratorium automatically took effect. During that time, no one

The Danaharta Act and the 15th Schedule

allowed Danaharta tocarry outforeclosure of the ;
On@ lous amu Code 1965
 Asset Management Companies: Global
Experience Syn. 4 465
collateral without going through the cour
t process. This contrasted with the
normal time-consuming procedures wher
e financial institutions had to obtain
court orders to sell charged properties. Prop
erty collateral could be foreclosed
when borrowers failed to comply with Dana
harta’s notice to remedy any breach
of the loan agreement within 30 days. The Dana
harta Act also allowed Danaharta
to sell underlying collateral via private treaty,
which was either by auction, tender
or private contract, as compared to the financia
l institutions, which were allowed
to sell foreclosed properties only via public auction.

4.13. Were these powers extreme or extra-ordinary?

There were concerns that the powers given to
Danaharta were extreme,
particularly of the fact that Danaharta could bypass
court processes in the course
of its operations.
Although the powers were strong, they were warranted
in view of the greater
national interest of preventing a collapse in the banking
system. Prevention of a
failure in the banking system would avert the threat of a
major recession and
breakdown in the economy, which would definitely have
social implications.
Many also assumed that the powers in the Act were arbitr
ary. In actual fact, the
Statutory vesting process, the appointment of Special Admin
istrators, and
foreclosures outside of the court system were inspired by legal
mechanisms/approaches in existence in other jurisdictions. Company
law in both
England and Australia has long had the power to appoint perso
ns with similar
functions to Danaharta’s Special Administrators, under the provisions
of the
English Insolvency Act of 1986 and the Australian Corporatio
ns Law,
respectively.

4.14. Acquisition of NPLs by Danaharta

One of crucial strategic issues for any AMC is — how does it acquire NPLs,
what kind of risk/return is to be retained with the selling banks, and how does it
fund the NPLs so bought. It may be noted that Danaharta was a centralized AMC
— so its approach had to be different from decentralized AMCs, as, for instance,
in India.
Soon after its inception, Danaharta decided to embark on a system-wide NPL
carve-out and make offers to all financial institutions in Malaysia. This included
finance companies, development banks and locally incorporated foreign banks.
Danaharta did not intend to remove all NPLs from the system as every banking
system in the world can tolerate a certain level of NPLs. By August 1998, the net
NPL ratio for the banking system had reached 11.4% and was projected to reach
an alarming 15%1 by the end of 1998. Given the unhealthy state of affairs, itwas
resolved that the net NPL ratio had to be brought to below 10%. It was decided
that only NPLs with value of RM5 million and above would be acquired because
that would address approximately 70% of the total NPLs by value in the banking
system.
 etc.
400 Syad Part 1—Chap. 6—Asset Management Companies,

forcibly acquire the

Unlike the madels in some countries, Danaharta did nol
NPLs to
NIPLs from the banks — banks had the option of selling their
entage, a
However, where the NPL ratio of the bank exceeded a certain perc
below,
directive of the Central bank forced the banks tosell their NPLs ~ see
Due diligence on the NPL accounts had to be forgone as U would have been
too time-c andon su
Danahar mi
ta did have the manpower
notng to carry Wtoul,
Instead, Danaharta relied on representations from the selling banks with regard to
the details of each loan. In addition, warranty provisions were included in all loan
acquisition agreements. This allowed Danaharta to return the NPLs to the
financial institutions in case of breach of warranties.

4.15. Setting the purchase price for NPLs

Since the acquisition of NPLs was purely on a voluntary basis (except as
discussed below), Danaharta had to formulate simple yet transparent valuation
method that was attractive enough to entice the financial institutions to transact.
Conventional methods such as “derived investment value”, where loans are
valued based on potential cashflow generation, could not be applied to NPLs
which were not generating any cashflow. It was also complicated and too time-
consuming.
The final approach split the loans into 3 classes:
1. Secured Loans:

The pricing followed the following approach

:
. Where thefair value was found tobehigher
than otequal tothe
loan amount outstanding, purchase price was equal
tothefull
 Asset Management Companies: Global Experience Syn. 4 467

2. Unsecured loans
For unsecured loans, Danaharta’s purchase price was equal to 10% of
the principal amount outstanding. This was an arbitrary figure. Korea's
AMC for example, used 3%, which was also an arbitrary value. It
worked because unsecured loans were typically given to public listed
companies and usually some value could be derived from the company’s

3. Exceptionally large loans:

For exceptionally large NPLs in excess of RM200 million in gross
value, where valuation of the loan was onerous or inconclusive,
Danaharta paid either a nominal sum, e.g. RM1 Or a percentage of the
joan outstanding. Very few NPLs were acquired under this method.
As the risks of recovery were essentially still borne by the selling
financial institutions, Danaharta agreed to seck the consent of the selling
financial institutions when deciding on the recovery strategy.

4.16. Carrot
and Stick Policy:
As in every country, the purchase price set by AMCs would mean heavy
upfront losses taken by the selling banks, which would eat up their precious
regulatory capital. Hence, there was initial hesitation on the part of the selling
banks. To resolve this problem, Danaharta devised a carrot and stick approach to
motivate the financial institutions to sell their NPLs. The central bank helped by
issuing directive to the financial institutions that they had to sell NPLs to
Danaharta if their respective NPL ratio was above 10%.
There was also a motivation. Danaharta proposed to share with the selling
financial institutions. any surplus recovery from the NPLs, on an 80%:20% basis.
with 80% going to the financial institutions. This. incentive applied to both
secured and unsecured NPLs, in cases where the fair value of the loan was less

There was. however. 2 cap on the surplus - the share of surplus recovery to be
received by the selling financial institution was capped at the initial shortfall
suffered (1c. the purchase price less the upfront payment), except in case of
exceptionally large NPLs where the purchase price was much lesser.
In addition. as in case of Korea, financial institutions were allowed by the
Central bank to amortise the shortfall arising from the sale of an NPL over five
years, commencing from the time of sale. This would smoothen out the effect of
the diminution in the value of their loan assets. Under the arrangement, financial
institutions would have to write off 20% of the shortfall in the first year, as that
represented the money that would be kept by Danaharta in the event of a surplus.
In the following years. the financial institutions would have to write off a
further 20% each year (minimum), until the shortfall had been fully written off.
However, once Danaharta had resolved the loan, and the total recovery value was
 Part }—Chap. O—Asset Management Companies, etc.
+05 sya 4
nder of the shortlall, uf
known, the financial institutions had to write off the remai ws
east a
any, af thal pout i lime.
the more pru route
ned owl, many financial instituuions preferred
to Danah arta,
“ona wrung offtheentire shortfall in value of NPLs sold
would
Now for the stick. If the bank did not accept the Danaharta offer, i
8O% of
immediately have to write down the carrying value of its NPL» to
Danaharta’s valuation. This would impact negatively on the financial institution's
|
profit and loss account.
Also. there was a threat - Danaharta would make only one offer for each NPL,
and financial igstitutions were given a short period of time to consider whether or
not to accept it

4.17. Funding
Notably, funding is one of the most important aspects of isition of NPLs,
Buying NPLs and issuing paper to the seller, instead of , means that the
buyer might take a very callous approach to the acquisition and the selling is no
better than replacing one piece of deadwood by another. However, in most cases
of AMCs, purchases of NPLs have been funded by paper.
In case of Danaharta, the initial acquisition plans were to pay for the purchases
in cash. The initial estimate of the funds required for NPL acquisition was RM25
billion. Danaharta turned to the private sector for funding, and issuing bonds
seemed to be the most obvious option. Having to borrow commercially meant
that Danaharta would have to exercise commercial discipline throughout its
activities. The financing had to be at the best cost and one with a maturity profile
that matched its NPL acquisition strategy.
With the economic environment considerably stabilizing post 1998, the
financing requirement was scaled down to RM15 billion, and as it turned out,
Danaharta only needed about RM13 billion.
The company issued domestic bonds to fund its purchases. These bonds were
issued tothe selling banks in exchange for the NPLs. The only unique factor
was
that the bonds were zero-coupon and guaranteed by the Government. Zero -

a yield of 7.15%. The bonds had a 5 vea

bonds would beconverted tointerest -bearing bonds However, if|
The bond method offered Danaharta several advantages:
¢ Being zero-coupon bonds, Danaharta did not have to sérvice interest

3
See ns
Tue duri thelife ofthebond. Without thepressure ofhaving
@ streamngof cash to
to service interest paymen
sey thwuldmats thecoveyoftachNPR “NE
in the
tsshort
evaluate
each NPL
 Asset Management Companies: Global Expe
rience Syn. 4 469
e The issuance of bonds on a staggered basis
allowed Danaharta to borrow
money Only when it was needed, taking
advantage of the declining
interest rates over time.
e As for the sellers, they exchanged a non-inco
me generating NPLs for a
sovernment-guaranteed yielding asset, there
by strengthening their
balance sheets.
e As Danaharta bonds carried zero risk when being
considered for capital
adequacy purposes, financial institutions saw an
risk-weighted capital ratios. impr ovement in their
In total, 15 tranches of bonds were issued from
November 1998 to March
2000, at effective interest rates, which declined stead
ily from 7.15% per annum
to 5.165%. Issued at the rate of almost one tranc
he per
until early 2000, the bond issues raised a total of RM8. month, from late 1998
22 billion in capital for
Danaharta, translating into a debt obligation of RM11.14
paid cash for NPLs acquired from development
billion. Danaharta also
finance institutions, loans
extended under the Islamic concept, as well as unsec
ured NPLs.

4.18. Management of the NPLs by Danaharta:

Danaharta acquired two types of NPLs — one that it bought from the banking
system, and the other than belonged to the central bank (government banks) and
were simply managed by Danaharta. In either case, Danaharta used either the soft
approach or the hard approach. If a borrower's business were viable, the “soft
approach” would be used. However, if a borrower's business were
deemed non-
viable, or if a borrower failed to comply with the loan restructuring guidel
ines to
restructure its loans, the “hard approach” would be employed. See below
for
discussion of the two approaches.
Danaharta reports that the soft approach yielded better recovery compared to
the hard approach. As such, Danaharta was always keen to use the soft approach.

4.19. Soft approach alternatives:

e Plain loan restructuring: One of the most common strategies used by
Danaharta was restructuring of loans. The restructuring guidelines have
been reproduced in Appendix 3 to this Chapter. This could involve an
extension of the loan repayment period, or rescheduling of loan
repayments.
e Settlement of loans: These were cases where borrowers opted for a
quick settlement of the loans, normally within 12 months.
e Schemes of arrangement: These were voluntary schemes formulated by
both borrowers and creditors to restructure the loans. They included
schemes under section 230 of the Companies Act, 2013” dealing with
compromises and arrangements.

, tioni ies Act, 2013 has not been notified, and as

230 of the Companies as ssuc
uch is yett to
tocome into force
cones
5 AES last ontiisd as on 13" September, 2013). Corresponding to section 230 of the
Companies Act, 2013 was section 391/393 of theCompanies Act, 1956.
 etc.
470 sad Part }—Chap. @—Asset Management Companies,

Hard approach alternatives:

enabled
ppeiatmeat of Special Administrators; The Danaharta Act
N COMP AS, ©.B.
ems to appoint Special Administrators over COPLA
tions, Once
a corporate borrower that failed to fulfill its loan obliga
l and
appointed, the Special Administrators assumed temporary contro
a
management of the assets and affairs of the company and prepared
ss.
workout scheme aimed at maximizing the recovery value of the busine
Up to 30th September 2005, Danaharta had appoi nted Specia l
Administrators over 73 groups of companies. By the same date, all
Specia) Administrators had been discharged from their appomtments
after the successful completion of their work, except for those of six
groups of companies. The remaining Special Administrators were
expected to be discharged by 31st December 2005.
Foreclosure: Foreclosure involved the sale of property or share
collateral pledged as security for a loan, Danaharta could foreclose on the
collateral if a borrower failed to repay its loan.
Legal action: Taking legal action against a borrower was a last resort for
Danaharta. This option was considered after all other recovery strategies
had been exhausted as it was lengthy and costly and usually generated

Others: “Others” included cases of partial resolution, liquidation of

companies and appointments of Receivers and Managers over companies
or assets.
Table 6.9 below summarises the recoveries, including the recov t
followed: 7 Pe

Table 6.9 Analysis of recovery from various recovery methods as at

30 September 2005
 Asset Management Companies: Global Experien
ce Syn. 4 471
4.21. Post Danaharta NPLs in Malaysia
In 2006 Malaysian Central Bank issued its guidelines
on disposal of NPLs. The
government was supportive for the development
of the market giving the
Malaysian market a very positive outlook.
The common problem of disposing of the NPLs seen
in most Asian markets
and also in Malaysia is the wide gap between the bid
ask spread, causing the
markets to slowdown. In spite of the GDP growth levels
falling, NPLs levels
were not seen to be on the rise and the value of the
non-performing loans
continued to deteriorate in 2009 with gross NPLs falling from
RM 34.3 bn in
December, 2008 to RM 32.6 bn in July, 2009 (PwC report, NPL
Asia, 2009). The
fall in numbers can be explained partly because of the
continued low
unemployment rates and partly because Bank Negara Malaysia
allowed banks to
immediately reclassify NPL to performing once the borro
wer agreed for
rescheduling of the loan both in case of corporate loans and retail
loans. The
Corporate Debt Restructuring Committee recommenced its operations
in 2009
providing the corporate borrowers’ platform to restructure their debt. Anoth
er
debt resolution scheme by the name of Small Debt Resolution Scheme was
set up
for SMEs in December, 2008.

4.22. Philippines
Philippines issued its Special Purpose Vehicle Act in 2002 which was later
amended in 2006 and also expired in 2008. The Act has enabled banks to dispose
of NPAs worth USD 1.9 bn by the end of 2005 and the NPL ratio has been
consistently falling since, from somewhere around 8% in 2005 to 3.9% in July,
2008. The act also makes the transactions lucrative as the buyer or the seller of
NPA need not pay any stamp duty, capital gains tax etc. The purpose behind the
Act was to bring the NPL levels in Philippines of banks back to pre-financial
crisis level of 4% and the country was successful in achieving the levels. In 2009,
National Home Mortgage Finance Corp. (NHMFC) securitised mortgage loans.
As per Bangko Sentral NG Philipinas, Inflation Report, Third Quarter, 2008,
there was a drop of 8.1% in the NPL levels as against 17.1% expansion in the
Total Loan Portfolio. Though the banking system’s asset quality was constantly
improving, NPL ratio in Philippines was higher than other countries in the region
like Indonesia, Malaysia, South Korea with 4%, 2.5% and 0.7% NPL levels
respectively. The reason for such low NPL levels in the other countries in the
region is because of the presence of state owned asset management companies in
the states whereas Philippines has yet not resorted to such practice. However the
lower levels of NPL levels in Philippines could be attributed to stringent
compliance with Basel II requirements, banking system being adequately
capitalized, diligent compliance with loan-loss provisioning requirements and
high NPL coverage ratio.
 sya. 4 Part l—Chap. 0 —Arssei Management Companies, et.
4?2
erage Ratios™
Fable 6.10: Comparative NPL, NPA, and Cov
Fr.Fit toe wast As of HindDecember, 2012

* py preliminary

Though in recent years, according to the Status Report on the Philippine

:
Financial System™, Philippines’ banking system has shown a sions See Beery
as the by end-December 2012 overall NPL level declined to P104,9 billion from
last year’s P106.0 billion. Consequently, the NPL ratio has eased to 2.5%, w
is 0.3 percentage point better than last year’s 2.8%. The NPL ratio of the banking
system in Philippine has been below 4% since the 1997 crisis. The improvement
can be attributed to banks’ efforts towards strengthening credit risk management
practices, write-offs and collection of banks. The figures below show gradual
decline in NPL ratio over time and comparative NPL details for different banks
in Philippines:

Fp: hapten govgideloses Pathan ota Shes 80

. ; . available at / the website of
Ph
September, 25, sownlonds
http://www.
2/StatRep
/Publications/201
 Asset Management Companies: Global Experien
ce Syn. 4 473
4.23. Thailand:
For quite some time after the 1997 crisis, Thai banks
had put up their private
asset Management companies. There were several AMCs
put up by the banks.
Led by Thai Farmers Bank, most of the local banks set
up AMCs in collaboration
with global investment banks such as GE Capit
al, Goldman Sachs, and Lend
Lease.
It was only in June 2001 that a centralized AMC was set up
by the government
by an executive decree as a means to purchase 1.37 trillio
n baht of bad assets
from local banks. The Government-sponsored AMC in Thail
and is the Thailand
Asset Management Corporation [http://www.tame.or.th/] (TAMC
). Within this
total amount, the majority (80%) or 1.12 trillion baht was
from state-owned
banks, while the rest or 0.25 trillion baht was expected from privat
e banks.
As per TAMC rules, the assets to be transferred to the AMC must
involve debt
over 5 million baht belonging to at least two creditors. Loan assets are
purchased
by 10-year bonds to be issued by TAMC and losses incurred afterward
will be
split under a loss-sharing formula.
The dual objectives of TAMC are (a) to enable debtors to repay their
outstanding debts and efficiently continue their businesses (b) to help financial
institutions avert losses which could endanger stability of the system.
As regards pricing, the TAMC board approved the use of central bank
valuation, instead of that set by the Land Department, for assets pledged as
collateral for bad loans to be transferred to TAMC. This decision, which favors
commercial banks in selling NPL, is based on the grounds that existing values
used at the Land Department are outdated and reappraisal by that organization
will be not only costly but also time-consuming.
TAMC after four years had largely succeeded in NPL resolution. As of the
second quarter of 2005, the TAMC had managed NPLs to resolution of an
approximate book value of Baht 772.4 billion (U.S. $ 8.8 billion) from an
approximate book value of Baht 778 billion (U.S. $ 9 billion) or 99 % of book
value of the NPLs transferred to TAMC. The NPLs managed to resolution
through debt restructuring or rehabilitation in the Central Bankruptcy Court
account for 74 % of the total book value of NPLs. TAMC had projected an
expected recovery rate from the debt repayment plans of debtors having achieved
resolution by debt restructuring or rehabilitation in the Central Bankruptcy Court
at approximately 48.2% of the book value of NPLs.
The Finance Ministry, state banks, and the TAMC reportedly plan to jointly
establish a new asset management firm in preparation for cleaning up NPLs at
state-owned financial institutions.
Data about the progress of TAMC in resolution of assets is available from the
quarterly progress reports on its website. As per the latest Quarterly Progress
 anies, etc
474 sya. 4 Part i—Ohap. O—Asset Management Comp

ailable™ the first quarter of the year 2011, TAMC has

having book value of Baht
soos yer ett ane on for 15,200 cases i:
774, 911 Milhoa. rae

settied umpaied assets can be categorized ngto the

managed
lved
one ocedure into2 groups whichafe;thegroupthathasbeen reso
Bankruptey
through debt restructuring or business rehabilitation in the Central 438,190
Baht
Court, comprising totally of 7,779 cases having book value of
aies
Million or56.55 percent ofbook value oftotal managed andsetiied imp
assets. In this group, there are 7,675 cases having book value of Baht 356,512
Million have been resolved through debt restructuring and the remaining of 104
cases having book value of Baht 81,678 Million have been resolved through
business rehabilitation in the Central Bankruptcy Court, Another group of those
has been resolved through foreclosure of collateral or final receivership under
Sections 74 and S8 of the Emergency Decree on Thai Asset
Corporation B.E, 2544 having 7,420 cases with book value of Baht 336,300
Million and write-off bad debt of 1 case having book value of Baht 421 Million or
43.40 and 0.05 percent of book value of total managed and settled impaired
assets,
For the impaired assets that have been resolved through debt restructuring or
business rehabilitation in the Central Bankruptcy Court that is worth according to
the debt repayment plans (excluding the debt to equity swap) of Baht 259,273
Million as at 31st March, 2011, TAMC has been accepted debt repayment in an
amount of Baht 203,553 Million or 78.51 percent of value of approved debt
restructuring or business rehabilitation.
Since TAMC’s operation commencement until 31st March 2011, TAMC has

sold Non-Performing Assets in total amount of Baht 76,174 Million (Selling

price), resulting that the remaining NPA to be further managed is in an amount of
Baht 63,719 Million, combining with the public auction sale of collateral by
TAMC in an amount of Baht 2,595 Million and by
Department inan amount of Baht 6,876 Million, the total
NPA sale is inan amount of Baht 85,645 Million
and
amount im an amount of Baht 72,211 Million.
In the first quarter of year 2011, TAMC are
able to sell in a total
Roe Nena 8.362 Million comprising ofi) sale ofNPA in
ontofBaht20saleofcollateral through public auctio an amo unt ofBaht
rorpn n byTAMC inan
wion; and iii) Sale ofcollateral through public auct
ion by

ee
3S. Quarterly Report : 1° 3 amaa
ry 2011
“Port_quarter/T AMC _Ist_Quarter -31" a March 2011 available at- Narn asset/uphoad/
ly_2011 1 pdf (accessed on$* uae
is i
-it
a / ri +
=
H
| i; |
f § :
1
e
i: .i : 4]: 5
i :Rs
Be
1 g

:
BS

: q 5|
eewa I ©

. E
atR :S
ef : 4
t +
repayment
Hy
:
: é
E

i
f
and sale of NPL to AMC. NPL stood at 254.2 billion baht atthe
f
3 FE F
SS

5)
° é e E SS i : B R :

Figure 6.12: Total Non-Performing

Loans in the Market

a
thiENGLISH/FINANCIALINSTITUTIONS/NEW_PUBLICATIONS/KEYDEV
bot.or
FUPERFORMANCEBANK/Paprs/Pesionmance 25pm(accessed on September, 2013)
 anies, etc
476 Sya. 4 Part l—Chap. 0—Asset Management Comp

n in 2009 due to the global

The volume ofportfolio transactions slowed dow
NPL portfolio atconcessional
Gnancial crisis and the sellers had to offer the
e a typical Thailand dea!
prices tobuyers most ofwhich were domestic; wher
the signi of the sale and
involved deposit of25% of the agreed price upfront on land TMB dea!
purchase agreement and the balance amount within 90 days,
orted by promissory
in 2009 was on seven years deferred payment basis supp
olios, retail and
notes. NPL portfolios were largely secured by housing loan portf
SME pools in tranches.
ted
In 2010, the market had four or five multi tranche deals, with a total estima
outstanding principal balance of US$1.6 billion. The Table below repres ents
selected NPL portfolio transactions in Thailand in 2010",

Table 6.13 Selected NPL portfolio sale transactions in Thailand in 2010

4.24. Indonesia:

sia
Bank Restructuri
Indone n (IBRA) Indonesia ee
ng Agency
(including Wis. aon
$57.8 billion in assets

to have lived its mandate and the mandate has been terminated.

: business terms. In
State owned banks have not mov spi regulation.
m ed to the market for sell
ae ing
s aa
However in2009,Bank Mandiri, oneofthefourstateowned tan NPLs
ks waereperted
. ee
7. Pwo Portfolio .
2011 ;= issue Advisory Group review of the Asian conkapetpel
available at (NPL) market.
Shererw
Portfoficadvers_ 201105
pdf(accessed om8"Seproneen, 20177 a
=
 Asset Management Companies: Global
Experience Syn. 4 477
to be allowing several companies to rest
ructure their debt aggregating to $225
million, with delayed principal payments.
In March 2010, the government released
new NPL settlement regulations,
which are widely expected to encourage
international investors to invest in
Indonesian NPLs. On 25" September, 2012, the Constitutional
Indonesia ruled on a case affecting bank Court of
ing rules for state-owned banking
institutions. The ruling allows state-controlled
/owned banks to claim uncollected
loans attached to the state, which are currently
being taken care of by the Finance
Ministry’s State Receivables Affairs Committe
e. The ruling ended a restriction
that was contained in a 1998 banking law that
had banned state-owned banks in
Indonesia from using a financial mechanism, kno
wn as the ‘credit haircut’. State
banks could not discount bad loans; such loans were consider
ed State
receivables,
and the Finance Ministry’s State Receivables Affa
irs Committee attempted to
fully collect them*®.

4.25. China:
Chinese banking scene is dominated by “Big Four’
state-owned banks, ViZ.,
Agricultural Bank of China, the Bank of China, China Const
ruction Bank and the
Industrial and Commercial Bank of China. In 1999, the gover
nment, concerned
that the NPL problem would worsen, took the dramatic step
of creating four
Asset Management Companies (AMCs) to purchase and manag
e the Big Four
banks’ large portfolios of NPLs. These four AMCs, now independen
t of the Big
Four banks, are China Great Wall [www.gwamcc.com/
], China Orient
[www.coamc.com.cn/], China Cinda [www.cindamc.com/] and
China Huarong
[http://www.chamc.com.cn].
The last-mentioned AMC above has so far been the most active in selling
NPLs to private investors.
In 2005, Huarong is reported to have sold loans worth RMB 52 billion, to
Huaraong/Deutsche JV, Silver Grant and other international investors. Cinda sold
loans worth nearly RMB 12 billion. Orient sold loans worth RMB 3 billion
approx. The performance in terms of recovery has also been very good. For
example, as of year-end 2005, China Cinda AMC (Cinda) reported collecting
RMB 62.84 billion ($7.8 billion) of cash from RMB 201.2 billion (U.S. $24.9
billion) of face value. Since establishment, the four AMCs had taken over RMB
1.4 trillion yuan worth of bad assets from ICBC, ABC, BOC, CCB and CDB, as
reported in China Financial Stability Report, 2012°’.
However, as the non-performing assets tapered off and AMCs’
commercialization deepened, the four AMCs’ traditional business model which

. Source for thisi Book: KPMG’s"ks “Global Debt Sales -Thi

Third Edition
ition- Indonesia”, available at:
s Ripe) www coe, den CIBBAVen esute Andizsights/AciclesPublications ¢lebel-debe
sales/Documents/indonesia-v2.pdf eae on ey onc an 2 reepiermmcemar 1
ial Stability Analysis Group of Pe PB
7 Gp deri. oe dev enfteedbe cutua/Uacroalea/Suplish it load File/Chine620Finencial%20%20Sta
bility%20Report(1).pdf (accessed on i September, 2013).
 Companies, etc.
47% syad Part }—Chap. 0—Asset Management

osing the bad assets pohioies could no

fit in with the needs of receiving and disp
rized by commercialized operation.
longer adapt to the new environment characte
to the forefront, In order to speed
The urgent call for AMCs’ restructuring came
Council authorized relevant
the commercialization of the AMCs, the State t reform
it
toestab s rm working group in 2008
a refo
lishie . , the pilo
In 2010
author
of June 2010, Cinda was
of China Cinda AMC launched firstly, By the end
2012, the State Council
restructured as a shareholding company. In January t Wall Asset
approved the reform plan of CHAMC. In addition, China Grea
y also accelerated the
Company and China Onent Asset Management Compan
internal reform, actively preparing for commercialization” .

China's NPL ratio has come down significantly in the recent years, but there is
still subsnumbe tarnt ia
of NPLs ldeal with, it being one of
to the largest NPL
markets in Asia. As of end 2012, The NPLs totaled RMB1.07 trillion, increased
by RMB234 billion year-on-year, whithe le NPL ratio dropped to 1.56%, down
by 0.66% year-on-year’. China's four asset management companies established
a decade ago are still the means for the banks to offload their NPLs, These AMCs
in turn sell would then sell it to third party investors’ largely foreign investors.
Chin NPLsa’ srs’ source of recovery is the guarantees and the collaterals
investo
provided by the guarantors and on transfer the consent of the guarantor was not
required to validate his liability.
However the recent jolt by the ‘Supreme Court guidance’ in the garb of “three
suspension policies” has left the investors apprehensive about any further activity
in the Chinese market. The suspension policies include 1) suspension on filing
any new NPL related cases, 2) judgment on any of the existing cases and 3)
decision of any of the pending cases. The genesis of the Supreme Court guidance
is that several cases in the past had been taken to the courts where the collateral
involved is a state owned asset. The guidance stated that no case would be
accepted against state owned or state controlled enterprise or any state owned
debtor bank for any defects in the NPLs after NPL has been assigned by the
deaGeanioer crte dane» 4 asrecane tals, ie ee d if

national orpublic interest andseveral other clauses, Moteover & made 1

mandatory for the guarantor to give his consent at the time of transfer to the
investors for the guarantee to be effective.

' : | inv: in China’s NPLs

wheChameide £20inthebidaskspread hasmade fewoftheinvestors even exit
market impacting the secondary market for these assets greatly.

4.26. Germany:
In 200' 3, German NPL market was est
ima
i ted at about USD 300 billion —
largestinEurope andthethirdlargest inth
eWorld. Correct estimation oftheane
sssttsassssemreunensonsenstis cain
a. ftp here naaStability Group Report,2012.
Sabenesiienon Sth aang View .do?do
September, 2013).
cID3669
1D9B45FC4 =BE 33T6A 156R
1 DDCDO0S
 Asset Management Companies: Global
Experience Syn. 4 479
of the German NPL market is itself contesta
ble, as the German banking regulator
does not publish any data on NPLs, largely
due to lack of a standard definition.
The German NPL market has been put as one
of the most active markets in the
World. Banks have strong incentives to
liquidate non-performing loans with
Basel II being applicable.
German regulators have largely adopted a hand
s-off approach, leaving the
market to take its own course. Banks have been
auctioning distressed debts to
buyers. Buyers include international investors. The
most prolific investors to date
have been Lone Star and Goldman Sachs, Merrill Lynch, Credit
Brothers, Shinsei Bank, Morgan
Suisse, Lehman
Stanley, JP Morgan Chase, Deutsche Bank,
Citigroup, and Cerberus.
Most of the loans sold are real-estate backed loans, inclu
ding residential, multi-
family and commercial real estate.
The first German NPL securitisation deal happened in 2006
and was the largest
NPL securitisation in Europe then, with a volume of
Euro1.34 billion. The
German NPL market has been developing briskly since 2003,
faced some slow-
down 2007 onwards.

Czech Republic
Portugal
Russia
Poland
Turkey
Greece
Spain
Austria
Italy
Germany
Shaded area indicates change in scale
! | | |
9 9 9 9 Sud) 9
e ~ > o> a No ae a’ yp ©

EUR b
Amounts and estimates are for various periods from 31st December 2006 to 31st December 2007
Source: Central Bank or equivalent Agency (Italy, Austria, Spain, Poland, Turkey, Russia, Portugal,
and Czech Republic).
Analyst estimates (Germany)

Figure 6.14: Total Non-Performing Loans in the Market

According to a PWC Report”, portfolioiO sizes

Si i 201 Irange d from EUR
traded in
136m for smaller property loan portfolios to EUR 1.3bn face value for larger

.
nual European outlook for non-core and non-performing ing loan portfolios
FRONDS available
ie, at
ws htipiovoew.9 We de/delfinancdicnstilstungen/bankeb/asetafpwe-2012-06-23. sue 4-a-growing
non-core-asset-market.pdf (accessed on 5” September, 2013).
 anies, ete.
450) Sya. 5 Part |—Chap. 6—Asset Managemen! Comp

ofwaded portfolios in 2011 were

commercial real estate portfolios. The majority
ks as well as local financial
cold bycommercial banks including foreign ban
ions are shown below:
INSULULIONS. Some of the recent portfolio transact

Table 6.15: Recent transactions

Source: Press articles, company andother publicity available information

5. FACTORS FOR THE SUCCESS OF AMCs
Having reviewed the performance of AMCs in different
lessons to learn as for success of AMCs? A
een on
of ee felon:
ee
en
* Strong political will: Strong political backing on the
goverment to adressNPL the stemisracialstarepoife

Ap sgpecsiannge 2 3)——-_ Support: Preferably, the government

the
AMChastoisneitsowndebtinsead,anexplictguarantee by
should fund the AMC’

and the AMG. «© Strengthen the financial positions ofthebanks

,
* Supportive legal infrastructure: An effectiv
as speciallegalpowers granted
bankrupty andforeclosure lawsaswell
recoverythe
- that allows
toachieve a higher AMC to resolve its assets more
rate.
qui and

“. for International
YON andGaonan Ma:Occasional paperno. onPubic AeaeiManapetton Compeniee ions
Hohl
 NPLs as Investment Option
Syn. 6 481
© Efficient market environment: Well-functioning
capital markets facilitate
asset sales, while permitting foreign investors to
purchase assets from the
AMC will also speed up asset disposition, especially
when the domestic
capital market is not so well developed.
e Clear AMC mandate: The AMC must have
clear objectives and
procedures for its operation, such as the types of assets
to be acquired
and the resolution methods it is permitted to use. It shoul
d focus on asset
sales and not be overly burdened by broad corporate restr
ucturing.
e Well defined AMC life: In general, the tenure of an
AMC should be
limited in order to prevent it from sitting on assets it acqui
res for long
periods of time for fear of realising large losses, but it
should also be
realistic relative to the task on hand in order to give the
AMC sufficient
time to deal with the assets under its control.
e Adequate governance: The AMC should have a sound interna
l control
system and effective external supervision, and be audited regularly
by an
independent audit firm.
e Good transparency: The AMC should periodically disclose the results
of
its Operations vis-a-vis its mandate as well as its audit results in a manner
that can be easily understood by the market and the public.
¢ Realistic asset pricing: Generally, assets should be transferred to
an
AMC at market-based prices, especially for privately owned banks.
Often, proper incentives, such as option-like profit/loss-sharing
agreements, or enforcements help facilitate asset transfers.
e Speedy resolution: The AMC should aim for speedy disposition of
acquired assets. Waiting for an economic turnaround to increase recovery
often leads to slower resolution progress and larger losses.

6. NPLs AS INVESTMENT OPTION:

Global interest in NPLs has been heightened because NPLs are seen as an
investment opportunity. This point also explains why NPL markets are connected
with real estate markets. NPLs appear to be attractive investment opportunity
because the loans are often backed by commercial real estate, which can be
bought at substantial discounts over the prevailing market prices.
Right from the time when Japanese banks reeled under massive bad real estate
loans, investors have been lured by the availability of cheap loans backed by
properties that can be disposed of.
According to Non-performing Loan Report of E&Y”, the US NPL market
remained active in 2012, there may have been less investment activity simply
because there were fewer investment opportunities. However, the survey
conducted indicates that US NPL market is expected to remain active, although
for a shorter time frame than that anticipated a year ago. Meanwhile, Europe is

44, Flockingi to Europe: Ernst and Young 2013 non-performing loan report; avaiailable at:
itn IewW ey com/Publicston/vwLUAsscts/Plocking. to’ Burope/$FILE/Flocking to. Europe.paf
(accessed on 5th September, 2013).
 panies, et
4320s Sym © Part 1—Chap. ©—Asset Management Com

:
- Li
drawing more investment from internationa

|
l investors, with NPLs
by commercial properties in Germany, the UK,
Ireland and
the most interest. Sales of NPLs could increase
in 201
in
as
more confident in the
sellers take advantage ofthe demand and investors grow
e more able to meet
stability ofEurope's economy and the euro and are therefor
 APPENDIX 1

IMPORTANT FEATURES OF THE

THAILAND ASSET MANAGEMENT
CORPORATION LAW

Who can transfer assets to TAMC

There are 2 types of financial institutions that may transfer NPLs
to TAMC:
those which are majority-owned by the State or State enterprises,
and private
financial institutions.
In case of category 1, it is mandatory to transfer all NPLs as of 31° Decemb
er,
2000 within the period as prescribed by TACM.
In case of private financial institutions, NPLs as of 31° December, 2000
of this
group of institutions may be transferred to TACM. Under this group are covered
commercial banks, but not the branches of foreign banks, and finance companies
and credit foncier companies under the law concerning finance, security and
credit foncier, including finance companies which contain securities business.
Other juridical bodies as may be notified by the Government may also transfer
their NPLs.
Legal effect of the transfer of NPLs to TAMC
According to the law, the transfer of NPLs to TAMC shall not affect or release
any liability for a wrong committed by the transferor.
As the transfer of NPLs to the Corporation is mandatory, if the transferor fails
to transfer such NPL to TAMC within the period as prescribed by TAMC, such
institutions or AMC will be required to pay compensation.
Should the TAMC discover that any NPL was the result of a legal flow or
failure to perform duties under the law concerning the business to which the
transferor is subjected, TAMC may notify the Bank of Thailand to investigate the
same.
The transfer of loans shall take effect with all rights, equities, liabilities as
attached to the loan prior to transfer.
An important provision is that all pending cases filed by the lenders whose
NPLs have been transferred to TAMC shall be dismissed by the Court unless
otherwise requested by TAMC or unless the Court has already placed the debtor
under temporary or absolute receivership order, or unless it has already approved
the plan.

483
 ment Companies, eb
App. | Pant i—Chap. O-—Assel Manage
+54
e-owned lenders, all
have been wansferred to TAMC by the stat plaintiff, Ln such
e of the TAMC as the
seine cases shailbemnstated inthenam
any documentary evidence which is
a case, TAMC has the right to object to
mine a withess, Or Object LO a WITHESS
already submutted to the Court, re-cross-exa
Court has already nendered its
that has already testified to the Court, If the C shall be the
itute, TAM
judgment in favour of such banks or financial inst
of the original plainuff,
judgment creditor instead
may appraise the
Another significant provision is that the debtor and TAMC t the said
value of the securities for the NPLs, and by mutual agreement, adjus
TAMC shall
value from the outstanding debt, If such agreement is reached, the
not file a suit against such debtor.
Since taxes on transfer of the NPLs are a significant drag, TAMC has been
exempted from government fees or taxation in accepting the transfer of NPLs ,
the transfer of securities of NPLs, or the transfer of properties according to the
debt restructuring or business reorganiz underati on
the decree.
Pricing of NPLs for purchase by TAMC
An NPL will be priced by adding the outstanding principal at the transfer date
plus the outstanding interest not exceeding 3 months prior to the transfer date.
e The amount which TAMC shall be paid by the financial institutes or
AMC for the transfer of NPLs shall be as follows:
being a state-owned
e In case of transferor institution, shall be
the price
equal to the value of the collateral. If there is no collateral, the value shall
be prescribed byTAMC.
In other cases, the price shall be equal to the value of the collateral but must not
exceed the value of the NPL as stated in the account minus the reserve required
by law or the Bank of Thailand.
wanes Sapeaeal edhe arelte Cane a to the
government appraisal v for calculating the registration fees. If it is not
land, the price shall be fixed by TAMC. 7 F
The price for purchase of NPLs is to be paid in form of a non-transfer note and
which shall not be encashed until the expiry date of 10 years from the date such
note. However, TAMC may redeem such note prior tothe specified date.
Powers granted to the TAMC in respect of the debt
The Decree grants to TAMC the following powers:
1. Restructure debt;
2. Restructure business:
3. Dis pos
the debtor's e
asset:
 Important Features of the Thailand Asset Manageme
nt, etc. App. 1 485
Debt Restructuring
For the purpose of restructuring, TAMC is allowed:
e to decrease the amount of principal, interest, the intere
st rate and period
for calculating interest, extend the period of repayment
of debt or release
the conditions of repayment of debt for debtors.
e to convert debt into equity;
e to accept the transfer of properties or rights to claims for
repayment of
debt, or partially dispose the properties or rights to claims from
debtor by
a third party. If the disposition is of the properties of the debtor
which are
not unsecured, TAMC must obtain the consent from the debtor to
do so.
e to accept the transfer of shares, or purchase increased capital
shares of
the debtor for the benefit of restructure the debtor's business.
e to use any other measure with the approval of the committee.
Business Restructuring
TAMC has been given wide powers to prepare a plan for restructuring of the
borrower's business. These powers are exercisable subject to the following
conditions:
e The debtor is a juristic entity or public company or partnership.
e TAMC holds more than 50 percent of the debtor's debt as stated in the
debtor's balance sheet
e There is initial evidence showing that the debtor's business can be in
operation, or that further operation of the debtor's business will benefit,
rehabilitate, or develop the economy of the country; and
e The debtor gives consent or expresses its intention in writing to
restructure its business and to accept all obligations under the
restructuring.
In other words, the restructuring powers are not forced on the debtor, but rather
offered as a way out to enforcement of other rights.
The restructuring process goes as under: first, the administrative committee
shall appoint any expert to prepare the plan, to be implemented within 5 years.
The debtor is given the right to plead before the committee to amend the plan,
with a right of further appeal.
After the plan is approved by the committee, TAMC must petition the
Bankruptcy Court for its approval. If the Court accepts the plan, it may render an
ex-parte decree.
For the purposes of restructuring, TAMC is empowered to:-
1. Amalgamate or merge the debtor's business with any other business;
2. Close some business operations of the debtor;
 anies, etc.
4380 Ape. ' Part i—Chap. 0 —Asset Management Comp

icipate indebtor's
. Arrange for the other debtor's creditors who pagt
ve repa
receiur
toct
business restru in gt
ymen
oval ofthe committee,
+ Proceed with any other matters subject totheappr
bankruptcyy protection in
The restructuring plan under the Thai law is akin to a
n, recovery action, etc.
terms of the automatic stay itimplies against legal actio

Thedisposition ofthemortgaged or ed collateral shall be done by a

public auctio n
or by other means if considers that
on Naea He ee Be me FP prareca Ane eachyw
property by paying a not less than the price it would have received from
salein a public auction. TAMC must announce the date
at
 APPENDIX 2

IMPORTANT FEATURES OF THE PENGURUSAN

DANAHARTA NASIONAL BERHAD ACT 1998

Danaharta was established to:

* assist financial institutions by removing impaired assets:
e assist the business sector by dealing expeditiously with financially
distressed enterprises; and :
* promote the revitalisation of the nation's economy by injecting liquidity
into the financial system. “
These goals are to be achieved through the acquisition, management, financing
and disposition of assets and liabilities by Danaharta, which is empowered by the
Act to implement its objectives for the public good promptly, efficiently,
economically and effectively.
Expeditious administration and management of persons whose assets or
liabilities have been acquired by Danaharta requires the creation and appointment
of Special Administrators whose duties, powers and obligations are derived from
existing legislation of Australia, the United Kingdom and the United States.
To promote transparency and the essential safeguarding of third party rights,
Independent Advisors are created in the Act and appointed to review the
proposals of the Special Administrators, taking into consideration the interests of
creditors (whether secured or unsecured) and members of the affected person. As
a further safeguard and demonstration of independence, the Act creates an
Oversight Committee which approves the appointment of Special Administrators
and Independent Advisors as well as any extension and termination of moratoria
over affected persons.
Part I: Preliminary
Part I states the short title to the Act and deals with its application and
commencement. [section |] It also defines words used in the Act. [section 2]
Part II: The Corporation
Part II confirms Pengurusan Danaharta Nasional Berhad as the Corporation for
purposes of the Act. [section 3] In addition to its powers under its Memorandum
and Articles of Association, Danaharta is empowered to carry on business as an
asset management company to acquire, manage, finance and dispose of assets
and liabilities. [section 4]

487
 App. 2 Part }—Chap. O—Asset Management ¢ OMPAHiEs, Cb.
+85
by the Minister of Finance,
The directors of Danaharta, who will be appointed
will comprise:
4 non-eaccullve Chairman,
4 pon-voung managing director,
two members repres enu
the ng
Govern ment,
fromer
three memb s te sector, and
the priva
two members from the international community, |secuon 5]
The Pirst Schedule of the Act contains provisions dealing with Board
appointme ntss.
ahd meeting
Subject to the Act, Danaharta's affairs will be regulated by its Memorandum
and Articles of Association. [section 6] In order to ensure ansparency, a director
is not allowed to ici or vote on any matter in which he has a conflict of
interest. [section 7] As a company, Danaharta is required to keep its accounts un
accordance with the Companies Act, 1965 and is also required to send a copy of
its audited accounts to the Minister of Finance. [section 8]
Part Ill: Acquisition of Share Capital of the Corporation by the Minister of

Part III provides for the share capital of Danaharta to be acquired and held
initially by the Minister of Finance incorporated under the Minister of Finance
(Incorporation)
Act, 1957. [section9]
Part IV: Guarantee by the Government
Part IV allows for the Government to guarantee Danaharta's subject
to section 14 of the Financial Procedure Act 1957. [sections 10-12]
Part V: Acquisitions and Dispositions by the Corporation
In order for Danaharta to acquire and subsequently dispose of assets

convey clear title tothese assets subject only to a defined set of obligations and

relation to distressed assets, would expose Danaharta and

el a. tah any party
Danaharta to an unquantifiable and, thus, unacceptab the
le and

Existing law also

~ ee BASSET 9 TU SSSR CEB WV VEEOWIIE VE LEI OUVLIVI CIUCLL IU alQulre AaSSCLS
/hich applies with any necessary changes to an acquisition
liary of Danaharta. [section 13]
set acquired by Danaharta vests in Danaharta on the vesting
sting certificate issued by Danaharta. The vesting certificate
> that the asset has been vested in Danaharta. On and from
iharta acquires all of the seller's rights, title and interests in
to registered interests and claims disclosed to Danaharta
>. Danaharta also assumes certain obligations disclosed to it
set is a security for the payment or discharge of a liability
naharta will have the priority that the seller had. The effect
de any person from raising any claim against Danaharta in
less the claim is a disclosed claim. {sections 14-14A]
with such a claim continues to have recourse against the

ning a register or record of ownership, interest or security

of Land and Registrar of Companies) must do all things
ct to the vesting upon delivery of the vesting certificate.
the asset is an interest over land the Registrar of Land will
le register document of title. [sections 16 & 17]
may relate to an asset outside Malaysia. [section 18]
in asset from Danaharta is also able to enjoy the benefits of
r Part V subject only to approval of the relevant regulatory
rities. [sections 19-19A]
ler relating to a proposed acquisition or by Danaharta for
ted. [section 20]
t of Assets
egislation (including section 176 of the Companies Act
Je for administration or judicial management of assets.
laysia is accordingly restricted to consensual workouts and
receiver, manager or liquidator. In the current economic
for maximising value through financial and operational
‘cessary injection of skill and cash are virtually absent.
 = App. 2 Part 1—Chap. 0—Asset Management Companies, ete.
0
These appointments mity
appouted womanage and control distressed enterprises.
prises themselves or
occur ma Danaharta is petitioned by the distressed enter
nstrated that the
when Danaharta has, through its diligent evaluation, demo
ations to creditors, or
distressed enterprise will no longer be able meet its oblig
value or will
that such Special Administration will result in- maximisation of
serve public interests or will expedite the restructuring of a debt,

The Independent Advisor will prepare a report in which the interests of creditors
(secured and | ) and members of the distressed enterprise are specifically

These safeguards, together with the approval of any secured creditors for all
workout proposals by a Special Administrator and the requirement for public
notices 08,s0 nt ie the,Act,surve toeateme Sanperenes oe, Seri A
process, while at the same time providing the ability of skilled specialists to turn
around the performance of distressed enterprises through carefully defined
powers and restrictions which have been tested in other countries. Danaharta will
play a key coordinative role to ensure this process results in maximising value of

In the absence of the Special Administrator, lenders will increasingly look to

liquidation and holders of security will rush to enforce their security, bringing
down weakened enterprises and erasing value from the enterprises’ records. With
the Act's provisions, powers and controls are balanced and effective, with a view
to a measured rejuvenation of enterprises and revitalisation of the economy.

and the
a framework formal
Part VIestablisithesacquires powers by which Danahar ta may
manage the assets should restructuring be aproiate.

affected person”), thesubsidiaries oftheborrower, anycompany thathiegiven

security or any company where at least 2% of its shares of which have been

Italso establishes an Oversight Committee comprising

ing representatives
from the
/ ofFinance. Bank Negara Malaysia and the Securities Commission
to

If Danaharta issatisfied that the ct to appointa

ccommend the appointment of 4 Special ae
 ee ee - Saeee reve

ected person is unable to pay its debts or fulfil its

editors; or
the primary affected person as a going concern can be

cous realisation of the primary affected person's business

than on a winding up; or
eous realisation or more expeditious settlement of a duty
| by any person to Danaharta may be achieved. [section

ministrator is appointed, Danaharta will appoint an

roved by the Oversight Committee. [section 26)
oint a Special Administrator where a winding up order
the approval of the relevant regulatory body has been
specified persons (such as insurance companies and
‘ction 27]
he affected person starts from the date of appointment of
r. [section 28]
pecial Administrator must, within two days, notify the
hin seven days, notify the Registrar of Companies and
pointment. [section 29] The mere fact of an appointment
or does not trigger a breach of contract or release any
29A]
ator is empowered to manage the assets and affairs of
on 30] Detailed powers of the Special Administrator are
chedule of the Act. is
rator will act in accordance with any directions of
vorkout proposal is approved, in accordance with the

tor is the agent of the affected person. [section 32]

 anies, etc.
492 App. 2 Part 1—Chap. 6—Asset Management Comp

rator may also require officers

Administrator. [section 36] The Special Administ
it with information, require
and employees of the affected person to provide
nging to the affected person
delivery of books and records, seize property belo
vions 37, 38, 39, 40, 42, 42A
and disclaim, avoid or recover certain assets, [seo
& 43)
of any duty,
it is an offence for any person to obstruct or hinder the exereise
right or power by the Special Administrator [section 39A]
Upon the appointment of the Special Administrator, a moratorium on all claims
lasts
and proceedings against the affected person takes effect. This moratorium
for 12 months unless extended in accordance with the Act, Breach of the
moratorium is an offence [section 41]

proposal taking into consideration the interests of creditors (secured and

unsecured) and shareholders. [section 44] The proposal is then submitted to
Danaharta who may approve the proposal. [section 45]
If the proposal is approved by Danaharta, the Special Administrator will hold
meeting of secured creditors (if any) to obtain their approval of the , :
[section 46] If the proposal is approved by a majority in value secured
creditors (or where there are no secured creditors known to the Special
Administrators, Danaharta has approved the proposal), the Special Administrator
will publish that fact and proceed to implement the proposal subject to regulatory
approvals. [sections 47 & 49] Modifications to the proposal may be made and, if
theIndependent Advisorthinksthattheyaresuficiently material itmayrequire
Special Administrator toconvene
a meeting of secured creditors (i
consider the modifications. [section 48] yer ey
If iaal proposal
Admini is not -approvedtt
or is abandoned cents ta enn
appoint a replacement Special Administrator. [section 50]
The remainder of Part VI contains provisions dealing with:
A Or
e the elt . * ‘
Talifications ofSpecial Administrators andIndependent
@ joint appointment s of Special Ad -

* obligation to report misconduct:

© saving of things done; and
* preservation of statutory time limits
Part Vile z . [sections 51-56]

Part VII ensures

that
Danaharta, asholder of;any security over any ‘a
able to dispose of such Aaiing
otherthings, PartVIIisimtendea tooverrornc ve treaty. [section
 Important Features of the Pengurusan Dana
harta, etc. App. 2 493
decision of the Federal Court in Kimlin Hous
ing Development Sdn Bhd v Bank
Bumiputra [M] Bhd.* That decision cast doub
t on a chargee's ability to exercise
a power of sale conferred on the chargee by contr
act.
Part VII also allows Danaharta to take such Steps
it deems fit to preserve the
value of the land of to facilitate the disposal of
the land by way of private treaty.
Part VIII: Application of Other Acts

Part VIII excludes the application of the Islamic

Banking Act 1983, the
Moneylenders Act 1951 and section 132G of the
Companies Act, 1956 to
Danaharta. [section 58] These exclusions are required
given Danaharta's unique
mission.

Part IX: Application of the Act

Part IX clarifies the application of the Act to Danaharta

and its subsidiaries.
Danaharta may transfer assets among subsidiaries and itself throu
gh the statutory
vesting procedures in Part V. [section 59] A subsidiary is an
entity (such as a
company or unit trust scheme) which is controlled by Danaharta.
The Act applies to each subsidiary prescribed by the Minister of Financ
e so
long as it remains a subsidiary. The Act will also cease to apply to that
subsidiary
if it no longer carries on activities pursuant to the objectives of Danaharta and
the
Minister of Finance revokes the prescription. [section 60]
The Minister of Finance may also direct that all or certain provisions of the Act
cease to apply to Danaharta if the Minister of Finance, Incorporated ceases to
hold more than 50% of the issued capital of Danaharta. [section 61] However,
any guarantee given by the Government pursuant to Part V continues to subsist.
[section 62]

Part X: General

Part X contains provisions dealing with judicial notice, secrecy and immunity.
[sections 63, 65 & 66] Danaharta is taken to be an entity falling within section
4(6) of the Companies Act, 1956. [section 64] Approved costs and expenses of
the Special Administrator and approved lendings during the administration are
given priority in payment. [section 66A] Where a company commits an offence,
officers of the company may be charged for the same offence. [section 66B] No
person other than the Minister may institute winding up (or similar) proceedings
against Danaharta. In addition, certain protections are made available to
Danaharta, its officers and employees to ensure that they are not prejudiced by
reason of the fact that:they are officers or employees of a company that may be
technically insolvent. [section 67] These provisions are necessary given the
nature of Danaharta's activities.
Part X also allows the Minister to make regulations and preserves ne
done for Danaharta in anticipation of the enactment of the Act. [sections 68

45. (1997) 2 MLJ 805.

4940s App.2 Part 1—Chap. 6—Asset Management Companies, etc
when hebelieves it18 no
69) The Minister may terminate theoperation oftheAct
70]
longer necessary for itto remain inforce. [section
being issued
Purt X preserves acts done ingood faith and prohibits injunctions
tors or
against Danaharta, the Oversight Committee, Special Administra ion and
Independent Advisors. The provision is required given Danaharta' s funct
mission which is to maximise recovery values, [sections 71 & 72)
 APPENDIX3

DANAHARTA’S LOAN RESTRUCTURING

PRINCIPLES AND GUIDELINES

All borrowers were given one chance to restructure their loans but the

© To maximise the overall recovery value and return to Danaharia.

© To suniunise the involvement of taxpayers’ moncy.
. Ore en ee CE

SnMnaMIAaN. tas Pct? icdngeinncy Hib coaneudcic beanscx

borrowers and them advisers to formulae workout proposals. Loan
sestructusing schemes approved by Danahaia oust adhere to these
guidelines.
Detailed rationales must be given for deviations from these guidelines.
Shins ok o iecteiiaeionts ne TL
© Loan restructuring principles:
© Guidelines
for comporatc borrowers:
© Guidelines
for individual borrowers: and
6 Guidelmes
for guarantors.

1. Lean Restructuring Principles

The following were the loan restructuring principles that had tobeobserved:
(a) Haircut tothe shareholders of the borrower: Under
the scheme. the
share rs
take 2 proportionately
must holde bigges haircut. ie. where the
scheme requires debt reduction. the share capital reduction ratio must
be greater than the debt reduction ratio. In addition. subordination of
shareholders’ loans (if any) would be made a pre-requisite to the
scheme.
 anies, ete.
496 App. 3 Part }—Chap. 6—Asset Management Comp

d creditors: Schemes must reflect

(b) Fair treatment to secured and unsecure the creditors in a fair
a genuine effort by the borrower to settle with
more favourable than
manner. Settiements to secured creditors must be
those offered to unsecured creditors.
(c No dilution of inadequate security;
Schemes should not result in a
is in excess of
dilution of the security to the lenders unless the collateral
~"

be utilised
the outstanding loans, All forms of cash collateral must only
to retire or settle the outstanding loan amount,
only
(d) Only one opportunity given: Danaharta would give the borrower
one opportunity in implementing a scheme, This was to preven t
borrowers from making unnecessary revisions once the scheme was

(e) Make borrow ers

work for lenders: Any scheme must allow for the
lenders to also benefit from efforts put in by borrowers, While viable
borrowers were given the time and opportunity to make good their
obliga be closely monitored on performa
would ns,
theytio andnce
efforts
to repay lenders.

LOANRESTRUCTURINRINCIPLES AND
2. Guidelines for Corporate Borrowers:
The following were the guidelines for corporate borrowers that should be
adhered to:
(a) Terms
of settlement offered: No zero-coupon structure should be
entertained. All financial instruments offered should have a reasonable
yield that commensurated with the cashflow of the borrower.
(b) Clarity of usage of funds: The usage of funds proposed under a
scheme should be clearly identified/defined at the outset strict]
adhered to. 7 at j
(c) Equity-kicker elements: The scheme should involve equity-kickers such
as warrants, convertible loans, etc.

(d) Repayment period: The repayment period for restruct loans

ured
should
not exceed five years. -
(e) Benefits ofwritten down assets: Any subsequent value realised in excess
the book value of assets (written down as part of the scheme) should
be subject toa sharing ratio between the borrower and the lende
r.

shareholders ofthe borrower todilute the even

tuay
creditors through issuance of new shares.
Dearcabsast ta 2 Nixie Kats wiiut wey Fis ngpt, Wt ppt ALS
Age-3 «7

3. |peselonere foot Nsella seed Voor reer:

The lowing gues cpple’d 2 Omid ews a Sold
wuctedoy.
@) Statmory decharatom: AD, mtersteds tassomers we apie oo Be x
Stameny beciadan on fee 1 wore Ts eet Ss eee
the borrower's accommidoiiety mm aan © Gee sas.
(by ee eee Be aire BeeLond preening: abt
be then acest Ge Sorrows: Saokd Gee see fa
() Annual review of performance: Tae seme 9 be Coscty semmenet
2 ao weed eviews ASprime.
(6) Moraormm on the Espasa & persoma asus. Tre
PAT wae assets by Gee borrows sonié ost Se sowed Cap o
Gov Ge
dusaizon Of the scheme wales Gee poocecdés we ios Gee seem
ees ot ea
(©) Comes pedcomese Cosmet péeoest gold & Seas io
borrowers prax 2 Gee commmeacomedt 6 Ge eee down Deda
to apply ah evatieble evenues fox covers om Ge overt of Ge scheme
fee Ths will pret ay aeons > Ge es ws dees Be
ane ~
() Equtyticior-
The scheme shonild cide Gee prownaon of a0 equity
ket
~ Deer
o
@ wn me The spaymeat pers Sor someones iam stent
mot cxcee)d fnve years
The scheme should costzas some Consign ior Tare pI et BUT
eo Amosstorms mecha
© Peewee baros mss

The guadelaess appieed so puaramiors auc sicmic Te adeses ice

(a) Subssamtial aud crincci reset Beers Se iouding was Tae Tee
oe the stamdies ar
(he recowery measerss st we oe ee Pe
est oogmse Ge obieabor of Ge Suaors
 As such, relevant provisions of the guidelines for corporate and
individual borrowers should apply. #
b) Other guarantors: In respect of other guarantors, no release
guarantees should beconsidered unless allfeasible recovery measures
have been pursued.
 CHAPTER 7

NON-PERFORMING LOANS —
A SLEW OF MEASURES
SYNOPSIS
. Measures to combat NPLs..................0--. 502 7.9. Asset classification for
> MEeE PRESSURES nn ee. ce ee 502 restructured loans................000.-
2.1. Dissemination of list of 7.10. Provisioning norms for
defaulting borrowers................. 502 restructured accounts ................
2.2. -Wilful.defaultets ....cc1c.ccocereceesees 503 7.11. Performance of the CDR
2.3. Other penal measures under Scheme }...7:2 66 7.ii....c4002...1...
the Master Circular .......0....00..... 505 7.12. Legal basis of the CDR
2.4. Criminal Action against SCREW steveececaeeveveestveeieivecivesverivve
Wilful Defaullters .......i5:..:..0..c050: 505 7.13. Eligibility for the CDR scheme
. Credit information companies ................ 506 7.14. Who can apply ...............00000
3.1. Credit Information Bureau of 8. Corporate debt restructuring in case of
oe 506 SI EE ee eee
3.2. Credit Information Companies 9. Compromises: one-time settlement.........
(Regulation) Act, 2005 ............. 508 | 10. Disposal of non-performing loans ..........
3.3. Major Provisions under the 10.1. Can NPLs be sold outside the
| Cie cesses RE oe msrateam | 508 atipial SY SteMy. ..A0E.........
3.4. Private credit information 10.2. Requisites for the selling bank..
ai ek a i 509 10.3. Requisites for the buying bank .
. Legislative measures to demotivate 10.4. Portfolio view ordiscrete view.
eo | ee 510} 11. Legal controversy on transferability of
4.1. Income tax disincentives .......... 510 NGATISS: is gh sch} .»..1- <0 ered. Pc) 14d
4.2. Restrictions under the 12. Choosing the remedy.......4..cscss.ecsseuecs.sees
Companies Act. 1956 ............... 510 12.1. Debt recovery options: Social
. Legislative measures to combat NPLs.... 511 PAP WOM recsectoscsorchesasearceaes seseeees
5.1. The Debt Recovery Tribunals 12.2. Debt recovery options:
PAWEL) 005-2. DEEE $0200). RELA fooied S11 Bankers’ viewpoint................0
5.2. Special recovery powers under 12.3. Choice of remedies: A legal
State Finance Corpora-tions COMPATISON HA) ASA ATMA!
EE Be ee ae ee eee i Annex.1; Chapter III-A of the
PMY ea ee aernmeyie errr 513 Reserve Bank of India
5.4. Winding up law..........::ccceseeeeee 513 ACt, 1934.........ssseessseenees 527
- Formal workouts: sick industrial Annex. 2: Master Circular on
COMPAID TQVIVAL | 2..0.dsvepsiercoreyeureh cwetts 514 Wilful Defaulters......... 527
- Informal workouts: Corporate debt Annex. 3: Credit —_ Information
PEMMUCIOTINE hss sesi). ohigss bese Halde 518 Companies
7.1. General norms for (Regulation) Act, 2005. 527
RRPMSLIMUENIS soo ccanceresscossart
chaos 519 Annex. 4: Section 22 of Sick
7.2. Special case of restructuring..... 519 Industrial Companies
7.3. Restructuring under the CDR (Special
SHRI Manta, 0oesoeesereensseees 520 Provisions)Act, 1985... oef
7.4. Institutional framework for Annex. 5A: Prudential Guidelines
gt eee 521 a ga
7.5. CDR Standing Forum............... 521 pole a m 0
7.6. CDR Empowered Group .......... 522 Advances by Ban ei 527
GP BUS) oe 523 Annex.5B: Se) a aii
7.8. Common Conditions for es vik
FESUTUCCUTING ....20-.020ecereseerseesseeers 523 CDR Mechanism.......... 527

499
 A Slew af Measures
ww sya. Part 1—Chap. 7—Non-Performung Loans—

“a =e Rostiucturiny
Aamea OA: m — ee §27
of SMEs Notification on
Annex, 7: Ciuidelines
dated Sth September, purchase/sale of Non
dus . S27
af SME performing — finanonl
Annes. 6B: esennes §27
BRGBOB,, cs vvvyvecvercnnneys
Dott

market over recent times,

india has attracted international attention as an NPL Companies
from the wansfer of loans through Asset Reconstruction
by ICI-
(ARCs), the Indian market also saw an auction of non-performing loans national
CL This has put India onthe global map of the NPL market, Most inter
next
NPL reports now refer toIndia asthe number two Asian location for NPLs,
after China,
The following data’ compiled in Table 7.1,
Table 7.2 and Table7.3 for different years provides a comparative view of the
success of various measures in resolving non-performing assets over the last few
years:

Table 7.1: Measures of resolving NPAs (2003-04 and 2004-05)

NPAs Recovered by Scheduled Commercial Banks through Various Channels

(Amount
in Rs. Crore)

oa ae 13(2) of the SARFAES!I Act.

we Scheme
e e 31° July. 2004 and thelast date forprocessing ofapplication was

1. Reserve
211d. x India: Report onTrends andProgress ofBanking inIndia,2004.05 200849. and
 Measures to Combat NPLS Syn. 501

Table 7.2: Measures of resolving NPAs (2007-08, 2008-09)

NPAs Recovered by Scheduled Commercial Banks through Various Channels

(Amount in Rs. Crore)

No, of Amount
Cases In-
Referred

==
i) Adalats = ae
2,142 [ap aay
5,48,308 baie2d
5
toe =oos aan
Ga) SARFAESI 83,9124| 7,263 | 4,429 61,780 | 12,067 | 3,982 a

Number of notices issued

Table7.3: Measures of resolving NPAs (2010-11 and 2011-12)

NPAs of Scheduled Commercial Banks Recovered through Various Channels

HiT etiagae
(Amount in Rs. Toe
pecerery
ee of | Amount= |+
Amount ae ec
No. Amount |Amount
ae
Cases | Involved | Recov- Cases In- Recov-
Pik ered Referred volved ered

| Gi)DRTs ||12,872 | retart aa are | 17.0

0 |

“28

a ee tee ad
Notes: 1. *: Refers to amount recovered during the given year, which could be with aEto cases
referred during the given year as well as during the earlier years.
2. #: Number of notices issued.

One may note the sharp rise of the SARFAESI Act as a tool in resolution of
NPLs in India. The sheer number of cases in which the banks have resorted to
SARFAESI Act action is huge.
 Slew af Measures
S02 Sya.! Part —Chap. 7—Non-Perfornung Leaans—A

|. MEASURES TO COMBAT NPLs

Wiking
a period the government, banks and regulators have been
an mesh aptonhe| burden of non-performing assets. These measures
ae
may be categorised as follows.
negative list, etc,
© Moral pressure-classification as wilful defaulter,
ncentives against de-
© De-motivating and creating legal obstacles: tax disi

© Legislative measures:
© Special legislation for recovery of bank dues,
© Special legislation for recovery of dues to financial institutions,
© Special legislation for enforcement of security interests
* Corporate debt restructuring.
* Sick industrial companies regime.
* Winding up proceedings.

2. MORAL PRESSURE

2.1. Dissemination
of list of defaulting borrowers
In order to create a moral pressure on defaulting borrowers, the regulators re-
sort to schemes whereby particulars of defaulting borrowers are published, This
supposedly achieves twin results—one, hapless lenders are cautioned against
lending to the borrower in question; and two, a borrower sitting on the fence
would try hard to save his name from being put on to the list.

since 1994, based on a Budget announcement in the 1994 Budget, and continued
upto 2002, when the role of the RBI was replaced by CIBIL—see next section.
Under the erstwhile RBI-administered scheme, vide a circular of 23rd April
1994, the RBI formulated the scheme for circulation of the names of defaulting
borrowers. Salient features of the scheme, as modified from time to time, are as

* Banks and Fls are required to submitin format Reserve

Bank of India as on 31% March and ees
tails of the non-suit filed borrowal accounts which have
been
as doubtful and loss accounts by them with (both under-
funded and non-funded) aggregating Rs.1 crore and above.
March at aacQnsolidated form byRBItothebanks and
Fisason 31"
 Moral Pressure
Syn. 2 503
Notably, both the circulation of defaulters list,
as also that of wilful defaulters
(see below) are not in pursuance of a Statute,
and are simply the disclosure of a
banker’s opinion to a fellow banker. The publi
c dissemination of information is
limited to “suit filed cases,” which is obviousl
y in the public domain. The rele-
vant statutory provisions are in Chapter IIIA of
the Reserve Bank of India Act.
Sec 45E limits the disclosure of the credit info
rmation. (For text of the relevant
provisions of the statute, see Annexure 1 to this Chapter)
.
While the dissemination of defaulters list by the RBI conti
nued upto 2001, con-
sidering the concerns expressed over the persistence
of wilful default in the fi-
nancial system in the 8th Report of the Parliament’s Stand
ing Committee on Fi-
nance on Financial Institutions, the RBI constituted in May
2001, a Work
ing
Group on Wilful Defaulters (WGWD) under the Chair
manship of Shri S. S.
Kohli, the then Chairman of the Indian Banks’ Association.
The Group submitted
its report in November 2001. The recommendations of the
WGWD were further
examined by an In-House Working Group constituted by the Reser
ve Bank. Ac-
cordingly, the scheme was further revised by RBI on May 30" May,
2002.
Based on the above, the scheme for RBI-intermediated collection
and dissemi-
nation of information about wilful defaulters has since been replaced by
filing of
defaulters’ information and its dissemination by CIBIL (see next section
). How-
ever, the definitions below are still relevant.

p My A Wilful defaulters
The scheme regarding “wilful defaulters” was introduced pursuant to the in-
structions of the Central Vigilance Commission in 1999. This scheme required all
banks and FIs to report cases of “wilful defaults” on a quarterly basis to the RBI,
and the RBI in turn circulates the same on a quarterly basis. Subsequently, over a
period of time, the RBI has been giving further instructions regarding wilful de-
faults. A Master Circular of 1° July, 20137, consolidates all circulars and instruc-
tions in this regard. The text of the Master Circular is given in Annexure 2 to
this Chapter.
A “wilful default” is defined in the Master Circular as under:

A wilful default would be deemed to have occurred if any of the follow-

ing events is noted:
(a) The unit has defaulted in meeting its payment/repayment obliga-
tions to the lender even when it has the capacity to honour the
said obligations.
(b) The unit has defaulted in meeting its payment/repayment obliga-
tions to the lender and has not utilised the finance from the lend-
er for the specific purposes for which the finance was availed of
but has diverted the funds for other purposes.

, ter Circular
i on Wilful Defaulters, dated 1°; July, 2013, availab
ilable at: ‘s
¢ httpu/febidoes bi. ore inftdoes’ notifiesion/PDFs/63h1CWILDO107 13.pdf (accessed on 3" Septem
ber, 2013).
 af Measures
Mey Sy. 2 Part }—Chap. 7—Non-Perfornung Loans—A Slew

(c) The unit has defaulted in meoting itspaymeni/re payment obliga:

the funds so that the
tions to the lender and has siphoned off
for which the fi-
funds are not utilised for the specific purpose
the wart in
nance was availed of, nor are the funds available with
the form of other assets.
t obliga
(d) The unit has defaulted in meeting its payment/repaymen
tions to the lender and has also disposed off or remo ved the
or it
movable fixed assets or immovable property given by him
for the purpose ofsecuring a term loan without the knowl edge of
the bank/lender.
Itis pertinent tonote that a “wilful default” shall be identified keeping
in view the track record of the borrowers and should not be decided on
the basis of isolated transactions default iden
The/inc ts.
to be categori sed
as wilful must be intentional, deliberate and calculated.
The term ‘diversion of funds’, referrto edin para (b) above, would be
construed to include any one of the under noted occurrences:
(i) Utilisation of short-term working capital funds for long-term
purposes not in conformity with the terms of sanction;
(ii) Deploying borrowed funds for purposes/activities or creation of
assets other than those for which the loan was sanctioned;
(iii) Transferring funds to the subsidiaries/group companies or other
corporates by whatever modalities;
(iv) Routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender;

instruments
without approval of lenders:
(vi) Shortfall in deployment of funds vis-a-vis the amounts dis-

The term ‘siphoning todat

of funds’, 9 referre (c) above, should be
‘ para

onpuen! to occur ifany funds borrowed from banks/Fis are utilised for

cated
daedie n fone tent
the toCIBIL (seebelow) becoming functional, RBI hasallo-
relating to dissemination of information about suit-filed cases
cases of wilful defaulters to CIBIL
 Moral Pressure Syn. 2 SOS

2.3. Other penal measures under the Master Circular

In addition to dissemination of information to CIBIL and to SEBI, the Master
Circular on wilful defaults lists several other measures against wilful defaulters.
These are as follows:
(a) No additional facilities should be granted by any bank/FI to the listed
wilful defaulters. In addition, the entrepreneurs/promoters of the compa-
mies where banks/Fls have identified siphoning/diversion of funds, mis-
representation, falsification of accounts and fraudulent transactions
should be debarred from institutional finance from the scheduled com-
mercial banks, Development Financial Institutions, Government owned
NBFCs, investment institutions etc. for floating new ventures for a pe-
riod of 5 years from the date, the name of the wilful defaulter is pub-
lished in the list of wilful defaulters by the RBL
(b) The legal process, wherever warranted, against the borrowers/guarantors
and foreclosure of recovery of dues should be initiated expeditiously.
The lenders may initiate criminal proceedings against wilful defaulters,
wherever necessary.
(c) Wherever possible, the banks and FIs should adopt a proactive approach
for a change of management of the wilfully defaulting borrower unit.
(d) A covenant in the loan agreements, with the companies in which the
banks/notified Fis have significant stake, should be incorporated by the
banks/Flis to the effect that the borrowing company should not induct a
person who is a promoter or director on the Board of a company which
has been identified as a wilful defaulter as per the definition in the Mas-
ter Circular and that in case, such a person is found to be on the Board of
the borrower company. it would take expeditious and effective steps for
removal of the person from its Board.
It would be imperative on the part of the banks and Fils to put in place a trans-
parent mechanism for the entire process so that the penal provisions are not mis-
used and the scope of such discretionary powers are kept to the barest minimum.
It should also be ensured that a solitary or isolated instance is not made the basis
for imposing the penal action.

2.4. Criminal Action against Wilful Defaulters

The RBI Master Circular of 2™ July, 2013, lists several criminal measures
against wilful defaulters as well. Accordingly, the RBI states in the Master Circu-
lar that-
(a) It is essential that offences of breach of trust or cheating construed to
have been committed in the case of loans should be clearly defined under
the existing statutes governing the banks, providing for criminal action in
all cases where the borrowers divert the funds with mala fide intentions.
 ures
500 Sya. 35 Part I—Chap. 7—Non-Performing Loaans—A Slew af Meas

use of funds and obtain

(b) itis essential that banks closely monitor the end-
s have been used
certificates from the borrowers certifying that the fund
for the purpose for which they were obtained.
nst the borrower,
(c) Wrong certification should attract criminal action agai
in certificates
Banks/Fls should closely monitor the end-use of funds and obta
ose for which
from borrowers certifying that the funds are utilised for the purp
s, banks/Fls
they were obtained. In case of wrong certification by the borrower
ever
may consider appropriate legal proceedings, including criminal action wher
necessary, against the borrowers.
it isessential to recognise that there is scope even under the existing legisla-
tions to initiate criminal action against wilful defaulters depending upon the facts
and circumstances of the case under the provisions of Sections 403 and 415 of
the Indian Penal Code (IPC) 1860, Banks/Fls are, therefore, advised to seriously
and promptly consider initiating criminal action against wilful defaulters or
wrong certification by borrowers, wherever considered necessary, based on the
facts and circumstances of each case under the above provisions of the IPC to
comply with our instructions and the recommendations of JPC.
It should also be ensured that the penal provisions are used effectively and deter-
minedly but after careful consideration and due caution. Towards this end, banks/Fls
are advised to put ip place a transparent mechanism, with the approval of their Board,
for initiating criminal proceedings based on the facts of individual case.

3. CREDIT INFORMATION COMPANIES

3.1. Credit Inform

Bureau
atiof India
on Ltd.
A specialised body to disseminate information about credit, particularly corpo-
ratecredit, wasformed with thename Credit Information Bureau ofIndia Lim
ited (CIBIL) (website www.cibil.com). CIBIL was set up in 2000 with sharehold-
ing from SBI, HDFC and two technology providers—Dun and Bradstreet, and
Trans Union. CIBIL works on a membership model—its credit reports are
pro-
see ameubers only. CIBIL’s membership is notrestricted tobanks and Fis

become its members. CIBIL has a symbiotic relation with its members—it ob-
tains credit information from and provides credit reports toits
members.
so nil Provides both positive andnegative credit information.
shee. Pete uy asitintends toextend itsoperations
Itisnotlimited
to cover consumer credit
So. Following isa brief description ofthe working
of CIBIL:

covers credit availed by non-individ 7

concerns, private andpublic limited companies. etc rm™ Proprictary
 Credit Information Companies
Syn. 3 507
Membership of CIBIL currently includes Banks, Financ
ial Institutions, State
Financial Corporations, Non-Banking Financial Companies,
Housing Finance
Companies and Credit Card Companies. As mentioned before
, only members can
be beneficiaries of the credit information maintained by CIBIL
.
CIBIL collects commercial and consumer credit-related data
and collates such
data to create and distribute credit reports to its members. CIBIL
primarily gets
information from its members only and at a subsequent stage,
supplements it
with public domain information in order to create a truly comprehens
ive snapshot
of an entity’s financial track record. CIBIL provides solutions in the
form of
Consumer Credit Information Reports, Company credit Information Report
s, etc.
The following is the information on a borrower that is available with CIBIL:
The Credit Information Report (CIR) includes the following information:
* Basic borrower information like:
(i) Name
(ii) Address
In case of individuals:
(iii) Identification numbers
(iv) Passport ID
(v) Voters ID
(vi) Date of birth
In case of non-individuals
(vii) D-U-N-S® Number
(viii) Registration Number
(ix) Legal Constitution
* Records of all the credit facilities availed by the borrower
° Past payment history
* Amount overdue
* Number of inquiries made on that borrower, by different Members
* Suit-filed status
The following is not available with CIBIL:
* Income/Revenue details
* Amount(s) deposited with the bank
® Details of borrowers’ assets
* Value of asset(s) mortgaged
* Details of investment(s)
CIBIL is merely a disseminatio — does not have . any role to play in
inati n body—it
characterisation of borrower as NPA. CIBIL does not classify any accounts as
 of Measures
50% Sya. 5 Part |—Chap. 7—Non-Performing Laans—A Slew
wall-
h classi
er has
fault -ounts. It merely reflects; thisthis 1information after the memb
Classification as per
ouoh event The Number of Days Past Due and/or Asset
CIBIL.
RBI's definition as submitted by members is reflected in the

3.2. Credit Information Companies (Regulation) Act, 2005

it Information Companies (Regulation) Act, 2005, or CICRA was passed
inMay 2008,and notified in the — of India on 23" June, 2005 but became
operational from 14" December, 2006. The Act was passed with a view to regu-
lating credit information companies and to facilitating efficient distribution of
credit, and for matters concerned or incidental to it, (The text of the Act is given
in Annexure 3 to this Chapter.)

talrequirement ofRs. 2)crones, and pald-ap Capel stantaeanens € 0b IOS, 7 %

members,
ers, retail and . Section 15(1) of the Act requires that every credit insti-
tution, which includes co-operative banks, has to become a member of at least
one credit information company within a period of three months from com-
mencement of the Act or any extended time allowed by the Reserve Bank on ap-
plication. Before the passing of CICRA, Credit Information Bureau (India) or
CIBIL carried out a similar type of activity and today almost all banks are its
members. What CICRA does is to allow the creation of several such credit in-
formation agencies. Banks will thus be able to readily access full credit history of
borrowers / whether they have ever borrowed, ever defaulted, have a perfect re-
payment record, who their lenders are, etc. This holds qm pn
credit cards and card withdrawals. With the passing of CICRA, all institu-
tions are legally mandated to provide borrowers’ data to a credit information
company and the consent of the borrower is no longer required.

3.3. Major Provisio nsAct

under the
> Credit Inform
Comp
at anyio
meanns a com
form andn
eda regis tered
p y
under the Companies Act, 1956, and which has been granted a certi
ficate
ofTesistration from theReserve Bank ofIndia tocarry onthebusiness
of
> Credit Information means any information relating
to:
° the amount and the nature ofloans/advances/amount
outstanding
iuten soany facility granted by a credit in-
,

* the nature
of ity taken ”
ced faiay, teene Palaing
* the guarantee/non-fund
tionforanyofitsborrower) ty Branted bya credit institu-
: the creditworthiness ofany borrower of
a credit institution.
 Credit Information Companies
Syn. 3 509
* Any other matter that RBI may~consider
necessary to be in-
cluded, and the same can be specified and notif ied by RBI
> Functions of Credit Information Company
is to:
* collect, process and collate information on trade
, credit, financial
standing of the borrowers of credit institution, whic
ber of credit information company, h is a mem-
* to provide credit information to its specified
users
specified users of any other credit information comp or to the
any other credit information company being its memb any or to
er,
* to provide credit scoring to its specified users,
*® to undertake research project.
*® to undertake any other form of business which the Reser
ve Bank
may, specify by regulations as a form of business in which
lawful for a credit information company to engage. it is
This Act further amends certain enactments like RBI Act
Regulation Act, so as to permit disclosure of credit information.1934, The Banking

Reo Private credit information companies

Apart from CIBIL, certificate of registration has been issued to Experi
Information Company of India Pvt. Ltd. and Equifax Credit Information an Credit
Pvt. Ltd. on 17" February, 2010, and 26" March, 2010, respectively Services
mence the business of credit information. to com-

Further in 2008, the Government had announced the Guidelines for foreign
vestment in Credit Information Companies’, broad guidelines being: in-

* Foreign investment is subject to CICRA.

* Foreign investment i.e. Foreign Direct Investment (FDI) + investment by
Foreign Institutional Investors (FII) under Portfolio Investment Scheme
(PIS) is allowed upto 49% with prior approval of Government and regu-
latory clearance from RBI.
* Investment by SEBI Registered FIIs would be permitted only through
purchases in the secondary market to an extent of 24 per cent. This limit
is within the overall limit of 49%.
° FIl investment is subject to conditions:
O No single entity should directly or indirectly hold more than 10%
equity.
O Any acquisition in excess of 1% will have to be reported to RBI
as a reporting requirement.
O Fils investing in credit information companies shall not seek a
representation on the Board of Directors based upon their share-
holding.

. Department of Industrial
i Policy
i and Promotioni (FC section) PressS Note No. 1(2008):
8 Http://www din tic. in/Enetiah’policy/chatigea'pn. 2008, pdf (accessed on 3™ September, 2013).
 Measures
510 Sya. 4 Part L—Chap. 7—Non-Performing Laans—-A Slew af

>y effe
The Consolidated PDI Policy ctiv
effect iv e from 5"‘ April, 20133 retains | the same
Industry, in its meeting dated
limits. However, the Ministry of Commerce and
74%, that too, under auto.
16" July, 2013 has decided to raise the FDI cap upto
matic route.”

4. LEGISLATIVE MEASURES TO DEMOTIVATE

DEFAULTERS
vate
A spate of disincentives has been incorporated in various laws to demoti
are:
borrowers from defaulting to banks and financial institutions, Some of these

4.1. Income tax disincentives

Section 43B of the Income tax Act provides that any sum payable by way of in-
terest on any loan or borrowing from any bank or public financial institution or a
State financial corporation or a State industrial investment corporation can be
claimedas a deductible expense only upon actual payment thereof, This provi-
years ago in 1989 and once amended in 1991.
sion wasinserted
This provision, as can be understood with a bit of reflection, only removes the
incentive to default, as under the provisions of law prior to the amendment, a bor-
rower could claim a tax set-off for the interest payable to banks, and yet not pay
the same, thus literally have the cake and eat it too.

4.2. Restrictions
under the Companies Act, 2013°
A company is prohibited to buy back its securities if the company makes a de-
fault in repayment of a term loan or any interest payable thereon to any financial
institution or banking company [Section 70(1)(c), also see corresponding section
77B of the Companies Act, 1956]. However, buy back is not prohibited if the
default is remedied and 3 years has lapsed after the default ceased to subsist. Pur-
ther, section 186(5) of the Companies Act, 2013 prohibits the company to make
an investment or given any loan/guarantee
without/securi
obtaining thety
prior
approval of the public financial institution where any term loan is subsisting [see
corresponding section 372A(2) of theCompanies Act, 1956]. Such approval will
roe, wauired if the amount ofinvestment/loan, etc.is within thelimits
pre-
wnccr Section 186(2) ofthe Companies Act, 2013, andthere isnodefault
pay mrs loan instalments or payment of interest thereon as per the terms
conditions of such loan to the public financial institut
ion
Note that this
tat Sects 4A oftheCompare ae” my incase offinanci* al -institut
fate ® - ™ s
ions listed

&_ See
m.press release le-/rcs ac -
“e: Hlt://pib.nic.in/newsite/erclease
aspx "rehid=97252 (accessed
on 3” Sepnemiber,
Such ‘hat
Raveneither
otYetsection 68force.
come into nor section 186of wpdited
(information theCompanies
aeon17 Tal h N aal
 Legislative Measures to Combat NPLs
Syn. 5 511
5. LEGISLATIVE MEASURES TO COMBAT NPL
s
. A Series of legislative measures have been taken
to provide for faster quasi-
judicial or non-judicial recovery of debts by banks.
The significant measures are
discussed below.

a The Debt Recovery Tribunals law

The DRT law was, politically, a bold step to provide for
a faster lane for deliv-
ery of justice to banks seeking to recover their debts. The
normal means for re-
covery of debts by:
(a) enforcement of security interests, which, strictly as per
law, could be
done without the intervention of Courts, but was seldom done
except
through bankruptcy or winding up proceedings;
(b) corporate winding up proceedings;
(c) civil recovery actions including, what was supposedly a summary
pro-
ceeding, recovery for failure of a negotiable instrument that were provin
g
too slow.
Since these routes required intervention of the judiciary, the process involved
protracted litigation. Indian judiciary was already over-burdened with litigation
involving wide range of matters. Hence, the Tiwari Committee recommended,
way back in 1981, the establishment of special tribunals to deal with cases for
recovery filed by banks. The idea was endorsed by the Narasimham Committee
in 1991. The Recovery of Debts due to Banks and Financial Institutions Act was
enacted in 1993 and came into force in August 1993.
The DRT law grants exclusive jurisdiction to the DRTs for applications filed
by banks and financial institutions for recovery of debts due to them, for an
amount exceeding Rs. 10 lacs. The DRT law is NOT intended for:
(a) claims of any creditor other than banks or financial institutions;
(b) winding up of companies, or distribution of assets of companies, as such
proceedings involve proof of debts to other creditors also, which is be-
yond the scope of the DRT law;
(c) claims by any borrower against a bank, except in course of adjudication
proceedings under the DRT law.
The law itself has had bumpy history. It has faced challenges in Courts several
times. Soon after the enactment of the law and the formation of the DRTs, the
Delhi Bar Association petitioned the Delhi High Court, challenging the constitu-
tional validity of the Act. In August 1994, the Delhi High Court expressed a pre-
liminary view that the Act may not be valid, and blocked the proceedings of the
DRTs until final order. The final order, of 10'" March, 1995, held the Act as un-
constitutional because it violated the independence of the judiciary from the ex-
ecutive, and on other technical grounds.
$12 Sya. 5 Part |—Chap. 7—Non-Performing Loans—A Slew of Measures

The government filed an SLP before the Supreme Court. On 18" March, 1996,
the Supreme Court gave an interum order that notwithstanding any stay onder
the meantime, the
passed in any writ petitions, DRTs should resume functions. In
its key provisions in
PRT (Amendment) Act, 2000, comprehensively amended
g in Union
light of the pleadings in earlier cases. The Supreme Court's final rulin
dated 14° Mareh,
of India & Another v, Delhi High Court Bar Association’
2002, upheld the constitutional validity of the law as amended.
As regards the performance of the RDB law, there are 33 DRTs and 5 |.
late Tribunals in the country. As per the provisional data, 10,877 cases involving
Rs. [8,885 crores were disposed of by the DRTs during the calendar year of 201 |
and 9125 cases involving Rs. 16078 crores during the calendar year of 2012’,
During the year 2010, 11,801 cases involving Rs. 21,079.33 crore were disposed
of by the DRTsFrom . Ist April 1996 to 31st December 2005, 86,922 cases in-
volving an amount of Rs. 1,84,538.01 crores were filed, Out of which, 59,115
cases involving an amount of Rs. 91,866.59 crores were disposed of, and recov-
ery of Rs. 24,915.28 crores was made. So there has been continuous decline in
the number of cases disposed by DRTs, over the years.
The key features of DRT law have been discussed separately at length in this
book—see Chapter 11.
An article® in 2006 reviewed the performance of the DRTs. Though based on a
sample of cases filed before DRTs and the Bombay High Court, the author pro-
vides the following comparative mean data (No. of days):
Table 7.4

& AIR2002sc 1479.

2013-14, 201 -
Orn
®. dot Emance, Outcome
Snieta Visaria: Legal aadLan Wagan tadtata i,
September. 2013) ‘SeealsoThe Dire 2p inSV, accessed
el
on
Debt Recovery Impact ofReforms Credit
 Legislative Measures to Combat NPLs
Syn. 5 613
ment Corporations, and some all-India
financial institutions also. Text of thes
special laws is appended in Appendix to e
Part IV of this book.

5.3. Lok Adalats

Apart from moving through DRTs, banks can
also avail of an alternative fo-
rum, Lok Adalats. Lok Adalats are alternative
dispute resolution agencies usually
headed by retired judges. Section 19 of the
Legal Services Authorities Act, 1987
provides for organisation of Lok Adalats, wher
ein it is stated that every State Au-
thority, or District Authority or Supreme Cour
t Legal Services Committee or, as
the case may be, Taluk Legal Services Committe
e may organize Lok Adalats at
such intervals and places and for exercising such
jurisdiction and for such areas
as it thinks fit. Under the said Act, the Lok Adal
ats have been given powers
equivalent to a civil court.
Proceedings in Lok Adalats are in the nature of comp
romise settlements.
RBI issued Guidelines for compromise settlement of
dues of banks and finan-
cial institutions through Lok Adalats vide Circular dated
4" May, 2001. The Cir-
cular, recognising the advantages of Lok Adalat proce
edings, says: “There are
certain advantages in using the forum of Lok Adalats by
banks and financial in-
stitutions in compromise settlement of their NPAs. There
are no court fees in-
volved when fresh disputes are referred to it. It can take
cognizance of any exist-
ing suit in the court as well as look into and adjudicate upon
fresh disputes. If no
settlement is arrived at, the parties can continue with court proce
edings. Its de-
crees have legal status and are binding.”
The circular above required cases in the “doubtful” and “loss” catego
ry, of upto
Rs. 5 lacs dues to be referred to Lok Adalats. Subsequently, by a Circul
ar dated
3™ August, 2004, the ceiling was increased to Rs. 20 lacs.

5.4. Winding up law

The globally recognised equitable remedy, in case borrowers fail to repay their
debts, is insolvency, or, in case of corporates, winding up. It is only due to the
inefficiency of the winding up regime that alternative modes of enforcement, re-
covery or resolution have been thought of. The best way out, evidently, would
have been to make the winding up system more efficient, but it is unfortunate
that instead of striking at the root of the problem, the policy-makers have been
trying to search for short cuts.
The winding up remedy, as it presently exists, is extremely slow. The Eradi
Committee gave some stunning data’ on the pending cases in winding up
matters:

9. As of 31st March 1999,

 Si4 sya. 6 Part l—Chap. 7—Non-Performing Loans—A Slew af Measures

Table 7.5

————T735 |520 | 1035 | 15-201 2025 1 25 Total

Years Years Years Years Years Years
and
above

While these provisions have been enacted, effect has not been given tothe
pro-
of years, In
ae
May 2 Supre
2010, the me Courtthe
ee NCLT
clear
remained pending for several
ed the
theNCLT
408 taskupinitia
e Theaken
Ce™. bythe ted recen tly Cop
by See, ies
enactedis
Companieund
price
Clec s Act, mo
2013 .
mon
Secti
the Companies Act, 2013 provides for constitution of the
Chapter XX" (sections 270 to365) deals with winding upof NCLT. and
MOLT. The ae ofsections 271 to303) empowers winding upby
. Part-1
Provisions the
{toGhosesammined
amendment compared to those contained in the Compn ae
anies 1956,

10. Union of India v.R. Gandhi

*. Effective Presidem Madras Bar Association
2013. from 12" September, 3, a8 notified by the MCA in rth A
of the
**. None September
 Formal Workouts: SICK Industrial Companie
s’ Revival Syn. 6 515
Provisions relating to re-organisation of companie
s that are either bankrupt or
potentially bankrupt exist in bankruptcy laws
of most countries. Of these, the
most significant is the Chapter 11 applications
in the US Bankruptcy Code, and
provisions for administration under the UK inso
lvency law. The purpose of the
re-organisation proceedings is to ensure that, when
companies are bleeding with
problems, losses, and liabilities, it does not face
the onslaught of creditors’ en-
forcement actions, which would accelerate bankruptcy, virtually elimi
chances of revival and Significantly undermine the nate
value of assets of the com-
pany.
The Sick Industrial Companies (Special Provisions
) Act 1985 was enacted in
1986 to provide interim protection to sick and potentiall
y bankrupt companies,
and to prepare plans for their re-organisation or revival.
The Act is administered
by the Board for Industrial and Financial Reconstruction
(BIFR) to whom wide
ranging powers have been given, including the power to order
a company to be
wound up. Among significant provisions of the law is a provi
sion [sec. 22] for
suspension of legal proceedings against sick companies—this is
similar to the
automatic stay under US Bankruptcy laws. (Text of selected provi
sions of the
Act is given in Annexure 4 of this Chapter.)
As regards the performance of the SICA, the following lines from the report
of
the Eradi committee say it all:
“5.8.1 The Committee had the benefit of hearing the views of the Union
Labour Secretary, Union Banking Secretary, and experts representing fi-
nancial institutions, commercial bodies and Indian Bankers Association
on the subject. These organisations and persons have, with one voice ex-
pressed a clear opinion that the BIFR and AAIFR have not been able to
fulfil the purpose and mandate as envisaged under SICA, of providing
viable schemes for the revival of sick companies in a reasonable short
time frame.
The BIFR’s official site '' provides performance data of the BIFR. The data is
as under:

Table 7.6: Board for Industrial & Financial Reconstruction

Year Wise Performance
As on 30-09-2010

Winding up
Recommended

rd
11. Available at: http://bifr.nic.in/geninfo.htm; (accessed on 3" September, 2013).
 Decal)
:
|Fug
.
i
:

i
ey

|
| Ea
,
Meee
Hi dae
Hal alll
MeAEBa

ai:
LRU

ny
(Ee
g2e=

the Act, 2013 receiv the assent

*.

ed of the
fot phase-wise of differem
and
as such
forc aseyet
 Formal Workouts: SICK Industrial Companie
s’ Revival Syn. 6 517
“(d) any appeal preferred to the Appellate Auth
ority for Industrial and
Financial Reconstruction or any reference made
or inquiry pending to or
before the Board of Industrial and Financial Reco
nstruction or any pro-
ceeding of whatever nature pending before the
Appellate Authority for
Industrial and Financial Reconstruction or the Boar
d for Industrial and
Financial Reconstruction under the Sick Industrial
Companies (Special
Provisions) Act, 1985 immediately before the comm
encement of this Act
shall stand abated:
Provided that a company in respect of which such appea
l or reference
or inquiry stands abated under this clause may make a
reference to the
Tribunal under this Act within one hundred and eight
y days from the
commencement of this Act in accordance with the provisions
of this Act:
Provided further that no fees shall be payable for making such
reference
under this Act by a company whose appeal or reference or inquir
y stands
abated under this clause.”
Besides the abatement of proceedings before BIFR/AAIFR as stated
above, Chapter XIX” of the Companies Act provides for revival
and re-
habilitation of sick companies. The provisions relating to sick companies
were statutorily shifted from SICA to the Companies Act by the Compa
-
nies (Second Amendment) Act 2002, in sections 424A to 424L of the
Companies Act 1956, but that amendment was not enforced. There are
fundamental changes, both over the SICA, as also over the unenforced
provisions of the 1956 Act.
The most significant change is the very meaning of sickness, which was
earlier based on loss of net worth, and has now been linked to failure to
pay debt on demand. Applications for revival may be made either by any
secured creditors, or by the company, or by the government, authorities, or
a bank. Section 253(4) refers to “one or more grounds specified in sub-
section (1) and (2)”, from which it may be inferred that section 253(2)
provides an independent right to the company to bring protective action.
Another important change is that there is no statutory, numerical basis
for determining sickness. Under section 253(7), the NCLT determines
whether the company is sick or not. It should be logical to expect that the
basis for such determination sickness. Under section 253(7), the NCLT
determines whether the company is sick or not. It should be logical to
expect that the basis for such determination should be the fall in the
value of assets sufficiently below liabilities. A company in order to be
called “sick” should not be a healthy company — one which may pay its
debts in regular course of its business or by realizing its assets; at the
same time, the company should not have become insolvent beyond
remedying, so that it is sick and not dead.
The word “industrial” in the definition of sick company is intently
missing, since the definition of the Act does not presuppose the company
to be an industrial company.
h
*, Not yet notified, as such not yet effective. (Information updated as on 13" September, 2013).
 ns—A Slew of Measures
518 Sya.7 Part |—Chap. 7-—Non-Performing Loa
2013 are how
! ovisions of Chapter XIX of the Companies Act,
Chapter Liat US Bank.
| - “ wo administration provisions, akin to
ynterim administrator, or
ruptey Code. Thus, the NCLT may appoint an
be given powers to take
an administrator. The interum administrator may
nistrator miaty like-
over the management of the company, the final admi
rs of the NCLT,
wise takeover the assets or management subject to orde

+ INFORMAL WORKOUTS: CORPORATE DEBT

RESTRUCTURING
noted in-
One of the features of resolution strategies used in India that has been
ternationally is the Corporate Debt Restructuring (CDR) scheme. What makes it
more intere issti ng
that the CDR sche parallel with several far reaching
runsme
legal powers available to banks.
Corporate debt restructuring experiment is not a to India—several coun-
tries | a centralised restructuring system, instance, the Malaysian
Central Bank steers a Corporate Debt Restructuring Committee.’ It is said that
the CDR practice emanates from what is called “London ” advocated
by the Bank of England during the recession of mid-70s. ia, Korea and
Thailand have also adopted similar modelsof corpdebt orat e g.
restructurin
In India, RBI has issued guidelines in respect of restructuring of advances. Re-
cently, in 30" May, 2013,
the prudential guidelineson of advances
have been reviewed'’ taking into consideration the ions of the
Working Group under the Chairmanship of Shri B.Mahapatra. The extant pru-
dential guidelines on restructuring
of advances have been porated in the Part
B of the Master Circular on Prudential Norms on Income Asset
i and Provisioning pertaining to Advances, issued on 1" July,
2013". Text of the same has been given in Annexure 5A to this Chapter.
ee ae

(i) Guidelines on restructuring of advances extended to industrial units.

(ii) Guidelines on restructuringof advances extended to industrial units un-
si der the Corporate Debt Restructuring (CDR) Mechanism
ii) Guidelines on restructuring of advances extended to Small and Medium
' Enterprises (SME)
(1v) Guidelines on restructuring of all other advances.

reviewed in February
2003. They wereonce againrevised videNotification of10th Nowember, 200s
ir —$—

12. See website

of the CDRC on Bank Negara Malaysia
ch=31 (accessed
on4” September,
: 2013), site, at http://www brim gov my/indes php”

uedes O Sepauns
2 Nw fOi.oTg inScripts/NOKFiCAtIONU ser8p NA=BOORE Mode”) (ae-
 Informal Workouts: Corporate Debt Restructuring
Syn. 7 519
As per the Annual Policy Statement of 2006-07, Para
174, it was proposed that a
Working Group should be constituted to align the exist
ing guidelines on restruc-
turing of advances (other than under CDR mechanism)
in lines with the provi-
sions of revised CDR mechanism. The Guidelines for restr
ucturing of advances
were revised in 2008 in accordance with the Annual Polic
y Statement of 2006-
07, vide RBI Circular dated 27" August, 2008 and the provisions
of CDR mech-
anism were made available to borrowers engaged in non-indust
rial activities as
well. The part of the Master Circular dealing specifically with CDR
Mechanism
is reproduced as Annexure 5B to this Chapter. Also see discussion
below.
tale General norms for Restructuring
The Prudential Guidelines lay down eligibility criteria for restructuring of
ad-
vances, asset classification norms, provisioning norms, income recogni
tion
norms, risk-weights, etc. Banks may restructure the accounts classified
under
‘standard’, 'sub- standard’ and ‘doubtful’ categories, but restructuring of borrowa
l
accounts with retrospective effect is not allowed. No account will be taken up for
restructuring by the banks unless the financial viability is established and there is
a reasonable certainty of repayment from the borrower, as per the terms of re-
structuring package. Upon restructuring, the accounts classified as ‘standard as-
sets’ should be immediately re-classified as 'sub-standard assets’.
See later in this Chapter for detailed discussion on common conditions for re-
structuring, asset classification norms, and provisioning norms.

7.2. Special case of restructuring

In order to motivate banks to process applications for restructuring speedily,
the RBI has put in place a special dispensation for restructuring. The specialty of
this scheme is that the account will not slip to sub-standard category if the re-
structuring complies with the conditions mentioned below. That is to say, if the
account was standard, it will retain its standard categorisation. Besides, during
the specified period (12 months), the asset classification of the sub-standard/
doubtful accounts will not deteriorate upon restructuring, if satisfactory perform-
ance is demonstrated during the specified period. The conditions for this special
treatment are as follows:
* The dues to the bank are ‘fully secured’. The meaning of “fully secured”
for this purpose is that the realisable value of tangible security (leaving
guarantees, etc) fully covers the outstanding amount of the bank. How-
ever, for this purpose, the bank guarantees, State Government Guarantees
and Central Government Guarantees will be treated at par with tangible
security. The condition of being fully secured by tangible security will
not be applicable in the following cases:
a) SSI borrowers, where the outstanding is up to Rs. 25 lakhs.
b) Infrastructure projects, provided the cash flows generated from
these projects are adequate for repayment of the advance, the fi-
nancing bank(s) have in place an appropriate mechanism to escrow
 Part I—Chap. 7—Neon-Perjornung Loans —A Slew af Measures
5 Sya. 7
claim on these
the cash flows, and also have a clear and legal first
cash flows.
to 31”
c) Dues of Micro Finance Institutions (MFIs) restructured up
March, 2011.
re ac-
© The unit becomes viable in 8 years, if it is engaged in infrastructu
tivities, and in 5 years in the case of other units, Prior to the review , the
time period was 10 years and 7 years respectively,
The repayment period of the restructured advance including the morato-
rium, if any, does not exceed 15 years in the case of infrastructure ad-
vances, and 10 years in the case of other advances, The aforesaid ceiling
of 10 years would not be applicable for restructured home loans; in these
cases, the Board of Director of the banks should prescribe the maximum
period for restructu advancred
e keping in view the safety and soundness
of the advances. Lendin g to indivi duals meant, for acquiring residential

L deny hnsen aceboy gti Mees) og he

However, pr ertrosie ye loans shoul ri sk weighted with an
additional
. | wei i
percentage pointn t s to the risk weight pre-
eight pre

debt, whichever is higher. This stipulation is the minimum and banks

may decide on a higher sacrifice by on the riskiness
of the project and promoters’ ability to bring in sacrifice amount
Further, suchhighersacrifice muyiavaridtly tetatiaed uponie
ron y CDR accounts Fi -
variably be brought upfront while extending the to
the borrowers. Previously, as per the Master Circular, the ” pac-
rifice and additional funds brought bythem was to be a minimum of 1
of banks’ sacrifice, generally to be brought upfront. “¥
* Personal guarantee isoffered bythepromoter, andthesame ismanda-
cm isaffected yee ren Sencante weswitmabied when the
atheeiey. ected ternal factors pertto the economy
aini ngand

* The restructuring under consideration is not a ‘ ing”

ats a acountcomingfor restrctring forthesecondime
demain nen reviewed guidelines, the extant asset classification benefits
all on restructuring on fulfilling certain conditions will be withdrawn for
restructurings effective from 1”April, 2015 with certain exceptions.
7.3. Restructuring under the CDR system
The CDR
creditor and scheme isa special, consensual
debtor-creditor arrangement andprinciple
the aggrovds by:
aa
 Informal Workouts: C orporate Debt Restructur
ing Syn. 7 521
majority of 75% creditors (by value) which make
s it binding on the remaining
25% to fall in line with the majority decision.
Parallels of the CDR mechanism
can be found in insolvency laws of UK (volu
ntary arrangements), and several
other bankruptcy laws. There do exist similar legal
provisions under the Compa-
nies Act also—sections 391/393 provide for arrangem
ents between the company
and its creditors, which, if agreed to by a certain major
ity of creditors, will be
binding on all. However, the scheme under section 391/
393 requires judicial in-
tervention, besides meetings of members and creditors,
and is generally viewed
as being cumbersome. On the other hand, the CDR mech
anism is almost as sim-
ple as signing up a loan agreement.
The CDR mechanism in India is modelled on the
lines of similar informal
workout mechanisms prevalent in several other count
ries—Thailand, Malaysia,
Korea, Hong Kong, China, etc.
While the CDR scheme is voluntary, the Scheme expects lenders to make a
considered decision about whether to opt for restructuring, enfor
cement of secu-
rity interest, or enforcement of a debt. The CDR Mechanism covers only
multiple
banking accounts, syndication/consortium accounts, where all banks and institu
-
tions together have an outstanding aggregate exposure of Rs.100 millio
n and
above. It covers all categories of assets in the books of member-creditor classi-
s
fied in terms of RBI's prudential asset classification standards. The cases
of re-
structuring of standard and sub-standard class of assets are covered in Category-I,
while cases of doubtful assets are covered under Category-II. The Scheme spe-
cifically expects making of this decision in cases where the aggregate exposure
of the financial system in a case is Rs. 100 crores or above.

7.4. Institutional framework for CDR

While the CDR scheme is a voluntary agreement between the bank and the bor-
rower, the RBI has formulated a complete institutional framework for the CDR.
The institutional set up is a 3-Tier structure with the following bodies:
= CDR Standing Forum
= CDR Empowered Group
m CDR Cell

Laks CDR Standing Forum

The CDR Standing Forum is the representative general body of all financial in-
stitutions and banks participating in CDR system. The Forum is a self-
empowered body, which will lay down policies and guidelines, and monitor the
progress of corporate debt restructuring.
The Forum also provides an official platform for both the creditors and bor-
rowers (by consultation) to amicably and collectively evolve policies and Ritts,
lines for working out debt restructuring plans in the interest of all concerned. The
Forum consists of the heads of leading banks and financial institutions participat-
ing in the restructuring process.
 Laans—A Slew of Measures
Sya.7 Part t—Chap. 7~ Non-Performing
$22
Group, ts role
is aot a me mb er of the CD R Standing Forum and Core
The RBI
ad guidelines.
will be coafined to providing bro
um sha ll mee t at lea st onc e every six months and would
The CDR Standing For por ate debt restructuring system. The
Ko-
ito r the pro gre ss of cor
review and mon se relating to
ld als o lay dow n the pol icies and guidelines including tho unit
rum wou
ame ter s for res tru ctu rin g (fo r example, maximum period for a
the critical par promoters:
ome via ble und er a res tru ctu ring package, minimum level of
to bec
) to be fol low ed by th e CD R Em powered Group and CDR Cell for
sacrifice ete. to
ir smooth functioning and adherence
‘cbt restructuring and would ensure the
tructuring. It can also review any indi
the prescribed time schedules for debt dres Group and CDR Cell, The CDR Stand-
re
vidual decisions of the CDR Empowe
del ines for dispensing special treatment to
ing Forum may also formulate gui
e likely tobedelayed beyond the time
these cases, which arecomplicated and ar

e alives ofHDI,J the

__Theindividual casesofcorporate debtreat IDBIL,
Eemiai
. consisting
tothe
tionan expes EDleve l rned companoffinan
sentall
cial instistandi 3
ure to the conce . While the mber
who have
wil condotoftheGroup'smec,
faite the "eit Ueta propottil to

institutions/banks approve i
Grou and ensure that §
to re them in the CDR Empowered
ett
fici Br

of
Souediia,
There should
towards debt restructuring.

structuring of debts ofindividual corporates.

of res tru ctu rin g. ub mt ed to tby th eCDRCellAtforthestb
ofequest
te tR Cel l, se e bel ow. Aft er th e Emp owered Group decides
Gesrim an gi ng of
Stay vale toe Re cee na ee ae eek
 Informal Workouts: Corporate Debt Rest
ructuring Syn. 7 523
_The Empowered Group looks into each case
viability and rehabilitation potential of the of debt restructuring, examine the
Company and approve the restructur-
ing package within a specified time frame of
90 days, or at best within 180 days
of reference to the Empowered Group.

7.7. CDR Cell

The CDR Standing Forum and the CDR Empowered
Group will be assisted by
a CDR Cell in all their functions. The CDR Cell has
its own website at http://
www.cdrindia.org.
How do the proposals for restructuring move? There
is no formal method of
submission of proposals—proposals may be referred by either
borrowers or by
lenders; see later in this Chapter. The CDR Cell makes the initial
scrutiny of the
proposals received from borrowers/creditors, by calling for propo
sed rehabilita-
tion plan and other information and put up the matter before the
CDR Empow-
ered Group, within one month to decide whether rehabilitation is prima
facie fea-
sible. If found feasible, the CDR Cell will proceed to prepare detailed
rehabilita-
tion plan with the help of creditors and, if necessary, experts to be engag
ed from
outside. If not found prima facie feasible, the creditors may start action for
re-
covery of their dues.
Notably, there is no binding requirement on the part of creditors to refer a mat-
ter for restructuring first, before initiating legal proceedings.
All references for corporate debt restructuring by creditors or borrowers will be
made to the CDR Cell. It shall be the responsibility. of the lead institution/major
stakeholder to the corporate, to work out a preliminary restructuring plan in con-
sultation with other stakeholders and submit to the CDR Cell within one month.
The CDR Cell will prepare the restructuring plan in terms of the general policies
and guidelines approved by the CDR Standing Forum and place for consideration
of the Empowered Group within 30 days for decision. The Empowered Group
can approve or suggest modifications but ensure that a final decision is taken
within a total period of 90 days. However, for sufficient reasons, the period can
be extended up to a maximum of 180 days from the date of reference to the CDR
Cell.

7.8. Common Conditions for restructuring

The following are the conditions/rules applicable to any restructuring, whether
under the CDR system or outside:
¢ Banks may restructure the accounts classified under ‘standard’, ‘sub-
standard’ and ‘doubtful’ categories.
 A Slew of Measures
$24 Sya.7? Part |—Chap. 7—Non-Performing Loans—

ucturing proposal is
Restructuring cannot be retrospective. While a restr
s would continue
under consideration, the usual asset classification norm
ewed for restnuc:
to apply, that is to say, the fact that a loan is being revi
non-performing
turing will not stop it from slipping from performing to
oval ofthe
category. The asset classification status as on the date ofappr
restructured package by the competent authority would be relevant to de.
cide the asset classification status of the account after restructur
ing/rescheduling/renegotiation. In case there is undue delay in sanction-
ing a restructuring package and in the meantime the asset classification
status of the account undergoes deterioration, it woul d r of su-
be a matte
pervisory concern,
Normally, restructuring cannot take place unless alteration/changes in the
original loan agreement are made with the formal consenV/application of
the debtor. However, the process of restructuring can be initiated by the
bank bitiin deserving cases subject to customer agreeing to the terms and

No account will be taken up for restructuring by the banks unless the fi-
nancial viability is established and there is a reasonable certainty of re-
payment from the borrower, as per the terms of restructuring
The viability should be determined by the banks based on the €
viability parameters and benchmarks for each parameter determined by
them. Illustratively, the broad viability parameters may include the Re-
turn on Capital Employed, Debt Service Coverage Ratio, spread between
the internal rate of return of the project and the cost of capital, etc. The
accounts not considered viable should not be restructured and banks
should accelerate the recovery measures in respect of such accounts. Any
restructuring done without looking into cash flows of the borrower and
assessing the viability of the projects/activity financed by banks would
be treated as an attempt at ever-greening a weak credit facility and would
invite supervisory concerns/action.
While the borrowers indulging in frauds and malfeasance will continue
to remain ineligible for restructuring, banks may review the reasons for
classification of the borrowers as wilful defaulters ial y in old cases
where the manner of classification of a borrower as a defaulter
was not transparent and satisfy itself that the borrower is in a position to
rectify the wilful default. The restructuring of such cases may be done
der
CoretheCORonly,
Group Mockeana may Pie
be oattal out with ene
the approval Be
of the
BIFR cases are not eligible for restructuring without
their express
proval. CDRCore Group inthecaseofadvances restructured under CDR
Mechanism/the lead bank in the case of SME Debt » Moxthe-
syns = individual banks inother cases, may consider the
stthing thespprivd hon Date mee suring that all the formalitiesin
package. are completed before implementing the
 Informal Workouts: Corporate Debt
Restructuring Syn. 7 525
7.9. Asset classification for restructured
loans
As discussed before, the general principl
e of asset classification is that any re-
structured account, restructured to avoid
default or impending weakness, is re-
Classified upon restructuring as ‘sub-standar
d assets’. If an asset was already non-
performing at the time of restructuring, it
retains the same Classification, and
would continue to slip into further lower cate
gories (doubtful or loss asset) as per
extant asset classification norms with referenc
e to the pre-restructuring repay-
ment schedule.
Standard accounts classified as NPA and NPA
accounts retained in the same
category on restructuring by the bank should
be upgraded only when all the out-
Standing loan/facilities in the account perform
satisfactorily during the ‘specified
period’. “Specified period” means a period of
1 year from the commencement of
the first payment of interest or principal, whic
hever is later, on the credit facility
with longest period of moratorium under the term
s of restructuring package.
“Satisfactory performance,” in case of non-agricult
ural cash credit loans, would
mean account not being out of order for more than
90 days at any time during the
specified period. In addition, there should not be any
Overdues at the end of the
specified period. In case of non-agricultural term loan,
“satisfactory perform-
ance” would mean not overdue for a period of more than
90 days.
In case, however, satisfactory performance after the specif
ied period is not evi-
denced, the asset classification of the restructured account
would be governed as
per the applicable prudential norms with reference to the
pre-restructuring pay-
ment schedule
Any additional finance may be treated as a ‘standard asset’,
up to a period of
one year after the first interest/principal payment, whichever is
earlier, and falls
due under the approved restructuring package. However, in the case
of accounts
where the pre-restructuring facilities were classified as ‘sub-s
tandard’ and
‘doubtful’, interest income on the additional finance should be recogn
ised only
on cash basis. If the restructured asset does not qualify for upgradation at the
end
of the above specified one year period, the additional finance shall be placed
in
the same asset classification category as the restructured debt.

7.10. Provisioning norms for restructured accounts

Apart from provisioning generally required in case of all sub-standard ac-
counts, in case of restructured accounts, RBI requires creation of a separate pro-
vision for diminution in the fair value of restructured account. International
accounting standards (IAS 39, IFRS 7) and comparable Indian accounting stan-
dards (AS 30) require'an impairment charge in case of a restructured account.
The RBI stipulation comes close to the required impairment charge.
The erosion in the fair value of the advance should be computed as the differ-
ence between the fair value of the loan before and after restructuring. Fair value
of the loan before restructuring will be computed as the present value of cash
flows representing the interest at the existing rate charged on the advance before
 ns—A Slew of Measures
$26 Sya.7 Part | hap. ?—Non-Performing Loa

ruct urin g and the prin cipa l, dis cou nte d at a rate equal to the bank's BPLR or
rest
rower) ason thedate ofresimoluring
ne rate(whichever is applicable tothebor

er is applicable tothebor.
rateequal tothebank's BPLR orbaserate (whichev ate term premium and
opri
cower) ason the date ofrestructuring plus the appr
date ofrestructuring,
credit risk premium fortheborrower category onthe

7A. Performance of the CDR Scheme

Thefollowing datashowsthepatformases ofi CON NO:

PROGRESS REPORT
(As on 31" March, 2013)
Table 7.7: Overall Status
(Rs. crore)

Torala Cases Rejected/Closed | Cases under finalization

orn |a ar
Debt , =e
[229015

ila
a a (Rs. crore)

=e a ee
Informal Workouts: Corporate Debt Restruct
uring Syn. 7 527
Sr. No. Industry Aggregate Debt Debt in %
(Rs. crore)
2 Ship-Breaking/Ship 3 6213
Building
EE
2.71
_ oS) Petrochemicals
F
Hospitality — tN

N — ON
Refineries oo
\o~~
Nnpy
_—

Other (Jewe, Lig- 4152

uor, edible oil etc.)
1.81
17

— oo OQ _ :2 Le)P ~” ON eS)N _
£ -)
ff
Paper/Packaging
NO Electronics (oe)~—oo
|s +e _— N fo»)
fr
21
22
Storage Media
Metals (Non-ferrous
panifthe aiquisiie trae
5 2171
Metals)
0.95
23 Ceramic Tiles
4 Computer (Hard- 3 1914
EE
ware/soft) 0.84
25 Engineering
26
B. Food & Food Proc- ~~coOo

E
essing =) Wwa
E
N oo ~—NnN Wwes)

N \o Auto Components
+

33 > %. E
INwe)Nn

35 Rubber PMaT 9285 Wf11iSvaseDIOW 7} AT smMeeIs2 HC

ie
6
Forgings Ss =)° = n
37 | Hospital & Health- vse? meee IG

[Source: http://www.cdrindia.org/statistical.htm]
 Slew of Measures
$28 Sya.7 Part |—Chap. 7—Non-Performing Leaans—A
s”:
Table 7.9: Comparative Performance over the year
Cases under final- Total Cases Ap-
sation af Restruc- proved (including

7.12. Legal basis of the CDR scheme

As the CDR scheme is an informal workout mechanism, it is backed by mutual
consent of parties rather than by any law. As menti there are legal
earlier,oned
provisions to have any debtor-creditor agreement stamped with the authority of
the judiciary also, but under the CDR scheme, the informal nature is its greatest
advantage.
The legal basis of the scheme is a debtor-creditor and inter-creditor

7.13. Eligibility
for the CDR scheme
The CDR scheme being purely v , neither the lender nor the borrower
can force a case to be called under the Therefore,
the eligibility conditions
below are only from the int of ing what does not under the
CDR scheme. In other words, even ifa case falls under the CDR scheme, a bor-

The eligcond
ib itioil
ns are
it as unde
y r:
1. A borrower with a single lender isnot eligible.
2. Fund-based and non-fund based exposure should beat
Note that there are separate 5 ame for least Rs 10 crores.
separately. guidelines CDR for SMEs, discussed
Se
1S. Compiled from the data available on CDR Cells website
 Corporate Debt Restructuring in case
of SMEs Syn. 8 529
3. There are two categories of CDR
cases—
Category | pertains to accounts that are Category | and Category 2.
“standard” and “sub-standard”
while Category 2 relates to cases that are
Classified as “doubtful.” For be-
ing treated as a Category | case, it woul
d be sufficient if the account is
standard/substandard with 90% in value
of the concerned lenders.
4. For the CDR scheme being applied,
it is not necessary for the unit to be
sick, or the debt being an NPA, for a defa
ult of a certain time. However,
viable and potential NPAs get priority.
5. Cases of fraud and misfeasance are
ineligible under the CDR but the
Core group has the liberty of consideration
of the reasons for which the
case became bad. In other words, in case of
so-c
(as for the meaning of wilful defaults, see else alled “wilful defaulters”
where in this Chapter) al-
So, it may be possible to examine the reasons
for such default and pro-
vide for a restructuring package.
6. Accounts where legal action has been initiated
again
also eligible to be treated under the CDR, providedst the borrowers are
creditors constituting at least 75% in value and 60% it is agreed upon
Ous issue here could be—if the requisite majority in number. A curi-
of the lenders decide to
move the case to CDR, will it be mandatory
for the other lenders, who
might have initiated legal action, to withdraw such
legal action? Since
there is no inter-creditor agreement as among vario
us lenders to an en-
terprise, and the CDR scheme does not have a mandator
y legal jurisdic-
tion, there is no way lenders opting to stay out of the
scheme may be
forced to abate their legal proceedings, except by way of
a moral suasion.
7. BIFR cases are not eligible for restructuring under the
CDR system.
However, large value BIFR cases may be eligible for restru
cturing under
the CDR system if specifically recommended by the CDR
Core Group
on case by case basis.

7.14. |Who can apply

The Scheme provides that any of the lenders, with an exposure of at least 20%
in either working capital or term finance may apply. The concerned corporate
may also apply, with the support of a lender with a minimum stake as above.
The Scheme expects the lenders, in all cases where the exposure of the finan-
cial system is more than Rs 100 crores, to take a considered decision as to wheth-
er to refer a case to CDR, or to take action under SARFAESI, or to take file suits
under the DRT, etc.

8. CORPORATE DEBT RESTRUCTURING IN CASE

OF SMEs |
As may be noted in the CDR scheme, the CDR mechanism discussed in the
previous heading is applicable in case of exposures of Rs. 10 crores or above.
In case of SMEs, RBI Notification dated 8th Sept 2005 (See Annexure OA 0
this Chapter) makes provisions for restructuring. Also, see Part B of Annexure
 Measures
Sw) Sya.? Part |—Chap. 7—Non-Performung Loans—A Slew af

2013 (see Annexure

on Master Circular on Prudential Guidelines dated 2 July,
s covered by the ¢ DR
6B of this Chapter). While in case of larger exposure
and therefore, requires the
Scheme. the defaulted account has multiple lenders,
case of SMEs, the de-
formulation of a scheme that is binding on all lenders, in formalities
Hence, the
faulting borrower would typically have only one lender,
agreement, etc, are not
associated with formulation of a scheme, inter-creditor
applicable in case of SMEs.
g, the
While the SME CDR scheme provides for units eligible for restructurin
restructuring is based entirely on a scheme to be formulated by the bank itsel!.

9, COMPROMISES: ONE-TIME SETTLEMENT

One of the best policies in resolving problem loans is to arrive at an amicable
solution and have the loan settled by way of a one-time settlement. Insteadof
pursuing a vigorous strategy of recovering all, and waiting for it for a long time,
wisdom demands acceleration of recovery, even if it amounts to sacrificing a part
of the receivables.
From time to time, the RBI has been coming out with One-Time Settlement
(OTS) schemes. For example, in September 2005, the RBI came out with an OTS
scheme in case of SME loans upto Rs 10 crores. Earlier, there have been OTS
schemes relating to non-SME loans as well. RBI, in accordance with the recom-
mendations made by the Working Group concerned with rehabilitation of poten-
tially viable sick units'®, required of banks to put in place a Non-discretionary
sielet, Gshyeproved byGp Bound otDeaeieran Mane orkinttae.
sector, approved the Board of Directors as also conv RBIin Cir-
cular dated 4” May, 2009". eo

10. DISPOSAL OF NON-PERFORMING LOANS

Quite often, getting rid of a problem loan on an outright basis may be a better
solution. May bethepurchaser isbettersuited torecover theloan, oFmaybethe
purchaser may aggregate the loans sold by different component-holders and get
more power, etc. 2 ~

Till last few years there was virtually nomarket forIndian NPLs. However
has been noted earlier, India has quickly emerged into an attractive mart
me . ~

for
rt ed

global investors topick up NPLs, particularly those backed by properties. It

expected that the market for NPLs will get more active over is
time.
The potent buyers for
ialNPLs are:
° Asset reconstruction companies:
* Pr
vate iv
debt
de’ at
realisat
eion rm i€s, not re
regi gias
stARCser
but ed
virtua
' lly
Se
16. Guidelines for Rehabilitation of Sick
DE ere iscripts/BS_C Micro Emterp
rises, —
Display.aspx 71d=7664 (accessed on Deremoe.
17. RBV2008-09/467 (Credit delivery totheMicr
o andSmall Emerpris es Sector)
 Disposal of Non-preforming Loans
Syn. 10 531
* Banks, wanting to either consolidate their own positi
on, or buying for
arbitrage, resolution, reconstruction or winding up;
* Investors, hoping for either betterment, or disposal of
assets, or recovery
through one of the various recovery options.
In view of the motivation for banks to dispose of NPLs, the
RBI in July 2005
issued guidelines on disposal of NPLs by banks. Text of these
Guidelines has
subsequently been incorporated in the Master Circular on Prudential
Norms, dat-
ed 1“ July, 2013, with some changes. The extracts from the Maste
r Circular dat-
ed 1“ July, 2013, are given in Annexure 7 to this Chapter.
Note that there are separate guidelines for sale of NPLs to asset reconst
ruction
companies—these are dealt with in Part III of the Book.
Salient features of the Guidelines of the RBI for disposal of NPLs are
dis-
cussed below. Several of the stipulations are either superfluous or they do
not
make sense—see in author’s comments at appropriate places.

10.1. Can NPLs be sold outside the financial system

The guidelines are applicable to sale of non-performing assets within the “fi-
nancial system” meaning—banks, notified financial institutions and NBFCs. A
key question that arises is—whether banks can sell their non-performing loans to
entities other than the “financial system”. In the author’s opinion, there is no re-
straint on the sale of a loan to any buyer outside the banking system; of course,
such buyer cannot avail of the preferential rights available to regulated financial
intermediaries under the RDB law or SARFAESI law. Note, however, that Para 7
of the Master Circular says: “Since the sale/purchase of non-performing financial
assets under this option would be conducted within the financial system, the
whole process of resolving the non-performing assets and matters related thereto
has to be initiated with due diligence and care, warranting the existence of a set
of clear guidelines, which shall be complied with by all entities so that the proc-
ess of resolving non-performing assets by sale and purchase of NPAs _pro-
ceeds on smooth and sound lines.” As per the author, the interpretation of this
clause is that if a sale is done to an entity within the financial system, the seller
and buyer are bound by it. If a sale of NPLs is done to an entity not covered by
the financial system, the seller is regulated as per these guidelines; the buyer is
not. In other words, in absence of a legal restraint, a mere reference in the guide-
lines to sale of NPLs done within the financial cannot be interpreted as a prohibi-
tion on sale outside the system. [There is a more generic issue—whether NPLs
can be sold at all, in view of legal controversy on very transferability of loans—
see the heading below].

10.2. Requisites for the selling bank

* The loan should be sold on a non-recourse basis, for a non-contingent
consideration.
* The sale price should not generally be less than the NPV of the recover-
ies from the loans. In practice, this stipulation is completely meaningless
as in case of distressed loans, no one has any clue on what the cash flows
 of Measures
532 sya. Part 1—Chap. 7—Non-Perornung Louns—A Slew

unting rate to be used

on account of recovery will be. Besides, the disco
high, as the rule of
in case of non-performing assets can be arbiarily
used when cash-
discounting is that higher discounting rates are to be
flows are uncertain.
before
The most intriguing clause is clause (ix) of Para 7, which says that
non-
sale. the NPL must have been on the books of the selling bank, as
performing asset, for at least 2 years. First of all, the rationale of laying
down this requirement is understandable, Why should there be a lock-in
period for a non-performing asset atall, and more so, why a long wait of
2 years? Secondly, for several short-term assets, the security value con-
tinues to deteriorate fast—so that if the bank holds what it Cannot recover
for 2 years (plus 90 days to allow it to become non-performing), the very
motivation of the buyer to buy it would be lost, There is a similar restric-
tion in case of sale of assets on a portfolio basis (clause xii), This is ap-
parently a very illogical restriction, and the fact that is has remained in
the guidelines for 4years, makes it all the more painful.
Assets may be sold either on asset-by-asset, that is, discrete basis, or
portfolio basis. The portfo view islio
applicable in case of homogenous
retail assets. The meaning of “homogenous” is al] assets with similar as-
set and purpose. For example, all car loans may be taken as homogenous.

manner of computation of the transfer of price. If the transfer price has

been computed by valuing each asset individually, it is a case of pur-
chase of assets on discrete basis. If the purchase consideration has been
computed en-bloc, without computing the price of each individual asset,
it partakes the character of a portfolio transaction.

10.3.

|
least 5% in each half year thereafter ’ subject to full recovery
: ithi Sane
within
years. In other words, sthe
predicted frombuying
the bank ™ should
pot have done an analysis of
the
ingtofullrecovery within 3 years,andphased recovery withatleast5%
Goeni onlyof
e Joan, butFirst all, the period of 3 years cannot be referredto

|)
te the amount thathasfallen overdue. Forexample
Sara pyne ngm
ep ber
AGh taore orming assets andisbeing sold.
:
ecret entire loan in 3 years, if the origi-
wa
10s
years. Besides, the very basis of laying down a
 Disposal of Non-preforming Loans Syn. 10 $33

O No doubt, every buyer of NPLs must forecast the expected re-

coveries, because it is on the basis of the expected recoveries that
the standard/s classification
ub-st of the asset will be
andar dde-
termined—see below.
© The buyer should nt be ing fox resale—the buyer should hold the
NPL for at least 15 months. Thi ae ee, agen, 25 these Xs
no; reason :why the tae
buyer Nohcheed
cannot be buying the N
ciency, which may ap
$0 no reason why the buyer cannot securitise the NPLs j
banks should not sell such assets back to the bank, which sold the

e fareadteat Denes Marat ree

financial asset purchased, may be classified as ‘standard’ in books of
ae ts eee ofpacker.
Thereafter, the asset iiication status of the financial
asset purchased,
shall be determined by the record of recovery in the books of the pur-

§ '= ¥ ; . Clearly. expected cashflows for NPLs cannot be projected

on a month-by-month basis. At the most, at the time of purchase. cash-
flows may have been projected on basis, though semi-annual
would have been more late. . the first point is the choiceof
the reference J sigmuficam point is in case of NPLs.

* Recognition of income: All recoveries must first be taken towards the

principal—that is, recognition of income will be deferred
until the total
collections exceed the price paid for the asset.

104. Portfolio
view or discrete view
The purchase of an NPL portfolio may have to very carefully consider whether
to buy assets on an individual basis or portfolio basis. We have discussed above
the indications in the transactions that help to decide whether the parties viewed
the transaction as purchase of individual assets or a portfolio.
From the purchaser's viewpoint. there are two very significant points:
© First, the treatment of the asset (the asset. in case of a portfolio, is the
entire portfolio) as standard or sub-standard will depend on the perform-
ance of the portfolio relative to the expected cashflows. In case of pur-
chase of several assets. some of them may remain standard. and some
may not have expected recoveries and hence may become sub-standard.
In case of a portfolio view. the total of the expected versus actual cash-
 Slew af Measures
534 Sya. il Part 1—Chap. 7—Non-Performing Loans—A

e portiolio to become sub

flows for the portfolio may cause the entir
egation, the excess of collec:
standard. On the other hand, because of aggr
e underperforming from
tions on better performing assets may save thos
being sub-standard.
hased NPLs may be
® Second, the guidelines provide that income on purc
purchase price for
booked only after the total recoveries exceed the total
eries start ex:
the asset. In case of discrete asset purchases, once the recov
booked. How-
ceeding the purchase price ofthe asset, income may be e pool
ever, in case of the portfolio view, the recoveries from the entir
inco me may
have to exceed the price paid for the entire pool before any
be taken to books,

ll. LEGAL CONTROVERSY ON TRANSFERABILITY

OF LOANS
Gujarat High Court inKotak Mahindra Bank v, Official
Bench ofon
The Divisi
Lad." (O.).Appeal No. 156 of 2007) gave a rul-
Liquidator, APS Star Industries
ing that seemed to challenge the very basis of transactions in non-performing
loans, or, for that matter, any transactions in loans as such, Globally, transfer of
loans by banks in different forms, be it as a part of securitisation transactions or
otherwise as whole loans, add up to nearly USD 3-4 trillions every year. How-
ever, the High Court ruling seemed to suggest that banks in India selling any of
their loans are violating the provisions of the Banking Regulation Act, 1949 (BR
Act). The main plank of the ruling seems to be that sale of loans is not a banking
activity, and hence, not authorised under the BR Act.
The ruling was appealed against, as Special Leave Petition (Civil) No(s). 2240/
2009 filed before the Supreme Court of India'’. The Indian Banks Association
also joined as an intervening
party. In the decisive ruling, ICICI Lid. v. Official
liquidator
of APS Star Industries Ltd. & Others” the Hon'ble Supreme Court
made important observations which may be briefly stated as follows:
(a) Under 6(1) of the BR Act, a banking company, in addition to the busi-
ness of banking, may do all such other things as are incidental or condu-
cive to the promotion or advancement of the business of the company.
(6) Sections 8 and 9 of the BR Act are non-obstante clauses that restrict
banking company in dealing inthe buying orselling of goods except in

(c) The BR Act provides ample liberty to the banking companies i to under-
take new businesses subject to the control of RBI, and subject tothe re-
Strictions and provisions contained in Sections & and 9:

128. (2009) 3 Comp LJ 459 (Guj)

19. (2010)
pa ) 153 _
153 Comp Cas 107 (Guj).
mn. 2011 SC 1571.
Legal Controversy on Transferability of Loans
Syn. 11 535
“...apart from the principal business of accepting deposits and
lending the said 1949 Act leaves ample scope for the banking
companies to venture into new businesses subject to such busi-
nesses being subject to the control of the Regulator, viz. RBI. In
other words, the 1949 Act allows banking companies to under-
take activities and businesses as long as they do not attract pro-
hibitions and restrictions like those contained in Sections 8 and

(d) In exercise of the powers conferred by Sections 21 and 35A of the said
Act, RBI can issue directions having statutory force of law. RBI has been
vested with various powers under the BR Acct.
“The test to be applied is — whether trading in NPAs has the
characteristics of a bona fide banking business. That test is satis-
fied in this case. The guidelines issued by RBI dated 13.7.2005
itself authorizes banks to deal inter se in NPAs. These guidelines
have been issued by the Regulator in exercise of the powers con-
ferred by Sections 21 and 35A of the Act. They have a statutory
force of law. They have allowed banks to engage in trading in
NPAs with the purpose of cleaning the balance sheets so that
they could raise the capital adequacy ratio.”
“... The “banking policy” is enunciated by RBI. Such policy
cannot be said to be ultra vires the Act. The idea behind empow-
ering RBI to determine the Policy in relation to Advances is to
enable banking companies to expand their business of banking
and in that sense such guidelines also define — as to what consti-
tutes banking business.”
(e) NPAs have an adverse impact on the financial strength of the banks. RBI
guidelines are meant to improve the asset-quality in banks and constitute
a “restructuring measure” and not “an elimination measure”. “Restructur-
ing” cannot be treated at par with “trading”, therefore “trading in NPAs”
is actually a misnomer. So, transfer of debts/NPAs inter se between
banks is permissible under the BR Acct.
“Continuous growth in NPAs threatens the repayment capacity
of the banks. They have an adverse impact on the financial
strength of the banks which in the present era of globalization
are required to conform to International Standards. Thus, NPA
means an asset or account receivable of a borrower, which has
been classified by banks orfinancial institutions in terms of RBI
Guidelines as sub-standard, doubtful etc. These guidelines are is-
sued to improve quality of assets of the banks. The 2005 guide-
lines of RBI are not to eliminate NPAs but to restructure. The
BR Act, 1949 vide Section 21 empowers RBI in the interest of
the Banking Policy to lay down guidelines in relation to ad-
vances to be followed by banking companies. The 2005 guide-
lines have been issued as “a restructuring measure” in order to
avoid setbacks in the banking system. NPAs do not generate 1n-
terest. 85% of the Indian Banks’ income comes from interest.
Thus, NPAs adversely impact profits of the banks and hence, as
a matter of Banking Policy, RBI as Regulator seeks through its
guidelines under Section 21 r/w Section 35A to manage these
 Measures
536 Sya. 12 Part L—Chap. 7—Non-Performing Loans—A Slew of
deal with re
NPAs and not to eliminate, The said guidelines ts be-
structuring ofthe banking sysiem which is one of the abyec
king polic y”. One
hind giving authority to RBI to frame “ban we
more aspect needs to be kept in mind. In this batch of cases“Ac:
are dealing with assets in the hands of banks. NPAs are
count Receivables”. The impugned guidelines show that RBI
considers inter se NPA assi between banks to be a tool
for resolving the issue of NPAs and in the interest ofbanking
policy under Section 21 of the BR Act, 1949. The object is to
minimize the problem of credit risk, The o debi restruc-

ructuring as a@ matter of banking policy cannot be treated as

“tradin . One has to keep in mind the Sbiect behind enactment
of BR Act, 1949, Thus, the said Guidelines fall under Section 21
of the 1949 Act. These Guidelines are a part of Credit Appraisal
Mechanism. Thus, in our view the i Guidelines are not
ultra vires the BR Act, 1949. Dealing in NPAs as part of the
Credit Appraisal Mechanism and as a part of Restructuring
Mechanism falls within Section 2] r/w Section 35A of the Act.
Hence, it cannot be said that “transfer of debts/NPAs” inter se
between banks is an activity which is impermissible under the
1949 Act.” [emphasis ours]

12. CHOOSING
THE REMEDY
Banks are now, like never before in the placed
with multiple options i
recovering their debts. ite fepresales ry ptewn yeoa meaty
though some of them may be pursued sequentially. Some options are effective
ca uneViewpou ofCheleader, Gatmay, iaSang tun, emeem to0 Bage social

12.1. Debt recovery options: Social viewpoint

Some thoughts on the relative merits of the different options are as under:

rte of
lenders isalmost a sure prescription bankruptcy. ' Hence, . if
. i
being evaluated fora possible workout orrevitalisation, itisappropriate
enforcement ofsecurity interests should be kept onhold.
However, debtors should not use restructuring asanalibi toblock the
actions of the the deci
amy berevived orext “ eee ein a camgany
 Choosing the Remedy
Syn. 12 537
* If a unit cannot be reorganised, the most equitable way
to ensure fair dis-
tribution of the assets of the entity is winding up. A unit
that cannot keep
alive should be brought to death. In winding up, the rights
of the secured
lenders are supreme—therefore, whether the lenders enforce
security in-
terests directly or through bankruptcy courts, the outcome
should most
likely be the same. Therefore, there should be no hesitation in
allowing
non-judicial enforcement of security interests for secured lenders.
* From a social viewpoint, one of least desirable agencies is
a specialised
quasi-judicial body such as the Debt Recovery Tribunal, particularly
af-
ter proper security interest enforcement laws have been put in place.
The
DRT does not, and cannot, have any concern for the interest
of other
lenders. If banks have a security interest, the same may be
enforced, ei-
ther directly, or in a winding up process. If or to the extent banks
do not
have security interest, there is no difference between the claims of banks
and those of other lenders—therefore, giving any special status to banks
undermines the interest of the other stakeholders. In fact, if the DRT
passes a decree for disposal of some or other assets of the entity, not only
does the same reduce the assets available to other creditors in winding
up, but also hastens the process of the entity going bankrupt. The way the
DRTs are constituted, they do not have the required experience or train-
ing to look at the social aspects of winding up. In fact, any agency that
looks after the interest of a class of lenders is by itself discriminatory, as
winding up proceedings are premised on the most significant principles
of equity and equality before law.
° In fact, if the quasi-judicial administration of winding up by the NCLT
becomes operational, DRTs may be completely superficial. DRTs cannot
do what the NCLT can do—put a company to an equitable winding up.

12.2. Debt recovery options: Bankers’ viewpoint

Choice of the various recovery options from the viewpoint of bankers will most
likely be based on: (a) time taken in recovery; (b) extent of recovery.
Some thoughts from the viewpoint of lenders are:
* To the extent banks have a singular security interest on a tangible asset
that can readily be sold, enforcement of security interest under the SAR-
FAESI Act should be seen as the best remedy. The remedy is fast, and
has the least extent of judicial intervention. Since the borrower faces the
impending threat of losing the possession of his property, he may be
ready to do the best he can to settle the dues with the bank.
O If the security interest is not singular but pari passu, unless
banks may amicably join in action, disposal of the loan to an ag-
gregating body such as the ARCs may be a good option.
* Working capital lenders typically may not have sufficient tangible, read-
ily sellable assets. Hence, they may have to proceed through DRTs, or
 af Measures
Sya. 12 Part L—Chap. 7—Non-Performing Loans—A Slew

winding up courts, obviously,

winding up courts. Between DRTs and
er.
from banks’ viewpoint, the DRTs are bett
o losses, While proceedings
Quite often, the company may be deeply int
aoteavtargrmnous soins
are continued in DRTs, losses tend to increase,
ness. anks may be
imminent bankruptcy loses interest to runthe busi
as to whether to
neurship. Hence, a strategic decision needs to be made the unit is
if
have the unit restructured, or put iton the block, Therefore,
viable, it may be a much better strategy, though not appealing
in the dhort run, to take the unit through restructuring process.

12.3. Choice of remedies: A legal comparison

The following is a comparative view of the various remedies from a legal
viewpoint:
Table 7.10

Winding up

Revival of a sick | eer | of

 ANNEXURE 1

CHAPTER III-A OF THE RESERVE

BANK OF INDIA ACT, 1934
CHAPTER Il-A-COLLECTION AND FURNISHING OF CREDIT IN-
FORMATION
45A. In this Chapter, unless the context otherwise requires —
(a) “‘Danking company” means a banking company as defined in section 5
of the Banking Regulation Act. 1949, and includes the Site Bank of In-
Gia. any subsidiary bank as defined in the State Bank of India (Subsidiary
Banks) Act. 1959. any cosresponding new bank constituted by section 3
of the Banking Companies (Acquisition and Transia of Undertakings)
Act, 1970, and any other financial institution notified by the Central
Government in thas behalf:
(b) “borrower” means any person © whoni any credst Iseut has been sanc-
tioned by any banking company. whether availed of or not. and includes—
(3) im the case of 2 company or corporation. is subsidiaries: 3
(3) 1m the case of 2 Hinds Undivided Family. asy member thereof or
any frm in wich such member is 2 partners.
(3) im the case of 2 frm. any pasiner thereof of any other firm in
which such pastner is 2 pariner: and
(iv) in the case of an individual. any firm in witch such individual ts
2 pasiner-
(c) “creda infommation™ means any information relating ©
(i) the amounts and the nature of loans or advances and other credit
facilities granted by 2 banking company to any borrower or class
of borrowezs-
(ii) the nature of security taken from any borrower or class of bor-
rowers for credit facilities granted to him or to such class:
(iii) the guarantee furnished by 2 banking company for any of its cus-
tomers or any class of its customers:
iv) the means, antecedents, history of financial transactions and the
credit worthiness of any borrower or class of borrowers:
(¥) any other information which the Bank may consider to be rele-
vant for the more orderly regulation of credat or credit policy.

539
 ures
S40 Annex.1 Part |—Chap. 7—Non-Performing Loans-A Slew of Meas

45B. The Bank may~

information
(a). collect, in such manner as it may think fit, credit
from banking companies, and
(b). furnish such informatto ionany banking company in accordance
with the provisionsof section 45D.
485C. (1) For the purpose of enabling the Bank to discharge its functions
under this Chapter, it may at any time direct any banking com-
pany to submit to it such statements relating to such credit in-
formation and in such form and within such time as may be
the Bank from tim
by ied
specif e
to time.
(2) A banking company shall, notwithstanding anything to the con-
trary contained in any law for the time being in force or in any
instrument regulating the constitution thereof or im any agree-
ment executed by it, relating to the secrecy of its dealings with
its constituents, be bound to comply with any direction issued
under sub-section
(1).
45D. — (1) A banking company may, in connection with any financial ar-
rangement entered irito or proposed to be entered into by it, with
any person, make an application to the Bank in such form as the
Banik may specify requesting it to furnish the applicant with such
credit information as may be specified in the application.
(2) On receipt of an application under sub-section (J), the Bank
shall, as soon as may be, furnish the applicant with such credit
information relating to the matters specified in the application, as
may be in its possession:
Provided that the information so furnished shall not disclose the
formation
to the Bank.
OO ecndan u inGuEOR shcutapeionien toryseth foes,ant
‘it inf twenty
exceeding ion furnishi
fit for furnishing
rupees, as it may deem

(1) Any credit information contained in any statement submitted by

a banking company under section 45C or furnished by the Bank
under section 45D, shall be treated as
pate heer ~d oa any
not, except for the ,
ter. be published or otherwise disclosed. —_— UC

thepublic
(b)the tion byt the
publicainteres Bank, ifitconsiders necessary
50todo,ofanyinformation ed
collect
by it under section 45C, in such consolidated form as it
 Chap. I-A of the Reserve Bank of India Act, 1934 Annex. 1 541
may think fi without disclosing the name of any bank-
ing comor panits borrowers
y ;
(cy. the disclosure of publication by the banking company or
by the Bank of any credit information to any other bank-
ing company ox in accordance with the practice and us-
age customary among bankers o1 2s permitied or te-
quired undes any other law:
Provided that any credit information received by a
banking company under this clause shall not be pub-
lished except in accordance with the practice and usage
customary among bankers or as permitied or required
und other law_
any es
(8) the disclosures of any credit information under the
Credit Information Companies (Regulation) Act, 2005]
(3) Notwithstanding ing comtained in any law for the time be-
ing in force, no court, tribunal or other authority shall compel the

45¥. No pexson shali have any right, whether in contract or otherwise, to any
compensation for any loss incurred by reason of the operation of any of the pro-
visi of this
onsChapter.
45G. [Penalties.] Rep. By the Reser
Bank ve
of India (Amendment) Act, 1974
(51 of 1974),s. 15.

Mies. by Act 30 of 2005. =. 34 and Sch. (wei 14-12-2006)

 ANNEXURE 2

MASTER CIRCULAR ON WILFUL

DEFAULTERS
RBI/2013-14/63
DBOD No. CID.BC, 3 /20.16.003/2013-14
July 1, 2013
(i) All scheduled commercial banks (excluding RRBs and LABs) and
(ii) All India Notified Financial Institutions
Dear Sir,
Master Circular on Wilful Defaulters
As you are aware. the Reserve Bank of India has, from time to time, issued a
number of circulars to banks and financial institutions (FIs) containing instruc-
tions on matters relating to wilful defaulters. In order to enable the banks/FIs to
have all the existing instructions on the subject at one place, this Master Circular
has been prepared. The Master Circular incorporates all the instruc-
tions/guidelines issued on cases of wilful default, which are operational as on
date. The Master Circular has also been placed on the RBI web-site
(http://www.rbi.org.in).
Yours faithfully,
(Rajesh Verma)
Chief General Manager

Master Circular on ‘“Wilful Defaulters’

Purpose:-To put in place a system to disseminate credit information pertain g
to willful defaulters for cautioning banks and financial institut so asions
to ensure
that further bank finance is not made available to them.
Application:-To all scheduled commercial ;
and All India Notified Financial Institutions. Sells te ie eee

$42
 Master Circular on Wilful Defaulters
Annex. 2 543
Structure:

i) Guidelines issued on wilful defaulters on May

Pe]
|
30, 2002

2.1 |Definition of Wilful Default

2.2 |Diversion and siphoning of funds

N oS)

End-use of Funds

. Penal measures

NIN]
oe
(LS
el
(= Guarantees furnished by group companies

-7 |Role of Auditors

2.8 |Role of Internal Audit / Inspection

2.9 {Reporting to RBI / Credit Information Companies

3:

Q rievances Redressal Mechanism

cae Q riminal Action against Wilful Defaulters

J P C recommendations

4.2 |Monitoring of End Use

4.3 Criminal Action by Banks / FIs

5 |Reporting names of Directors

5.1 {Need for Ensuring Accuracy

5.2 |Position regarding Independent & Nominee Directors

5.3. |Government Undertakings

5.4__|Inclusion of Director Identification Number (DIN)

Annex | - Reporting Format

Annex 2 - List of Circulars consolidated :

1. Introduction
Pursuant to the instructions of the Central Vigilance Commission for collection
of information on wilful defaults of Rs.25 lakhs and above by RBI and dissemi-
nation to the reporting banks and FIs, a scheme was framed by RBI with effect
from Ist April 1999 under which the banks and notified All India Financial Insti-
tutions were required to submit to RBI the details of the wilful defaulters. Wilful
default broadly covered the following:
44 Apnex.2 Part Chap. 7 Non-Performing Loans—A Stew of Measures

adequate cash flow and good

(a) Deliberate non-payment of the dues despite
networth,
ulting unit,
(b) Siphoning off of funds to the detriment of the deta
sold and proceeds
(c)) Assets financed either not been purchased or been
have been misutilised;
(d) Misrepresentation / falsification ofrecords;
(e) Disposal / removal of securities without bank's knowledge;
(f) Fraudulent transactions by the borrower,
Accordingly, banks and Fls started reporting all cases of wilful defaults, which
occurred or were detected after 31st March 1999 on a quarterly basis, It covered
all non-performing borrowal accounts with outstan dings (funded facilities and
such non-funded facilities which are converted into funded facilities) aggregating
Rs.25 lakhs and above identified as wilful default by a Committee of higher func-
tionaries headed by the Executive Director and consisting of two GMs/DGMs.
Banks/Fls were advithat sed they should examine al! cases of wilful defaults of
Rs 1.00 crore and above for filing of suits and also consider criminal action
wherever instances of cheating/fraud by the defaulting borrowers were detected.
In case of consortiu m/m
lending , ult ipl
banks and Fis e
were advise d re-
that they
port wilful defaults to other participatin g/f
banks also. Cases of ng
ina nci wilful
s d re
defaults at overseas branche were require be reported if such disclosu is per-
mitted under the laws of the host country.
2. Guidelines issued on wilful defaulters
Further, considering the concerns sed over the ce of wilful
de-
fault in the financial S temainthe8thReportOFAe Paceaaa SieabingCom-
mittee on Finance on Financial Institutions, the Reserve Bank of India, in consul-
tation with the Government of India, constituted in May 2001 a Working Group
on Wilful Defaulters (WGWD) under the Chairmanship of Shri S. S. Kohli, the
then Chairman of the Indian Banks’ Association, for examining some of the rec-
ommendations of the Committee. The submitted
its report in November

The above scheme was in addition to the Scheme of Disclosure of Informa-

ace 3 Borrowers of banks and FIs introduced in April 1994, vide
ircular DBOD.No.BC/CIS/47/20.16.002/94 dated 23
April 1994.
2.1 Definition of wilful default
The term ” tonal » has been redefin
Stor ed in
; supersession of the earlier defi-

all, A “wilful default

‘ ” would be deemed to have occurred if
; any of the following
 Master Circular on Wilful Defaulters
Annex, 2 545
(a) The unit has defaulted in meeting
its payment / repayment obligations to
the lender even when it has the Capacity
to honour the said obligations.
(b) The unit has defaulted in meeting
its payment / repayment obligations to
the lender and has not utilised the finance
from the lender for the specific
purposes for which finance was availed
of but has diverted the funds for
other purposes.
(c) The unit has defaulted in meeting its paym
ent / repayment obligations to
the lender and has siphoned off the funds
so that the funds have not been
utilised for the specific purpose for whic
h finance was avai led of, nor are
the funds available with the unit in the form
of other assets.
(d) The unit has defaulted in meeting its paym
ent / repayment obligations to
the lender and has also disposed off or-remov
ed the movable fixed assets
or immovable property given by him or it for
the purpose of securing a
term loan without the knowledge of the bank/len
der.
2.2 Diversion and siphoning of funds
The terms “diversion of funds” and “siphoning of
funds” should construe to
mean the following:-
2.2.1 Diversion of funds, referred to at para 2.1(b)
above, would be construed
to include any one of the undernoted occurrences:
(a) utilisation of short-term working capital funds for long-
term purposes not
in conformity with the terms of sanction;
(b )deploying borrowed funds for purposes / activities or creati
on of assets
other than those for which the loan was sanctioned;
(c) transferring funds to the subsidiaries / Group companies or other
corpo-
rates by whatever modalities;
(d) routing of funds through any bank other than the lender bank or members
of consortium without prior permission of the lender:
(€) investment in other companies by way of acquiring equities / debt in-
struments without approval of lenders;
(f) shortfall in deployment of funds vis-a-vis the amounts disbursed / drawn
and the difference not being accounted for.
2.2.2 Siphoning of funds, referred to at para 2.1(c) above, should be construed
to occur if any funds borrowed from banks / FIs_are utilised for purposes un-
related to the operations of the borrower, to the detriment of the financial health
of the entity or of the lender. The decision as to whether a particular instance
amounts to siphoning of funds would have to be a judgement of the lenders based
on objective facts and circumstances of the case.
The identification of the wilful default should be made keeping in view the
track record of the borrowers and should not be decided on the basis of cee
transactions/incidents. The default to be categorised as wilful must be intentional,
deliberate and calculated.
S40 Annmex.2 Part i—Chap. 7—Non-Performing Loans—A Slew of Measures

2.3 Cut-off limits

While the penal measures indicated at para 2.5 below would normally be at
tracted by all the borrowers identified as wilful defaulters or the promoters in-
volved in diversion / siphoning of funds, keeping in view the present limit of Rs.
25 lakh fixed by the Central Vigilance Commission for reporting of cases of wil-
ful default by the banks/Fls to RBI, any wilful defaulter with an outstanding bal-
anc ofeRs. 25 lakh or more, would attract the penal measures stipulated at para
2.5 below. This limit of Rs. 25 lakh may also be applied for the purpose of taking
cognisance of the instances of ‘siphoning’ / ‘diversion’ of funds.
2.4 End-use of Funds
In cases of project financing, the banks / FIs seek to ensure end use of funds
by, inter alia, obtaining certification from the Chartered Accountants for the pur-
pose. In case of short-term corporate / clean loans, such an approach ought to be
supplemented by ‘due diligence’ on the part of lenders themselves, and to the ex-
tent possible, such loans should be limited to only those borrowers whose integ-
rity and reliability are above board. The banks and Fils, therefore, should not de-
pend entirely on the certificates issued by the Chartered Accountants but
strengthen their internal controls and the credit risk management system to en-
hance the quality of their loan portfolio.
Needless to say, ensuring end-use of funds by the banks and the Fls should
form a part of their loan policy document for which appropriate measures should
be put in place. The following are some of the illustrative measures that could
be taken by the lenders for monitoring and ensuring end-use of funds:
(a) Meaningful
: ] Boras
j laa s
reports /
/
operating statements j

(b) Regular inspection of borrowers’ assets charged to the lenders as secu-

’

>c comets taintamned Wiecea eke

; etOfaccounts endthea-ties
; ac-
(d) Periodical visits to the assisted unit
s:
(e) System ofperiodical stock audit, incase ofworking capi
tal finance:
(f) ia odical comprehensive management audit ofthe‘Credit’
lenders, so as to identify the systemic-weaknesses function of
in the credit-

In order to prevent the access

to the capi
copy of the list of wilful Capital markets by the wilful defaulters,a
faulters (suitfiled defaulters (non-suit filed accounts) and list ofwilful =
 Master Circular on Wilful Defaulters
Annex. 2 547
The following measures should be init
iated by the banks and FIs against the
wilful defaulters identified as per the defi
nition indicated at paragraph 2.1 above:
(a) No additional facilities should be gran
ted by any bank / FI to the listed
wilful defaulters. In addition, the entrepre
neurs / promoters of compa-
nies where banks / FIs have identified siph
oning / diversion of funds,
misrepresentation, falsification of accounts
and fraudulent transactions
Should be debarred from institutional fina
nce from the scheduled com-
mercial bank s, Development Financial Institutions, Government owned
NBFCs, investment institutions etc. for floating
new ventures for a pe-
riod of 5 years from the date the name of the wilf
ul defaulter is published
in the list of wilful defaulters by the RBI.
(b) The legal process, wherever warranted, again
st the borrowers / guaran-
tors and foreclosure of recovery of dues should
be initiated expedi-
tiously. The lenders may initiate criminal proceedings
against wilful de-
faulters, wherever necessary.
(c) Wherever possible, the banks and FIs should adopt a
proactive approach
for a change of management of the wilfully defaulting borrower
unit.
(d) A covenant in the loan agreements, with the companies in which the
banks / notified FIs have significant stake, should be incorporated
by the
banks / FIs to the effect that the borrowing company should not induct
a
person who is a promoter or director on the Board of a company
which
has been identified as a wilful defaulter as per the definition at paragraph
2.1 above and that in case, such a person is found to be on the Board
of
the borrower company, it would take expeditious and effective steps for
removal of the person from its Board.
It would be imperative on the part of the banks and FIs to put in place a trans-
parent mechanism for the entire process so that the penal provisions are not mis-
used and the scope of such discretionary powers are kept to the barest minimum.
It should also be ensured that a solitary or isolated instance is not made the basis
for imposing the penal action.
2.6 Guarantees furnished by group companies
While dealing with wilful default of a single borrowing company in a Group,
the banks / FIs should consider the track record of the individual company, with
reference to its repayment performance to its lenders. However, in cases where a
letter of comfort and / or the guarantees furnished by the companies within the
Group on behalf of the wilfully defaulting units are not honoured when invoked
by the banks / FIs, such Group companies should also be reckoned as wilful de-
faulters.

2.7 Role of auditors

In case any falsification of accounts on the part of the borrowers is observed by
the banks / FIs, and if it is observed that the auditors were negligent or deficient
in conducting the audit, they should lodge a formal complaint against the auditors
 S49 Ampex. 2 29 Part }—Chap. 7—Neon-Performing Laans—A Slew af Measures

to
of the borrowers with the Lasutute of Chartered Acoountatits of India (ICAI)
enable the ICAI to examine and fix accountability of the auditors.
With a view to monitoring the end-use of funds, if the lenders desire a specific
certification from the borrowers’ auditors regarding diversion / siphoning of
funds by the borrower, the lender should award a separate mandate to the audi-
tors for the purpose. To facilitate such certification by the auditors the banks and
Fs will also need to ensure that appropriate covenants in the loan agreements are
incorporated to enable award of such a mandate by the lenders to the borrowers /

2.8 Role of Internal Audit / Lnspection

The aspect of diversion of funds by the borrowers should be adequately looked
into while conducting internal audit/inspection of their offices/branches and peri-
odical reviews on cases of wilful defaults should be submitted to the Audit
Committee of the bank.
2.9 Reporting to RBI / Credit Information Companies
Banks/Fls should submit the list of suit-filed accounts of wilful defaulters of
Rs.25 lakh and above as at end-March, June, September and December every
year to a credit information company which has obtained certificate of registra-
tion from RBI in terms of Section 5 of the Credit Information Companies (Regu-
lation) Act, 2005 and of which it is a member. Reserve Bank of India has, in ex-
ercise of the powers conferred by the Act and the Rules and Regulations framed
thereunder, granted Certificate of Registration to (i) Experian Credit Information
Company of India Private Limited, (ii) Equifax Credit Information Services Pri-
vate Limited, (iii) High Mark Credit Information Services Private Limited and
(iv) Credit Information Bureau (India) Limited (CIBIL) to commence/carry on
the business ofcredit information. Banks/FIs should, however, submit the
quar-
terly list ofwilful defaulters where suits have not been filed only to RBI
in the
format given in Annex 1. Credit Inf ion Compan have alsoies
been advised
to disseminate the information pertaining to suit filed accounts of Wilful
faulters
De-
on their respective websites.
Explanation
Inthisconnection, itisclarified that banks need not report cases where
(i) outstanding amount falls below Rs.25 lakh and
(ii) imrespect of cases where banks have f
and the borrower has fully paid the agreed for a compromise settlement
3. Grievances Redressal Mechanism
the
should takels
Banks/F fol wi onic salute
stances of wilful default: lowing measures in identifying and reporting in-

default, decisions tocl ify the pee reek Ay aw

entrusted toa Committee ofhigherfunctionaries headed
bytheExecs
 Master Circular on Wilful Defaulters
Annex. 2 549
tive Director and consisting of two GMs/DG
Ms as decided by the Board
of the concerned bank/FI.
(ii) The decision taken on classification
of wilful defaulters should be well
document ed and supported by requisite evidence. The
decision should
clearly spell out the reasons for which the borr
ower has been declared as
wilful defaulter vis-a-vis RBI guidelines.
(iii) The borrower should thereafter be suitably
advised about the proposal to
classify him as wilful defaulter along with the
reasons therefor. The con-
cerned borrower should be provided reasonable
time (say 15 days) for
making representation against such decision, if he
so desires, to a Griev-
ance Redressal Committee headed by the Chairman
and Managing Di-
rector and consisting of two other senior officials.
(iv) Further, the above Grievance Redressal Comm
ittee should also give a
hearing to the borrower if he represents that he has
been wrongly classi-
fied as wilful defaulter.
(v) A final declaration as ‘wilful defaulter’ should
be made after a view is
taken by the Committee on the representation and the borro
wer should be
suitably advised.
4. Criminal Action against Wilful Defaulters
4.1 J.P.C. Recommendations
Reserve Bank examined, the issues relating to restraining wilful
defaults in
consultation with the Standing Technical Advisory Committee on
Financial
Regulation in the context of the following recommendations of the JPC
and in
particular, on the need for initiating criminal action against concerned borrow
ers,
viz.
(a) It is essential that offences of breach of trust or cheating construed to
have been committed in the case of loans should be clearly defined under
the existing statutes governing the banks, providing for criminal action in
all cases where the borrowers divert the funds with malafide intentions.
(b) It is essential that banks closely monitor the end-use of funds and obtain
certificates from the borrowers certifying that the funds have been used
for the purpose for which these were obtained.
(c) Wrong certification should attract criminal action against the borrower.
4.2 Monitoring of End Use
Banks / FIs should closely monitor the end-use of funds and obtain certificates
from borrowers certifying that the funds are utilised for the purpose for which
they were obtained. In case of wrong certification by the borrowers, banks / FIs
may consider appropriate legal proceedings, including criminal action wherever
necessary, against the borrowers.
550 Appex.2 = Part }—-Chap. 7—Nen-Performing Laans—A Slew of Measures

4.3 Criminal Action by Banks / Fis

it is essential to recognise that there is scope even under the exisung legisla
uons to initiate cruminal action against wilful defaulters depending upon the facts
and circumstances of the case under the provisions of Sections 403 and 415 of
the Indian Penal Code (IPC) 1860. Bank/sPls are, therefore, advised to seriously
and promptly consider initiating criminal action against wilful defaulters or
wrong certification by borrowers, wherever conside red necessa ry, based on the
facts and circum sta
of each nce
case under the s
above provis of ion
the IPCsto
comply with our instructions and the recomm endati ons of JPC.
It should also be ensured that the penal provisions are used effectively and de-
terminedly but after careful consideration and due caution, Towards this end,
banks / Fls are advised to put in place a transparent mechanism, with the ap-
proval of their Board, for initiating criminal proceedings based on the facts of
individual case.
5. Reporting
names of Directors
5.1 Need for Ensuring Accuracy
RBI / Credit Information Companies disseminate informati on non-suit
on filed
and suit filed accounts respectively, as reported to them by the banks / Fils and
responsibility for reporting correct information and also accuracy of facts and
figures rests with the concerned banks and financial institutions. Therefore, banks
and financial institutions should take immediate steps to up-date their records and
ensure that the names of current directors are reported. In addition to reporting
the names of current directors, it is necessary to furnish information about direc-
tors who were associated with the company at the time the account was classified
as defaulter, toput the other banks and financial institutions on guard. Banks and
Fis may also ensure the facts about directors, wherever possible, by
cross-
checking with Registrar ofCompanies.
5.2 Position regarding Independent and Nominee directors
Professional Directors who associate with companies
for their expert know]-
edge act as independent directors. Such i directors apart from receiv-
ing direct
’ or 's remuneration
i do not have any
transactions with the company, itspromoters, it relationship
s management orits subsidiariesor
,
which in the judgment of Board may affect the
guiding principle ofdisclosure, nomaterial factshould be
ir jud gme nt. As a
c Idbepubliched. Homwbany thatis a
hould
whi le
; Hi et, while doidef
ng aul
$0,ter andthenames ofalldirectors
4 suit abs we ,
should be made that the concerned person was an

should
be
 Master Circular on Wilful Defaulters
Annex. 2 551
5.3 Government Undertakings
In the case of Government undertakings,
it should be ensured that the names of
directors are not to be reported. Instead,
a legend "Government of -------- under-
taking" should be added.
5.4 Inclusion of Director Identification Num
ber (DIN)
In order to ensure that directors are correctly
identified and in no case, persons
whose names appear to be similar to the name
s of directors appearing in the list
of wilful defaulters, are wrongfully denied
credit facilities on such grounds,
banks/FIs have been advised to include the Dire
ctor Identification Number (DIN)
as one of the fields in the data submitted by them
to Reserve Bank of India /
Credit Information Companies.

ANNEX 1
Format for submission of data on cases of wilful defau
lt (non-suit
filed accounts) of Rs.25 lakh & above to RBI on quarter
ly basis:
The banks/FIs are required to submit data of wilful defaul
ters (non-suit filed
accounts) in Compact Disks (CDs) to RBI on quarterly basis, using
the following
structure (with the same field names):

Description
SCTG Numeric Category of bank/FI Number 1/2/4/6/8 should be fed
1 SBI and its associate banks
2 Nationalised banks
4 Foreign banks
6 Private Sector Banks
8 Financial Institutions
BKNM Name of bank/FI Name of the bank/FI

4 STATE Character 15 Name of state Name of state in which branch

is situated

aginPRTY Name of Party The legal name

REGADDR Character | 96 |Registered address __|Registered Office address

OSAMT Numeric Outstanding amount

; in Rs. lakhs
(Rounded off)

pene Suit filed or not Type ‘SUIT’ in case suit is

filed. For other cases this field
should be kept blank.

Name of other banks/ |The names of other banks/F “Ts

552 Apmex.2 = Part |—Chap. 7—Nen-Performing Laany~A Slew af Measures

‘Vieid| Wlekd Name type Width Description Romarks

vailed ered Lacility should be
indicated. The names may be
in abbreviated form e.g
8 tor Bank of Baroda,
for State Bank of India etc.

iy

_~

; =: .44P

ww,
@t-.} 444A

=—==.
=4 ‘es
=G:=

: :>>

4 4 ~->a _=: - 41 ;

a
V 44 @a
‘se
cS
“s
,}>’ “.
Master Circular on Wilful Defaulte
rs Annex. 2

CI
553

i)£ i) IN_DIR7 Numeric Director Identifica- |8 digit Director Identification

tion Number of DIR7 Number of the Director at DIR7
i)nN iS ve)oo
IN_DIR8 Numeric Director Identifica- |8 digit Director Identification
tion Number of DIR8 {Number of the Director at DIR8
Ne
i)|fo)
:
:

i)io) DIN_DIR9 Numeric Director Identifica- |8 digit Director Identification

tion Number of DIR9 |Number of the Director at DIR9

30 |DIN_DIR1O _ |Numeric ee Identifica- 8 digit Director Identification

tion Number of Number of the Director at
DIR10
Character

lear Numeric ote Director Identifica- 8 digit Director Identification

tion Number of Number of the Director at
DIR11
DIR12 Character

34 |DIN_DIR12_ |Numeric Director Identifica- _|8 digit Director Identification

tion Number of Number of the Director at
DIR12 DIR12

DIN_DIR13 Numeric Director Identifica- {8 digit Director Identification

tion Number of Number of the Director at
DIR13 DIR13

As in DIR1

DIN_DIR14 wenger rayDirector Identifica- 8 digit Director Identification

tion Number of Number of the Director at
DIRI4 DIR14

(1) If total numbers of directors exceed 14, the name of additional directors
may be entered in blank spaces available in the other directors’ columns.
(2) The data / information should be submitted in the above format in Com-
pact disks as .dbf file only. While submitting the CD, the banks/FIs
should ensure that:
® the CD is readable and is not corrupted / virus-affected.
554 Appex.2 = Part |—Chap. ?—Non-Performing Laans—A Slew af Measures

the CD ts labelled properly undicaung name of the bank, name of

the list and period to which the list belongs, and the name of list
indicated on label and in the letter are same.
the name and width of each of the fields and order of the fields
is strictly as per the above format.
records with outstanding amount of less than Rs.25 lakh have not
been included.
no suit-filed
account has been included,
* use of following types of words have been avoided (as the fields
cannot be properly indexed); ‘M/s’, ’Mr’, “Shri’ ete,
the words ‘Mrs’, ‘Smit’, ‘Dr’ etc, have been fed at the end of
name of the person, if applicable.
Except for field "SUIT" and some of the fields from DIR1 To
DIR 14, as applicable, information is completely filled in and
columns are not kept blank.
(3) In case of ‘Nil’ data, there is no need to send any CD and the position can
be conve a letter/fax.
throughyed
(4) A certificate signed by a sufficiently senior official stating that “the list of
eile deena een cree Cee ee
thereof ’s instructions in this regard have been strictly fol-
lowed’ is sent along with the CD.
 ANNEXURE 3
CREDIT INFORMATION COMPANIE
S
(REGULATION) ACT, 2005
[No. 30 of 2005]
An actto provide for regulation of credit information companies and to facil
tate efficient distribution of credit, and i-
for matters connected therewith or inci-
dental thereto.
Be it enacted by the Parliament in the Fifty-sixt
h Year of the Republic of India
as follows:

CHAPTER I
PRELIMINARY
1. Short title, extent and commencement.—(1)
This Act may be called the
Credit Information Companies (Regulation) Act, 2005.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Gover
nment may, by
notification in the Official Gazette, appoint:
Provided that different dates may be appointed for different provis
ions of this
Act, and any reference in any such provision to the commencement
of this Act
shall be construed as a reference to the coming into force of that provision.
2. Definitions.—In this Act, unless the context otherwise requires,
(a) ‘board’ means the Board of Directors of a credit information company;
(b) ‘borrower’ means any person who has been granted loan or any other
credit facility by a credit institution and includes a client of a credit insti-
tution;
(c) ‘client’ includes:
(i) a guarantor or a person who proposes to give guarantee or secu-
rity for a borrower of a credit institution; or
(ii) a person:
(A) who has obtained or seeks to obtain financial assistance
from a credit institution, by way of loans, advances, hire
purchase, leasing facility, letter of credit, guarantee

ho)
 556 Annex.3 Part |—Chap. 7—Non-Performing Loans—A Slew of Measures

facility, venture capital assistance or by way of oredit

cards or in any other form or manner,
(B) who has raised or seeks to raise money by issue of seou-
rity as defined in clause (/) of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), or by is-
sue of commercial paper, depository receipt or any other
instrument,
(C) whose financial standing has been assessed or is pro-
posed to be assessed by a credit institution or any other
person or institution as may, by notification,be directed
by the Reserve Bank;
(d) credit information means any information relating to:

standing under credit cards and other credit facilities granted or

to be granted, by a credit institution to any borrower,
(ii) the nature of security taken or proposed to be taken by a credit
institution from any borrower for credit facilities granted or pro-
posed to be granted to him;
(iii) the guarantee furnished or any other non-fund based facility
granted or proposed to be granted by a credit institution for any
of its borrowers;
(iv) the credit
of wor
any borrower
thi of a credit
nes institutio
s n;
(v) any other matter which the Reserve Bank may, consider neces-
sary for inclusion in the credit information to be collected and
maintained by credit information companies, and, specify, by no-

(€) credit information company means a company formed and

under
@
theCompanies Act,1956(1 of1936)andwhich hasbeengranted
certificate ofregistration under sub-section (2)ofsection 5;
(f) credit institution means a banking company and includes:
(i) a corresponding new bank, the State Bank of India, a subsidiary
bank, * ©0-OPerative bank,theNational Bank andregional rural
(ii) a non-banking financial company as defined
secti: on 450-1 of the Reserve Bank of Indiaunder
Act,
clause (f) of
1934 (2 of
1934);
Pe <2
[(tia)
ing
a factorRegulatiasdefined2011)
under clause (i)(i) of
of section
2 of the Pactor-
iti) ainset
public financial1956 institution ; section
(1 of 1956) to in i 4A of the
eee
22. Ins. by Act 12 of 201
2. 8. 35 and Sch. (wef 1-2
-2012)
 Credit Information Companies (Reg
Att,
n) WS Aunex BS 8 557

(iv) the financial onpoxzison established by 2 Vise under section 3 of

the Size Financial Corporation Act, 1951 (63 of 1951),
(v) the housing finance imsttesiion releried to in Aause (4) of section
2 A the National Housing Bank Act, 1967 (53 of 1967);
(vi) the cosmpanies engaged im the business A creda casds and other
smiles caids and companies dealing with Gestriintion of credit in
any Shes manner,
(vii) any Cher wnstttettion which the Reserve Bank may specify, from
time to time, fox the purposes of this clause:

(h) ‘noGiicaiion’ means 2 notifieziion published in the Official Gazette of

india;
G) ‘prescribed means prescribed by rules made under this Act-
(j) ‘regulations’ means reguiziions made by the Reserve Bank under this
Act;
(k) “Reserve Bank’ means the Reserve Bank of Indiz comstituted under sec-
tion 3 of the Reserve Bank of India Act. 1934 (2 of 1934),

being 2 member under sub-section (3) of section 15, and includes such
other person of institution 2s may be specified by regulations made, from
time to time. by the Reserve Bank for the purpose of obtaining credit in-
formation from 2 credit imformation company:
(m) “words and expressions used herein’ and not defined in this Act but de-
fined im the Reserve Bank of Indiz Act. 1934 (2 of 1934) of the Banking
Regulation Act. 1949 (10 of 1949) of the Companies Act. 1956 (1 of
1956) shall have the meanings respectively assigned to them in those
Acts.
CHAPTER [i
REGISTRATION
OF CREDIT INFORMATION
COMPANIES
3. Prohibition to commence or carry on business of credit information —
save as otherwise provided in this Act. no company shall commence or carry on
be business of creda information without obtaining 2 cestificate of registration
rom the Reserve Bank under this Act
4. Application for registration —1) Every company which intends to com-
ence the business of credit information shal] make an application for registra-
on to the Reserve Bank im such form aad manner as may be specified by regui2-
ons.
 558 Apnex.3 030Part Chap. 7—Non-Performing Loans-—A Slew of Measures

of
(2) Every credit information company, in existence on the commencement
this Act, before the expiry of six months from such commencement, shall apply
in writing to the Reserve Bank for obtuning 4 certificate of registraon under
this Act:
Provided that in the case of a credit information company in existence on the
commencement of this Act, nothing in section 3 shall be deemed to prohibit such
credit information company from carrying on the business of a credit information
company, until it is granted a certificate of registration or is by notice in writing
informed by the Reserve Bank that a certificate of registration cannot be granted
to it. )

5. Grant of certificate of registration,—(|) The Reserve Bank may, for the

purpose of considering the application of a company for grant of a certificate of
registration to commence or carry on the business of credit information, requires
to be satisfied, by an inspection of records or books of such company or other-
wise that the following condition s namely:
are fulfilled,
(a) that the applicant company has minimum capital structure referred to in
section8;
(b) that the general character of the management or the proposed manage-
ment of the applicant company shall not be prejudicial to the interest of
its specified users, clients or borrowers, or other credit information com-
panies;
(c) that any other condition, the fulfilment of which in the opinion of the
Reserve Bank, shall be necessary to ensure that the commencement or

rowers or other credit information compan

or others
ie who
s, would

(2) The Reserve Bank may, after being satisfied that the conditions as
toinsub-section (1) are fulfilled, grant a certificate ofregistr referred
ation tothe appli-
cant company to commence or carry on the business of credit i jon, sub-

(S) The Reserve Bank may, having regard totheavai

formation, the potential and ,
labl
:
e business ofcredit in-
companies andother scope for expansion of existing credit information

Provided that the total nu

mber of it i
mined may.onbeingsatisfie
d bytheReserve Bank, thatth
ereischange inavail.
 Credit Information Companies (Reg
n.) Act, 2005 Annex. 3 559
able business of credit information, pote
ntial and scope for expansion of existing
credit information companies and othe
r relevant factors relating thereto, be
viewed by the Reserve Bank. re-
6. Power of Reserve Bank to cancel cert
ificate of registration.—(1) The Re-
serve Bank may cancel a certificate of regi
stration granted to a credit information
company under sub-section (2) of section 5,
if such company,—
(i) ceases to carry on the business of credit
information; or
(ii) has failed to comply with any of the cond
itions subject to which the cer-
tificate of registration has been granted to it; or
(iii) at any time fails to fulfil any of the cond
itions referred to in sub-clauses
(a) to (c) of sub-section (1) or sub-section (2)
of section 5; or
(iv) fails:
(a) to comply with the provisions of any law
for the time being in
force or any direction issued by the Reserve Bank under
the pro-
visions of this Act; or
(b) to submit or offer for inspection its books of accou
nt and other
relevant documents when so demanded by the office
rs, persons
or agency referred to in sub-section (1) of section 12.
(2) Before fulfilment, the certificate of registration granted
to a credit informa-
tion company under this section on the ground that the
company has failed to
comply with the conditions specified in clauses (a) to
(c) of sub-section (1) or
sub-section (2) of section 5, or the provisions of any other law
for the time being
in force, or directions issued under this Act, the Reserve Bank,
shall grant time to
such company on such terms as the Reserve Bank may deem appro
priate for tak-
ing necessary steps to comply with such directions or provisions or fulfil
ment of
such conditions, within such time:
Provided that if the Reserve Bank is of the opinion that the delay in cancelling
the certificate of registration of such company shall be prejudicial or detrimental
to the public interest or banking policy or credit system or borrowers or other
credit information companies, the Reserve Bank may cancel the certificate of
registration without granting time as provided in sub-section (2).
(3) No order of cancellation of certificate of registration granted to a credit in-
formation company shall be made by the Reserve Bank unless such company has
been given a reasonable opportunity of being heard.
7. Appeal against order of Reserve Bank.—( I) A credit information com-
pany aggrieved by the order of rejection of an application for grant of certificate
of registration under section 5 or cancellation of certificate of registration undet
section 6, may prefer an appeal to the Central Government or any other authority
or tribunal which may be designated by rules made by the Central Government,
within a period of thirty days from the dateon which such order of rejection ot
cancellation, as the case may be, is communicated to the credit information com-
pany.
560 Apnex.3 9 Part Chap. 7—Non-Performing Loans-—A Slew of Measures

(2) The decision of the Central Government or the authority or tribunal referred
to in sub-section (1) where an appeal has been preferred to it under sub-section
be
(1). or of the Reserve Bank where no such appeal has been preferred, shall
final:
Provided that before making any order of rejection of an appeal, the applicant
company or the credit information company, as the case may be, shall be given a
reasonable opportunity of being heard.
8. Requirement as to minimum capital.—(|) The authorised capital of every
credit information company shall be a minimum of thirty crores:
Provided that the Reserve Bank may, by notification, increase the minimum
amount of authorised capital to any amount not exceeding fifty crores.
(2) The issued capital of every credit information company shall not be less
than twenty crores:
Provided that the Reserve Bank may, by notification, increase the issued capi-
tal to any amount not exceeding the minimum amount of authorised capital as
referred to in sub-section (1).
(3) The minimum paid up capital of every credit information company at any
time shall not be less than seventy-five per cent of the issued capital.
CHAPTER III
MANAGEMENT OF CREDIT INFORMATION COMPANIES

of its board, and where he is appointed on whole-time basis ~“ : of its

board. heshall beentrusted with the management of the whole of the affairsof
company:

(2) Where a chairperson isappointed on a h j

whole of the affairs of the credit inf Nati company do net
managing
director or, a whole-ti
 Credit Information C ompanies
(Regn.) Act, 2005
Annex. 3 561
(4) In discharging its functions, the
board shall act on business principl
Shall have due regard to the interest es and
of its specified users, credit institut
clients or borrowers of credit institut ions or the
ions.
_ (5) Where the Reserve Bank is sati
sfied that it is in the public interest
interest of banking policy or credit or in the
system of the country, or for preven
ting the

necessary so to do, the Reserve Bank may,

for reasons to be recorded in writing,
by order published in the Official Gazette,
supersede the board of such company,
for such period not exceeding six months,
as may be specified in the order and
which may be extended from time to time
, so, however, that the total period shall
not exceed twelve months:
Provided that before making any such orde
r, the Reserve Bank shall give a rea-
sonable opportunity to the board of such credi
t information company to make
representation against the proposed superses
sion and shall consider the represen-
tation, if any, of the board.
(6) The Reserve Bank may, on supersession
of the board of a credit informa-
tion company under sub-section (5), appoint an Administra
tor for such period
and on such salary and other terms and conditions as it
may determine.
(7) The Reserve Bank may issue such directions to the
Administrator as it may
deem appropriate and the Administrator shall be bound to
follow such directions.
(8) Upon making of the order under sub-section (5), supersedin
g the board of a
credit information company:
(a) the chairperson, managing director and other directors of such
credit in-
formation company shall, as from the date of Supersession, vacate their
offices as such;
(b) all the powers, functions and duties which may, by or under the provi-
sions of the Companies Act, 1956 (1 of 1956) or this Act or any other
law for the time being in force, be exercised or discharged, by or on be-
half of the board of such credit information company, or by a resolution
passed in general meeting of that company, shall, until the reconstitution
of its board under sub-section (10), be exercised and discharged by the
Administrator appointed by the Reserve Bank under sub-section (6):
Provided that the power exercised by the Administrator shall be valid
notwithstanding that such powers are exercisable by a resolution passed
in the general meeting of such credit information company.
(9) The salary and allowances payable to the Administrator and staff assisting
the Administrator shall be borne by the credit information company.
(10) On and before the expiration of two months before expiry of the period of
supersession mentioned in the order of the Reserve Bank dia ena oe
section (5), the Administrator of the credit information company, shall call a g
$62 Annex.3 = Part |—-Chap. 7—Non-Performing Loans—A Slew of Measures

al meeting of the credit information company to elect new director s

and recon:
cae aeherd and anyperson whohad vacated his office under clause (@) of
sub-section (8), shall not be deemed to be disqualified for re-appomtment,
(11) Notwithstanding anything contained in any law for the time being in force
or in any contract or the memorandum or articles of association, ofthe credit in-
formation company, on the removal of a person from office under this section,
that person shall not be entitled to claim any compensation for the loss or termi.
nati of on
office.
10. Power of Reserve Bank to determine policy,——Where the Reserve Bank
is satisfied that it is necessary or expedient in the public interest or in the interest
of specified users or in the interest of credit information companies or credit in-
stitutions or clients or borrowers so to do, it may deter mine
the policy in relation
to functioning of the credit information companies or credit institutions or speci -
fied users generally or in particular and when the policy has been so determined
all credit information companies, credit institutions and specified users, as the
case may be, shall be bound to follow the policy as so determined.
11. Power of Reserve Bank to give directions.—(1) Where the Reserve Bank
is satisfied that,
(a) in the public interest;or
(b) in the interest of credit institutions;or
(c) in the interest of specified users; or
(d) in the interest of banking policy; or
(€) to prevent the affairs of any credit information company being conducted
in a manner detrimental to the interests of its specified users or in a man-
nerPrejudicial totheinterests ofcredit institutions orborrowers orcli-
; Or
© wee’ ne Proper management ofcredit information companies gener-
y;
it isnecessary toissue directions tocredit information companies or credit in-
Sttutions or specified users generally, ortoany credit information company ot
crema : particular, it , from time to time, i
suchtions
stitu directions asitdeems fit,andsuch creditinformation companies, ereditin
and specified users or credit information credit insti
andspecified user,asthecasemaybe,shallbebound tocomply withsuchdite,
modify orcancel any direction j
Bank, in so modifying or cancellin
g direction, impose such conditions
asitthinksfitsub
, jecttowhichthemodification or cancellation chal hace ae
(3) The Reserv Ban
e k may,at time, if it is
estoFin theinterestofacreditinformation compsatisfied public inter
any ea nna Publi ier.
 Credit Information C.ompanies (Regn.) Act,
2005 Annex. 3 563
sary so to do, by order in writing and on such
terms and conditions as may be
specified therein:
(a) require such credit information company to call
a meeting of its directors
for the purpose of considering any matter relat
ing to or arising out of the
affairs of the credit information company;
(b) depute one or more of its officers to watch
the proceedings at any meet-
ing of the board of the credit information comp
any or of any committee
or of any other body constituted by it and requi
re the credit information
company to give an opportunity to the officers so
deputed to be heard at
such meetings and also require such officers to send
a report of such pro-
ceedings to the Reserve Bank:
(Cc) require the board of the credit information company
or of any committee
or any other body constituted by it to give in writing
to any officer de-
puted by the Reserve Bank in this behalf at his usual addre
ss all notices
of, and other communications relating to, any meeti
ng of the board,
committee or other body constituted by it;
(d) appoint one or more of its officers to observe the manner
in which the
affairs of the credit information company or of its offices or branch
es are
being conducted and make a report thereon:
(€) require the credit information company to make, within such time
as may
be specified in the order, such changes in the management as the Reserv
e
Bank may consider necessary.
(4) The Reserve Bank may, at any time, direct any credit information compan
y
to furnish it within such time as may be specified by the Reserve Bank,
such
statements and information relating to the business or affairs of the credit infor-
mation company as the Reserve Bank may consider necessary or expedient to
obtain for the purpose of this Act.
12. Inspection of credit information company, credit institution and speci-
fied user.—(1) Notwithstanding anything to the contrary contained in section
235 of the Companies Act, 1956 (1 of 1956), the Reserve Bank, at any time, may
and on being directed so to do by the Central Government shall, cause an inspec-
tion to be made by one or more of its officers or through such other persons or
agency as the Reserve Bank may determine, of any credit information company
or credit institution or specified user and their books and accounts; and the Re-
serve Bank shall supply to the credit information company or credit institution or
specified user, as the case may be, a copy of its report on such inspection.
(2) It shall be the duty of every director or other officer or employee of the
credit information company, credit institution and specified user to produce to
any officer or person or agency, as the case may be, making an inspection under
sub-section (1) all such books, accounts and other documents in his custody or
power and to furnish him with any statement and information relating to the af-
fairs of such credit information company, credit institution and specified user, as
the said officer or person or agency may require of him within such time as the
said officer or person or agency may specify.
 04 Apnex.3) 20 Part }—Chap. 7—Non-Performing Loans-~A Slew af Measures

(3) Any officer of the Reserve Bank or person or an agonoy Making ah MSpPec-
tion under sub-section (1) may examine on oath any director or other officer or
employee of the credit information company, credit institution and specified user,
in relation to their business, and may administer an oath accordingly,
(4) The expenses of, or incidental to the inspection under sub-section (1) by
any personor any agency referred by the con-
to in sub-section (1) shall be borne
cerned credit information company or credit institution or specified user, as the
case may be.
CHAPTER IV
AUDITORS
13. Powers and duties of auditors.— (1) It shall be the duty of an auditor of a
credit information company to inquire whether or not the credit information
company has furnished to the Reserve Bank such statements, information or par-
ticulars relating to its business as are required to be furnished under this Act and
the auditor shall, except where he is satisfied on such inquiry that the credit in-
formation company has furnished such a statement, information or particulars,
make a report to the Reserve Bank in this regard.
(2) The Reserve Bank may, on being satisfied that it is necessary so to do, in
the public interest or in the interest of credit system, issue directions in particular
or in general with respect to audit of the credit information company and submis-
sion of the report to the Reserve Bank.
(3) Where the Reserve Bank is of the opinion that it is necessary so to do in the
public interest or in the interest of the credit information company or its mem-
bers, orinthe interest of credit system or credit institution or its borrower or cli-
ent sotodo, it may, at any time, by an order, direct that a special audit of
the ac-
counts of the credit information company in relation to any such transac
tion or

(4) The remuneration of the auditors as

be fixed by the Reserve Barik,
havingregardto the natureandvolumeof workinvolvedintheauditand
armante ’Ss —+ ry to, theex
audit, shall be borne by the credit information
|

| CHAPTERV
FUNCTIONS OF CREDIT INFORMATION
COMPANIES
14. Functions of a credit informati
, on com—(p A cren
1) a inform
dit y ation
namely.) “"eaee imany oneormore ofthefollow .
ing forms ofbusiness,
 Credit Information Companies (Regn.) Act, 2005
Annex. 3 565
(a) to collect, process and collate information on trade, credit and
financial
standing of the borrowers of the credit institution which is a member
of
the credit information company;
(b) to provide credit information to its specified users or to the specified us-
ers of any other credit information company or to any other credit infor-
mation company being its member;
(c) to provide credit scoring to its specified users or specified users of any
other credit information company or to other credit information compa-
nies being its members;
(d) to undertake research project;
(¢) to undertake any other form of business which the Reserve Bank may,
specify by regulations as a form of business in which it is lawful for a
credit information company to engage.
(2) No credit information company shall engage in any form of business other
than those referred to in sub-section (1).
(3) Any credit information company for the purposes of carrying on the busi-
ness of credit information may-
(a) register credit institutions and other credit information companies, at
their option as its member, subject to such terms and conditions as may
be pre-determined and disclosed by such credit information company;
(b) charge such reasonable amount of fees, as it may deem appropriate not
exceeding the maximum fee, as may be specified under section 27, for
furnishing credit information to a specified user;
(c) generally, to do all such other acts and perform such other functions as
are necessary to facilitate proper conduct of its affairs, business and func-
tions in accordance with the provisions of this Act.
15. Credit Institution to be member of a Credit Information Company.—
(1) Every credit institution in existence on the commencement of this Act, before
the expiry of three months from such commencement or within such extended
period, as the Reserve Bank may allow on its application and subject to being
satisfied about the reason for extension, shall become a member of at least one
credit information company.
(2) Every credit institution which comes into existence after the commence-
ment of this Act, before the expiry of three months from its coming into exis-
tence, or within such extended period, as the Reserve Bank may allow on its ap-
plication and subject'to being satisfied about the reason for extension, shall be-
come a member of at least one credit information company.
(3) A credit information company may, at its option, become a member of an-
other credit information company.
(4) No credit information company shall refuse to register a credit institution or
another credit information company as its member without providing reasonable
opportunity of being heard to such credit institution or credit information com-
 366 Apmex.3 = Part Chap. 7—Non-Performing Loans-—A Slew af Measures

any, whose application M proposes to reject and recording reasons for such re:
aaa 6 can of such order of rejection shall be forwarded to the Reserve
Bank
(5) A credit tastitution or credit information Company aggrieved by the order of
rejection of its application for its registration as a member of a credit information
company under sub-section (4) may prefer anappeal to the Reserve Bank, within
a period of thirty days from the date on which such an order of rejection was
communicated to it:
Provided that the Reserve Bank may, if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within the said period, allow
it to be filed within a further period not exceeding thirty days,
(6) On receipt of an appeal under sub-section (5), the Reserve Bank, after giv-
ing the appellant and other concerned parties, an opportunity of being heard, pass
such order as it deems fit.
(7) The decision of the Reserve Bank where an appeal has been preferred 10 it
under sub-section (5) shall be final and the order of the credit information com-
pany under sub-section (4) shall be final after the expiry of the said period of
thirty days where no appeal has been preferred under that sub-section to the Re-
serve Bank.
(8) Every specified user shall beentitled toobtain credit information for its use
from the credit information company of which such specified user is a member.
16. Failure
scaaie to become
teins a member of a credit information company — }
(a) abstains from becoming a member of at least one credit
information
company;or
(b) atany time is not a member of any credit information
company:
the Reserve Bank, suo motu or on a complaint from a crédit
pany may, direct such credit institution totake necessary step information com-
asItmay speci
s within such time,
fy tobecome a member of a credit information comp
any
(2) Incase a credit institution fails tocomply
Bank under sub-section (1), tobecome mem
with
the directions ofthe
ber ofatJeast one credit information

+ le by
thereto, require its members being a credit institution
credit information company, tofurnish such credit
necessary inaccordance withthe : “d
provisions ofthis Ane nm it tay deem
 Credit Information Companies (Regn.) Act,
2005 Annex. 3 567
(2) Every credit institution which is a memb
er of the credit information com-
pany and every credit information company
which is a member of other credit
information company shall, on receipt of
notice under sub-section (1), provide
credit information to the credit information comp
any of which it is a member,
within such period as may be specified in the notic
e.
(3) Every credit information company shall provi
de for such purpose, as may
be specified by regulations, the credit information recei
ved under sub-section (2),
to its specified user on receipt of request from him
in accordance with the provi-
sions of this Act and directions issued thereunder by
the Reserve Bank from time
to time in this behalf.
(4) No credit information received under this Act:
(a) by the credit information company, shall be disclosed
to any person other
than its specified user; or
(b) by the specified user, shall be disclosed to any other person
;
(c) by the credit information company or specified user, shall
be disclosed
for any other purpose than as permitted or required by any other
law for
the time being in force.
18. Settlement of dispute.—(1) Notwithstanding anything contained
in any
law for the time being in force, if any dispute arises amongst credit inform
ation
companies, credit institutions, borrowers and clients on matters relatin
g to busi-
ness of credit information, and for which no remedy has been provided under
this
Act, such disputes shall be settled by conciliation or arbitration as provided
in the
Arbitration and Conciliation Act, 1996 (26 of 1996), as if the parties to
the dis-
pute have consented in writing for determination of such dispute by conciliation
or arbitration, and provisions of that Act shall apply accordingly.
(2) Where a dispute has been referred to arbitration under sub-section (1), the
same shall be settled or decided:
(a) by the arbitrator to be appointed by the Reserve Bank:
(b) within three months of making a reference by the parties to the dispute:
Provided that the arbitrator may, after recording the reasons therefor,
extend the said period up to a maximum period of six months:
Provided further that, in an appropriate case or cases, the Reserve Bank
may, if it considers necessary to do so (reasons to be recorded in writ-
ing), direct the parties to the dispute to appoint an arbitrator in accor-
dance with the provisions of the Arbitration and Conciliation Act, 1996
(26 of 1996), for settlement of their disputes in accordance with the pro-
visions of that Act.
(3) Save as otherwise provided under this Act, the provisions of the Arbitration
and Conciliation Act, 1996 (26 of 1996) shall apply to all arbitration under this
Act as if the proceedings for arbitration were referred for settlement or decision
under the provisions of the Arbitration and Conciliation Act, 1996.
305 Apmex.3 9 Part Chap. 7—Nen-Performung Laans-A Slew af Measures

CHAPTER V1
INFORMATION PRIVACY PRINCIPLES AND
FURNISHING OF CREDIT INFORMATION
1% Accuracy and security of credit information.-A ocredil information
company or credit institution or specified user, as the case may be, in possession
or control of credit information, shall take such steps (including security sale
guards) as may be prescribed, to ensure that the data relating to the credit infor-
mation maintained by them is accurate, complete, duly protected against any loss
or unauthorised access or use or unauthorised disclosure thereot,
20. Privacy principles.—Every credit information company, credit institution
and specified user, shall adopt the following privacy principles in relation to col-
lection, processing, collating, recording, preservation, secrecy, sharing and usage
of credit information, namely-
(a) the principles-

member credit institutions or credit information companies, for

processing, recording, protecting the data relating to credit in-
formation furnished by, or obtained from, their member credit
institutions or credit information companies, as the case may be,
and sharing of such data with specified users;
(ii) which may be adopted by every specified
user for processing,
preserving and protecting the data relating to credit in-
formation furnished, orreceived, as the case may be, by it;
(iii) which may be adopted by every credit information for
allowing access to records containing credit isformetion ofbor-
foo econ Clients andalteration ofsuch records incase ofneed
sO;
(b) the purpose for which the credit j |
ouch we and & Serer ore

insututions orspecified users, asthe case may be:

(d) preservation of credit information

ion may be maintained, man-

. and maintenance of records of credit
 Credit Information Companies (Regn.)
Act, 2005 Annex. 3 569
(f) any other principles and procedures
relating to credit information which
the Reserve Bank may consider necessar
y and appropriate and may be
specified by regulations.
21. Alteration of credit information files
and credit reports.—(1) Any per-
son, who applies for grant or sanction of credi
t facility, from any credit institu-
tion, may request to such institution to furn
ish him a copy of the credit informa-
tion obtained by such institution from the credi
t information company.
(2) Every credit institution shall, on recei
pt of request under sub-section (1),
furnish to the person referred to in that sub-sectio
n, a copy of the credit informa-
tion subject to payment of such charges, as may
be specified by regulations, by
the Reserve Bank in this regard.
(3) If a credit information company or specified
user or credit institution in
Possession or control of the credit informatio
n, has not updated the information
maintained by it, a borrower or client may request
all or any of them to update
the information; whether by making an appropriate corre
ction, or addition or oth-
erwise, and on such request the credit information comp
any or the specified user
or the credit institution, as the case may be, shall take appro
priate steps to update
the credit information within thirty days after being requested
to do so:
Provided that the credit information company and the specif
ied user shall make
the correction, deletion or addition in the credit information only
after such cor-
rection, deletion or addition has been certified as correc
t by the concerned credit
institution:

Provided further that no such correction, deletion or addition shall be made in

the credit information if any dispute relating to such correction, deletion or addi-
tion is pending before any arbitrator or tribunal or court, and in cases where such
a dispute is pending, the entries in the books of the concerned credit institution
shall be taken into account for the purpose of credit information.
22. Unauthorised access to credit information.—(1) No person shall have
access to credit information in the possession or control of a credit information
company or a credit institution or a specified user unless the access is authorised
by this Act or any other law for the time being in force or directed to do so by
any court or tribunal and any such access to credit information without such au-
thorisation or direction shall be considered as an unauthorised access to credit
information.
(2) Any person who obtains unauthorised access to credit information as re-
ferred to in sub-section (1) shall be punishable with fine which may extend to one
lakh rupees in respectof each offence and if he continues to have such unauthor-
ised access, with further fine which may extend to ten thousand rupees for every
day on which the default continues, and such unauthorised credit information
shall not be taken into account of any purpose.
 370 Apnex.3 = Part |—Chap. 7—Non-Performing Loans-—A Slew af Measures

CHAPTER Vi
OFFENCES AND PENALTIES
23. Offe penalties.—( |)Whoever, in any retur
andaces n document or
or other
in any information required or furnished by, or under, or for the purposes of, any
provision of this Act, wilfully makes @ statement which is false in any material
particular, knowing it to be false, or wilfully omits tomake a material statement,
shall be punishab lent for a term which may extend
with imprisonme to one year
and shall also be liable to fine.
(2) Every credit information company or a credit institution or any specified
user, wilfully, performing any act or engaging in any practice, in breach of any of
the principles referred to in section 20, shall be punishable with fine not exceed-
ing one crore.
(3) Any credit information company or credit institution or specified user wil-
fully providing to any other credit information company or credit institution or
specified waaraxbortoiwer orclieht, adthe.chak tease, aoa Tae which
is false in any material particular, knowing it to be false, or wilfully omits to
make a material statement, shall be punishable, with fine which may extend to
one crore rupees.
(4) Any person who contravenes any provision of this Act or of any rule or or-
der made thereunder, or obstructs the lawful exercise of any power conferred by
or under this Act, or makes default in complying with any requirement of this
Act or of any rule or order made or direction issued thereunder, shall, if no spe-
cific provision is made under this Act for punishment of such contravention, ob-
struction or default, bepunishable with fine which may extend to one lakh rupees
and where a contravention or default is a continuing one, with a further fine

guilty of the contravention or default and shall be liable to be

and punished accordingly: Proceeded against
Provided that nothing contained in this sub-section shall render any such per.
son
or liable
ordefautoltanypunishment
was commi provided inthisActifheproves thatthecontraven.
tted without his knowledge orthatheexercised alldue
 Credit Information Companies (Regn.) Act, 2005
Annex. 3 571
manager, secretary or other officer of the credi
t information company or the cred-
it institution, such chairperson, managing direc
tor, any other director, manager,
secretary or other officer shall also be deemed
to be guilty of that contravention
or default and shall be liable to be proceeded again
st and punished accordingly.
Explanation.—For the purposes of this section,
(a) company means any body corporate and includes
a firm or other associa-
tion of individuals, and
(b) director, in relation to a firm, means a partner in
the firm.
24. Cognisance of offences.—(1) No court shall take
cognisance of any of-
fence committed by a member of a credit information compa
ny and punishable
under section 23 except upon a complaint in writing made
by an officer of the
credit information company generally or specially authorised
in writing in this
behalf by the credit information company or if so directed by
the Reserve Bank
so to do and no court other than that of a Metropolitan Magis
trate or a Judicial
Magistrate of the first class or any court superior thereto shall try
any such of-
fence.
Explanation.—For the purposes of this sub-section, member of a credit
infor-
mation company shall mean a member referred to in section 15.
(2) No court shall take cognisance of any offence committed by a credit infor-
mation company punishable under section 23, except upon a complaint in writing
made by an officer of the Reserve Bank generally or specially authorised in writ-
ing in this behalf by the Reserve Bank and no court other than that of a Metro-
politan Magistrate or a Judicial Magistrate of the first class or any court superior
thereto shall try any such offence.
25. Power of Reserve Bank to impose penalty.—(1) Notwithstanding any-
thing contained in section 23, if a contravention or default of the nature referred
to in sub-section (2) of section 22 or sub-section (2) or sub-section (3) or sub-
section (4) of section 23, as the case may be, is made by a credit information
company or a credit institution then, the Reserve Bank may impose on such cred-
it information company or credit institution-
(i) where the contravention is of the nature referred to in sub-section (2) of
section 22, a penalty not exceeding one lakh rupees;
(ii) where the contravention is of the nature referred to in sub-section (2) or
sub-section (3) of section 23, a penalty not exceeding one crore rupees;
(iii) where the contravention is of the nature referred to in sub-section (4) of
section 23, a penalty not exceeding one lakh rupees and where such con-
travention or default is continuing one, a further penalty which may ex-
tend to five thousand rupees for every day, after the first, during which
the contravention or default continues.
(2) For the purpose of adjudging the penalty under sub-section (1), the Reserve
Bank shall serve notice on credit information company or credit institution or
specified user, as the case may be, requiring it to show cause as to why the
 §72 Anaex.3 = Part Chap. 7?—Non-Performing Loans-—A Slew af Measures

amount mentioned in the notice should not be imposed as penalty and a reason.
able opportunity of being heard shall also be given to such credit information
company or credit institution or specified user as the case may be.
(3) No complaint shal! be filed against credit information company or credit in-
stitution or specified user, as the case may be, in any court of law in respect of
any contravention or default in respect of which any penalty has been imposed by
the Reserve Bank under this section.
(4) Any penalty imposed by the Reserve Bank under this Act shall be payable
within a period of fourteen days from the date on which notice issued by the Re-
serve Bank demanding payment of the sum is served on the credit information
company or credit institution or specified user, as the case may be, and in the
event of failure of such credit information company or credit institution or speci-
fied user to pay the sum within such period, may be levied on a direction made
by the principal civil court having jurisdiction in the area where the registered
office of the credit information company or credit institution or specified user,
being a company, is situated and in case of credit institution incorporated outside
India, where its principal place of business in India is situated:
Provided that such direction under this sub-section shall be made only upon an
application made in this behalfto the court by the Reserve Bank.
(5) The court which makes a direction under sub-section (4) shall issue a cer-
tificate mentioning therein the sum payable by a credit information company
or
credit institution or specified user, as the case may be, and every such certific
shall beenforceable in the same manner as if itwere a decree made
ate
by the court
in a civil suit.
(6) Where any complaint has been filed against credit infor
mation company or
credit institution orspecified user asthe case may be, in
any court in respect of
the contravention ordefault ofthe nature referred toin
sub-section (2)ofsection
22 and sub-section (2) orsub-section (3) otsub-sectio
n (4) ofsection 23,then, no
Proceedings fortheimposition ofanypenalty on
thecredit information company
orcredit institution orspecified user shall be
taken under this section,
26. Application offines—A court imposing
rectthatthewhole oranypartthereof shallbe any fine under this Act di-
Costoftheproceedings,
app lie d inortow ard s pay men t of
orforsuch purposes asmay bedirected
bythecourt.
CHAPTER VIII
MISCELLANEOUS
27. Power ofReserve Bank tospecif
y maximum amount offees—The
serve Bank may.specify, byregulations,
regulati : | Re-
under sub-section (3) of by the maximum amount of fees leviable
neal
ers and for admiss ions of credit 14 for
inetitnt;providing i : ion to
t the specifieus-d
member of a creditinformation coment editinformation companies asa
28.Disclo sur
ofinfor en
matio
 Credit Information Companies (Reg
n.) Act, 2005 Annex, 3 573
agent employed in the business of a cred
it information company or in the busi
ness of a specified user shall, except -
for the purposes of this Act or when re-
quired to do so by any other law in forc
e or court or tribunal or authority, dis-
close any information to any person.
29. Obligations as to fidelity and secr
ecy.—(1) Every credit information
company shall observe, except as otherwis
e required by law, the practices and
usages Customary among credit information
companies and it shall not divulge
any information relating to, or to the affairs of,
its members or specified users.
(2) Every chairperson, director, member, audit
or, adviser, officer or other em-
ployee of a credit information company shall
, before entering upon his duties,
make a declaration of fidelity and secrecy in
the form, as may be prescribed in
this regard.
Explanation.—For the purposes of this section
and section 30, the terms prac-
tices and usages customary means such practices
and usages which, are generally
followed by credit information companies or may
develop in due course in rela-
tion to their functions, in pursuance of the provisions
of this Act, rules and regu-
lations made and directions issued thereunder from
time to time in pursuance
thereof.
30. Protection of action taken in good faith.—(1) No suit
or other legal pro-
ceedings or prosecution shall lie against the Reserve Bank
or the Central Gov-
ernment or credit information company or credit institution,
or their chairperson,
director, member, auditor, adviser, officer or other employee,
or agent or any
person authorised by the Reserve Bank or the Central Government
or credit in-
formation company or credit institution to discharge any function
under this Act,
for any loss or damage caused or as is likely to be caused by anyth
ing which is in
good faith done or intended to be done, in pursuance of this Act or any
other law
for the time being in force.
(2) Nothing contained in sub-section (1) shall affect the right of any person to
claim damages against a credit information company, a credit institution or their
chairperson, director, member, auditor, advisor, officer or other employee or
agents, as the case may be, in respect of loss caused to him on account of any
such disclosure made by any one of them and which is unauthorised or fraudulent
or contrary to provisions of this Act, or practices or usages customary among
them.
31. Bar of jurisdiction.—No court or authority shall have, or be entitled to ex-
ercise, any jurisdiction, powers or authority, except the Supreme Court and a
High Court exercising jurisdiction under articles 32, 226 and 227 of the Constitu-
tion, in relation to the matters referred to in sections 4, 5, 6, 7 and 18.
32. Power of Reserve Bank to exempt in certain cases.—(1) The Central
Government may, on the recommendation of the Reserve Bank, by notification in
the Official Gazette, direct that any or all of the provisions of this Act shall not
apply to any credit information company or a credit institution, as the am may
be, either generally or for such period and subject to such exceptions or modi
tions, as may be mentioned in that notification.
 574 Apnex.3 2390Part Chap. 7—Non-Performing Loans--A Slew of Measures

(2) A copy of every aoufication proposed to be issued ander sub-secuion (1),

shall be laid indraft before each House of Parliament, while itis in session, for a
total period of thurt days which may be comprised in one session oF In two OF
more successive tm and if, before the expiry of the session immediately
following the session or the successive sessions aforesaid, both Houses agree in
disapproving the issue of the notification or both Houses agree in making any
modification in the notification, the notification shall not be issued or as the case
may be, shall be issued only in such modified form as may be agreed upon by
h
the Houses.
bot
SAA of other laws not barred.—The provisions of this Act shal!
be in addition to, and not, save as provided under this Act, in derogation of, the
provisions of the Companies Act, 1956 (1 of 1956) or any other law for the time
inforce.
being
MM. Amendment of certain enactments.—The enactments mentioned in the
Schedule to this Act shall be amended in the manner specified therein,
35. Removal of difficulties. —(1) If any difficulty arises in giving effect to the
provisions of this Act, the Central Government may, by order published in the
Official Gazette, make such provisions not inconsistent with the provisions of
this Act as appear to it to be necessary or expedient for removing the difficulty:
Provided that no order shall be made under this section after the expiry of a pe-
riod of two years from the commencement of this Act.
_ (2) Every order made under this section shall be laid, as soon as may be after it
is made, before each House of Parliament.
_ 36. Power to make Rules.—(1) The Central Government may, after consulta-
tion with the Reserve Bank, by notification in the Official Gazette, make rules to
carry out the provisio of thisns
Act.
(2) In particular, and without prejudice tothe generality ofthe foregoing
ers, such rules may provide forallorany ofthe following matters, -
namely: sa

of section
7;

(5) the steps tobetaken byevery credit information credit insti-

tution and specified user for ensuring pple mene spl

(c) the form in which a declaration

offidelity secrecy made
der sub-section (2) of section 29:
ve aie 7
(d) any other matter which isrequired
tobe, ormay be prescribed.
(3) Every rule made ‘by
by the Central Government under
Soonasmaybeafteritismade, bef thi, s
ore eachHouseofParliament, whi
OFFh WO ok ron Patio’ ofthirty day lefe 0
s ich may be compri in one
se sesd
fetnceoessive Sessions, and if, bef sion
ore the expiry ofthe session
following the session
riowses agreeimmaking anymodifi orthesuccessive sessions aforesaid, both
cation intheruleotbothHouses
agree thn
 Credit Information Companies (Reg
n.) Act, 2005 Annex. 3 575
the rule should not be made, the rule
shall thereafter have effect only in such
modified form or be of no effect, as the
case may be; so, however, that any such
modification or annulment shall be with
out prejudice to the validity of anything
previously done under that rule.
37. Power of Reserve Bank to mak
e regulations.—(1) The Reserve Bank
may make regulations consistent with the
provisions of this Act and the rules
made thereunder to carry out the purposes of
this Act.
(2) In particular, and without prejudice to the
generality of the foregoing pow-
ers, such regulations may provide for all or
any of the following matters, namely:
(a) the persons or institutions which may
be specified as specified users un-
der clau
se (/) of section vs
(b) the form in which application may be made
under sub-section (1) of sec-
tion 4 and the manner of filing such application
under that sub-section;
(c) any other form of business in which a credit
information company may
engage under clause (e) of sub-section (1) of secti
on 14;
(d) the form of notice for collection and furnishing
of information procedure
relating thereto and purposes for which credit informatio
n may be pro-
vided under sub-sections (1) and (2) of section 17;
(e) the principles and procedures relating to credit informatio
n which may be
specified under clause (f) of section 20:
(f) the amount which may be required to be paid for obtaining
copy of credit
information under sub-section (2) of section 21;
(g) the maximum amount of charges payable under section 27.
(3) Every regulation, as soon as may be after it is made by the Reserv
e Bank,
shall be forwarded to the Central Government and that Government shall
cause a
copy of the same to be laid before each House of Parliament, while it is in
Ses-
sion, for a total period of thirty days which may be comprised in one session or in
two or more successive sessions, and if, before the expiry of the session immedi
-
ately following the session or the successive sessions aforesaid, both Houses
agree in making any modification in the regulation, or both Houses agree that the
regulation should not be made, the regulation shall, thereafter, have effect only in
such modified form or be of no effect, as the case may be; so, however, that any
such modification or annulment shall be without prejudice to the validity of any-
thing previously done under that regulation.
THE SCHEDULE
(See section 34)
Amendments to certain enactments

Part I
The Reserve Bank of India Act, 1934
(2 of 1934)
Section 45E, sub-section (2), after clause (c), insert
 $76 Annex.3 = Part |—Chap. 7—Non-Performing Loans—A Slew of Measures

“(d) the disclosures of amy credit information under the Credit Information
Companies (Regulation) Act, 2005,”
Part I
The Banking Regulation Act, 1949
(10of 1949)
|. Section 19, after sub-section (3), insert
“(4) Save as provided in clause (c) of sub-section (1), a banking c y may
form a subsidjary company to carry on the business of credit information in ac-
cordance wit Credit Information Companies (Regulation) Act, 2005.”
the h
2. Section 28, for “publish any information obtained by them under this Act in
such consolidated form as they think fit,” substitute-
“(a) publish any information obtained by them under this Act in such con-
solidated
form as they think fit;
(b) in such manner as they may consider proper, any credit information dis-
closed under theCredit Information Companies (Regulation) Act, 2005.”
Part Ill
The State Financial Corporation
Act, 1951
(63 of 1951)
Section 40, after sub-section (3), insert-
“(4) Nothing contained in this section shall apply to the credit information dis-
clos
under the
ed Credit Information Companies (Regulat ion)
Act, 2005.” "
Part IV
The State Bank of India Act, 1955
(23 of 1955)
Section 44, after sub-section (2), insert-
“(3) Nothing contained in this section shall .
closedunder theCredit Information Companies (Regulation) Ac Doone

PartV
The State Bank of India (Subsidiary Banks) Act,
1959
(38 of 1959)
Section 52, after sub-section
(2), insert-
“(3) Nothing contained in this section : .
closed und
theer
Credit Information Gommuieny* epee
 Credit Information Companies (Regn
.) Act, 2005 Annex. 3 577

Part VI
The Deposit Insurance and Credit Guaran
tee
Corporation Act, 1961
(47 of 1961)
Section 39, after sub-section (2), insert-
“(3) Nothing contained in this secti
on shall apply to the credit information dis-
closed under the Credit Information Companie
s (Regulation) Act, 2005.”
Part VII
The State Agricultural Credit Corporations Act,
1968
(60 of 1968)
Section 40, insert-
“Provided that nothing contained in this section shal]
apply to the credit infor-
mation disclosed under the Credit Information Comp
anies (Regulation) Act,
2005.”

Part VIII
The Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970
(5 of 1970)
Section 13, after sub-section (3), insert-
“(4) Nothing contained in this section shall apply to the credit information
dis-
closed under the Credit Information Companies (Regulation) Act, 2005.”

Part IX |
The Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1980
(40 of 1980)
Section 13, after sub-section (3), insert-
(4) Nothing contained in this section shall apply to the credit information dis-
closed under the Credit Information Companies (Regulation) Act, 2005.
Part X
The Export-Import Bank of India Act, 1981
(28 of 1981)
Section 30, after sub-section (3), insert-
“(4) Nothing contained in this section shall apply to the credit information dis-
closed under the Credit Information Companies (Regulation) Act, 2005.
 578 Anmex. 3 Part |—Chap. 7—Noan-Performing Loans—<A Slew af Measures

Part XI
The National Bank for Agriculture and
Rural Development Act, 1981
(61 of 1981)
Section 51, after sub-section (2), insert-
“(3) Nothing contained in this section shall apply to the credit information dis-
closed under the Credit Information Companies (Regulation) Act, 2005.”
Part XII
The Public Financial Institutions ( as to
Fid and
eliSecrecy)tyAct, 198
(48 of 1983)
Section 3, after sub-section (2), insert-
“(3) Nothing contained in this section shall apply to the credit information dis-
closed under the Credit Information Companies (Regulation) Act,
2005.”
Part XIII
The National Housing Bank Act, 1987
(53 of 1987)
Section 44, after sub-section (2), insert-

cna he Cenea Compa Regt aSa

“(3) Nothin —w , + ee

Part XIV
The Regional Rural Banks Act, 1976
(21 of 1976)
Section 25, after sub-section (2), insert-
“(3) Nothi — : _ . '
aunt under the
CreditInformation Compaen aoe editinformation.
 ANNEXURE 4
SECTION 22 OF SICK INDUSTRIAL COMPANIES
(SPECIAL PROVISIONS)ACT, 1985
22. Suspension of legal proceedings, contracts, ete.—(1) Where
in respect of
an industrial company, an inquiry under section 16 is pending or
any scheme re-
ferred to under section 17 is under preparation or consideration or
a sanctioned
scheme is under implementation or where an appeal under section 25
relating to
an industrial company is pending, then, notwithstanding anything contained
in
the Companies Act, 1956, or any other law or the memorandum and article
s of
association of the industrial company or any other instrument having effect under
the said Act or other law, no proceedings for the winding up of the industrial
company or for execution, distress or the like against any of the properties of the
industrial company, or for the appointment of a receiver in respect thereof and no
suit for the recovery of money, or for the enforcement of any security against the
industrial company or of any guarantee in respect of any loans or advance grant-
ed to the industrial company shall lie or be proceeded with further, except with
the consent of the Board or, as the case may be, the appellate authority.
(2) Where the management of the sick industrial company is taken over or
changed in pursuance of any scheme sanctioned under section 18, notwithstand-
ing anything contained in the Companies Act, 1956, or any other law or in the
memorandum and articles of association of such company or any instrument hav-
ing effect under the said Act or other law—
(a) it shall not be lawful for the shareholders of such company or any other
person to nominate or appoint any person to be a director of the com-
pany,
(b) no resolution passed at any meeting of the shareholders of such company
shall be given effect to unless approved by the Board.
(3) Where an inquiry under section 16 is pending or any scheme referred to in
section 17 is under preparation or during the period of consideration of any
scheme under section 18 or where any such scheme is sanctioned thereunder, for
due implementation of the scheme, the Board may by order declare with respect
to the sick industrial company concerned that the operation of all or any of the
contracts, assurances of property, agreements, settlements, awards, standing or-
ders or other instruments in force, to which such sick industrial company 1s a par-
ty or which may be applicable to such sick industrial company immediately be-
fore the date of such order, shall remain suspended or that all or any of the rights,
privileges, obligations and liabilities accruing or arising thereunder before the

mMbY,
 Sau Anmex. 4 Part |—Chap. 7—Non-Performing Loans—A Slew af Measures

said date, shall remain suspended or shall be enforceable with such adaptations
and in such manner as may be specifiedby the Board:
Provided that such declaration shall not be made for a period exceeding two
years which may be extended by one year at a time so, however, that the total
period shall not exceed seven years in the aggregate.
(4) Any declaration made under sub-section (3) with respec
to a t
sick industrial
company shall have effect notwithstanding anything contained in the Companies
Act, 1956, or any other law, the memorandum and articles of association of the
company or any instrument having effect under the said Act or other law or any
agreement or any decree or order of a court, Tribunal, offi or other
cer authority
or ofany submission, settlement orstanding order and accordingly,—
(a) any remedy for the enforcement of any right, privilege, Obligation and
liability suspended or modified by such declaration, and all proceedings
relating thereto pending before any court, Tribunal, officer or other au-
thority shall remain stayed orbecontinued subject tosuch declaration;

(b) on the declceasin

argat to have
io effec
n t—
(1) any right, privilege, obligation or liability so remaining
pended ormodified su -
, shall become revived and enforceable asif
the declhad arneveat
r been
iomaden
: and
(ii) any proceeding so remaining stayed shall be proc
eeded with
from thestage ofeons ofanylawwhich may
thenbeinforce,
which reached when the proceedings
(5) Incomputing theperiod oflimitation for
the enforcement ofan right, priv-
ilege.obligation orliability, theperiod dur
forcement thereof remains suspended und ing whi ch itor the rem edy fortheoy.
er this section shall beexcluded
 ANNEXURE 5A

PRUDENTIAL GUIDELINES ON
RESTRUCTURING OF ADVANCES BY BANKS

[Extracts from the Master Circular on Prudential norms on

Income Recognition, Asset Classification and Provisioning
pertaining to Advances dated July 1, 2013]
PARTB
Prudential Guidelines on Restructuring of Advances by Banks
10. Background
10.1 The guidelines issued by the Reserve Bank of India on restructuring of
advances (other than those restructured under a separate set of guidelines
issued by the Rural Planning and Credit Department (RPCD) of the RBI
on restructuring of advances on account of natural calamities) are divided
into the following four categories :
(i) Guidelines on restructuring of advances extended to industrial
units.
(ii) Guidelines on restructuring of advances extended to industrial
units under the Corporate Debt Restructuring (CDR) Mechanism
(iii) Guidelines on restructuring of advances extended to Small and
Medium Enterprises (SME)
(iv) Guidelines on restructuring of all other advances.
In these four sets of guidelines on restructuring of advances, the differen-
tiations were broadly made based on whether a borrower is engaged in an
industrial activity or a non-industrial activity. In addition, an elaborate
institutional mechanism was laid down for accounts restructured under
CDR Mechanism. The major difference in the prudential regulations was
in the stipulation that subject to certain conditions, the accounts of bor-
rowers engaged in industrial activities (under CDR Mechanism, SME
Debt Restructuring Mechanism and outside these mechanisms) continued
to be classified in the existing asset classification category upon restruc-
turing. This benefit of retention of asset classification on restructuring
was not made available to the accounts of borrowers engaged in non-
industrial activities except to SME borrowers. Another difference was
that the prudential regulations covering the CDR Mechanism and restruc-
turing of advances extended to SMEs were more detailed and compre-

581
 $82 Aunex.5A Part |—Chap. 7—Non-Performing Loans-—A Slew of Measures

hensive than that covering the restructuring of the rest of the ad Vanoes
including the advances extended to the industrial units, Outside CDR
Mechanism. Further, the CDR Mechanism was made available only to
the borrowers engaged in industrial activities.

of natural calamities which will continue to be covered by the extant

guidelines issued by the RPCD, were harmonised in August 2008,
10.3 In the backdrop of extraordinary rise in restructured standard advances,
these prudential norms were further revised by into account the
recommendations of the Working Group (Chairman: Shri B, Mahapatra)
to review the existing prudential guidelines on restructuring of advances
by banks/financial institutions. These prudential norms applicable to all
restructurings including those under CDR Mechanism are included in
this circular. The details of the institutional / organizational framework
for CDR Mechanism and SME Debt Restructuring Mechanism are given
in Annex
- 4.
10.4

ll. Key Concepts

Key concepts used in these guidelines are defined in Annex -5.
12. General Principles and Prudential Norms for Restructured Advan
ces
The principles and prudential norms laid down inthis paragrap
to all advances including theborrowers, who areeligible for h applicable
special regulatory
treatment for asset classification as specified in para 15.
12.1 Eligibility criteria for restructuring of
advances
12.1.1 Banks may restructure the accounts '
“3 ed under ‘standar .
dard sna’ saied. Classifi d’, ‘sub- stan-

. cat
rest i g ]
ructurin
thereisunduedelayinsanctioning arestructeiog mena ean cae
;
 Prudential Guidelines on Restructuring of Advances
by Banks Annex. 5A 583
meantime the asset classification status of the account under
goes deterio-
ration, it would be a matter of supervisory concern.
Normally, restructuring cannot take place unless alteration /
changes in
the original loan agreement are made with the formal consent
/ applica-
tion of the debtor. However, the process of restructuring can be initiat
ed
by the bank in deserving cases subject to customer agreeing to the
terms
and conditions.
12.1.4 No account will be taken up for restructuring by the banks unless
the fi-
nancial viability is established and there is a reasonable certainty of re-
payment from the borrower, as per the terms of restructuring package.
Any restructuring done without looking into cash flows of the borrower
and assessing the viability of the projects / activity financed by banks
would be treated as an attempt at ever greening a weak credit facility and
would invite supervisory concerns / action. Banks should accelerate the
recovery measures in respect of such accounts. The viability should be
determined by the banks based on the acceptable viability benchmarks
determined by them, which may be applied on a case-by-case basis, de-
pending on merits of each case. Illustratively, the parameters may in-
clude the Return on Capital Employed, Debt Service Coverage Ratio,
Gap between the Internal Rate of Return and Cost of Funds and the
amount of provision required in lieu of the diminution in the fair value of
the restructured advance. As different sectors of economy have different
performance indicators, it will be desirable that banks adopt these broad
benchmarks with suitable modifications. Therefore, it has been decided
that the viability should be determined by the banks based on the accept-
able viability parameters and benchmarks for each parameter determined
by them. The benchmarks for the viability parameters adopted by the
CDR Mechanism are given in the Appendix to Part — B of this Master
Circular and individual banks may suitably adopt them with appropriate
adjustments, if any, for specific sectors while restructuring of accounts in
non-CDR cases. ;
Py Oe While the borrowers indulging in frauds and malfeasance will continue
to remain ineligible for restructuring, banks may review the reasons for
classification of the borrowers as wilful defaulters, specially in old cases
where the manner of classificationof a borrower as a wilful defaulter
was not transparent, and satisfy itself that the borrower is in a position to
rectify the wilful default. The restructuring of such cases may be done
with Board's approval, while for such accounts the restructuring under
the CDR Mechanism may be carried out with the approval of the Core
Group only. ,
12.1.6 BIFR cases are not eligible for restructuring without their express ap-
proval. CDR Core Group in the case of advances restructured under CDR
Mechanism, the lead bank in the case of SME Debt Restructuring
Mechanism and the individual banks in other cases, may consider the
proposals for restructuring in such cases, after ensuring that all the for-
a4 Anpex. 5A Part }—Chap. 7—Nen-Performing Laans-A Siew of Measures

malities in seeking the approval trom BIFR are Conapleted belore imple
mentin g .
the package
12.2 Asset classification aerms
Restructuring of advances could take place in the following stages:
(a) before commencement of commercial production / operation,
(b) after commencement of commercial production / operation but
before the asset has been classified as ‘sub-standard’;
(c) after commencement of commercial production / operation and
the asset has been classified as ‘sub-standard’ or ‘doubtful’,
12.2.1 The accounts classified as ‘standard assets’ shouldbe immediately re-
classifiedas ‘sub-standard assets’ upon restructuring.
12.2.2 The non-performing assets, upon restructuring, would continue to have
the same asset classification as prior to restructuring and slip into further
lower asset classification categories as per extant asset classification
norms with reference to the pre-restructuring repayment schedule.
12.2.3 Standard accounts classified as NPA and NPA accounts retained in the
same category on restructuring by the bank should be upgraded only
when all the outstanding loan/facilities in the account perform satisfacto-
rily during the ‘specified period’ (Annex - 5), i.e. principal and interest
on all facilities in the account are serviced as per terms of payment dur-
ing that period.
12.2.4 In case, however, satisfactory performance after the specified period is
not evidenced, the asset classification of the restructured account would
be governed as per the applicable prudential norms with reference to the
pre-restru cturi
payment ng
schedule.
12.2.5 Any additional finance may be treated as ‘standard asset’ during the

12.2.6 Ifa restructured asset, which isa stan

dard asset onrestructuring in terms
wuldbeclaveifi ed eo ° restructuring ona subsequent occasion, it
of
- *
, .
wat
Prudential Guidelines on Restructuring
of Advances by Banks Annex. 5A 585
12.3 Income recognition norms
Subject to provisions of paragraphs 12.2.
5, 13.2 and 14.2, interest income in
respect of restructured accounts classified
as ‘standard assets’ will be recognized
on accrual basis and that in respect of the
accounts classified as ‘non-performing
assets’ will be recognized on cash basis.
12.4 Provisioning norms
12.4.1 Provision on restructured advances

(i) Banks will hold provision against the restr

uctured advances as per the
extant provisioning norms.
(ii) Restructured accounts classified as stand
ard advances will attract a
higher provision (as prescribed from time to time)
in the first two years
from the date of restructuring. In cases of moratori
um on payment of in-
terest/principal after restructuring, such advances
will attract the pre-
scribed higher provision for the period covering mora
torium and two
years thereafter.
(iii) Restructured accounts classified as non-performing
advances, when up-
graded to standard category will attract a higher provision
(as prescribed
from time to time) in the first year from the date of upgradatio
n.
(iv) The above-mentioned higher provision on restructured standa
rd advances
(2.75 per cent as prescribed vide circular dated November
26, 2012)
would increase to 5 per cent in respect of new restructured standa
rd ac-
counts (flow) with effect from June 1, 2013 and increase in a phased
manner for the stock of restructured standard accounts as on May
31,
2013 as under :
° 3.50 per cent - with effect from March 31, 2014 (spread over the
four quarters of 2013-14)
° 4.25 per cent - with effect from March 31, 2015 (spread over the
four quarters of 2014-15)
* 5.00 per cent - - with effect from March 31, 2016 (spread over
the four quarters of 2015-16)
12.4.2 Provision for diminution in the fair value of restructured advances
(i) Reduction in the rate of interest and / or reschedulement of the repay-
ment of principal amount, as part of the restructuring, will result in dimi-
nution in the fair value of the advance. Such diminution in value is an
economic loss for the bank and will have impact on the bank's market
value of equity. It is, therefore, necessary for banks to measure such
diminution in the fair value of the advance and make provisions for it by
debit to Profit & Loss Account. Such provision should be heldin addi-
tion to the provisions as per existing provisioning norms as indicated in
para 12.4.1 above, and in an account distinct from that for normal provi-
sions.
 af Measures
530 Aanex. SA Part |—Chap. 7-—Non-Performing Loauns—A Slew

3 pose. the erosion in the fair value of the advance shouldbe

re difference between the fair value of the loan belore and
g will be
after restructuring. Fair value of the loan before restructurin
compas ut theedpresent value of cash flows representing the interest al
the existing rate charged on the advance before restructuring and the
principal, discounted at a rate equal to the bank's BPLR or base
rat” (whichever is applicable ee 6 ype cay A
in, the appropriate term premium it risk premium for
wodes category on the date of restructuring, Fair value of the loan af-
ter restructuring will be computed as the present value of cash flows rep-
resenting the interest at the rate chargedon the advance on restructuring
and the principal, discounted at a rate equal to the bank's BPLR or base
rate (whichever is applic ab
to the le
borro wer) as on the date of restruc-
turing plus the appropriate term premium and credit risk premium for the
borrower category on the date of restructuring.
The above formula moderates the swing in the diminution of present val-
ue of loans with the interest rate cycle and will have to be followed con-
sistently by banks in future. Further, it is reiterated that the provisions re-
quired as above arise due to the action of the banks resulting in change in
contractual terms of the loan upon restructuring which are in the nature
of financial concessions. These provisions are distinct from the provi-
sions which are linked to the asset classification of the account classified
as NPA and reflect the impairment due to deterioration in the credit qual-
eee te et ee eee

(ii)

fice involved for the bank would be NPV debt/equ

of theitabove wd a
valuation lossonaccount of conversion into

nt of
amouer, ficed requi
sacrishoul from
redany promoe ters
effthecat . n 15.2.2
pent ea
. v)
.iv).
2.2.i
Furth there not be
 Prudential Guidelines on Restructuring of Adva
nces by Banks Annex. 5A 587
reduce the net present value of cash flows by resor
ting to any sort of fi-
nancial engineering. Banks are also advised to put
in place a proper
mechanism of checks and balances to ensure accurate
calculation of ero-
sion in the fair value of restructured accounts.
(ili) In the case of working capital facilities, the diminution
in the fair value
of the cash credit / overdraft component may be computed
as indicated in
para (i) above, reckoning the higher of the outstandin
g amount or the
limit sanctioned as the principal amount and taking the tenor
of the ad-
vance as one year. The term premium in the discount factor
would be as
applicable for one year. The fair value of the term loan compo
nents
(Working Capital Term Loan and Funded Interest Term Loan)
would be
computed as per actual cash flows and taking the term prem
ium in the
discount factor as applicable for the maturity of the respective term
loan
components.
(iv) In the event any security is taken in lieu of the diminution in the fair val-
ue of the advance, it should be valued at Re.1/- til] maturity of
the secu-
rity. This will ensure that the effect of charging off the economic sacri-
fice to the Profit & Loss account is not negated.
(v) The diminution in the fair value may be re-computed on each balance
sheet date till satisfactory completion of all repayment obligations and
full repayment of the outstanding in the account, so as to capture the
changes in the fair value on account of changes in BPLR or base rate
(whichever is applicable to the borrower), term premium and the credit
category of the borrower. Consequently, banks may provide for the
shortfall in provision or reverse the amount of excess provision held in
the distinct account.
(vi) If due to lack of expertise / appropriate infrastructure, a bank finds it dif-
ficult to ensure computation of diminution in the fair value of advances,
as an alternative to the methodology prescribed above for computing the
amount of diminution in the fair value, banks will have the option of no-
tionally computing the amount of diminution in the fair value and pro-
viding therefor, at five percent of the total exposure, in respect of all re-
structured accounts where the total dues to bank(s) are less than rupees
one crore. .
12.4.3 The total provisions required against an account (normal provisions plus
provisions in lieu of diminution in the fair value of the advance) are
capped at 100% of the outstanding debt amount.
12.5 Risk- Weights
a. Restructured housing loans should be risk weighted with an additional
risk weight of 25 percentage points.
b. With a view to reflecting a higher element of inherent risk which may be
latent in entities whose obligations have been subjected to restructuring
rescheduling either by banks on their own or along with other bankers
creditors, the unrated standard / performing claims on corporates should
 585 Aanex.5A Part i—Chap. 7—Non-Performing Laans—A Slew af Measures

be assigned a higher msk weight of 125% until saastactory performance

under the revised payment schedule has been established for one year
from the date when the first payment of interest / principal falls due un.
der the revised schedule.
c. For details on risk weights, Master Circular
DBOD.No.BP.MC.2/21.06.201/2013-14 dated July 1, 2013 on “Basel I!)
Capital Regulations’ may be referred.
13. Prudential Norms for Conversion of Principal into Debt / Equity
13.1 Asset classification
norms
A part of the outstanding principal amount can be converted into debt or equity
instruments as part of restructuring. The debt / equity instruments so created will
be classified in the same asset classification category in which the restructured
advance has been classified. Further movement in the asset classification of these
instruments would also be determined based on the subsequent asset classifica-
tion of the restructured advance.
13.2 Income recognition norms
13.2.1 Standard Accounts
In the case of restructured accounts classified as ‘standard’, the income, if any,
generated by these instruments may be recognised on accrual basis.
13.2.2 Non- Performing Accounts
In the case of restructured accounts classified as non-performing assets, the in-
rg if any, generated by these instruments may be recognised only on cash
sis.
13.3 Valuation and provisioning norms
These instruments should be held under AFS and valued asper usual valua
tion
norms. Equity classified as standard asset should be valued eithe
r at market
value, if quoted, or atbreak-up value, ifnot quoted without
valuation reserve,
considering the re-
if any)which is tobeascertained from thecompany’
s lates

14. Prudential Norms for Conversion of Unpaid Interest ‘Funded Inter

est Term Loan’ (FITL), Debt or Equity Instruments —
 Prudential Guidelines on Restructurin
g of Advances by Banks — Annex. 5A 589
FITL / debt or equity instruments woul
d also be determined based on the subs
quent asset classification of the restructured e-
advance.
14.2 Income recognition norms
14.2.1 The income, if any, generated by these inst
ruments may be recognised on
accrual basis, if these instruments are Clas
sified as ‘standard’, and on cash
basis in the cases where these have been Clas
sified as a non-performing
asset.
14.2.2 The unrealised income represented by
FITL / Debt or equity instrument
should have a corresponding credit in an account
styled as "Sundry Li-
abilities Account (Interest Capitalization)".
14.2.3 In the case of conversion of unrealised
interest income into equity, which
is quoted, interest income can be recognized after
the account is up-
graded to standard category at market value of equit
y, on the date of such
upgradation, not exceeding the amount of interest conv
erted into equity.
14.2.4 Only on repayment in case of FITL or sale
/ redemption proceeds of the
debt / equity instruments, the amount received wil] be
recognized in the
P&L Account, while simultaneously reducing the balan
ce in the "Sundry
Liabilities Account (Interest Capitalisation)".
14.3 Valuation & Provisioning norms
Valuation and provisioning norms would be as per para 13.3
above. The depre-
ciation, if any, on valuation may be charged to the Sundr
y Liabilities (Interest
Capitalisation) Account.
15. Special Regulatory Treatment for Asset Classification
15.1 The special regulatory treatment for asset classification, in modifi
cation
to the provisions in this regard stipulated in para 12, will be available to
the borrowers engaged in important business activities, subject to com-
pliance with certain conditions as enumerated in para 15.2 below. Such
treatment is not extended to the following categories of advances:
i. Consumer and personal advances;
li. Advances classified as Capital market exposures;
ili. Advances classified as commercial real estate exposures
The asset classification of these three categories accounts as well as that
of other accounts which do not comply with the conditions enumerated
in para 15.2, will be governed by the prudential norms in this regard de-
scribed in para 12 above.
15.2 Elements of special regulatory framework
The special regulatory treatment has the following two components:
(i) Incentive for quick implementation of the restructuring package.
(ii) Retention of the asset classification of the restructured account in the
pre-restructuring asset classification category
 res
yw Annex. 5A Part |—Chap. 7—Non-Performing Loans—A Slew of Measu

ge
15.2.1 Incentive for quick implementation of the restructuring packa
tur:
As stated in para 12.1.2, during the pendency of the application for restruc
ing of the advance with the bank, the usual asset classification norms would con:
tinue to apply. The process of reclassification of an asset should not stop merely
because the application is under consideration, However, as an incentive for
quick implementation of the package, if the approved is implemented by
the bank as per the following time schedule, the asset classification status may be
restored to the position which existed when the reference was made to the CDR
Cell in respec t covered undthe
of cases er CDR Mechanismor wh en
the restruc-
turing application was received by the bank in non-CDR cases:
the CDR Mechanism,
(i) Within 120 days from the date of approval under
(ii) Within 120 days from the date of receipt of by the bankin
cases other than those restructured under the Mechanism.
15.2.2 Asset classification
benefits
Subject to the compliance with the undernoted conditions in addition to the
adherence to the prudential framework laid down in para 12:
(i) In modification
to para 12.2.1,
an existing ‘standard asset’ will not be
downgraded to the sub-standard category upon restructuring,
(ii) In modification to para 12.2.2, during the specified period, the asset clas-
sification of the sub-standard / doubtful accounts will not deteriorate
upon restructuring, if satisfactory performance is demonstrated during
the specified period.
However, these benefits will be available subject to compliance with
the fol-
lowing conditions:
(i) Fil oe Dankare‘fully secured’ asdefined inAnnex - 5. Thecon-
dition
os ing fully| secured
by tangibleible security will not be applicable
i in
i

(a) MSE borrowers, where the outstanding is up to Rs.25 lakh.

(b) Infrastructure projects, provided the cash flows generated from
these projects are adequate for repayment of the advance, the fi-
roe tee unis) have inplace anappropriate mechanism toes-
—- cash flows,
:
also have a clear and legal first claim
and ‘

(ii) The
are unit becomes viable in 8 years, in infrastructure
if it is engaged in i ac-
tivities, and in 5 years in the case of other units. - a
(im) The repayment period ofthe restructured including themorato
rum, ifany.doesnotexceed 15 yearsinthecaseofinfrastructure. ad
vances and 10 years in the case of other advances. The aforesaid
applicable for restructured home loans: in these
cases the Board ofDirectors ofthe banks should
prescribe the maximum
Prudential Guidelines on Restructuring of Advances
by Banks Annex. 5A 591
period for restructured advance keeping in view the safety
and soundness
of the advances.
(iv) Promoters' sacrifice and additional funds brought by them
should be a
minimum of 20 per cent of banks’ sacrifice or 2 per cent
of the restruc-
tured debt, whichever is higher. This stipulation is the
minimum and
banks may decide on a higher sacrifice by promoters depen
ding on the
riskiness of the project and promoters’ ability to bring in highe
r sacrifice
amount. Further, such higher sacrifice may invariably be insist
ed upon in
larger accounts, especially CDR accounts. The promoters’
sacrifice
should invariably be brought upfront while extending the restru
cturing
benefits to the borrowers. The term ‘bank's sacrifice’ means the amoun
t
of "erosion in the fair value of the advance" or “total sacrifice”,
to be
computed as per the methodology enumerated in para 12.4.2 (i) and
(ii)
above.
(Prior to May 30, 2013, if banks were convinced that the promot
ers face
genuine difficulty in bringing their share of the sacrifice immediately and
need some extension of time to fulfill their commitments, the promoters
could be allowed to bring in 50% of their sacrifice, i.e. 50% of 15%, up-
front and the balance within a period of one year. However, in such
cases, if the promoters fail to bring in their balance share of sacrifice
within the extended time limit of one year, the asset classification bene-
fits derived by banks will cease to accrue and the banks will have to re-
vert to classifying such accounts as per the asset classification norms
specified under para 12.2 of this circular.)
(v) Promoter’s contribution need not necessarily be brought in cash and can
be brought in the form of de-rating of equity, conversion of unsecured
loan brought by the promoter into equity and interest free loans.
(vi) The restructuring under consideration is not a 'repeated restructuring’ as
defined in para (v) of Annex - 5.
IsWe & In line with the recommendation of the Working Group (Chairman: Shri
B. Mahapatra) to review the existing prudential guidelines on restructur-
ing of advances by banks/financial institutions, the extant incentive for
quick implementation of restructuring package and asset classification
benefits (paragraph 15.2.1 & 15.2.2 above) available on restructuring on
fulfilling the conditions will however be withdrawn for all restructurings
effective from April 1, 2015 with the exception of provisions related to
changes in DCCO in respect of infrastructure as well as non-
infrastructure project loans (please see para 4.2.15). It implies that with
effect from April 1, 2015, a standard account on restructuring (for rea-
sons other than change in DCCO) would be immediately classified as
sub-standard on restructuring as also the non-performing assets, upon re-
structuring, would continue to have the same asset classification as prio
to restructuring and slip into further lower asset classification categories
as per the extant asset classification norms with reference to the pre-
restructuring repayment schedule.
$92 Annex. 5A Part |—Chap. 7—Non-Performing Loans—A Slew of Measures

16. Miscellaneous
16.1 The banks should decide on the issue regarding convertibility (into eq,
uity) option as a part of restructuring exercise siosshy tho bonis / Ginan-
cial institutt s shall have the right to convert a portion of the restruc-
tured amount into equity, keeping in view the requirement un-
der Section 19 of the Banking Regulat ion Act, 1949, (in the case of
banks) and relevant SEB! regulations.
Conversio of debt ninto preference shares should be done only as a last
resort and such conversion of debt into equity/preference shares should,
in any case, be restricted to a cap (say 10 per cent of the restructured
debt). Further, any convers of debt ion
into equity should be done only in
the case of listed companies.
16.3 Acquisition of equity shares / convertible bonds / convertible debentures
in companies by way of conversion of debt / overdue interest can be
done without seeking prior approval from RBI, even if by such acquisi-
tion the prudential capital market exposure limit prescribed by the RBI is
breached. However, this will be subject to reporting of such holdings to
RBI, Department of Banking Supervision (DBS), every month along
with the regular DSB Return on Asset Quality. Nonetheless, banks will
have to comply with the provisions of Section 19(2) of the Banking
Regulation Act, 1949.
16.4 Acquisition of non-SLR securities by way of conversion of debt is ex-
empted from the mandatory rating requirement and the prudential limit
on investment in unlisted non-SLR securities, prescribed by the RBI,
subject to periodical reporting to the RBI in the aforesaid DSB return.
16.5 Banks may consider incorporating in the approved restructuring »
agescreditor's rightstoaccelerate repayment andtheborrower's sightto
pre pay. Purther, all restructuring packages :
: ’ clause and it should be based on certain performance crite-
riaofthe borrower. Inany case, minimum 75 per cent ofthe recompense
amount should be recovered by the lenders and in cases where some fa-
cility under restructuring has been extended below base rate, 100 per cent
of the recompense amount should be recovered.
16.6 he on
 Prudential Guidelines on Restructurin
g of Advances by Banks Annex. 5A 593
tion in the fair value of the restructured
advances as per the format given
in Annex-6. The information would be
required for advances restructured under

structured part or facility. This means even

if only one of the facilities / accounts
of a borrower has been restructured, the bank
should also disclose the entire out-
standing amount pertaining to all the facilities
/ accounts of that particular bor-
rower. The disclosu re format prescribed in Annex-6, inter-alia
, includes the fol-
lowing:
i. details of accounts restructured on a cumulati
ve basis excluding the stan-
dard restructured accounts which cease to attra
ct higher provision and
risk weight (if applicable):
li. provisions made on restructured accounts unde
r various categories; and
ili. details of movement of restructured accounts.
This implies that once the higher provisions and risk
weights (if applicable) on
restructured advances (classified as standard either ab
initio or on upgradation
from NPA category) revert to the normal level on accou
nt of satisfactory per-
formance during the prescribed period, such advances
should no longer be re-
quired to be disclosed by banks as restructured accounts
in the “Notes on Ac-
counts” in their Annual Balance Sheets. However, the provi
sion for diminution in
the fair value of restructured accounts on such restructured
accounts should con-
tinue to be maintained by banks as per the existing instructions
.
18. It has been reiterated that the basic objective of restructurin
g is to pre-
serve economic value of units, not ever-greening of problem accoun
ts.
This can be achieved by banks and the borrowers only by careful
as-
sessment of the viability, quick detection of weaknesses in accounts and
a time-bound implementation of restructuring packages.
SS ree SS SS Ss SS eee
ee

Appendix
Broad benchmarks for the viability parameters
(i) Return on capital employed should be at least equivalent to 5 year Gov-
ernment security yield plus 2 per cent.
(ii) The debt service coverage ratio should be greater than 1.25 within the 5
years period in which the unit should become viable and on year to year
basis the ratio should be above 1. The normal debt service coverage ratio
for 10 years repayment period should be around 1.33.
(iii) The benchmark gap between internal’rate of return and cost of capital
should be at least Iper cent.
(iv) Operating and cash break even points should be worked out and they
should be comparable with the industry norms.
 Measures
S44 Ananex.5A Part l—Chap. 7—Non-Performing Loans—A Slew af
future projections
(v) Trends of the company based on historical data and
should be with the industry. Thus behaviour of past and fu-
average,
ture EBIDTA should be studied and compared with industry
(vi) Loan life ratio (LILR), as defined below should be 1.4, which would give
a cushion of 40% to the amount of loan to be serviced,
Present value of total available cash flow (ACF) during the loan life pe-
riod (inc lut di
interes ngal)
and princip
ieee ee ee ee ee ee ee
LLR= ee eeooee ee

Maximum amount of loan

 ANNEXURE 5B
GUIDELINES FOR RESTRUCTURING UNDER
CDR MECHANISM
[Relevant extracts from Master Circular on Prudential Norm
s
on Income Recognition, Asset Classification, and Provisioning
pertaining to Advances dated July 1, 2013]
[Hereunder is the text of Part A only, Part B deals with SME Debt Restruc
tur-
ing Mechanism which has been reproduced in Annexure 6B ]

Annex — 4
Organisational Framework for Restructuring of Advances Under Consor-
tium / Multiple Banking / Syndication Arrangements
A. Corporate Debt Restructuring (CDR) Mechanism

1.1 Objective
The objective of the Corporate Debt Restructuring (CDR) framework is to en-
sure timely and transparent mechanism for restructuring the corporate debts of
viable entities facing problems, outside the purview of BIFR, DRT and other le-
gal proceedings, for the benefit of all concerned. In particular, the framework
will aim at preserving viable corporates that are affected by certain internal and
external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.
1.2 Scope
The CDR Mechanism has been designed to facilitate restructuring of advances
of borrowers enjoying credit facilities from more than one bank / Financial Insti-
tution (FI) in a coordinated manner.The CDR Mechanism is an organizational
framework institutionalized for speedy disposal of restructuring proposals of
large borrowers availing finance from more than one banks / FIs. This mecha-
nism will be available to all borrowers engaged in any type of activity subject to
the following conditions :
a. The borrowers enjoy credit facilities from more than one bank / FI under
multiple banking / syndication / consortium system of lending.
b. The total outstanding (fund-based and non-fund based) exposure is Rs. 10
crore or above.
CDR system in the country will have a three tier structure :

595
 YO Apnes. SB Part i—Chap. 7—Non-Performing Laans-—A Slew of Measures

® CDR Standing Forum and its Core Group

* CDR Empowered Group
* CDR Cell
2. CDR Standing Forum
2.1 The CDR Standing Forum would be the representative general body of all
financial institutions and banks participating in CDR system. All financial insti-
tutions and banks should participate in the system in their own interest, CDR
Standing Forum will be a selfempowered body, which will lay down policies and
guidelines, and monitor the progress of corporate debt restructuring.
2.2 The Forum will also provide an official platform for both the creditorsand
borrowers (by consultation) to amicably and collectively evolve policies and
guidelines for working out debt restructuring plans in the interests of all con-
cerned.
2.3 The CDR Standing Forum shall comprise of Chairman & Managing Direc-
tor, Industrial Development Bank of India Lid; Chairman, State Bank of India;
ing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks' Asso-
ciationas well as Chairmen and Managing Directors of all banks and financial
institutions participating as permanent members in the system. Since institutions
like Unit Trust of India, General Insurance Corporation, Life Insurance Corpora-
tion may have assumed exposures on certain borrowers, these institutions may
participate in the CDR system. The Forum will elect its Chairman for a period of
one year and the principle of rotation will be followed in the subsequent years.
However, the Forum may decide to have a Working Chairman as a whole-time
officer to guide and carry out the decisions of the CDR Standing Forum. The RBI
would not be a member of the CDR Standing Forum and Core Group. Its role
will be confined to providing broad guidelines.
saldreviow ey ending Forum shall meetatleastonceevery sixmonths and
would review monitor progress of corporate debt restructuring system.
The Forum would also lay down the policies and guidelines including those
relat-
ing to the critical parameters for restructuring
ing (for example, maximum period
a unitto become viable under a restructuring package, muniimumn
leveldf me

. Empowered ’
Standing Forum may also formulate guidelines fordispensing
ing special treatment

:!
to those which ; ,
Geneframe pre mau be delayed beyond the

eS
CIC! Bank Ltd, Bank ofBaroda, Bank of of India
India, Punjab National Bank. Indian
 Guidelines for Restructuring under CDR
Mechanism Annex. 5B 597
Banks' Association and Deputy Chairman
of Indian Banks' Association repre-
senting foreign banks in India.
2.6 The CDR Core Group would lay down the polic
ies and guidelines to be fol-
lowed by the CDR Empowered Group and CDR
Cell for debt restructuring. The-
se guidelines shall also suitably address the opera
tional difficulties experienced
in the functioning of the CDR Empowered Grou
p. The CDR Core Group shall
also prescribe the PERT chart for processing of cases
referred to the CDR system
and decide on the modalities for enforcement of the
time frame. The CDR Core
Group shall also lay down guidelines to ensure that
Over-optimistic projections
are not assumed while preparing / approving restr
ucturing proposals especially
with regard to capacity utilization, price of products,
profit margin, demand,
availability of raw materials, input-output ratio and
likely impact of imports /
international cost competitiveness.
3. CDR Empowered Group
3.1 The individual cases of corporate debt restructuring shall
be decided by the
CDR Empowered Group, consisting of ED level representatives
of Industrial De-
velopment Bank of India Ltd., ICICI Bank Ltd. and State Bank of
India as stand-
ing members, in addition to ED level representatives of financial
institutions and
banks who have an exposure to the concerned company. While
the standing
members will facilitate the conduct of the Group's meetings, voting
will be in
proportion to the exposure of the creditors only. In order to make the
CDR Em-
powered Group effective and broad based and operate efficiently and smoot
hly, it
would have to be ensured that participating institutions / banks approve a
panel
of senior officers to represent them in the CDR Empowered Group and ensure
that they depute officials only from among the panel to attend the meetings of
CDR Empowered Group. Further, nominees who attend the meeting pertaining to
one account should invariably attend all the meetings pertaining to that account
instead of deputing their representatives.
3.2 The level of representation of banks / financial institutions on the CDR
Empowered Group should be at a sufficiently senior level to ensure that con-
cerned bank / FI abides by the necessary commitments including sacrifices, made
towards debt restructuring. There should be a general authorisation by the respec-
tive Boards of the participating institutions / banks in favour of their representa-
tives on the CDR Empowered Group, authorising them to take decisions on be-
half of their organization, regarding restructuring of debts of individual corpo-
rates.
3.3 The CDR Empowered Group will consider the preliminary report of all
cases of requests of restructuring, submitted to it by the CDR Cell. After the Em-
powered Group decides that restructuring of the company is prima-facie feasible
and the enterprise is potentially viable in terms of the policies and guidelines
evolved by Standing Forum, the detailed restructuring package will be worked
out by the CDR Cell in conjunction with the Lead Institution. However, if the
lead institution faces difficulties in working out the detailed restructuring vel
age, the participating banks / financial institutions should decide upon the alter-
 res
393 Annex. 5B Part |—Chap. 7—Non-Performing Laans—A Slew af Measu

aie usututio n which would work out the detailed restructuring package al
/ bank
report of the
the firstmeeting of the Empowered Group when the preliminary
CDR Cell comes up for consideration,
The CDR Empowered G would be mandated to look into each case of
pe sw ete =me examine theviability and rehabilitauon potential of the Com-
pany and approve the restructuring package within a specified time frame of 90
days, or at best within 180 days of reference to the Empowered Group, The CDR
Empowered Group shall decide on the acceptable viability benchmark levels on
the following illustrative parameters, which may be applied on a case-by-case
basis, based onthe mer each case:
ofits
* Return on Capital Employed (ROCE),
* Debt Service Coverage Ratio (DSCR),
* Gap between the Internal Rate of Return (IRR) and the Cost of Fund
(CoP),
* Extent of sacrifice.
3.5 The Board of each bank / FI should authorise its Chief Executive Officer
(CEO) and / or Executive Director (ED) to decide on the restructuring package in
respect of cases referred to the CDR system, with the requisite requirements to
meet the control needs. CDR Empowered Group will meet on two or three occa-
sions in respect of each borrowal account. This will provide an ity to the
TNL tof On en oe / ED, in case
in respect of those cases where the critical parameters of restructuring
are beyond the authority delegated to him / her.
3.6 The decisions of the CDR Empowered Group shall be final. If
of debt is found to be viable and feasible and approved by the Empowered
Group, the company would be put on the mode. If ing 1s
not found viable, the creditors would then be free to take necessary steps for im-
mediate
heetivally recovery
er isle: of dues
“ and / or liquidation orwinding
windi up of the company , col-

4. CDR Cell ae
 Guidelines for Restructuring under CDR Mech
anism Annex. 5B 599
month. The CDR Cell will prepare the restructur
ing plan in terms of the general
policies and guidelines approved by the CDR
Standing Forum and place for con-
sideration of the Empowered Group within 30 days
for decision. The Empowered
Group can approve or Suggest modifications but
ensure that a final decision is
taken within a total period of 90 days. However,
for sufficient reasons the period
can be extended up to a maximum of 180 days from
the date of reference to the
CDR Cell.
4.3 The CDR Standing Forum, the CDR Empowered
Group and CDR Cell is at
present housed in Industrial Development Bank of India
Ltd. However, it may be
shifted to another place if considered necessary, as may
be decided by the Stand-
ing Forum. The administrative and other costs shall
be shared by all financial
institutions and banks. The sharing pattern shall be as deter
mined by the Standing
Forum.
4.4 CDR Cell will have adequate members of staff deputed
from banks and fi-
nancial institutions. The CDR Cell may also take outside profes
sional help. The
cost in operating the CDR mechanism including CDR Cell will
be met from con-
tribution of the financial institutions and banks in the Core Group
at the rate of
Rs.50 lakh each and contribution from other institutions and banks
at the rate of
Rs.5 lakh each.
5 Other features
5.1 Eligibility criteria
5.1.1 The scheme will not apply to accounts involving only one financial insti-
tution or one bank. The CDR mechanism will cover only multiple banking ac-
counts / syndication / consortium accounts of corporate borrowers engaged in
any type of activity with outstanding fund-based and non-fund based exposure of
Rs.10 crore and above by banks and institutions.
5.1.2 The Category 1 CDR system will be applicable only to accounts classi-
fied as 'standard' and 'sub-standard'. There may be a situation where a small por-
tion of debt by a bank might be classified as doubtful. In that situation, if the ac-
count has been classified as 'standard’/ 'substandard' in the books of at least 90%
of creditors (by value), the same would be treated as standard / substandard, only
for the purpose of judging the account as eligible for CDR, in the books of the
remaining 10% of creditors. There would be no requirement of the account /
company being sick, NPA or being in default for a specified period before refer-
ence to the CDR system. However, potentially viable cases of NPAs will get pri-
ority. This approach would provide the necessary flexibility and facilitate timely
intervention for debt restructuring. Prescribing any milestone(s) may not be nec-
essary, since the debt restructuring exercise is being triggered by banks and fi-
nancial institutions or with their consent.
5.1.3 While corporates indulging in frauds and malfeasance even in a single
bank will continue to remain ineligible for restructuring under CDR mechanism
as hitherto, the Core group may review the reasons for classification of the bor-
rower as wilful defaulter specially in old cases where the manner of classification
UU Anwes. 5B Part —Chap. 7—Non-Perfonming Loans- A Slew af Measures

ower as a wilful defaulter was not transparent and satisty sell that the
d an
oe ae iniaa position torectify thewilful default provided heis grante
opportunity under the CDR mechanism. Such exceptional cases may be
for restructuring with the approval of the Core Group only. The Core Group miaty
ensure that cases involving frauds or diversion of funds with malatide intent are
not covered.
$.1.4 The accounts where recovery suits have been filed by the creditors
against the company, may be eligible for consideration under the CDR system
provided, the initiative to resolve the case under the CDR system is taken by at
(by value) and 60% of creditors (by number),
least 75% of the creditors
5.1.5 BIFR cases are not eligible for yyti ie under the CDR system,
However, large value BIFR cases may be eligible for restructuring under the
CDR system if specifically recommended by the CDR Core Group. The Core
Group shall recommend exceptional BIFR caseson a case-to-case basis for con-
sider underation
the CDR system. It should be ensured that the lending institu-
tions complete all the formalities in seeking the approval from BIFR before im-
plementing the package.
5.2 Reference to CDR system
5.2.1 Reference toCorporate Debt Restructuring System could be triggered by
(i) any or more of the creditor who have minimum 20% share in either
capital or term finance, or (ii) by the concerned corporate, if supported by a bank
or financial institution having stake as in (i) above.

5.3 Legal Basis

5.3.1 CDR is a non- mechanism which is a voluntary based on
Debtor- Creditor Agreement (DCA) and Inter-Creditor A). The
ee (DCA) and the Inter-Creditor
Agreement (ICA) shall

troughteemembership ofthe Fo
Standing
atthe time of reference to Corporate Debt
reegs, DR echo
_

ent ceed an ee
Gepenes en-
with necessary
 Guidelines for Restructuring under CDR Mech
anism Annex. 5B 601
the CDR System, could join CDR mechanism of
a particular corporate by signing
transaction to transaction ICA, wherever they have
exposure to such corporate.
5.3.2 The Inter-Creditor Agreement would be a
legally binding agreement
amongst the creditors, with necessary enforcement and
penal clauses, wherein the
creditors would commit themselves to abide by the vario
us elements of CDR Sys-
tem. Further, the creditors shall agree that if 75 per cent
of creditors by value and
60 per cent of the creditors by number, agree to a restr
ucturing package of an
existing debt (i.e., debt outstanding), the same would be
binding on the remaining
creditors. Since Category 1 CDR Scheme covers only stand
ard and sub-standard
accounts, which in the opinion of 75 per cent of the creditors
by value and 60 per
cent of creditors by number, are likely to become perfo
rming after introduction
of the CDR package, it is expected that all other creditors
(i.e., those outside the
minimum 75 per cent by value and 60 per cent by number) would
be willing to
participate in the entire CDR package, including the agreed addit
ional financing.
5.3.3 In order to improve effectiveness of the CDR mechanism a clause
may be
incorporated in the loan agreements involving consortium / syndicate
accounts
whereby all creditors, including those which are not members of the CDR mech-
anism, agree to be bound by the terms of the restructuring package that may
be
approved under the CDR mechanism, as and when restructuring may become
necessary.
5.3.4 One of the most important elements of Debtor-Creditor Agreement would
be ‘stand still’ agreement binding for 90 days, or 180 days by both sides. Under
this clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-
still’ whereby both the parties commit themselves not to take recourse to any oth-
er legal action during the 'stand-still' period, this would be necessary for enabling
the CDR System to undertake the necessary debt restructuring exercise without
any outside intervention, judicial or otherwise. However, the stand-still clause
will be applicable only to any civil action either by the borrower or any lender
against the other party and will not cover any criminal action. Further, during the
stand-still period, outstanding foreign exchange forward contracts, derivative
products, etc., can be crystallised, provided the borrower is agreeable to such
crystallisation. The borrower will additionally undertake that during the stand-
still period the documents will stand extended for the purpose of limitation and
also that he will not approach any other authority for any relief and the directors
of the borrowing company will not resign from the Board of Directors during the
stand-still period.
5.4 Sharing of Additional finance
5.4.1 Additional finance, if any, is to be provided by all creditors of a ‘standard!
or ‘substandard account’ irrespective of whether they are working capital or term
creditors, on a pro-rata basis. In case for any internal reason, any creditor Set
the minimum 75 per cent and 60 per cent) does not wish to commit ne
financing, that creditor will have an option in accordance with the provisions 0
para 5.6.
602 Annex. SB Part |—Chap. 7—Non-Performing Laans-—A Slew of Measures

or new
5.4.2 The providers of additional finance, whether existing creditors
creditors, shall have a preferential claim, to be worked out under the restructuring
out
package, over the providers of existing finance with respect to the cash flows
of recoveries, in respect of the additional exposure
5.5 Exit Option
$.5.1 As stated in para 5.5.1 a creditor (outside the minimum 75 per cent and
60 per cent) who for any internal reason does not wish to commit additional fi-
nance will have an option. At the same time, in order to avoid the "free rider"
problem, it is necessary to provide some disincentive to the creditor who wishes
toexercise this option. Such creditors can either (a) arrange for its share of addi-
tional finance to be provided by a new or existing creditor, or (b) agree to the
deferment of the first year's interest due to it after the CDR package becomes
effective. The first year's deferred interest as mentioned above, without com-
pounding, will be payable along with the last instalment of the principal due to
the creditor.
§.5.2 In addition, the exit option will also be available to all lenders within the
minimum 75 percent and 60 percent provided the purchaser agrees to abide by
restructuring package approved by the Empowered Group. The exiting lenders
may be allowed to continue with their existing level of exposure to the borrower
provided they tie up with either the existing lenders or fresh lenders taking up
their share of additional finance.
5.5.3 The lenders who wish to exit from the package would have the option to
sell their existing share to either the existing lenders or fresh lenders, at an ap-
propriate price, which would be decided mutually between the exiting lender and
the taking over lender. The new lenders shall rank on par with the existing lend-
ers for repayment and servicing of the dues since they have taken over the exist-
ing dues to the exiting lender.
5.5.4 In order tobring more flexibility in the exit option, One Time Settlement
can also beconsidered, wherever necessary, asa part ofthe restructuring
pack-

5.6.1 There have been inst

able bythecreditors buttheance
accosunts
where theAsg
proj opehascidiraggt marth Beg
 Guidelines for Restructuring under CDR Mechanism Annex. 5B 3
It will not be binding on the creditors to take up additional
_

financing
worked out under the debt restructuring package and the decisi
on to lend
or not to lend will depend on each creditor bank / FI separately. In
other
words, under the proposed second category of the CDR mecha
nism, the
existing loans will only be restructured and it would be up to the
pro-
moter to firm up additional financing arrangement with new or existing
creditors individually.
All other norms under the CDR mechanism such as the standstil] clause,
+”

asset Classification status during the pendency of restructuring under

CDR, etc., will continue to be applicable to this Category also.
5.6.2 No individual case should be referred to RBL CDR Core Group may take
a final decision whether a particular case falls under the CDR guidelines or it
does not.
5.6.3 All the other features of the CDR system as applicable to the First Cate-
gory will also be applicable to cases restructured under the Second Category.
5.7 Incorporation of ‘right to recompense’ clause
All CDR approved packages must incorporate creditors’ right to accelerate re-
payment and borrowers’ right to pre-pay. The right of recompense should be
based on certain performance criteria to be decided by the Standing Forum.
 ANNEXURE 6A

RESTRUCTURING IN CASE OF SMES

RBI NOTIFICATION DATED 8TH
SEPTEMBER, 2005
[See also Part B of the Annex 4 to the RBI Master Circular of 1" July, 2013,
appearing here as Annexure 6B—this part contains provisions on SME restruc-
turing|
RBI/2005-06/159
DBOD. BP. BC. No. 34/21.04.132/2005-06, Dated September 8, 2005
The Chairman/Managing Director
All Commercial Banks
Dear Sir,
Debt restructuring mechanism for Small and Medium Enterprises (SMEs)—
Announcement made by the Union Finance Minister
As part of announcement made by the Hon’ble Finance Minister for improving
the flow of credit to small and medium enterprises, a debt restructuring mecha-
nism for units in SME sector is required to be implemented by all banks. These
detailed guidelines are being issued to ensure restructuring of debt of all eligible
small and medium enterprises at terms which are, at least, as favourable as the
Corporate Debt Restructuring mechanism in the banking sector.
2. Definition of SMEs
SMEs will be as defined in RPCD Circular No. RPCD.PLFNS.BC. 31/06.02
31/2005-06 dated August 19, 2005, which isreproduced below:
vestment ina plant and machinery, does not exceed Rs. 1 crore
respect of certain specified items under hosiery, hand tool
, except in
s, drugs and
S, Stationery items, and sports goods, where this invest-

. ‘ ~
in plant and machinery in

terprises (MB).”
 Restructuring in case of SMEs RBI
Notification, etc. Annex. 6A 605
3. Eligibility criteria
(i) These guidelines would be applicable
to the following entities, which are
viable or potentially viable:
(a) All non-corporate SMEs irrespective
of the level of dues to
banks.
(b) All corporate SMEs, which are enjoying
banking facilities from
a single bank, irrespective of the level of dues
to the bank.
(c) All corporate SMEs, which have fund
ed and non-funded out-
Standing up to Rs. 10 crore under multiple/con
sortium banking
arrangement (for outstanding of Rs.10 crore
and above, guide-
lines are being issued separately).
(ii) Accounts involving wilful default, fraud and
malfeasance will not be eli-
gible for restructuring under these guidelines.
(iii) Accounts classified by banks as “Loss Asset
s” will not be eligible for
restructuring.
(iv) In respect of BIFR cases, banks should ensure compl
etion of all formali-
ties in seeking approval from BIFR before implementing the
package.
4. Viability criteria
Banks may decide on the acceptable viability benchmark, consis
tent with the
unit becoming viable in 7 years and the repayment period for
restructured debt
not exceeding 10 years.
5. Prudential Norms for restructured accounts

(i) Treatment of ‘standard’ accounts subjected to restructuring:

(a) A rescheduling of the instalments of principal alone, would not
cause a standard asset to be classified in the sub-standard cate-
gory, provided the borrower’s outstanding is fully covered by
tangible security. However, the condition of tangible security
may not be made applicable in cases where the outstanding is
up to Rs. 5 lakh, since the collateral requirement for loans up
to Rs. 5 lakh has been dispensed with for SSI/tiny sector.
(b A rescheduling of interest element would not cause an asset to be
—

downgraded to sub-standard category subject to the condition

that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or provi-
sion is made to the extent of the sacrifice involved.
(c) In casé there is a sacrifice involved in the amount of interest in
present value terms, as at (b) above, the amount of sacrifice
should either be written off or provision made to the extent of the
sacrifice involved.
(ii) Treatment of ‘sub-standard’/’ doubtful’ accounts subjected to restructur-
ing:
 res
600 Annex. 6A Part |—Chap. 7—Non-Performing Laans—A Slew of Measu

(a) A rescheduling of the instalments of prineipal alone, would ren

der a ‘sub-standard’/‘doubtful’ asset eligible to continue in the
‘sub-standard’/ ‘doubtful’ category for specified period (as
defined in paragraph 7 below), provided the borrower's oul
standing is fully covered by tangible security, However, the con.
dition of tangible security may not be made applicable in cases
where the outstanding is up to Rs. 5 lakh, since the collateral re-
quir em
for en
loans tRs. 5 lakh has been dispensed with for
up to
SSIAiny sector.
(b) A rescheduling of interest element would render a sub-
standard/’ doubtful’ asset eligible to be continued to be classified
in sub-standard/‘doubtful’ category for the specified period sub-
ject to the condition that the amount of sacrifice, if any, in the
element of interest, measured in pre-sent value terms, is either
eT seek Sent” is made to the extent of the sacrifice in-

(c) Even in cases where the sacrifice is by way of write-off of the

past interest dues, the asset should continue to be treated as sub-
standard/’ doubtful’ .
(iii) Treatment
of Provision
(a) Provision made towards interest sacrifice should be created by
debit to Profit & Loss account, and held in a distinct account. For
this purpose, the future interest due as per the current BPLR in

©) Secnrice maybere-computed oneachbalance sheet datetillsat

Payment
of the outstanding in the account,
so as to the
changes in the fair value on account of changes in term

(c) The amount of provision made for NPA, may ersed

Ge ncent weeedioles Suet ~sg
6. Additional finance

any, may be treated as ‘standard asset’ inall .

standard,
date when sub-standard,
the anddoubtful
btful hpof one year afterSethe
accounts, up toa period
dee Under thefirst restrof
payment
approved interest
uctur ing pack of Iftherestructured is
orage. earlier, falls
asset doesnot
 Restructuring in case of SMEs RBI
Notification, etc. Annex. 6A 607
qualify for upgradation at the end of the abov
e period, additional finance shall be
placed in the same asset classification Cate
gory as the restructured debt.
7. Upgradation of restructured accounts
The sub-standard/doubtful accounts at para
S(ii)(a) & (b) above, which have
been subjected to restructuring, whether in respe
ct of principal instalment or in-
terest, by whatever modality, would be eligible
to be upgraded to the standard
category after the specified period, i.e., a period
of one year after the date when
first payment of interest or of principal, whichever
is earlier, falls due under the
rescheduled terms, subject to satisfactory performance
during the period.
8. Asset classification status

During the specified one-year period, the asset classificati

on status of resched-
uled accounts will not deteriorate if satisfactory perfo
rmance of the account is
demonstrated during the period. In case, however, the
satisfactory performance
during the one year period is not evidenced, the asset classi
fication of the restruc-
tured account would be governed as per the applicable
prudential norms with
reference to the pre-restructuring payment schedule. The
asset classification
would be bank-specific based on the record of recovery of each
bank, as per the
existing prudential norms applicable to banks.
9. Repeated restructuring
The special dispensation for asset classification as available in terms
of
paragraphs 5, 6 and 7 above, shall be available only when the account
is re-
structured for the first time.
10. Procedure
(i) Based on these guidelines, banks may formulate, with the approval of
their Board of Directors, a debt Restructuring Scheme for SMEs. While
framing the scheme, banks may ensure that the scheme is simple to com-
prehend and will, at the minimum, include parameters indicated in these
guidelines.
(ii) The restructuring would follow a receipt of a request to that effect from
the borrowing units.
(iii) In case of eligible SMEs which are under consortium/multiple banking
arrangements, the bank with the maximum outstanding may work out the
restructuring package, along with the bank having the second largest
share.
11. Time frame |
Banks should work out the restructuring package and implement the same
within a maximum period of 60 days from date of receipt of requests.
12. Review
Banks may review the progress in rehabilitation and restructuring of SME ac-
counts on a quarterly basis and keep the Board informed.
608 Annex.6A Part |—Chap. 7—Non-Performing Loans—A Slew of Measures

13. Disclosure
The Debt Restructuring Scheme for SMEs should be displayed on the bank's
website and also forwarded to SIDBI for placing on their website.
Banks should also disclose in their published annual Balance Sheets, under
“Notes on Accounts”, the following information in respect of restructuring wn-
dertaken during the year for SME accounts:
(a) Total amount of assets of SMEs subjected to restructuring.
[(a) = (b)+(c)+(d)]
(b) The amount of standard assets of SMEs subjected to restructuring,
(c) The amount of sub-standard assets of SMEs subjected to restructuring.
(d) The amount of doubtful assets of SMEs subjected to restructuring.
14, Please acknowledgereceipt.
Yours faithfully,
sd/-
(Anand Sinha)
 ANNEXURE 6B
RESTRUCTURING OF SME ADVAN
CES-
SME DEBT RESTRUCTURING MECH
ANISM
[Extracts from Master Circular on Prudenti
al norms on Income Recognition,
Asset Classification and Provisioning pert
aining to Advances dated July 1, 2013]

Annex -4
Organisational Framework for Restructurin
g of Advances Under
Consortium / Multiple Banking / Syndication
Arrangements
B. SME Debt Restructuring Mechanism
Apart from CDR Mechanism, there exists a much
simpler mechanism for restruc-
turing of loans availed by Small and Medium Enter
prises (SMEs). Unlike in the
case of CDR Mechanism, the operational rules
of the mechanism have been left
to be formulated by the banks concerned. This mech
anism will be applicable to
all the borrowers which have funded and non-fund
ed outstanding up to Rs.10
crore under multiple /consortium banking arrangement.
Major elements of this
arrangements are as under:
i Under this mechanism, banks may formulate, with the approv
al of their
Board of Directors, a debt restructuring scheme for SMEs
within the
prudential norms laid down by RBI. Banks may frame different
sets of
policies for borrowers belonging to different sectors within the SME
if
they so desire.
i While framing the scheme, banks may ensure that the scheme is simple
«hi

to comprehend and will, at the minimum, include parameters indicated in

these guidelines. |
il The main plank of the scheme is that the bank with the maximum out-
_—

standing may work out the restructuring package, along with the bank
having the second largest share.
Banks should work out the restructuring package and implement the
same within a maximum period of 90 days from date of receipt of re-
quests.
The SME Debt Restructuring Mechanism will be available to all borrow-
ers engaged in any type of activity.
vi Banks may review the progress in rehabilitation and restructuring of
SMEs accounts on a quarterly basis and keep the Board informed.

609
 ANNEXURE 7

GUIDELINES ON PURCHASE/SALE OF
NON-PERFORMING FINANCIAL ASSETS
[as incorporated in Master Circular on Prudential Guidelines,
July 1, 2013)
Note: Originally, the guidelines on sale of non-performing financial assets
were issued as RBI/2005-06/54, DBOD.NO.BP. BC. 16 /21.04.04 8/2005-06, dat-
ed 13 July, 2005. There are some differences in the text of the inal Guide-
lines, and those incorporated in the Master Circular. The Master over-
rides the earlier guidelines.

7. Guidelines on purchase/ sale of Non - Performing Financial Assets

In order to increase the options available to banks for resolving their non per-
forming assets and to develop a healthy secondary market for nonperforming as-
sets, where securitisation companies and reconstruction companies are not in-
volved, guidelines have been issued to banks on purchase / sale of Non Perform-
ing Assets. Since the sale/purchase of nonperforming financial assets under this
option would be conducted within the financial system the whole process of re-
solving the non performing assets and matters related thereto has to be initiated
with due diligence and care warranting the existence of a set of clear guidelines
which shall be complied with by all entities so that the process of resolving
non-
performing assets by sale and purchase of NPAs proceeds on smooth and sound
lines. Accordingly guidelines on sale/putchase of nonperforming assets have
been formulated and furnished below. The guidelines may be placed before the
bank's /FI's /NBFC's Board and appropriate steps may be taken for their imple-

Scope
7.1 These guidelines would beapplicable tobanks, Fis and NBFCs purchasing/
selling non performing financial assets, from/to other banks/Fls/NBFCs (exclud-
ing securitisation companies/ reconstruction companies).
in multip
ments, would be eligible for purchase/sale interms ofle/con banki
sor ng tiu
arranm
ge -
nonperforming asseV/non performing investment
these guidelines
ines if it i
inthebooks oftheselling bank.

610
 Guidelines on Purchase/Sale of Non-Performi
ng, etc. Annex. 7 611
The reference to ‘bank’ in the guidelines on
purchase/sale of nonperforming fi-
nancial assets would include financial insti
tutions and NBFCs.
Structure
Ve The guidelines to be followed by banks
purchasing/ selling nonperforming
financial assets from / to other banks are give
n below. The guidelines have been
grouped under the following headings:
(i) Procedure for purchase/ sale of non performi
ng financial assets by banks,
including valuation and pricing aspects.
(ii) Prudential norms, in the following areas, for banks
for purchase/ sale of
non performing financial assets:
(a) Asset classification norms
(b) Provisioning norms
(c) Accounting of recoveries
(d) Capital adequacy norms
(e) Exposure norms
(iii) Disclosure requirements
7.3 Procedure for purchase/ sale of non performing financial
assets, includ-
ing valuation and pricing aspects Poisetoe.
(i) A bank which is purchasing/ selling nonperforming financial
assets
should ensure that the purchase/ sale is conducted in accordance with a
policy approved by the Board. The Board shall lay down policies and
guidelines covering, inter alia,
(a) Non performing financial assets that may be purchased/ sold;
(b) Norms and procedure for purchase/ sale of such financial assets;
(c) Valuation procedure to be followed to ensure that the economic
value of financial assets is reasonably estimated based on the es-
timated cash flows arising out of repayments and recovery pros-
pects;
(d) Delegation of powers of various functionaries for taking decision
on the purchase/ sale of the financial assets; etc.
(e) Accounting policy
(ii) While laying down the policy, the Board shall satisfy itself that the bank
has adequate skills to purchase non performing financial assets and deal
with them in an efficient manner which will result in value addition to
the bank. The Board should also ensure that appropriate systems and
procedures are in place to effectively address the risks that a purchasing
bank would assume while engaging in this activity.
(iii) Banks should, while selling NPAs, work out the net present value of the
estimated cash flows associated with the realisable value of the available
securities net of the cost of realisation. The sale price should generally
612 Appex.7? = Part Chap. 7—Non-Performing Loans—A Slew of Measures

not be lower than the net present value arrived at in the manner described
above. (same principle should be used in compromise settlements, As the
payment of the compromise amount may be in instalments, the net pre-
sent value of the settlement amount should be caloulated and this amount
should generally not be less than the net present value of the realisable
value of securities. )
(iv) The estimated cash flows are normally expected to be realised within a
period of three years and at least 10% of the estima cash flows should
ted
be realized in the first year and at least 5% in each half year thereafter,
subject to full recovery within three years.
(¥V ~ A bank may purchase/sell non performing financial assets from/to other
banks only on ‘without recourse’ basis, i.c., the entire credit risk associ-
ated with the non performing financial assets should be transferred to the
purchasing bank. Selling bank shall ensure that the effect of the sale of
the financial assets should be such that the asset is taken off the books of
the bank and after the sale there should not be any known liability de-
volving on the selling bank.
(vi) Banks should ensure that subsequent to sale of the non performing finan-
cial assets to other banks, they do not have any involvement with refer-
ence to assets sold and do not assume operational, legal or any other ty
of risks relating to the financial assets sold. Consequently, the specific
financial asset should not enjoy the support of credit enhancements / |i-
quidity facilities inany form or manner.
(vii) Each bank will make its own assessment of the value offered by the pur-
chasing bank; for the financial asset and decide whether to accept or re-
the offer.
ject
(viii) Under no circumstances can a sale to other banks be made at a contin-
gent price whereby in the event of shortfall in the realization by the pur-
chasing banks, theselling banks would have tobeara part oftheshort-

(ix) A non performing asset in the books of a bank shall beeligible for sale to
other banks only if it has remained a non performing asset for at least
two years in the books of the selling bank.
(x)

pretee
: nen out f the books of the selliing bank only on receipt

(xi)
initsbooks atleastfora period of15 monithe bef
ore itieoar weae
banks.
wold OeBanks
HPPAshould not sell such assets ;
back to the bank, which had

(xii)
Banks arealso permitted tosel/buy homogeneous pool within retail
Performing financial assets, ona portfolio basis
Performing financialassetsofthepoolhasfemeined ashonperformne ~
 Guidelines on Purchase/Sale of Non-Performing, etc.
Annex. 7 613
financial asset for at least 2 years in the books of the selling
bank. The
pool of assets would be treated as a single asset in the books
of the pur-
chasing bank.
(xiii) The selling bank shall pursue the staff accountability aspects
as per the
existing instructions in respect of the non performing assets sold to
other
banks.
7.4. Prudential norms for banks for the purchase/ sale transactions
(A) Asset classification norms
(i) The non performing financial asset purchased, may be classified as ‘stan-
dard’ in the books of the purchasing bank for a period of 90 days from
the date of purchase. Thereafter, the asset classification status of the fi-
nancial asset purchased, shall be determined by the record of recovery in
the books of the purchasing bank with reference to cash flows estimated
while purchasing the asset which should be in compliance -with require-
ments in Para 7.3 (iv).
(ii) The asset classification status of an existing exposure (other than pur-
chased financial asset) to the same obligor in the books of the purchasing
bank will continue to be governed by the record of recovery of that expo-
sure and hence may be different.
(iii) Where the purchase/sale does not satisfy any of the prudential require-
ments prescribed in these guidelines the asset classification status of the
financial asset in the books of the purchasing bank at the time of pur-
chase shall be the same as in the books of the selling bank. Thereafter,
the asset classification status will continue to be determined with refer-
ence to the date of NPA in the selling bank.
(iv) Any restructure/reschedule/rephrase of the repayment schedule or the
estimated cash flow of the nonperforming financial asset by the purchas-
ing bank shall render the account as a nonperforming asset.
(B) Provisioning norms
Books of selling bank
(i) When a bank sells its nonperforming financial assets to other banks, the
same will be removed from its books on transfer.
(ii) If the sale is at a price below the net book value (NBV) (i.e., book value
less provisions held), the shortfall should be debited to the profit and loss
account of that year.
(iii) If the sale is for a value higher than the NBV, the excess provision shall
not be reversed but will be utilised to meet the shortfall/ loss on account
of sale of other non-performing financial assets.
Books of purchasing bank
The asset shall attract provisioning requirement appropriate to its asset classifi-
cation status in the books of the purchasing bank.
614 Apnex.7? Part Chap. 7—Non-Performing Loans-—A Slew of Measures

(C) Accounting of recovenes

Agy recovery im respect of a nonpertorming asset purchased from other banks
should firstbeadjusted against itsacquisition cost, Recoveries inexcess ofthe
acquisition cost can be recognised as profit,
,
(D) Capital Adequacy
For the purpos e adequacy, banks should assign 100% risk weights to
of capital
thenonperforming financial assets purchased from other banks, Incase thenon-
performing asset purchased is an investment, then it would attract capital charge
for market risks also. For NBFPCs the relevant instructions on capital adequacy
would be
(E) Exposure Norms
The purchasing bank will reckon exposure on the obligor of the specific finan-

exposure ceilings (both single and group) reckoning exposures10

obligors arising on account of the purchase. For NBFCs the relevant instructions
on exposure norms would be applicable.
7.5. Disclosure Requirements
Banks which purchase nonperforming financial assets from other banks shal]
be required to make the following disclosures in the Notes on Accounts to their
Balance sheets:
A. Details ofnon-perf
financial
ormi
assets purchased:
ng
(Amo
inunts
Rupees crore)
|. (a) No. of accounts purchased during the year
(b) Aggregate outstanding
2. (a) Of these, number of accounts restructured during the year
(b) Aggregate outstanding
B. Details of non-performing financial assets sold:
(Amo Rupees crore)
inunts
1. No. of accounts
sold
2. Aggregate outstanding
3. Aggregate consideration received
C. The purchasing bank shall furnish all relevant ts to credit infor-
which the bank isa member etc. inrespect ofthe
nonperforming financial assets

__8-1 Interms ofSection 43(D) oftheInc

interestinrelation tosuchcategories of ome Tax Act 1961. income
badanddoubtful debtsasmaybeye
.
Guidelines on Purchase/Sale of Non-Performing, etc. Annex. 7 615
scribed having regard to the guidelines issued_by the RBI in relation to
such
debts, shall be chargeable to tax in the previous year in which it is credited
to the
bank’s profit and loss account or received, whichever is earlier.
(8.2 This stipulation is not applicable to provisioning required to be made as in-
dicated above. In other words, amounts set aside for making provision for NPAs
as above are not eligible for tax deductions.
8.3 Therefore, the banks should either make full provision as per the guidelines
or write-off such advances and claim such tax benefits as are applicable, by
evolving appropriate methodology in consultation with their auditors/tax consult-
ants. Recoveries made in such accounts should be offered for tax purposes as per
the rules.
8.4 Write -off at Head Office Level
Banks may write- off advances at Head Office level, even though the relative
advances are still outstanding in the branch books. However, it is necessary that
provision is made as per the classification accorded to the respective accounts. In
other words, if an advance is a loss asset, 100 percent provision will have to be
made therefor.
9. NPA Management - Requirement of Effective Mechanism and Granular
Data
(i) Asset quality of banks is one of the most important indicators of their
financial health. Banks should, therefore put in place a robust MIS
mechanism for early detection of signs of distress at individual account
level as well as at segment level (asset class, industry, geographic, size,
etc.). Such early warning signals should be used for putting in place an
effective preventive asset quality management framework, including a
transparent restructuring mechanism for viable accounts under distress
within the prevailing regulatory framework, for preserving the economic
value of those entities in all segments.
(ii) The banks’ IT and MIS system should be robust and able to generate reli-
able and quality information with regard to their asset quality for effec-
tive decision making. There should be no inconsistencies between infor-
mation furnished under regulatory/ statutory reporting and the banks'
own MIS reporting. Banks should also have system generated segment
wise information on non-performing assets and restructured assets which
may include data on the opening balances, additions, reductions (upgra-
dations, actual recoveries, write-offs etc.), closing balances, provisions
held, technical write-offs, etc.
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 CHAPTER 8
ASSET RECONSTRUCTION COMPANIES
IN INDIA: GENESIS AND
PERFORMANCE

SYNOPSIS
1. The idea of asset reconstruction in 4.2. Methodology of Purchase of
lea lee esate sopyetenis tern em 619 FL ee RE RS eae
2. substantial recovery powers to arc’S ...... 628
621 4.3. Transaction Structure................ 629
3. Overview of performance of arcs in 4.4. Acquisition and sale of retail
i ee ee ee a eee as Pe 622 assetsu...4 120}. habs cute 631
4. review of ARCIL’s performance............ 625 4.5. Resolution and Recovery........... 632
4.1. Acquisition of NPLs and their
WIEBE LS eS Lok... eas 626

The business of asset reconstruction, or put in global language, asset

management of non-performing assets, has been slow to start but is soon
expected to gather pace.
ARCIL, the first asset reconstruction company in India, started its operations in
the financial year 2003-04. As on date, there are more than a dozen asset
reconstruction companies registered with the Reserve Bank of India, and most of
them seem to have commenced operations. As we have noted in Chapter 6, the
Indian model of asset reconstruction companies differs substantially from the
global model of companies formed to resolve systemically impaired loans.
Briefly, the chief differences are:
e Globally, asset management companies were formed to resolve loans that
went bad because of a systemic crisis, not loans that went bad because of
bad lending. In India, there is no finding that the loans that have gone
bad in the past have suffered a systemic crisis. In fact, there is no
evidence of a systemic or market crisis in India at all. Hence, the
approach has had nothing to do with managing the evils of a system
breakdown.
e India is the only country where ARCs have sprung up as a business
model, with special statutory powers granted by the lawmakers. There is
no doubt that dealing with distressed assets is a global business, but in no
other case have the governments come forward to grant special
incentives or special legal powers to profit-oriented asset management
companies. In other words, where special powers were granted, as in
case of Danaharta, Malaysia, the vehicle had a singular brief — resolution
of loans that went due to a system crisis. It is arguable whether asset

617
ols Sya. li Part L—Chap. 8—Asset Reconsiruction Companies in India, etc.

onstruction Companies, which were envisaged as tool of resolving the

problem ofbadloans, could actually bea business model, andifit is &
business mode! indeed, is there any justification for granting special
statutory powe them.
tors
India is the only country Where asset reconstruction es do nol
have a sunset clause. In most other countries, such as U pote oo
elc., asset Management Companies Came IN Pesponse LO & Crisis, Crisis
resolution measures cannot be everlasting—they lose their meaning if
they last forever.
Clearly, there has been no central thinking on the role and powers of ARCs.
The Committee reports on whose recommendations the ARC model was initially
mooted may have actually never envisaged an asset reconstruction business
boom that India currently seems to have.
Several asset reconstruction companies have been authorised by the RBI lately.
Besides ARCIL, the names of the Asset Reconstruction Companies availableon
the RBI website are as follows’:
Asset Care & Reconstruction Enterprise Lid (Formerly Asset Care
Enterprise Limited) (ACRE) — An asset reconstruction company
promoted by IFCI and other banks and financial institutions. It started its
operationsin July, 2007.
ASREC (India) Limited
3. Pegasus Assets Reconstruction
Pvt. Ltd.

Sun coef Scopes ae

International Asset Reconstr
Company
ucti Pvt.
on Ltd.
Reliance Asset Reconstructi
Companyon
Ltd.
Prithvi Asset Reconstruction and Securitisation Company Ltd.
Phoeni ARC Pvtx Ltd.
Invent Assets Securitisation & Reconstruction Private Limited
10. JM Financial Asset Reconstruction Company Limited
11. India SME Asset Reconstruction Company Limited (ISARC)
12. Edelweiss Asset Reconstruction Comp ay Limnos
13. UV Asset Reconstruction Company Limited

ane let @tart a

1. Data lastupdated ason25 July. 2013.
 The Idea of Asset Reconstruction in India
Syn. 1 619

1. THE IDEA OF ASSET RECONSTRUCTION IN

INDIA
The idea of asset reconstruction dates back to 1991, when the Committee
on
Financial System (Narasimham Committee) Suggested setting up of an
asset
reconstruction fund. The idea then was to recapitalise the banks that write
off
their NPLs and thereby lose capital. Due to budgetary constraints of the Central
Government, this idea never worked.
The Committee on Banking Sector Reforms (Narasimham IT) in 1998 once
again went into the question. It considered two alternatives:
“For banks with a high NPA portfolio, the Committee suggests
consideration of two alternative approaches to the problem as an
alternative to the ARF proposal made by the earlier CFS. In the first
approach, all loan assets in the doubtful and loss categories - which in
any case represent bulk of the hard core NPAs in most banks should be
identified and their realisable value determined. These assets could be
transferred to an Asset Reconstruction Company (ARC) which would
issue to the banks NPA Swap Bonds representing the realisable value of
the assets transferred, provided the stamp duties are not excessive. The
ARC could be set up by one bank or a set of banks or even in the private
sector. In case the banks themselves decide to set up an ARC, it would
need to be ensured that the staff required by the ARC is made available
to it by the banks concerned either on transfer or on deputation basis, so
that staff with institutional memory on NPAs is available to ARC and
there is also some rationalisation of staff in the banks whose assets are
sought to be transferred to the ARC. Funding of such an ARC could be
facilitated by treating it on par with venture capital for purpose of tax
incentives. Some other banks may be willing to fund such assets in effect
by securitising them. This approach would be worthwhile and workable
if stamp duty rates are minimal and tax incentives are provided to the
banks.’’(Chapter IU, para 3.28)
“An alternative approach could be to enable the banks in difficulty to
issue bonds which could form a part of Tier II capital. This will help the
banks to bolster capital adequacy which has been eroded because of the
provisioning requirements for NPAs. As the banks in difficulty may find
it difficult to attract subscribers to bonds, the Government will need to
guarantee these instruments which would then make them eligible for
SLR investments by banks and approve instruments by LIC, GIC and
Provident Funds.” (Chapter II, para 3.29)
A special group was also set up by the Government of India in July, 1998, for
suggesting an operating plan for setting up Asset Reconstruction Companies. The
Union Budget 1998-09 also stressed the need for banks with large NPLs to
transfer them to ARCs, as suggested by the Narasimham II. However, nothing
happened.
620 Sya. ! Part Chap. 8—Asset Reconstruction Companies in India, etc.

The Committeeon Weak Public Sector Bank (Verma Committee, 1999) drew a
lesson from the Asian neighbours who had set up Asset Management Companies:
“The quickest and possibly the most effective way of removing NPAs
from the books of the weak banks would be to move these oul to a
separate agency which will buy these loans from the banks and make its
own efforts for their recovery, Separate institutional arrangements for
taking over problem loans have playe a keydpart in bank restructuringin
different countries with varying degrees of success. To name a few, these
include the Resolution Trust Corporation in the USA, Securum and
Retriva in Sweden, the Cooperative Credit Purchase Company, the
Resolution and Collection Bank, and the Housing Loan Administration
Corporationin Japan,
and the Korea Asset Management Corporation in
Korea” [Para 7.63}
On the modality of the ARC, the Verma Committee thought of a centralised
asset construction fund, but managed by an AMC:
“Selection of a proper financial vehicle through which non-performing
loans can be transferred out of the weak banks’ books is the key issue.
After due consideration, the Working Group has come to the conclusion
that in our situation it would be desirable to develop a structure which
will combine the advantages of government ownership and private
enterprise. The broad structure would be that of a government-owned
Asset Reconstruction Fund (ARF) managed by an independent private
sector Asset Management Company (AMC).” [Para 7.65]
Thus, debilitating over an asset reconstruction fund or an asset

performing ass intoeper

t for
s ming assets?A enalysie |
Actfallsgreatlyshortoftheki aaevel
ndofpowers whichDanaharta in
Malayna tg
 Substantial Recovery Powers to ARC’s
Syn. 2 621
been granted. The powers granted by the ARCs are
quite vague and general, and
are not very different from the powers granted under
the same law to the secured
lender as well. In fact, given the privity of contract,
a secured lender would
possibly be seen by the judicial system of the country
as better equipped to
realise sticky loans than a separate ARC. Since the ARC
field is an open-to-all
playground, it is very likely to invite the so-called vultu
re investors, and it is
quite likely that the ARCs may be seen by the judicial
system as predators on
the prowl.

2. SUBSTANTIAL RECOVERY POWERS TO ARC’s

We have discussed above the differences between the Indian model
of asset
reconstruction companies and the models adopted in different countri
es. Truly,
each country has to analyse its problem of NPLs in its own way and find
the best
solution—therefore, no two models are comparable.
India did not go for a centralised AMC solution. It is not clear whether the idea
of a centralised AMC was discussed, evaluated and dropped. A centralised AMC
can be given special powers, which are critical to resolve the problem. The ARCs
in India are simply business entities buying junk with a hope to make profit. As
may be noted in this Chapter, several entrepreneurs are mooting the idea of
floating their ARCs. Giving special recovery powers to such entities, particularly
powers like takeover of business, etc. would sound illogical.
For several years, the business model of ARCs was based primarily on
aggregation of non-performing loans sold by various banks. As far as recovery
powers of the ARCs were concerned, there was no major difference between the
powers of the ARCs and the powers of the banks themselves. However, the RBI
made effective, on 21st April 2010, the guidelines on Change in or Takeover of
the Management of the Business of the Borrower by Securitisation Companies
and Reconstruction Companies (enclosed as Appendix 5, Chapter 9), later on
updated till June 30, 2013 by RBI. This provides significant legal mileage to
ARCs, not available to banks. Note that the powers for takeover of management
in case of banks are available only where the bank holds security interest on
substantially the whole of the business of the borrower. The powers for takeover
of management under sec. 9 are much wider. and are not subject to conditions
imposed under sec. 13. See further comments under sec. 9 and sec 13(4)(b) in
Part 2 of the book.
With the power to takeover management, it may be expected that ARCs will be
able to exert significant pressure on a borrower to force performance or otherwise
accelerate r ecovery.
622 Sya. 3 Part 1—Chap. 8—Asset Reconstruction Companies in India. etc.

3% OVERVIEW OF PERFORMANCE OF ARCs IN

INDIA’
As the R of the Key Advisory Group on the Asset Reconstruction
Comeaten’ dined 30”Decider 201 1°, dur three years, i.e, from 2008-
theing
2010, the gross NPAs of the banking system have been on a rise, and shows an
accelerated incremental growth. However, during the same time period, the
growth in book value of NPAs sold by banks/FIs to ARCs has not been able to
keep pace. Even while NPAs are increasing, the incremental SRs issued since
2008 has been declining, as is evident from Table 8./* below:
Table 8.1: Incremental NPAs and Incremental SRs issued

FSaaa ae aL |
Incremental GrossNPAs | ss '|_—_—s«SS,949| 12,538 15,774
fue tatth
“Jun-}
— Jun-07 | Jun-08 hae,
S Jun-09)
Re
Value Transferred eal 41,414 PAT
62,
to ARCs

LIncrementalflow | | 12,870] 10,128] 10,675

1 ellis
ebm ane activity. A
in acquisition and Rs. 622 billion in book value,
assets have beenacquired by ARCs inFY 2010
4
When it comes to NPA reduction, asstated earlier the
hasbeen declining fast,asshown in Table &.>* ee ee
i i |
aa
2. r a cnanehan tne ber 2013) nn SSG Capheal Management 1a
& Sevens pcp mo
se Recaro Conipate
‘ Mimancialservices gov inMreportsteports_arcs pdf(accessed om Septernber. n, avethéite te
Source Securitization 7 and ARC in waa ee Mr.

"Shyam’20Maheshwari_SSG%.20Capital
past Mand 2Opresen 204% 20eevanpf (accensed
on9°See eeBoia
Me2
 Overview of Performance of ARCs in India
Syn. 3 623

Table 8.2: NPA reduction by ARCs

[in
[ ReMilio
2n 008
Book Value of Assets acquired
[2008 FF 2070
128,700 101,280 106,750

SRs subscribed by eee

Fa SC KZ
12,390 a970| 3,960
Others-QIBs 5,580 (50) 1,100

In Rs. Million FY 2008 FY 2009 FY 2010

Gross NPAs beginning FY 502,990 554,188 682,840
New NPAs in FY 344,206 523,822 656,748

NPAs write-off
782,842
10,167
|___388,281 | 389.580
6,888 102,534
Gross NPAs end FY 554,188 682,840 847,475

ARCs as a % of Total NPA 44% 26% 22%

reductions

Total recoveries by ARCs have been about Rs. 53 billion, compared to their
total acquisitions of Rs. 146 billion. See Table 8.3°.
Table 8.3: Recoveries by ARCs

2010
INR cr)

[AssetsGae|= | ~ | =
paeneld Weful ofARCH andfiadactively 19959 8

ip i il a a
: Gi

RKN

Li. Sa
|
|TMARC | apidateva bn)onmeyanaiv foinae) 0°24
6. lbid.
 Similar circumstances exist even now. In FY 2012, while the NPAs rose by Rs.
440 billion, but ARC acquisitions rose by only Rs. 64 bil on’. The slowing down
isfor reasons attributable to both sellers and buyers, as stated below”:
a) Price expectations of banks are driven by “extent of current
provisioning” instead of future recoverability;
b) Large scale restructurings have been taking place since 2009 onwards,
thereby avoiding imminent defaults. Consequently, incento tive
sell has
reduced among banks;
c) Most ofthe ARCs in India are constrained by lack of funding, The SRs
issued by ARCs are out of favour with banks, known to be the key
subscrib of such
ersSRs;
d) There are vigilance concerns, that limit banks’ willingness to sell at
below carrying cost or on a bilateral basis;
€) Foreign banks have cut down their activity levels.
As regards profitability ofthe ARCs, during FY 2010, all ARCs
t Invent excep
were making profits, with ARCIL topping the charts. Table 8.4 draw sa

Presentation
a — on onSeptember, 2013).J/hwww vinodkothari.com/D2 _S1_Shyam%,
9. Source: NPL Securitization International
Maree ea SC Capitalamgenem Lid,evant
http:/Aeww vinodkothari. ne 7“
201_Imernational% 2Nexperiences% 20in% 2ONPL% 20sec
past% Nand % 20present%
20& % 20relevant% 20for%
pa ane oth Septet :
OShyam% 20Maheshwari SSO%20Capital
a eink De$2
 Review of ARCIL’s Performance
Syn. 4 625
Table 8.4: Profit and Loss Summary of ARCs (FY 2009
and 20] 0)

2008
Operating Other PBT | PAT | Operating | Other | PBT ~~>
Income Income Income Income

—-

> o orD
nn nn

>10
|
&B A 2b) wencuSit £&
ON
India SME
Total
hap 1 | Ble
col — jmn “I —
;
Reliance
z

Edelweiss
z i o) —s WwW
x
Phoenix |
el —
7
|
]
N
W—

i
ey ss
3

Ni]
— N =
= —_
Aa
Pegasus

WwW

= <
| >/s
a. 4<
fas
i a
Alchemist eS)
—
;
ry E
Grand
Total

However, the profitability has been low due to low deployment of capital and
high cost of SR funded acquisitions.

4. REVIEW OF ARCIL’S PERFORMANCE”

The first Asset Reconstruction Company of India was set up with the name
Asset Reconstruction Company of India Limited (ARCIL). Major banks such as
the ICICI Bank, State Bank of India, IDBI Limited, and the Punjab National
Bank held the equity of ARCIL and had actively participated in its formation.
Originally, substantial shares were held by ICICI Bank (29.58%), followed by
IDBI (20.48%), SBI (19.95%), and Punjab National Bank (10%). This would
have meant ARCIL being treated as “affiliate” of both ICICI and IDBI.
Subsequent increase in capital has led to more diversified shareholding. The

10. Sources: ARCIL’s website, publicly available information, Press Reports, Balance Sheets for the
FYs 2010-11 and 2011-12.
 626 Syva. 4 Part lL heap S—Asset Reconstruction ( ompanies i India. ek

recent position on its website (http://www.arcil.co.in/) is shown by Figure 8,5

‘ : i}

below
® State Bank of India (19.95)
® (D8! Bank Lad, (19.18)
127
. ICICT Bank Lad, (13.26)
\" 4
® Punjab National Bank (10.01)
9.94
. ® Lathe Investment Pte Lid, (9.9)

® IDC Company Lid. (8.37)

® Virst Rand Bank Lad. 8.A. (4.11)

* Karnataka Bank (2.64)

® HDC Lad, (2.32)

~ ICICT Home Pinance
Company Lad, (2.26)
99
The Karur Vysya Bank Lid, (1.96)

® Barclays Bank, PLC (1.5)

* Quiveo Enterprises Ltd, (1,35)

® The South Indian Bank Lad. (1.27)

Figure 8.5 : Shareholding pattern of ARCIL

As can be seen, the 5 major shareholders of ARCIL are State Bank of

India,
IDBI Bank Ltd., ICICI Bank Ltd., Punjab National Bank, and Lathe
Investment
Pte Ltd. (a wholly owned subsidiary of Government of Singapore
Investment
Corporation (Ventures) Pte Ltd.). During the year 2010-11, Quiveo
Enterprises
Ltd. Cyprus acquired 44,00,000 equity shares of the
Company (1.35%) from
Citicorp Finance (India) Ltd., as a result of which the aggregate foreign
shareholding in ARCIL increased to 15.36% direct
”.
The capitalofARCIL has also been expanded. As
on 31st March, 2012, it had
a paid up capital of Rs. 324.89 crores appr
oxim ately.

4.1. Acquisition of NPLs and their fun

ding
Financ. ial yea
) r 2004-05 was the firsst t year of operations of
ps year 2004-2005, ARCIL acquir ARCIL. Durin
ed a total of Rs. 8978 crores NPAs ho
vanks for a purchase price of Rs. 1974 m
crores. The company acquired these
24 sellers. ICICI Bank is the larges from
t seller
tune of Rs. 2.346 crores, followed b SBI hav ing obtained security receipts to
(Rs. 428 the
(Rs. 349 crores) IFC] Limited _
(Rs. 101 crores). enti

11. Source: Compiled by a

us/shareholders/ (accessedat
on Squabe theton on website: http://www _arcil.co.in/about
12. Source: Balance Sheet as
on 31° March. 2011
 Review of ARCIL’s Performance Syn. 4 627

During the financial year 2004-05, the manner of funding the acquisition of
assets, vis-a-vis the capital requirements, indicated the farce that the capital
requirements imposed on ARCs_had_ been. Regulations require asset
reconstruction companies to hold capital against the assets they acquire—
however, the easy escape route was to hold the assets in the name of trustees and
completely avoid capital requirements. This was evident from the balance sheet
of ARCIL as on 31st March, 2005. The balance sheet shows, that of Rs. 100
crores paid capital that it had raised, nearly Rs. 91 crores was held as fixed
deposits with the banks. Barring a small amount shown as “recoverable from
trusts/sellers”, the total amount shown as invested by ARCIL in buying the NPLs
is Rs. 13.48 lacs, less than 1% of the amount of consideration supposedly “paid”
to buy the NPLs. This makes it quite obvious that the entire amount of assets
would have been acquired by issuing security receipts (SRs), a paper that
indicates the beneficial interest of the very same assets that selling banks had in
the first place. The Rs. 13.48 lacs amount referred to above is in buying the SRs
of various trusts.
However, subsequent regulatory changes mandated ARCs to make a minimum
investment in the SRs. The RBI issued the guidelines vide Notification
No.DNBS.5/CGM (PK)-2006 dated September 20, 2006, requiring an ARC to
invest in the SRs issued by the trust set up for the purpose of securitisation, an
amount not less than 5% under each scheme with immediate effect. It was also
directed that in case of those SC/RCs which have already issued the SRs, such
SC/RCs shall achieve the minimum subscription limit under each scheme with in
a period of six months from the date of issue of guidelines in the matter.
Subsequently, vide a notification dated 21st April, 2010, it was directed that not
only will the ARC invest at least 5% in each issuance of SRs, it will also hold the
same until all SRs have been redeemed.
This would obviously mean a substantial funding requirement for the ARCs.
The balance sheet as on 31st March, 2009, shows an investment of nearly Rs.
1598 crores in SRs of 344 trusts.
Very curiously, ARCIL is a trustee for each of the trusts that had acquired the
assets. ARCIL is also the asset manager of the trusts. It is quite likely that the
residual economic interest, that is, the surplus left over after payment of dues to
all other SR-holders, will flow to ARCIL. All this is sufficient to treat ARCIL as
holding company/quasi-holding company of each of the trusts where ARCIL is
the trustee. In terms of international accounting principles, a trust will need to be
consolidated with the entity that holds “residual economic interest” in the trust,
that is, the right to sweep the excess cash left in the trust. As per consolidation
accounting standards applicable in India, a trust will require consolidation based
on control over its management, which, in view of both trusteeship and
management of assets, vests with ARCIL. In other words, if the SRs imply a
limited beneficial interest of the SR holders, then the residual beneficiary of the
trusts needs to be identified and the trusts need consolidation with such
beneficiary. From the annual report of ARCIL, it is evident that the trusts a8
not been consolidated with either ARCIL or with any of the other SR age :
residua
SRs held by ARCIL give it the right to sweep or participate in the
 628 sad Part —Chap. &—Asset Reconstruction Companies in India, etc,

surplus of the wusts, thea consolidauion standards are clearly applicable, as a

right to residual surplus of an entity is Weated as “equily for accounting
purposes, and the entity holding majority of such equity would need to
consolidate such entity.
During the FY 2011-12, ARCIL acquired financial assets involving total dues
of Rs 408 crore from banks / financial institutions (sellers) for an aggregate
consideration of Rs!9 crore. Upto 31" March, 2012, ARCIL had acquired
an aggregate debt of Rs 48,881 crore at an average price of 25% of the
debt acquired’. The seller banks include ICICI Bank Lid., IDB! Bank, State
Bank of India, IPCI Lid., Bank of India, among others. And upto the said
date, SRs issued for acquisition of financial assets aggregated to Rs 12,132 crore,
out of which SRs of Rs 6,009 crore were outstanding. Of the said SRs of
Rs 6,009 crore outstanding as on 31" March, 2012, SRs of Rs 4,772 crore
were held by seller banks which invested in the SRs while selling their
respective NPAs.
Earlier, in 2009-10, with a view to raise funds from third parties thereby
providing an exit opportunity to banks, ARCIL Asset Reconstruction Fund I
ep tie gle Jy 5 eeleendr'pr launched. AARF-II was closed
for subscription on April, 2011 with a fund size of Rs 200 crore out of which
Rs 153 crore has been drawn down and deployed for acquisition of financial
assets.

4.2. Method
of Purchas
olo e of
gy Assets
the RBI guidelines on purchase and sale of NPAs, the board of the selling bank
must formulate policy for the sale of NPAs that must inter alia lay down the
nature of NPAs that may be sold, valuation norms to be followed and accoun
ting
treatment on the sale of NPAs. ARCIL suggests that the selling bank must set
up

behalf of the selling bank. The nodal cell also consult reputed valuers
however, thenames ofsuchvaluers must beauthorised
bytheboard

A ban
k or financial asset desirous of sel
l a NPA must
theassesitintendstoselltoARCIL ina prescribe
d formatlaiddown byAltea
Sn

i Management Discussion and Analysis for FY 2011-12.

 Review of ARCIL’s Performance Syn. 4 629
The selling bank must furnish certain information relating to the asset to be
sold
such as the name of the borrower, the location of the head office, and the
branch
office of the borrower, the industry to which the borrower belongs to, the nature
of the financial facility extended by the bank, financial institution, and the
aggregate outstanding. Based on these, ARCIL would decide whether or not to
acquire the assets. Submission of the form informing the ARCIL about the sellers
intention to acquire the assets does not oblige ARCIL to acquire the asset, nor is
the seller obliged to sell the assets to ARCIL simply because it has submitted the
details of the assets and ARCIL has carried a due diligence. This stage is only for
due diligence and negotiation between the parties. ARCIL, however, undertakes
a confidentiality agreement under which it promises not to disclose the details
regarding the NPAs to any outside party.
The process of acquisition of the asset also depends on the value of the
property involved. Where the aggregate debt of the borrower is upto Rs. 10
crores, ARCIL evaluates the transaction based on a pool. The assets are
considered as a whole and the due diligence of the assets would be done en bloc
as a portfolio of assets. In other words, ARCIL will not consider assets
individually. However, where the valuation of the asset is more than Rs. 10
crores, the due diligence, valuation and price negotiation for the transaction shall
be asset specific. The term “aggregate debt” shall include the principal and all
charges applicable.

4.3. Transaction Structure

The ARCIL typically sets up trusts for acquiring specific assets. These trusts
issue security receipts in exchange of NPAs that are issued in favour of selling
banks and financial institutions. After acquiring the assets, the trust issues
security receipts that entitle the buyer to obtain the receivables from sale/lease,
etc. from the NPA. The trustee is the legal owner of asset while the purchasers of
the security receipts are the beneficial owners of the asset. ARCIL acts as the
trustee and the manager of the trusts and uses its powers under sec. 9 of the
SARFAESI Act to recover the dues by selling the asset.
The cash received from sale of the security receipts is paid to the selling bank.
Thus, there is no immediate cash payment to the selling bank.
Detailed transaction structure is explained below:
60 Sya4 Part 1—Chap. 8—Asset Reconstruction Companies in India, etc,

Porliohe based ust

Figure
8.6: Stage |
(Source: Acquisition brochure on ARCIL website)
The security receipts issued by the ARCIL represent undivided beneficial
interest
in the trust assets.
In the second stage the transaction, ARCIL pools the various assets into a
master trust which are sold to other investors. The ARCIL comes up with
declarations regarding the NAVs on respective schemes.

Figure 8.7: Stage Il- Pooling atSubsequent Stage

(Source: Acquisition brochure on ARCIL website)
 Review of ARCIL’s Performance Syn. 4 631

ARCIL also acquires assets on an agency fee basis for a mutually agreed fee.
However, in such a case, there is no “true sale” and hence the assets remain
in the
books of the bank or financial institutions.

4.4. Acquisition and sale of retail assets

In 2008, ARCIL started a new division called ‘Arms’, for purchase,
management and disposal of retail NPLs. Several FAQs explaining the
philosophy and business process of the new division have been given on its
website'*.The following is a notable quote:

“Arcil-Arms is not a recovery agent but a resolution agent. The term

‘resolution’ in this context refers to ‘finding a solution’ upon recognising the
issues affecting the borrowers’ repayment capabilities, whereas recovery means
collection of dues. As a part of our communication strategy, we have coined and
would define the term as resolution, which is different from recovery.

Our communication strategy will manifest itself in our approach that a

defaulter of a bank loan is not necessarily a defaulter by choice. There could be
many reasons for a bank loan default by a borrower. We give utmost importance
to the good intention of the borrower for curing the default situation and help
them by providing them with a practical solution to enable them to walk the path
and resolve the issues. We would also communicate at large that the defaulters
with fraudulent intent are like the parasites of the society and they need to be
discouraged or banned by all. On a bigger canvas, we also communicate the need
to foster a ‘responsible borrowing culture’ for economic prosperity of the
country.”

Aggregate collections by the retail division during FY 2010-11 touched Rs.

117 crore and during 2011-12, the total collections amounted to Rs 116.07 crore.
Number of accounts under servicing increased from 26480 to 56299 as of 31“
March, 2012, an increase by 110% as against its cumulative acquisition of
accounts of above 90,000 accounts. The author has doubts as to whether ARCs
have the power to acquire non-performing loans from anyone other than
banks/financial institutions covered by the SARFAESI Act. Hence, certainly the
retail assets could not have included assets originated by NBFCs. Also if the
assets have any unsecured loans or loans where there is no “security interest”
enforceable under the SAFAESI Act, there is nothing to be done under
SARFAESI Act by transferring the assets to an ARC. The ARC may, at best, use
either common law remedies or moral persuasion.

15th September, 2013)

14. http://www.arms.net.in/Business_Centre/FAQs.html (accessed on
632 Syn Part l—Chap. 8—Asset Reconstruction Companies in India, etc.

4.5. Resoluti on
and Recovery
Till March, 2012, the aggregate recovery since the commencement of business
amou Rs 7,689 crore. Details of recovery for the last 5 years are shown in
tonted
Table8.8 below:

Table 8.8

a Recovery (Rs crore

 CHAPTER 9
LAW AND PRACTICE OF ASSET
RECONSTRUCTION IN INDIA
SYNOPSIS
1. What is an asset reconstruction A 2ee, ACCOUNTING ASGUES 5 S503 oS ce eecerecendepeaneiet2 650
20 eae ees, aepmoren._oxgtneie meates 0633 12.1 Whether off balance sheet............. 651
2. Why do I need an arc? ..........cceeeeececeeeeeeeees 634 12.2 Nature of “asset” acquired by the
3. How to form an asset reconstruction selling banks sien). 26 GA ids 651
DL | ee ne 636 12.3 Impairment provisions..................- 652
3.1 What is needed to form an ARC?.....636 12.4 Whether the assets appear on the
3.2 Capital requirements for ARCs......... 637 balance sheet of the Trust.............. 652
4. Who can invest in the capital of an arc?....637 12.5 Consolidation of the trust with its
5. Who can invest in the security receipts primary beneficiary ..................000 653
(SRs) issued by an arc?..............ccccsssseseees 638 12.6 Disclosures of NPLs sold by
6. How does the ARC raise funding? ............ 639 barks: JUS RI AMER. LORE 654
7. What business can the arc do?..........0.00..... 640 App. Statutory/regulatory §_Materials
8. RBI directions and guidelines on relating to Asset reconstruction
AKCis: copvers.of.4. senured.crilh 641 COMIDAMIES 1553 TL TLe.- toate iie 5h 655
8.1 SARC (Reserve Bank’s) App. 1 RBI Guidelines and Directions ..... 655
Guidelines and Directions................. 641 App.2 Guidelines to Banks for sale of
8.2 Modes of acquiring assets................. 642 NPLS to Asset reconstruction
8.3 Reconstruction activities................... 642 GOMIDANICS oes oho consdiopcnsudssacosseqsytocess 670
8.4 Capital adequacy ....0.......cceeseeeeseees 643 App. 3 Guidance Note for Securitisation
8.5 Investment in land and buildings......644 Companies and Reconstruction
8.6 When does a bad apple become OTA DENIER bones ture corey cnn -tupesyins 675
DMG ns cnsansapbtd candied istlsdevaridadesupiapiraap
titi:644 App. 4 Notifications relating to Asset
8.7 Plan of realisation.......0......:cccccesenees 645 reconstruction companies.............. 680
8.8 Disclosures in the balance sheet App.5 Guidelines for takeover of
OF PEN os. s28 hee sSattecpthevncas sonscesstenies645 FIGATIABOTHIONE seezet ict. taareeeh..ccesecectoues
682
8.9 Directions to transferring banks........ 646 App. 6 Master Circular on
8.10 Master Circular of 1° July, 2013 .....647 directions/instructions issued to
9. ARC’s and trusts formed by arc’s ............. 648 the Securitisation Companies/
£0... Sale. of npls, Dy DARKS a0 iceorasshcennnderecbderenasris 649 Reconstruction Companies............ 688
11.Taxation of asset reconstruction
Companies... 5S0-25. IL TA Iai. 649

While a detailed commentary on the SARFAESI Act follows, in this Chapter,

we take a quick overview of the overall scheme of the law, and the issues ad-
dressed/not addressed by the enactment.

1. WHAT IS AN ASSET RECONSTRUCTION COM-

PANY?
As would be evident from the commentary on the Act, the definition of an As-
set Reconstruction Company in the law is very vague. The definition in sec.
in
2(1)(b) defines “asset reconstruction”, and evidently, any company engaged

633
 634 Sya. 2 Part L—Chap. 9—Law and Practice afAsset Reconstruction, etc.

the business of asset reconstruction is an Asset Reconstruction Company. The

way the word “asset reconstruction” is defined, acquisition of an assel tor the
purpose of its realisation would amount Lo asset reconstruction, As commented in
our commentary, the definition gives no indication of what the business of asset
reconstruction ts. First of all, realisation of asset cannot be its reconstruction, and
the singular purpose for acquisition of any assel is its realisation, Hence, on an
extended logic, the definition is too broad to be meaningful at all,
Since as set reconstruction companies require registration with the RBI, the
simplest meani ng
of an ARC is registered with
is one which the RBI. The conse-
quential question may be — when does a company require registration with the
RBI? And the answer is, if anyone wants to be entitled to the privileges of an
asset reconstruction company, one ought to seek registration with the RBI,
The usage of the word “company” with “asset reconstruction” is very explicit,
Hence, an entity other than a company cannot be an “asset reconstruction com-
pany”. ARCs have a practice of buying assets as a trustee of a trust, While a trust
is not a separate legal entity, a trustee acting in a fiduciary capacity has a differ-
ent personality than his own. In other words, even if the trustee happens to be an
ARC, the trustee in its capacity as such cannot be entitled to the privileges of an
ARC.

2. WHY DOTINEED AN ARC?

The business of dealing in NPLs has come up as a lucrative business by itself.
The several NPL reports produced by Ernst and Young talk about the substantial
inte in buying
rest NPLs in different jurisdictions. Larger investment banks have
specialised departments that deal in junk assets. In addition, there is an investor
interest too, as noted in the earlier Chapters.
Thus, while the business ofbuying bad loans with an eye on making arbitr
age
profits is well understandable, the key question is — does the business of buyin
NPLs necessarily have to be in the form of an ARC?
g

__In terms of regulation, in addition to the vague and citcular definition

inthe law, it is evident that the business ofasset reconstruc ARC of
tion requires regula-
tory authorisation only when itiscarried in the corporate format.
tion business, defined in similar terms by the law,
Like securitisa-
iscarried almost
outside the SARFAESI Act since theassets are acquired
'snot applicable toanactivity carried innon-corp bytrusts, theregulation
orate form.
If itisnota regulatory necessity, itmust bea
tory prwo business necessity The regula-
ivre mus
ilt eg
bebaceked by
OYSpespecicial powers orabililitiesities whi
whic ch« would notbe
As far asthe powers under the Act are
concerned, theentire 1 of
was has ty andhazy. Special powers areconferred
insec. 9 ofthe Act butthese
 Why do I need an ARC? Syn. 2 635
Management of the Business of the Borrower by Securitisation Companies
and
Reconstruction Companies (Reserve Bank) Guidelines, 2010”, vide Notification
dated 21“ April, 2010'. These Guidelines have been updated from time to time,
latest being on 1* July, 2013 [see Appendix 5 to this Chapter]. In any event, if
the law is to be taken at its face value, then a similar right to takeover manage-
ment has been conferred on the secured creditor also, by the amendments made
in sec. 13(4) in 2004, although the legal sanctity of such power is greatly in doubt
— see comments in the Commentary section.
Therefore, if there is a motivation to get recognised as an ARC, it is possibly
not due to the special recovery rights granted by the law. The answer might lie,
though not very clearly, in one or more of the following privileges:
e The ARC route allows entrepreneurs, who are not banks, to get into the
business of acquiring NPLs. Other than through the ARC route, it seems
that entrepreneurs cannot even buy NPLs. The RBI Guidelines on sale of
NPLs by banks to entities other than ARCs were discussed, and cited, in
Chapter 7. The 13th July, 2005 Guidelines’ suggest that banks cannot
even sell NPLs to entities other than banks or financial institutions. In
addition, even if the buyer happens to be an ARC, the conditions on dis-
posal of NPLs to the buyer seem to be more stringent than those in case
of ARCs. Hence, ARC route seems to be the only possible avenue for en-
trepreneurs to engage in NPL business.
e The powers of a secured creditor under the law are limited to banks and
financial institutions, and ARCs. Therefore, the buyer buying NPLs in
capacity as ARCs is, at worst, at par with the rights of a secured creditor
under the law.
e Foreign investments have been permitted in ARCs — see later in this
Chapter. This is also a special privilege that allows entrepreneurs to lev-
erage on foreign capital to invest in NPLs.
Thus, the ARC route in India seems to be developing, as the very license to
deal in NPLs in India, in view of the restrictive regime silently prohibiting banks
to sell their loans to entities other than banks and ARCs.
In addition to the above, the following special powers granted to ARCs may be
noted:
e There are several powers purported granted under the SARFAESI Acct.
The same have been commented under sec. 9 of Act in the commentary
section.
¢ ARCs have been specified as “public financial institution” under sec. 4A
of the Companies Act. This amendment was made by the SARFAESI
Act itself by insertion of an item in sec. 4A of the Companies Act. Being

1. Original Notification available at: http://rbidocs.rbi.org.in/rdocs/Conten/PDFs/35MC010710.pdt

(accessed on 6" September, 2013).
2. See Chapter 7, Appendix 8.
 et.
636 Sya. 3 Part |—Chap. 9—Law and Practice of Asset Reconstruction,
the
a “public financial institution” brings the following privileges under
Companies Act:
° Convertibility of debentures or loans into equity shares as per
sec. 81(4) and sec. 94A.
* Appointme nt by special resolution in case of & Cerwin
of auditor
percentage of shareholding by holders, including public financial
institutions, u/s, 224A.
¢ Income-tax incentives: The Income-tax Act also gives certain special
benefits to public financial institutions, such as in sec, 10(23D), sec.
43D, sec. 36(viiac) and sec, 36(x), etc, However, none of these seem to
be related to the business of ARCs.
e Stamp duty benefits — In certain states, stamp duty exemption for transfer
of property has been granted in case of ARCs,
e Under the SEBI (Substantial Acquisition of Shares) Regulations, com-
monly known as the “Takeover code’, change of control of a company
pursuant to a takeover passed by an ARC is not treated as a takeover re-
quiring the applicability of the Takeover code.
e Permission granted for investment by foreign investors in the capital of
ARCs is discussed later in this Chapter.

3. HOW TO FORM AN ASSET RECONSTRUCTION

COMPANY?
Forming an ARC under the Act requires registration with the RBI. Given the
very few ARCs that have so far been registered with the RBI, it might seem that
the RBI is very selectively processing registration applications.
On the face of it, if the applicant satisfies the eligibility criteria, and makes an
i with the necessary formalities, there is no reason why the

3.1. What is needed to form an ARC?

The eligibiof
litytee
norms maidfor ARCs are
oh cani edts tementioned in sec. 3(3)
3 of the Act. For criti-
ome

plate oftheeligibility conditions for NBFCs. Apart from thenegative nd

controlling
bility relates to theexperience of directors
andasset reconstruction. Finance being securitisation
such a wide area,itisdifficult toseethe
 Who can invest in the Capital of an ARC?
Syn. 4 637
RBI declining an application for registration on the groun
ds of eligibility. How-
ever, the capital requirement (see below) may be a significant
barrier.
What if the RBI rejects an application for registration? Since it
is an adminis-
trative action, there will be possibility of filing a writ before a
High Court under
Article 226.

K, 2 Capital requirements for ARCs

The Act requires ARCs to have a minimum capital of Rs. 2 crores. However,
the RBI amended the Securitisation Companies and Reconstruction Compan
ies
(Reserve Bank) Guidelines and Directions, 2003, in 2004 and enhanced the
“minimum owned fund” requirement to Rs. 100 crores, or 15% of the assets
pro-
posed to be acquired by the ARC (excluding assets acquired as a trustee), which-
ever is lower. However, under the Guidelines too, the minimum Owned Fund for
any Securitisation Company or Reconstruction Company shall in no case be less
than Rs 2 crores. Practically, however, regulators are insisting on a capital of Rs
100 crores right at the inception.
Most of the assets that ARCs are holding are held as trustee: RBI guidelines lay
down that the 15% capital requirement will be applicable to assets acquired on
the balance sheet of the ARC or on that of the trusts. In addition, RBI guidelines
require the ARC to hold at least 5% of the security receipts issued by the trusts.
There is nothing that prohibits the ARC from borrowing against its investments
in the SRs. In fact, in the annual report of ARCIL, it is apparent that ARCIL has
borrowed by pledging its SRs.
Of course, ARCs have been permitted to invest their capital in security re-
ceipts.

4. WHO CAN INVEST IN THE CAPITAL OF AN

ARC?
The law or the guidelines do not seem to be limiting investment in the capital
of ARCs, while there are limitations in who can invest in the security receipts of
ARCs. The law defines a “sponsor” of an ARC as an entity holding 10% or more
of the equity capital of the ARC. See comments under the Commentary section
u/s. 2(1)(zh).
A major relaxation in November, 2005 was to open up foreign investments in
the capital of ARCs. Under the Foreign Direct Investment route, applications for
investment upto 49% of the equity capital of the ARC would be considered and
Foreign Institutional Investors (FIIs) were not permitted to hold the capital of the
ARCs’. However, under the Consolidated FDI Policy of 2013 (effective from 5
April, 2013), Flls have been permitted to invest in the capital of ARCs and the

3. Press release by Department of Economic Affairs:

Fito://oriw SOL Ore Ah’Seriptsrbe Viewcontent aspx M142116 (accessed on 6" September, 2013).
 struction, ec
63% Sya. 5 Part 1—Chap. 9—Law and Practice afAsset Recon

overall! limit of 49% has been drastically raised to 74% (FDI + Fil). The cond-
tions supulated in the FDI Policy are:
ered
(i) Persons resident outside India can invest in the capital of ARCs regist
with Reserve Bank only under the Government Route.
(ii) No sponsor may hold more than 50% of the shareholding in an ARC either
by way of FDI or by routing it through an FI! controlled by the single sponsor.
(iii) The total shareholding of an individual FI shall not exceed 10% of the to-
tal paid-up capital.
(iv) Flls registered with SEBI can invest in the Security Receipts (SRs) issued
by ARCs registered with Reserve Bank. Fils can invest up to 74%of each
tran che
of scheme of SRs. Such investment should be within the FIT limit on cor-
porate bonds prescribed from time to time, and sectoral caps under extant MDI
Regulations should also be complied with,
(v) All investments would be subject to provisions of section 3(3)(1)
of Securi-
tization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002.
Again, very recently, the Ministry of Commerce and Industry, in its meeting
dated 16" July, 2013, has decided to allow upto 49% FDI in ARCs under the
automatic route, while 49% to 100% FDI under the FIPB route’,

5. WHO CAN INVEST IN THE SECURITY RECEIPTS

(SRS) ISSUED BY AN ARC?
As per the definition of “security receipts” under the SARFAESI Acct, it is ap-
parent that only Qualified Institutional Buyers (QIBs) can invest in the same.
QIBs have been defined under the SARFAESI Act to mean a financial institu-

opment corporation, trustee or securitisation company or reconstruction company

Fee esered with SEBI oranyother body corporate asmay bespecified
y .

Under the Consolidated FDI Policy of 2013 (effective from 5 April,

Filsregistered withSEBI caninvest intheSecurity Receipts (SRs) issued
by
ARCs registered with RBI. Fils can invest up to 74% of each tranche of schern
of SRs. Such investment should be within the FIIlimit on corpor
e
ate bonds pre-
scribed from time to time, and sectoral caps under extant FDI
also be complied with. Prior tothis, the maximum limit was ions should
49% of each tranche
ofscheme of SRs, subject tothecondition that investment
bya single FIlineach

& See —e-

01 ta Release: http://pib.nic.im/newsit e/erel
aspx ease
"relid=9 7252 (accessed on 6” Semember
 How does the ARC raise funding?
Syn. 6 639
tranche of SRs should not exceed 10% of the issue,
vide RBI Notification dated
11" November, 2005°.
In exercise of the power to notify a body corporate as a QIB for the
purpose of
SARFAESI, SEBI, vide Notification dated 31° March, 2008° has notifie
d the
non-banking financial companies (NBFCs) registered under sec. 45-IA
of the
RBI Act, provided the following conditions are fulfilled:
e The NBFC is a NBFC-ND-SI (non-deposit taking, systemically impor-
tant), with asset size of Rs. 100 crores and above
e Other NBFC-NDs, having asset size of Rs. 50 crores and above and
“Capital to Risk — weighted Assets Ratio” (CRAR) of 10% as applicable
to non-deposit taking NBFCs as per the last audited balance sheet.
In addition to specified NBFCs, SEBI has also notified an Alternative Invest-
ment Fund (AIF), which is a body corporate and is registered under the SEBI
(AIF) Regulations, 2012, as QIBs for the purpose of SARFAESI Act, vide Noti-
fication dated 3 August, 2012’.
Recently, amendments have been made to Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations,
2000° to allow long term investors like Sovereign Wealth Funds (SWFs), Multi-
lateral Agencies, Endowment Funds, Insurance Funds and Pension Funds and
Foreign Central Banks registered with SEBI to purchase, on repatriation basis,
either directly from the issuer of such securities or through registered stock bro-
ker on a recognised Stock Exchange in India SRs issued by ARCs provided that
the total holding by an individual long term investor in each tranche of scheme of
Security Receipts shall not exceed 10% of the issue and the total holdings of all
eligible investors put together shall not exceed 49% of the paid up value of each
tranche of scheme of SRs issued by the ARCs. Qualified Foreign Investors
(QFIs) are also permitted to invest in SRs subject to the same limitations.

6. HOW DOES THE ARC RAISE FUNDING?

Equally, as significant as the question of raising equity capital for the ARCs is
the funding of the assets that the ARCs acquire.
ARCs have two options of acquiring assets—acquisition of assets as a trustee,
in trusts, and acquisition of assets in the ARC itself, that is, on the balance sheet

5. Notification no. RBI/2005-06/203 A.P. (DIR Series) Circular No.16 available at: ‘
http://www.rbi.org.in/scripts/NotificationUser.aspx
?1d=2613& Mode=0 (accessed on 6 September,
2013).
6. Notification No. F.No. 11/LC/GN/2008/21670, available at: w
http://www.sebi.gov.in/acts/qibnotification.pdf (accessed on 6 September, 2013).
7. Notification No. LAD-NRO/GN/2012-13/09/17427, available at: o a
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1348468504478.pdf (accessed on 6 September,
2013). ;
8. Vide Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) (Eighth Amendment) Regulations, 2013 dated 26° March, 2013: fi 2
http://rbi.org.in/Scripts/Notificati onUser.aspx16 (accessed on 6” September,
?7Mode=0&Id=79
2013).
 tion, et
640 Sya. 6 Part |—Chap. 9—Law and Practice of Asset Reconstruc

are to ‘be
of the ARC. In the former case as also in the latter case, the assets
n, in
counted as assets of the ARC for the purpose of capital adequacy, In additio
cas ofethe trust route, the ARC is requir ed at lea
to invest 5%stof the SKs issued
by the trusts.
Very clumsily, Section 7 provides the method of funding of the assets to he ao.
quired by the ARC. It is notable that the whole concept of “securitisation”, which
was germane in the way the sections were intended to operate, has fallen through
the creeks. The two modes of acquisition of assets, either on the balance sheet of
the ARC itself or as trustee, seem to be no different, as both are treated as “secu-
rity receipts”. If the idea of the Act was securitisation of the assets, then the ARC
can really be no more than a trustee, and therefore, acquisit assets in the
ofion
trust mode is not an alternat ive
but the only way of acq uir ing
assets by the ARCs.
On the other hand, if the assets were to be funded by the ARCs themselvesand ,
were to be held on the balance sheet of the ARCs, there is no que sti
of on
issue of
“security receipts” at all. The entire notion of “security receipts”, including the
nomenclature itself, seem to have no real foundation, except that the word was
coined under the belief that the securities of the ARCs will be the “receipts” for
the purpose of stamp duty liable to only nominal rates of duty.
From the definition of “security receipts” as also the language of sec. 7, it is
apparent that only Qualified Institutional Buyers (QIBs) may invest in the secu-
rity receipts. For the meaning of QIBs and commentary, see the Commentary
portion
u/s. 2(1)(u).
A November 2005 notification of the RBI has granted a general permission to
FIIs to invest in security receipts, subject to the following two conditions:
(a) FIIs can invest upto 49% of each tranche of scheme of Security Receipts;
(b) Subject to condition that investment of a single FII in each tranche of
scheme of SRs shall not exceed 10% of the issue.
Further, due to a recent amendment as pointed earlier, QFIs and long term in-
vestors registered with SEBI - SWFs, Multilateral Agencies, Pension/ Insurance/
Endowment Funds, Foreign Central Banks are also permitted to invest in security
receipts, subject to the conditions laid down.

7. WHAT BUSINESS CAN THE ARC DO?

The ptinciodd tent of ARCs isto —e formi
However, sec. 10 extends theOuntnews ofAICS 00acting tsa tesovery enman Go;
banks or financial institutions, acting as
inted by theC a | manager of NPLs . and receiver
ap-|

A question that often comes is - can ARCs buy performing loans? There i
statutory restraint onthis. ARCs have thepower tobuyfinancial assets — which
includes both performing and non-performing assets.
 RBI Directions and Guidelines on ARC’s
Syn. 8 641
8. RBI DIRECTIONS AND GUIDELINES ON ARC’s
On 23rd April, 2003, nearly 11 months after the
SARFAESI law came into ef-
fect, and nearly 1 month after a ridiculous deadline for
making application for
registration, the RBI brought into force guidelines relati
ng to securitisation and
asset reconstruction companies titled “The Securitisation Comp
anies and Recon-
struction Companies (Reserve Bank) Guidelines and Direc
tions, 2003”.
Unsurprisingly, the muddling up of securitisation and asset recons
truction ac-
tivities became all the more evident in the Guidelines as the
RBI said that the
same company could take up both asset reconstruction and securi
tisation activi-
ties—so, one would have securitisation and asset reconstructi
on companies
(SARCs) in the country. The confusion with the language—securitis
ation and
reconstruction clubbed into one, has prevailed all through the Guidel
ines and
subsequent circulars of the RBI, as every such legislative text has contin
ued to
make a mention of Securitisation Company/Reconstruction Company,
whereas
there is nothing such as securitisation company covered by the Guidelines.
There are separate guidelines about transfer of non-performing assets by banks
to ARCs. Together with the Guidelines and Directions, these define the net
worth
and capital adequacy requirements for SARCs, provide for NPA recognition and
consequent provisioning for the SARCs, and quite significantly, define the norms
for transfer of assets by banks to the SARCs.

8.1. SARC (Reserve Bank’s) Guidelines and Directions

Under various provisions of the SARFAESI Act, the RBI has issued the 2003
Guidelines and Directions. [Text of the Guidelines and Directions is enclosed as
Appendix 1 to this Chapter, as updated till 30" June, 2013]. Precision of lan-
guage is not a great virtue with lot many draftsman these days, but one is in-
trigued by the dual words “guidelines” and “directions”. Obvious to a layman,
directions implies something which is mandatory, while guidelines are a guide to
good conduct, but not necessary mandatory. Section 12 of the Act empowers the
RBI to give directions - guidelines, being merely for guidance or help, does not
need a statutory power as such. Thus, the use of the words “guidelines” and “di-
rections” would fox all those who are more careful about words and want to tell
those parts of the said Guidelines and Directions which are mandatory from those
that are not. For example, Rule 7 which goes into the niceties of operations of an
ARC and prescribes biblical rules of good behavior (thou shall be a good boy) is
more like a guideline than a direction.
The 2003 Guidelines and Directions were last amended on 21st April 2010.
The most curious exception to the scope of the Directions is that most of the
operative part of the Directions applies to a direct acquisition of assets by a
SARC, but does not apply only if such assets are held as a trustee for a trust. To
fall outside the discipline of the Directions, all that the SARC has to do is to set-
tle a trust, be a trustee to such trust, and acquire assets as a trustee. So, the obvi-
ous question is: what is it that would motivate a SARC from holding any of the
 oe Sya. 5 Part l—Chap. ¥—Law and Practice of Asset Reconstruction, etc.

financial assets # acquires directly? So, uf everyone will choose the easy way oul
anyway, what is the relevance of the Directions, if ai all?
Another, and even more cunous provision is in para 4) of the Directions
which says: “Any entity not registered with the Bank under sec. 3 of the Act may
vonduct the business of securitisation or asset reconstrucuon outside the purview
of the Act.” Section 3 of the parent law clearly puts a bar on a businessof seou-
ritisation and asset reconstruction without being registered with the RBI, Of
course, the words “securitisation” and “asset reconstruction” only relate to cer.
tain assets under that law—for instance, they relate to assets of a bank originator.
So, quite obviously, the provisions of the Act do not apply if someone were to
securitise assets of a non-banking originator. But if the ions, Where the
meaning of the words “securitisation” or “asset reconstruction” could not be dif-
ferent from what it is under the Act, say that business of securitisation or asset
reconstruction can be carried outside the purview of the Act, it defies the very
purpose of the mandatory nature of sec, 3 of the Act. By settled rule, a subordi-
nate instrument cannot travel beyond the parent law: therefore, sec, 3 should re-
main unaffected by Rule 4(iii) of the Directions and the latter should be simply
read down.

8.2. Modes of acquirin

asset
gs
The Directions seem to be suggesting that securitisation transactions will be
done by acquiring assets in the name of trusts tobe settled by the SARC. In
the
commentary part of this Book,” we have discussed at length the nature of a
trust—the trust is not an entity; the trustee is. So, it is the SARC which is the
entity. The Directions seem to be suggesting that the SARC will first
assets and then transfer the same tothe trust—this does not literal
buy the
ly make sense
cee ne a but the SARC itself . Instead of first acquiring
assets as a ial owner,
and then declaring trust, the SARC
assets asa trustee inthe first place. mi
Rr papa: ———
The security receipts will becreated by the trust (that is,
pacity as trustee). We have also discussed at length in the trustee, in ca-
security receipts” has
the F that the word
a flawed definition inthe Act and that there is no
the SARC from issuing any other type ofsecurity bar on
as well.
The only new provision relating tosecurity rece
ipts inthe Directions isthat the
OBS ty Ofthesecurity receipts isrestrict
ed: they canonlybetransfetred to

8.3. Reconstruction activities

The Directions also provide, what we have eatlier construed
goodconduct forreconstruction activities. ThisisRule7. This to rules
requires formarion
MNNONS SEISOfPolicies bythe SARC onissnes like acquisition Ofasset,
9. SeeNotesimChapter 1. PartTl
under definition of“default”, “secur
ed creditor”
 RBI Directions and Guidelines on ARC’s
Syn. 8 643
valuation, disposal, settlement, realisation cycle, etc. This rule
essentially lays
down various policies, all of which are internally to be framed and
implemented.
It should not have been necessary for the RBI to put in such basic rules
of busi-
ness in a quasi-legislative instruments: no regulator should make the mistak
e of
substituting corporate governance by such rudimentary rules.

8.4. Capital adequacy

A 15% capital adequacy has been prescribed for SARCs on risk-weighted as-
sets. The risk weights are similar to those under the Basel I Convention.
On 29th March, 2004, the minimum net owned fund requirement for ARCs
was increased from Rs. 2 crores to Rs. 100 crores, or 15% of the value of total
financial assets “acquired or to be acquired” by the ARC, whichever is less. Im-
portantly, in the 29th March, 2004 notification, there was a very confusing state-
ment about assets proposed to be acquired in the trust mode (which is, inciden-
tally the almost-always used mode of ARCs buying assets). The amendment said:
“While computing the amount for the purpose of the first proviso, no account
shall be taken, whether the assets are transferred to a trust set up for the purpose
of securitisation or not”. As is quite obvious, this language is extremely confus-
ing. It might be stretched either way—that the assets acquired as a trustee shall
not be counted for the purpose of determination of the value of assets, or that the
assets acquired as a trustee shall also be counted.
In fact, there is no apparent reason to count together the assets acquired as a
trustee. The assets of the trust are not the assets of the trustee—hence, there is no
reason why the trustee should hold any capital against the trust assets. After all,
capital is needed for first loss risk—the trustee has no risk in the assets, it is hold-
ing as a trustee. Hence, there should be no need to require capital on assets held
as a trustee.

While it appears logical to exclude the assets acquired as a trustee, the note ac-
companying the Notification of 29th March, 2004, seemed to suggest that the
intention was to include such assets. The accompanying note says: “In order to
ensure that the size of capital should have some relationship to the value of assets
acquired by the Securitisation Company or Reconstruction Company, and securi-
tized, it has been decided that for commencing the business of securitisation or
asset reconstruction, the minimum owned fund shall be an amount not less than
15% of the total financial assets acquired or to be acquired by the Securitisation
Company or Reconstruction Company on an aggregate basis or Rs. 100 crore
whichever is lower, irrespective of whether the assets are transferred to a trust set
up for the purpose of securitisation or not.’”” ARCIL, one the prominent functional
ARCs in the country, increased its capital from Rs. 10 crores to Rs. 100 crores
during the financial year 2004-05.
SARCs are supposed to deploy their “surplus” funds only in G-secs and bank
deposits. “Surplus”, of course, is what is not invested in accordance with the
scheme of investments. The amendments made in 2004 also enable ARCs to in-
vest in the security receipts issued by the trusts. This, it may be noted, might
ca sya. 5 Part L—Chap. +—Law and Practice af Assei Reconstruction, etc,

ammount to a conflict of interest because a trustee, also being a beneficiary, plages

himself on an office of profit. Amendments made in April 2010 have expanded
the invesument avenues for such surplus funds to include deposits with Small
Industries Development Bank of India, National Bank for bog enn and Rural
Development or such other entity as may be specified by Reserve Bank of
india from time to ume.

8.5. Investment in land and buildings

The Guidelines and Directions prohibit an ARC investing out of its owned fund
in land and building, provided that this restriction will not apply to funds bor-
rowed as also to owned fund in excess of the minimum prescribed, Amendments
made in April 2010 have relaxed this requirement, The exception s
now are:
“Provided that this restriction shall not apply to investment in land
and/or building by Securitisation Co y orRennebatadian Colnany
for its own use upto 10% of its owned fund;
Provided further that any land and/or building acquired by Securitisa-
tion Company or Reconstruction Company in the ordinary course of its
business of reconstruction of assets while enforcing its security interest,
shall be disposed of within a period of five years from the date of such
acquisition or such extended period as may be permitted by the Bank in
the interest of realisation of the dues of the Securitisation Company or
Reconstruction Company.”

8.6. | When does a bad apple become bad

Another curious part of the Directions is its approach to NPA recognition by
SARCs. It is a common knowledge that ARCs are really “bad banks”—they rep-
resent a bunch of bad assets hived off from the originating banks. By presump-
tion, the assets must have been non-performing (though the Act or the Directions
do not limit ARCs to buy bad loans only) from the very start. But they turn into
performing assets from the very day they are bought up by the ARC, and remain
performing for at least 6 months. It is only after the failure of interest
principal after 6 months of acquisition that they become non-performing.
Once they become non-performing, they will start coming for provisioning ing re-
quirements. This, coupled with the requirement that the securities of the ARC
must be interest-bearing (see later), isa sure prescription that the ARC will soon
be having losses on its own balance sheet. By mandatory i
Act, ifan ARC does not make profits for3 consecutive years, itmust bedisquali
-
fied to be an ARC, and therefore, wind up. It would not be i therefore
that thecombined effect oftheDirections would beto make the whole business
of ARCs unviable except for vulture financiers.
 RBI Directions and Guidelines on ARC’s
Syn. 8 645

8.7. Plan of realisation

In terms of clause 7(6)(i) of the Directions, every ARC is required to formula
te
a plan for realisation of NPLs acquired by providing for one or more measures
listed therein. Further, in terms of clause 7(6)(i) of the Directions, the plan
of
realisation shall clearly spell out the steps proposed to reconstruct the assets and
realise the same within a specified timeframe, which shall not in any case exceed
five years from the date of acquisition. Subsequently, it was decided that on ex-
piry of five years from the date of acquisition of financial assets, the Board of
Directors of the ARC may increase the period for realisation of financial assets
so that the total period for realisation shall not exceed eight years from the date
of acquisition of financial assets concerned. The Board of Directors of the ARC
shall specify the steps that will be taken by the ARC to realise the financial assets
within the time frame as above.
Qualified Institutional Buyers shall be entitled to invoke the provisions of Sec-
tion 7(3) of the SARFAESI Act only at the end of such extended period as ex-
plained above. If the period for realisation is not extended, the Qualified Institu-
tional Buyers shall be entitled to invoke the provisions of Section 7(3) of the Act
at the end of period of realisation which shall not exceed five years from the date
of acquisition of the financial asset concerned.

8.8. Disclosures in the balance sheet of ARCs

Besides meeting the requirements of section 129 read with Schedule III of the
Companies Act, 2013* [corresponding to Schedule VI (revised) of the Companies
Act, 1956] the ARCs have to prepare the following and annex the same to the
Balance Sheet:
(i) the names and addresses of the banks/financial institutions from whom
financial assets were acquired and the value at which such assets were
acquired from each such bank/financial institutions;
(ii) Dispersion of various financial assets industry-wise and sponsor-wise.
(dispersion is to be indicated as a percentage to the total assets);
(iii) Details of related parties as per Accounting Standard and guidance notes
issued by the Institute of Chartered Accountants of India and the
amounts due to and from them; and
(iv) A statement clearly charting therein the migration of financial assets
from standard to non-performing.
Amendments made in April 2010 have imposed additional disclosure require-
ments for ARCs. Accordingly, an ARC shall disclose the following as a part of
its annual report: .
(i) Value of financial assets acquired during the financial year either in its
own books or in the books of the trust;
(ii) Value offinancial assets realised during the financial year;
(iii) Value of financial assets outstanding for realisation as at the end of the
financial year;

*, Note that Section 129 of the Companies Act, 2013 (consequently Schedule III), has not been noti-
fied and is not effective as yet (Information updated as on 13th September, 2013).
040 sya. 5 Part L—Chap. 9—Law and Practice afAsset Reconstruction, ete.

(iv) Value of Security Receipts redeemed partly and the Seourity Receipis
redeemed fully during the financial year;
(v) Value of Security Receipts pending for redemption as at the end of the
financial year;
(vi) Value of Security Receipts which could not be redeemed as a result of
non-realisation ofthe financial asset as per the policy formulated by the
Securitisation company or Reconstruction company under Paragraph
7(6 Mii) or 7(6N iii);
(vii) Value of land and/or building acquired in ordinary course
af business of
reconstruction of assets (year wise).

8.9. _ Directions
to transferring banks
Importantly, the RBI has also given Directions to banks which contain both a
provision for regulatory capital relief, as also issues like recognition of profit/
losses, etc.
Para 3 of these Guidelines gives an impression that banks can sell only non-
performing loans to SARCs. Once again, the RBI has made the elementary mis-
take of confusion all securitisation to be all reconstruction or vice versa, since
securitisation, as different from asset reconstruction, is done in case of per :
ing assets rather than non-performing assets. But most likely, bankers, swear
by the letter and not spirit of the RBI directives, are unlikely to take these Guide-
lines only limitedto asset reconstruction.
These Guidelines contain certain important clarifications that will help the se-
curitisation market:
¢ That banks may invest in security receipts or other securities issued by
the SARCs, which will be regarded as investments in the hand of the

¢ That the exposure will be regarded as exposure in the SARC and not the

¢ That banks may remove the assets transferred by them to SARCs from
RBI Directions and Guidelines on ARC’s
Syn. 8 647
imposed by the RBI in case of bonds and debentures may be skipped in
case of
pass-through certificates.
ARCs are not money-banks: they are not financial intermediaries. They are re-
covery devices. There is no way ARCs can externally fund their acquisitions ex-
cept by bringing in external investors. Such external investors are unlikely to
accept a subordination to the transferring banks, as that does not make commer-
cial sense. Therefore, there is no option but for the originating banks to accept a
subordination of their bonds/debentures. Since the RBI guidelines expressly pro-
vide that the debentures cannot have a legal final maturity beyond 6 years, and
they must be redeemable in cash, the only way would be to take the ARC to
bankruptcy after 6 years if the assets have failed to pay off completely by then.
And a complete pay off within 6 years will be extremely difficult to expect.

8.10. Master Circular of 1° July, 2013

In line with the current practice of the RBI to incorporate circulars in form of a
master circular, a Master Circular for Securitisation Companies/Reconstruction
Companies has been issued vide RBI/2013-2014/55
DNBS (PD) CC.No.33/SCRC/26.03.001/ 2013-2014. [Text of the Master Circu-
lar is reproduced in Appendix 6 to this Chapter]. The Master Circular covers
requirements brought in way of various circulars over time. The substantive re-
quirements are as follows:
e Capital requirements: The minimum owned fund shall be an amount
not less than 15% of the total financial assets acquired or to be acquired
by the Securitisation Company or Reconstruction Company on an aggre-
gate basis or Rs. 100 crore whichever is lower. The assets include assets
parked on the balance sheets of trusts as well. Further, the ARC should
continue to hold this owned fund level until the realisation of the assets
and redemption of security receipts issued against such assets. The ARC
can utilise this amount towards the Security Receipts issued by the trust
under each scheme. This will ensure the stake of the ARC in the assets
acquired.
e Minimum investment in security receipts: ARCs are required to invest
in the Security Receipts issued by the trust set up for the purpose of secu-
ritisation, an amount not less than 5% under each scheme with immediate
effect. In case of those SC/RCs which have already issued the SRs, such
SC/RCs shall achieve the minimum subscription limit under each scheme
with in a period of 6 months from the date of issue of guidelines in the
matter. Further, by way of a Notification no RBI/2009-2010/414 DNBS
(PD) CC. No. 19/SCRC/26.03.001/2009-2010 dated 21st April, 2010, it
was stipulated that all the ARCs should henceforth invest in and continue
to hold minimum 5% stake of the outstanding amount of the SRs issued
by the ARCs under each scheme and each class till the redemption of all
the SRs issued under particular scheme.
O45 sya. 9 Part k—Chap. 9—Law and Practice af Asset Reconsinuotion, etc.

e Declaration of NAVs: ln onder to enable the Qualified tasatuuonal

Buyers to know the value of their investments in the Seourity Receipts,
ARCs have been advised by the RBI to declare Net Asset Value of the
Security Receipts issued by them at periodical intervals. The actual im-
plemen of tat ion
this could be very curious. SRs are backby ednon-
performing loans—the hen recovery is the only evidence of the
actualce,
val ue
of the loans. If the loans lead to recoveries , is typically
the money
distributed. However, valuation of non-performing loans is based on pro-
jected cashflows from such loans (see discussion on valuation of non-
performing loans in context of sale of NPLs by banks ~ Chapter 7), The
projected cashflows may change, based on actual track record of recov-
ery.
. Purchase of NPLs from other ARCs; The RBI has opined that ARCs
were floated to purchase NPLs from banks/financial institutions/NBFCs.
Hence, it is not open for the ARCs to buy NPLs from other ARCs,
e Restructuring of NPLs: The RBI has opined that there is no bar on
ARCs deploying their funds for undertaking restructuring of acquired
loan account with the sole purpose of realising their dues,
e Extension of time for realisation of NPLs: The time period fixed under
the Securitisation Companies and Reconstruction Companies (Reserve
Bank) Guidelines and Directions, 2003, for realisation of NPLs acquired
by ARCs was originally 5Syears. The RBI has extended that time by an-
other 2 years. Later, by the amendments made in April 2010, the time
frame is extended to 8 years.
In addition, the RBI has evolved guidance note based on guidelin issued
eson
various matters, which has been reproduced in Appendix 3 to this Chapter.

9. ARC’S AND TRUSTS FORMED BY ARC’S

As mentioned several times in this Commentary, the route adopted by ARCs
for acquisition of NPLs has been to use trusts. In fact, with the RBI having im-
posed capital requirement of 15% of assets acquired by the ARCs, the trust route
seems to be the only convenientroute.
Can a trust formed by an ARC be treated as an ARC itself? Under trust law,
trust is not an entity as such, but indicates the beneficial relation between the
trustee and the beneficiary. Inother words, the obligation attached to propert
that requires the trustee tohold it, to bethe benefit ofthe beneficiary is what y
referred to as trust. Hence, trust isnot an entity atall.
is

Will the powers exercisable by an ARC also be exercisable where

acting in its capacity as a trustee? Sec. 2int) ohdeeAch,defia ARC i
ing “taemeed aout,
for’. as amended, specifically includes a securitisation
company, whether acting
as such oras a trustee for any trust set upbyit. Inother
words, where the ARC ic
acting imits Capaci
ty as a trustee, itiscounted as a “secu
have thestatus ofanARC aswell? Since no amendments,red creditor’, But will it
corresponding tothose
 Taxation of Asset Reconstruction Companies
Syn. 11 649
in sec. 2(zd), have been made in the definition of “asset reconstruction com-
pany”’, it if felt that the special powers of ARCs will not be applicable
in case it is
acting as a trustee. See also commentary in Chapter 1, Part II of
the book under
definition of “default”, “secured creditor’.

10. SALE OF NPLs BY BANKS

The April 23, 2003 Guidelines of the RBI contain detailed instructions relating
to banks selling their NPLs to ARCs. Subsequently, guidelines in this respect
have been incorporated in the Master Circular on Prudential Guidelines on In-
come Recognition, Asset Classification and Provisioning pertaining to Advances,
dated 1” July, 2013. The text of relevant extracts of these Guidelines is placed in
Appendix 2 to this Chapter.
It seems from the said guidelines that only NPLs can be sold by banks. Sale of
standard assets is permitted only where such asset is a part of a consortium debt,
majority of which has already been classed as NPLs by the other members of the
consortium.
In practice, most of the sale of NPLs by banks has taken place in lieu of “secu-
rity receipts”. While regulation requires the security receipts to be of “non-
contingent” nature, but it is quite obvious that as the NPLs are acquired in the
trust mode, and a trust is a special purpose vehicle with no equity of its own, all
the security receipts are really speaking contingent, in that their value is no dif-
ferent from the value of the underlying assets transferred in the first place by the
bank to the ARC. The ARC simply acquires them as a trustee, giving no absolute
undertaking of its own to repay the security receipts: hence, there is none except
an extremely illusory difference between the assets transferred by the banks, and
the paper that the banks acquire in lieu thereof.

11. TAXATION OF ASSET RECONSTRUCTION COM-

PANIES
As mentioned earlier, the assets acquired by the ARCs are acquired in trust
form with the ARC acting as trustee. The taxation of these trusts will be the same
as in case of any other securitisation transaction. There are, however, significant
differences:
(a) In case of traditional securitisation transactions, it is possible to predict
the net realisation from assets acquired by the SPV with reasonable cer-
tainty. For instance, if a pool of auto loans worth Rs. 100 million has
been acquired, it is unlikely that the realisation will exceed Rs. 100 mil-
lion, while there may be a downward variation. In case of NPLs, if a pool
of NPLs has been acquired at Rs. 100 million, the probabilities of up-
ward and downward variation from that number are almost symmetri-
cally distributed. Therefore, there is a good likelihood of there being a
realisation that exceeds the fair value at which the NPLs were acquired.
650 Sya. 12 =Part Chap. —Law and Practoe a Asset ReconstirHonon, etc.

ive
(b) This is “profit”. This profit may be distributed to the ARC as incent

come

(c) In addition, traditional securitisation transactions, in view of completely

grey prov isio
about till now, have been structured
taxation ns as “revoca-
ble transfers”, “non discretionary trusts”, etc,, to avoid taxation of the
SPV as a tax paying entity, In case of ARCs, in view of the wide discre-
tion enjoyed by the ARC as the trustee of the trust, it is difficult to hold it
as a non-discretionary trust. It is also difficult to contend that the transfer
of the asset made by the bank was a “revocable contribution” to the trust,
as the trustee acquires irrevocable title by way of a true sale over such
assets.
(d) The net result of the above discussion is that the taxation of the trusts in
which NPLs are acquired remains fraught with uncertainty, On the face
of it, it seems difficult to avoid entity-level taxation of the trusts, al-
though the result may not be very different, from a macro perspective, if
the beneficiaries of the SPV are taxed individually,
For taxation of SPVs in general, see Chapter 4.

12. ACCOUNTING ISSUES

Race? eT Stee inte oatmeee SST GE ames

(a) oe a ne ee osOne

(b) If the answer to the above question is in the affirmative,

(a) What will be the accounting treatment of the security receipts
that the bank acquires from the ARC?
(b) Will theassets appear onthebooks ofthetrust that acquires such
assets?
(c) Can the trustee or anyone else be deemed to be holding “residual eco-
nomic interest” in the trust in which the assets are acquired, to require
consolidation of such trust with the trustee or such holder? 7”

10. For example. US FAS 140 deals with transfers offinancial assets 1AS 39
ingforfinancial instruments dealswithde-recophition offinancial asete thaaeweeom
 Accounting Issues
Syn. 12 651
has been defined in a particular manner, the Note has a limited applica
bility to
securitisation transactions only." The transfer of NPLs to trusts,
and the trust in
turn issuing security receipts which represent beneficial interest in such
NPLs,
may be treated as a case of securitisation, and hence, securitisation accoun
ting
Standards may be said to be applicable in the instant case.

12.1. Whether off balance sheet

Generally speaking, when an asset is transferred by a seller to a buyer, the asset
goes off the balance sheet of the seller, and comes on the balance sheet of the
buyer. In case of several securitisation transactions, the so-called seller continues
to be involved and associated with the assets to an extent that, from a substantive
viewpoint, the sale itself might be questionable. Hence, questions on off-balance
sheet treatment do arise.
In case of the bank selling NPLs to ARCs, the bank does not have much of in-
volvement with the assets as far as the realisation of the assets is concerned. The
very purpose of the transfer is to ensure that the realisation efforts are done at the
ARC level. There is a legal transfer of the assets in a manner that would count as
a “true sale”, and the servicing of the assets, that is, realisation, is done by the
ARC. It cannot be said that all the risks and rewards of the assets continue to be
retained by the bank, while there is an extent of retention of risks and rewards by
the selling bank. Therefore, the assets transferred by the bank to the ARC should
generally qualify for off balance sheet treatment.

12.2. Nature of “asset” acquired by the selling bank

As in most securitisation transactions, the issuing vehicle issues securities rep-
resenting beneficial interest in the assets held by the vehicle, which are, partly at
least, re-acquired by the erstwhile seller. A question arises as to what is the na-
ture of such securities? Are these securities nothing but a fractional interest in the
very assets transferred by the seller, such that a transfer may be presumed not to
have taken place to the extent of beneficial interest re-acquired, or is a new asset?
US accounting standard FAS 140 answers this question with reference to the
constitution of the SPV—if the SPV is a “qualifying special purpose entity”, then
the securities of the SPV are treated as a new asset. However, if not, then the
seller is deemed to be re-acquiring a fractional interest in the very same assets
that he transferred, and to the extent of such re-acquisition, there is no off-
balance sheet treatment.
There are no analogous provisions in Indian securitisation accounting rules. In
view of the specialized nature of the ARCs, the legal powers bestowed upon the
ARCs, and the aggregation of assets that usually happens at ARC level, it will
not be improper to hold that the securities of the ARC are not just a beneficial
fractional interest in the assets that the bank transferred, but an independent asset.

11. Accounting standards dealing with securitisation have been discussed at length in Vinod Kothari:
Securitization: The Financial Instrument of the Future.
652 Sya. 129 Part |—Chap. 9—Law and Practice af Asset Reconstruction, etc.

This goes much in line with the RBI's directives, treating the securities of the
ARC as 4 performing asset.
Hence, the bank acquiring the security receipts of trust ar the ARC will reflect
the same as 4 new financial instrument acquired by the bank.

12.3. Impairment provisions

Accounting standard AS 30, corresponding to LAS 39, provides for impairment
of financial assets. Default by a borrower is surely an indicator of impairment,
Restis ruct urin
another indicator g
of impairment. Impairment provision maybe
in addition to the provision required by the RBI regulations on non-performing
assets, The impai provisioning requirement is that the cashflows from the
asset will be estimated, and such estimated cashflows will be discounted at an
appropriate discounting rate.

12.4. Whether the assets appear on the balance sheet of the

Trust
Whether the assets transferred by the bank(s) that go off the books of the bank,
come on the books of the trust? We have mentioned earlier that a trust is not a
separate legal entity. However, from accounting viewpoint, the existence of a
separate legal entity is not crucial. For instance, a proprietorship business and the
proprietor are not separate—yet it is commonplace to prepare separate accounts
for the business. The idea of separate books of account is to deal with assets, in-
comes, liabilities, and expenses which are,by contract, arrangement or under-
standing, distinct from those of the entity owning it.
There is no doubt that the assets acquired by the ARC as a trustee will not be
reflected as the assets of the ARC (see, however, the issue of consolidation be-
low). Should these assets be reflected as the assets of the trust?
The International Accounting Standard IAS 39 has an answer to this question.
On certain transactions that would qualify as “pass through” transactions, the assets
will not stay on the books of the trust also. In other words, the issuance of benefi-

ofthetrust. The conditions for giving a pass-through treatment are given in

Para 19
of IAS 39. Accordingly, ifthevehicle, that is,thetrust, has acquired assets and has
issued correspondin g obligations, say, the security receipts, a pass through treat-
ment will apply if ALL the following conditions are satisfied:
(a) if the trust is not requiredto y the security receipts unless .
iscsmumicy fromtheaxsets taqueseion: yA -y
(b) having received the money from the assets, the
trust cannot hot the
same tothesecurity receipts: inother words, the
trust does notKee the
right toretain orreinvest the money received, except
due topurely tem-
 Accounting Issues
Syn. 12 653
porary mismatches to have a practical timeframe of distri
bution of the
Sums collected;
(c) the trust is barred from creating any further encumbrance
on the assets in
question.
. In case of trusts formed by ARCs, the trusts have a degree of
discretion. There
is also an aggregation of assets in the trusts. In other words,
it would be difficult
to look at the security receipts as a clear pass-through of the assets
acquired by
the trusts.
As such, in the opinion of the author, the pass through treatment
will be diffi-
cult to apply, and the assets acquired by the SPV will be treated
as the assets of
the vehicle, with the security receipts being treated as corresponding liabilit
ies.

12.5. Consolidation of the trust with its primary beneficiary

A very significant question is whether the trust may be treated as a “subsidiary”
of either the trustee or any other primary beneficiary, requiring consolidation.
Consolidation is dealt with by Indian Accounting Standard AS 21 and Interna-
tional Accounting standard IAS 27. The issue of consolidation of SPVs has re-
ceived considerable attention of the standard setters—there is an Interpretation by
the International Accounting Standards Board called SIC 12, and there is a fairly
detailed Interpretation by the US Financial Accounting Standards Board called
FIN 46.
As consolidation is normally in the context of “subsidiaries”, one may make
the mistake of equating a “subsidiary” to mean a subsidiary company. The word
“subsidiary” in context of accounting standards is not limited to companies. The
word “subsidiary” is defined as any enterprise which is controlled by another
enterprise. Therefore, every enterprise has the potential of being treated as a sub-
sidiary.
Consolidation under AS 21 is based on two criteria—voting control, and con-
trol of composition of the board of directors or other governing body of the en-
terprise. It is notable that AS 21 does not take ownership of “equity” as the basis
of consolidation. Note also that “equity” is defined, not a legal equity, but right to
residual economic interest in the enterprise.
In case of ARCs, the ARC is the trustee; therefore, the governing body of the
trust is clearly the ARC itself. Controlling of the governing body, with a view to
deriving economic benefit, is also “control” for the purpose of consolidation. If
the trustee derives economic benefit from the trust, for instance, has a right to
receive fees which are of residual nature, there might be a strong contention that
the trustee is also holding the equity of the enterprise.
SIC 12 and FIN 46 both concede that equity is not a proper benchmark for con-
sidering the residual beneficial ownership of special purpose entities. SPVs are
known by their negligible net worth. Hence, legal equity is too thin to be of any
consequence. Residual economic interest, that is, being liable to suffer downward
variability in the net results of the SPV and being entitled to absorb upward
654 Sya.12 09 Part Chap. 9—Law and Practice af Asset Reconstruction, etc

variability in such net results, has been used as the criteria for consolidation un-
der FIN 46. Likewise, SIC |2 uses provision of subordinated interest in the SPV
as the criteria for consolidation.
SIC 12 is an interpretati LAS 27. The Indian standard AS 21 is modeled on
ofon
the basis of LAS 27 and therefore, it would not be wrong to say that SIC 12 has
its applicability to India as well. Hence, it is necessary to consider consolidation
of the trusts on the basis of residual economic benefit. Residual economic benetit
is the ability to sweep the left-over of the returns of the trust, after securities car-
rying only a fixed interest are paid, That is tosay, if there is a security or an ent-
tlement that would entitle the holder to sweep the net result of the operation of
the trust, the holder thereof should be regarded as the parent of the trust for the
pos
purof e
consolidat ion,

12.6. Disclosures
of NPLs sold by banks
RBI has issued a Master Circular on “Disclosure in Financial Statements-Notes
to Accounts” dated 1" July, 2013"? to provide detailed guidance to the banks in
the matter of disclosures in financial statements. The Master Circular requires the
disclosure pertaining of financial assets sold to SCs/ARCs on the following lines:
“ Details of financial assets sold to Securitisation/Reconstruction
Company
Asset Reconstruction: a

Table 9.1

(ii) Aggregate value (net of provisions) of

accounts sold to SC/RC

Similar such requirem

have been
ents
laid down
 APPENDICES
STATUTORY/REGULATORY MATERIALS
RELATING TO ASSET RECONSTRUCTION
COMPANIES

APPENDIX 1

RBI GUIDELINES AND DIRECTIONS

RBI/2013-2014/54
DNBS (PD) CC. No. 31/SCRC/26.03.001/ 2013-2014

July 1, 2013
Notification as amended upto June 30, 2013 -The Securitisation Companies
and Reconstruction Companies (Reserve Bank) Guidelines and Directions,
2003
As you are aware, in order to have all current instructions on the subject at one
place, the Reserve Bank of India issues updated circulars/notifications. The in-
structions contained in the Notification No. DNBS.2/CGM(CSM)-2003, dated
April 23, 2003 updated as on June 30, 2013 are reproduced below. The updated
Notification has also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
(N.S.Vishwanathan)
Principal Chief General Manager

Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003

The Securitisation Companies.and Reconstruction
Companies (Reserve Bank) Guidelines and Directions, 2003

The Reserve Bank of India, having considered it necessary in the public inter-
est, and being satisfied that, for the purpose of enabling the Reserve Bank to
regulate the financial system to the advantage of the country and to prevent the
affairs of any Securitisation Company or Reconstruction Company from being
conducted in a manner detrimental to the interest of investors or in any manner
prejudicial to the interest of such Securitisation Company or Reconstruction
Company, it is necessary to issue the guidelines and directions relating to

655
656 App. ! Part I—Chap. 9—Law and Practice af Asset Reconstruction, etc.

registration, measures of asset reconstruction, functions of the company, prauden-

tial norms, acquisition of financial assets and matters related thereto, as set out
below, hereby, in exercise of the powers conferred by Sections 3, 9, 10 and 12 of
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, issues to every Seouritistion Company or Recon.
struction Company, the guidelines and directions hereimnatter specified,
Short title and commencement
1. (1) These guidelines and directions shall be known as “The Securitisation
Companies and Reconstruction Companies (Reserve Bank) Guidelines and Di-
rections, 2003’.
(2) They shall come into force with effect from April 23, 2003 and any refer-
ence in these guidelines and directions to the date of commencement thereof shal]
be deemed to be a reference to that date.
Applicability oftheDirections
2. The provisions of these guidelines and directions shall apply to Securitisa-
tion Companies or Reconstruction Companies registered with the Reserve Bank
of India under Section 3 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002. However, in respect of
the trust/s mentioned in paragraphs 8 herein, the provisions of paragraphs 4, 5,
6,9, 10(i), LOGii) 12,13,14 and 15 shall not be applicable.
3. Definitions
(1) (i) “Act” means the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002;
(ii) “Bank” means the Reserve Bank of India constituted under Section 3 of
the Reserve Bank of India Act, 1934;
“[Giii) “Date ofacquisition” means the date on which the ownership of financial
assetsis acquiredby Securitisation Company or Reconstruction
Com-
pany either on its own books or directly in the books of the trust;]
(iv) “Deposit” means deposit as defined in the Companies (-Acceptance of
Pee Rates 1975 Seamed water Seetion 38 A oftheCompanion Act,
(v) Fair value means the mean of the earning value and the break up value;
(vi) “Non-performing Asset” (NPA) means an asset in respect of which:
a) Interest or principal (or instalment thereof) is overdue
Fdof
180daysor
morefromthe
dateofacquisition or
theduc
: as pershee
contract between the
the borrow
and the originat
eror,
b) interest or principal (or instalment thereof) is overdue
riodof180daysormorefromthedatefixedforreceipt thereat

14. Sub. vide Notification No. DNBS. FD(SC/RC). 8/CCo

m(ASR)-2010, dated 21-4-2010.
 RBI Directions and Guidelines
App. 1 657
in the plan formulated for realisation of the assets referred
to in
paragraph 7(1)(6) herein;
Cc — interest or principal (or instalment thereof) is overdue on expiry
of the planning period, where no plan is formulated for realis
a-
tion of the assets referred to in paragraph 7(1)(6) herein; or
d) any other receivable, if it is overdue for a period of 180 days
or
more in the books of the Securitisation Company or Reconstruc-
tion Company.
Provided that the Board of Directors of a Securitisation Com-
pany or Reconstruction Company may, on default by the bor-
rower, Classify an asset as a non-performing asset even earlier
than the period mentioned above (for facilitating enforcement as
provided for in Section 13 of the Act).
(vii) “Overdue” means an amount which remains unpaid beyond the due date;
(viii) “Owned Fund” means the aggregate of paid up equity capital, paid up
preference capital to the extent it is compulsorily convertible into equity
capital, free reserves (excluding revaluation reserve), credit balance in
Profit and Loss Account as reduced by the debit balance on the profit and
loss account and Miscellaneous Expenditure (to the extent not written off
or adjusted), book value of intangible assets and under / short provision
against NPA / diminution in value of investments, and over recognition
of income, if any; and further reduced by the book value of the shares
acquired in a Securitisation Company or Reconstruction Company, and
other deductions required on account of the items qualified by the audi-
tors in their report on the financial statements:
(ix) "Planning period" means a period not exceeding twelve months allowed
for formulating a plan for realization of non-performing assets (in the
books of the originator) acquired for the purpose of reconstruction;
(x) “Standard asset” means an asset, which is not an NPA.
(x1) “Trust” means trust as defined in Section 3 of the Indian Trusts Act,
1882.
(2) Words or expressions used but not defined herein and defined in the Secu-
ritisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, shall have the same meaning as assigned to them in that Act.
Any other words or expressions not defined in that Act shall have the same
meaning as assigned to them in the Companies Act, 1956.
4. Registration and matters incidental thereto
I(i) Every Securitisation Company or Reconstruction Company shall apply
for registration in the form of application specified vide Notification
No.DNBS.1/CGM(CSM)-2003 dated March 7, 2003 and obtain a certifi-

15. Ins. vide Notification No. DNBS. 1/CGM(CSM)/2003, dated 7-3-2003.

 ek.
653 App. | Part I—Chap. 9—Law and Practice of Asset Reconstruction,

cate of registfrom ratthe ionBank as provunder ided Section 3 ofthe

Act;}
(ii) A Securitisation Company or Reconstruction Company, which has ob-
tained a certificate of registration issued by the Bank under Section 3 of
the Act. can undertake both securitisation and asset reconstruction activi:
ties;
1(ii)(a) A Securitisation Company or Reconstruction Company shall
commence business within six months from the date of grant of
Certif Registrte
ofica ation by the Bank,
Provided that on the application by the Securitisation Company
or Reconstruction Company, the Bank may grant extension for
such further period, not exceeding one year in aggregate from
the date of grant of Certificate ofRegistration,
(ii) (b) A Securitisation Company or Reconstruction Company, which
has obtai ned
a Certificate of Registra from thetion
Bank under
Section 3 of the Act and not commenced business as on the date
of the Notification shall commence business within six months
from the date of Notification.”
"{(ii) (c) Provisions of section 45 -IA, 45-IB and 45IC of RBI Act,1934
shall not apply to non-banking financial company, which is a se-
curitisation company or reconstruction company registered with
the Bank under Section 3 of the SARFAESI Act,2002}.
(iti) Any entity not registered with the Bank under Section 3 of the Act may
conduct the business of securitisation or asset reconstruction outside the
purview
of the Act.
5 Owned Fund
Every Securitisation Company or Reconstruction Company seeking the Bank’s
registration under Section 3 oftheAct,shall have a minimum Owned Fund of
.§ 4 CHORE.

_ [Provided thatevery Securitisation company orreconstruction seek-

ing the Bank’s registration
under Section 3, or on business
on
of the Securitisation Companies ond Geena
mencement ‘Re.

Provided further that —

(i) struction
the minimum Owned Fund
Company shall
for any Securitisation Company
in nocase be less than Rs two crore: aan

17. Ins. vide Notification No. DNBS. 3/CGM(OPAY2003, dated28-8.2003

Ins. vide Notification No.DNBS. MEDISGY 008 dean29-3204.
 RBI Directions and Guidelines
App. 1 659
(ii) a Securitisation Company or Reconstruction Company
carrying on busi-
ness on the commencement of the Securitisation Companies
and Recon-
struction Companies (Reserve Bank) (Amendment) Guidelines and Di-
rections, 2004 shall reach the level of minimum Owned Fund specif
ied in
the first proviso within three months from such commenceme
nt;
(iii) while computing the amount for the purpose of the first provis
o, no ac-
count shall be taken whether the assets are transferred to a trust set
up for
the purpose of Securitisation or not;
(iv) the amount shall be continued to be held by the Securitisation Compa
ny
or Reconstruction Company until realisation of assets and redemption
of
security receipts issued against such assets;
"[(v) the Securitisation Company or Reconstruction Company shall invest in
the security receipts issued by the trust set up for the purpose of securiti-
sation, an amount not less than 5% under each scheme:
provided further that-
a Securitisation Company or Reconstruction Company which has already is-
sued the security receipts shall achieve the minimum subscription limit in secu-
rity receipts under each scheme within a period of six months from the date of
the Notification. ]
(vi) the Securitisation Company or Reconstruction Company shall continue
to hold a minimum of 5% of the Security Receipts of each class issued
by the SC/RC under each scheme on an ongoing basis till the redemption
of all the Security Receipts issued under such scheme.]
6. Permissible Business
(i) A Securitisation Company or Reconstruction Company shall com-
mence/undertake only the securitisation and asset reconstruction activi-
ties and the functions provided for in Section 10 of the Act.
(ii) A Securitisation Company or Reconstruction Company, which is carry-
ing on any other business, shall cease to do such business by June 20,
2003;
(iii) A Securitisation Company or Reconstruction Company shall not raise
monies by way of deposit.
7. Asset Reconstruction

(1) Acquisition of Financial Assets

(i) Every Securitisation Company or Reconstruction Company shall frame
with the approval of its Board of Directors, a ‘Financial Asset Acquisi-
tion Policy’, within 90 days of grant of Certificate of Registration, which
shall clearly lay down the policies and guidelines covering, inter alia,

19. Ins. vide i i

} Notification -9-2006.
No. DNBS. 5/CGM(PK)/2006, dated 20-9
20. Ins. vide Notification No. DNBS. PD(SC/RC). 9/CGM(ASR)-2010, dated 21-4-2010.
600 App. | Part L—Chap. Y—Law and Practice afAsset Reconsiruotian, @tc,

andms
“l(4) por onrits Own books or
procedure for acquisition eithe
directly in the books of the trust; ]
(b) types and the desirable profile of the assets,
(c) valuation procedure ensuring that the assets acquired have realis-
able value which is capable of being reasonably estimated and
independently valued;
(d) in the case of financial assets acquired for asset reconstruction,
the broad parameters for formulation of plans for their realisa-
von.
(ii) The Board of Directors may delegate powers to a committee Comprising
any director and/or any functi onarie
of the company s
for taking decisions
on propesals for acquisition of financial assets,
(iii) Deviation from the policy should be made only with the approval
of the Board of Directors.
*[(2) () Change in or take Over of Management
The Securitisation Company or Reconstruction Company shall take the meas-
ures specified in Sections 9(a) of the Act, in accordance with instructions con-
tained in Circular DNBS/PD (SC/RC) No. 17 /26.03.001/2009-10 dated April 21,
2010 as amended from time to time.

VEPLa RCE y a |
ures specified in Section 9(b) of the Act, until the Bank issues necessary guide-
lines in this behalf.]
(3) Rescheduling
of Debts
(i) Every Securitisation
Company or Reconstruc
Company shall
tion frame a
Ce ee Dae ears ne eeee oe weaned
parameters for rescheduling of debts due from borrowers;
(ii) All proposals should be in line with and supported by an acceptable busi-
ness plan, projected earnings and cash flows of the borrower;
(mi) TheProposals should notmaterially affect theasset lisbility management
of the Securitisation Company or Reconstruction Company or the com-
mitments given to investors;
(iv) The Board of Directors may delegate powers to a committee
anydirectorand/oraayfunctionaries ofthecompany for takingdecisions
on proposals
for reschedulementof debts;
 RBI Directions and Guidelines
App. 1 661
(4) Enforcement of Security Interest
While taking recourse to the sale of secured assets in terms of Section
13(4) of
the Act, a Securitisation Company or Reconstruction Company may itself acquire
the secured assets, either for its own use or for resale, only if the sale is
con-
ducted through a public auction.
(5) Settlement of dues payable by the borrower
(i) Every Securitisation Company or Reconstruction Company shall frame a
policy duly approved by the Board of Directors laying down the broad
parameters for settlement of debts due from borrowers:
(ii) The policy may, interalia, cover aspects such as cut-off date, formula for
computation of realisable amount and settlement of account, payment
terms and conditions, and borrower’s capability to pay the amount set-
tled;
(iii) Where the settlement does not envisage payment of the entire amount
agreed upon in one installment, the proposals should be in line with and
supported by an acceptable business plan, projected earnings and cash
flows of the borrower;
(iv) The proposal should not materially affect the asset liability management
of the Securitisation Company or Reconstruction Company or the com-
mitments given to investors;
(v) The Board of Directors may delegate powers to a committee comprising
any director and/or any functionaries of the company for taking decisions
on proposals for settlement of dues;
(vi) Deviation from the policy should be made only with the approval of the
Board of Directors.
(6) Plan for realisation
(i) Every Securitisation Company or Reconstruction Company may, within
the planning period, formulate a plan for realisation of assets, which may
provide for one or more of the following measures:
(a) Rescheduling of payment of debts payable by the borrower;
(b) Enforcement of security interest in accordance with the provi-
sions of the Act; |
(c) Settlement of dues payable by the borrower;
(d) Change in or takeover of the management, or sale or lease of the
whole or part of business of borrower after formulation of neces-
sary guidelines in this behalf by the Bank as stated in paragraph
7(2) herein above.
*[(ii) Securitisation Company or Reconstruction Company shall formulate the
policy for realisation of financial assets under which the period for

23. Sub. vide Notification No. DNBS. PD(SC/RC). 8/CGM(ASR)-2010, dated 21-4-2010.
662 App. | Part l—Chap. 9—Law and Practice ofAsset Reconstruction, etc.

realisation shall not exceed five years from the date of acquisition of the
ncia
finaasset l
concerned.
(iii) The Boardof Directoof rsthe Securitisation Company or Reconstruction
Company may increase the period for realisation of financial assets so
that the total period for realisation shall not exceed eight years from the
date of acquisition of financial assets concerned.
(iv) The Board of Directors of the Securitisation Company or Reconstruction
Company shall specify the steps that will be taken by the Securitisation
Company or Reconstruction Company to realise the financial assets
within the time frame referred to in clause (ii) or (i1)) as the case may be,
(v) The Qualified Institutional Buyers shall be entitled to invoke the provi-
sions of Section 7(3) of the Act only at the end of such extended period,
if the period for realisation is extended under clause (iii).
8. Securitisation
*T(1) Issue of Security Receipts- A Securitisation or Reconstruction
company shall give effect to the provisions of sections 7(1) and (2) of the Act
through one or more trusts set up exclusively for the purpose. The Securitisation
company or Reconstruction company shall transfer the assets to the said trusts at
the price at which those assets were acquired from the originator if the assets are
not acquired directly on the books of the trust:-]
(i) The trusts shall issue Security Receipts only to qualified institutional
buyers; and hold and administer the financial assets for the benefit of the
qualified institutional buyers;
(ii) The trust of such
eeshitrusts shall
pvest with the Securitisation Company
or Reconstruction Company;
(iii) A Securitisation Company or Reconstruction Company proposing to
issue Security Receipts, shall, prior to such an issue, formulate a policy,
duly approved by the Board of Directors, providing for issue of security
receipts under each scheme formulated by the trust;
(iv) The policy referred to in sub-paragraph (iii) above shall provide that the
security receipts issued would be transferable / assignable only in favour
of other qualified institutional buyers.
(2) Disclosures

Security Reculgts shallsnake dischougers tetuotioned inteeSamaten 9

9. Requirement as to capital adequacy
(1) Every Securitisation Company ot Reconstruction Company shall mainta
in,
i
on an ongoing basis, a capital adequacy ratio, which shall not be less than
fifteen
percent of its total risk weighted assets. The risk-weighted assets
shall be calcu-

24. Sub. vide Notification No. DNBS. PD(SC/RC). 8/CG

M(ASR)-2010,
dated 21-4-2010.
 RBI Directions and Guidelines App. 1 663
lated as the weighted aggregate of on balance sheet and off balance sheet items as
detailed hereunder: Weighted risk assets

On-Balance Sheet items Percentage risk weight

a) Cash and deposits with scheduled; commercial banks B(flor bastoode sonalsd |
(b) Investments in Government securities la:peimuseuac-eucaginatenal

Off- Balance Sheet Items

All Contingent Liabilities

(2) Shares held in other Securitisation Companies or Reconstruction Compa-

nies shall not attract any risk weight.
10. Deployment of Funds
(i) A Securitisation Company or Reconstruction Company, may as a spon-
sor and for the purpose of establishing a joint venture, invest in the eq-
uity share capital of a Securitisation Company or Reconstruction Com-
pany formed for the purpose of asset reconstruction;
Ti) A Securitisation company or Reconstruction company may deploy any
surplus funds available with it, in terms of a policy framed in this regard
by its Board of Directors, only in Government securities and deposits
with scheduled commercial banks, Small Industries Development Bank
of India, National Bank for Agriculture and Rural Development or such
other entity as may be specified by the Bank from time to time;]
*°[(iii) No Securitisation Company or Reconstruction Company shall, invest in
land or building, -
Provided that the restriction shall not apply to investment by Securitisation
Company or Reconstruction Company in land and buildings for its own use up to
10% of its owned fund,
Provided further that the restriction shall not apply to land and building ac-
quired by the Securitisation Company or Reconstruction Company in satisfaction
of claims in ordinary course of its business of reconstruction of assets in accor-
dance with the provisions of SARFAESI Act.”
Provided further that any land and/or building acquired by Securitisation Com-
pany or Reconstruction Company in the ordinary course of its business of recon-
struction of assets while enforcing its security interest, shall be disposed of
within a period of fiye years from the date of such acquisition or such extended

25. Sub. vide Notification No. DNBS. PD(SC/RC). 8/CGM(ASR)-2010, dated 21-4-2010.
26. Sub. vide Notification No. DNBS. PD(SC/RC). 8/CGM(ASR)-2010, dated 21-4-2010.
00+ App. | Part l—Chap. Y—Law and Pracnoe af Asset Reconsiructon, etc.

period a> tay De permuttedby the Bank in the interest of realization of the dues
of the Securitisation Company or Recorstrucken Company. |
il. Accounting
Year
Every Securitisation Company or Reconstruction Company shall prepare its
balance sheet and profit and loss account as on March 31 every year,
12. Asset Classification
(1) Classification’
(i) Every Securitisation Company or Reconstruction Company shall, after
taking into account the degree of well-defined credit weaknesses and ex-
tent of dependence on collateral security for realisation, classify the as-
sets *’[held in its own books) into the following categories, namely:
(a) Standard assets
(b) Non-Performing Assets.
(ii) The Non-Performing Assets shall be classifiedfurther as
(a) “Sub-standard asset’ for a period not exceeding twelve months
from the date it was classified asnon-performing asset;
(b) “Doubtful asset’ if the asset remains a sub-standard asset for a
period exceeding
twelve months;
28 2 , . A
[(c) “Loss asset’ if (A) the asset is non-performing for a period ex-
ceeding 36 months; (B) the asset is adversely affected by a po-
tential threat of non-recoverability due to either erosion in the
value of security or non-availability of security; (C) the asset has
been identified as loss asset by the Securitization company or
Reconstruction company or its internal or external auditor; or
(D) the financial asset including Security Receipts is not realized

formulated by the Securitization company or :

company under Paragraph 7 (6) (ii) or7 (6) (iii) and the Securiti-
zation company or Reconstruction company or the trust con-
cerned continues to hold those assets].
(iii) Assets acquired by the Securitisation Company or Reconstruction Com-
pany for the purpose of asset reconstruction may be treated as standard
assets during the planning period, if any.
(2) Asset Reconstruction : Renegotiated / Reschec
4

(i) Where theterms ofagreement regarding interest and/orprincipal relat-

ing tostandard asset have been renegotiated or rescheduled by a Securiti-
 RBI Directions and Guidelines
App. 1 665
asset with effect from the date of renegotiation / reschedulement
or con-
tinue to remain as a doubtful asset as the case be.
(ii) The asset may be upgraded as a standard asset only after
satisfactory
performance for a period of twelve months as per the renegotiated /
re-
scheduled terms.
(3) Provisioning requirements
_Every Securitisation Company or Reconstruction Company shall make provi-
sion against Non Performing Assets, as under: -

Asset Category | Provision Required

Sub-standard A general provision of 10% of the outstanding;
Assets

Doubtful Assets (i) 100% provision to the extent the asset is not covered by
the estimated __realisable value of _ security;
(ii) In addition to item (i) above, 50% of the remaining out-
standing.
The entire asset shall be written off.
(If, for any reason, the asset is retained in the books, 100%
thereof shall be provided for).

13. Investments
All investments should be valued at lower of cost or realisable value. Where
market rates are available, the market value would be presumed to be the realis-
able value and in cases where market rates are not available, the realisable value
should be the fair value. However, investments in other registered Securitisation
Company or Reconstruction Company shall be treated as long term investments
and valued in accordance with the Accounting Standards and guidance notes is-
sued by the Institute of Chartered Accountants of India.
14. Income recognition
(i) The income recognition shall be based on recognised accounting princi-
ples;
(ii) All the Accounting Standards and Guidance Notes issued by the Institute
of Chartered Accountants of India shall be followed in so far as they are
not inconsistent with the guidelines and directions contained herein;
(iii) Interest and any other charges in respect of all the NPAs shall be recog-
nised only when they are actually realised. Any such unrealised income
recognised by a Securitisation Company or Reconstruction Company be-
fore the asset became non-performing and remaining unrealised shall be
derecognised.
660 App. | Part L—Chap. 9—Law and Practice of Asset Recansinuchon, etc.

15. Disclosures in the balance sheet

addi-
(1) Every Securitisation Company or Reconstruction Company shall, in
tion to the requirements of schedule V1 of the Companies Act, 1956, prepare the
following schedules and annex them to its balance sheet:
(i) the names and addresses of the banks/financial institutions from whom
financial assets were acquired and the value at which such assets were
acquired from each such bank/financial institutions,
(ii) Dispersion of various financial assets industry-wise and Sponsor-wise.
(dispersion is tobe indicated as a percentage to the total assets),
(iii) Details ofrelated pasties osperAccepting Stantind annveuecepes ote
issued by the Institute of Chartered Accountants of and the
amounts due to and from them; and
(iv) A statement clearly charting therein the migration of financial assets
from standard to non-performing.
“I(v) Value of financial assets during the financial year either on its
own books or in the books of the trust;
(vi) Value of financial assets realized during the financial year;
(vii) Value of financial assets outstanding for realization as at the end of the
financial year;
(viii) Value of Security Receipts redeemed partially and the Security Receipts
redeemed fully during the financial year;
(ix) Value of Security Receipts pending for redemption as at the end of the
financial year;
(x) Value of Security Receipts which could not be redeemed as a result of
non-realization of the financial asset as per the policy formulated by the
Securitization company or Reconstruction company under Paragraph
7(6)(ii) or 7(6)(iii).
(xi) Value of land and/ or building acquired in ordinary course of business of
of assets (year on
reconstructi wise). ]
(2) (i) The accounting policies adoptedin presentation
of the
ial statements shall be in conformity with the applicable
norms prescr byibed
the Bank.
(ii) Where any of the i is not in conformity with these

such an effect is. not ascertainable,

imable, the fact shall be sodisclosed
; citing the
(ii) An inappropriate treatment of an item in Balance Sheet or Profit
Loss Account cannot bedeemed tohavebeen rectified either bydiscle

29. Ins. vide Notification No. DNBS. PD(SC/RC). 8/CGM(ASR)

-2010, dated 21-4-2010.
RBI Directions and Guidelines App. 1 667

Sure of accounting policies used or by disclosure in notes to balance

sheet and profit and loss account.
16. Internal Audit
Every Securitisation Company or Reconstruction Company shall put in place
an effective Internal Control System providing for periodical checks and review
of the asset acquisition procedures and asset reconstruction measures followed by
the company and matters related thereto.
17. Exemptions
The Bank may, if it considers necessary for avoiding any hardship to Securiti-
sation Company or Reconstruction Company, or for any other just and sufficient
reason exempt all Securitisation Companies or Reconstruction Companies or a
particular Securitisation Company or Reconstruction Company or class of Secu-
ritisation Companies or Reconstruction Companies, from all or any of the provi-
sions of these guidelines and directions either generally or for any specified pe-
riod, subject to such conditions as the Bank may impose.
(C.S.Murthy)
Chief General Manager-in-Charge

Annex
(1) Disclosure in Offer Document
A. Relating to the Issuer of Security Receipts
i. Name, place of Registered Office, date of incorporation, date of com-
mencement of business of the Securitisation Company or Reconstruction
Company;
ii. Particulars of sponsors, shareholders, and a brief profile of the Directors
on the Board of the Securitisation Company or Reconstruction Company
with their qualifications and experience;
iii. Summary of financial information of the company for the last three years
or since commencement of business of the company, which ever is
shorter;
iv. Details of Securitisation / Asset Reconstruction activities handled, if any,
in the last three years or since commencement of business, which ever 1s
shorter.
B. Terms
of Offer
i. Objects of offer;
ii. Description of the instrument giving particulars relating to its form,
denomination, issue price, etc together with an averment that the trans-
ferability of security receipts is restricted to the qualified institutional
buyers;
665 App. | Part |—Chap. }—Law and Practice of Asset Reconstruction, etc.

i. Arrangements made for management of assets and extent of management

fee charged by Securitisation Company or Reconstruction Company,
iv. Interest rate / probable yield;
v. Terms of payment of principal / interest, date of maturity / redemption,
vi. Servicing and administration arrangement;
vii. Details of credit rating, if any, and a summary of the rationale for the
rating;
viii. Description of assets being securitised,
ix. Geographical distribution of asset pool;
x. Residual maturity, interest rates, outstanding principal of the asset pool,
xi. Nature and value of underlying security, expected cash flows, their quan-
tum and timing, credit enhancement measures;
xii. Policy for acquisition of assets and valuation methodology adopted;
xiii. Terms of acquisition of assets from banks /financial institutions;
xiv. Details of performance record with the Originators;
xv. Terms of replacement of assets, if any, to the asset pool;
xvi. Statement of risk factors, particularly relating to future cash flows and
steps taken to mitigate the same;
xvii. Arrangements, if any, for implementing asset reconstruction measures in
case of default
xviii. Duties of the Trustee;
Xix. Specific asset reconstruction measures, if any, on which approvals wil]
be sought from investors;
xx. Dispute Redressal Mechanism.
(2) Disclo on quarterl
sur y ebasis
- Defaults, prepayments, losses, if any, during the quarter:
ii. Change in credit rating, if any;
iii. Change in profile of the assets by way of accretion to or realisation
of
assets from the existing
pool;

- Any other material information, which has a bearing onthe earni

ng pros-

List of amending Notifications:

|. Notification No. DNBS. 1/CGM(CSM) dated/2
Marc00
h 7.20
3 03
2. Notification No. DNBS. 3/CGM(OPdateA) d /2
August
00 2832003
3. NotificationNo. DNBS.4/ED(SG) date/-
d Marc
20 h 29.
04 2004
RBI Directions and Guidelines
App. 1 669
4. Notification No. DNBS. 5/CGM(PK)/-2006 dated September
20, 2006
Notification No. DNBS. 6/CGM(PK)/-2006 dated October
19, 2006
Notification DNBS(PD-SC/RC) No. 7 /CGM (ASR)/-2010 dated
April 21,
2010
7. Notification No. DNBS. PD (SC/RC). 8 /CGM (ASR) - 2010 dated April
21,
2010.
8. Notification No. DNBS. PD (SC/RC). 9 /CGM (ASR) - 2010 dated
April,
21,2010
 APPENDIX 2

GUIDELINES TO BANKS FOR SALE OF NPLS TO

ASSET RECONSTRUCTION COMPANIES
Guidelines on sale of financial assets to Securitisation Company (SC)/
Reconstruction Company (RC) (created under the Securitisation and
Reconstruction of Financial Assets and Enforcementof
Security Interest Act, 2002) and related issues
[Note: These guidelines were originally issued as DBOD No.BP. BC.
96/2 1.04.048/2002-03, dated 23” April, 2003. Subsequently, they have been
incorporated as a part of the Master Circular on Prudential Guidelines on Income
Recognition, Asset Classification and Provisioning pertaining to Advances, dated
1“ July, 2013. Below is the extract of the Master Circular. |
6. Guidelines on sale of financial assets to Securitisation Company
(SC)/Reconstruction Company (RC) (created under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002) and reiated issues.
6.1 Scope
These guidelines would be applicable to sale of financial assets enumerated in
paragraph 6.3 below, by banks/ Fls, for asset reconstruction/ securitisation under
the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002.
6.2 Structure
The guidelines to be followed by banks/ FIs while selling their financial assets
to SC/RC under the Act ibid and investing in bonds/ debentures/ security receipts
offered by the SC/RC are given below. The prudential guidelines have been
grouped under the following headings:
i) Financial assets which can be sold.
ii) Procedure for sale of banks’/ Fis’ financial assets to SC/ RC. including
valuat
and pricing
ion aspects.
iti) Prudential norms, in the following areas, for banks/ FIs for sale of their
financial assets to SC/ RC and for investing in bonds/ debentures/ secu-
rity receipts and any other securities offered by the SC/RC as compensa-
tion consequent upon sale of financial assets:
a) Provis /ion
Valuatiing
on norms

670
Guidelines to Banks for Sale of NPLs, etc.
App. 2 671

b) Capital adequacy norms

c) Exposure norms
iv) Disclosure requirements
6.3 Financial assets which can be sold
A financial asset may be sold to the SC/RC by any bank/ FI where the asset is:
i) A NPA, including a non-performing bond/ debenture, and
ii) A Standard Asset where:
(a) the asset is under consortium/ multiple banking arrangements,
(b) at least 75% by value of the asset is classified as non-performing
asset in the books of other banks/FIs, and
(c) at least 75% (by value) of the banks / FIs who are under the con-
sortium / multiple banking arrangements agree to the sale of the
asset to SC/RC.
6.4. Procedure for sale of banks’/ FIs’ financial assets to SC/ RC, including
valuation and pricing aspects
(a) The Securitisation and Reconstruction of Financial Assets and Enforce-
ment of Security Interest Act, 2002 (SARFAESI Act) allows acquisition
of financial assets by SC/RC from any bank/ FI on such terms and condi-
tions as may be agreed upon between them. This provides for sale of the
financial assets on ‘without recourse’ basis, i.e., with the entire credit
risk associated with the financial assets being transferred to SC/ RC, as
well as on ‘with recourse’ basis, i.e., subject to unrealized part of the as-
set reverting to the seller bank/ FI. Banks/ FIs are, however, directed to
ensure that the effect of the sale of the financial assets should be such
that the asset is taken off the books of the bank/ FI and after the sale
there should not be any known liability devolving on the banks/ FIs.
(b) Banks/ FIs, which propose to sell to SC/RC their financial assets 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,
(i) Financial assets to be sold;
(ii) Norms and procedure for sale of such financial assets;
(iii) Valuation procedure to be followed to ensure that the realisable
value of financial assets is reasonably estimated;
(iv) Delegation of powers of various functionaries for taking decision
on the sale of the financial assets; etc.
(c Banks/ FIs should ensure that subsequent to sale of the financial assets to
—

SC/RC, they do not assume any operational, legal or any other type of
risks relating to the financial assets sold.
672 App. 2 Part I—Chap. 9—Law and Practice of Asset Reconstruction, etc,

(d) (i) Each bank / Fl will make its own assessment of the value offered
by the SC / RC for the financial asset and decide whether to ac-
cept or reject the offer.
(ii) In the case of consortium / multiple banking arrangements, if
75% (by value) of the banks / Fis decide to accept the offer, the
remaining banks / Pls will be obligated to accept the offer,
(iii) Under no circumstances can a transfer to the SC/ RC be made at
a contingent price whereby in the event of shortfall in the reali-
zation by the SC/RC, the banks/ FIs would have to bear a part of
the shortfall.
(e) Banks/ Fils may receive cash or bonds or debentures as sale consideration
for the financial assets sold to SC/RC.
(f) Bonds/ debentures received by banks/ Fls as sale consideration towards
sale of financial assets to SC/RC will be classified as investments in the
books of banks/ Fls.
(g) Banks may also invest in security receipts, Pass-through certificates
(PTC), or other bonds/ debentures issued by SC/RC. These securities wil!
also be classifiedas investments in the books of banks/ Fls.
(h) In cases of specific financial assets, where it is considered 5

banks/ FIs may enter into agreement with SC/RC to share, in an

proportion, any surplus realised by SC/RC on the eventual realisation of
the concerned asset. In such cases the terms of sale should provide for a
report from the SC/RC to the bank/ FI on the value realised from the as-
set. No credit for the expected profit will be taken by banks/ Fis until the
profit materializes on actual sale.
6.5. Prudential norms for banks/ FIs for the sale transactions
(A) Provisioning/ valuation norms
(a) (i) When a bank / FI sells its financial assets to SC/ RC, on transfer
the same will be removed from its books.
(ii) If the sale to SC/ RC is at a price below the net book value
(NBV) (i.e., book value less provisions held), the shortfall
should be debited tothe profit and loss account of that year.
(iti) Ifthe sale isfor a value higher than the NBV, the excess
provi-
sion will not be reversed but will be utilized to meet the shortf
all/
loss on account of sale of other financial assets to SC/RC.
(iv) When banks/ Fis invest in the security receipts/ pass-
through
certificates issued by SC/RC in respect of the financial
assets
sold by them to the SC/RC, the sale shall be recognised
in books
of the banks / Fls at the lower of:
@ the redemption valu
Grech endl see of e the security receipts/ pass-

© the NBV of the financia

asset.
l
 Guidelines to Banks for Sale of NPLs, etc.
App. 2 673

The above investment should be carried in the books of the

bank / FI at the price as determined above until its sale or reali-
zation, and on such sale or realization, the loss or gain must be
dealt with in the same manner as at (11) and (iii) above.
(b) The securities (bonds and debentures) offered by SC / RC should
satisfy
the following conditions:
(i) The securities must not have a term in excess of six years.
(ii) The securities must carry a rate of interest which is not lower
than 1.5% above the Bank Rate in force at the time of issue.
(iii) The securities must be secured by an appropriate charge on the
assets transferred.
(iv) The securities must provide for part or full prepayment in the
event the SC / RC sells the asset securing the security before the
maturity date of the security.
(v) The commitment of the SC / RC to redeem the securities must be
unconditional and not linked to the realization of the assets.
(vi) Whenever the security is transferred to any other party, notice of
transfer should be issued to the SC/ RC.
(c) Investment in debentures/ bonds/ security receipts/ Pass-through certifi-
cates issued by SC/ RC
All instruments received by banks/FIs from SC/RC as sale consideration for fi-
nancial assets sold to them and also other instruments issued by SC/ RC in which
banks/ FIs invest will be in the nature of non SLR securities. Accordingly, the
valuation, classification and other norms applicable to investment in non-SLR
instruments prescribed by RBI from time to time would be applicable to bank’s/
FI’s investment in debentures/ bonds/ security receipts/PTCs issued by SC/ RC.
However, if any of the above instruments issued by SC/RC is limited to the ac-
tual realisation of the financial assets assigned to the instruments in the con-
cerned scheme the bank/ FI shall reckon the Net Asset Value (NAV), obtained
from SC/RC from time to time, for valuation of such investments.
(B) Exposure Norms
Banks’/ FIs’ investments in debentures/ bonds/ security receipts/PTCs issued
by a SC/RC will constitute exposure on the SC/RC. As only a few SC/RC are
being set up now, banks’/ FIs’ exposure on SC/RC through their investments in
debentures/ bonds/security receipts/PTCs issued by the SC/ RC may go beyond
their prudential exposure ceiling. In view of the extra ordinary nature of event,
banks/ FIs will be allowed, in the initial years, to exceed prudential exposure
ceiling on a case-to-case basis.
6.6. Disclosure Requirements
Banks/ FIs, which sell their financial assets to an SC/ RC, shall be required to
make the following disclosures in the Notes on Accounts to their Balance sheets:
674 App. 2 Part |—Chap. 9—Law and Practice of Asset Reconstruction, etc.

Details of financial assets sold during the year to SC/RC for Asset Reoonstruc-
on
a. No. of accounts
b. Aggregate value (net of provisions) of accounts sold to SC / RC
c. Aggregate consideration
d. Additional consideration realized in respect of accounts transferred in
earlier years
e. Aggregate gain / loss over net book value.
6.7. Related Issues
(a) SC/RC will also take over financial assets which cannot be revived and
which, therefore, will have to be disposed of on a realisation basis. Nor-
mally the SC/ RC will not take over these assets but act as an agent for
recovery for which it will charge a fee.
(b) Where the assets fall in the above category, the assets will not be re-
moved from the books of the bank/ FI but realisations as and when re-
ceived will be credited to the asset account. Provisioning for the asset
will continue to be made by the bank / FI in the normal course.
 APPENDIX 3

GUIDANCE NOTE FOR SECURITISATION

COMPANIES AND RECONSTRUCTION
COMPANIES
Reserve Bank of India Department of Non-Banking Supervision
Central Office World Trade Centre, Centre 1, Cuffe Parade,
Colaba, Mumbai - 400 005

GUIDANCE NOTES FOR SECURITISATION COMPANIES AND RE-

CONSTRUCTION COMPANIES
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002' had come into effect from June 21, 2002. In exercise
of the powers conferred therein, the Bank has framed Guidelines and Directions
to Securitisation Companies and Reconstruction Companies relating to registra-
tion and other matters like acquisition of financial assets, prudential norms relat-
ing to income recognition, classification of assets, provisioning, accounting stan-
dards, capital adequacy, measures for asset reconstruction and deployment of
funds.
2. The Bank has evolved a set of instructions which are required to be complied
with by all Securitisation Companies or Reconstruction Companies so that the
process of asset reconstruction proceeds on smooth and sound lines. In addition,
the Bank has evolved guidance note based on guidelines issued on various mat-
ters, gist of which is given below for the guidance of securitization companies or
reconstruction companies. The words and expressions used in these notes shall
have the same meaning as in the Act.
(1) Acquisition of Financial Assets
i) Every securitization company or reconstruction company is required to
evolve Asset Acquisition Policy within 90 days of getting the certificate
of registration which shall, inter alia, provide that the transactions will
take place in a transparent manner and at a fair price in a well informed
market, and the transactions are executed on arm’s length basis by exer-
cise of due diligence.
ii) The share of financial assets to be acquired from the bank /FI should be
appropriately and objectively worked out keeping in view the provision
in the Act requiring consent of secured creditors holding not less than
715% of the amount outstanding to a borrower for the purpose of en-
forcement of security interest;

675.
 676 App. 3 Part —Chap. —Law and Practice af Asset Reconsirwonon, etc,

(iii) For easy and faster realisability, all the financial assets due from a single
debior to various banks / Fis may be considered for acquisition, Simi-
larly, financial assets having linkages to the same collateral may be con-
sidered for acquisition to ensure relatively faster and easy realisation.
iv) Both fund and aon-fuad based financial assets may be included in the list
of assets for acquisition. Standard Assets in the books of originator likely
lo face distress prospectively may also be acquired;
v) Acquisition of funded assets should not include takeover ofoutstanding
commitments, if any, of any bank/Fl to lend further. Terms of acquisition
of security interest in non-fund transactions, should provide for the rela-
live commitments to continue with bank/Fl, tll demand for funding
arises,
vi) Loans not backed by proper documentation should be avoided.
vii) As far as ible, the valuation process should be uniform for assets of
same profile and should ensure that the valuation of the financial assets is
done in scientific and objective manner. Valuation may be done inter-
nally or by engaging an independent agency, depending upon the value
of the assets. Ideally, valuation may be entrusted to the committee
authorised to approve acquisition of assets, which may carry out the task
in line with an Asset Acquisition Policy laid down by the board of direc-
tors in this regard.
vili) The assets acqui by
red
SC/RC should be transfer to the trusts
red set up
by the securitization company or reconstruction company at the price at
which these were acquired from the originator of the asset. However,
there is no restriction on acquisition of assets from banks/ FIs directly in
the books of trusts set up by securitization company or reconstruction
company.
ix) The assets acquired by the securitization company or reconstruction
company are required to be resolved within a period which shall nor-
mally not exceed five years from the date of acquisition of such assets.
However, if the assets remain unresolved at the end of five years from
the date of acquisition, the Board of securitization company or recon-
struction company may increase the period of realisation up to 8 years
from the original date of acquisition of asset subject to conditions.
x) No securitization company or reconstruction company should acquire

SCIRCs are
annot
not cov covered satedthe definiitition , financiphone
al institutionAyra
the SARFAESI Act. “ ”
(2) Issue of security receipts
1) Every securitization company or reconstruction company shall i
trusteeship of such trust shall vest with the securitization
construction company. Canyany oF t-
Guidance Note for Securitisation & Reconstruction Companies
App. 3 677

li) The trust shall issue security receipts only to qualified institutional buy-
ers and such security receipts shall be transferable/ assignable only in fa-
vour of other qualified institutional buyers.
iii) Every securitization company or reconstruction company intending to
Issue security receipts shall make disclosures in the offer document as
prescribed by the Bank from time to time.
iv) Every securitization company or reconstruction company shall invest in
the security receipts issued by trusts set up for the purpose of securitiza-
tion an amount not less than 5% under each scheme.
Vv) Every securitization company or reconstruction company shall continue
to hold a minimum of 5% of the security receipts issued by the SC/RC
under each scheme on an ongoing basis till the redemption of all the se-
curity receipts issued under each scheme.
Vi) Qualified institutional buyers will be entitled to invoke the provisions of
Section 7(3) of the SARFAESI Act at the end of 5 years or 8 years i.e as
at the end of period of realisation applicable for the particular asset.
Vi) Every securitization company or reconstruction company is required to
declare Net Asset Value of the security receipts issued by it at periodical
interval to enable the qualified institutional buyers to value their invest-
ment in SRs. For arriving at NAV, the SRs are required to be rated on
‘recovery rating scale’ and the rating agencies are also required to dis-
close the rationale for rating.
3. Application of prudential norms
i) Every securitization company or reconstruction company is required to
maintain, on an ongoing basis a capital adequacy ratio which shall not be
less than 15% of its total risk weighted assets.
11) Every securitization company or reconstruction company is required to
classify the assets as standard assets or non- performing assets after tak-
ing into account the period of delinquency and other weaknesses having
bearing on the realisability of the asset. Such companies are also required
to make provisions against the non- performing assets as specified by the
Bank from time to time. The classification / provisioning norms will ap-
ply only to those assets which are held on the books of securitization
company or reconstruction company.
iil) 'Loss Assets’ will include financial assets including security receipts con-
tinued to be held by the securitization company or reconstruction com-
pany which has not been realized within the total time frame of 5 years
or 8 years, as the case may be.
iv) A securitization company or reconstruction company may invest in eq-
uity of another securitization company or reconstruction company or
may deploy its surplus funds only in Government securities or as depos-
its with scheduled commercial banks/ SIDBI/ NABARD/ other such en-
tity as may be specified by RBI from time to time.
 GEE Shy ASAGSS Ws ENEMAS SOR PO ree tee ,— ee to ee et Eee ee
Neer

riod of 5 years from the date of its acquisition or suc

may be permitted by the Bank.
vi) The income recognition shall be based on recognizec
ples and all the accounting standards and guidance n
shall be followed by securitization company or reco:
in so far as they are not inconsistent with guidelines a
by the Bank.
(4) Approval of Policy Documents by the Board of Directo
Every securitization company or reconstruction company
Guidelines with the approval of their Board of Directors o
asset acquisition, rescheduling of debt due from borrowers,
payable by the borrowers, issue of security receipts and p
ployment of surplus funds. The policy relating to acquisition «
required to be evolved within 90 days of grant of certificat
securitization company or reconstruction company. Every sec
or reconstruction company shall maintain a record indicatin;
of deviations made from the prescriptions of the Board of Dit
of asset acquisition, pricing, etc. and the reasons therefor shou
(5) Regulatory Reporting.
i) Every securitization company or reconstruction com
submit quarterly statement viz. SCRC1 & SCRC 2 to
days of close of the quarter to which it pertains indi
alia, owned fund position, value of assets acquired,
sued/ outstanding, investment in security receipts by |
banks/ FIs from whom the assets were acquired by
pany or reconstruction company etc.
ii) Every securitization company or reconstruction com
furnish to the Bank a copy of the audited balance she
tors'/ auditors’ report within one month from the dat
the audited accounts of securitization company or |
pany are adopted.
(6) Internal Audit
i un
mht mote ret aaAeHaatAth APTARGNIAC AY *arnnn
bap
ener laymenof WME SRSTEERE SP) LIRR, 1) TS OR
eligible 1 | Direct levestment| yr
vest in Cheeguity capital of Asset Reconstruction Companies
‘OVETA LAR EVO
A OTTI
RT T
OV ress release —
| OlMTryoexrreno 794
in the ARCs, only Foreign Direct investment will be }
Wasi) od aan sai4G dobeAithbiae Giaaagliaaal be
baieb E008 4AIO) eerie wart OV aoiissiiieV))
ray. I PiPR) would henceforth
i | ea of ¢ to invest
ms "
ich are regis-
ma g coPiitions

it AOL 2
eee

“eR
sheesh sian
ud by renee R conetructsae
est upto 49 per cent of cach ane on hereon
ondition that investment of a wagie PT én cach ¢
ce sdatombtaaanaa
os iy

aaveneanan “_

Feoedcashnummsotawss p
mine cps
mane lransier or

of banks ERO BOGS EA oy), of thit curcautes to the nafice

COLOMO) (roi? AI)
ASHORE A
mained in
i this cizcular has been issued under sections
tet) Paghange ttanpeccn nt Ast. sts ideo
 APPENDIX 4

NOTIFICATIONS RELATING TO ASSET

RECONSTRUCTION COMPANIES
Exemption to Securitisation or Reconstruction Companies from RBI Act
(Notification No. DNBS. VCGM (OPA)- 2003 dated August 28, 2003)
Reserve Bank of India Department of Non-Banking Supervision
Central Office, Centre 1, World Trade Centre, Cuffe Parade,
Colaba, Mumbai - 400 005
Notification No.DNBS.3/CGM (OPA)-2003 dated August 28, 2003—
Exemption to Securitisation or Reconstruction Companies from RBI Act
The Reserve Bank of India, on being satisfied that it is necessary so to do, in
exercise of its powers conferred under Section 45NC of the Reserve Bank of In-
dia Act, 1934 (2 of 1934), hereby declares that the provisions of Sections 45-1A,
45-IB and 45-IC of the Reserve Bank of India Act, 1934 (2 of 1934), shall not
apply to a non-banking financial company which is a Securitisation Company or
Reconstruction Company registered with the Reserve Bank of India under Sec-
tion 3 of the Securitisation and Reconstruction of Financial Assets and Enforce-
ment of Security Interest Act, 2002.

Sd/-
(O.P. Aggarwal)
Chief General Manager-in-Charge
NOTIFICATION RELATING TO FOREIGN INVESTMENTS
IN ARCS AND IN SECURITY RECEIPTS OF ARCS
Reserve Bank of India Foreign Exchange Department,
Central Office, Mumbai-400 00]
RBI/2005-06/203
A.P. (DIR Series) Circular No. 16, November J] , 2005
To
All Banks Authorised
to Deal in Foreign Exchange
Madan/Sir,
Foreign Investments in Asset Reconstruction Companies
(ARC)
Attention of Authorised Dealers isinvited tothe
Foreign Exchange Manage-
ment (Transfer orIssue ofSecurity bya Person
Resident outside India) Regula-
 Notification Relating to Asset Reconstruction Companies
App. 4 681
tions, 2000, notified by the Reserve Bank of India vide Notification
No. 20, dated
3rd May, 2000, as amended from time to time.
2. Foreign Direct Investments in Asset Reconstruction Compa
nies
(ARCs).—In consultation with Government of India, it has been decide
d to per-
mit persons/entities eligible under the Foreign Direct Investment (FDI)
route,
other than FIIs to invest in the equity capital of Asset Reconstruction Compan
ies
(ARCs) registered with the Reserve Bank of India. A copy of the press
release
dated November 8, 2005, issued by the Government is enclosed.
It is clarified that in the ARCs, only Foreign Direct Investment will be permit-
ted. However, investments by Foreign Institutional Investors (FIIs) will not be
permitted.
Accordingly, Foreign Investment Promotion Board (FIPB) would henceforth
consider applications from eligible persons/entities, under the FDI route to invest
in the paid up equity capital of Asset Reconstruction Companies, which are regis-
tered with the Reserve Bank of India subject to the following conditions:
(a) Maximum foreign equity shall not exceed 49% of the paid up equity cap-
ital of the ARC.
(b) Where investment by any individual entity exceeds 10% of the paid up
equity capital, ARC should comply with the provisions of Section 3(3)
(f) of Securitisation and Reconstruction of Financial Assets and En-
forcement of Security Interest Act, 2002 (SARFAESI Act).
3. Investments in Security Receipts issued by ARCs.—It has also been de-
cided to grant general permission to Foreign Institutional Investors (FIIs) regis-
tered with Securities and Exchange Board of India (SEBI) to invest in Security
Receipts (SRs) issued by Asset Reconstruction Companies (ARCs) registered
with RBI. FIIs can invest upto 49 per cent of each tranche of scheme of Security
Receipts subject to condition that investment of a single FII in each tranche of
scheme of SRs shall not exceed 10 per cent of the issue.
4. The policy on FDI in ARCs would be subject to review after two years and
that of FII investment in SRs would be reviewed.after one year.
5. Necessary amendments to the Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident outside India) are being issued separately.
6. Authorised Dealer banks may bring the contents of this circular to the notice
of their constituents and customers concerned.
7. The direction contained in this circular has been issued under sections 10(4)
and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999), and is
without prejudice to permissions/approvals, if any, required under any other law.
Yours faithfully,
(Vinay Baiyjal)
Chief General Manager
 APPENDIX 5
GUIDELINES FOR TAKEOVER OF
MANAGEMENT

RBI/20] 3-201 4/56

DNBS (PD) CC, No. 32/SCRC/26,03,001/201 3-2014
July 1, 2013
Notification as amended upto June 30, 2013 - Change in or Takeover of the
Management of the Business of the Borrower by Securitisation Companies
and Reconstruction Companies (Reserve Bank) Guidelines, 2010
As you are aware, in order to have all current instructions on the subject at one
place, the Reserve Bank of India issues updatedcirculars/ notifications. The in-
structions contained in the Notification PD(SC/RC)
DNBS/ No.7/ CGM(ASR)/
2010 dated April 21, 2010 updated as on June 30, 2013, are reproduced. The up-
dated Notification has also been placed on the RBI web-site
(http://www.rbi.org.in).
Yours faithfully,
(N.S.Vishwanathan)
Principal Chief General Manager

Notification on Change in or Take Over of the Management of the Business

of the Borrower by Securitisation Companies and Reconstruction Compa-
nies (Reserve Bank) Guidelines,
2010
In view of announcement in the Monetary Policy Statement, the Reserve Bank
ofIndia hereby notifies these guidelines, framed under Section 9(a) of
the Secu-
nitisation and Reconstruction of Financial Assets and Enforcement
of Security
Interest Act, 2002 (SARFAESI Act) to provide for the proper mana
gement of the
business of the borrower to enable the Securitisation Company or
Reconstruction
Company (SC/RC) torealise their dues from the borrowers,
byeffecting change
in ortake over of the management of the business of the borrower
and related
matters
1. Short Title and Commencement
(a) These guidelines shall be known as “The Chan
ge in Take Over
' ofthebusiness oftheborrower bySecuritisation
nies and Reconstruction Companies (Res Compe.
Bank
er ) Guide
ve lines , 2010”.

682
 Guidelines for Takeover of Management App. 5 683

(b) These guidelines shall come into force with effect from April 21, 2010.
Explanation:
For the purpose of these guidelines:
1. “change in management” means effecting change by the borrower at the
instance of SC/RC in the person who has responsibility for the whole or
substantially whole of the management of the business of the borrower
and / or other relevant personnel.
ii. The term “Takeover of management” means taking over of the responsi-
bility for the management of the business of the borrower with or without
effecting change in management personnel of the borrower by the
SC/RC.
2. Object of the Guidelines
The objective of these guidelines is to ensure fairness, transparency, non-
discrimination and non- arbitrariness in the action of Securitisation Companies or
Reconstruction Companies and to build in a system of checks and balances while
effecting change in or take over of the management of the business of the bor-
rower by the SCs/ RCs under Section 9(a) of the SARFAESI Act. The SCs/ RCs
shall follow these guidelines while exercising the powers conferred on them un-
der Section 9(a) of the SARFAESI Act, 2002.
3. Powers of SC/RC and Scope of the Guidelines
An SC/RC may resort to change in or take over of the management of the busi-
ness of the borrower for the purpose of realization of its dues from the borrower
subject to the provisions of these guidelines. The SCs/ RCs resorting to take over
of management of the business of the borrower shall do so after complying with
the manner of takeover of the management in accordance with the provisions of
Section 15 of the SARFAESI Act. On realization of its dues in full, the SC/RC
shall restore the management of the business to the borrower as provided in Sec-
tion 15(4) of the SARFAESI Act.
4. Eligibility conditions to exercise power for change in or take over of
management
In the circumstances set forth in paragraph 5
(a) An SC/RC may effect change in or take over of the management of the
business of the borrower, where the amount due to it from the borrower
is not less than 25% of the total assets owned by the borrower; and
(b) Where the borrower is financed by more than one secured creditor (in-
cluding SC/RC), secured creditors (including SC/RC) holding not less
than 75% of the outstanding security receipts agree to such action.
Explanation : “Total Assets’ means total assets as disclosed in its latest audited
Balance Sheet immediately preceding the date of taking action.
634 App. 5 Part l—Chap. 9—Law and Practice ofAsset Reconstruction, etc.

5. Grounds for effecting change in or takeover of management

Subject to the eligibility conditions set forth in paragraph 4, SC/RC shall be en-
utled to effect change in management or take over of the management of busi-
ness of the borrower on any of the following grounds:
(a) the borrower makes a willful default in repayment of the amount due
under the relevant loan agreement/s;
(b) the SC/RC is satisfied that the management of the business of the bor-
rower is acting in a manner adversely affecting the interest of the credi-
tors (including SC/RC) or is failing to take necessary action to avoid any
event which would adversely affect the interest of the creditors;
(c) SC/RC is satisfied that the management of the business of the borrower
is Not Competent to run the business resulting in losses/ non- repayment
of dues to the SC/RC or there is a lack of professional management of
the business of the borrower or the key managerial personne! of the busi-
ness of the borrower have not been appointed for more than one year
from the date of such vacancy which would adversely affect the financial
health of the business of the borrower or the interests of the SC/RC as a
secured creditor;
(d) the borrower has without the prior approval of the secured creditors (in-
cluding SC/RC), sold, disposed of, charged, encumbered or alienated
10% or more (in aggregate) of its assets secured to the SC/RC;
(e) there are reasonable grounds to believe that the borrower would be un-
able to pay itsdebts as per terms of repayment accepted by the borrower:
(f) the borrower has entered into any arrangement or compromise with
creditors without the consent of the SC/RC which adversely affects the
interest of the SC/RC or the borrower has committed any act of insol-
vency;
(g) the borrower discontinues or threatens to discontinue any of its busi-
nesses constituting 10% or more of its turnover:
(h) all or a significant part ofthe assets of the borrower required
for or es-
sential for its business or operations are damaged due to the actio
n
the borrower,
od

(j) the SC/RC issatisfied that serious dispute/s have arisen among
moters ordirectors otpartners ofthebusiness ofthe
borrowes, why,
could materially affect theability ofthe borrower to
repay the loan:
(k) failure ofthe borrower to acquire the assets for which
availed andutilization ofthefunds borrowed for
otherthanstatedrar
Poe oFdisposal ofthe financed assets and misuse ormisappropriation
 Guidelines for Takeover of Management App. 5 685

(1) fraudulent transactions by the borrower in respect of the assets secured to

the creditor/s.
Explanation A: For the purpose of this paragraph, wilful default in repayment of
amount due, includes -
(a) non-payment of dues despite adequate cash flow and availability of other
resources, or
(b) ‘routing of transactions through banks which are not lenders/ consortium
members’ so as to avoid payment of dues, or
(c) siphoning off funds to the detriment of the defaulting unit, or misrepre-
sentation / falsification of records pertaining to the transactions with the
SC/RC
Explanation B: The decision as to whether the borrower is a wilful defaulter or
not, shall be made by the SC/RC keeping in view the track record of the borrower
and not on the basis of an isolated transaction/incident which is not material. The
default to be categorized as wilful must be intentional, deliberate and calculated.
6. Policy regarding change in or take over of management
(A) Every SC / RC shall frame policy guidelines regarding change in or take
over of the management of the business of the borrower, with the approval of its
Board of Directors and the borrowers shall be made aware of such policy of the
SC/RC.
(B) Such policy shall generally provide for the following:
(i) The change in or take over of the management of the business of the bor-
rower should be done only after the proposal is examined by an Inde-
pendent Advisory Committee to be appointed by the SC/RC consisting of
professionals having technical / finance / legal background who after as-
sessment of the financial position of the borrower, time frame available
for recovery of the debt from the borrower, future prospects of the busi-
ness of the borrower and other relevant aspects shall recommend to the
SC/RC that it may resort to change in or take over of the management of
the business of the borrower and that such action would be necessary for
effective running of the business leading to recovery of its dues;
(ii) The Board of Directors including at least two independent directors of
the SC/RC should deliberate on the recommendations of the Independent
Advisory Committee and consider the various options available for the
recovery of dues before deciding whether under the existing circum-
stances the change in or take over of the management of the business of
the borrower is necessary and the decision shall be specifically included
in the minutes.
(iii) The SC/RC shall carry out due diligence exercise and record the details
of the exercise, including the findings on the circumstances which had
led to default in repayment of the dues by the borrower and why the de-
656 App. > Part L—Cltap. 9—Law and Practice afAsset Reconstruction, etc.

cision to Change in or take over of the management of the business of the

borrower has become necessary.
(iv) The SC/RC shall identify suitable personnel / agencies, who can take
over the management of the business of the borrower by formulating a
plan for operating and managing the business of the borrower effectively,
so that the dues of the SC/RC may be realized from the borrower within
the tume frame.
(v) Such plan will also include procedure to be adopted by the SC/RC at the
time of restoration of the management of the business to the borrower in
accordance with paragraph 3 above, borrower's rights and liabilities at
the time of change in or take over of manage the SC/RC and at
byment
the time of restoration of management back to the borrower, rights and
liabilities of the new management taking over management of the busi-
ness of the borrower at the behest of SC/RC. It should be clarifiedto the
new management by the SC/RC that the scope of their role is limited to
recovery of dues of the SC/RC by managing the affai rs of
of the business
the borrower in a prudent manner.
Explanation:
To ensure independence of members of Independent Advisory Committee
(LAC), such members should not be connected with the affairs of the SC/RC in
any manner and should not receive any pecuniary benefit from the SC/RC except
for services rendered for acting as member of IAC.
7. Procedure for change in or take over of management
(a) The SC/RC shall give a notice of 60 days to the borrower indicating its
intention to effect change in or take over of the management of the busi-
ness of the borrower and calling for objections, if any.
(b) The objections, if any, submitted by the borrower shall be initially con-
sidered by the IAC and thereafter the objections along with the recom-
mendations of the IAC shall be submitted to the Board of Directors of
the SC/RC. The Board of Directors of SC/RC shall pass a reasoned order
within a period of 30 days from the date of expiry of the notice period,
indicating the decision of the SC/RC regarding the change in or take over
of the management of the business of the borrower, which shall be com-
munic the borrower.
to ated
8. Reporting
SCs/ RCs shall report to the Bank all cases where they have taken action to
cause change in or take over of the management of the business of the borrower
for realization ofits dues from the borrower interms of circular DNBS (PD) OC
No. 12 / SCRC / 10.30.000/ 2008dated
-2Septem
00ber926,2008.
9. A Notification DNBS(PD-SC/RC) 7/ CGM(ASR 2010 dated April
2010 amending paragraph 7(2) ofthe“The Securitisation ra
sro” Companies (Reserve Bank) Guidelines and Directions, 2003” lh
isen-
 Guidelines for Takeover of Management App. 5 687

Yours faithfully
(A.S. Rao)
Chief General Manager In-Charge
Encl: 2
ee a a a a 1 Ss (so a ee cneee

Reserve Bank of India

Department of Non-Banking Supervision
Central Office
World Trade Centre
Mumbai 400 005
Notification DNBS(PD-SC/RC) No. 7 /CGM (ASR)/-2010 dated April 21,
2010
The Securitisation Companies and Reconstruction
Companies (Reserve Bank) Guidelines and Directions, 2003
The Reserve Bank of India, having considered it necessary in the public inter-
est, and being satisfied that, for the purpose of enabling the Reserve Bank to
regulate the financial system to the advantage of the country and to prevent the
affairs of Securitisation Company or Reconstruction Company from being con-
ducted in a manner detrimental to the interest of investors or in any manner
prejudicial to the interest of such Securitisation Company or Reconstruction
Company, hereby in exercise of the powers conferred under clause (b) of sub-
section (1) of Section 3 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, directs that ‘The Securiti-
sation Companies and Reconstruction Companies (Reserve Bank) Guidelines and
Directions, 2003’ (hereinafter called guidelines) shall stand amended, as follows,
namely:
1. Paragraph 7(2) of the guidelines shall be substituted as under:
**(2) (i) Change or take Over of Management
The Securitisation Company or Reconstruction Company shall take the meas-
ures specified in Sections 9(a) of the Act, in accordance with instructions con-
tained in Circular DNBS/PD (SC/RC) No.17 /26.03.001/2009-10 dated April 21,
2010 as amended from time to time.
(ii) Sale or Lease of a part or whole of the business of the borrower
No Securitisation Company or Reconstruction Company shall take the meas-
ures specified in Section 9(b) of the Act, until the Bank issues necessary guide-
lines in this behalf.
(A. S. Rao)
Chief General Manager In-Charge
 APPENDIX 6

MASTER CIRCULAR ON
DIRECTIONS/INSTRUCTIONS ISSUED TO
THE SECURITISATION COMPANIES/
RECONSTRUCTION COMPANIES

RBI/2013-2014/55
DNBS (PD) CC.NO.33/SCRC/26.03,001/ 2013-2014

July 1, 2013
As you are aware, in order to have all current instructions on the subject at one
place, the Reserve Bank of India issues updated circulars/ notifications. A gist of
circulars issued by the Bank to Securitisation Companies/ Reconstruction Com-
panies updated as on June 30, 2013 is given in the Annex. The detailed circulars
have also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
(N.S. Vishwanathan)
Principal Chief General Manager
—_——
sss

Annex
(1) Submission of application for a Certificate of Registration to com-
mence/ carry on the business of a Securitisation Company or Reconstruction

The Securitisation C ss" : a

tion from the Reserve Bank of India shall submit Papen
ayoyopsaa
(Ann to ex
Notification
ed No.DNBS. 1/;CGM (CSM)-2003 dated March 7, 2003)
specified bythe Bank, duly filled inwith alltherelevant annexu
res/ supporting
documents to the Chief General Manager-in-Charge, Depar
tment
Banking Supervision, Central Office, Reserve Bank of India, Centre of Non.
1, World
Trade Centre, Cuffe Parade, Colaba, Mumbai 400 005.
(2) Ma
Siatinn in of
teminimu
oramet na m owned
nc fund
e for carr
out yi
the busines
ng s of
 Master Circular on Directions/Instructions, etc.
App. 6 689

The Bank had issued the guidelines vide Notification No.DNBS.4/

CGM
(OPA)-2004 dated March 29, 2004 that for commencing the business of
securiti-
Sauon or asset reconstruction the minimum owned fund shall be an amount
not
less than 15% of the total financial assets acquired or to be acquired by the
Secu-
ritisation Company or Reconstruction Company on an aggregate basis or Rs.100
crore whichever is lower, irrespective of whether the assets are transferred
to a
trust set up for the purpose of securitization or not. Further, the Securitisation
Company or Reconstruction Company should continue to hold this owned fund
level until the realization of the assets and redemption of security receipts issued
against such assets. The Securitization Company or Reconstruction Company can
utilize this amount towards the Security Receipts issued by the trust under each
scheme. This will ensure the stake of the Securitisation Company or Reconstruc-
tion Company in the assets acquired.
(3) Commencement of business by Securitisation Companies/ Reconstruc-
tion Companies
The Bank had issued the guidelines vide Notification No.DNBS.6/CGM (PK)-
2006 dated October 19, 2006 that the Securitisation Company or Reconstruction
Company should commence business within six months from the date of grant of
Certificate of Registration. The Bank may on application made by SC/RC grant
extension of time beyond six months but in no case such extension of time shall
exceed 12 months from the date of grant of Certificate of Registration.
(4) Submission of quarterly statements by Securitisation Companies/ Recon-
struction Companies
Quarterly Statement in the formats viz. SCRC1 & SCRC2 on assets acquired,
securitized and reconstructed are to be submitted by Securitisation Companies/
Reconstruction Companies registered with the Reserve Bank of India under Sec-
tion 3(4) of the Securitisation and Reconstruction of Financial Assets and En-
forcement of Security Interest Act, 2002 within 15 days of close of the quarter to
which it pertains. The first such statement was to be with reference to quarter
ending March 31, 2007.
(5) Regulation of SCs/ RCs- Submission of returns and audited balance sheet
by SCs/ RCs
All the SCs/RCs registered with the Bank were advised to furnish the position
of Owned Fund in Quarterly Statement SCRC1 as item No.1 and also furnish a
copy of audited balance sheet along with the Directors' Report/ Auditors' Report
every year within one month from the date of Annual General Body Meeting, in
which the audited accounts are adopted, starting with the balance sheet as on
March 31, 2008.
(6) Investment in Security Receipts issued by the trusts floated by Securitisa-
tion Companies/ Reconstruction Companies
The Bank had issued the guidelines vide Notification No.DNBS.5/CGM (PK)-
2006 dated September 20, 2006 that the Securitisation Company or Reconstruc-
tion Company shall invest in the Security Receipts issued by the trust set up for
 OW App. 6 Part l—C hap. Y—Law and Practice af Asset Reconstruction, etc.

the purpose of secuntisation, an amount not less than 5% under each scheme with
immediate effect. In case of those SC/RCs which have already issued the SRs,
such SC/RCs shall acmeve the minimum subseription limit under each scheme
within a period of © months from the date of issue of guidelines in the matter,
(7) Guide on Declaration
lines of Net Asset Value of Security Receipts issued
by Securitisation Company/Reconstruction Company
In order to enable the Qualified Institutional Buyers to know the value of thei:
investments in the Security Receipts issued by the Securitisation Company/ Re.
construction Company, the Securitisation Companies/ Reconstruction Companies
registered with the Bank under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, were advised to declare
Net Asset Value of the Security Receipts issued by them at periodical intervals.
(8) Regulation of SCs/ RCs-Disclosure while issuing Security Receipts (SRs)
Further to para 7 of circular DNBS (PD) CC, No, 6/SCRC/10,30,049/2006-07
dated May 28, 2007, SCs/RCs were advised that in order to enable the investors
to make informed investment decision in the SRs, the disclosure in respect of
underlying basket of assets required to be made by SCs/ RCs in the offer docu-
ments, include disclosure in respect of the date of acquisition of the assets, valua-
tion of the assets and the interest of SCs/ RCs in such assets, at the time of
issue
of SRs.
(9) Quarterly Statement to be submitted by Securitisation
nies/Reconstruction Companies registered with the Reserve Bank Compa-
of India
under Sectio 3(4)nof the SARFAESI Act
Based on the experience gained the Bank
, has revi the
seforma
dts of quarterly
Statements SCRC 1 and SCRC 2 to be submitted by Secur
itisation Compa-
nies/Reconstruction Companies registered with the Bank.
As earlier, the state-
ments should be submitted within 15 days of the close of
the quarter to which it

Colaba, Mumbai 400005. The first such in revised format should be

forwarded for the quarter ending December
31, 2008.
tionCommanies cocoa Zssets bySecuritisation Companies! Reconstruc.

cin vies ofS SS oe SAREE eS ce

wc wc pore Sa fT
eens retort rior
account withthesolepurpose ofrealizing
their dues nytt
 Master Circular on Directions/Instructions, etc. App. 6 691

(11) Resolution of acquired assets - Extension in time frame for redemption

of security receipts (SRs) issued
In terms of paragraph 7(6)(ii) of “The Securitisation Companies and Recon-
struction Companies (Reserve Bank) Guidelines and Directions, 2003” dated
April 23, 2003 (hereinafter called 'guidelines') it has been prescribed that the
plan of realisation of assets shall not exceed five years from the date of acquisi-
tion of asset. Certain Securitisation Companies/ Reconstruction Companies (SCs/
RCs) which had not been able to realize the financial asset acquired within the
given time frame, represented to the Bank seeking extension in time frame for
resolution of financial assets. Taking into account the representations received, as
an interim measure, the Bank has accorded permission to give an extension of
two more years for realisation of the assets in respect of the security receipts
(SRs) issued by SCs/ RCs, which have completed five years.
The provisions of extant guidelines as per paragraph 7(6)(ii) of the guidelines
would apply to all other SRs issued by the SCs/ RCs.
(12) Guidelines on “the Change in or Take Over of the Management of the
Business of the Borrower by Securitisation Companies and Reconstruction
Companies (Reserve Bank) Guidelines, 2010”
The Reserve Bank of India had issued for the first time circular/ guidelines on
the captioned subject enabling the SCs/RCs registered with the Bank to take re-
course to measure outlined in Section 9 (a) of the SARFAESI Act, 2002 dealing
with the issue.
(13) The Securitisation Companies and Reconstruction Companies (Reserve
Bank) Guidelines and Directions, 2003
The Bank had issued Notification No. 2 dated April 23, 2003 providing the
framework for regulation of Securitisation Companies/ Reconstruction Compa-
nies (SCs/RCs). In the light of experience gained over the years and to ameliorate
the difficulties faced by such companies in complying with the guidelines, fol-
lowing changes were made applicable with effect from the date of the Notifica-
tion.
a. It is clarified to SCs/ RCs that they can acquire the assets either in their
own books or directly in the books of the trusts set up by them.
b. The period for realisation of assets acquired by SCs/ RCs can be ex-
tended from 5 years to 8 years by the Board of Directors of the SC/ RC
subject to certain conditions.
c. Additional avenues for deployment of surplus funds with NABARD and
SIDBI are being provided to SCs/RCs. An upper limit of 10% of the
owned funds has been stipulated for the investment of SCs/ RCs in land
and buildings for their own use.
d. It is being stipulated that any asset / Security Receipt which remain unre-
solved/ not redeemed as at the end of five years or eight years will now
be treated as loss asset.
oy. App- © Part L—Chap. ¥—Law and Practice af Assei Reconsinuctian, etc,

c. With 4 view to bringing Wanspa and markeiren in the func

discipline cy
uomag of SCs/ RCs.odditional disclosures related lo assets realised dur-
ing the year, value of financial assets unresolved as at the end of the year,
value of security receipts pending for redemption etc, are prescribed,
(14) The Securitisation Companies and Reconstruction Companies (Reserve
Bank) Guidelines and Directions, 2003
In partial modification to Notification No, 5 dated September 20, 2006, it is
made mandatory that the Securitisation Company or Reconstruction Company
shall continue to hold a minimum of 5% of the Security Receipts of each class
issued by the SC/RC under each scheme on an ongoing basis till the redemption
of all the Security Receipts issued under such scheme.
(15) Submission of information to Credit Information Companies
In terms of Section 2(f)(ii) of the Credit Information Companies (Regulation)
Act, 2005, securitisation companies/reconstruction companies (SCs/RCs) are also
covered under the definition of “credit institution”. Further, the Credit Informa-
tion Companies (Regulation) Act provides that every credit institution in exis-
tence shall become a member of at least one credit information company. Thus,
all SC/RCs being ‘credit institutions’ are required to become a member of at least
one credit information company as per the statute,
(16) Setting up of Central Electronic Registry under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002
Pursuant to the announcement made by the Finance Minister in the budget
speech for 2011-12, Government of India, Ministry ofFinance notified the estab-
lishment of the Central Registry vide notification F. No. 56/05/2007-BO-II dated
March 31, 2011. The objective of setting up of Central Registry is to prevent
frauds in loan cases involving multiple lending from different banks on the same
immovable property.
The Central Registry of Securitisation Asset Reconstruction and Security Inter-
est of India (CERSAIT), a Government Company licensed under Section 25 of the
Companies Act, 1956 has been incorporated for the purpose of operating and
maintaining the Central Registry under the provisions of the Securitisation
and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act,
2002 (SARFAESI Act).
Listof circulars issued to Securutisation Companies/ Reconstruc
tion Com-
panies
DNBS.PD.CC 1/SCRC/10.30/2002-03 dated April 23, 2003.
DNBS. PD. CC. 2 / SCRC/ 10.30/ 2003-04 dated March 29. 2004
DNBS. PD. CC.3/SCRC/ 10.30.000/ 2006-07 dated September 20 2006
DNBS.PD.CC.4/SCRC/10.30,000/2006-07 dated October 19, 2006
»
w DNBS. (PD) C.C. No. 5/ SCRC/10.30.000/ 2006-07 dated April
ee»
25, 2007
Master Circular on Directions/Instructions, etc. App. 6 693

DNBS (PD) CC. No. 6/ SCRC / 10.30.049/ 2006-07 dated May 28, 2007
DNBS (PD) CC. No. 8 / SCRC / 10.30.000/ 2007-08 dated March 5,
2008
DNBS (PD) CC. No. 9 / SCRC / 10.30.000/ 2007-08 dated April 22,
2008
DNBS (PD) CC. No. 12 / SCRC / 10.30.000/ 2008-09 September 26,
2008
. DNBS /PD (SC/RC) CC. No.13/26.03.001/2008-09 April 22, 2009
. DNBS (PD) CC. No. 14/ SCRC / 26.01.001/ 2008-09 April 24, 2009
. Circular No. DNBS. (PD).CC.No. 17 /SCRC/26.03.001/2009 - 2010
dated April 21, 2010
. Circular No. DNBS. (PD).CC.No. 18 /SCRC/26.03.001/2009 - 2010
dated April 21, 2010
. Circular No. DNBS. (PD).CC.No. 19 /SCRC/26.03.001/2009 - 2010
dated April 21, 2010
. Circular No. DNBS. (PD).CC.No. 23 /SCRC/26.03.001/2010 - 2011
dated November 25, 2010
. Circular No. DNBS. (PD).CC.No. 24 /SCRC/26.03.001/2010 - 2011
dated May 25, 2011
 q 7 ec gle: “pg tame + Nae +> Gay.

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 CHAPTER 10
INTRODUCTION TO GLOBAL LAWS
ON SECURITY INTERESTS
SYNOPSIS
}. Move for a Modern Law on Secured “3 Modern Security Interest Enforcement
Tris... 4. ee 696 Paws in" WONG: ts. st ccc,
1.1. EBRD’s Core principles of law Ts i
on secured transactions............. 697 7.2. Adoption of the US model in
1.2. ADB’s_ project for Asian 4 Other COUNUHTICS...........:ccseeseeeeees
pe 2 Mee TR ge nding: saneaati 699 i.
2. Essential Principles of Security Enforce- mithe WK L503. cnn. eae
ment Law as Per World Bank Working - Security Enforcement Law in India........
i I 700 oO. Security Interests on Immovable
\© Pro-
2.1. Types of collateral available as
Seeubity.isiatect..c:.escncs.-i 9.1. Mortgages ORR R eee ewe eee eeeeeeneeeeeeees
2.2. 9.2. Ingredients of a mortgage.........
2.3. Future property and global 9.3. Types of mortgages...................
i security
0 on rag -1 Simple mortgage .................
Identification of collateral by Mortgage by conditional
class or description er eae: senate aan epee
2.5. Obligations capable of being Usufructuary mortgage seneeee
sewed s.4.2......08.h%...8--..- English mortgage ................
. Non-possessory security........... Mortgage by deposit of
. Ease and cost-effectiveness of title deeds or equitable

9.3.6 Anomalous mortgage..........

. Registration machinerty............. 9.4. Rights of the mortgagee............
. Priority rules Pee eeeee ee CeCe re errr eee bd Dy Re in REST da
. 2005 World Bank principles on . Security Interest in Specific Movable
Insolvency and Creditor Rights i oe Oe a
BURRIS Mics cchasiovigicsaasd insasnaihscs 1)01 Weel1 Rea Sie entiteme sytem
a UNIDROIT Model for Security 10.2. Chattel mortgage or mortgage
Interests in Mobile Equipment................ of movable property...............0+
4. UNCITRAL Legislative guide on TD. HY DOUCSHOD cap exeptsssferpanbe yranaes
secured transactions, 2007 ..........cccccceeeee+ . Floating Charges or Security Interest in
4.1. Fundamental policies of an KGenieral Property shi Lhd) Aid ressdans
effective and efficient secured 11.1. Floating charges in case of a
transactions regiMe..........:.00200++ going concern: Receivership .... 728
4.2. Essential elements of a security 11.2. Floating charges in case of
BSTECMICN 051 s.JJiaAcsedalabdes-oo0e winding up PTePECE TEST CECE Eee 730
4.3. Rules for determining priority . Overview of Enforcement of Security
as among competing claimants. Interests, 1) TOGIAs, dercaccsy isoesseretinteasbvenasss 730
4.4. Recommendations on 12.1. Enforcement of security
enforcement of a_ security PICETEStS SHI AIATAL.. ALA 730
interes herpes: saphess wry gey..14 711 12.2. Common law enforcement of
. 2011 - UNCITRAL, Hague Conference SECUFIty INtETESts .........sereereeesere 731
and Unidroit Texts on _ Security 12.3. Enforcement of _ security
Interests rer ois ahtadssty dinar a ar bibiss fori. 713 interests under special laws ...... 732
2011 - UNCITRAL, Hague Conference 12.4. WINING UP........seereereereerereesevers 733
and Unidroit Texts on _ Security 12.5. Settle ments)..s...ss0sscesrssseresooeeeres
Interéstsiw. ch cotlneaalerciatlose: 12.6. Workouts ....csssssesssovereeserscrecesenens

695
690 Sya. i Part L—Chap. 10—tniradwction to Glabal Laws an Seourity, etc,

13. Winadiag Up Pracapics 735 13.2. Pronties wn) winding Up... 740
13.1. Righs of a scoured croduar App. i Law Commission of UB
say ou of wandmg up recommendations of relorns
proceedings 735 af seourity interest lw ,...... 737

In this Chapter, we take a generic look at the law of security interests, and the
global concern on the rights of the seoured lender. The concern as to the rights of
the secured lender is economic rather than legal: the law has only been shaped to
meet economic objectives. The objective is to impart a certainty to asset-based
lending to attract wider investor participation in financial markets, With
increasing participation of professional investors, who are answerable to their
investors or beneficiaries, into corporate funding enabled by securitisation, it has
become imperative to grant a safe harbour to secured lending.
Law of security interests is not limited to enforcement. In fact, there are 3
facets to security interest law—creation, perfection, and enforcement, Creation
deals with how parties can create security interests, Most security interests are
created by mutual agreements, but some are created by law, or as a result of
something else. Perfection deals with putting public to notice about a security
interest, such that those intending to deal with the asset in question are kept
aware of the security interest. Enforcement deals with taking action in pursuance
of a security interest.
Security interest laws are known by various names—security interest law,
collateral law, secured lending law, etc.

1. MOVE FOR A MODERN LAW ON SECURED

TRANSACTIONS
The move, on a global scale, for a modern and consolidated law on
enforcement of security interests has been on for quite some time. Legal systems
to enable secured transactions have been considered as an obvious must with the
increasing need for private capital. “Every commercial investor is interested in
making a profit from his investment but in many cases, the first fundamental
concern is to obtain protection against loss of the investment. A legal framework
for secured transactions is a key requirement in creating an investor-friendly
climate. An investor who knows that he has legally recognised rights to turn to
his debtor's assets in case of non-payment may assess the investment risk quite
differently. It may influence his decision whether to invest or not; it may also
change the terms on which he is prepared to invest (typically by lowering the
interest rate on a loan).”' In an often-cited article titled, “Power of the
Collateral”, Heywood Fleisig says: “The issue of collateral is one of great
economic importance. When borrowers cannot use their assets as collateral
loans
for
and cannot purchase goods on credit using the goods themselves as

1. Introduction to model Secured Transactions law, on EBRD website at

/sectrans/modellaw/modlaw0a
htm. (accessed Scptemner She eeeeaiein
Transactions lawreform section isavailable at:htt ~~ + 2013), EBRD Secured
index.htm (acces
on 6" Septembe
sed r, 2013).
 Move for a modern law on secured transactions
Syn. 1 697
collateral, interest rates on loans tend to be higher to reflect
the risk to lenders. In
many developing countries, where legal and regulatory constr
aints make it
difficult to use movable property as loan collateral, the cost of
loans makes
capital equipment more expensive for entrepreneurs relative to their
counterparts
in industrial countries; businesses either postpone buying new equip
ment or
finance it, more slowly out of their own limited savings. Small busine
sses, in
particular, are hit hard by the scarcity of low-cost financing, but the
whole
economy suffers because the lack of new investment dampens productivity
and
keeps the incomes down. Estimates put welfare losses caused by barrie
rs to
secured transactions at 5-10% of GNP in Argentina and Bolivia.”
Thus, it is also agreed that a strong secured transactions law directly
contributes to the lower cost of providing credit, whereas the cost of credit tends
to be unreasonably high in countries that do not have strong secured credit laws.
With globalisation of commerce, international harmony in laws dealing with
secured transactions is also essential. Therefore, multi-lateral institutions such
as
IMF, EBRD, ADB also took it upon themselves to have a model law for secured
transactions internationally.
The European Bank for Reconstruction and Development (EBRD) took an
early lead and initiated a project for a harmonised law on secured transactions
soon after it was established in 1991. The advisory panel for the project consisted
of some of the world’s best-known scholars on property and security law. The
EBRD Model Law on Secured Transactions® was formulated in 1994,

cA. EBRD’s Core principles of law on secured transactions

EBRD has stated 10 core principles of a security law, developed in course of
consistent international dialogue after publication of its model law’:
e Security should reduce the risk of giving credit leading to an
increased availability of credit on improved terms.
This goes to the basic assumption made by EBRD on all its work on secured
transactions law reform. :
e The law should enable the quick, cheap and simple creation of a
proprietary security right without depriving the person giving the
security of the use of his assets.
In most market economy scenarios, depriving the debtor of the use of his assets
is self-defeating; non-possessory security that gives a remedy attached to the
charged asset is an essential element of a modern secured transactions law. Any

isi Heywood: * “Power of

2. Fleisig, the Collateral”,”, originally
origi published in IMF’s. Development Finance
and iebrodhiced on Vinod Kothari’s leasing website at: http://india-financing.com/collatera.htm
ed on 6th September, 2013).
3. ae teh Law je available at: http://www.ebrd.com/downloads/research/guides/secured.pdf
(accessed on 6" September, 2013). naw th
4. http://www.ebrd.com/pages/sector/legal/secured/core/coreprinciples.shtml (accessed on 6
September, 2013).
0s Sya. i Part L—Chap. 10—Intraduction to Global Laws on Seowruy, etc.

delay, cost or complexity in the creation process reduces the economic effioiency
of security.
e if the secured debt is not paid, the holder of security should be able
to have the charged assets realised and to have the proceeds applied
towards satisfaction of his claim prior to other creditors.
The exact nature of the proprietary right that arises when seourity is granted has
to be defined in the context of the relevant laws. If it is to be effective, it must
link to the creditor's claim the remedy of recovering from the assels given as
security,
e Enforcement procedures should enable prompt realisation at market
value of the assets given as security.
A remedy is only as good as the procedures and practices for exercising 1
allow it to be. If the value received on realisation is expected to be only half the
market value, then the provider of credit will require more assets to be given as
security. If it is expected that enforcement will take two years, then the creditor
will give less favourable credit terms to the debtor.
e The security right should continue to be effective and enforceable
after the bankruptcy or insolvency of the person who has given it.
The position against which the creditor most wants protection is the insolvency
of the debtor. Any reduction of rights or dilution of priority upon insolvency will
reduce the value of security. A limited exception to this principle may be
necessary to make it compatible with rules that permit a moratorium at the
commencement of insolvency.
e The costs of taking, maintaining, and enforcing security should be low.
A person granting credit will usually ensure that al] costs connected with the
credit are passed on to the debtor. High costs of security will be reflected in the
price for credit and will diminish the efficiency of the credit market.
e Security should be available: (a) over all types of assets; (b) to secure
all types of debts; and (c) between all types of person.
This principle covers a multitude of issues that may arise between the way law
is applied and the needs of commercial reality. They may appear technical but
can be of critical importance when seeking to implement a commercial
agreement. With very limited exceptions (e.g. personal clothing), a person should

and the secured debt should be capable of general description (e.¢., all machines
in a factory, all debts arising under sales contract). Itshould also be possible to
charge constantly changing ‘pools’ of assets such as inventory, debts receivable
and stocks of equipment and to secure fluctuating debts
under a bank overdraft facility. Any physical or legal person (whether in
public orprivate sector) who is permitted by law to transfer property should be
able to grant security.
5 NON-possessory, some other means (normally a public
1 system) are needed to ensure that the third parties do not
without being made aware of the existence of the charge.
Id establish rules governing competing rights of persons
ity and other persons claiming rights in the assets given

ive means of publicity is in place, there remain some cases

s to provide, for example sales of charged assets in the
owner’s business (where the purchaser cannot be expected
fore purchasing).
sible, the parties should be able to adapt security to the
particular transaction.
acilitate the operations of the secured credit market and to
protections are in place to prevent debtor, creditor, or third
prejudiced by secured transactions. It should not be the
create rules and structures for the operations of secured
principally at directing the manner in which parties to
tructure their transaction.

»ject for Asian countries

| Development Bank (ADB) also did a comparison of
in some key Asian countries (China, India, Indonesia,
) and deliberated extensively on the options for reform, and
model security enforcement law.
suggested by ADB are the following:
{ a system for security interests that meet certain minimum
s. The economic requirements for a regime whose single
ired credit are:
is cheap, simple, comprehensive-—An economically
yermits inexpensive creation of a security interest against
any person for any transaction.
is public, inexpensive tofile, easy to search. —The law
« breast ea ik. ! Bia) £2. eee
 700 Sya. 2 Part |—Chap. 10—Intreduction to Global Laws on Seourity, etc.

claims of third parties such as junior secured and unsecured creditors, a

trustee in bankruptcy trustees, or same purchasers of the collateral,
e Enforcement that is fast and cheap.— The \aw provides inexpensive and
fast enforcement, permitting recovery and sale even at low costs relative
to the value of the collateral; that means, typically, a system substantially
administered by the creditor.
The key legal features of such a regime are that it is unified functionally,
provides for publication by registration, gives security interests high priority with
no exceptions, and provides for speedy enforcement outside the courts, This is
the extreme form of the broad functional approach that Chapter TV (of the ADB
report) also describes. In practice, countries do not enact a law im such an
extreme form because they have other values than simply maximising secured
credit. This model is useful, however, as a baseline against which exceptions
need to be justified.

2. ESSENTIAL PRINCIPLES OF SECURITY

ENFORCEMENT LAW AS PER WORLD BANK
WORKING PAPER
In September 1999, the World Bank also published a detailed working paper
on creditor-debtor relations. The working group included Prof Roy Goode, one of
the world’s most celebrated experts on security laws. The working group
suggested 10 esseniial principles of security enforcement law as under:

2.1. Types of collateral available as security

The legal regime should, in principle, recognise security over all types of asset,
movable and immovable, tangible and intangible, including inventory and
receivables, and proceeds. It may well be that there are particular categories of
asset or debtor which call for special treatment, such as farm equipment. But
subject to such special cases, the availability of security should not be limited to
land but should embrace all forms of movable property, tangible or intangible,
including accounts receivable, and intellectual property rights. New forms of
collateral are emerging as the drive to reduce the risk, expense and inconvenience
of issuing and transferring paper has led to the abandonment of paper-based
investment securities in favour of dematerialisation through electronic records, or
alternatively to the immobilisation of paper-based securities by deposit with

recorded ;

which themselves are capable ofbeing given insecurity.

2.2. Classification
of collateral
Not all types of collateral can besubject tothe same rules. In
necessary to distinguish tangibles (inrespect of which secur
particular, itis
ity can be perfected
 Essential principles of security enforcement law,
etc. Syn. 2 701
by possession as an alternative to registration)
from intangibles (where this
method 1s not available), and to distinguish equipmen
t held for use in the debtor’ s
business from inventory held for resale or lease.

yx Future property and global security

Common law systems have long recognised the ability
of a creditor to take
security over the debtor’s future property and to treat the
security interest as
automatically attaching to such property after acquisition
by the debtor without
the need for any new act of transfer—this is the well-known
concept of floating
charges. A number of civil law systems also allow this for partic
ular categories of
asset. For example, German law has the Sicherungsbereignung
for the security
transfer of tangible movables and the Sicherungsabtretung
for the security
assignment of claims, both of which accommodate security in
after-acquired
property. It is vital to modern financing that the lender should be
able to take
security over a shifting pool of assets, without which a global
(or all-assets)
Security is impossible. In England, the floating charge has prove
d a highly
efficient and flexible financing tool, while in North America, simila
r effects have
been achie-ved more directly by the floating lien embodied in Article 9
and the
Canadian Personal Property Security Act based upon it. Civil law systems often
achieve somewhat similar results through an enterprise mortgage, such as the
nantissement de fonds de commerce of French law.

2.4. Identification of collateral by class or description

The requirement which is still found in a number of legal systems to identify
each item of collateral specifically is cumbersome even when applied to
existing assets, particularly where they are not of a kind lending themselves to
unique identification, and makes it difficult, if not impossible, to provide for
security over future property, still less for global security. It should suffice that
the description of the collateral is such that the asset over which security is
asserted can be identified as falling within the scope of the security agreement.
For this purpose, security over all the debtor’s present and future receivables or
even “all the present and future property of the debtor” should be regarded
as sufficient.

2.5. Obligations capable of being secured

The security agreement should be able to secure any or all obligations of the
debtor to the creditor, present or future.

2.6. Non-possessory security

In the case of security over chattels, a requirement of delivery of possession is
a serious impediment. Typically, such chattels will be held by the debtor either as
equipment for use in its business or for sale as inventory. Delivery of possession
702 Sya. 2 Part L—Chap. 10—tntraduction to Glabal Laws an Seowrily, etc.
sell the
to the creditor would thus deprive the debtor of the ability to use or
chattels and thereby generate the income from which to repay 1s indebtedness
including security by class or description (as opposed to individual specification )
and global (all-assets) security, Further, the law should permit not only
possessory but non-possessory security over tangible assets, since these will
typically be assets of the enterprise which the debtor company needs to hold and
ch
use in order to carry on its business and earn the income from whito repay Hs
debts.

y byJ Ease and cost-effectiveness of creation

Most legal systems (though not English law) require security to be created or
evidenced by a writing signed by the debtor, and identifying the collateral, and
the obligations secured. Formalities of this kind are relatively easy to comply
with. It is desirable to avoid additional formalities that involve inconvenience and
expense, such as notarisation. As regards security interests in investment
securities, the move towards dematerialisation and immobilisation of securities
mentioned earlier has increasingly led to the abandonment ofBee sate
transfers and charges and the use of electronic transfer systems to security
transactions. Usually, this requires legislation in order to remove obstacles
created by legal requirements for documents, writings and signatures. In the case
of security assignments of debts, a number of legal systems require formal notice
of the security assignment to be given to the debtor (in some cases, by an official
and in a prescribed form) not merely to prevent the debtor from paying the
assignor or to preserve the assignee’s priority but as a condition of validity of the
assignment. In other words, the notice is not simply a perfection requirement but
is a constitutive element in the creation of the security. One effect of this is that if
notice has not been given to the debtor prior to its bankruptcy, the assignment has
no effect, so that the debtor’s estate is able to retain both the benefits of the
advance and the debts given in security. Fulfillment of a notice requirement,
which in contrast to registration does not fulfil any effective public notice
function, is impracticable in the case of bulk assignments and security over
ongoing streams of receivables. Moreover, the notice requi is
incompatible with the concept of security over classes of asset and security over
future property, which does not lend themselves to individual specification.
Notice to the debtor does not feature as a constitutive element of a security
assignment in the UNCITRAL Draft Convention on Assignment in Receivables
Financing (see later in this Chapter) or in the draft chapter on assignment in the
forthcoming Part III of the Principles of European Contract Law prepared by the
Commission on European Contract Law.

2.8. Ease of enforcement

It is important that intending creditors should have confidence i the ability
the legal system to provide prompt and efficient means 2 -
security. is at its easiest where the law allows j
fo
themselves toprescribe their own default remedies andthereby tobypser the s
 Essential principles ofsecurity enforcement law, etc.
Syn. 2 703
need for recourse to the courts, but a number of systems view
even peaceful
self-help with disfavour, taking the view that it may tend to a breach
of the
peace, and interference with such a long-standing legal traditi
on may be
felt to offend against public policy in the countries concerned. Moreo
ver, it is
generally accepted that even in dealings between commercial enterp
rises, the
law cannot adopt a completely laissez-faire approach and must set limits
on
party autonomy in the selection of default remedies, for example, by nullif
ying
or restricting contractual provisions for the forfeiture of the collateral
to the
creditor.

2.9. Registration machinery

Also necessary is a system by which public notice—preferably by recording in
a public can be given of non-possessory security interests. Perfection by
registration is the one way of bridging the gap between legal systems that adopt
the common law concept nemo dat quod non habet and those which follow the
civil law rule possession vaut titre. A registration or similar system is necessary
to prevent the debtor from raising further credit on the strength of his apparent
ownership of the assets (the so-called “false wealth” doctrine) by enabling third
parties intending to acquire an interest in the asset to become aware of the
existence of a prior security interest. Registration also has a central role in the
ordering of priorities. For assets capable of unique identification, such as aircraft,
ships and motor vehicles, it is feasible to have a system of registration against the
asset itself. For other types of asset, the registration would be effected against the
name of the debtor. In keeping with a policy allowing global (all-assets) security,
the registration system should allow a global security over present and future
property to be effected by a single registration. A modern registration system
should be electronic and should allow registration and searching on-line.
Experience, particularly in North America, has shown that registration and search
fees can be kept down to a modest level while still allowing the registration
system to operate at a profit.

2.10. Priority rules

A developed regime for security interests should also lay down rules to govern
the priority of competing interests in the collateral and the proceeds of inventory
collateral, and these should be framed so as to produce results which in the
typical case would commend themselves to the commercial community as
fair and reasonable. Among other things, special priority needsto be given
to the purchase-money security interest in order to avoid giving the first
financier a monopoly over loans to the debtor and scooping up as a windfall, the
debtor’s acquired property financed by subsequent lenders. The subject of
priorities is complex and space does not allow further discussion in the present
paper.
704 Sya. 2 Part |—Chap. 10—Intreduction to Global Laws on Seourity, etc.

2.11. 2005 World Bank principles on Insolvency and Creditor

Rights principles
in 2005, the World Bank revised the earlier 2001 principles on creditors’
rights. In 2003, the World Bank convened the Global Forum on Insolvency Risk
Management (FIRM) to discuss the experience with and lessons from the
application of the Principles in the assessment program, The forum convened
over 200 experts from 31 countries to discuss the lessons from this application
and to discuss further refinements to the Principles themselves. During 2003 and
2004, the Bank also convened three working group sessions of the Global Judges
Forum, involving judges from approximately 70 countries who assisted the Bank
in its review of the institutional framework principles and developed more
detailed recommendations for strengthening court practices for commercial
enforcement and insolvency proceedings,
Based on the experience gained from the use of the Principles, and following
extensive consultations, the World Bank principles have been thoroughly
reviewed and updated.
The following is the summary of the World Bank 2005 Principles:
Credit Environment
Compatible credit and enforcement systems.—A regularised system of credit
should be supported by mechanisms that provide efficient, transparent, and
reliable methods for recovering debt, including the seizure and sale of immovable
and movable assets and sale or collection of intangible assets, such as debt owed
to the debtor by third parties. An efficient system for enforcing debt claims is
crucial to a functioning credit system, especially for unsecured credit. A
creditor's ability to take possession of a debtor’s property and to sell it to satisfy
the debt is the simplest, most effective means of ensuring prompt payment. It is
far more effective than the threat of an insolvency proceeding, which often
requires a level of proof and a prospect of procedural delay, that in all but
extreme cases make, the threat not credible to debtors as leverage for payment.
Collateral systems.—One of the pillars of a modern credit economy is the
ability to own and freely transfer ownership interests in property, and to grant a
security interest to credit providers with respect to such interests and rights as a
Wd da etacnhy Mabie ie& etal
ay an enormously important role in a well functioning market economy. Laws
governing secured credit mitigate lenders’ risks of default and thereby increase the
flow of capital and facilitate low-cost financing. Discrepancies and uncertainties in
the legal framework governing security interests are the main reasons for the high
costs and unavailability of credit, especially in developing countries.
The legal framework for secured lending should address the
features and elements, that is to say: =
@ the creation
® recognition,
and
 Essential principles of security enforcement law,
etc. Syn. 2 705
e enforcement of security interests in all types of assets
:
°
movable and immovable,
° tangible and intangible—including _inventories,
receivables,
proceeds, and future property, and on a global basis,
° including both possessory and non-possessory interests.
The law should encompass any or all of a debtor’s obliga
tions to a creditor,
present or future, and debt obligations between all types of
persons. In addition, it
should allow effective notice and registration rules to be adapt
ed to all types of
property, and should provide clear rules of priority on compe
ting claims or
interests in the same assets. For security rights and notice to
third parties to be
effective, they must be capable of being publicised at reasonable
costs and easily
accessible to stakeholders. A reliable, affordable public regist
ry system is
therefore essential to promote optimal conditions for asset-based
lending. Where
several registries exist, the registration system should be integr
ated to the
maximum extent possible so that all notices recorded under the
secured
transactions legislation can be easily retrieved.
Enforcement systems.—Needs of commerce demand that secured lenders
are
able to rely on their contractual agreements, fostering confidence that
fuels
investment, lending and commerce. Conversely, uncertainty about the
enforceability of contractual rights increases the cost of credit to compensate for
the increased risk of non-performance or, in severe cases, leads to credit
tightening.
Risk Management and Informal Workout Systems
Credit information systems.—A modern credit-based economy requires access
to complete, accurate, and reliable information concerning borrowers’ payment
histories. This process should take place in a legal environment that provides the
framework for the creation and operation of effective credit information systems.
Permissible uses of information from credit information systems should be
clearly circumscribed, especially regarding information about individuals. Legal
controls on the type of information collected and distributed by credit
information systems may often be used to advance public policies, including anti-
discrimination laws. Privacy concerns should be addressed through notice of the
existence of such systems, notice of when information from such systems is used
to make adverse decisions, and access by data subjects to stored credit
information with the ability to dispute and have corrected inaccurate or
incomplete information. An effective enforcement and supervision mechanism
should be in place that provides efficient, inexpensive, transparent, and
predictable methods for resolving disputes concerning the operation of credit
information systems along with proportionate sanctions that encourage
compliance but are not so stringent as to discourage the operation of such
systems.
Informal corporate workouts.—Corporate workouts should be supported by
an environment that encourages participants to restore an enterprise to financial
viability. Informal workouts are negotiated in the “shadow of the law.
 706 Sya. 2 Part |—Chap. 10—Intraduction to Global Laws on Seourity, etc.

Accordingly, the enabling environment must include clear laws and procedures
that require disclosure of or access to timely and accurate financial information
on the distressed enterprise; encourage lending 10, Imvesiment im, oF
recapitalisation of viable distressed enterprises; support a broad range of
restructuring activities, such as debt write-offs, re-schedulings, restructurings,
and debt-equity conversions; and provide favorable or neutral tax treatment for
restructurings.
Insolvency Law Systems
Where an enterprise is not viable, the main thrust of the law should be switt
and efficient liquidation to maximise recoveries for the benefit of creditors.
Liquidations can include the preservation and sale of the business, as distinct
from the legal entity, On the other hand, where an enterprise is viable, meaning
that it can be rehabilitated, its assets are often more valuable if retained in a
rehabilitated business than if sold in a liquidation, The rescue of a business
preserves jobs, provides creditors with a greater return based on higher going
concern values of the enterprise, potentially produces a return for owners, and
obtains for the country, the fruits of the rehabilitated enterprise, The rescue of a
business should be promoted through formal and informal procedures.
Rehabilitation should permit quick and easy access to the process, protect all
those involved, permit the negotiation of a commercial plan, enable a majority of
creditors in favour of a plan or other course of action to bind all other creditors
(subject to appropriate protections), and provide for supervision to ensure that the
process is not subject to abuse. Modern rescue procedures typically address a
wide range of commercial expectations in dynamic markets. Though insolvency
laws may not be susceptible to fixed formulas, modern systems generally rely on
design features to achieve the objectives outlined above.
Commercial insolvency—Though approaches vary, effective insolvency
systems have a number of aims and objectives. Systems should aspire to: (i)
integrate with a country’s broader legal and commercial systems; (ii) maximise
the value of a firm’s assets and recoveries by creditors; (iii) provide for the
ciricient siduidation of‘both non-viable businesses and businesses whose
iquidation is ikely to produce a greater return to creditors and reoganiston
viable businesses; (iv) strike a careful balance between liquidation
ea
reorganisation, allowing for easy conversion of proceedings from one proceeding

dismemberment of a debtor’s assets by individual credi

tors
Judgments; (ix) provide a transparent procedure that contains, seeking quick
applies. clear risk allocation rules and incentives for gathe
and consistently
ring and dispensing
information; (x) recognise existing creditor rights and respe
ct the priority of
 Essential principles of security enforcement law, etc. Syn. 2 707

Implementation: Institutional and Regulatory Frameworks

Strong institutions and regulations are crucial to an effective insolvency
system. The institutional framework has three main elements: the institutions
responsible for insolvency proceedings; the operational system through which
cases and decisions are processed; and the requirements needed to preserve the
integrity of those institutions—recognising that the integrity of the insolvency
system is the linchpin for its success. A number of fundamental principles
influence the design and maintenance of the institutions and participants with
authority over insolvency proceedings.
Overarching Considerations for Promoting Sound Investment Climates
Transparency, accountability and corporate governance.—Minimum
standards of transparency and corporate governance should be established to
foster communication and cooperation. Disclosure of basic information—
including financial statements, operating statistics, and detailed cash flows—is
recommended for a sound risk assessment. Accounting and auditing standards
should be compatible with international best practices so that creditors can assess
credit risk and monitor a debtor’s financial viability. A predictable, reliable legal
framework and judicial process are needed to implement reforms, ensure fair
treatment of all parties, and deter unacceptable practices. Corporate law and
regulation should guide the conduct of the borrower’s shareholders. A
corporation’s board of directors should be responsible, accountable, and
independent of management, subject to best practices on corporate governance.
The law should be imposed impartially and consistently. Creditor rights and
insolvency systems interact with and are affected by these additional systems,
and are most effective when good practices are adopted in other relevant parts of
the legal system, especially the commercial law.
Transparency and Corporate Governance.—Transparency and good
corporate governance are the cornerstones of a strong lending system and
corporate sector. Transparency exists when information is assembled and made
readily available to other parties and, when combined with the good behavior of
“corporate citizens,” creates an informed and communicative environment
conducive to greater cooperation among all parties.-Transparency and corporate
governance are especially important in emerging markets, which are more
sensitive to volatility from external factors. Without transparency, there 1s a
greater likelihood that loan pricing will not reflect underlying risks, leading to
higher interest rates and other charges. Transparency and strong corporate
governance are needed in both domestic and cross-border transactions and at all
phases of investment: at the inception when making a loan, when managing
exposure while the loan is outstanding, and especially when a borrower's
financial difficulties become apparent and the lender is seeking to exit the loan.
Lenders require confidence in their investment, and confidence can be provided
only through ongoing monitoring, whether before or during a restructuring or
after a reorganisation plan has been implemented.
 108 sya. 3 Part L—Chap. 10-—tntnaduction to Global Laws on Seourtly, ete,

Predictability.—Jovesument in emerging markels is discouraged by the lack

of well-defined and predictable risk allocation rules and by the inconsistent
application of written laws. Moreover, during systemic crises, Investors often
demand uncertainty risk premiums too onerous to permit markets to clear, Some
investors may avoid emerging markets entirely despite expected returns that tar
outweigh known risks. Rational lenders will demand risk premiums to
compensate for systemic uncertainty in making, managing, and collecting
investments in emerging markets. The likelihood that creditors will have to rely
on risk allocation rules increases when the fundamental factors supporting
investment deteriorate, That is because risk allocation rules set minimum
standards that have considerable application in limiting downside uncertainty but
usually do not enhance returns in non-distressed markets (particularly for fixed.
income investors). During actual or perceived systemic crises, lenders tend to
concentrate on reducing risk and risk premiums soar, At these times the inability
to predict downside risk can cripple markets. The effect can impinge on other
risks in the country, causing lender reluctance even towards untroubled
borrowers.

3. UNIDROIT MODEL FOR SECURITY INTERESTS

IN MOBILE EQUIPMENT
UNIDROIT (International Institute for Unification of Private Law) is a United
Nations body that is instrumental in formulating conventions on commercial law
relating to matters that affect international trade. UNIDROIJT has formulated
conventions on several issues such as sale of goods, financial leases, formation of
contracts, etc.

UNIDROIT adopted a convention on security interests in mobile equipment in

2001". This convention is known as the Cape Town Convention, based on the
place where it was signed. The convention relates to security interests in mobile
equipment such aircraft and ships that regularly cross national borders.

4. UNCITRAL LEGISLATIVE GUIDE ON SECURED

TRANSACTIONS, 2007°
UNCITRAL entrusted a working group with the task of developing an efficient
legal regime for security interests in goods involved in a commercial activity.
The working group considered the first draft of the guide on secured transactions
in May 2002. The work of the Working Group was developed through 12 one-

6. http://www uncitral_org/pdf/english/texts/security-Ig/e/09-8267 Ebook-Guide_(19-04-

10English.pdf (accessed on 6" September, 2013). = S
UNCITRAL Legislative guide on secured transactions, 2007
Syn. 4 709
July 2007 (first part) and from 10th to 14th December 2007 (second
part), and
the text was adopted by consensus on 14th December 2007.
The Guide lays down fundamental policies of an effective and efficient secured
transactions regime, essential elements of a security agreement, rules for
determining priority as among competing claimants, general principles of
enforcement of a security interest and recommendations on the same, while
dealing with several other important matters. Some of the important principles
and policies as enunciated under the Guide are discussed:

4.1. Fundamental policies of an effective and efficient secured

transactions regime
Comprehensive Scope: The legislation should embrace all forms of
secured transactions, all categories of grantors and secured creditors and
all types of movable asset and secured obligation.
Functional, integrated and comprehensive approach: To the maximum
extent possible, all transactions that create a right in any type of asset
meant to secure the performance of an obligation (that is, to fulfil
security functions) should be considered to be secured transactions and
regulated by the same rules or, at least, by the same principles.
Security rights in future assets of a grantor: Many States only permit
grantors to create security rights in assets that are in existence and that
they own at the time the security right is created. The Guide adopts the
view that except to the extent that consumer protection legislation
provides otherwise, a security right may be created in future assets.
Extension of a security right into proceeds: The economic value of the
encumbered asset is the creditor’s ultimate source of payment, the
security right should be extended into whatever proceeds are received
upon the disposition of the encumbered asset.
Distinguishing effectiveness as between the parties from effectiveness
against third parties: The policy is recommended because in many
States, when a security right is created, it is effective not only between
the grantor and the secured creditor but also against third parties.
Sometimes this provides insufficient notice to third parties. As a result,
States often impose additional formalities for the creation of the security
right (even as between the grantor and secured creditor) that go well
beyond what is normally required for contracting. This means that a
secured creditor must always await the conclusion of the agreement with
a grantor before taking steps to ensure the priority of its security right as
against competing claimants.
Establishment of a general security rights registry: Efficiency will be
enhanced if a State establishes a registry with certain central features like
single general security rights registry, recording of notices relating to
existing or potential security rights and not documents, availability of
registry files for searching by any interested party, etc.
710 sya4 Part k—Chap. 10—Iniraduction to Global Laws an Seourity, etc.

the
e Availability of multiple security rights in the same assets: To avoid
cases where grantor is effectively required to dedicate the full value of an
asset to a single secured creditor, even when the asset has a much higher
value than the credit it secures, the regime should be designed to permit
multiple grants of security rights in the same asset,
e Temporal basis for priority among multiple security rights; This is
required in order to gain the optimal benefit of permitting muluple
security rights in the same asset. Priority should normally be determined
by the order of registration of a notice in the registry or of achieving
third-party effectiveness by some other means,
© Priority between security rights and other rights; Precise rules should
be enacted to govern every possible type of priority conflict with the
rights of a competing claimant and to avoid, as far as possible, creating
any later-in-time rights that would outrank existing security rights.
e Facilitative rather than formalistic regulation: \n general, parties
should be permitted to design their own security agreements and that any
mandatory rules should aim only at ensuring fairness and protecting the
legitimate interests of third parties.
e Extrajudicial enforcement: As \ong as the enforcement regime is
designed to protect the legitimate rights of grantors and third parties,
yes shouldbe no limitation on a secured creditor’s right to enforceout
court.
e@ Equality of treatment of all creditors that provide credit to enable
grantors to acquire tangible assets: Many States draw a sharp
distinction between the rights of sellers and the rights of lenders. The
Guide holds that sellers and lenders that provide credit to enable a buyer
to acquire tangible assets should be treated in the same way.

4.2. Essential elements of a security agreement

most legal systems, like identification of parties, description

6 of the obligation to
be secured, description of the assets to be encumbered, and clear reflection of the
intention of the parties to create a security right.
The degree of specificity required for identification of the secured obligatio
i n
and the encumbered assets varies from State to State. Advantage of specific
description is certainty, but the disadvantage is lack of flexibility to address
important financing transactions involving changing amounts of secured

Therefore, itisimportant to deal with the identification and description elements

in the security agreement. Failure to do so may result in disputes concerning the
scope of the assets encumbered and the obligaton secured, unless
elements can be established through other means. --
 UNCITRAL Legislative guide on secured transactions, 2007
Syn. 4 711
In some States, the security agreement must also set out in great detail
a
number of additional matters governing the relationship between the grantor and
the secured creditor (like the duty of care on the part of the party in possession of
the encumbered assets and representations with respect to the encumbered assets,
the right of the grantor to dispose of encumbered assets and the duties of the
grantor relating to any proceeds received from the disposition). However, these
details may not be mandatory for other States.
The Guide recommends a security agreement be effective between the parties
as long as it expressly confirms the intention of the parties to create a security
right, specifically identifies the grantor and the secured creditor and describes the
secured obligation and the assets to be encumbered

4.3. Rules for determining priority as among competing

claimants
The Guide upholds the principle that a security right cannot have priority over
the right of a third party unless the security right is “effective” as against that
third party. Third-party effectiveness may be achieved when a security right has
been created, depending on the type of asset being encumbered, and one of the
following additional steps has taken place: (a) registration of a notice in the
general security rights registry; (b) possession of the encumbered asset by the
secured creditor; (c) conclusion of a control agreement; (d) registration of the
security right in a specialized registry or its notation on a title certificate; and (e)
notification to a third-party obligor. The Guide also contemplates that, in certain
cases, third-party effectiveness of a security right may be achieved automatically
upon creation of the security right.
The regime adopted in most States involves a combination of priority
principles based on time and priority principles based either on the specific
character of a creditor’s claim or on the specific method for achieving third-party
effectiveness.

Recommendations have been made to determine priority between security

rights granted by the same grantor in the same encumbered asset; priority of a
security right registered in a specialized registry or noted on a title certificate;
priority of rights of transferees, lessees and licensees of an encumbered asset;
priority of preferential claims; priority of rights of judgement creditors; priority
of a security right in an attachment to immovable property; priority of rights of
persons providing services with respect to an encumbered asset, among others.

° ° 7
4.4. Recommendations on enforcement of a security interest
The recommendations aim to provide clear, simple and efficient methods for
the enforcement of security rights after debtor default. Some of the major
recommendations, to be included in the legislation, are:

7. Terminology and Recommendations: http://www.uncitral.org/pdf/english/texts/security-

1g/e/Terminology-and-Recs. 18-1-10.pdf (accessed on 6 September, 2013).
7i2 Sya. 4 Part —Chap. 10—lniraduction 10 Global Laws an Seourtly, etc.

A pefsoa musi eaforce us nights and perform is obligations under the

provisions on enforcement in good faith and in a commercially
reasonable manner. This cannot be waived unilaterally or varied by
agreement al any time, Subject to this, the grantor and any other person
thal Owes payment may waive any of its rights, but only after default and
the secured creditor may waive any of its rights under the provisions on
enforcement. A variation of nghts by agreement may not adversely affect
the rights of any person not a party to the agreement,
If a person fails to © y with its obligations under the provisions on
enforcement, it is liable for damages caused by such failure,
The debtor, the grantor or any other interested person is entitled at any
time to apply to a court or other authority for relief from the secured
creditor's failure to comply with its obligations.
The law should provide for expeditious proceedings to address cases
where the secured creditor, the grantor or any other person that owes
performance of the secured obligation, or claims to have a right in an
encumbered asset, applies to a court or other authority with respect to the
exercise of post-default rights,
The grantor should be entitled to exercise one or more of the rights, post-
default, including paying in full and obtaining a release, apply to a court
or other authority for relief in case the secured creditor does not fulfil its
obligations, etc. Similarly, there are recommendations pertaining to post-
default rights of the secured creditor.
Post-default, the secured creditor may exercise its rights either by
applying to a court or other authority, or without application to a court or
other authority (i.e. extrajudicial exercise of rights)
The exercise of a post-default right with respect to an encumbered asset
does not prevent the exercise of a post-default right with respect to the
obligation secured by that asset, and vice versa.
If a secured creditor has commenced enforcement by taking any of the
actions described in the provisions on enforcement, a secured creditor
whose security right has priority as against that of the enforcing secured
creditor or the enforcing judgment creditor is entitled to take over the
enforcement process at any time before the earlier of the disposition,
acquisition or collection of an encumbered asset or the conclusion of an
agreement by the enforcing secured creditor to dispose of the
encumbered asset.
After default the secured creditor is entitled to possession of a tangible
encumbered asset. Further, the secured creditor may elect to do so
without applying to a court or other authority, provided certain
condit satisfied.
areions
Similarly, post-d a secure
ef d credit
auorltshould
, be without
applying to a court or other authority, tosell or otherwise dispose of,
 2011 - UNCTTRAL, Hague Conference and Unidroit Texts, etc. Syn.6 8=— 7153

lease on license an encumbered aac wo the extent of the granton’s rights

in the encumbered asset.
© In the case of extrajudicial Gisposition of an encumbered asset, the
enforcing secured credits must apply the net proceeds of its enforcement
(after deducting cons of enforcement) to the secured obligation. Surplus
shall not remain with the secured creditor.
© After default, the xamed credits may propose in writing to acquire one
on tne of the encumbered assets in total or partial satisfaction of the

5. 2011 - UNCITRAL, HAGUE CONFERENCE AND

UNIDROIT TEXTS ON SECURITY IN
Many instruments promulgaed by the three organizations [the Hague
Conference, UNCITRAL and UNIDROIT) concer of hirectly affect transactions
creating rights in movable acts (whether tangible of itangibic) to secure
obligations and similar financing transactions such as the sale of receivables. The
policymakers and legislators who have na actively participated in the
preparation of the instruments may have some difficulty in determining various
aspects periaining to such instruments. Therefore, the three organizations came
up with comparison and analysis of major features of international instruments
relating to secured transactions.

6. 2011 - UNCITRAL, HAGUE CONFERENCE AND

UNIDROIT TEXTS ON SECURITY INTERESTS”
Besides the above detailed texts on secured transactions. UNCITRAL. in the
year 1997 designed Model Law on Cross-border Insolvency tw assist States to
ip their insolvency laws with 2 moder legal framework to more effectively
address cross-border insolvency proceedings conceming debtors experiencing

i of a foreign proceeding or upon recognition is subject to the

discretion of the court: itis expressly stated that in granting such relief the court
must be satisfied that the interests of the creditors and other interested persons.

grants to conditions it considers appropriate: and the court mzy modify or

terminate the relief granted. if so requested by a person affected thereby.
714 Sya. 7 Part L—Chap. 10—Iniroduction 10 Global Laws an Seourity, etc.

7. MODERN SECURITY INTEREST ENFORCEMENT

LAWS IN WORLD
Security interest enforcement laws in the world are being modeled on the
pattern of the US Article 9 of the Uniform Commercial Code (UCC), It is a
known fact that the SARFABSI Act in India has been modeled loosely on that
basis. Several Canadian state laws are based on Article 9 of the UOC, The New
Zealand Personal Property Security Act is also based on the same system,
Several European jurisdictions have passed similar laws,
An article titled, “The Evolution of Secured Transactions” by Yoram Keinan'”
traces the complete history of the development of Article 9 of UOC and its
impact on laws of other countries. The basis of the security interest enforcement
laws in U.K., India, Australia, and other common law destinations has been the
tradition of common law. Common law, as is evident, depended less on
legislation and more on the rich history of case law. English common law
recognised statutory security interests and several forms of equitable security
interests. There were, for example, several instances where an assignment was
regarded as an equitable assignment.

7.1. Article 9 of UCC, USA

Adoption of Article 9 in the US served two purposes—unification of law in
different states with the US, and replacement of the scattered body of common
law principles with specific law. In that sense, Article 9 is closer to civil law than
common law. “The enactment of UCC 9 in the US reflects a different approach
than that of a traditional common law country. As most commentators agree, the
remarkable feature of UCC 9 is that it abolishes the multiplicity of Common
Law, equitable and statutory security devices and replaces them with the
functional concept of a “security agreement” creating
a “security interest.”
The significant features of Article 9 of UCC are summed up by Keinan as under:
Contractual agreements.— Article 9-102(2) lists security interests to
which it is expressly applicable. These include a conditional sale, trust
receipt, and other lien or title retention contract and lease or consignment
intended as security.” It includes “the retention of reservation of title by a
seller of goods” within the concept of security interest” and a reservation of
title under a lease or consignment, but only where itis intended as security.
Type of secured interests.—Section 1-201(37) defines “security

pr heatr orap mainte = an obligation obligation”. Unde

od UCC
r 9- |
after-acquired property can also be secured. _

10. See ce 3P/1B/2004/02/ 10/0002655 | 2a=

200402 10164359/Rendered/PDF/wdr27827
11. Keinan, ibid. on13” September, 2013).
Pdf (accessed
 Modern Security interest Enforcement laws in world
Syn. 7 715

Formation of secured interest.—The secured interest is attached to

the property when it is perfected. Perfection is accomplished by either
filling, or possession.
Effect on contract parties.—The debtor retains the residual
beneficial title to the collateral (unless the security takes the form of a
pledge): the secured party’s real remedies against the collateral are
contingent upon the debtor’s default and are then limited to the value
needed to satisfy the secured obligation.
Registration.—Article 9 unified the filing of all types of secured
interests, except from real estate mortgages, into one single notice filling
register. The notice is referred to as “financial statement”, and is signed
by both parties. Note that the filing does not validate the transaction, but
rather, serves as an information tool.
Priority between secured creditors.—The priority ranking system
ranks secured creditor above all other creditors. Among competing
secured creditors, priority rank determined by the order in which,
perfection was accomplished.
Priority between secured and unsecured creditors.—In light of
the functional definition of “secured interest”, UCC 9 does not provide
priority rules between secured and unsecured creditors. Moreover, the
super-priority, historically available to the unsecured creditor as against the
holder of a security interest in floating collateral is no longer available.
Enforcement.—Besides the regular judiciary procedure, UCC provides
creditors with several extrajudicial enforcement rights (self-help). Self-help
includes repossession of the collateral and selling it, foreclosure by sale,
concluding an agreement with the debtor. (UCC 9-503 and 9-504)

As is apparent from the above discussion, some of the significant features of

the U.S. Security Interest Law are:
e Codification of law on security interests in a common code: In
English law, the provisions in Companies Act concerned only
registration, that is, perfection of charges. Creation of security interests
was left entirely to the mutual agreement of parties. Enforcement was
based on court precedents and, to an extent, the provisions of property
law relating to mortgages, priorities etc. were based on bankruptcy laws.
The U.S. code tried to consolidate all provisions relating to security
interests in a unified code.
e Exclusion of security interests on real property: While English
provisions, particularly those in the Companies Act, pertain to both
movable and immovable properties, the US security interests law kept
real estate security interests out of the picture altogether. The need for
this was obvious, since the US law dealt with essential question of
enforcement, and therefore, directly affected property rights. Since
716 Sya.7 Part 1—Chap. 10—Intraduction to Global Laws on Security, etc.

property rights are covered by separate regimes applicable to movable

and immovable properties, it made logical sense to limit the commercial
laws on security interests to movable properties onty.
One of:the notable features of Article
e Priorities based on perfection
9 of UCC is to fix priorities among competing lenders based on the date
of perfection—perfection happens, except of pledges or possessory
security interests, on filing of the security interests, In English law,
priorities are based on mutual contract between parties, and in case of 4
conflict, based on date of execution, As between registered and
unregistered security interests, a registered security interest overrides an
unregistered one, but as between two registered security interests, it is
based on execution and not perfection.
e Self help enforcement rule: One of the notable features of the Article
9 is to provide for self-help repossession except in cases where breach of
peace is apprehended.
e Floating charges recognised as security interest in “after
red ”: The concept of floating charges is a uniqueness
of English law and is treated as an equitable charge until crystallisation.
Under Article 9 of UCC, security interest may be created on after-
acquired property as well—hence, security interests on floating assets
such as inventory and debtors were treated almost like any other security
interest, subject to the right of disposal.

7.2. Adoption of the US model in other countries

The US model was implemented in several Canadian states also. The process
of adoption started in 1960, and various versions of the Personal Property
Security Act have been adopted in most of the Canadian provinces.
In 1988, New Zealand Law Commission recommended the adoption of a
PPSA-type law in New Zealand too. The present enactment in New Zealand is
the Personal Property Security Interest Act, 1999.
In Australia, the relevant enactment is the Personal Property Security Interest
Act, 2009.
Several European countries have implemented similar laws.
The UK Law Commission recently submitted a report on adoption of an Article
9-type law in UK aswell.” Inview ofitssignificance for a country that has been
the traditional exporter of legal systems world-over, we take it up in the next

12. http://www _lawcom.gov.uk/docs/c2%6

pdf, (accessed on 6" September, 2013).
 Modern Security interest Enforcement laws in world
Syn. 7 717
dod Reform of security interest law in the UK
Unarguably, company charges law originated in the UK as a
part of the
corporate law, and today forms the basis of corporate charges registry
systems in
most countries which have adopted UK-type corporate law. In this
light, it is
interesting to note that the U.K. Law Commission has recommended reform
s in
the system of registry of charges.
The UK security interests registry system has been reviewed by several
committees in the past, and was criticised on several counts by the Diamond
Report in 1989.'° One of the primary grounds was that the archaic system of
filing under the UK law was filing of physical documents, whereas most
countries had developed modern electronic filing systems. The issue of priorities
was also discussed—including the conflict between legal and equitable charges,
and the 21-day filing system” that might have a creditor discover that a property
on which he obtained charge 5 days back was actually charged to another
creditor 20 days back, who files such particulars now.
The UK Law Commission issued its report titled Company Security Interests in
August 2005.'° This was preceded by two consultation papers issued in 2002 and
2004.'° The Department of Trade and Industry has also issued a consultation
paper in July 2005. While a Company Law Reform Bill was presented in 2005 to
comprehensively revise the rest of the Companies Act, the provisions about
security interests have not been taken up in the said Bill. The Companies Act,
2006, as finally enacted has not incorporated reforms of registration of security
interests suggested by the Law Commission.
The Law Commission favoured amendment of the registry system. Besides
electronic filing, it also seeks to have the system of priorities be based on the date
of filing rather than the date of execution. However, the concept of floating
charges is effectively retained:
As far as priority rules are concerned, the general principle underlying
the scheme is that the party who registers first should gain priority. When
the contest is between a chargee and someone who has bought the
property that is subject to the charge, priority will for the most part
depend on whether the charge is registered and, if it was, whether the
charge permitted the chargee to sell the property free of the charge (a
floating charge., as opposed to a fixed charge which permits sale only
with the chargee’s agreement to the specific sale).

13. See A.L. Diamond, A Review of Security Interests in Property, (1989).

14. 30 days in India, with an extended period of another 30 days subject to extension of time by the
Registrar.
‘5, hs http://lawcommission.justice.gov.uk/docs/lc296_Company_Security_Interests.pdf (accessed on
6th september, 2013); More about the report on: nik .
http://lawcommission.justice.gov.uk/areas/company-security-interests.htm.(accessed on 6
September, 2013). ;
16. Text of the consultation papers: (Consultation Paper No. 164, 2002-
http://lawcommission.justice.gov.uk/docs/cp164 (accessed on 6th September, i
2013) Company_Security_Interests_Consultation.pdf, Consultation Paper No. 176, 2004- .
http://awcommission.justice.gov.uk/docs/cp176_Company_Security_Interests_Consultative_Repor
t.pdf)(accessed on 6" September, 2013).
718 Sya. 8 Part |—Chap. 10—tntroduction to Global Laws an Security, etc.

The UK Law Commission's recommendations for reform of security interest

law in UK is quite significant for several reasons——one, because iM Comes of the
back of the very rich tradition of UK law, and two, because it absorbs experience
of other countries, particularly, the USA, in implementing modern security
interest laws.
Summary of the recommendations of the Law Commission is appended in
Appendix | to this Chapter.

8. SECURITY ENFORCEMENT LAW IN INDIA

There is no attempt as yet to consolidate the law relating to creation, perfection
and enforcement of security interests. Even the present legislation, SARFAES!
Act, contains only dedicated provisions on enforcement but does not deal with
issues of priority, perfection, allocation, etc. The only impact of the Act is to
allow repossession of charged assets on a certain default on the terms of a
secured loan, and that too, in case of banks and financial institutions. The Act
cannot be said to be a re-look at the whole gamut of enforcement of security
legislation as recommended by the multi-lateral agencies referred to above.
The generic law of enforcement of security interests is presently scattered in
several provisions ofcommon law, as also special statutes in India. The common
law for most parts is contained in the Transfer of Property Act, Contract Act and
Companies Act, and parts of Civil Procedure Code. Special isions to benefit
banks and financial institutions exist in the RDB Act, State Finance Corporations
Act, and specific financial institutions.
From the point of view of nature, perfection and enforcement, security interests
can be classified as follows:
e Security interests on immovable property
+a Mortgages
+a Charges
Security interests on movable property
e In case of corporate borrowers
e On specific property
+a Possessory security or pledge
+a Non-possessory security or hypothecations
On general property or floating charges
e In case of non-corporate borrowers
+s Security interests on actionable
claims.
There are specific provisions in case of banks and financial institutions
deviate fromthegeneral lawandwherea freehandis allowed 10theadjudicating
tribunals to decide upon the enforcement. However, these are only enforcement
provisions and do not set any special rules on security as such.
 Security Interests on brmurvable Property Syn.9 38719

9. SECURITY INTERESTS ON IMMOVABLE PRO-

PERTY
it is 2 commonplace feause of common law commttign 1 make Gittinction
between unmovable and movable properties. The general body of law relating &
sdle, sccuttty imterests, and gifts of immovable properties % contained in the
Transler of Property Act. As far as secunity heres ae concermed, the Tramia
A Property Act Gstinguishes baween monigzges and agen.

91. Mortgages”
The most common form of seasity imtarest on immovable property is 2
mosigage. Mortgages” are defined in sec. 56 of the Transies A Property Act as
“the tuamsica of istezest in specific immovable property for the purpose of
securing the payment of moncy advanced of 0 be advanced by way of loan, am
existing of future dett of the performance of an engagement that may give rise to
a pecuniary liabilny”.
A mortgage is Gificem from 2 chage—2z Charge dies ach mou w action
A any imecres’ exces secusity interest in the collaeradl property in favour of the
charge holdex. The definitions of mortgage and Guage ae usually exclusive, 2s
a Chasge excludes 2 maorigzze.

« Transfer of interest: Obviously. the uterest o rights wansferred we

the interest ox rights held by the mortgagor. Ifthe mortgagor is the owner

right
transfer the rigitt of sale os disposal (simple morigege). of may
all of these rights (conditional sale and Engissh muastgzge)
720 Sya. 9 Part |—Chap. 10—Introduction to Global Laws on Security, etc.

of the debtor is not a mortgage—Nerton v. Florence Land and Public

Works Co.”

e Accessory to a debt: The distinguishing line between a mortgage and

a sale is that a sale is made with the intent of transfenmng interest, a
mortgage wansfers interest with the intent of securing some debt, A
mortgage secures a debt, and does not either create or discharge a debt, A
transfer made either for creating or discharging debt cannot be a
mortgage. The debt may be a present or future debt—4he wordings in the
definition are wide enough to incorporate various types of debt, but the
intent must be to secure such debt.

9.3. ‘Types of mortgages

The Transfer of Property enumerates six types of mortgages, Understanding the
nature of these mortgages is important because it is based on the difference that
the law grants two distinct and mutually exclusive rights to the mortgage-
holder—the right of foreclosure and the right of sale. The six mortgage types are
as under:

9.3.1 Simple mortgage

Most mortgages in practice amount to simple mortgages. In a simple mortgage,
the obligation to pay is a personal obligation, but the debtor agrees, expresslyor
by implication, that in the eventof the debtor failing to pay as per contract, the
creditor shall have a right to cause the mortgaged property to be sold and the
proceeds of the sale to be applied in payment of the debt. The ownership of the
property stays with the mortgagor; the possession of the property also stays with
the mortgagor. The question is: if a mortgage by definition is a transfer of
interest, what interest is really transferred in case of a simple mortgage? The
answer is—the right to cause the property to be sold to realise the debt. The
mortgagee does not have the right to sell the property but the right to cause the
property to be sold—which obviously means only by decree of a Court.
It isnotable that by law, the legal rights of the creditor in case of a charge, not
bein a mortgage,
g are similar to a simple mortgage.

9.3.2 Mort
by ga
conditige
onal sale
Several variants of mortgage by conditional sale are listed in the section. Inall
cases, as implicit by the name “conditional sale”, there is a sale ofthe property to
suhag ttto8wyseksaah Scene
Parties is not to but to create security interest. Thus, either the case ic a
conditional sale, such that the condition isto become absolute on a certain date, or
that thesale shall beannulled ifthe mortgagor clears the debt, orthatthe mortgagee
shall re-transfer the property on the debt being cleared.

19. (1877) 7 Ch. D. 332.

 Security Interests on Immovable Property
Syn. 9 721
9.3.3 Usufructuary mortgage
While a simple mortgage is transfer of security interest
but there is no transfer
Of possession, a usufructuary mortgage is similar to a
pledge in case of movable
property and transfers both the possession and secur
ity interest. ‘“Usufruct”
means the fruits of use: accordingly a usufructuary
mortgage is created by
delivering possession of the mortgage property to the
mortgagee, uthorizing the
latter to retain the possession until payment of the mortgage
money.

9.3.4 English mortgage

There is an absolute transfer of property to the mortgagee in case
of an English
mortgage, upon the condition that when the debt is cleared, the mortg
agee will
transfer the same, back to the mortgagor. The difference between condit
ional sale
and English mortgage is that while in the former case, the transfer
of property is
merely conditional, there is an absolute transfer in case of the latter.
In other
words, the lender acquires a proprietary interest in the property.

9.3.5 Mortgage by deposit of title deeds or equitable mortgage

In banking practice in India, the most common form of mortgage is mortgage
by deposit of title deeds. This is practiced in certain notified cities, and is created
by delivery of documents of title to the property with the intent of creating
security interest therein. Therefore, the transaction is oral or behavioural, and the
evidence of the mortgage is the deposit of title deeds. There are 3 important
elements of a titular mortgage—a debt owing by the mortgagor, deposit of title
deeds, and the intent to create security. Mere possession of the title deeds is not
enough to create a titular mortgage and there can be no presumption as to such
intent. It is notable that the legal provisions applicable to simple mortgages also
apply to titular mortgages [sec. 96 of TP Act].
See Note regarding proposed Land Titling law, according to which mortgages
may, in future, be created electronically, substantially changing the whole
concept of equitable mortgages. Besides, the proposed changes in Indian Stamp
Act may impose stamp duty on equitable mortgages, making the practice
unworkable.

9.3.6 Anomalous mortgage

This is the residuary or miscellaneous variety in which mortgages other than
those listed above fall.

9.4. Rights of the mortgagee

The law distinguishes between two distinct, and mutually exclusive rights of
the mortgagee. These are: (a) right of foreclosure; and (b) right of sale. Neither of
the two rights is a self-help right as the law necessarily requires a decree of court
722 Sya. 9 Part 1—Chap. 10—Intreduction to Global Laws on Seowrify, etc.

in either case. However, first of all, it is important to understand the distinction

between foreclosure and sale.
Foreclosure is the antidote of the mortgagor right of redemption. In certain
mortgages, the mortgagor transfers the property to the mortgagee, but he has the
right of redemption—that is, the right to regain the property and make it free of
the mortgagee’s rights. This right is conferred by sec, 60 of the Act, and is also
sometimes called the equity of redemption as it is a fundamental principle of
equity that as the mortgagor did not intend to transfer his property but merely to
use it as a collateral, the debtor should be allowed to retrieve his property once he
clears the debt. A suit for foreclosure puts an end to the mortgagor's equity of
redemption and is therefore akin to ousting the mortgagor from the property,
Obvious enough, the question of foreclosure arises only in cases where the
mortgagor makes a transfer of proprietary interest in the property, Therefore, sec.
67(a) authorises a suit for foreclosure only in case of a mortgage by conditional
sale, or an anomalous mortgage where the mortgagee is entitled to foreclose, Suit
for foreclosure is not allowed either in a simple mortgage or in English mortgage
since in either case, the real right that is transferred by the mortgagor is the right
of sale and not right of ousting the mortgagor from the property. In case of a
conditional sale, the understa ofnding
the parties is that on defaultof the debt, the
sale will become absolute—the remedy of foreclosure is to attach finality to such
sale being absolute. In case of a usufructuary mortgage, the understanding
between the parties was that the mortgagee will conti to enjoynue
the usufruct
until as long as the debt is cleared—therefore, the mortgagee can neither
foreclose, nor sell, as the usufruct is what was intended.
Sale, that is, causing the property to be sold to defray the debt, is the other
remedy in case of mortgages. As can be seen, the remedy of sale and foreclosure
are mutually exclusive. For example,in case of a conditional sale, the mortgagee
cannot sue for sale—though once he forecloses and becomes the absolute owner,
he can do so himself. In an English or simple mortgage, the mortgagee can sue
for sale but not foreclosure. The law is obviously in favour of the remedy of sale
rather than foreclosure for most mortgages.” The rationale is clear—the remedy
of foreclosure amounts to putting the creditor in the position of owner of the
mortgaged property, which may be hard in cases where the value of the
is more than the debt owed. The right of the creditor was primarily to be paid for
the debt due, and that is more easily adjusted in case of an action for sale where
the sale proceeds will be used to pay off the debt.
Though the mortgagee’s principal remedy is to approach the Court for a decree
of sale, in certain cases, sec. 69 of the TP Act permits the mortgagee to even sell
the mortgaged property without the intervention of the Court. However, these

20. This, by implication, also applies tocharges, and therefore, also to hypothe
cations of movable
 Security interest in specific movable property Syn. 10 723

9.5. Charges
The difference between mortgage and charge is more conceptual than practical.
In practice, the word “charge” is very commonly used in a catch-all sense
covering mortgages as well—for instance, charges under the Companies Act
include mortgages as well.
The distinction between a charge and a mortgage is evident from the
definitions under the TP Act. Section 58(a) defining mortgage says a mortgage is
“the transfer of an interest in specific immovable property”. Section 100,
defining charge says “where immovable property is made security for the
payment of money to another and the transaction does not amount to a
mortgage”. In other words, under the TP Act, all security interests on immovable
property that do not amount to mortgage are treated as charges. Therefore, in law
and in art, the word “charge” is wider than mortgage—every mortgage is a
charge but every charge is not a mortgage.
While a mortgage implies transfer of an interest in property to the mortgagee,
there is no transfer of an interest but a mere creation of security interest in
immovable property. The right that a charge seeks to create is not a right in
property but a right against the debtor, though secured by immovable property. It
is a right in respect of property, but not a right in property. Therefore, while a
mortgage interest is a jus in rem, a charge is a jus ad rem, or a right backed by
property. A mortgage being a right against the world at large is a transferable
right and can be enforced against subsequent transferees as well. A charge, being
a personal right, can be enforced only against a transferee for value, who has
notice of the charge.
By sec. 100, the provisions of the law applicable to simple mortgages have also
been extended to charges. Therefore, there is no appreciable difference between
charges and mortgages except as mentioned above.

10. SECURITY INTEREST IN SPECIFIC MOVABLE

PROPERTY
Common law systems have not typically legislated legal provisions relating to
security interests in movable property—this is only a present-day trend as noted
earlier. Traditional legal systems were concerned about transactions involving
security interests in immovable property but left movable property to be
regulated by parties’ contract.
Indian law has no specific enactment relating to security interests in movable
property, except in cases of pledge. From this viewpoint, security interests in
movable property can be distinguished as:
e Possessory security interest or pledge
e Mortgage of movable property
e Non-possessory security interest or hypothecation

21. Dattatreya Mote v. Anand Datar, (1974) 2 SCC 799.

724 Syn. lv Part l—Chap. 10-—tntraduction te Global Laws an Seouruy, ete.

10.1. Pledge
A pledge is a security interest where possession of the secured goods is also
granted to the creditor, Thus, ut is bailment combined with security interest.
Section 172 of the Contracts Act defines a pledge as “the bailment of goods as
security for payment of a debt”. Since it is a bailment, a pledge has to be of
specific property.
The delivery of the property by the debtor to creditor is essential to constitute a
pledge. The delivery might be actual or symbolic. Whether actual or constructive,
the delivery must be such as can place the pawnee in control of the goods at his
own discretion. For instance, in case of titular properties such as title deeds,
shares, etc., which require endorsement and not mere delivery, the handing over
of possession must be accompanied by possession, A delivery not accompanied
by such possession amounts to an equitable mortgage but not a pledge.
A pledge transfers possession to the pawnee: the law gives the pawnee a right
of retention. The pawnee may retain the goods pledged, not only for payment of
the debt or performance of the promise, but for the interest, the debit and all
necessary expenses incurred by the pawnee—sec, 173. The enforcement of
security is covered by sec. 176. If the pawnor defaults in payment of the debt, the
pawnee may bring a suit against the pawnor upon the debt, and retain the goods
pledge d
as collateral security; or he may sell the goods pledged on giving the
pawnor reasona noticeble
of sale. Therefo re,has a special
the pawnee kind of a
property in the pledged goods—but he has to elect one of the two remedies:
either retain the goods as a collateral and sue for the money, or sell the goods. In
case the pawnee elects to sell the property, the section also authorises the pawnee
to sue for any deficit; and also obliges the pawnee to return any surplus.
An important safeguard is the pawnee’s right of redemption contained in sec.
177—-similar to a mortgagor’s right to redemption in caseof mortgages. If there
has been a default on the part of the pawnor to pay the debt, the pawnor may stil]
redeem the property at any time before the goods are actually sold. The s
equity of redemption, like that in case of mortgages, is an important iple of
equity that after all, a lender does not have a proprietary interest in the goods and
as long as the lender gets paid for what is due to him, and in case of a default,
also the expenses arising on account of default, the lender has no further property
in the goods.
It may be contended that in case of a hypothecation where possession of goods
has been taken over by the creditor upon default by the debtor, the creditor in
possession stands in the same footing as a pawnee and the provisions of secs.
176-177 are applicable to such a creditor in possession.

10.2. Chattel mortgage or mortgage of movable property

Like in case of immovable property, a mortgage movable property transfers an
interest in property to the lender to secure the payment of the obligation of the
borrower. There is no question of mortgage by deposit oftitle deeds inthis case,
 Security interest in specific movable property
Syn. 10 725
as movable properties do not have any title deeds. Most
likely, a chattel mortgage
may take the form of a conditional sale, or usufructuary
mortgage. There are
several instances where a hire-purchase transaction has been
construed by courts
as a chattel mortgage.

10.3. Hypothecation
Hypothecation is a non-possessory security interest. The distinc
tion between
mortgage and hypothecation is that while mortgage amounts to a
transfer of
interest in property, hire purchase is a mere charge. Though no provis
ions in law
were made about hypothecations, such security interests have been held
as valid
for a long time. The legal distinction between pledge and hypothecatio
n has been
understood as under—in a pledge, there is a lien and handing over of
possession
to the creditor. In case of hypothecation, the goods remain the physic
al
possession of the debtor, but there is a lien or security interest in favour
of the
lender. It is as if the goods are in legal possession of the creditor, but physic
al
possession of the debtor. In Gopal Singh Hira Singh v. Punjab National Bank,”
the Court held that the borrower holds the actual physical possession of the goods
not in his own right as the owner but as the agent of the hypothecatee, that is, the
creditor.
In Union of India v. Ct. Shentilanathan,” hypothecation was defined thus: “a
hypothecation is a right in a creditor over a thing belonging to another and which
consists in the power in him to cause the goods to be sold in order that his debt
might be paid to him from the sale proceeds. This right is distinguishable from a
mortgage of chattels.” In this and in several cases, Courts seem to have mixed up
hypothecation being a fixed charge and a hypothecation being a floating charge.
From the several rulings under banking law in India, the legal rights of the
creditor in case of a hypothecation were not clear—in some cases, Courts
equated the rights of the hypothecatee with that of a mortgagee or equitable
mortgagee, while in some cases, the Courts treated a hypothecation as a floating
charge. In Central Bureau of Investigation v. Duncans Agro Industries Ltd.,”* the
Supreme Court held that in case of a hypothecation of stock, the debtor was free
to sell the stock without the permission of the creditor. In facts of the case, a
hypothecation of stock was understandably a case of floating charge.” However,
the weakness of hypothecation as a security was demonstrably highlighted in
Canara Bank y. Official Assignee, High Court,”° where the rights of the bank as
hypothecatee were rendered meaningless on account of a doctrine of “reputed
Ownership” contained in insolvency laws [e.g., sec. 28(3) of the Provincial
Insolvency Act, 1920, and sec. 52(2) of the Presidency Towns Insolvency Act,
1909]. Though it was admitted in this case that plant and machinery of the
insolvent had been hypothecated to the bank, the Court held as under:

22. AIR 1976 Del 115.

23. 48 Com Cases 640 (Mad).
24. 87 Com Cases 849.
25. See also the ruling in Brumark later.
26. 88 Com Cases 642 (Mad).
726 Sya. 10 Part —Chap. 10—tntraduction to Global Laws on Seourity, etc.

“The bank can, if at all, claim to be secured creditor with a charge over
the goods. The bank musi have taken care to lake possession of the
machinery and the materials as they are movables, In the absence
thereof. the bank must have taken care to affix a notice containing the
information that the machinery and the materials are hypothecated to the
bank. It is common knowledge that in case of hypothecation, a metal
plate will be fixed on the machinery to it will be written in indelible mk
that the machinery is hypothecated, to such and such bank... In the
absence of such display having been found by the staff of the official
assignee, the court is justified in holding that there was no display that
the machinery and the materials were hypothecated in favour of the
appellant-bank.” On appeal before the Supreme Court, even the apex
court ducked the issue of reputed ownership and the impact of
hypothecation: “The contentions raised by the respective parties in this
appeal as to the import of the reputed ownership clause and the
overriding effect on sections 17 and 52(2)(a) of the Act when a
mortgagee fails to give notice to the mortgagor, namely, the debtor
insolvent to perfect his title even though the hypothecated goods
be yh.tothesmocianasn, onebak,Open 58hg CRE Pema
case.” See also Syndicate Bank v. Official Liquidator, Pras Enge
Co.**
In case of hypothecation, as the physical possession of the asset is with the
debtor, it is strongly advised that creditor physically repossesses the goods,
preferably before commencement of bankruptcy proceedings. It seems the law is
in favour of the creditor taking possession of the goods. “It was open to the bank
to take possession of the debt secured by hypothecation. It was open to the bank
to take possession of the hypothecated property on its own or though the
court.” —Syndicate Bank v. Official Liquidator, Prashant Engineering Co. P.
Ltd.,” but if the creditor does not do so, it faces this consequence: “The bank
having filed a suit for the recovery of money and having failed to make a claim
on the security, any claim on the security or the sale proceeds thereof would now
1 anegrentogs rw esi Rule 2 of the Civil Procedure Code, 1908, with the
result t no subsisting claim on the machinery or
sale proceeds thereof and must rank as an unsecured creditor.” Wee
In case of Indian Oil Corporation v. NEPC India Ltd., ruling dated 20" Jul
2006, theSuprente Cow exnaiiasd dir tect ofteipeaidion pethiaty iite
whether hypothecation amounts to entrustment of the asset by the hypothecator
to the hypothecatee. The Supreme Court held that such was not the case. Also see
the Commentary section, comments under definition of Hypothecation.

27. Canara Bank v. Official Assignee, 88 Com Cases 690 (SC).

28. 59 Com Cases 301 (Del). Itis notable that the doctrine of reputed ownership is not applicable to
companies where floating charges are registrable. It is, however, tradi j
and common law countries to “it " a
socutes Ot wh an ee tery ym Fm
doctrine “
was scrapped
apply tooyOntne [BN
i e s . ” Ie octet ohepaied ownceship
29. 59 Com Cases 301 (Del).
 Floating Charges or Security Interest in General Property Syn. 11 727

11. FLOATING CHARGES OR SECURITY INTEREST

IN GENERAL PROPERTY
Floating charges are security interests on the general property of the borrower
being 2 company. Since the general property of the borrower is not specific or
ascertainable, it is not creationof security interest on any particular property and
therefore, is merely a device to put 4 certain creditor in priority over the rest of
the creditors.
Floating charges are a typicality of English law. In Richard Dale Agnew v. The
Commissioner of Inland Revenue, (popularly known as the Brumark’s case” the
House of Lords traced the history of development of the concept of floating
charges.
The floating charge originated in England in a series of cases in the
Division in the 1870's. The ruling in Re Panama, New Zealand, and Australian
Royal Mail Co.,” is generally regarded
as the first case in which
the floating
charge was recognised. There were several cases soon thereafter.”
Two things led to this development. First, the possibility of assigning future
property in equity was confirmed in Holroyd v. Marshall The principle was of
general application and made it possible for future book debts tobe assigned by
way of security: Tailbyv. Official Receiver.” Secondly, the Companies Clauses
Consolidation Act, 1845 sanctioned 2 form of mortgage for use by statutory
companies by which the company assigned “its undertaking”. It was natural that
this formula should afterwards be adopted by companies incorporated under the
Companies Act, 1862.
In re Panama case, the debenture used this principle of creating a security
interest on the “undertaking” of the company. The idea behind this charge was
that whereas the debtor indicated a desire to secure the interests of the creditor.
the property on which charge was to be created was such. which in ordinary
course was to be dealt in, and creating a fixed-charge-type interest in such
property would paralyse the operations of the company. Therefore, the debtor
was free to deal in the property until as long as the charge-holder did not
interfere. “The floating charge is capable of affording the creditor, by a single
instrument. an effective and comprehensive security upon the entire undertaking
of the debtor company and its assets from time to time, while at the same time
leaving the company free to deal with its assets and pay itstrade creditors in the
ordinary course of business without reference to the holder of the charge.”
In 1897, Lord Macnaghten wrote the first judicial definition of floating charges
een er Back rd, Other Securities Investment Co. Lid. vy. Manila

MM. alten A,
{2001}
2 AC 710.
1370)
5 Ch
ge /nay and Public Works Co.. Ex p. Moor, (1878) 10 Ch D 530, In re Hamilton's
POTD
Windsor Ironworks Co., Ex p. Pitman Trusts
& Edwards, (1879) 12 Ch D 707: and In re Colonial
Corporation, Ex». Bradshaw, (1879) 15 ChD 465.
mo (4862) 10 HLCes191.
34. (1883) 13 App. Cas. 523.
728 Sya th 9 Purt Chap. 10—tniraduction 10 Glabal Laws on Seowrily, etc.

Railway Co.,” which is by tar one of the most commonly quoted defimton of the
term: “A floating security is an equitable charge on the assets for the ume being
of a going concern. It attaches to the subject charged in the varying condition in
which it happens to be from time to time, It is of the essence of suc h that
a change
it remains dormant watil the undertaking charged ceases to be a going Concern, OF
until the person in whose favour the charge is created intervenes”.
The concept of floating charges, though age-old, has extensively been
discussed in several recent English rulings. In the Brumark’s case, it was held
that a charge on assets, on which the charge holder cannot have real control, will
be a floating charge. This position was reiterated in Smith (Administrator of
Cosslett (Contractors) Lid, v, Bridgend County Borough Council). Recently, in
National Westminster Bank ple v. Spectrum Plus Limited,” the House of Lords
once again held that a charge on book debts where the company has the liberty of
collecting and commingling the collections will be a floating charge.
What exactly is meant by “intervenes” in connection with a floating charge-
holder? In case of a fixed charge holder, the rights of the lender are obviously
dependant on whether the charge was a mortgage, pledge or hypothecation, A
floating charge is created by the instrument of debt (instruments of debt in law
are regarded as “debentures”) or the debenture. The debenture would contain the
rights of the charge-holder in respect of the property covered by the floating
charge. The rights could be visualised in two situations: (a) if the company is still
a going concern; (b) if the company goes into winding up.

11.1. Floating charges in case of a going concern: Receivership

A floating charge in essence is a charge on a nebulous asset base, and therefore
the traditional concept of a possessory remedy does not apply in case of floating
charges. Hence, documents creating a floating charge, usually a debenture,
authorises the charge holder to appoint a “receiver” on happening of certain
trigger events as defined in the debenture. The trigger event may be a default, an
apprehended default, or whatever else the parties might have agreed to.
Legally, the word “receiver” and “manager” imply distinct duties—the role and
duty of a receiver is merely to take custody of the property; the receiver has no
right or duty to run the property of the debtor. A manager, on the other hand, can
tun the property. Receivers are appointed by Courts under civil laws and several
other specific statutes, and receivers appointed by Courts are usually both
receivers and managers. In case of a loan document, the document may either
empower the appointment of a receiver, or receiver and manager, both.
In England, the concept of a floating charge has necessarily been associated
withheremedy forteecharge bythespptiatnscat of« secelver andaunanar As
the concept of floating charge was developed along Chancery Court rulings
discussed above, the receivership concept was also elaborated upon by Chancery

35. [1897] AC 81.

36. [2005] UKHL 41.
 Floating Charges or Security Interest in General Prope
rty Syn. 11 729
Courts in the second half of the nineteenth century.
Many of the rules and
procedures governing charges and receivers are contained
in subsequent case
law, but much of the purely administrative framework has been
brought into the
Insolvency Act, 1986.
Since the implementation of the Insolvency Act, 1986, a person
appointed
receiver or manager of the majority of a company’s property under
a debenture
created as a floating charge has been known as an administrative
receiver.*’
In countries which have adopted the UK pattern of corporate laws,
appointment
of receivers by debentureholders is normally contained in the
law and the
priorities and procedures are substantially the same as in case of windin
g up.
Section 123 of the Companies Act, 1956 in India permits and provide
s for
appointment of receivers by debentureholders holding a floating charge.
This
provision is applicable where the company is not in winding up. In
case the
company is in winding up, the provisions of section 530(5) will apply
as
discussed below. The section does not lay down when a receiver
can be
appointed by a debentureholder. There have been several rulings of English
courts on the power of debentureholders or their trustees holding floating charges
to appoint receivers, but essentially these circumstances will be laid down in the
debenture trust deed, or terms of the debenture. The Companies Act, 2013, on the
other hand, does not specifically provide for appointment of receivers by
debentureholders holding a floating charge. However, a reading of sec. 84° will
reflect that the Act does not prohibit appointment of receivers.

Upon appointment of the receiver, all floating charges crystallise, that is,
become fixed charges. Therefore, obviously, the company can no longer deal
with the assets except with the consent of the charge holder.

Section 123 of the Companies Act, 1956 provides that the rules of priority in
relation to assets of the borrower are the same as under sec. 530 in case of a
company in winding up. Essentially, these rules are:
e The claims of fixed charge holders» and over-riding preferential
payments, that is, workmen’s dues, rank above the claims of floating
charge holders.
e The claims the preferential creditors also rank above the claims of the
floating charge holders.
Accordingly, the receiver is required to make payment to the preferential
creditors, as provided for in sec. 530, in priority to any claims on account of
principal or interest of the debentureholders. The Companies Act, 2013 does not

37. Subsequent insolvency reforms seek to do away with administrative receivership—Enterprise Bill
of 2002.
*, Not yet notified, as such not effective. (information updated as on 13" September, 2013). As such
the relevant provisions of the Companies Act, 1956 continue to be in force till the new provisions
get effective.
730 Sya. 12 Part L—Chap. 10—Intreaducnan to Global Laws on Seourly, ete.

up
explicitly lay down pnorty rules for floating charges, except under winding
as discussed in Para 11.2.

11.2. Floating charges in case of winding up

The general rule of priorities in winding up is the same as in case of Hon.
corporate insolvency. The specific provisions in case of corporate insolvency are
contained in sees. 529, 529A, and sec. 530 of the Companies Act, 1956
(corresponding provisions in the Companies Act, 2013 are contained in sees, 325
to 327) Proviso to sec. 529(1) read with sec. 529A elevates workmen to the status
of secured creditors—that is to say, the claims of secured creditors shall rank pari
passu with the claims of workmen, Section 530(5) provides for certain
referential debts that shall be paid prior to the claims of debentureholders
Iding a floating charge.
There is no conflict between sec. 123 and sec. 530—if the debentureholders
holding a floating charge take action Pay to the Comma going into winding up
and int a receiver in terms of debentures, preferential debts under
sec. 530 still rank above the claims of the floating charge holder in terms of sec.
123. However, in case no such action is taken by the debentureholder, a floating
charge holder ranks after the claims of both the fixed charge holders and the
preferential claims.
Congruent to sec. 530 of the Companies Act, 1956 is sec. 327(3)" of the
Companies Act, 2013.

12. OVERVIEW OF ENFORCEMENT OF SECURITY

INTERESTS IN INDIA
The graphic below gives an overview of the remedies available to a secured
creditor in India:

12.1. Enforcement of security interests

Quite obviously, the question of enforcementof security interests arises only in
case of secured obligations. Not all the remedies discussed below are for
enforcement of security interests—that is, some of the remedies discussed below
are available even in case of unsecured obligations.
There are several remedies, either alternative or simultaneous, available to a
creditor, and the options are more in case of secured obligations than in other
cases. The creditor may simply seek to enforce his claim, or may opt to secure a
workout of the borrower’s failed business, or strike some kind of a mutual
settlement to avoid litigation and the related costs. The choice is quite often very
clear—workout, for example, will not be a feasible remedy unless the creditor/s
have interest that extends to a larger part of the business of the borrower, the
business isinherently viable, and the creditor/s see more value for themselves if
the business is reorganised rather than closed down.

®, Jbid.
 Overview ofExforcemens of Security Interests in India Syn.12 8 73!

|Crediuns remedies |

| Enforcement | ; Workout
1 : ee

- : pth enone | a
be a Winding up | Forma * Informal

: i

|_| sicAor |!) cor

| Companies
Act |

Qe
oe
SO
ee
——

;
\eg RBIOTS |
scheme

Figure 10.1

On the other hand. workouts might often require further lending, or

compromises, and the lender might simply prefer to realise his claims than to
choose the long route of re-organisation.
Enforcement of security interest may be done cither undes common law, or
under applicable special laws. or under the Companies Act by way of winding up
proceedings.

12.2. of security
Common law enforc nt s
emeinterest
if there is a security interest, there is always 2 common law remedy for its
enforcement, because a security interest without 2 way to enforce it has no
meaning. Howeve some of ther.remedies require judicial intervention.
732 Syn. 12 Part }—Chap. 10—Intreduction to Global Laws on Seourity, etc.

12.3. Enforcement of security interests under special laws

In modern India, several legislations have been passed to enable enforcement
of security interests, or enforcement of a debt, by special means, These include:
¢ Special powers granted to state finance corporations, state industrial
development corporations, or other specific constitutional statutes of
respective instituuions.
e Special powers for recovery of debt owed to banks or financial
institutions, by quasi-judicial Tribunals known as debi recovery
tribunals.
e Special provisions in the SARFAESI Act for enforcement of security
interests held by banks and financial institutions,
The special powers granted to State Finance Corporations (SFCs) and the like
bodies are contained in their respective governing statutes, For instance, sec, 29
of the State Finance Corporations Act provides the SFCs with special powers of
enforcement. These powers provide for special measures for recovery of debts
due to the institution.
The RDB Act has been around for more than a decade now, and after passing
through several attacks on its constitutionality, now seems to be working fine.
The primary purpose of the RDB Act was to take banks’ claims out of civil
courts and put them into a separate alternative machinery. The DRTs are
specialised tribunals for delivery of justice in case of banks’ claims. Their
advantage is their specialisation—in that they deal with banks’ claims against
borrowers. Their disadvantages are many: for instance, that they only deal with
banks’ claims against borrowers, and not vice versa (except to the limited extent
of counter claims), and therefore, cannot be expected to have a completely
unbiased view of a banker-borrower relationship. One of the biggest problems of
DRTs has been sloth—since DRTs have to adjudicate upon the banks’ claims,
and adjudication requires evidence, arguments, and application of mind, there are
instances where cases remain pending for years.
The SARFAESI Act is among the boldest and, by far, the fastest of all
remedies, principally because it does not require any adjudication at all,
Whatever process of justice is enshrined in the Act isall after enforcement by the
bank, although the common practice (and in some cases, even rulings) suggests
that prior to confirmation of a sale by the DRTs, the banks only take
possession. Hence, the borrower is under a considerable pressure in SARFAESI
proceedings and the bank clearly has an upper hand.

determination of claims and counter claims of parties, the Act

be seen as a
device thatlosesjustice inthebargain forspeed,atleastattheiniti
al stages, In
any system, delivery of justice is far slower than delivery of
injustice—so,
 Overview of Enforcement of Security Interests in India
Syn. 12 733
SARFAESI may only be justified as a knee-jerk reacti
on to get rid of the
accumulated problem of non-performing loans, but canno
t be a part of a larger
policy. If there are special rights to creditors, they must
extend to all creditors,
and there must then also be fetters that check against unlaw
ful or unfaithful
exercise of such powers by creditors.

12.4. Winding up
In classical settings of corporate laws, winding up was thought
as the most
equitable remedy for a troubled company that could not pay its credito
rs. The law
envisaged two situations—if the company could be resurrected or revived
, the
court could pass appropriate orders for reorganisation or reconstructi
on of the
company. If the company had become moribund and could not be revived
, or
otherwise, the creditors were not willing to accept any compromises,
the only
remedy was to wind up the company. Winding up principles derive their
basis
from the age-old principles of insolvency—what is insolvency in case of
individuals is winding up in case of companies.
Thus, secs. 394 etc. of the Companies Act deal with reorganisation of
companies. Section 421 contains provisions about an administrative receiver
appointed in terms of an instrument entitling the lender to appoint the same,
normally, a debenture. Section 425 onwards deals with winding up. The position
is substantially same in other countries. In the US Bankruptcy Code, Chapter 7
deals with liquidation, and Chapter 11 deals with reorganisation. The UK
Insolvency Act, 1986, provides for corporate voluntary arrangement,
administration (which is similar to Chapter 11 of the US Bankruptcy Code),
administrative receivership by a creditor holding floating charges, and winding
up.
The winding up process in actual implementation has been handled extremely
poorly in India. Data provided by the Eradi Committee revealed that winding up
cases had been on the backburner in Courts not for years but for decades.
Proposal for comprehensive reform of the winding up process, including
transfer of the provision to the National Company Law Tribunal, has been
enacted but is pending enforcement.
Since winding up principles are anchored in insolvency laws, which in turn are
supposed to incorporate principles of equity, these are discussed at length later in
this chapter.

12.5. Settlements
Settlements are purely voluntary, and would normally involve compromise,
either on the part of the creditor, or on the part of the debtor. Settlements are
generally mutual, except compromises, and settlements taken through Courts
under the Companies Act.
734 Sya. 12 Part }—Chap. 10—tatroduction to Glabal Laws on Seowrity, etc.

The RBI has framed guidelines for One-Time settlement (OTS) in case of
smal! outstandings. These guidelines have been referred to in an earher
Chapter.
Section 391 of the Companies Act makes it possible for compromises to be
struck through the forum of courts. If a compromise is unanimously agreed upon,
there is obviously no need to seek the assistance of courts, But if the compromise
is agreed upon by a special majority [3/4th in value of the affected creditors
sec. 391(2)), then the court’s jurisdiction may be invoked to have the
compromise forced upon all the creditors of the company, The section may be
used to enforce a compromise on a “class of creditors”, While the word “class”
has not been defined in the law, the purpose is to segregate creditors who have
distinctive rights. For instance, secured creditors, unsecured creditors,
subordinated creditors, form different classes, Public depositors in India
apparently form a different class as there are several sections dealing with just
deposits. As the idea behind the “classification” is to enforce the provisions to
creditors of the particular class, the classification must be logical, so as to create
an intelligible distinction between the creditors included, and those excluded by
the particular class.

12.6. Workouts
In appropriate cases, creditors may find it better to explore possibilities of a
comprehensive workout, that is,revival of a company, than mere enforcementof
claims. Breaking a company down and allowing the claimants to recover their
claims may not be the best solution, quite often from creditors’ viewpoint, and
almost always from a larger societal viewpoint, as demolishing a corporation is
almost like felling down a full-grown tree that provides shelter, relief and
livelihood to lots. Therefore, bankruptcy laws of most countries provide for
reorganisation as an alternative to winding-up—Chapter 11 of the US
Bankruptcy Code, administration under the UK are examples.
Workouts may be formal, that is, through the intermediation of an authority, or
informal, based on mutual agreement of parties concerned.
Sick Industrial Companies Act (SICA) is India’s version of Chapter11 of the
US Bankruptcy Code. SICA contained all such provisions as were the
fundamental features of Chapter 11—an automatic stay on enforcement of
creditors’ claim, overriding powers of the BIFR to order revival of the
and pass suitable orders in that respect, etc. The actual administration of SICA
has also been fraught with several inefficiencies, and legislation has already been
enacted, though not enforced, to transfer the powers of BIFR to the National
Law Tribunal.
Compan y
_ The Corporate Debt Restructuring (CDR) scheme is an example
informal workeet process, The CDR eohine the teen Gectuecn dnaiirenme,
 Winding up Principles
Syn. 13 735

13. WINDING UP PRINCIPLES

Winding up is not limited to situations of bankruptcy—there can
be instances
of compulsory winding up by court for reasons other than bankru
ptcy, or
members’ or creditors’ voluntary winding up. Nor can it be said that
winding up
can be generally pursued as a remedy to enforce payment of debts, becaus
e
Winding up is ordered when the company is unable to pay its debts, that is,
it has
become bankrupt. When the company becomes bankrupt and cannot
be
reorganised or reconstructed, the only remedy available is to wind
up the
company.
When the company is unable to pay its debts, the company may be
compulsorily wound up by the court [sec. 433(e)]. Section 434 provides the
circumstances when the company is deemed to be unable to pay its debts, of
which, inability to pay or secure payment to a creditor of Rs. 500 or more who
issues a demand, within 3 weeks time, is one. Section 439(1)(b) empowers a
creditor to file a petition in court for winding up.
As already mentioned, winding up can be ordered both in cases of solvent
companies, and insolvent companies, but if the winding up is in respect of
insolvent companies, insolvency rules are applicable. Section 529 provides that
in respect of proving of debt, valuation of annuities and future or contingent
liabilities, and in respect of priorities of secured and unsecured creditors, the
same rules will apply as under insolvency laws in case of non-corporate
insolvency.

13.1. Right of a secured creditor to stay out of winding up

proceedings
It has consistently been held by Courts that a secured creditor may stay out of
winding up proceedings, and instead of proving his debt before the court, may
seek to enforce his security interest. This is clearly covered by proviso to sec.
529(2) and has been repeatedly upheld by courts in several cases, such as M. K.
Ranganathan v. Government of Madras,”* and Industrial Credit and Investment
Corporation Of India Ltd. v. Srinivas Agencies.”
Does a secured creditor seeking to enforce his security interest outside of
bankruptcy resolution have to seek the leave of the court in order to do so? While
protocol demands that the secured creditor must seek the leave of the court,
authorities on English law have held that such leave is merely a formality: see,
for example, R.M. Goode [Principles of Corporate Insolvency Law, 1997, p.
168], citing Re David Lloyd & Co.” Recently, the Supreme Court had occasion
to consider whether a secured creditor or receiver enforcing security interest
during winding up has to seek the leave of the Court, and Court held that the

38. 25 Com Cases 344.

39. 86 Com Cases 255.
40. (1877) 6 Ch. D. 339.
736 Sya.13 = Part |—Chap. 10—Introduction to Global Laws on Security, etc.

official liquidator must also be “associated” when the secured creditor takes
proceeding for enforcement.“

13.2. Priorities in winding up

While the general principle is that insolvency rules are applicable as for
priorities, the law lays down some specific rules for corporate bankruptcies.
First of all, proviso to see, 529(1) and (2) puts workmen's dues, as defined in
that section, as a pari passu security interest with those of the secured creditors,
whether such creditors opt to realise security interest outside winding up, or
prove the same in winding up, The pari passu portion will be worked out as
(value of security interest)/(total debts due to secured creditors + total workmen's
dues), and the security interest of each secured creditor will abate for workmen's
dues based on the above proportion,
Under sec. 529A, so much of the secured creditors’ dues as had to be abated for
payment of workmen's dues, and workmen’s dues that could not be discharged
from secured assets, will have an overriding preferential claim in winding up.
Accordingly, the stacking order of priorities in winding up is as under:
+e Secured creditors (opting to prove their claim before the court) and
workmen's dues;
e Overriding preferential claim, that is, workmen’s dues not discharged by
secured assets and secured creditors’ claim unpaid due to cession of pari
passu interest to workmen’s dues;
e Preferential claims, that is, amounts listed in sec. 530;
e Dues payable to floating charge holders;
e Dues payable to unsecured creditors;
e Residue, if any, to preference shareholders and equity shareholders,
though the same is unexpected in case of insolvent companies.

41. Rajasthan Financial Corpn. v. The Official Liquidator, (2005) & SCC 190.
 APPENDIX 1
LAW COMMISSION OF UK RECOMMENDATIONS ON
REFORM OF SECURITY INTEREST LAW
UK LAW COMMISSION REPORT NO. 296
Summary
1. In 2002, the Department of Trade and Industry asked the Law Commission
to consider the case for reforming the law on company charges. This followed a
recommendation in the Final Report of the Company Law Review Steering
Group. The Group reported that it had received substantial criticism of the
current system for registering charges and for deciding priority between them.
Radical reform was needed but it had not had time to consult on detailed
proposals.
2. We published a consultation paper (CP No 164) in 2002, and a more detailed
consultative report (CP No. 176) in 2004. These are available on our website:
www.lawcom.gov.uk.
3. Here we summarise our main proposals. A fuller summary is available in
Part | of the report, paragraphs 1.27, 1.44. Part 1 also provides cross-references
to the paragraphs of the report where the issues are discussed in detail.

NEW SYSTEM OF ELECTRONIC NOTICE FILING

4. The current system of registering charges is unduly cumbersome, slow and

expensive. It involves the submission of paper documents, although the register
itself is electronic. It requires companies House Staff to check through lengthy
legal documents and to issue a conclusive certificate of registration.
5. Under the new scheme, we recommend:
e@ Electronic filing will replace the current paper-based system.
e To register a charge, it will be necessary only to send brief particulars of
the charge in a simple, electronic format. The original charge document
will not be sent.
e The Registrar of Companies will no longer be responsible for checking
the particulars that have been filed and will not issue a conclusive
certificate. It will be up to the party who files (normally the lender) to
ensure that the financing statement identifies the correct company as
debtor and that the description is adequate to cover the property subject
to the charge. Provided the financing statement does identify the correct

Jal
738 App. | Part l—Chap. 10—Iniraduction to Glebal Laws on Seourity, etc.

company, the charge will be validly registered in respect of the property

listed im the particulars.
e The property may be described in general terms, but there will be a
facility for parties who wish the description to cover precisely what is in
the charge agreement to include the exact terms of the agreement,
e Formal responsibility for registration, and the rarely-applied criminal
liability for failure to register, will be removed from the company, lt will
be up to the lender taking the charge to file, if it wishes to protect its
security. If the company becomes insolvent before the charge is
registered, the charge will not be effective against the administrator or
liquidator. Unregistered charges will also be vulnerable to the loss of
priority.
REMOVING THE 21 DAY TIME LIMIT
6. Under current law, unless a registrable charge is registered within 21 days, it
is void against a liquidator or administrator, This causes inconvenience; each
year, Companies House rejects around 3,000 late applications, Lenders must
either re- execute the paperwork or apply to the court to register out of time. If a
charge is registered within the 21-day period, its priority depends on when it was
created, not when it was registered. A charge-holder that registers first could find
itself subject to a charge created up to three weeks earlier that it knew nothing
about.
7. Under the new scheme:
@ The formal time limit for registration (and the need for court applications
for late registration)
will be removed.
¢ There will be no period of invisibility. Between submission of the
particulars and their appearance on the register. It will be possible to
search quickly and reliably on-line.
© Lenders may file in advance of the transaction. They may therefore
protect their position during negotiations. Similarly, a single filing may
cover a number of similar transactions between the same parties,
removing the need for multiple filings.

EXTENDING THE LIST OF REGISTRABLE CHARGES

8. The list of charges that need to be registered is out-of-date. The
Act,1956, omitssome charges which areoftenused. There isalsouncertainty
about what should be registered and what should not.
-.
pers 8
9. Under the new scheme:

© All charges are registrable unless specifically exempted.

@ The principal exemptions will befor charges over registered
and overfinancial coliterd: See baow. a _
 Law Commission of UK recommendations, etc.
App. 1 739

CLEARER PRIORITY RULES

10. The Companies Act, 1985, does not lay down clear
rules about what
happens when two or more creditors have registered
charges over the same
property. Priority depends on complex common law rules
that are not suited to
modern financing methods. Priority between a secured lender
and someone who
buys property that is subject to a charge is also unclear.
11. Under the new scheme:

e Priority between competing charges will be by date of filing

(unless
otherwise agreed between the parties involved). This will simplify
the
current law and will remove the current 21-day period of invisibility.
e The distinction between fixed and floating charges will be preserved,
principally because of its importance in insolvency.
e In the case of a floating charge, it will be unnecessary to rely on
a
negative pledge clause. To prevent subsequent charges gaining priority.
It will also be unnecessary to employ automatic crystallisation clauses.
With their uncertain effects, to protect property subject to a floating
charge from seizure by judgment creditors.
e The effect of registration on the rights of a person who buys the property
without knowing of the charge will be clarified. If the charge is fixed but
has not been registered, it will not affect a buyer who does not know of
it; if the fixed charge has been registered, it will be binding on the buyer.
@ Some charges may also be registered in specialist registers, such as those
covering unregistered land, registered aircraft and ships, and intellectual
property. The regulations clarify that normally any priority rules set out
in the specialist legislation will apply.

LAND
12. At present, a company charge cannot be registered in the Land Registry
until it has been registered with Companies House and a certificate of registration
has been issued. This causes administrative problems for the Land Registry. The
process is delaying the development of e-conveyancing.
13. Under the new scheme:
e If a charge over registered land is registered in the Land Registry, it will
not need to be registered in the Company Security Register as well.
Instead, the Land Registry will automatically forward to the Companies
House its information about charges over land owned by the companies.
The information will be available to those searching the Company
Security Register.

SALES OF RECEIVABLES

14. Receivables (that is, sums owed to the company by its various debtors) ne
an important asset and receivables financing 1s enormously important, especially
140 App. |! Part L—Chap. 10—Iniroduction 40 Global Laws an Seounily, ete,

for small and medium enterprises. At present, the law distinguishes between
charves over book debts, which require regiswation, and sales of book debts, for
example to a factor, which do not have to be registered, The two, however,
perform almost identical economic functions. The priority rules are unsuited to
modern receivables financing. They mean that a receivables financier must make
enquiries of the account debtor, and notify the debtor of the arrangement, or risk
losing out to a second financier. Restrictions on the assignment of receivables
frequently limit the use that companies may make of this efficient of financing.
15. Under the new scheme:
e Sales of receivables of the kind which factoring and discounting
agreements cover will be brought within the scheme. This means that
they must be registered to be valid on insolvency,
e Their priority will be determined by the date of filing.
@ Provisions in the contract generating the receivable that purport to
restrict its assignment will no longer be effective against the assignee.

SCOTTISH AND OVERSEAS COMPANIES

16. The current provisions requiring registration of charges created by
companies registered outside Great Britain over their property in England and
Wales have proved highly unsatisfactory. The principal problem is that there is a
great uncertainty about when a company has a place of business here, so that
charges must be registered. The result is that particulars of many charges are sent
to Companies House for registration as a precaution, but the information is not
placed on the register and is not available to searchers.
17. Under the new scheme:
e Charges created by Scottish and overseas companies over their property
in England and Wales will fall within the scheme. The information will
ccdidiey Ge dine ef etna ar Eartmee e
provisions on receivables to companies
registered in England and Wales.) a aa
¢ Charges created by companies registered in England and Wales over
their property in other jurisdictions will remain registrable, but without
prejudice to the rights acquired in those assets by the secured party or
third parties according to the law of that jurisdiction.

FINANCIAL COLLATERAL

and bank accounts need todosoquickly and with cer . Purchasers of

Directive on Financial Collatera

Coll l \amagenmtn. Thee choo
 Law Commission of UK recommendations, etc.
App. 1 741
the priority rules between competing charges
and between charges and
purchasers. This is a particular problem in financial marke
ts, where it is essential
that investment property is readily transferable.
19. Under the new scheme:
e Registration will not be needed where the charg
ee has obtained
possession or control. Within the meaning of the Directive,
or has control
of it as defined by the regulations we propose.
e A chargee will have control of financial collateral if the compa
ny can no
longer deal freely with the assets free of the charge.
e The regulations set out ways in which the chargee can
obtain control
over particular types of financial collateral.
e A security which is perfected by control will have priority
over one
merely perfected by filing; priority between charges perfected by control
will depend on the order in which control was obtained.
e Purchasers of securities or securities entitlements for value and without
notice of existing security interests will not be affected by them.

THE BUSINESS CASE

20. There is a clear business case for reform. The move to electronic filing, and
the abolition of the certificate of registration, and the 21-day period for
registration, will result in direct savings to lenders, companies and Companies
House. The other changes will make the law more certain and reliable. Overall,
the cost of secure borrowing will be reduced.
FURTHER WORK

Title-retention devices
21. In our Consultative Report, we proposed to include title-retention devices
such as finance leases, hire-purchase and conditional sale agreements within the
scheme. This proved controversial. Many people thought it would be illogical to
have one set of rules applying to title-retention devices entered into by
companies, and another for those involving unincorporated businesses and
individuals. The most important reason for requiring title-retention devices to be
registered is to protect purchasers. We intend to reconsider this issue in the
context of a broader project on transfer of title by non-owners.

Statement of rights and remedies

22. The Consultative Report included a draft statement setting out the rights
and duties of the parties to a security agreement, particularly following anes
Again this proved controversial, and we are not proceeding with it as part 0 me
scheme. We intend to consult further to see how much support there would be for
restatement of the existing law which would clarify English law for its users and
which might serve as a model for European and international harmonisation.
742 «Appt 40 Globaluct
Part 1—Chap. 10—Intred ion
Laws on Seourity, etc.

Charges created by unincorporated businesses and individuals

e for
23. Our terms of reference asked us to consider whether any new schem
company charges should be extended to unincorporated businesses und
individua ls. , charges granted by non-companies must comply with
At present
Bilof ls Sale Acts, 1878-1891. Our consultation paper examined these provisions
and concluded that they are out-of-date, unnecessarily complicated, and unduly
restrict the forms of secured borrowing available to small businesses.
24. We continue to believe that there is a strong case for replacing the Bills of
Sale Acts, but in the time available we have not been able to devise detailed
recommendations. As far as consumers are concerned, we recommend that
Department of Trade and Industry consider the issue, For unincorporated
es,
businesswe will return to the subject when we know whether our proposal
comp an
will be implem s
ieented,
 CHAPTER 11
DEBT RECOVERY LAW IN INDIA:
AN OVERVIEW!
SYNOPSIS
|Peat 2° SGT ry, 6 eepae pea ereetinias 743 6.2. Recovery of debts determined
2. Tribunal vis-a-vis Civil Courts ............... 744 by Pribunale 2S eA ee 754
3. Administrative Machinery ....0.0....0.0000..... 745 | 7. Appellate Machinery 0.0.....ccccccccccsscsscecees
4. Jurisdiction of the Tribunals................... 754
745 | 8. Applicability of Court Rules .........0........ J 55
4.1. Exclusive jurisdiction ............... 745 8.1. Applicability of the Indian
4.2. Subject matter of the case......... 746 Limitation Act or the Indian
4.3. Pecuniary jurisdiction............... 749 Bwidence \Act)...230.. fonscsoe 755
4.4. Territorial jurisdiction............... 750 8.2. Tribunal not bound to follow
5. Making of Recovery Applications to the Civil Procedure Code: Sec- tion
ga 20, Sei, SSSR ee band 751 4 RR OR ee Pe 755
5.1. Impleadment of third 8.3. Cross-examination may not be
PAPC S. 2500.0. .T08.3... 08nd 752 MECTCUI LS. SII ha 756
5.2. Counter claim and _ set-off 9. The Drt Act to Have an Overriding
claimed by defendants .............. fa 4 BEICCE: SOCHON G94 ev 5 55 855 55205 ds heen csss 757
6. Powers of the Tribunal....0....0...0.ccccceeses- 753 | 10. Protection for Action Taken in Good
6.1. Power to make interim orders Paithiss....cxnasaizior:...h..8etetia 758
Or requiring furnishing of 11. Transfer of Cases from One Tribunal to
SeCHMtes 2. £12 f11. 2S22k1D2LD. 753 AAnOthiers(.) O5%.10.S3RRIOII9.OF 758

The Recovery of Debts due to Banks and Financial Institutions Act, 1993, was
enacted on 27th August, 1993, to provide for the establishment of Tribunals for
expeditious adjudication and recovery of debts due to banks and financial
institutions, and for matters connected therewith or incidental thereto. Quite
obviously, the idea of the law was to provide for an alternative mechanism for
recovery of debts due to the banks and financial institutions. Quite clearly, the
law was not meant for resolution of banking cases—as it is only banks and
financial institutions that could file cases before DRTs, and those too, related to
recovery of debts only.

1. HISTORY OF THE ACT

Recommendations for introduction of such a law started coming as early as
1981, when a Committee under the chairmanship of Shri T. Tiwari had examined
the legal and other difficulties faced by banks and financial institutions and
suggested setting up of special tribunals for recovery of dues by following a
summary procedure. But it was only after the report from the Committee on the
Financial System headed by Shri M. Narasimham in 1991, which also strongly

1. Abhishek Tikmani, formerly of Vinod Kothari & Company, assisted in writing this Chapter.

743
 An Overview
i Sya. 2 Part L—Chap. 11—Debi Recovery Law in india:

favoured setting up of special uibunals to recover blocked funds of Hinaneial

start taking imitative 1
soationsiaels in + desis assets, did the government
enacted by the
this regard. Finally, afier much deliberation, the Act was t
of India excep
Parliament and came into force on 27th August, 1993, in whole
the State of Jammu and Kashmur.
Presently, there are 33 DRTs and 5 DRATs in the country,
High
The legality and validity of the Act, was however challenged in the Delhi
Court in the matter of Delhi High Court Bar Association v, Union of India’,
whereby various issues were argued to challenge the constitutional sanctity of the
Act. On some of these counts, the petition succeeded and the Delhi High Court
held the law as bad on grounds like the power of the Central Government to
constitute tribunals under Articles 323A and 323B of the Constitution, that the
law placed tribunal on pedestal higher than the High Courts in respect of
monetary jurisdiction; that judiciary had been given no role in appointment of
presiding officers; that there were no provisions for set-off, counter claims or
transfer of cases, etc.
However, Supreme Court stepped in and gave a stay to such an order of the
Delhi High Court on being assured that the government will consider amending
the legal anomalies in the law’. Finally, necessary amendments were made in the
year 2000, and the Act was given the green signal. The Act has been recently
amended vide the Enforcement of Security Interest and Recovery of Debts Laws
any a gg Act, 2012‘ (“the amending Act), the changes are indicated later in

The performance of the DRT law has been discussed in an earlier Chapter.

2. TRIBUNAL VIS-A-VIS CIVIL COURTS

Tribunals whether they pertain to income-tax or sales tax or excise or customs
or administration, have now become an essential part of the judicial system in our
country. Such specialised institutions may not come strictly within the concept of
the judiciary, as envisaged by Article 50, but it cannot be denied that such
tribunals have become an indispensable part of the justice delivery system, like
courts of law. Sections 17 and 18 of the RDB Act, 1993, has given exclusive
jurisdiction to Tribunals and Appellate Tribunals established under this Act to

recovery of debts due to them. On the establishment of the these tribunals, all
suits in which the amount claimed is Rs. 10 lacs or more, stands automatically
transferred tothem (the transferred matter has tobe taken up from the stage ithas

2 1995 TAD Delhi 1238, AIR 1995 Dethi 323 11 (1995)

3. AIR 2002 SC 1479. ae scat
4 Passed in Rajya Sabha on 20° December, 2012, enforced from 15” |
hntp:/fuww prsindia org/uploads/media/Enforcemem/Enforcement% 200% 0Securing %Dass
4sy
20and% 20R:
20Recoyery% 200f% 20Debts %20Laws% 20Amendment%
29%
Act also
on 9” September, 2013). The amending
(accessed ppm nepal see
SARFAESI Act, asdiscussed inlater makes certain amendments
tothe
 Jurisdiction of the Tribunals Syn.4 745
been transferred or an appropriate stage and not de novo). No other court or
authority can exercise any jurisdiction, powers or authority in relation to these
matters, except the Supreme Court or a High Court exercising jurisdiction under
Articles 226 and 227 of the Constitution. However, sec. 18 is not applicable in
case of proceedings in relation to recovery of debts due to any multi-State co-
operative banks under the Multi-State Co-operative Societies Act, 2002, pending
before the commencement of the amending Act; such proceedings shall continue
as is.

3. ADMINISTRATIVE MACHINERY
The purpose of the RDB law is to allow a quasi-judicial forum for the banks
and financial institutions to file suits for recovery of debts due to them. Under the
law, a bank or financial institution may file an application before the DRTs of an
appropriate jurisdiction that have been given wide-ranging powers. DRTs are
single member benches—they have a presiding officer.
An aggrieved borrower or bank may take the matter further up to a Debt
Recovery Appellate Tribunal (DRAT).
In case of further grievances, the aggrieved person can go to the Supreme
Court.
Each DRT has a Recovery Officer, who, besides performing general
administrative functions, also takes care of the execution of orders of the
Tribunal

4. JURISDICTION OF THE TRIBUNALS

4.1. Exclusive jurisdiction dot

The powers and authority of a Debt Recovery Tribunal are limited to the cases.
which falls under its jurisdiction only. On cases that fall within the jurisdiction of
the Tribunal, the Tribunal has an exclusive jurisdiction—sec. 18 of the Act ousts
the jurisdiction of court or any other authority on matters on which jurisdiction
has been conferred on the Tribunals under the law.
In commentary to the SARFAESI Act, we have elaborately discussed the
meaning of exclusive jurisdiction, and the principles applicable relating to
exclu sion
of jurisdiction of courts. We have discussed that the purpose of the
exclusive jurisdiction prpvisions is not to leave a citizen without any remedyat
all, but to ensure that there is no overlapping jurisdiction, and that the speedier
implementation of an alternate machinery is not impeded by taking matters to
courts. Thus, on matters conferred under the law, and on those matters only. civil
courts will not have jurisdiction.
Does ive jurisdiction mean banks and financial institutions cannot file
a bank as an
suits Ene irsofmoney to civil courts? DRT law is available to
 iew
746 Sya.4 Part 1—Chap. 11—Debi Recovery Law in india, An Overv

only when the bank

option, and a matter comes under the junsdiction ofthe law
or financial institution exercises the said opuon.
Since the DRT
Can a borrower be stopped from filing a suit against a bank”
claim against
law is limited only for recovery of debts, if the borrower has any
a suil in a
the bank, there is nothing that stops the borrower from filing such
court.

4.2. Subject matter of the case

The subject matter jurisdic Tribunal is limited only to cases of debt
of ation
recovery applications from banks and financial institutions, Two points have to
be noted in this regard:
(i) The Tribunal can take up the applications from banks and financial
institutions only.
(ii) The application should be for the recovery of debt,
The very purpose of the Act wasto remove the difficulties that banks were
facing in recovering their loans and enforcing the securities. As such, the benefit
for speedy recovery of dues is not available to any other persons apart from
ban financial institutions, and nor the Tribunal has any powers to take up
and ks
any such application no matter whatsoever be the necessity or reasons for doing
so.
Clause (d) of sec. 2 of the Act defines ‘bank’ so as to mean a banking
company, a corresponding new bank, State Bank of India, a subsidiary
bank, a
Regional Rural Bank, a multi State co-operative bank’.
The term banking company has been given the same meaning assigned to it in
clause (c) of sec. 5 of the Banking Regulation Act, 1949, which states, “banking
company” means any company which transacts the business of banking in India.
The term banking is also defined as—the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft, order or otherwise.
Bombay High Court in the matter of Narendra Kantilal Shah v. Joint
Registrar, Co-operative Societies (Appeal) Bombay,’ held that co-operative bank
that transacts the business of banking would also be considered as a bank within
the meaning of sec. 2(d) of the Act. Later, the decision stood negated in view of
the Supreme Court’s decision in Greater Bombay Co-Op. Bank Lid vs M/S
United
Yarn Tex. Pvt. Ltd’.wherein itwas viewed that the definition of a banking
company under the RDB Act as derived from sec. 5(c) of the Banking Regulation
Act, has to be “strictly confined to the words used in Section 5(c) of the BR Act”;
that sec.56oftheBR Act isjust tomake theregulatory machinery provided by
the BR Act to apply to co-operative banks also: and that was thus a
 Jurisdiction of the Tribunals
Syn. 4 747
conscious exclusion and deliberate commission
of co-operative banks from the
purview of the RDB Act” since co-operative banks
have comprehensive, self-
contained and less expensive remedies available to
them under the State Co-
operative Societies Acts of the States concerned, while
other banks and financial
institutions did not have such speedy remedies and they
had to file suits in civil
courts.
However, due to the changes made by the amending Act,
the term “bank” now
also expressly includes a multi-State co-operative bank.
The object of such
inclusion is to provide an additional and effective recovery
mechanism to multi-
State co-operative banks. The multi co-operative banks
have been given an
option either to initiate proceedings for recovery of its debts
under the Multi-
State Co-operative Societies Act, 2002 or the RDB Act.
Clause (h) of sec. 2 of the RDB Act defines financial institutions:
“a public
financial institution specified u/s. 4A of the Companies Act, 1956
and such other
institutions as the Central Government might notify in this regard”,
Furthermore the application should be for the recovery of debt only. Clause
(g)
of Section 2 of the Act defines debt as-
“Debt” means any liability (inclusive of interest) which is claimed as
due from any person by a bank or a financial institution, or by a
consortium of banks, or financial institutions during the course of any
business activity undertaken by the bank, the financial institution or the
consortium under any law for the time being in force, in cash or
otherwise, whether secured or unsecured, or assigned, or whether
payable under decree or order of any civil court or any arbitration award
or otherwise, or under a mortgage and subsisting on, and legally
recoverable on, the date of application.”
The debts to be recovered should arise during the course of business activity.
The course of business activity has to be construed as normal course of business
activity of the bank and financial institutions. The normal banking activities
primarily comprises of borrowing and lending and other matters incidental
thereto. Issuance, clearance, receiving proceeds of bank drafts, pay orders,
cheques, letter of credit, etc. fall within normal business activities of any bank.
The term ‘debt’ means any liability that is legally recoverable on the date on
which the proceedings are initiated for recovery of the same. It is not necessary
that unless the amount claimed by the bank is determined or decided by a
competent forum before they can be said to be due and would not be amount due
under the Act.®
In the matter of Federal Bank Ltd. v. Sanmac Motor Finance Ltd.,’ the DRT,
Chennai, held that default committed by the defendant in not returning amount of
interest in non-convertible debentures falls within the meaning of debt since

8. State Bank of Bikaner & Jaipur v. Ballabh Das & Co., 1 (2001) BC 47.
9. I1 (2004) BC 215 (DRAT/DRT).
748 Sya.4 Part |—Chap. | 1—Debt Recovery Law in India: An Overview

investment in debentures can be construed as loan by the bank to the company,

and hence in normal course of business.
When two or more banks form a consortium for lending money jointly in
certain proportions to the borrowers, it will be taken to be a transaction done in
ordinary course of business activity of the banks and financial institutions, So ul
money which is payable by one bank to its consortium partner as per the
consortium agreement and terms between themselves will be considered as
‘debt’."”
The debt in section 2(g) includes not only original amount due from any person
to bank or financial institutions, but also amount payable under decree or order of
any civil court,
Scope of the term “debt” was extensively studied by the x Court in Lureka
Forbes Limited y. Allahabad Bank & Ors”. orbes granted two
companies (“licensees”) a licence to occupy certain premises, Three years after
entering into the original licence agreement, the licensees offered to vacate the
property, and proposed that Eureka Forbes sell their unsold stock and adjust the
proceeds towards the unpaid licence fee. However, this stock had
been hypothecated by the licenseesto Allahabad Bank, a fact of which Eureka
Forbes claimed to be unaware. The Allahabad Bank filed suit against Bureka
Forbes, which was eventually transferred to the Debt Recovery Tribunal after the
RDB Act was enacted. It was contended by Eureka Forbes that it was neither a
borrower, nor was there any privity of contract with the bank; therefore the
money claimed from the bank was not “a debt”. The Court viewed that:
“expression ‘debt’ has to be given general and wider meaning, just to
illustrate, the word ‘any liability’ as opposed to the word ‘determined
liability’ or ‘definite liability’ or ‘any person’ in contrast to ‘from the
debtor’. The expression ‘any person’ shows that the framers do not wish
to restrict the same in its ambit or application. The legislature has not
intended to restrict to the relationship of a creditor or debtor alone.”
Therefore, claim of the bank against Eureka Forbes was held to be a “debt”
within the meaning of the RDB Act.
Though the term debt has been given the widest scope possible defining it
asanyHebility, H cantot gooutside thenorttelcuurve OfCauaabel nedViky tetao
circumstances.

10. Syndicate Bank v. Canara Bank, 1 (2005) BC 10 (DRAT/DRT).

Il. Sneha Industries v. State Bank ofHyderabad,
12. (2010) 6 SCC 193, z ett oe
13. Bank of India v. Ramniklal Kapadia, Ni (1997) BC 543 (548).
 Jurisdiction of the Tribunals
Syn. 4 749
some third person, then it is clearly business
activity and legally recoverable
through application to the Tribunal.!
The suit for recovery of amounts due to debenture
holders, filed by the bank as
a debenture trustee was not allowed as a suit for
the recovery of debt due to
financial institution within the meaning of term ‘debt
’ under the DRT Act, 1993
as it was not specifically the debt due to the bank thou
gh it may be one of the
business and services of the Bank to act as a debenture
trustee. The Tribunal had
no jurisdiction to entertain that suit.'>
The claim by the bank from the Insurance Company,
which is a claim under
Insurance Policy, was not considered to fall within
the ambit of debt, as it was
not the primary business function of the bank.!
Again, a contingent liability will also not fall within the defini
tion of debt.'”
DRAT, Chennai in the matter of Canara Bank y. R. Parvat
hi,'® further clarif
ied
that DRT has no jurisdiction to decide, regarding plinth area
of building or
fixation of rent for premises. That has to be separately decided
before the Rent
Control Court since these maters are outside the purview of DRT
Act, 1993.

4.3. Pecuniary jurisdiction

The Debt Recovery Tribunals cannot take up any application, which is
not
covered by the pecuniary jurisdiction that has been conferred upon them.
The
Act will not apply where the amount of debt due to any bank or financial
institution or to consortium of banks or financial institutions is less than Rs. 10
lakhs or such other amount, being not less than Rs. 1 lakh, as the Central
Government may, by notification, specify.
Since such other amount has not been specified by the Central Government as
yet, the Tribunals hence can take up applications, which are for recovery of debts
amounting to Rs. 10 lakhs and above.
The fact that the Act applies only to the claims above Rs. 10 lakhs is not
violative of Article 14 of the Constitution (Equality before Law), since
classification based on valuation cannot be said to be irrational. The demarcation
is not arbitrary as this limitation is aimed at ensuring that the Tribunals are not
flooded with applications for petty amounts, and the volume of work does not
increase to an unmanageable extent, which may defeat the very purpose of the
Act. The provision is just and fair; anyways having regard to contingency, debts
less than Rs. 10 lakhs but more than 1 lakhs can also be included within the
purview of this Act if the Central Government by notification specify in this
regard.

14. J.V.Mansukhani & Co. v. Presiding Officer, AIR 2000 Del 103 (DB).
- Krishna Filaments Ltd. v. Industrial Development Bank of India, 1 (2005) BC 317 (DB).
16. South Indian Bank Ltd. v. A. Abdul Hameed, I (2004) BC 228 (DRAT/DRT). pr Ty
17. Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax [1966 AIR 1370,
SCR (2) 688].
18. Ll (2004) BC 72 (DRAT/DRT).
750 Sya. 4 Part 1—Chap. 11—Debi Recovery Law in India: An Overview
of
Again, the limitation onthe pecuniary jurisdiction would refer tothe claim
date, For
the bank on the date of filing of the suit and not subsequent to the
example, a bank initiates a suit before a civil court for recovery of Rs, 9 lakhs,
but atthe time of passing the final decree the amount adds up to Rs, 11 lakhs on
account of interest and other recoverable amount, This does not imply that the
civil court loses jurisdiction over the matter just because the amount swelled to
more than Rs. 10 lak the time of passin
at hs g Clearl
the decree, y,
the cut-off date
is the date of filing the application and not the date of the final order,
Plural remedies ie. clubbing of more than one cause of action in one
application is also permissible if the Tribunal is satisfied that these causes are
interrelated. In a single application where one cause of action in respect of
housing loan and the other in respect of vehicle loan taken by respondent were
clubbed together, the single application under sec. 19 of the Act was held not
So, a single petition in respect of more than one loan, where the total
barred.'”
amount is Rs. 10 lakhs or more is maintainable.

4.4. Territorial jurisdiction

The territorial jurisdiction of the Debt Recovery Tribunals has also been
clearly demarcated. Central Government via notifications has established
separate tribunals in India and has also specified the states that will fall under its
jurisdiction. Where a bank or financial institution has to recover any debt from
any person, it may make an application to the Tribunal within the local limits of
whose jurisdiction:
(a) the defendant, or each of the defendants where there are more than one,
at the time of making the application, actually and voluntarily resides or
carries on business or personally works for gain; or
(b) any of the defendants, where there are more than one, at the time of
making the application, actually and voluntarily resides or carries on
business or personally works for gain; or
(c) the cause of action, wholly or in part, arises.
A bank or financial institution can institute any matter for recovery of debt
before the Tribunal within whose jurisdiction the cause of action arose. The
bank’s office shall be the Regional Office through which the transactions took
place and that may not be its head or central office.
It must be noted that the place of residence or carrying of business activity
dcfenrdann istobeconsidercd andnotthatoftheapplicamt bank andthefgmecaa
institution.
Moreover, it may be questioned that whether on consent of both the defendant
and the applicant, the matter can be taken up in any other Tribunal, which does
not have the jurisdiction as per the conditions. The Act has not specified anything
in this regard but general interpretation reveals that the jurisdiction of the

19. Gerty Svarna v. Union ofIndia, (1998) 92 Comp Cas 782 (Kant).
 Making of recovery applications to the Tribunal
Syn. 5 761
Tribunal has to be established on the first hand.
The principles relating to
Jurisdiction are similar to those under normal civil
law—parties may, by mutual
consent, not confer jurisdiction on a judicial body
that does not have one, and
Parties Cannot take away, by mutual consent, jurisdicti
on that does vest in such
body. Hence, the Tribunal has no power as such to take
up any matter not falling
within its jurisdiction even on the consent of both
the defendant and the
applicant.
The powers of the Debt Recovery Tribunal is hence limite
d to its jurisdiction
only and any application received by the Tribunal shall be
dismissed at the first
instance if it is found that it is not within the jurisdiction of
the Tribunal. Even in
the application to the Tribunal, it has to be stated that the subjec
t matter of the
recovery of debt dues fall within the jurisdiction of the Tribunal.

5. MAKING OF RECOVERY APPLICATIONS TO

THE TRIBUNAL
One of the most significant operative provisions of the law is sec. 19.
Section 19(1) provides that where a bank or financial institution has to recover
any debt from any person, it may make an application to the DRT of appropriate
jurisdiction.
Where a bank or a financial institution, which has to recover its debt from any
person, has filed an application to the Tribunal, and against the same person
another bank or financial institution also has a claim to recover its debt, then the
latter bank or financial institution may join the applicant bank or financial
institution at any stage of the proceedings, before the final order is passed, by
making an application to the Tribunal—sec. 19(2). A very interesting point arises
over here is that, whether the bank or financial institution, which has filed the
original suit, can refuse impleadment of other banks? Since, there has been no
reference regarding notice to the original parties, it is clear that the decision
entirely rests upon the Tribunal to entertain any such application before a final
order is passed.
Thus, on one side of the recovery application before a DRT, there is a bank or
financial institution which claims to have a debt due to it, and on the other side, is
“any person”. The following important points are notable in this regard:
e The application is entertainable only in case of recovery of a debt—note
the comments earlier about meaning of “debt”. If there is a debt, then it is
not necessary that the debt must have become non-performing asset, as
under the SARFAESI Act.
e The applicant has to be a bank or financial institution—it is not possible
for a borrower to file an original application before the RDB law.
e The application may be filed against any person—“any person” may
include an individual, corporation, state body, or even the State itself.
The application for recovery of debt under the Act is maintainable
752 Syn. 5 Part l—Chap. 11—Debt Recovery Law in India: An Overview

against the state as well if it has borrowed money from banks and
financial institutions.
Recently inserted sub-section (1A) to sec, 19, vide the amending Act, provides
an option to the multi-State co-operative bank to initiate ings under the
Multi-State Co-operative Societies Act, 2002 to recover debts, whether due
before or after the date of commencement of the amending Act from any person
instead of making an application under the DRT.

5.1. Impleadment of third parties

The RDB Act is not meant for determination of claims of third parties.
In the matter of Nivedita vy. South Indian Bank Lid.,”' an application was filed
by the bank of the borrower. The wife and sons of the respondent borrower
applied for being impleaded in the case alleging that the mortgage executed by
the father is not for necessity or benefit of the family. Hence, it should not be
binding on them and their rights and liabilities shall also be determined in the
case. It was held that the prayer of the applicants was neither incidental nor
ancillary to the matter of the case and hence not tenable.
Similarly, a purchaser of a mortgaged property cannot be impleaded in the
proceedings before the Tribunal just because after filing of the application he has
purchased the suit property, mortgaged property in the instant case.”

5.2. Counter claim and set-off claimed by defendants

One of the points argued in the Delhi High Court Bar Association case (supra)
was that the Act was completely one-sided, and cannot be expected to result into
any delivery of justice as the borrower had virtually no say in making or pressing
for recovery of his claims against the bank.
Sub-section (6), accordingly, states that the borrower may make any counter-
claims or set-off at the time of the first hearing. Tribunal is not merely an
executing authority to recover debts, but is enjoined with a duty to decide debts
by considering the accurate cause shown by the debtor and such cause can
include counter claim and set-off by the debtor as put forth against claim of the
bank. Sub-section (6) limits the right to put up a counter-claim at the time of first
hearing of the application, but not afterwards unless permitted by the Tribunal.
Set-offs and counter-claims may both be presented by the borrower—sub-section
(8). These written statements shall have the same effect as a plaint in a cross-suit
so as to enable the Tribunal to a final order in respect original
claim and set-off. wes et onohom

20. Sta
ofte
Assam v.State Bank of
21. (1998) 2 MLJ 465, (1999) 4 AllBikaner
India
& Jaipur, Ti(200BC
Banking Law Judg
0)372.
ment
60(Mad)
s,
22. RM. Rajendra v. Recovery Officer, (2001) 104CompCas 19 (Mad).
 Powers of the Tribunal
Syn. 6 753
6. POWERS OF THE TRIBUNAL
Section 19(12) empowers the Tribunal to pass
an interim order prohibiting the
borrower from disposing of any of his assets.
It is notable that while the SARFAESI Act is inten
ded for enforcement of
security interests, the RDB Act extends to all
claims of banks in respect of
debts due. In other words, it is not necessary that
the debt of the bank may be a
secured debt. If the debt is not a secured debt, will
the DRT still have a right to
pass an order refraining the borrower from selling any
of his assets? The power
of the DRTs under the law is similar to the power
of courts for recovery of
money. Hence, the interlocutory stay on disposal of assets
is from the viewpoint
of ensuring that the assets of the borrower are not
siphoned off to frustrate
recovery.
Sub-sections (14) and (15) which provide for conditional attachment
of
property extend the debt recovering powers of the Tribun
als. The bank that
comes before the Tribunal is not necessarily a secured credit
or having security
interest on the asset. Hence, a Tribunal while passing orders
of attachment will
duly respect the interests of secured creditors having securi
ty interest on the
asset. The competing claims of the secured creditor and the applic
ant under the
RDB law came before the Supreme Court in Allahabad Bank v. Canar
a Bank’?—
see discussion in Part II of the book on SARFAESI Commentary.
The principal power and function of the Tribunal is—
= Adjudication of the claim of the bank
m Issue of certificate of recovery or such other step as it might think
appropriate for recovery.
Sub-section (18) lists several powers of the Tribunal—such as appointment of
a receiver, removal of a person from possession of the property, etc. Section
19(22) authorises the Tribunal to issue a certificate for recovery of debt, which
has been taken at par with the decree of a civil court on recovery of money.

6.1. Power to make interim orders or requiring furnishing of

securities
After the Act was enacted in 1993, a lot of cases were referred to the Debt
Recovery Tribunals. However the true purpose of the Act to assist the banks and
financial institutions in recovering their dues was not achieved in several cases,
as the defendant was able to take advantage of time taken in complying with the
procedures, time taken for hearing, etc. and used to dispose of his property and
declare itself insolvent. By way of amendment in the Act in 2000, sub-section
(12) to sec. 19 was inserted. It gave explicit powers to the Tribunal to make an
interim order (whether by way of injunction, or Stay, or attachment) against the
defendant to prohibit him from disposing, transferring or alienating any property

23. (2000) 4 SCC 406.

754 Sya.7 Part —Chap. 11—Debi Recovery Law in India: An Overview

or assets belonging to him without the prior permission of the Tribunal. Further
sub-section (13) also conferred powers on the Tribunal to direct the defendant,
within a time to be fixed by it, to furnish a security in such sum as may be
prescribed if it is satisfied, by affidavit or otherwise, that the defendant with the
intention of obstructing an execution of order for the recovery of debt is likely to
dispose, cause any damage or mischief to the property by creating third party
interest or otherwise.

6.2. Recovery of debts determined by Tribunal

After determining the debt due, the Presiding Officer of the Tribunal shall issue
a certificate under his signature to the Recovery Officer for recovery of the
amount of debt specified in the certificate, Where the Tribunal, which has issued
the certificate, is satisfied that the property is situated within the local limits of
the jurisdiction of two or more tribunals, it may send the copies of certificate of
recovery for execution to such other tribunals where the property is situated, The
jurisdiction of the recovery officer is exclusive in respect to execution of the
recovery certificate.
The recovery officer shall on receipt of the copy of certificate proceed to
recover the amount of debt specified in the certificate by one or more of the
following modes:
(a) Attachment or sale of the movable or immovable property of the
defendant.
(b) Arrest of the defendant and his detention in prison.
(c) Appointing a receiver for the management of the movable or immovable
propertiesof the defendant.
The recovery officer may, without prejudice (without doing harm or without
compromising the other rights of the party) to the modes of recovery specified
above, may recover the amount by any one or more of the modes stated. The
recovery officer can also require any person from whom money is due or may be
due to the defendant, to credit so much of the money to the account of the
recovery officer, up to the extent of total amount recoverable.
Although the presiding officer can withdraw the recovery certificate or correct
any clerical or arithmetical mistakes by intimating the recovery officer, itis not
open to defendant to dispute the amount specified in the certificate.

7. APPELLATE MACHINERY
Appeals against the ruling ofthe DRTs lietothe Appellate (DRAT).
At the time of appeal to the DRAT, a deposit is required to the extent
the amount adjudicated by the DRT—section 21. of 75%of
=
 Applicability of Court Rules
Syn. 8 755

8. APPLICABILITY OF COURT RULES

8.1. Applicability of the Indian Limitation Act or the Indian

Evidence Act
Before the Debt Recovery Tribunal, there has been no exclusion made with this
regard to the applicability of the Indian Limitation Act, 1963, or Indian Evidence
Act, 1872.
In fact, sec. 24 of the RDB Acct clearly provides that the provisions of the
Limitation Act shall, as far as may be, apply to an application made to a Tribunal.
The limitation period for filing an application under sec. 19 is three years. Every
suit instituted, appeal preferred or application made after the prescribed period
shall be dismissed whether limitation has been set as a defence or not. However,
any appeal or application may be admitted after the prescribed period, if the
applicant satisfies the Tribunal that he had sufficient cause for not making the
application within the specified period.

8.2. Tribunal not bound to follow Civil Procedure Code:

Section 22
The Tribunal subject to other provisions of the Act and Rules thereunder can
regulate its own procedure including the places at which they shall have their
sittings, and are not bound by the procedure laid down in the Civil Procedure
Code. They are guided by the principles of natural justice and shall deal with the
matter expeditiously and endeavour to dispose of the application finally within
six months of the date of receipt of application. Any proceeding before the
Tribunal is to be deemed as a judicial proceeding.
It must be noted that the time period of 180 days does not confer or create any
right in favour of any person. The Tribunal is only expected to make reasonable
efforts to dispose of the application as expeditiously as possible. No person has
been conferred any right by this provision so as to question the reasonability of
efforts made by the Tribunal
The principles of natural justice are based on the doctrine of audi alteram
partem, which requires that the opponent should be given an opportunity to be
heard and procedure adopted by the Tribunal in deciding the matters should be
fair and reasonable, free from arbitrariness and discrimination. These principles
envisages subject to any special provisions that may be contained in the Act,
rules or regulations, the following:
(a) The applicant shall be permitted to file its application with the supporting
documents.
(b) The copies of the application and documents shall be furnished to the
defendant, and the defendant shall be given an opportunity to file his
statement, objection, reply with the supporting documents.
756 sya. 5 Part 1—Chap. 11—Dett Recovery Law in India; An Overview

(c) The Tribunal shall frame the issues or formulate the pointsan dispute for
the decision.
(d) The applicanvdefendant shall be permitted to produce evidence with an
opportunity to the defendanVapplicant to cross-examine the withesses or
evidences.
(ec) An opportunity to both the parties to submit arguments and any other
ings.
(f) The decision of the Tribunal shall be given by assigning reasons,
The Principles of Law and Natural justice should be diligently followed and
cannot be mi ied. In the mater of Oriental Bank of Commerce v, Gallop
Granites Lid.* it was held that DRT violated the principles of natural justice by
entertaining an application from the respondents with further documents and
evidences on the date fixed for delivery of judgment, inspite of closing of
evidence and hearing, and matter being adjourned for delivery of judgment,
There has to be a difference in circumstances where the evidence was closed and
where the matter had been adjourned upon reserving judgment. Hence the
impugned order was set aside.
However, the Tribunal has all the powers as are vested in a civil court under
the Code of Civil Procedure, 1908, while trying a suit namely summoning and
enforcing attendance, receiving attendance, issuing commissions for the
examination of witnesses or documents, dismissing an application for default or
deciding it ex-parte etc.
In the matterofPravat Kumar Banerjee v. United Bank of India’, the Hon’ ble
Judge of the Orissa High Court held that Debt Recovery Tribunals have been
established by the ordinance of the Parliament and shal] be deemed to be a civil
court, and a court subordinate to the High Court.

8.3. Cross-examination
may not be needed
In a certain case, Supreme Court ruled in March 2002 that it was not necessary
for DRTs to always cross-examine a witness. Evidence could be taken by
affidavits also on the pattern of High Courts and Supreme Court where the cases
can be decided merely on the basis of documents and affidavits filed before them,
ordinarily. The court observed that it is common knowledge that hardly any
transaction of the bank will be oral and without proper documentation. In such an
Bory onda cen Ee ee er eee
may at any time for sufficient reasons, order that any particular fact
be proved
affidavit, on such conditions as the Tribunal thi anata. ad

24. 1 (2005) BC 86(DRAT/DRT).

25. 1 (2004) BC 127.
 The DRT Act to have an overriding effect: Sec. 34
Syn. 9 ‘i |
9. THE DRT ACT TO HAVE AN OVERRIDING
EFFECT: SECTION 34
The provisions of the DRT Act shall have an effect notwi
thstanding anything
inconsistent therewith contained in any other law for the time
being in force or in
any instrument having effect by virtue of any law other than
this Act. This kind
of a non-obstante clause has become quite common in severa
l modern laws.
But the provisions of this Act or Rules made thereunder shall
be in addition to
and not in derogation of the:
> Industrial Finance Corporation Act, 1948
State Financial Corporation Act, 1951
Unit Trust of India Act, 1963
Industrial Reconstruction Bank of India Act, 1984
Sv
V
VY Sick Industrial Companies (Special Provisions) Act, 1985
V Small Industries Development Bank of India Act, 1989
The obvious reason why the provisions of the law have been made additional
to the laws listed above is because these laws also contain special provisions for
recovery—see Reference law in Part IV of this book.
In the matter of Montari Industries Limited v. State Bank of Patiala,”® it was
held that the proceedings before the DRT should be stayed as an appeal before
the AAIFR was pending. Section 22 of the Sick Industrial Companies Act states
that— **.... no suit for the recovery of money or for the enforcement of any
security against the industrial company or of any guarantee in respect of any
loans or advance granted to the industrial company shall lie or be proceeded with
further, except with the consent of the Board or, as the case may be, the
Appellate Authority.’’ So the DRT should have stayed its proceeding and thus
the impugned order was set aside since the SICA Act clearly had an overriding
effect.
It is also worthwhile to note that a similar statute; U.P. Public Moneys
(Recovery of Dues) Act, 1972, has been enacted in the State of Uttar Pradesh for
recovery of debts. Needless to say, in view of section 34 of RDB Act, 1993, and
Article 254 of the Constitution of India, the provisions of RDB Act, 1993, shall
prevail over such other laws.
The overriding nature of the provisions of the Act was recently discussed by
the Supreme Court in Rajasthan State Financial Corporation case—the case has
been discussed in Part II of the book on Commentary on SARFAESI Act.

26. 1 (2005) BC 221 (DRAT/DRT).

758 Syn. 10 Part 1—Chap. 11—Debi Recovery Law in India; An Overview

10. PROTECTION FOR ACTION TAKEN IN GOOD

FAITH
The presiding officers, chairpersons, and recovery officers are appointed by the
Central Government and have to meet the qualifications criteria mentioned un the
Act. Needless to say, they are very experienced and people with high standards
of integrity. Their actions and procedures are guided by the rules and regulations
to the Act and are supposed to be for the service of the country and law, In some
circumstances, it might happen that their action, decisions may be called in
question even though the officers and chairpersons have taken that in good faith.
So it would be imperative to save these servants of law from being unduly
doubted and questioned. As such, the DRT Act has provided that ‘no suit or legal
proceeding shall lie against the Central Government or against the Presiding
officer of a Tribunal or the Chairperson of an Appellate Tribunal or against the
recovery officer for anything which is in good faith done or intended to be done
in pursuance of this Act or any rule or order made thereunder.’

ll. TRANSFER OF CASES FROM ONE TRIBUNAL TO

ANOTHER
Section 17A of the RDB Act, 1993, provides that the Chairperson of an
Appellate Tribunal having jurisdiction over the Tribunals can exercise general
power of superintendence and control over the Tribunals including the power of
appraising the work and recording the annual confidential reports of the presiding
officers. Furthermore, they, on application of any parties or on their own motion
after notice to the parties and hearing them, transfer any case from one Tribunal
for disposal, to another Tribunal.
_ Transfer can only be ordered when the party has reasonable apprehension that
justice will be denied to him. The mere fact that the party has suspicion in this
regard would not constitute a valid ground. A change of Tribunal is not allowable
merely because the other side too has no objection to such change. Even the

of the case is also vague and hence not tenable.

 PART II
SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT, 2002
TEXT AND COMMENTARY

ARRANGEMENT OF CHAPTERS

CHAP. I BREEIMINARY 521100). Qed ceconak ion at foancial as: 771

CHAP. IT REGULATION OF SECURITISATION AND RECONST-
RUCTION OF FINANCIAL ASSETS OF BANKS AND FINAN-
GLAD INSTEEUIMIONS: he. 532d wear. hth Revehliz. of .i 875
CHAP. III 953
CHAP. IV 1149
CHAP. V 1163
CHAP. VI 1167

759
 =

—_ i ae
1@ ea rry. THA’ PU ACTION TF. iy GOOD

yArtu Sub eee J

ee
 THE SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENF ORCEMENT
OF SECURITY INTEREST ACT, 2002

SYNOPSIS
1. Comments on the Preamble................. 761 8. Deposit of money before “appeal’......
2. Legislative History ..0.0.......c.cccccsessscsees 762 767
9. Public Interest vs. Private Interest....... 768
3. Judicial history: Question of constitu- nO." ‘Conélasions?. REG ALIBA, OO 769
tional validity in Mardia Chemicals.... 763] 11. NPA ACt? cece
4) Need for tlie Act 214,001,26Zale 769
5 764} 12. Connection between the DRT law and
5. Classification of NPAS ..........cccsecceeseee. 765 the SARFAESD Act. c..)scced..3..scesecs--desses 769
6. Constitutionality of Section 13............ 766| 13. Debtor-creditor disputes and the
7. Jurisdiction of Civil Courts ................. 767 BARE AP SLAC iscsi cee 770
An Act to regulate securitisation and reconstruction of financial assets and en-
forcement of security interests and for matters connected therewith and inciden-
tal thereto.
Be it enacted by Parliament in the 53rd year of the Republic of India as fol-
lows:

1. Comments on the Preamble

The relevance of the Preamble as a guide to the meaning of law has been dealt
with by several court rulings and authors. The Preamble provides a hint as to
what was the purpose that the lawmakers were trying to achieve by this law, and
therefore, the Preamble is an effective tool of construction. With courts increas-
ingly applying principles of “purpose construction”, the Preamble, setting the
purpose of the law, is becoming all the more significant.
As noted later, the dominant theme of this law seems to be regulatory, which is
unfortunate. As far as securitisation and reconstruction transactions are con-
cerned, there was virtually nothing that existed as on the date of this enactment
that needed to be regulated. The aim was enabling, but the tone is regulatory. Itis
perhaps for this reason that this enactment has been the least relevant for securiti-
sation transactions—while the Act is popularly known as “Securitisation Act”, it
has been concerned with enforcement of security interests alone, and not transac-
tions of securitisation.
Same way, in case ‘of enforcement of security interests, the question of “regu-
lating, enforcement of security interests” does not arise, as the spirit of the law 1s
to enable the speedier enforcement of security interests and regulation is merely
at the fringes.

* As amended by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment)
Act, 2012; w.e.f. 15"" January, 2013.

761
762 Preamble, Sya. 2 Part li—Securuisation and Reconsiruction, etc.

2. Legislative History
d by the Presi-
The Act replaces the Ordinance by the same name promulgate
by the Presi-
dent, effective 21st June, 2002. The Ordinance was re-promulgated
version of two
dent on 2ist August, 2002. The Ordinance contained a merged
sts earlier
separate Bills on securitisation, and enforcement of security intere
drafted at the behest of the Adhyarujina Committee.
Between the date of promulgation of the Ordinance and the sentation of the
Bill in the Parliament, there was substantial scope for improvin g upon the loose
language of this important piece of law, but the Government did not utilise the
opportunity, and the Bill was almost ad verbatim, the same as the Ordinance.
The Bill was presented before the Lok Sabha on 21st November, 2002, and be-
fore the Rajya Sabha on 25th November, 2002,
the Lok Sabha! indicates that the members were concerned
in te
Record of deba
about the Ordinance route adopted by the Government, The Finance Minister
agreed with “all the Hon. Members who say that recoto the path of Ordi-
urse
nance is not a good path”. The Finance Minister went on to say as follows:
“This Bill is essentially for securitisation of financial assets 80 as to
generate immediate liquidity, and it is also to enforce security because
at the present moment, there are no powers. The commercial environ-
ment, both within the country as also globally, is changing. This results
in what I would call an asset-liability mismatch as well as in mounting
levels of Non-Performing Assets (NPAs). As a ratio of GDP, India’s
Non-Performing Assets (NPAs) are really much lower than some of the
countries. The Government is committed to constantly reviewing, con-
stantly improving the provisions.
We believe that a climate had to be created within the country so that
there is a sense of responsibility, created both in the borrower as also
the lender. As far as big borrowers are concerned, definitely action will
be taken against them and as far as the small borrowers are concerned,
the Government is not going to discriminate against them too.
We have to act without fear and favour and the Finance Ministry acts
only in the interest of the country. I also want to make it clear that the
State Financial Corporations will also be covered under the provisions
of this Bill. I wish to assure the Hon. Members that employees will not
be affected with this change and no employees, either in the manage-
ment or a worker, will be affected on this account. The rules have al-

is already in the process of issuing guidelines. 1 wish to make it clear

that between the lender and the borrower, if there is any third party in-
volved, then that third party can always approach a court of law.”

1. Available at http://alfa.nic.in/Isdeb/is
|3/ses 11/211102.htmil (accessed
on 3rd January, 2003).
2. This See
i en
; SEEN, Gh EOS SOSecemneNes with thequovidions atlew. Seedie
 Judicial history: Question of Constitutional, etc.
Syn. 3 763
Out of the 27 Public Sector banks, during the pendency
of the Ordi-
nance, 25 banks have issued notices in respect of about 10,00
0 odd bor-
rower’s accounts. The banks have reported that there is
a positive im-
pact of the Ordinance and some borrowers have approached
for a com-
promise or a negotiated settlement. Just as the borrower has
the respon-
sibility, it is the collective view of the Government that the
lender also
has the responsibility. We must now recognise that whereas
the bor-
rower has the responsibility and obligation, which is both comme
rcial
and moral, to repay what he borrowed, the lender has an obliga
tion to
continue to service the borrower positively, supportively and
not always
as if the two are combative halves of a different organisation
. It is for
this and various other reasons that I commend this Bill for the consi
d-
eration of the House.”
In the Rajya Sabha, elaborate discussions took place on several import
ant sec-
tions of the Bill. The record of proceedings is available on the Rajya Sabha
web-
site.

3. Judicial history: Question of constitutional validity in Mardia

Chemicals
Background—Armed with the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, several banks issued notices to
the several lenders demanding the dues to be repaid within a period of 60 days.
Several borrowers filed writs contending*—
1. That the Act was not necessary as the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993, already deals with the laws con-
cerning recovery of Debts due to banks.
2. That the Act did not provide “adequate and efficacious” mechanism of
addressing the “objections” that the borrower has against the demand
notice issued by the lenders.
3. The requirement that an “appeal” (technically an application) can be
filed only after 75% of the claim raised in the notice is deposited is ul-
tra vires article 14 of the Constitution. Also it was argued that certain
provision of the Act, such as the classification of a particular asset as an
NPA, depended on the “whim and fancies” of the financial institutions
and hence against the principles of natural justice.
4. The enforcement of security interest is an issue governed according to
the terms of the contract between two private parties and a public legis-
lation cannot bestow certain powers “in a one sided manner” to all the
Borrowers.

5. “Whether provision for sale of the properties without intervention of

the Court under Section 13 of the Act is akin to the English mort-

3. http://rajyasabha.nic.in/rsdebate/deb_ndx/197/25112002/2to3.htm (accessed on 3rd January, 2003).

4. See Generally Para 33 of the Judgment.
764 Preamble, Sya. 4 Part 1lt—Securitisation and Reconstruction, etc.

gage and its effect on the scope of the bar of the jurisdiction of the
civil Court”.
6. Whether the provisions under Sections 13 and 17(2) of the Act are un-
constitutional on the basis of the parameters laid down in different deci-
sions of this Court,
7. “Whether the principle of lender's lability has been absolutely ignored
while enacting the Act and its effect”,
The Supreme Court clubbed the various writs filed before the High Courts and
proceeded to consider the various issues raised.

4. Need
for the Act
The petitioners argued that there was “no occasion to enact such a draconian
legislation to find a short-cut to realise the dues without their ascertainment but
which the secured creditor considered to be the dues and declare the same as non-
performing assets (NPAs)”.° The petitioners further submitted—
(a) More than 50% of the projected NPAs are concentrated in the priority
sector. They further showed that majority of the dues are against bor-
rowers who have dues ranging from Rs. 25,000 and Rs. 10 Lakhs.
Therefore, a special legislation aimed primarily to recover dues from
the industrial and corporate bodies does not address the NPA problem
and a knee jerk reaction.
(b) There is already a legislation namely the Recovery of Debts Due to
Banks and Financial Institutions Act on the same issue of recovery of
debts and providing an expeditious recovery procedure through the
Debts Recovery Tribunals.
(c) The NPA problem in India is sexed up by certain commentators. The
petitioners argued that “the percentage of NPA of as against the GDP is
only 6% in India which is much less as compared to China, Malaysia,
ema a and other countries. Therefore, it is evi-
vat resort taken to a drastic legislation, under misappre-
Gotemmene# ate pts ee

At the very outset, the Supreme Court rejected the that NPAs due
from industrial units is not a serious issue. While tee Court seoghel tat Ge Re
covery of Debts Due to Banks and Financial Institutions Act deals essentially
tusthelegacy tintonSioa cove easton ie aes
Nae: theboa e
lation not very successful in dealing
i with the problem of

“...it isto be noted that things in the concerned spheres are desired to
move faster. In the present day global economy, it may be difficult to
stick to old and conventional methods of financing and recovery of
 Classification of NPAs
Syn. 5 7605
dues. Hence, in our view, it cannot be said that a step
taken towards se-
Curitisation of the debts and to evolve means for faster recov
ery of the
NPAs was not called for or that it was superimposition of
undesired law
since one legislation was already operating in the field namel
y, the Re-
covery of Debts Due to Banks and Financial Institutions Act”.
The Court further observed that the NPA problem is an impor
tant issue retard-
ing the growth of the economy in general and the financial
sector in particular.
The Court pointed out that the fact that the NPAs have reache
d an alarming pro-
portion was noted by several committees and institutions dealin
g with the finan-
cial sector. The Narasimham Committee which was constituted
in 1991 in “Un-
der Chapter V of the Report under the heading “Capital Adequ
acy, Accounting
Policies and other Related Matters’, it opined that a proper syste
m of income rec-
ognition and provisioning is fundamental to the preservation of the
strength and
stability of banking system. It was also observed that the assets are
required to be
Classified; it also takes note of the fact that the Reserve Bank of India
had classi-
fied the advances of a bank, one category of which was bad debts/
doubtful
debts”. The Court also noted that the committee also recommended the settin
g up
of a “a separate institution by the Government of India to be known as ‘Asset
s
Reconstruction Fund’ (ARF) with the express purpose of taking over such
assets
from banks and financial institutions and subsequently following up on the re-
covery of dues owed to them from the primary borrowers’®. The Court furthe
r
noted that similar concerns were raised by the Second Narasimham Committee,
the Andhyarujina Committee, and the Reserve Bank of India.
Against this backdrop of rich literature, the Court rejected the contention of the
petitioners that there was no rationale for the enactment of a special legislation to
address the concern of the growing NPAs in banks. The Court also pointed out
whether to draft a particular legislation or not is a matter of legislative policy and
“such a policy decision cannot be faulted with, nor it is a matter to be gone into
by the Courts to test the legitimacy of such a measure relating to financial pol-
icy.”'” However, the Court also cautioned: “But certainly, what must be kept in
mind is that the law should not be in derogation of the rights which are guaran-
teed to the people under the Constitution. The procedure should also be fair, rea-
sonable and valid, though it may vary looking to the different situations needed
to be tackled and object sought to be achieved.”'' Hence, the Court proceeded to
consider the Constitutionality of the various provisions of the Act.

5. Classification of NPAs
The petitioners argued that the Act was ultra vires Article 14 since it gave the
lender, arbitrary powers to classify a particular asset as an NPA and take en-
forcement action under the Act. Rejecting the argument, the Court observed that
the RBI has come out with guidelines for declaring a particular asset as an NPA,
namely, the RBI’s prudential norms on income recognition, asset classification

8. Para 34.
9, Para 35.
10. Para 36.
11. Para 37.
766 Preamble, 5) a. 6 Part Li— Securitisation and Reconstruction, etc.

and provisioning—pertaining to advances.’ The Court concluded “it is quite evir

Se oneguidelines as laid Gee by the Reserve Bank of India which are in more
details but not necessary to be reproduced here, laying down the terms and condi
tions, and circumstances in which the debt is to be classified as non-performing
asset as early as possible. Therefore, we find no substance in the submission
made on behalf of the petitioners that there are no guidelines for treating the debt
as a non-performing asset.”
It is pertinent to note here that the original text of the Act, pre-Amendment, re-
ferred to an asset being a non-performing asset as per the directions of the Re-
serve Bank of India. In the Amending Act, the reference to the directions of the
RBI has been removed. Therefore, the position of the Act after the Amendment is
substantially different from what it was before the Supreme Court, Now, a lender
may treat the asset as a non-performing asset as per the lender's own policy, and
still get access to the provisions of the Act.

6. Constitutionality ofSection 13
The Court then proceeded to consider the “pivotal of the whole controversy”
namely section 13 of the Act. The petitioners contended that the sale of a secured
asset for enforcement of secured interest is an exception to the common law prin-
ciple. It was strongly argued by the petitioners that Section 13 empowers the Bor-
rower with unchecked arbitrary powers since “before any action is taken under
Section 13, there is no forum or adjudicatory mechanism to resolve any dispute
which may arise in respect
of the alleged dues
or theNPA.”’"*
At the very outset, the Court observed that there is a need for modern enforce-
ment laws and speedy enforcement laws and there has been a shift in paradigm
on the issue of enforcement laws which have increasingly become lender
friendly. The Court concluded in such a situation, that there is a need for change
in approach towards enforcement of the security interest law, and the Act cannot
be held to be u/tra vires merely because it allows the secured creditors to enforce
their rights without the intervention of a judicial authority.
In the same breath however, the Court pointed out that any law which does not
give the other party to represent his case would be struck down of Article 14 of
the Constitution. Particularly there must be some “internal mechanism” which
provides “safeguards for a borrower, before a secured asset is classified
as NPA.”
The Supreme Court observed that such an internal mechanism must be included
in the Act by mandating that the “creditor must apply its mind to the objections
raised in reply to such notice, and an internal mechanism must be particularly
evolved to consider such objections raised in the reply to the notice. There may
be some meaningful consideration of the objections raised rather than to |
reject them and proceed to take drastic measures under sub-section (4) of Section
13 of the Act. Once such a duty is envisaged on the part of the creditor, it would
only be conducive to the principles offairness on the part ofthe banks and finan-

12. For latest master circular consolidating

ing these norms ~~
13. Para 37. see elsewhere in this Update.
14. Para 19.
 Deposit of money before “appeal”
Syn. 8 767
cial institutions in dealing with their borrowers to appri
se them of the reason for
not accepting the objections or points raised in reply
to the notice served upon
them before proceeding to take measures under sub-s
ection (4) of Section 13.
Such reasons overruling the objections of the borrower
must also be communi-
cated to the borrower by the secured creditor. It will only
be in fulfilment of a
requirement of reasonableness and fairness in the dealings
of institutional financ-
ing which is so important from the point of view of the econ
omy of the country,
and would serve the purpose in the growth of a healthy econo
my..... a person in
respect of whom steps under Section 13(4) of the Act are likely
to be taken can-
not be denied the right to know the reason of non-acceptance and
of his objec-
tions.”!> (emphasis supplied)
In accordance with the observations of the Supreme Court, section
13(3A) of
the Act was inserted by the 2004 Ordinance.

7. Jurisdiction of Civil Courts

The Court noted that the civil courts can be approached in a limited number of
cases. The Court illustrated that one of such event where the Civil Court will
have jurisdiction could be invoked is where “the action of the secured creditor
is
alleged to be fraudulent or their claim may be so absurd and untenable which
may not require any probe, whatsoever or to say precisely to the extent the scope
is permissible to bring an action in the civil court in the cases of English mort-
gages.””'° Another illustration of such an action could be cases where a notice has
been served upon the guarantor and character of the guarantor itself is denied by
the party on whom the notice is served.

8. Deposit of money before “appeal”

As anticipated, the provisions of Section 17(2) came under attack before the
Constitutional Courts. At the very outset, the Court pointed out that the word
“appeal” has been inappropriately used in the statute.'’ The secured creditors ar-
gued that the section was not an unreasonable condition because—
(a) The Act provides that the Tribunal can reduce or waive the amount
based on the facts and circumstances of the case. Hence, the tribunal
can use its discretion to reduce the deposit required in cases where the
demand is unreasonable.
(b) The deposit is a necessary requirement because the value of the secured
asset which would be taken possession by the creditor may not be
enough to cover the amount of loan advanced.
The Court rejected both the arguments and held that they are devoid of any
merit. The Court held that the requirement of pre-depositing 75% of the money
renders the remedy ‘illusory’. The Court summarised the reasons for holding so
as under—

15. Para 45. Emphasis ours.

16. Para 54. e
17. The Author had also pointed the same in the last edition, see pp. 329-330.
768 Preamble, Syn. 9 Part 1l—Securitisation and Reconstruction, etc.

“(i) it is imposed while approaching the adjudicating authority of the first

instance, not in appeal;
(ii) there is no determination of the amount due as yet;
(iii) the secured assets or its management with transferable interest is al-
ready taken over and under control of the secured creditor;
(iv) no special reason for double security in respect of an amount yet to be
determined and settled,
(v) 75% of the amount claimed by no means would be a meagre amount;
(vi) it will leave the borrower in a position where it would not be possible
for him to raise any funds to make deposit of 75% of the undetermined
demand”."*
For the above reasons, the Court held that Section 17(2) of the Act is “unrea-
sonable, arbitrary and violative of Article 14 of the Constitution,”
Amendments have been made by the Amendment Act to get rid of this uncon-
stitutionality held by the Supreme Court—see later under the relevant provisions.
9. Public Interest vs. Private Interest
The petitioners vehemently argued that the enforcement of private contracts is
an issue that ought to be governed by the contracts entered between the parties
concerned and it is unfair and unreasonable on the part of the legislature to enact
a law which puts “one party at an advantageous position over the other.”””
Rejecting the contention of the petitioners, the Court pointed out that the NPA
issue 1s a major bottleneck in the development of the economy, hence it cannot
be argued that the NPA problem is a private matter between the defaulters and
the banks. The Court pointed out that it is an established principle of law that
“wherever public interest to such a large extent is involved, and it may become
necessary to achieve an object which serves the public purposes, individual rights
may have to give way.””' The Court concluded with the following words—
“In the present case we find that the unrealised dues of banking com-
panie and financial
s institutions utilising public money for advances
were mounting and it was considered imperative in view of recommen-
dations of experts committees to have such law which may provide
speedier remedy before any major fiscal set back occurs and for im-
provement of general financial flow of money necessary for the econ-
omy of the country that the impugned Act was enacted. Undoubtedly
such a legislation would be in the public interest and the individual in-
eee cand dere hee en ee cae Sen renee aiieeinn
. that would
not impi the :

33%
=
3 (3)SCR 1: Swami Motor Transports Pvt. Ltd.v.ShriSankraswomigel Wi
v. KG. Ramachandran, 1974 (1) SCC 424. ee Mun wit Rewel & Co.
ss :
 Connection between the DRT Law, etc.
12 769

10. Conclusions
After considering the argument on both sides, the Court concl
uded its observa-
tions in the following words—
(a) “Under sub-section (2) of Section 13, it is incumbent upon
the secured creditor to
serve 60 days notice before proceeding to take any of the measur
es as provided un-
der sub-section (4) of Section 13 of the Act. After service of
notice, if the borrower
raises any objection or places facts for consideration of the secured
creditor, such a
reply to the notice must be considered with due application of mind
and the reasons
for not accepting the objections, howsoever brief, they may be, must
be communi-
cated to the borrower. In connection with this conclusion we have already
held a
discussion in the earlier part of the judgment. The reasons so commun
icated shall
only be for the purposes of the information/knowledge of the borrow
er without
giving rise to any right to approach the Debts Recovery Tribunal under
Section 17
of the Act, at that stage.
(b) As already discussed earlier, on measures having been taken
under sub-section (4)
of Section 13 and before the date of sale/auction of the property, it would
be open
for the borrower to file an appeal (petition) under Section 17 of the Act before
the
Debts Recovery Tribunal.
(c) That the Tribunal in exercise of its ancillary powers shall have jurisdiction
to pass
any stay/interim order subject to the condition at it may deem fit and proper to im-
pose.
(d) In view of the discussion already held on this behalf, we find that the requireme
nt
of deposit of 75% of amount claimed before entertaining an appeal (petition) under
Section 17 of the Act is an oppressive, onerous and arbitrary condition against all
the canons of reasonableness. Such a condition is invalid and it is liable to be
struck down.
(e) As discussed earlier in this judgment, we find that it will be open to maintain a
civil suit in civil court, within the narrow scope and on the limited grounds on
which they are permissible, in the matters relating to an English mortgage enforce-
able without intervention of the Court.”

11. NPA Act?

The title of the Act, indicating securitisation, is quite confusing. Not just lay
persons, but even the judiciary has been confused by the title. We have men-
tioned at several places in the book that there is no apparent nexus between man-
agement of NPAs and securitisation, at least no such connection as to justify the
clubbing of the legal provisions relating to securitisation in an enactment dealing
with enforcement of security interests.
Regrettably, even the Apex court in a case dealing with enforcement of security in-
terests”’ wrote a few paragraphs dealing with securitisation, the definition of securiti-
sation as a financial instrument, and even cited some of the provisions of Basle II
dealing with securitisation. The case had nothing to do with securitisation.
In the same ruling, the Court even referred to the SARFAESI Act as the NPA Act.

12. Connection between the DRT law and the SARFAESI Act
The complementarity of the SARFAESI Act and the DRT law should not be
difficult to understand. These two laws operate in partly overlapping and partly

23. Para 80. | .

24. Transcore v. Union of India & Anr, Civil Appeal No. 3228 of 2006, decided on 29" November,
2006.
770 Preamble, 13 Part 1i—Securttisation and Reconstruction, etc.

different spheres. The DRT law is concerned with recovery of money owed to
banks. The SARFEAS! Act may result into recovery of money, bul its purpose is
enforcement of security interest. If there is money owed backed by a seourity
interest, it can be enforced under the SARFAESI Act as well as the DRT Act, but
if there is money owed for which there is no security interest, it can be enforced
only under the DRT Act. Also, if after enforcement of security interest under the
SARFAESI Act, there is still money owed to the bank, it can be enforced only
under the DRT law.
Typically, banks would choose one of the several remedies available, As to
remedies available to banks on non performing assets, see Part 1, Chapter 6. If a
bank chooses to use theSARFAESI Act, it cannot be sure of how much wouldit
realize by enforcement of security interest until the actual sale of the secured as-
set happens. If there is a deficit, the bank would be compelled to take action un-
der the DRT law, but by that time, there is a possibility that the bank would lose
the right to take action due to limitation, Therefore, banks might have the motiva-
tion to take action under the SARFAESI Act and DRT law simultaneously. As to
whether banks can take such simultaneous action has been discussed by Courts in
several forums and the Supreme Court recently held” that simultaneous proceed-
ings under both the laws is not barred.
In the aforesaid ruling, the Apex court also clarified the complementarity of the
two laws in the following words: “...the object behind the enactment of the NPA
Act is to accelerate the process of recovery of debt and to remove deficiencies/
obstacles in the way of realisation of debt under the DRT Act by the enactment
of the NPA Act, 2002”.
13. Debtor-creditor disputes and the SARFAESI Act:
Being essentially focu on thesed
enforcement of security interests, this Act pre-
sumes that the debt between the borrower and the bank is undisputed. It only
talks about liquidation of the debt by enforcement of security interests, and not
about the adjudication thereof. In the case of Transcore v. Union of India,” the
Supreme Court has repeatedly referred to the nature of the law- that it does not
deal with adjudication but merely liquidation. The Act also does not deal with
any dispute between the borrower and the creditor.
The key question is: if there is a dispute as regards the debt itself, reme-
diesdoestheborrower have?Iftheessential spiritofthelaw,aspointed oatby
the Apex court, is mere enforcement of security interests, disputes as regards the
debt itself cannot be resolved under this law. Therefore, the scheme of appeals
under sec. 17 is apparently only for the grievances about the measures taken
under sec. 13 (4). Ifthere are contentions about the very debt, does itimply
that
the remedies before civil courts would still lie? This question iscurrently neither
resolved, nor has itbeen addressed by Courts, but needless to say, as the law on
enforcement of security interests evolves, the question will get more focused at-

3s. 7 ranscore v. Union ofIndia & Anr, Civil Appeal No. 3228 of 2006,
decided on 29th November.
26. Ruling dated 20thNovember, 200
for6:
instance:
NPA, ActdoesaotGoalothdiguats Genween Geseven cradaees eae tee =n
ee
 CHAPTER I

PRELIMINARY

(1) This Act may be called the Securitisation and Reconstruction

of Financial Assets and Enforcement of Secu-
S. 1. Short title, extent rity Interest Act, 2002.
and commencement
(2) It extends to the whole of India.
(3) It shall be deemed to have come into force on the 21st day of
June, 2002.
SYNOPSIS
1. Scope of the law: Three-in-one......... 771 3. Operation of the law: Prospective or
2. Object of the legislation: Enabling retrospective WHI. YLGRa. SEQ 773
onreenlatosy lisesi lek otis. 772

COMMENTS
1. Scope of the law: Three-in-one
This Act merges into one, three separate, and for most parts, unrelated pieces
of draft legislation. These three parts are: (a) securitisation; (b) setting up of asset
reconstruction companies; and (c) provisions relating to registration and en-
forcement of security interests. There is an element of commonality, as well as
confusion that has resulted from the fusion of these three elements into a single
piece of legislation. For example, the requirements for asset reconstruction com-
panies have been applied to securitisation companies as well. Provisions for reg-
istration of security interests have also been made applicable to transfers in con-
nection with securitisation; and provisions which ought to have excluded the ap-
plicability of the security interest matters have apparently excluded securitisation
and reconstruction transactions as well.
If one looks at the legislative history, it is evident that the purposes of the three
elements of the present law were discernibly distinct:
e Securitisation is related to conversion of financial assets into capital
market securities, which is, for most purposes, unconnected with reso-
lution of non-performing assets. The purpose of law-making in this
field could not have been but enabling, to iron out difficulties created
by common law.

vi
772 See. 1, Syn. 2 Part Li—Chap. 1-—Prelaminary

e Asset recomstruction companies, OF assel Management COMPANIES aS

they are globally called, exist for a distinct purpose-—aoquisition and
resolution of sticky debts. Such companies have, in number of Coun
ies, also securitised their assets but their primary motive is NOL secu
ritisation but resolution. The purpose of law-making here was to conter
special powers to enable ARCs to recover non-performing loans,
e Enforcement of security interests is apparently completely uncon»
nected—and it is very difficult to understand the purpose of clubbing
this along with the above two elements—eaxcept, probably, the political
convenience of giving this important change in law, the garb of being
related to securitisation and reconstruciion—and thus making it easy to
‘push through’ as something technical, and hence, politically insensi-
live.
In real practice,the Act has been of no use to securitisation transactions, that is,
financing of pools of receivables. The Act has been of some use for asset recon-
struction companies that have come up in pursuance of the Act ~ however, in that
case too, it is the subordinate legislation more than the Act that has the sweep.
Hence, in practice, the Act has been most relevant for enforcement of security
interests.
The confusion caused by merging securitisation with an enactment dealing
with enforcement of security interests has gone deep and even most articulate
people are easily confused by the terminology — they take securitisation to mean
securitisation of non-performing loans, and they take the enforcement provisions
of this Act to deal with securitisation. Even the Apex court of the country has
apparently been confused by this cornbo legislation — in the ruling in Transcore
v. Union of India,’ the Supreme Court made references to Basel norms on secu-
ritisation and accounting standards on securitisation (which have nothing to do
with enforcement of security interests), though the case dealt with enforcement of
security interests.
2. Object of the legislation: enabling or regulatory?
dee nny Speaking, a statute could beofthefollowing types based onitsojec-
ve:

e statute: Is one which confers a new right that was not avail-

e Reguistery statute: A number of laws intend regulate something

which warranted Government's control. TheBanking Companies Reps

a
1. ATR 2007 SC 7112;
(2007) BC 3HSC).
 Operation of the law: prospective, etc.
Sec. 1, Syn. 3 773
® Penal statute: As the name implies, these laws
seek to penalise a
wrong. Most criminal laws, TADA, are examples of penal
laws.
® Fiscal statute: Statutes to allow the Governme
nt to raise revenue.
It is quite obvious that the objective of the present statut
e, in respect of each of
the three matters it deals with, could not have been anyth
ing but enabling. The
question of regulation arises when something exists and
is unregulated, and the
object of the legislation is to regulate the activity. Asset
reconstruction activity
has only originated by virtue of this law. Enforcement of
security interests is in-
tended to be given a new perspective—a new power, by virtue
of this law. Secu-
ritisation activity was existing in some measure even witho
ut this law, but obvi-
ously, the purpose of the Government was to obviate the diffic
ulties being faced
by such transactions, rather than to address any lack of discipline
in the securiti-
sation market.
The Supreme Court in Transcore v. Union of India’,stated thatthe
Act enables
the banks and financial institutions to realize long-term assets, manag
e problems
of liquidity, asset-liabilitymismatch and to improve recovery of debts
by exercis-
ing powers to take possession of securities, sell them and thus
reduce non-
performing assets by adopting measures for recovery and reconstructi
on. The
SARFAESI Act therefore deals with the quick enforcement of the securit
y and
the enforcement of the rights vested in the bank/financial institution?. See
al-
soUnited Bank of India v. SatyawatiTondon'’.
Unfortunately, however, the regulator’s idea of a gift is that he takes away
more than he gives. That is certainly true in the context of securitisation. Secu-
ritisation activity was going on in the country even in absence of this law. How-
ever, market players were faced with certain difficulties on account of lack of
proper legal provisions. Therefore, it was thought necessary to iron out difficul-
ties and remove bottlenecks. The over-riding purpose of the legislation was to
remove difficulties, rather than to create discipline. However, the over-riding
idea of the present statute seems to be regulation—complete with licensing, con-
ditions of license, cancellation, appeals, penalties, ... Hence, it is not surprising
that despite several years of passage of the law, ironically referred to as Securiti-
sation Act, not a single securitisation transaction has come in the marketplace
under the discipline of this law. If the law was founded with the objective of fa-
cilitating securitisation transactions, the market found it more convenient to
avoid the law than to fall under it. As a result, no transaction of securitisation has
taken place under this law.
3. Operation of the law: Prospective or retrospective?
From the viewpoint of the subject-matter of the law, this combo piece of legis-
lation should appropriately fall into the category of statutes relating to contracts
and transfer of propetties. It either provides for certain formalities relating to

2. I (2007) BC 33. See also Jaibharat Synthetics Ltd. &Ors. y. State Bank of India &Ors., 1 (2011) BC
214 Bom. (DB)
3. See also Indian Bank v. Blue Jaggers Estates Ltd. &Ors.111 (2010) BC 694 (SC). id 130
4. (2011) II BC 207 (SC); See also Punjab National Bank v. SonalMadan&Ors. {Ul (2011) :
(DRAT-Delhi]; Zubida Begum (DR.) &Anr. v. Indian Bank & Ors.1 (2013) BC 67 Mad. (DB).
774 Sec. 1, Syn. 3 Part Li—Chap. 1-—Preliminary

proper:
wansfer of properties, or dispenses with certain formalities on transfer of
lies —in relation to both securitisation and reconstWuchon COMpPAhies,
a
In terms of the age-old rule of interpretation, such provisions usually have
prospective application. Such statutes usually do not apply to transfers that were
effected prior to their enacument. Transfers made prior to the operative date of the
law can neither take the benefit of the law, nor can be subjected to the burdens of
the law, Such was the interpretation of the provisions of Transfer of Property
Act.
in case of enforcement of security interests, the scope of operation of the new
law would be more curious, Does this law apply to security interests created be-
fore the enactment of the law, or only those security interests that are created al-
ter the law came into force?
The provisions relating to the creation of security interests can be said to be de-
claratory in nature: they intend to create a prospective benefit to something done
in the past. In other words, the law intends to provide a new remedy for some-
thing which already has some remedy, however, found ineffective. In such cases,
the rule against retrospective legislation does not apply—that is to say, remedial
measures can be applied even to things which have been done in the past,
In other words, it is not necessary for enforcement of security interests under
the new legislatio the security interest must have been created after the law
that n
came into force.
In Unique Engineering Works v. Union of India’, distinguishing between retro-
spective and retroactive legislation, the Uttaranchal High Court held that the
2002 Act, is retroactive. In the following paragraph, the High Court gave its rea-
sons for holding such view:
“26. Thirdly, it was argued that the impugned NPA Act, 2002, can-
not apply retrospectively. It was argued that the impugned NPA Act,
2002, cannot be applied to cases which are pending before the Debts
Recovery Tribunal under the DRT Act, 1993. We do not find any merit
in this argument. Firstly,as stated above, the i NPA Act, 2002,
is a special Act vis a vis the DRT Act, 1993. impugned NPA Act,
2002, comes into picture only when the account of the borrower be-
orn ponun cooulGah aed ahead DA ke a a
powers to security, whereas Act, 1993, essentially
deals with the adjudication of the liabilities. A suit for fore-closure/sale
lies before Debts Recovery Tribunal under the DRT Act, 1993, but if
pending that suit, if an account of the borrower becomes a non-
performing asset for non-payment of interest on the ings under
the credit facility for specific period, then the banks were helpless in the
past and they had to wait till the final decree is in the suit before
the Debts Recovery Tribunal under the DRT 1993.
The cases be-
fore Debts Recovery Tribunal are mounting everyday. Simultaneously
the non-performing assets were mounting today; they are atthe figure

5. Ahmad Raza v. AbidHussain.ILR

6. TI (2004)BC 241 (DB). a ae
Operation of the law: prospective, etc.
Sec. 1, Syn. 3 775
of Rs. 90000 crores. It is for this reason that the Parli
ament thought it fit
to bypass section 69/69A of Transfer of Property Act. The
Receiver un-
der the DRT Act, 1993, or even the Receivers appointed
by Civil Court
in pending suits had no power to sell the property pending
the suit for
want of decree. Therefore, the Parliament has provided for
enforcement
of security interest immediately in cases where the Accounts
become ir-
regular so that the security interest could be immediately encas
hed and
the proceeds could be handed over to banks/financial institutions
who
in turn would provide credit to the borrower and make his
Account
regular to the extent possible. There is a difference between retros
pec-
tivity and retroactivity. In a case of retroactivity, the Parliament
takes
note of the existing conditions and it takes remedial measures to
rectify
the conditions. In the present case, if one looks at the various provi
sions
of the impugned NPA Acct, 2002, it is clear that the impugned NPA
Act,
2002, is retroactive in nature. Firstly, the Act is enacted to reduce
the
non-performing assets of Banks and Financial Institutions which has
accumulated. This is mentioned in statement of objects and reasons.
Secondly, even at present, in case where Order 40, Civil Procedure
Code applies, the Court can appoint a receiver to take possession or
custody of the property before or after the decree. Order 40, Rule 1 of
Civil Procedure Code is a part of procedural law. Similarly, under the
impugned NPA Act, 2002, we have the procedural law which enables
the bank to take possession of the property for non-payment of dues.
Therefore, chapter III of the impugned NPA Act, 2002, is procedural
law under which remedy is provided for enforcement of security inter-
est without intervention of the Court but at the same time appeal is pro-
vided to the Tribunal and in cases where possession is wrongly taken,
the Tribunal can correct the position. Thirdly, the various sections of
the Act indicate that the impugned NPA Act, 2002, is retrospective. In
this connection, one has to look at Section 2(f) which defines the word
“borrower” to mean any person who has been granted financial assis-
tance by any bank or who is given guarantee. Section 2(j) shows inten-
tion of the Parliament to include all borrowers who are given financial
assistance before the Act came into force. Section 2(j) defines the word
default and the language used is “Account of such borrower which is
classified as non-performing asset”. This shows that the Act is retroac-
tive. Similarly, Section 2(k) defines financial assistance to mean any
“loan or advance granted”. This also shows that the Act is retroactive.
Similarly, Section 2(n) provides for definition of the word “hypotheca-
tion” to mean credit by a borrower, which also indicates that the Act is
retroactive. So also, Section 2(zc) defines secured asset to mean prop-
erty on which “security interest is created”. This also indicates that the
Act is retrospective. Therefore, reading the various sections of the im-
pugned NPA Act, 2002, it is clear that the Act is retroactive. Lastly,
section 13(2) used the expression “any person who makes default
which clearly shows that the Act is retroactive. In the circumstances,
there is no merit in the argument that the impugned NPA Act, 2002, is
prospective and it cannot be read as a retrospective. There is one more
776 See. 1, Syn. 3 Pani Ui—Chap. 1-—Prelaninary

in
aspect Which needs to be ported oul. A security interest is an interest
the personal property of the borrower which seoured repayment or per-
formance of any obligation by the borrower, A security mterest has no
existence performance of an obligation by the borrower, A seourity i
terest has no existence independent of the obligation to repay andif the
underlying obligation is unenforceable, then the seourity wnterest 1 in-
valid. A security interest is always given for an antecedent debt, This is
clearly indicated by section 13(2) of the impugned NPA Act, 2002,
therefore the Act is retrospective,”
However, in Subhas Chandra Panda y. State of Orissa’, the Orissa High Court
took a contrary view. In this case, Maharishi Housing Development Financial
Corporation Limited was notified as financial instituon on and from 10-1 1-
2003, after the loan was sanctioned and security interest was created over the
asset. The loan agreements were entered on 26-5-2001 and 13-2-2002, both prior
to the enforcement of the 2002 Act. After quoting the definitions of “secured
creditor” and “borrower”, the Orissa High Court held that on conjoint reading of
sections 2(f), 2(m)(iv), 2(zd) and 2(zf), it is clear that in order to invoke the pro-
vision s 13 of the Act of 2002, on the date of alleged agreement, the
of Section
financial institution must be a financial institution and a secured creditor within
the meaning of the Act. It is noteworthy that Unique Engineering's case( supra)
was not even discussed in this ruling which is much later in point in time.
In Pradeep Kumar Gupta v. State of U.P.*, the Division Bench of Allahabad
High Court agreed with the views expressed by the Uttaranchal High Court in
Unique Engineering’s case (supra). The High Court stated thus:
"hi avedaen The reasons given in paragraph 26 of the judgment in
Unique EngineeringWorks have persuaded us to follow the judgment.
Prospective means looking forward, having reference to a state of
things existing before the Act in question. A retrospective statute con-
templates the past and gives to a previous transaction some different le-
gal effect from that which it had under the law when it occurred or tran-
spired. The Court shall not presume retrospectivity if any substantive
right is created by the statute. Ordinarily, the retrospectivity must be
found from the provisions of the Act itself. In case of acts providing for
procedure and machinery provisions, the statutes have always been
given retrospective effect.”
The Allahabad High Court, also relying on the Supreme Court’s view in
Transcore v. Union of India’, that realisation of secured assets under the 2002
Act is anadditional remedy, concluded that the securitisation and reconstruction

7. 1 (2009) BC 443.
8. 1(2010)BC422 (AN—DB).
9. 1 (2007) BC 33.
 Definitions
Sec. 2 777
securitisation of financial assets and enforcement of security interes
t under the
2002 Act.
The author has already expressed his opinion above, and with respect
, agrees
with the stand taken in Unique Engineering Works’case(supra) and Pradee
p
Kumar Gupta’s case (supra).

S. 2. Definitions (1) 4 In this Act, unless the context otherwise

requires,:—

(a) “Appellate Tribunal’? means a Debts Recovery Appellate

Tribunal established under sub-section (1) of section 8 of the
Recovery of Debts due to Banks and Financial Institutions
Act, 1993 (51 of 1993);
(b) “asset reconstruction” means acquisition by any securitisa-
tion company or reconstruction company of any right or in-
terest of any bank or financial institution in any financial as-
sistance for the purpose of realisation of such financial assis-
tance;
(c) “bank” means—
(i) a banking company; or
(ii) a corresponding new bank; or
(iii) the State Bank of India; or
(iv) a subsidiary bank; or
'"l (iva) a multi-State co-operative bank; or]
(v) such other bank which the Central government may,
by notification, specify for the purposes of this Act;
(d) “banking company” shall have the meaning assigned to it in
clause (c) of section 5 of the Banking Regulation Act, 1949
(10 of 1949);
(e) “Board” means the Securities and Exchange Board of India
established under section 3 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992);
(f) “borrower” means any person who has been granted finan-
cial assistance by any bank or financial institution or who
has given any guarantee or created any mortgage or pledge
as security for the financial assistance granted by any bank
or financial institution and includes a person who becomes
borrower of a securitisation company or reconstruction
company consequent upon acquisition by it of any rights or

10. Ins.by the Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Act, 2012 (1
of 2013), s.2 (w.e.f. 15-1-2013).
78 Sec. 2 Part U—Chap. 1-—Preliminary

interest of any bank or financial institution in relation to

such financial assistance;
(g) “Central Registry” means the registry set up or cause to be
set up under sub-section (1) of section 20;
(h) “corresponding new bank” shall have the meaning assigned
to it in clause (da) of section § of the Banking Regulation
Act, 1949 (10 of (1949);
"\(ha) “debt” shall have the meaning assigned to it in clause (g) of
section 2 of the Recovery of Debts Due to Banks and Finan-
cial Institutions Act, 1993 (51 of 1993);]
(i) “Debts Recovery Tribunal” means the Tribunal established
under sub-section (1) of section 3 of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 (51 of
1993);
J “default” means non-payment of any principal debt or inter-
oe

est thereon or any other amount payable by a borrower to

any secured creditor consequent upon which the account of
such borrower is classified as non-performing asset in the
books of account of the secured creditor '’[***]
(k “financial assistance” means any loan or advance granted or
~~

any debentures or bonds subscribed or any guarantees given

or letters of credit established or any other credit facility ex-
tended by any bank or financial institution;
(1) “financial asset” means debt or receivables and includes—
(i) a claim to any debt or receivables or part thereof,
whether secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or
charge on, immovable property; or
(iii) a mortgage, charge, hypothecation or pledge of mov-
able property; or
(iv) any right or interest in the security, whether full or
part underlying such debt or receivables; or

(vi) any financial assistance;

= me ym = Act, 2004 (30 of 2004), s.2 (wef. 11-1 1-2004)

words “in accordance with the directions or guidelines issued by the a
the Amendment Act. 2004 (30 of 2004). s.? (eat Ii 1-2004). hy seit tet eettie ad
 Definitions Sec. 2 779

(m) “financial institution” means—

(i) a public financial institution within the meaning of sec-
tion 4A of the Companies Act, 1956 (1 of 1956);
(ii) any institution specified by the Central Government
under sub-clause (ii) of clause (h) of section 2 of the
Recovery of Debts Due to Banks and Financial Institu-
tions Act. 1993 (51 of 1993);
(iii) International Finance Corporation established under
the International Finance Corporation (Status, Immu-
nities and Privileges) Act, 1958 (42 of 1958);
(iv) any other institution or non-banking financial com-
pany as defined in clause (f) of section 45-I of the Re-
serve Bank of India Act, 1934 (2 of 1934), which the
Central Government may, by notification, specify as
financial institution for the purposes of this Act;
(n) “hypothecation” means a charge in or upon any movable
property, existing or future, created by a borrower in favour
of secured creditor without delivery of possession of the
movable property to such creditor, as a security for financial
assistance and includes floating charge and crystallization of
such charge into fixed charge on movable property:
(0) “non-performing asset” means an asset or account of a bor-
rower, which, has been classified by a bank or financial in-
stitution as sub-standard, '*{[doubtful or loss asset,—
(a) in case such bank or financial institution is adminis-
tered or regulated by any authority or body estab-
lished, constituted or appointed by any law for the
time being in force, in accordance with the directions
or guidelines relating to assets classifications issued by
such authority or body;
(b) in any other case, in accordance with the directions or
guidelines relating to assets classifications issued by
the Reserve Bank;]
(p) “notification” means a notification published in the Official
Gazette;
(q) “obligor” means a person liable to the originator, whether
under a contract or otherwise, to pay a financial asset or to
discharge any obligation in respect of a financial asset,

13. Subs. by the Amendment Act, 2004 (30 of 2004), s.2 (w.e.f. 11-11-2004).
780 Sec. 2 Part ll—Chap. 1—-Pretiminary

whether existing, future, conditional or contingent and in-

cludes the borrower;
ir “originator” means the owner of a financial asset which is
ae

acquired by a securitisation company or reconstruction

company for the purpose of securitisation or asset recon:
struction;
(s) “prescribed” means prescribed by rules made under this
Act;
(t) “property” means:—
(i) immovable property;
(ii) movable property;
(iii) any debt or any right to receive payment of money,
whether secured or unsecured;
(iv) receivables, whether existing or future;
(v) intangible assets, being know-how, patent, copyright,
trade mark, licence, franchise or any other business or
commercial right of similar nature;
(u) “qualified institutional buyer’’ means a financial institution,
insurance company, bank, state financial corporation, state
industrial development corporation, '“[trustee or securitisa-
tion company or reconstruction company which has been
granted a certificate of registration under sub-section (4) of
section 3 or any asset management company making invest-
ment on behalf of mutual fund] or a foreign institutional in-
vestor registered under the Securities and Exchange Board of
India Act, 1992 (15 of 1992) or regulations made thereunder,
Mk enn adaen eee
rd;
(v) “reconstruction company” means a company formed and
registered under the Companies Act, 1956 (1 of 1956) for the
purpose of asset reconstruction;
(w) “Registrar of Companies” means the Registrar defined in
mena Partisans Fe Pred rectal 1956 (1 of
Vs
(x) “Reserve Bank” means the Reserve Bank of India consti-
tuted under section 3 of the Reserve Bank of India
(2 of 1934); ae

ts
14. Subs. by Amendment Act. 2004 (30 of 2004), s 2 (wef 11-11-2
004),
 Definitions Sec. 2 76)

(y) “scheme” means a scheme inviting subscription to secu-

rity receipts proposed to be issued by a securitisation
company or reconstruction company under the scheme;
(z) “securitisation” means acquisition of financial assets by any
securitisation company or reconstruction company from an y
originator, whether by raising of funds by such securitisa-
tion company or reconstruction company from qualified in-
stitutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise;
(za) “securitisation company” means any company formed and
registered under the Companies Act, 1956 (1 of 1956) for the
purpose of securitisation;
(zb) “security agreement” means an agreement, instrument or
any other document or arrangement under which security
interest is created in favour of the secured creditor including
the creation of mortgage by deposit of title deeds with the se-
cured creditor;
(ze) “secured asset” means the property on which security inter-
est is created;
(zd) “secured creditor” means any bank or financial institution
or any consortium or group of banks or financial institutions
and includes—
(i) debenture trustee appointed by any bank or financial
institution; or
'S'(ii) securitisation company or reconstruction company,
whether acting as such or managing a trust set up by
such securitisation company or reconstruction com-
pany for the securitisation or reconstruction, as the
case may be; or.]
(iii) any other trustee holding securities on behalf of a bank
or financial institution, in whose favour security inter-
est is created for due repayment by any borrower of
any financial assistance;
(ze) “secured debt” means a debt which is secured by any secu-
rity interest;
(zf) “security interest’ means right, title and interest of any kind
whatsoever upon property, created in favour of any secured
creditor and includes any mortgage, charge, hypothecation,
assignment other than those specified in section 31;

15. Subs. by Amendment Act, 2004 (30 of 2004), s. 2 (w-e.f. 11-11-2004).

782 Part L—Chap. 1 Preliminary

(zg) “security receipt” means a receipt or other security, issued

by a securitisation company or reconstruction company to
any qualified institutional buyer pursuant to a scheme, evi-
dencing the purchase or acquisition by the holder thereof, of
an undivided right, title or interest in the financial asset in-
volved in securitisation;
(zh) “sponsor” means any person holding not less than ten per
cent of the paid-up equity capital of a securitisation com-
pany or reconstruction company;
(zi) “State Bank of India” means the State Bank of India consti-
tuted under section 3 of the State Bank of India Act, 1955
(23 of 1955);
(zj) “subsidiary bank” shall have the meaning assigned to it in
clause (k) of section 2 of the State Bank of India (Subsidiary
Banks) Act, 1959 (38 of 1959);
(2) Words and expressions used and not defined in this Act but
defined in the Indian Contract Act, 1872 (9 of 1872) or the Trans-
ferof Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1
of 1956) or the Securities and Exchange Board of India Act, 1992
(15 of 1992) shall have the same meanings respectively assigned to
them in those Acts.

SYNOPSIS
SECTION 2(1)(b) 5. Borrower of securitisation company or
‘ TECONSIFUCTION COMPANY 20.00.00... cccceees 79%,
1. Wanders miles away ........0..2-c0--cccesc-sesns 784 6. Continued relation a must ..u.................... 79%,

COCONINO sscceeses 000i Lede actin 785 relationship 19%,

3. Can ARCs buy performing assets?......... 7% | & Clee of. tacks under derivatives
a on Aa buy and sell assets? .............. 786 transactions — whether covered by the
’ ie ARC Geen?
s have subsidiaries
ds carrying ae DE. , cestinahetads tapas ‘ihattalabessitesisssciiticces, VOD
6. Can ARCs buy performing loans?......... 787 SECTION 2(1)(h)
SECTION 2(1)(c) 1. This definition is imported into section
i Deas’ . 6 0 803
‘banking company” .......0.2..200. 788 Section 2

1. Importancem4ofthe ae
definition... ") FT Gave fee
1. Debdti aiid
en
2. Meaning of “banking company” ............ 793 ” pam ryey of det in this 807
SECTION 2(1\(e) 3. Componentsof EanwwyerT *
1. A definition
ofnomseny
oe. 794 | 4 Derivatives
claims of barks whether
AP oranges “
1. Significance of the definition 0.0... 794 pon ae
2. Meaning Of “Borrower” oo... cicee eee enssen 794 | 1 of the __— BIW.
3. Guarantors
and Security providers... 795 | 2. Connection with the NPA guidelines of
4. Meaning of guarantor and security the RBI: Amendments in 2004.00. bt)
pro —————— an A iOS CE eerenentesnentntenenenee R10
 Definitions
Sec. 2 783
4. NPA classification in case of banks
(upto 31st March, 2004) 0.0... ccccccceseeee. 811 SECTION 2(1)(n)
5. Current NPA classification norms for 1. Relevance of the definition .................... 839
LL) A | 812 2. Hypothecation means a charge............... 839
6. NPA classification for non-banking 3. Movable property, existing or future ..... 841
financial Companies .............c.c.csssessseeeees. 813 4. Without delivery of possession of the
7. Prudential regulations in case of MOVA@OIe PLODeI ner, 842
Financial Institutions ............0...cceseseseeees 814 5. And includes floating charge, etc........... 842
8. Non-performing asset in case of 6. Exceptions under section 31..........0.0....-. 843
Housing Finance Companies.................. 814 SECTION 2(1)(0)
9. What if the RBI Directions/Guidelines
WRC THO SECA Coos oc ccna cecssenancansscoace 1. Amendments made by the 2004
816
10. Amount in default .....0.0.0.0.0cceecececeeeeee TATE ES nt a le tal ti 843
816 2.
11. Incase of Guarantors ...0.0.0....eeeececeseees Regarding ‘sub-standard’, ‘doubtful’,
817
ESE ESS a et 843
Section 2(1)(k)
SECTION 2(1)(q)
1. Significance of the definition ................. 817
2. Comprehensive or inclusive? ................. 1. Significance of the definition................. 844
817
3. Loan or advance granted.............ccceeseeeee. 2. Meaning of obligor... 844
817
4. Originated loans .............cccssccsseseseeeseeeeeees 818 SECTION 2(1)(t)
5. Subscription to bonds or debentures ...... 818 Do JW as O1S FEQUITE” 2ooo 0.-e-cecececucvspsncaee 846
6. Guarantees given/letters of credit 2. General meaning of property .................
a 846
ee 819 3. Impact of the definition .......0.0.0.0.ccce.
7.. Other credit facilities -...o...3.0.000..0..c00.-. 846
819
8. Whether derivatives claims of banks a SECTION 2(1)(u)
“finanetah assistance” ss shaicodiscccesusce
lack.oce Ah. 2004 amendwienitisy s 2.00.5 c5.%,.nc.cceceseots 847
SECTION 2(L) 2. Who is a qualified institutional buyer? .. 848
— - Words of different import: Financial Section 2(1)(z)
asset, financial assistance, secured debt, 1. Asset Reconstruction and Securitisation
i) ee a ee 821 CO ee | ora 851
2. Significance of the definition ................. 822 2. A definition that leads nowhere ............. 851
3. Meaning of “financial asset” .................. 822 3. What is securitisation? 00.0.0... 852
4. UNCITRAL model law ......000000ccee 823 4. Mode of raising funds ...............ccccceeeee 853
5. Accounting Standards’ definition........... 823 Se PUNY ORS EMA BED oon sus gun yy onevesatvccacecencieonss 853
6. First limb: Any debt or receivable.......... 824 SECTION 2(1)(za)
EewDebt and.recesyable cisisd. i:02.-4 beess-cdadccevs 825
8. Receivables as actionable claims ........... 825 1. Qualifications of a special purpose
9. Second limb: “Any includes”’................. 826 VERICIO AAA LA Ydthitttat. fioktavn.. 854
10. Clause (i): Fractional interests in 2. Is “securitisation company” an SPV, or
secem/Ables.. i) md sacra Dent Harp stesin-<sies 826 the entity behind the SPV?.................... 857
11. Clause (ii): Debt secured by mortgage SECTION 2(1)(zb)
of immovable property ...............::cce0000 828 1. Relevance of the definition: ................... 857
12. Clause (iii): Mortgage, _ charge,
hypothecation or pledge of movable Section 2(1)(ze)
PRONE 55 Sass s5es pias cit ebiodcassstovareTWisientevers 828 1. Relevance of this definition ................... 858
13. Clause (iv): Security _ interests 2. Secured asset in case of floating
underlying receivables..............:cseseeeee 829 CHAGBOR fey. fod AAS bly- Bh db ntAdnted..0... 858
14. Clause (v): Any beneficial interest in 3. Rulings in case of Brumark and
pe. A ee oo ee Ontee 829 (Ole OE A ee a en cee 859
15. Beneficial interest in property may 4. How to tell a floating charge.................. 859
clash with Trusts Law..............ccscesesseeee 830 5. When does a_ floating charge
16. Assignability of Future Flows................. 830 cry stallise 7icxit..nias.3i3.ceeslaniiste: 860
17. Assignability of conditional receivables 832 6. Application of this law to floating
18. Clause (vi): Any financial assistance ..... 833 IAL EM ba josoat Ad tarhy Zoid Lamp SEV DAp brea TeeNy so fe 860
SECTION 2(m) SECTION 2(1)(zd)
1. Significance of the definition ................. 833 1. Meaning of “secured creditor” .............-. 861
25> legislated patton, tans dassaesiai< 834 Ds teDOVEDITO USTES .9.6....tsp
recs ysssveessscesevneees 862
Do. 1RODE TIQIUIRG DATE. foasiigivsessavesorsaver
+09) 837 3. Securitisation Company or Asset
4. Are housing finance companies, Reconstruction Company ...........::00e00+ 863
“fiNANCE COMPANIES”? .........scceeeeeceeseeevees 838 4. Effect of 2004 amendments................+ 863
5. Infrastructure finance companies: .......... 838 5. What if a reconstruction company
6. Applicability of the Act: Pre or post- gis acquires assets from a non-banking wh
Notificaativsiet si uith tev esvens. this byseyere’: tes COMTIOMTIN sosfiuacsaces
psp}onaasngungsresvecorersesnsussye
784 Sec. 21a) Part 1l—Chap. |-—Pretiminary

hether wusts of ARCs are “secured 7. Implications of inadequate stamp duty

"?.
P=creditors”? in eh dN coe: dod
cee O04 | on the assigament
Gn assignmenror Me debt
of the Gow ..,......00. 86?
SECTION Dilihze) SECTION 21 ag)
1 “Secured debt” and “financial 1, Seournty receipts and = “undivided
assistance” a. — gOS SE oxo .scunsnnnnnstebbeniibannnonesi nathyVabbWeanhnns ba)
“TION 2. Reoeipt or other seourily .........6660005
sac xan 3. Undivided intereat ........6.00s isin. ROY
1. Right, athe OF WtEPESE creer 86S 4. Seourity receipts as SCOUTIMIES,.......000... R70
(BS EYEE ~: . 2 : lity of seourity receipts ........ R70
EERE Aesniiaimenanepte :
4. Assignment for s@OUurity —...0.0006: N06 SECTION 2(1)(ah)
5. than those specified in 1, Sponso andrOFZINALOK .....00 0 871
Sp Pa ler be 867 2. Legal equityand economic equily ,........ #72
6. Implications of inadequate stamp duty a SECTION 2(2)
on the security agreement 0... i ma Ta avs

Section 2(1)(a)
(a) “Appellate Tribunal” means a Debt Recovery Appellate Tribu-
nal established under sub-section (1) of section 8 of the Recov-
ery of Debts due to Banks and Financial Institutions Act, 1993
(S1 of 1993);

COMMENTS
The Appellate Tribunal under the RDB law is also the second-tier appellate fo-
rum under this law, to which orders of the DRT are appealable. See section 18.

Section 2(1)(b)
(b) “asset reconstruction” means acquisition by any securitisation
company or reconstruction company of any right or interest of
any bank orfinancial institution in any financial assistance for
the purpose of realisation of such financial
assi
COMMENTS
1. Wanders miles away
_ This is a very 10 definition and this will lead to a completely blurred dis-

as the
way proper
this deflationmeaning
is of “asset reconstruction”.
There are several flaws in the

First, itis the acquisition of the financial asset which is

reconstruction. Obvious enough, it isnot the act of acquisitiontreat ed as
which is
 A short history ofthe word, etc.
Sec. 2(1)(b), Syn. 2 785
Second, as per this definition, any acquisition of
a financial asset can
be said to be reconstruction. If one looks at the
plain language of the
legislation, it reads: “acquisition by ...of any right
or interest of ..in any
financial assistance for the purpose of realisation
of such financial as-
sistance”. Obvious enough, any financial asset is
acquired for the pur-
pose of realisation thereof. For that matter, any asset
, financial or non-
financial, is acquired for the purpose of its beneficial
realisation. It is
not predicated from the language that the financial asset
in question
should have become a non-performing loan. A mere acqui
sition of, for
example, a loan, will be deemed to be asset reconstruction.
Third, all securitisation transactions also become asset recon
struction
transactions by virtue of this definition. This is for two
reasons—one,
acquisition of financial assets by securitisation companies
has specifi-
cally been included in the definition. Two, as the net of the
language is
wide enough to include any acquisition of a financial asset,
securitisa-
tion transactions are obviously included.
Fourth, and quite worrisome implication of this flawed definit
ion is
that even performing assets can be acquired by asset reconstructi
on
companies, which could not have been the intent.
2. A short history of the word “asset reconstruction”
In global banking jargon, the word “asset reconstruction” is not commonly
used. The more common word is “asset management” or “resolution”. There is
a
brief history as to how the internationally-prevalent word “asset management
companies” changed to “asset reconstruction companies” in India.
There was a proposal in the Narasimham Committee I to set up an “asset re-
construction fund” supported by the Government into which assets of banks with
high NPAs will be transferred. By the time of Narasimham II, a lot of interna-
tional activity had already been seen in resolution of NPLs in several Asian coun-
tries. Therefore, Narasimham II recommended setting up of resolution companies
on the lines of what had been done in Asia.'° These companies, in the earlier
tune, were called Asset Reconstruction Companies.
The Budget 1999-2000 announced the decision of the Government to set up an
ARC on a pilot basis for which the modalities were to be worked out. Since then,

16. The following are the extracts from an RBI Publication titled Banking Developments and Policy
Perspectives 1998-99: 1
1.73 To address the problem of accumulated NPAs, the first Narasimham Committee, suggested the
setting up of an Asset Reconstruction Fund, but this suggestion could not be implemented. Reiter-
ating this arrangement, the second Narasimham Committee suggested the setting up of an Asset
Reconstruction Company (ARC). The ARC, which would take over all loan assets in the doubtful
and loss categories, would issue to the banks NPA Swap Bonds representing the realisable value of
the assets transferred, provided the stamp duties are not excessive. pA
1.74 The international experience with such arrangements has, however, been mixed. re nc ie
progress in setting up of ARCs, is yet to be seen partly because the Debts Recovery Act =
other relevant legislations are yet to be strengthened. Besides, the ARCs could spasnce!
moral hazard problems. It is, therefore, necessary to attempt to make Debts Recovery Uri :
nals (DRTs) more effective in their operation. More importantly, debt recovery systems nee
to be improved across the board to ensure efficiency of the financial sector.
786 See. (1b), Sya. 3 Part Chap. 1—Preliminary

the ARC proposal had been a permanent fixture on each Union Budget, and i
was only after more than 3 years that legislative steps were taken to enable for-
mation of ARCs.
Till recently, it appears that the Government was not certain about the exact
mechanism of ARCs. As recently as in April 2002, RBI Deputy Governor G.P.
Muniappan said in a Cll meeting in Mumbai on |"April, 2002; “An Asset Re-
construction Company with an authorised capital of Rs, 2,000 crore and initial
paid up capital Rs. 1,400 crore is to be set up as a trust for undertaking activities
relating to asset reconstruction. It would negotiate with banks and financial insti-
tutions for acquiring distressed assets and develop markets for such assets, Gov-
ernment of India proposes to go in for legal reforms to facilitate the functioning
of ARC mechanism.” The Deputy Governor is clearly ing at one ARC for
several banks, and that too, in a trust format, while the theme of the nt legis-
lation seems to be separate ARCs for separate banks, in a corporate ormat,"”
3. Can ARCs buy performing assets?
From the language of the definition, there is nothing to prevent an asset recon-
struction company from buying performing assets as well. If the business of a
borrower goes bad, he would possibly default to all lenders, but then, it is possi-
ble that some of the loans may not have become non-performing because they are
not due. These loans are impaired, but not delinquent.
In the business of asset reconstruction, poolingof loans from various sellers by
itself provides a degree of power to the reconstruction company—therefore, there
might be a commercial motivation in the reconstruction company buying per-
forming loans.
There is no doubt that the provisions of section 13, viz., enforcement of secu-
rity interests, cannot be applied in case of performing assets. The reconstruction
company is left with powers under section 9. The powers under section 9 are
general powers against the borrower, and not against any specific asset. Hence, it
seems that those powers are exercisable.
In banking practice in India, the activity of sale of orming or non-
performing loans is shaped by the RBI’s guidelines. The pubdectines are not a

: separate guidelines for

sale of non-performing loans to asset reconstruction companies . These have been
discussed
in Part 1 of the book.
4. Can ARCs buy and sell assets?
The definition above puts the business of the ARC in very genetic terms—
realisation. Inmost countries, asset management companies dealing with
have used different approaches torealisation ofassets, including outri NPL«
the assets, viz., the loans. See Chapter 5 in Part I of the book. ght sale of

17. For more on the history of ARCs, see Part I.

 Can ARCs have subsidiaries carrying, etc.
Sec. 2(1)(b), Syn. 5 787
Evidently, a non-performing loan may be realised in several
ways, and disposal
of the loan is also one of the ways of realisation. As such, ARCs
may also sell
loans that they acquire.
However, the purpose of the law is clearly not for the ARCs to be
used as con-
duits for disposal of assets. Under current regulatory regime, it appear
s that banks
cannot sell NPLs to private players; ARCs have no such restriction.
If ARCs are
used as mere conduits for selling down NPLs to entities to whom
banks cannot
sell directly, that will be an apparent misuse of the device of ARCs.
The factors
relevant in determining whether the ARC used disposal of NPLs as a
part of its
realisation strategy, or merely allowed itself to be used as a conduit, will
be
largely circumstantial, but a proximity between purchase and sale, documentatio
n
of how the decision to sell the NPLs was arrived at, etc., may be relevan
t.
RBI guidelines on asset reconstruction companies provide that an ARC cannot
buy non-performing loans and then sell the same to another ARC. However, sale
of a non-performing loan is a way of resolution and should not be frowned upon.
5. Can ARCs have subsidiaries carrying non-ARC busi-
ness?
The concept of ARCs is relatively new—though with over 8 years of the exis-
tence of the law, for large part of time, there was only one ARC in the country.
However, recently, there seems to have been a spurt—as people have seen value
in distressed assets. Hence, questions will continue to arise as to what ARCs can
or cannot do. The law has extremely sketchy provisions on the outer periphery of
what ARCs can do. However, ARCs are not general-purpose entities with open-
ended list of powers. They are entities created under the statute, with special
powers granted by the statute. Hence, they are not expected to go beyond the
brief of the law and enter into commercial activities not connected with the busi-
ness of “asset reconstruction’ defined in this sub-section. If the ARC itself cannot
do certain things, it cannot do the same thing through a subsidiary also—as a
subsidiary is effectively a subset or extension of the parent company.
6. Can ARCs buy performing loans? >
In Chapter 9 of Part I of the book, the author has expressed the view that there
is no bar on an asset reconstruction company from buying performing assets as
well. This is clear from the use of the word. “financial assistance” in the defini-
tion. “Financial assistance”, as defined in section 2 (1) (k) covers both perform-
ing and non performing loans. The RBI has issued guidelines for acquisition of
non-performing loans by ARCs, but those guidelines cannot be deemed to pro-
hibit ARCs from buying performing loans.

Section 2(1)(c)
(c) “bank” means—
(i) a banking company; or
(ii) a corresponding new bank; or
788 Sec. 21h), Syn. 1 Pant Li—Chap. 1-—Prelinunary

(iii) the State Bank of India; or

(iv) a subsidiary bank; or
'* (iva) a multi-State co-operative bank; or]
(v) such other bank which the Central Government may, by
notification, specify for the purposes of this Act;

COMMENTS
1. Bank and “banking company”
The words “banking company” and “corresponding new bank” have been de-
fined separately in the legislation, See comments below,
In view of the definition of “banking company”, there seems litle relevance of
the last clause—“such other bank...” As would be apparent from the meaning of
“banking company”, there is no scope for any entity being a banking company
and not being covered by the definition in section 2(1)(d) mentioned herein be-
low. Therefore, the only possibility for the Central Government to notify “banks”
for the purposes of the Act would be cases where it is a bank, but not a company,
or a bank which is not engaged in any banking business in India.
Co-operative banks have been notified by the Central Government under this
power—see notes below under clause (d) as to why Urban Cooperative Banks
would not been covered under section 2(1)(c)(i), except under the notification
power granted by sub-clause (v) of clause (c). Also see notes below on amend-
ments made in 2012.
Nationalised banks are not “banking companies” and are not covered by sec-
tion 2(1)(c)(i) but are covered by section 2(1)(c)(ii) as “corresponding new
banks”.
Applicability to Cooperative Banks
In exercise of powers conferred under section 2(1)(c)(v), the Central Govern-
ment issued the following notification:
“Notification No. SO 105(
dated 28-1-2003:
E) In exercise of powers
conferred under item (v) of clause (c) of sub-section (1) of Section 2 of
the Securiti and Reconstructi
sati on of on
Financial Asse and Enforce-
t
ment of Security Interest Act, 2002 (54 of 2002), the Central Govern-
ment hereby specifies “Co-operative Bank” as defined in clause (cci) of
Section 5 of Banking Regulation Act, 1949 (10 of 1949), as “Bank” for
the purpose of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (54 of 2002).”
The Supreme Courtin Greater Bombay Co-operative Bank Limited y. United
Yarn Tex Pvt. Led.””, considered theapplicability oftheRDB Acttocooperative
banks registered under Maharashtra Co-operative Societies Act, 1960; the An-

the Enforcem Security Interest and

of ent
2012 (lofby2013),
18. Inserted s. 2¢w-ef. 15-1-2013). Recovery of Debt Laws (Amendment) Act.
19. (2007) AIR 1584.
 Bank and “banking company”
Sec. 2(1)(c), Syn. 1 789
dhra Pradesh Co-operative Societies Act,
1964; and the Multi-State Co-operative
Societies Act, 2002, and had occasion to compare the
applicability of the present
Act to these Cooperative Societies. The Supreme
Court held that in view of the
residuary power of notification retained by the Central
Government, cooperative
ati al are not “banking companies” are to be covered
under the SAR-
ct.
In Varghese v. Kerala State Co-operative Bank Ltd’, the
power of the Central
Government to issue a notification in terms of section
2(1)(c)(v) notifying a Co-
Operative Bank as a bank for the purpose of the Act was
challenged on the
ground that “co-operative societies” is a subject included
in Entry 32 of List II,
the State List in Seventh Schedule to the Constitution. The
Kerala High Court
held that the legislative competence as regards SARFAESI Act
falls easily within
Entries 6 and 7 of List III and thereby within the competence
of the Union, even
as regards the Co-operative Banks, and upheld the validity of the
aforesaid noti-
fication.
Inspite of the aforesaid notification there have been disputes relating
to appli-
cability of the Act to State Co-operative Banks and/or Multi-State Co-operative
Bank.
In Rama Steel Industries v. Shikshak Sahakari Bank Limited?! , it was held that
the Respondent Bank is a “primary Cooperative Bank” as defined in clause (ccv)
of Section 56 of Banking Regulation Act, and is a Cooperative Bank as defined
in clause (cci) of the said section. While the definition of “bank” under the provi-
sions of SARFAESI Act includes Co-operative Bank by virtue of notification
dated 28-1-2003, there is no corresponding change effected in the definition of
“bank” under the provisions of the RDDBFI Act or in the definition of “banking
Company” in the BR Act to include Co-operative Banks. Due to the aforesaid
notification issued under the SARFAESI Act, non-inclusion of Cooperative
Banks within the definition of “banking company” in the interpretation clause of
Section 5(e) of the BR Act would not make difference to the applicability of the
provisions of SARFAESI Act to Co-operative Banks. The said notification leaves
no doubt that the remedies under the provisions of SARFAESI Act are squarely
and clearly available to Co-operative Banks”. In another case of Khaja Indus-
tries v State of Maharastra’ similar views were reiterated by the Division Bench
of Bombay High Court.
While an S.L.P. being S.L.P (Civil) No. 19685 of 2007 preferred against Rama
Steel’scase (supra) has been dismissed by the Apex Court on 10th December
2008, the SLP preferred against Khaja Industries’case(supra)[Special Leave to
Appeal (Civil) No(s). 17573 of 2007] is pending before the Apex Court.
Interestingly, the DRAT-Chennai in Sri Basaveshwar Co-operative Bank Ltd.
v. Umesh”, referring to the decision of Apex Court in the case of Greater Bom-

20. AIR 2008 Ker 91; III (2008) BC 626.

21. 1 (2008) BC 122. . bs
22 ro she Shaikh Mehmood Shaikh Bibhan v. The Mogaveera Co-operative Bank limited
&Ors.11(2011)BC358Bom.(DB)]; Maamtaz Begum vy. Inamdar SyyadPeersabAminsab&Ors.l
(2012) BC 83 Kar. (DB). ;
23. 2008 (2) BomCR 860; 2007 (6) MhLj 712.
24. 1(2009) BC 21 (DRAT).
790 See. Wide), Syn. 1 Pant U—Chap. 1—Preliminary

buy Co-operative Bank Limited vy, United Yarn Tex Pvi, Lad. * and the provisions
of Karnataka Cooperative Societies Act, 1959, held that the appellants had no
power or authority to invoke the provisions under SARFAESI] Act, In this case,
the 2003 notification was neither mentioned nor discussed.
in yet another case Nashik Merchant's Co-operative Bank Lid. v, Aditya Hotel-
sPrivate Limited™*, the High Court had to consider whether the provisions of the
Act are applicable to Multi-State Co-operative Societies, The High Court held
that a “Multi-State Co-operative Bank” as defined in Section 5(cciiia) of Banking
Regulation Act means a “Multi-State Co-operative Society” which is a “primary
Co-operative Bank”, Sub-clause (cci) of Section 5 defines “co-operative Bank”
which means a State Co-operative Bank, Central Co-operative Bank and a pri-
mary Co-operative Bank. So the Multi-state Co-operative Bank is a Co-operative
Bank, thus covered by the Notification of 28th January 2003,
In Varghese v. Kerala State Co-operative Bank Limited’, the High Court held
thatKerala State Cooperative Bank Ltd, the District Cooperative Banks and the
Urban Co-operative Banks to be “co-operative banks” for the purpose of clause
(cci) of Section 5 of BR Act and as such fall within the notification dated 28-1-
2003 issued under the SARFAESI Act.
Recently, the Gujarat High Court in Administrator-Shri Dhakdi Group Co-
operative Cotton Seed vy. Union of India” has rendered a different oy and
held that the Notification dated 28-1-2003 issued under the SARF SI Act is
ultra-vires, unconstitutional and void ab initio, and as such the co-operative
banks cannot take any action under Section 13(4) of the SARFAESI Act. In
Greater Bombay case (supra)the issue involved was not the legislative compe-
tence of the Central Government to notify co-operative bank for the purpose of
the SARFAESI Act; the Supreme Court was dealing with the legislative compe-
tenceof the Parliament to enact the RDB Act with respect to
Bank and while doing so, it merely relied upon the provisions of the S AES]
Act bypry or 7“Parliament has empowered the Central Government
to notify suc creating a residuary er for the purpose of the
SARFAESI Act, which is absent in RDB Act, 1993. The High Court triedto
draw out propositions from the Supreme Court’s judgment in Greater Bombay
case (supra), some of which are indicated below:

The express exclusion of cooperative societies in Entry 43 of List 1 and

the express inclusion of cooperative societies in Entry 32 of List II sig-
nifies that notwithstanding its limited activity of banking, the Coopera-
tive Banks do not become a regular bank or a corporation and the Par-
lament does not get any authority tointerfere with the right of a Coop-

25. (20SLT 07)

616 ;11(2007) CLT 1
26. 1(2010) BC 319(DB) nae
27. (20Il BC 626.
08)
2 Special Civil Application No. 930 of2011; Judgment delivered on 22™ April,
2013
 Bank and “banking company”
Sec. 2(1)(c), Syn. 1 791
erative Society towards its members or its obligations towar
ds them as
created by the laws enacted by the State Legislatures in this behalf
.
* Cooperative Banks performing functions for the public with a
limited
commercial function as opposed to corporate banks cannot be
covered
by Entry 45 of List I dealing with "banking" and that the subjectof
co-
operative societies is not included in the Union List rather it covers un-
der Entry 32 of List II of Seventh Schedule appended to the Consti
tu-
tion.
One point taken up by the Gujarat High Court pertained to Section 17 of
the
SARFAESI Act that confers right to appeal upon any person (includ
ing a bor-
rower) against any measures taken under Section 13(4) of the SARFA
ESI Act.
The appellate power under Section 17 has been vested in DRT established
under
the RDB Act. According to the Supreme Court’s ruling in Greater Bombay (su-
pra) the DRT established under the RDB Act has no jurisdiction to entertain a
matter relating to the Cooperative Bank, it necessarily follows that such Tribunal
has no jurisdiction in the matterwhere the Cooperative Bank is the alleged credi-
tor and cannot also act as an appellate authority under the SARFAESI Act. In
other words, in order to exercise power of the Appellate Tribunal under the
SARFAESI Act, the Bank referred to in the Act cannot be a Cooperative Bank
which is essentially nothing but a Cooperative Society.
However, the above case law has been rendered ineffective, except historically,
by the amendment discussed below.
Effect of the Amendment Act of 2012
The Amendment Act of 2012 has included a multi-State Co-operative bank in
the definition of “bank”. So now the controversy pertaining to applicability of the
SARFAESI Act to multi-State Co-operative banks comes to a rest. Moreover, by
virtue of express inclusion of only multi-state co-operative banks, all other types
of co-operative banks will be treated to be excluded from the definition of bank
under the SARFAESIT Acct.
It is to be noted that the Amendment Act of 2012 comes into force w.e.f. 15"
January, 2013. As such, the cases with respect to co-operative banks filed prior to
the effective date will be studied in the light of the scenario existing before the
effective date; while those filed on or after the effective date will be decided on
the basis of the Amendment Act. In the opinion of the author, the power to serve
notice u/s 13 (2) will have to be exercised only on or after the effective date. As
there is no intent of retrospective amendment, the section cannot impart validity
to any action taken prior to the effective date of the amendment.
Also, as implied, with the Amendment Act coming into force, the Notification
of 2003 will be rendered nugatory since the scope of the Notification extends to
all types of Co-operative banks, though the Amendment Act allows only the in-
clusion of Multi-State Co-operative Banks.
It is also important to know what exactly “multi-State co-operative banks” are.
The Amendment Act has neither defined the term, nor has it given any reference
to pick the definition from.
792 Sec. 11 Me), Sym. 1 Part Chap. 1 Preliminary

The Multi-State Co-operative Societies Act, 2002” defines a “mull State oo-
operative society” as a society registered or deemed to be registered under the
Act and includinga national cooperative society and a Federal cooperative [Sec-
tion 2(q)]. In order to get registered under the Act, il is necessary that the main
objects of the society are to serve the interests of members in more than one state
(Section 5}. The same Act defines “a co-operative bank” as @ multi-state coopera:
tive society which undertakes banking business [Section 2(f)|. So, as can be n-
ferred from the definitions provided, “a multi-State co-operative bank” is 4
“multi-State co-operative society” carrying on banking business.
However, there is a disparity in the definitions used under the Banking Regula-
tion Act, 1949, The BR Act defines a “multi-State co-operative bank” as a multi.
State co-operative society which is a primary co-operative bank, The primary co-
operative bank, in turn, is a co-operative society, the primary object or principal
business of which is the transaction of banking business, Further, “a multi-State
co-operative society”, under the BR Act is a multi-State cooperative society reg-
istered as such under any Central Act for the time being in force relating to
multi-State co-operative societies but does not include a national co-operative
society and a federal cooperative.
Coming to the term “banking business”, the same has to be assigned a meaning
in terms of Section 5(c) of the BR Act (defines the term * ”) read with
Section 6 of the BR Act (lists the forms of business in which banking compa-
nies’ may engage).
A conjoint reading of the definitions discussed above will reflect that in order
to qualify as a “multi-State co-operative bank” under the SARFAESI Act, the
entity should:
(a) be a co-operative society,
(b) registered under the Central Act for multi-State co-operative societies,
i.e. the Multi-State Co-operative Societies Act, 2002,
(c) the main object of which is to serve the interests of members in more
than one State,
(d) the primary object or principal business of which is the transaction of
banking business, as defined under the BR Act.
The BR Act deserves a greater weightage than the Multi-State
Societies Act, because the SARFAESI Act is more concerned with the definition
of a bank: a co-operative society cafrying on the banking business is merely one
of the inclusions therein. Therefore, a national co-operative society/federal co-
operative society carrying on banking business will be excluded from the defini-
tion of “bank” under the SARFAESI Act.

29._hitp:/ agrico p nic.in/imagedefaulvcooperation/MSCSAct2002.pdf. (accessed on 12th August

30. As per Section 56 of the BR ;
ques te4 Go-epenaive beak. Act. references toa “banking company” shail be construed as refer-
 Meaning of “banking company”
Sec. 2(1)(d), 793
Section 2(1)(d)
(d) “banking company” shall have the meaning assigned to
it in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10
of 1949);

COMMENTS
1. Importance of the definition
This definition is read with section 2(1)(c) above, and is crucial for determi
ning
the meaning of “bank”. The words “bank” and “financial institution”
are key
words in the legislation as most of the operative provisions of the legislat
ion are
connected with banks and financial institutions.
2. Meaning of “banking company”
Section 5(c) of the Banking Regulation Act defines a “banking company” as
follows:
“Banking company means any company which transacts the business
of banking in India”.
“Banking” is defined in section 5(b) as “accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable
on demand or otherwise and withdrawable by cheque, draft, order or
otherwise”’.
There are three key elements to the meaning of a “banking company” in the
said definition.
* It must be engaged in the business of “banking”, which means accep-
tance of deposits repayable on demand or otherwise. There are several
functions of present-day banks—for example, remittance facilities,
safe-keeping, etc. which are not included in the above function. Mer-
chant banking, investment banking, etc: are not a part of “banking busi-
ness” in the aforesaid definition. Therefore, if an entity is not engaged
in the business of accepting deposits repayable on demand, it is not a
banking company. It is notable that non-banking companies can also
accept deposits, but they are not authorised to accept deposits repayable
on demand.
The entity must carry such business of “banking” in India. That is to
Say, it must be conducting the activities of “banking” as defined above,
in India.
Thirdly, the entity must be a “company”. Banks which are structured
other than as companies will not come under this definition. It is for this
reason that co-operative banks, which are structured as cooperatives
and not as companies, are prima facie not covered by the definition of
“banking company”. See notes under sec, 2(1)(c).
7194 Section Ye) Part li—Chap. 4—Preliminary

As the definition above includes only companies, it does not include, prima Ja
cie, even nationalised banks which are bodies corporat e bul not companie s. They
are. however, covered by section 2(1)(c)(ii), as “corresponding new banks”. See
for notes below clause (Cc).

Section 2(1)(e)
(e) “Board” means the Securities and Exchange Board of India es-
tablished under section 3 of the Securities and Exchange Board
of India Act, 1992 (15 of 1992);

| COMMENTS
1. A definition of no use
There are two different “Boards” talked of in this law—the Securities and Ex-
change Board of India and the Board for Industrial and Financial Reconstruction.
This definition tells us that where the word “Board” is used in this law, we
should take it to mean the former.
But the word “Board” has been used sparingly in this legislation. However,
there are references to the Securities and Exchange Board of India Act, 1992 at
several places.

Section 2(1)(f)
(f) “borrower” means any person who has been granted financial
assistance by any bank or financial institution or who has given
any guarantee or created any mortgage or pledge as security for
the financial assistance granted by any bank or financial institu-
tion and includes a person who becomes borrower of a securiti-
sation company or reconstruction company consequent upon
acquisition by it ofany rights or interest of any bank or financial
institution in relation to such financial assistance;

COMMENTS
1. Significance of the definition
This definition is very important as there are several sections in the law where
powers have been granted against borrowers. It would be necessary, in order to
apply such sections, to decide who is a “borrower”.
2. Meaning of “borrower”
Under the present definition, there are two sides toa transaction of“financial
assistance” —the borrower on one side, and a bank or financial institution on the
 Guarantors and security providers
Sec. 2(1)(f), Syn. 3 795
financial assistance must be a bank or financial institution,
if the party in question
is to be regarded as a “borrower”.
The other key element of a “borrower” is “financial assistance”.
This word is
central to the definition of a “borrower” and is analysed below.
Clearly, if the
relation between the bank/financial institution and the borrow
er is not one of a
“financial assistance”, the relation fails the definition, in which
case the operative
provisions of the legislation relating to borrowers will not be applic
able.
_The borrower may be “any person”—which means the applicability
of the pro-
visions against borrowers is not limited by the form of constitution—compa
nies,
firms or unincorporated bodies, are all covered.
Apart from the primary beneficiary of a financial assistance, even guarant
ors
and providers of security interest are covered in the definition. In essence,
there
are three parties covered on the recipient side:
(a) the grantee of financial assistance himself, that is, the person who
has
availed of the financial assistance;
(b) the guarantor for the benefit of such financial assistance; and
(c) person who has provided security in form of a mortgage or pledge in
respect of such financial assistance.
In Anushree Sah v Bombay Mercantile Bank Limited*! , when notice under sec-
tion 13(2) was given to the borrower and not to the guarantor, it was contended
that borrower also means a guarantor and as such notice should also have to be
given to the guarantor along with the borrower. The Chairperson negated the
contention stating that the term “borrower” as given under section 2(1)(f) of
SARFAESI Act is not defined to mean and include the guarantor and mortgagor
along with borrower but it is defined by using disjunctive “or”, that is to say, bor-
rower means any person who has been granted financial assistance or a guarantor
who has given guarantee or created any mortgage or pledge as security for finan-
cial assistance granted.
3. Guarantors and Security providers
Guarantors as primary borrowers?—The stringent measures of the legislation
apply with equal force to guarantors and providers of security interest as well.
The liability of a guarantor is defined by the guarantee agreement. The guarantee
agreement may be construed so as a fix of secondary liability on the guarantor,
that is, after exhausting remedies against the principal debtor. Alternatively, the
guarantee agreement may lead to a co-extensive liability. However, the provi-
sions of the legislation treat a guarantor also as a “borrower” and no distinction is
made in applying the provisions of the law against the guarantors.
There are two possible ways of looking at the guarantor’s position under this
law. One, the provisions of this law only supplements and provide force to the
contractual rights of parties. Therefore, the rights of a bank/financial institution
against a guarantor under this law cannot be different from what they are undet
common law. The present statute provides a mode of enforcement, and does not

31. Il (2008) BC 63 (DRAT).

796 See. (1 f), Syn. 3 Part li—Chap. 1-—Pretiminary

create or confer new powers. For example, the stringent measures provided for in
section 13(4) are only in cases where the borrower in question fails to meet his
liabilities to the secured lender. It is the liability which is the basis of the powers,
and failure to meet the liabilities within 60 days is the trigger that operates the
powers. So, if the liability of the guarantor is a secondary liability in common
law, the powers granted under this legislation cannot be enforced against the
guarantor on a stand-alone or primary-debtor basis.
The second view is that once a liability against a guarantor is established under
common law, that is, when the measures under this Act become enforceable,
thereafter, in enforcing the provisions of this legislation, no distinction can be
made between the primary debtor and the guarantor,
In the opinion of the author, the second view is more reasonable.
It is to be seen in course of administration and judicial interpretation as to
whether guarantors are treated as primary debtors under this law. Or, it may be
that the distinction between principal debtor and is not relevant if the
guarantee agreement provides that the liability of the guarantor is co-extensive
with that of the principal debtor. In a poorly argued case before the Allahabad
High Court, in Pramod Kumar v. Punjab National Bank” jhe Viability of the
guarantor was held co-extensive and the pursuit by the bank of enforcement un-
der theSARFAESI Act was upheld, but there was hardly any legal issue brought
before the Court.
In Pramod Kumar y. Punjab National Bank’’, the Allahabad High Court held,
without any special consideration to the language of this Act, that the liability of
the guarantor is immediate and co-extensive, and therefore, the lender may pro-
ceed against the guarantor under this Act’. The High Court based its ruling on
the decision of the Supreme Court in Bank of Bihar Ltd. v. Dr. Damodar
Prasad.” On the meaning of co-extensive liability of the guarantor, see a ruling
of the Supreme Court in Industrial Investment Bank of India Limited vy.
BiswanathJhunjhunwala”.
The Orissa High Court in Sri Sarat Chandra Acharya v. Bank
of India, Bhu-
baneshwar’’, referring to the decision of Supreme Court in Dr. Damodar
Prasad’s case(supra) and also the decisions in State Bank of India v. Saksari-
aSugar Mills Ltd.”, State Bank of India v. Indexport Registered”, as well as its
Judgment in Sukar Pradhan v. Orissa State FinancialCorporation™, held that
liabil underity
Section 128 of the Contract Act is co-extensive tothat ofthe bor-

(2009) 9
2009

SSRZAIRR
£a6
 Meaning of guarantor and security, etc.
Sec. 2(1)(f), Syn. 4 797
Krushna Chandra Mallick v. State Bank of India*’.
The same has been also reit-
erated in Suryakant Jagtap v. State Bank of Indore& Ors.
If the guarantor is simply a guarantor and has not creat
ed any security interest,
the provisions of this law have little relevance, as this law
is concerned with en-
forcement of security interests, and not enforcement of
covenants under financial
contracts. In Pandurang v. State Bank of Hyderabad”,
the DRT observed that
creation of mortgage is the species of the guarantee, since by
mortgage, the guar-
antor’s liability is correlated with the mortgaged property.
Thus, the power to
Stand as guarantor has implicit power to create mortgage. Thus,
if there is crea-
tion of a mortgage, a guarantee by the mortgagor may be impli
ed; however, if
there is only a guarantee, and not a mortgage, this enactment
would have no rele-
vance as there is no security interest created by the guarantor
to be enforced.
Note that this enactment is limited to enforcement of secur
ity interests, and not
enforcement of contractual obligations of parties.

4. Meaning of guarantor and security provider

It is notable that in either case, the word “financial assistance” is crucial.
Guar-
antors and providers of security interest are not to be included in this law unless
the relation between the bank/financial institution, and the beneficiary is one of a
“financial assistance”.
The word “guarantee” has a definitive meaning in common law and there are
enough of materials, including clear provisions of the Contracts Act as to what is
a guarantee. Briefly, a guarantee is a tripartite contract between the debtor, credi-
tor, and the surety, whereby the surety assumes the obligations of the debtor,
should the debtor not pay. A guarantee is necessarily given with the consent or
concurrence of the debtor, and the debtor implicitly becomes a part of the con-
tract of guarantee. If not with the consent or concurrence of the debtor, it may be
a contract of indemnity, but is not a contract of guarantee. Contracts of indemnity
are not covered by this law.
As far as provision of security is concerned, usually, securities are provided ei-
ther by the principal borrower itself, or by the guarantor. There are not many in-
stances where an unconnected party, neither being the borrower himself nor a
guarantor, places a security.
In any case, the law covers such situations as well, but to a very limited extent.
The person providing such security is covered under the law only where the secu-
rity is by way of a mortgage or pledge.
Both these words “mortgage” and “pledge” are often misunderstood—so it is
necessary to amplify them. There is a common misconception that the word
“mortgage” is related to immovable properties while the word “hypothecation”’ is
related to movable properties. There is no basis for this thinking. A mortgage can
be done for both movable and immovable property. In either case, the meaning of
a mortgage is transfer of some or all interest in a property, for the purpose of se-

41. AIR 2009 Ori 99, IV (2009) BC 64 (DB).

42. 1(2011)BC 569.
43. 1(2006) BC 59 (DRAT/DRT).
79% Sec. 211f), Syn. 5 Part li—Chap. |-—Preliminary

curing a debt, with an equity of redemption—that is, as the debt 4 mea the prop:
erty is redeemed from the mortgage. If a movable property Is trans erred in a way
that when a certain obligation is discharged, the property is restored back to the
transferor, there is a mortgage.”
A pledge, on the other hand, is a “bailment of goods as security for the pay-
ment of a debt or the performance of a promise” [Section 172 of the Indian Con:
tract Act, 1872]. There must be a bailment—that is, handing over of possession,
for a pledge.
As obvious from the above definition under the Indian Contract Act, placing of
a security deposit in cash is not a pledge, as the word “goods” does not include
money. Therefore, if a person, who is neither a guarantor under a financial assis-
tance, nor the borrower himself, places a cash security deposit with a lending
bank or financial institution, such person is not a “borrower” under this law,
5. Borrower of securitisation company or reconstruction
company
The latter part of the definition “and includes...” is obvious, since by virtue of
this very law, a borrowing from a bank or a financial institution gets transferred
to a securitisation company or reconstruction company upon transfer of such
loan
6. Continued relation a must
In order for a person to be treated as a “borrower” under the definition, it is im-
portant to understand the significance of the words “any person who has been
granted financial assistance by any bank or financial institution.” A financial as-
sistance, for example, a loan, is usually granted at a point of time, and is repaid
over a period of time. Until repaid, the relationship of “borrower” stays. This im-
plies that if the bank or financial institution in question has either sold or as-
signed the loan to any person other than a securitisation company or asset recon-
struction company, or novated the loan in favour of any person, or if the loan has
been discharged, the person does not remain a borrower.
Assume that a loan was given by a bank to Company X, but in a scheme of
takeover or merger, the loan has been taken over by Company Y. Hence, Com-
pany X ceases to be a borrower.
7. Assiofgn
borrowe
me r relatio
nt nship
A borrower under a financial assistance has a liability to the lender. Itis a trite
Position of common law that while rights or benefits under a contract are assign-
able, the liabilities orburdens under a contract are not assignable except with the
sanof cti
the counter
on party.
Therefore, a borrower cannot assign his liability, either asa principal debtor
as guarantoror security-provider, except through a novation. a
44. See
aaa later for moreppunef
on the maa
meg of — . Also see Part | ofthe book fot @ general disons-
)
 Claims of banks under derivatives transactions
Sec. 2(1)(f), Syn. 8 799

8. Claims of banks under derivatives transactions —

whether covered by the Act:
Banks enter into variety of derivative transactions with
corporates, and other
users. Generally speaking, in India, the current regulatory
scenario in respect of
OTC derivatives is that users are permitted to enter into deriva
tives transactions
only for hedging purposes, whereas banks are permitted to
enter into derivatives
both for hedging and for trading purpose. A trading purpose
will mean a bank
may buy a derivative position with a user, and sell the same
derivative position
with another bank, and thereby, simply make a spread.
There have been lots of cases where corporates/users lost thousa
nds of crores
of rupees in derivative deals — this particularly happened during
the 2007-2009
period when rupee was volatile. It is not that rupee has not been volatil
e before or
after that period — it is just that several banks sold to lots of corporates,
foreign
exchange derivatives transactions, packaged to look like brilliant ideas
for syn-
thetically transforming rupee debt into foreign currency debt, and thereby saving
on interest rates. These deals turned out to be lethal over time — hence, corpor
ates
had several thousands of crores of losses‘.
So as banks had to claim thousands of crores of rupees from the corporates,
there were several legal questions: Are these derivative deals legal? Do they cre-
ate a “debt” as defined under the DRT law? Is it a case of “financial assistance”
as defined under this law? Can a corporate disputing the right of the bank to
claim money under a derivative deal be said to be a “willful defaulter’? Several
of these questions are still unanswered — however, on some questions, there are
interesting rulings.
In State Bank of India v. ShardaSpuntex P. Ltd*’, an entity had been granted
limit for purchase of forward contracts in foreign exchange. Upon the company
failing to pay the dues of the bank, the bank characterised the account of the bor-
rower as NPA. The borrower moved the civil court for a suit of injunction, which
the lower court passed. The bank appealed to the High Court, citing sec. 34 of the
SARFAESI Act as the reason to exclude the jurisdiction of the civil court in the
matter. According to the bank, the amount owed by the borrower to the bank,
albeit for purchase of foreign exchange, was debt owed to the bank, and that in
the matter of recovery of debts, the jurisdiction of civil courts was excluded by
sec. 34 of this Act. Analysing the definition of “borrower”, the Rajasthan High
Court came to the conclusion that the grant of a limit for forward purchase of
foreign exchange was a “financial assistance’, and the amount owed by the bor-
rower was a “debt” and hence, the civil court had no jurisdiction in the matter.
Commenting on this ruling, in the 2010 edition of this book, this author com-
mented as follows: “With respect, the case is wrongly decided, on two counts.
Firstly, SARFAESI Act’is limited to recovery of debts of the bank. In the instant

45. See Vinod Kothari’s article at http://india-

finan-
ing.com/Forex_Derivatives_Litigation_in_India_Vague_Rules_and_Lax_Regulators_should_own_i
t_up.pdf(accessed on 12th August, 2013).
46. 1 (2010) BC 562 (Raj).
800 See. 111), Sya. 8 Part 1l—Chap. 1—Preliminary

case, the bank was not proceeding against the borrower for recovery of debt-—
instead, the borrower went against the bank claiming that the characterisation of
the debt as non-performing asset was wrongful. It is not even clear if the so-
called forward purchase of foreign exchange by the borrower was backed by se-
curity interest—if not, the question of the bank using the SARFAESI Act for re-
covery of a derivative transaction did not arise at all, In any case, there was no
proceeding under SARFAESI Act—hence, the question of bar of jurisdiction did
not arise. Secondly, the forward purchase of foreign exchange is a derivatives
transaction. The bank and the entity are two parties to a commercial transaction
of purchase and sale. The bank is acting in its capacity as a derivatives dealer--t
is not a case of grant of a financial assistance akin to a loan or credit facility, The
court went by the meaning of the term “debt”, without carefully analysing the
meaning of the term “borrower” and “financial assistance”. It is important to un-
derstand that the word “borrower” has no relevance unless the case is one of “fi-
nancial assistance”. The word “financial assistance” has to be read ejusdem
generis with other forms of financial assistance enumerated in sub-section
(1)(k).”
The question whether derivative dues of banks are “debt” was discussed in
context of the RDDBFI Act or the SARFAESI Act, before the ayy 4
Court in M/s.Rajshree Sugars & Chemicals Limited v. M/S.Axis B A
On the basis of Section 6(1) of the Banking Regulation Act, 1949" read with
Section 2(g) of the RDDBFI Act*’, the court opined that transactions in deriva-
tives fall well within Section 6(1) of the Banking Regulation Act; as such if the
transaction in question gives rise to a claim by the Bank, of any liability, on the
part of the company, the bank may certainly be able to invoke the provisions of
the RDDBFI Act, and it is not necessary that only in those cases where there is
an act of lending and borrowing that the provisions of the RDDBFI Act could be
invoked by the Bank. Precisely, what can be inferred from the court’s judgment
is that derivative dues are “debt” within the meaning of the RDDBFI Act (and
consequently the SARFAESI Act).
RajshreeSugars has not read the definition of “debt” with the expression “fi-
nancial assistance”. The word “debt” has no meaning unless it is connected with
the word “ borrower”, since a debt has to be that of a borrower. The word “bor-
rower’ is connected with the expression “financial assistance” — hence, it is not
enough to establish that a particular claim of the bank is a debt due to the bank. It
is Important to establish that such claim arises on account of a “financial assis-
tance”. So, the key question is, at least for the purposes of this Act, whether the
derivative transaction between the bank and the user be said to be a “financial
assistance”.
It is very important to understand several significant featur
of derivatives
es
transactions. Derivatives are like trading transactions - whether a particular en-
47. ATR2011Mad144.
48. suroruneof GeSeumnofbaie cnumenacn GUE
one or more of the forms of business enumerated in clauses (a) to (0),
0 eben
Banking.
49. Section 2(g) ofthe said Act defines debt toinclude any liability claimed
mpd
Bank,
netheSARFAESofTAY
,
mune Ye Ba ThetionPerson,
aa
as due from
by
 Claims of banks under derivatives transactio
ns Sec. 2(1)(f), Syn. 8 801
tity is making money or losing money on a deriv
ative deal depends on the under-
lying. The underlying is the risk which is being trade
d by the particular derivative
— for example, exchange rates will be underlying
in case of a forex derivative
deal. So, if a bank sold USD on a 6-month forwa
rd contract to a user, the
bank loses money if rupee weakens, and the bank
gains money if rupee
appreciates. Whether the bank will have money to
recover or money to pay, is
not certain at all. Therefore, it will be important for court
s to examine, whether, a
contract where a bank may have to pay money instead of
recovering money from
a user be said to be a ‘credit facility’.
There has also been a trail of litigation, ending up at
the Supreme Court, on
whether the failure (or refusal) of a corporate to pay a bank
under a derivative
transaction be said to be a “willful default”. The concept of
willful default is not
central to this law — however, we give below a brief revie
w of this litigation as
this concerns derivatives transactions.
In Kotak Mahindra Bank Ltd. v. Hindustan National Glass
& Ind. Ltd. &Ors. pf
it was contended on behalf of the appellant-bank that under
the deriva-
tives/forward contracts facility, neither the appellant was a “lender’’,
nor the re-
spondent was a “borrower” within the meaning of terms used in the defini
tion of
“wilful default” in the Master Circular on wilful defaulters issued by
RBI. The
Calcutta High Court held that the Master Circular applied only to lending
trans-
actions of a bank or financial institution and as in the foreign exchange deriva
tive
transactions between the parties, there was no such lending transactions and
the
appellant was not the lender and the respondent was not the borrower, the latter
could not be declared as a wilful defaulter in terms of the Master Circular.
On the contrary, the Bombay High Court in Emcure Pharmaceuticals Ltd.
&Anr.v. ICICI Bank Ltd. &Ors.”’, held that the said Master Circular covered de-
fault by a party in complying with the payment obligations under derivative
transactions, thereby rejecting the claim of the appellants that the Master Circular
was applicable to dues arising out of a lender-borrower relationship and as the
alleged dues arise under the derivative transactions and not against a credit facil-
ity sanctioned by the bank, there was no lender-borrower relationship between
the bank and the appellant and, therefore, the Master Circular was not applicable
to the case of the appellant.
The view taken in Emcure Pharmaceuticals Ltd. case (supra) was reiterated in
Finolex Industries Limited &Anr. v. Reserve Bank of India &Ors.”’.
Appeals against Kotak Mahindra (supra), Emcure Pharmaceuticals (supra)
and Finolex Industries (supra) were bunched together in Kotak Mahindra Bank
Ltd. v. Hindustan National Glass & Industries Ltd.°’, before the Hon'ble Su-
preme Court. So, in the instant case, the Supreme Court was concerned with the

50. Writ Petition No. 7729(W) of 2009, dated 01.09.2009, cited in Kotak Mahindra Bank Ltd. v. Hindu-
stan National Glass & Industries Ltd. (SC).
51. Writ Petition (Lodg.) No. 204 of 2011, dated 23/24.08.2011, cited in Kotak Mahindra Bank Ltd. v.
Hindustan National Glass & Industries Ltd. (SC). ut I |
52. Writ Petition (Lodg.) No. 345 of 2011, dated 23/24.08.2011, cited in Kotak Mahindra Bank Ltd. v.
Hindustan National Glass & Industries Ltd. (SC).
53. Civil Appeals 8916, 8917, 8918 of 2012. Judgment available on
eth edid night tackouieeomthitn gs .aspx ?filename=39808 (accessed on 16th September, 2013).
802 Sec. 21 f), Syn. 8 Part 1l—Chap. 1—Preliminary

question whether a wilful default in meeting payment obligations to a bank under

a derivative transaction will be covered under the said Master Circular, In the
said ruling, the Apex Court outrightly rejected the literal interpretation of the
term “lender” by the Calcutta High Court; and observed that “it is a settled prin-
ciple of interpretation that the words in a statute or a dooument are to be inter-
preted in the context or subject-matter in which the words are used and not ac-
cording to its literal meaning.” Further, purpose of the said Master Circular is “to
caution banks and financial institutions from giving any further bank finance to a
wilful defaulters, credit information cannot be confined to only the wilful de-
faults made by existing borrowers of the bank, but will also cover constituents of
the bank, who have defaulted in their dues under banking transactions with the
banks and who intend to avail further finance from the banks.”’ (emphasis ours).
Accordingly, the SC interpreted the term “lender” to be having a wider scope:
the term “wilful default” used in the Master Circular should be interpreted “to
mean not only a wilful default by a unit which has defaulted in meeting its re-
payment obligations to the lender, but also to mean a unit which has defaulted in
meeting its payment obligations to the bank under facilities such as a bank guar-
~ a tng naar also considered the definition of “credit information” under the
1934:
“4S5A(c). “credit information’’ means any information relating to—
(i) the amounts and the nature of loans or advances and other credit facili-
ties granted by a banking company to any borrower or class of borrow-
ers;
(ii) the nature of security taken from any borrower or class of borrowers for
credit facilities granted to him or to such class;
(iii) the guarantee furnished by a banking company for any of its customers
or any class of its customers:
(iv) the means, antecedents, history of financial transactions and the credit
worthiness of any borrower or class of borrowers;
(v) any other information which the Bank may consider to be relevant for
the more orderly regulation of credit or credit policy.”
_ The SC remarked that credit information means not only any information relat-
ing tomatters in sub-clauses (i),(ii),(iii) and (iv), but also relates to any other
in-
formation which the bank considers to be relevant for the more
;

constituent remaining unpaid to a bank may affect the credit and the credit
system of the country. Inforelati rmng at to defaul
iotersn of dues under derivative
‘ransa
ctions who intend to take additional finance from the bank
obviously will
Pope the meaning of credit information under
Section 45A(c\(v) of the

There is an important implication from the ruling we

n mt
Actto derivatives claims: the Supreme Court’s analysis
mation about derivatives is covered by Section 45A( has been that the infor-
cWv) of the 1934 Act. and
 This definition is imported into section 2(1)(c) above Sec. 2(1)(h), Syn. 1 803

not by clauses (i),(ii),(iii) and (iv) of Section 45A(c) of the RBI Act. Clause
(i) of
sec 45A (c ) of the RBI Act covers credit facilities. Nowhere has the Supreme
Court held that derivatives claims are credit facilities. If derivatives transac
tions
are not credit facilities, the counterparty with the bank cannot be a “borrower”
—
hence, sec 13 (2) containing the right of the bank to demand payment from a bor-
rower does not apply in case of derivative claims.

Section 2(1)(g)
(g) “Central Registry” means the registry set up or cause to be set
up under sub-section (1) of section 20;

COMMENTS
See for comments under section 20. The Central Registry is intended to main-
tain a national register of securitisation and asset reconstruction transactions, and
creation, modification, and satisfaction of security interests.
The word “cause” should read as “caused”.
In accordance with the provisions, the Central Registry of Securitisation Asset
Reconstruction and Security Interest of India (CERSAI) has been set up as a
company licensed under section 25 of the Companies Act, 1956. CERSAI be-
came operational on March 31, 2011°*.See our comments in Chapter 4 of Part-II
of the book.

Section 2(1)(h)
(h) “corresponding new bank” shall have the meaning assigned to
it in clause (da) of section 5 of the Banking Regulation Act, 1949
(10 of (1949);

COMMENTS
1. This definition is imported into section 2(1)(c) above
The purpose of this clause is to cover nationalised banks which are strictly
speaking not “banking company”, as they are bodies corporate but not companies
under the Companies Act, 1956.
Section 5(da) of the Banking Regulation Act defines “corresponding new
banks” as corresponding new banks constituted under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under sec-
tion 3 of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980. These two Acts are the legislations whereby several erstwhile private
sector banks were nationalised. The corresponding new banks are the bodies cor-
porate that came into existence as a result of such nationalisation.

54. Website of CERSAI: https://www.cersai.org.in/. (accessed on 12th August, 2013).

 BU4 Sec. 2(1)\ha), Syn. | Pari di—Chap. d-—Pretinunary

This clause, therefore, covers all nationalised banks in the country which
thereby become a part of the definition of “banks” in section 2(c) above.

Section 2(1)(ha)
“{(ha) “debt” shall have the meaning assigned to it in clause (g) of
section 2 of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (51 of 1993);]

COMMENTS
The Amending Act of 2004 inserted a definition to the word ‘Debt’ used in the
Act. The Amendment Act inserted Section 2(1)(ha) which lays down that the
word ‘debt’ in this Act will have the same meaning as defined in Section 2(g) of
the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,
Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 defines ‘Debt’ as follows—
““debt’ means any liability (inclusive of interest) which is claimed as
due from any person by a bank or a financial institution or by a consor-
tium of banks or financial institution during the course of any activity
undertaken by the bank or financial institution or the consortium under
any law for the time being in force, in cash or otherwise, whether se-
cured or unsecured, or assigned, or whether payable under a decree or
orderof any civil Court or any arbitral award or otherw orise
under a
mortgage and subsisting on, and legally recoverable on, the date of ap-
plication”.
As pointed out above, the original Act did not define the term “debt”. The Act
States that in case a word has not been defined in the Act, the definition of the
word as defined in the Indian Contract Act, or the Transfer of y Act, or
the Companies Act, 1956, or the Securities and Exchange Board of India Act will
be applicable.” None of the above mentioned Acts define the term ‘Debt’.
Probably the legislature was concerned that unless the term isdefined, the expan-
sive definition of the word as interpreted by the courts in respect of these
Acts
will create confusion. This is perhaps the reason why the legislature
thought it
prudent to include a specific definition to the term within the Act.
The term “debt” has been the subject matter of various decis
ions. In Web vy.
Stendon - it was held that a “debt” isa sum of money which is now payab
le or

55. Ins. by the Amendment Act, 2004,(30 of 2004 8. 2 (wef.

56. Sub-se2cti 11-11-2004)
of Section
on 2. .
57. (1883) 11 Q.BD. 518, 572
 “debt” Sec. 2(1)(ha), Syn. 1 805
Mills Ltd. v. CWT°*,one of the most important decisions
on this point, where the
Supreme Court defined the ‘debt’ as follows—
“A debt is a sum of money which is now payable or will becom
e
payable in future by reason of a present obligation debitum in presenti
solvendum in futuro.”
However, the above definition of the expression “debt” is based on the inter-
pretation of the word according to Section 2(m) of the Wealth Tax Act. The
Su-
preme Court in United Bank of India v. Debts Recovery Tribunal’ stated that
the
expression “debt” assumes special meanings according to the context it
is used
and hence, the expression ‘debt’ “may take color from the provisions of the con-
cerned Act, that it may have different shades of meaning’””'. The Court explained
the definition and interpretation of the word ‘debt’ as used in the Recovery of
Debts Due to Banks and Financial Institutions Act of the term in the following
words—
“There cannot be any dispute that the expression ‘debt’ has to be
given the widest amplitude to mean any liability which is alleged
as dues from any person by a bank during the course of any business
activity undertaken by the Bank either in cash or otherwise, whether
secured or unsecured, whether payable under a decree or order of
any Court or otherwise and legally recoverable on the date of the
application.”
In an apparent and understandable effort to give a wide meaning to the term
“debt”, the Tribunals have sometimes travelled an extraordinary distance. For
example, in ICICI Bank Ltd. y. Premier Housing and Industrial Enterprises
Ltd.”, the Chennai DRT held, very wrongly in the opinion of the author, that
failure to redeem preference shares subscribed by the bank, or to pay dividends
thereon, constituted “debt” and issued a recovery certificate for the said amount.
Debt recovery tribunals are specialists in banking matters and their lack of under-
standing of corporate laws is understandable. In fact, preference shares are only a
modified form of capital of a company, and it can, by no stretch of argument, be
contended that ownership capital supplied by the bank to a corporate is a debt
due to the bank. In fact, it is even difficult to understand whether subscription to
preference shares is at all a part of the “business of banking”. Sadly enough,
banks in India have en masse invested in preference capital, and have even
signed agreements requiring companies to pay a penal interest for failure to pay
preference dividend, without realising that preference dividend cannot be de-
clared unless the company makes a profit, and there can be no penalty for not
making a profit. Likewise, a company cannot redeem preference shares except
out of profits, or out of a fresh issue of capital—inability to do either cannot con-
stitute default of a “debt”.

58. 1966 AIR 1370, 1966 SCR (2) 688;

59. Kesoram Industries and Cotton Mills Ltd v. CWT, (1996) 59 ITR 767.
60. (1999) 96 Comp Cas 602.
61. See ah Raiss IndrajeetN.Suri&Anr. v. State Bank Of India &Anr.M(2011) BC 204 (DRAT-
Delhi)]
62. II (2004) BC 37 (DRAT/DRT).
 Part ll—Chap. 1—Pretimanary
800 See. 2(1ha), Sym. I

not liabilities and are therefore not

Similarly, very sumply equity shares are
ble into equity, the creditor either has
debt. Consequently, in case of debt converti
both. A claim to issuance of shares or
4 claim to the “debt” or to the shares, not Lo
an action seeking the recovery of a
delivery of shares cannot be regarded as
Act, The claim would be the one
"debt" as defined in section 2(g) of the said
gation, Same was held in Cochin
seeking the performance of a contractual obli .
International Airport Limited v. Presiding Officer, DRT
In State Bank of India y. ShardaSpuntex Pvt. Lid , it was held that “debt”
a bank or financial institution
by
means liability claimed as due from any person
unde rtak en by the Bank or Financial
during the course of any business activity
entering into forward con-
Institution. In the instant case, when for the purpose of to the bank, 1
me |
tracts for purchase of foreign exchange, an entity beca
said contracts, it certainly
was held that if any liability arises due to breach of
2(g) of the 1993 Act,
falls within the definition of “debt” provided under Section
the author, the ruling
and Section 2(ha) of the 2002 Act. In the opinion of
assistance” — see
wrongly looked at the word “debt” in isolation from “financial
notes under sub-sec (1)(f).
1. Debt in course of businessof banking
just the indebt-
The key issue in the definition of “debt” for the DRT law is not
the debt was cre-
edness of the borrower to the bank, but the purpose for which
ess ac-
ated. The debt in question should have been created in relation to a busin
due to
tivity of the bank. It is not that any amount receivable by a bank is a debt,
the bank, and therefthe orebank,is entitled to proceed under the RDB Act.
In State Bank of Bikaner and Jaipur v. Ballabh Das and Co.”, the Supreme
Court explained the natureof the word in the following words: “According to the
definition, the term “debt” means liability which is allegedly due from any per-
son by a bank or a financial institution. It should have arisen during the course
of business activity undertaken by the bank or the financial institution or the
consortium under any law for the time being in force. The liability to be dis-
charged may be in cash or otherwise. It would be immaterial whether the liability

ance Co. Ltd. vy. BhorukaRoadlines Ltd.°’, it was held that the claim for damages

63. 1 (2011) BC 322 (Del-DB).

64. 1 (2010) BC 562.
G5. AIR 1999 SC 3408.
1(2005) BC 76 (DRAT/DRT).
Lid., Ti(20(2005
Punjab National Bank v. Tata Infotech 5 ) BC 16 (DRA (DRAT/DRT).
67.
 Components of “Debt”:
Sec. 2(1)(ha), Syn. 3 807
against a transporter for damage of a consignment canno
t be a “debt” under the
RDB Act for enforcement of the provisions of that Act.
The same limitation would, apparently, be applicable
to the SARFAESI Act—
the debt should arise in course of the business of banking
and not otherwise. For
instance, trading portfolios held by banks may not be treate
d as assets in course
of banking. Same would be true in case of derivatives transactio
ns.
2. Relevance of definition of debt in this law
The word “debt” connects with section 2(j) of the Act where “defau
lt” has been
defined. Unless the sum in question is a debt, there is no default
, because a de-
fault can occur only in relation to a debt. See later comments under
section 2(j).
It is also pertinent to note that since the definition of “debt” is
related to “de-
fault”, and default refers to the debt being treated as a non-performing
asset, no
claim of a bank or financial institution may be a debt unless it can be
treated as a
non-performing asset. Section 13(2) also uses the term “secured debt”
—in other
words, most of the critical provisions of the law relating to enforcement of
secu-
rity interests hinge on whether the claim of bank, for which the security
interest
is sought to be enforced, was a “debt” at all.
3. Components of “Debt”
The way the word is defined, it might lead to a suggestion that all that is
claimed as payable by the bank is a debt. The word is defined as liability of the
borrower; the reciprocal of liability is a receivable. If what is being claimed is a
liability of the borrower, then it can generally be expected that the receivable
must also be shown in the books of the bank.
The question as to whether a particular-claim of the bank may be treated as a
“debt” or not may arise in several cases. For instance, can the word “debt” also
include claims of bank to compensation, penalties, etc? This question may be
greatly relevant as the bank, serving a notice under section 13(2) has to give de-
tails of the “amount due” by the borrower, which should be read as meaning the
same as debt due by the borrower. In a different context (whether a suit can be
filed in view of the monetary minimum under the RDB Act), the Bombay High
Court in Raj Corporation v. Bank of Baroda’, held that the debts due to the bank
would include loss and compensation claimed by the bank. However, in the
humble submission of the author, the bank’s claim should normally be backed by
the evidence appearing in the bank’s books. A loss or compensation claimed by
the bank would normally not be a debt due as per banker’s books. In the instance
case, the amount finally held as payable by the DRT was less than Rs. 10 lakhs
and therefore, the borrower had a point in contending that the bank had no right
to go to the DRT (as the required minimum claim is Rs. 10 lakhs) and it seems
that the bank consciously added certain claims merely to have the claim of the
required minimum amount.

68. II (2005) BC 3 (DB).

 Pant li—Chap, L-—Preliminary
SUS Sec. 1 ha), Sym. 4
Calcutta High Court held that the
in Cosmosteels P. Lid. y.Union of india’, the
ges, though the Tribunal had a
word “debt” in the DRT law cannot include dama
right to adjudicate in relation to damages.
Derivatives claims of banks whether “Debt”
4.
See Notes under sec. 2(1 (1).

Section 2(1)i)
lished un-
(i) “Debts Recovery Tribunal” means the Tribunal estab
s Due to
der sub-section (1) of section 3 of the Recovery of Debt
Banks and Financial Institutions Act, 1993 (51 of 1993);
COMMENTS
tive tribunals
Debt Recovery Tribunals (DRTs) are quasi-judicial administra
the Recovery of
appointed by the Central Government under section 3(1) of
of the said
Debts due to Banks and Financial Institutions Act, 1993. Section 3(1)
Act reads as under:
“The Central Government shall, by notification, establish one or
more Tribunals, to be known as the Debts Recovery Tribunal, to exer-
cise the jurisdiction, powers and authority conferred on such Tribunal
by or under this Act.”
This legislation provides for a right to “appeal” before the DRTs. The Recov-
ery of Debts Act provides for an “application” before the DRTs. Under the Re-
covery of Debts Act, the DRT does not exercise appellate powers—such powers
are reserved for the appellate body. See later, forcomm onen tscon-
the powers
ferred by this legislation to DRTs.

Section 2(1)(j)
(j) “default” means non-payment of any principal debt or interest
thereon or any other amount payable by a borrower to any se-
cured creditor consequent upon which the account of such bor-
rower is classified as non-performing asset in the books of ac-
count of the secured creditor" [* * * ] ~

COMMENTS
1. Significance
of the definition
Understandably, this is a very important definition for provisions related to en-
forcement of security interests. Several sections of this legislation are triggered
only where there is a “default”. Therefore, what constitutes a default is central to

oa > cet ae
words “in accordance with the directions or guidelines issued by the Reserve
Bank” omitted
the Amendment Act, 2004 (30 of 2004), s. 2 (wef. 11-11-2004). ” ad
 Connection with the NPA guidelines of the RBI:
etc. Sec. 2(1)(j), Syn. 2 809
the operation of these sections. The crucial provi
sion of the law—section 13(2)
itself hinges on the definition of “default”. Note that
to attract the meaning of
default, not only should there be a failure to pay,
the account of the borrower
Should be classified as a non-performing asset too. The
characterisation of non-
performing asset must be as per the applicable directions—s
ee sub-section (1)(0).
2. Connection with the NPA guidelines of the RBI:
Amendments in 2004
The definition in this sub-section prior to amendments broug
ht out in 2004 was
connected with the NPA treatment as per the directions or
guidelines of the RBI.
A debt could be taken as non-performing, if it was non-perfor
ming as per the di-
rections or guidelines issued by the RBI. In the case of Mardi
a Chemicals Ltd y.
Union of India”'before the Supreme Court, a question was raised
that the catego-
risation of an asset as a non-performing asset was based on
the whims of the
bank. In answer, the Supreme Court held: “Next we come to the
question as to
whether it is on whims and fancies of the financial institutions to
classify the as-
sets as non-performing assets, as canvassed before us. We find it not to
be so. As
a matter of fact, a policy has been laid down by the Reserve Bank of
India pro-
viding guidelines in the matter for declaring an asset to be a non-perfor
ming asset
known as “RBI’s prudential norms on income recognition, asset classi
fication
and provisioning—pertaining to advances through a Circular dated Augus
t 30,
2001.” Clearly, the Apex Court was influenced by the fact that the categorisati
on
of an asset as non-performing asset was based on the guidelines of the RBI.
The 2004 amendments consciously dropped the words “in accordance with the
directions or guidelines issued by the Reserve Bank.” Does this mean, it is possi-
ble for a bank to follow its own internal, and possibly, more conservative NPA
classification, and proceed with the action under this Act treating an asset as
NPA? In the opinion of the author, if the trigger point for the proceedings under
the Act is the categorisation of an asset as NPA, the secured lender cannot be
allowed the liberty of doing so based on his own guidelines, particularly so if the
guidelines are more stringent than those prescribed by the RBI. In any case the
definition of ‘non-performing loan’ in sec 2(1)(o0) has a reference to the direc-
tions of the RBI. The only ostensible for reason to remove reference to the RBI in
this clause could have been to include entities which are under RBI supervision —
such as housing finance companies. This flexibility is there in sec. 2(1)(o).
Thus, the purpose of the 2004 amendment could not have been to allow such
liberty of classification. In fact, it is intended to relate to those entities which are
not banks or otherwise not covered by the regulatory framework of the RBI on
NPA classification. For instance, a trust formed by a reconstruction company is
not, by itself, a reconstruction company nor is it covered by the RBI’s NPA clas-
sification norms. In such cases, the classification of an asset as NPA is enough,
even though the RBI norms are not clearly applicable. This intent is clear from
similar amendment made to the definition of “doubtful or loss asset” in section
2(0)—see notes below section 2(0).

71. AIR 2004 SC 2371; (2004) 4 SCC 311.

 Part li—Chap. 1-—Prelaminary
$10 Sec. A 1hj), Sya. 3
Pu. Lid, &Anr, ¥, Canara Bank
The High Count in Signal Apparels
of a borrower to be declared as
&Anr.”.wpheld that while considering an asset act judicially supported by mate
non-performing asset, a secured creditor should
at such decision devoid of any
rials and there must be Wansparency in arriving
must strictly follow the “directions
arbitrariness, thus, emphasizing that the bank
cation issued by the Reserve Bank of
or guidelines relating to the asset classifi
discretion in classifying a particular
India from time to ime while exercising its
dard, doubtful or loss assets to be
asset as non-performing, for instance sub-stan
known as non-performing assets. ...”.
3. Elements of default
under this definition:
There are 4 important elements for establishing a default
ition of this legisla-
(a) The borrower must be a “borrower” within the defin
ition of bor-
tion. Please see notes under “borrower” ante. The defin
itions—
rower, as noted earlier, is connected with two other defin
words, the
financial assistance, and bank/financial institution, In other
one
counterparties to the financial assistance must be a borrower on
relation
hand and a bank or financial institution on the other, and the
that connects the two should be that of a financial assistance,
(b) The financial assistance must be secured—this is obvious from the use
of the word “secured lender” in the definition. See also comments later
under the defini “securned lender
oftio ”ty interest”.
and “securi
(c) There must have been a non-payment of principal, interest or any other
sum payable by the borrower. These words seem to be enlarging the
scope of the definition substantially—it is easy to understand the mean-
ing of principal and interest. But what about other sums payable by a
borrower to a lender? For example, a borrower may have been called
upo tonpay inspection charges, service charge or such sother sums. The
issue is, can there be a “default” within the meaning of this definition,
on account of such defaults? In this regard, the next condition seems to
be of critical significance. The default must be such which can render
the account an NPA. In terms of the NPA guidelines applicable to both
banks and non-banking financial institutions, an account is not treated
as an NPA except on account of default of interest or principal. There-
fore, in view of the super-imposition of the next condition, the words
“or any other amount payable by a borrower” become superfluous.
(d) This condition is very important—the default must be such that conse-
quent upon the default, the account of such borrower is classified as a
non-performing asset. The definition of NPA is not related to the mag-
nitude of the default, but its length. So, if the default has continued for a
period which renders the account of the borrower an NPA, the borrower
can be said to have defaulted under this definition.
There are two more important phrases that need comment—‘“in the
books of account of the secured lender” and “in accordance with the

72. 11(2011)BC 124 Mad. (DB).

 NPA classification in case of banks, etc.
Sec. 2(1)(j), Syn. 4 811
directions or guidelines issued by the Reserve Bank”
. The latter phrase
was dropped by the 2004 Amendment, but in the opini
on of the author,
the relevance of the RBI guidelines on NPA Classifica
tion still exists—
see notes above and notes under sec 2 (1)(0). First
,“Books of accou
nt”
mostly refers to the accounting books in which finan
cial transactions
are recorded. NPA classification by itself is not an accou
nting event
which leads to any accounting record as such, and
therefore, the fact of
NPA classification is not reflected in books of account.
However, NPA
classification, under the RBI norms, leads to de-recogni
tion of income
and cessation of accrual—which is an accounting event
. Therefore,
there is an accounting dimension of an NPA Classification.
Second, the phrase “in accordance with the directions or guidel
ines
issued by the Reserve Bank” implies that the NPA classi
fication is
based on the RBI directives. A number of banks, particularly
interna-
tional banks, have stricter internal NPA recognition norms.
Several in-
ternational lending agencies also require NPAs to be recorded
based on
a shorter time-frame of default than under the RBI norms. Howev
er, for
the purpose of recognising a “default” under this definition, it is only
a
default as per the RBI directives. A lender cannot narrow down the pe-
riod of “default” by any of his own internal procedures for recognising
a default.
The author is of the view that in case of non-performing assets
held with the trusts and held by asset reconstruction companies, there
are no norms mandating the classification of the asset as a non-
performing asset. On the contrary, the guidelines and directions for
ARCs (see Chapter 9 of Part 1) clearly exempt the trusts from NPA
norms of the RBI. Hence, the definition of “default” fails in case of
trusts of the ARCs.
4. NPA classification in case of banks (upto 31st March,
2004)
The RBI’s policy on NPA classification was given by the following prudential
norms:
An asset, including a leased asset, becomes non-performing when it ceases to
generate income for the bank. A ‘Non-Performing Asset’ (NPA) was defined as a
credit facility in respect of which the interest and/or instalment of principal has
remained ‘past due’ for a specified period of time. The specified period was re-
duced in a phased manner as under:
Year ending March 31 Specified period
1995" four quarters
1994 three quarters
1995 onwards two quarters
An amount due under any credit facility is treated as “past due” when it is not
paid within 30 days from the due date. Due to the improvements in the payment
and settlement systems, recovery climate, upgradation of technology in the bank-
812 Sec. 2(1j), Sya. 5 Part 1l—Chap. |-—Preliminary

ing system, ete., it was decided to dispense with “past due’ co , with effect
from March 31, 2001. Accordingly, as from that date, a Non- ing Asset
(NPA) shall! be an advance where—
(i) interest and/or installment of principal remain overdue for a penod of
more than 180 days in respect of a Term Loan,
(ii) the account remains ‘out of order’ for a period of more than 180 days,
in respect of an Overdraft/Cash Credit (OD/CC),
(iii) the bill remains overdue for a period of more than 180 days in the case
of bills purchased and discounted,
(iv) interest and/or installment of principal remains overdue for twoharvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and
(v) any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.””
5. Current NPA classification norms for banks
The NPA classification norms were made more stringent and the delinquency
period was reduced from 2 quarters to | quarter, effective 31st March 2004.
Lately, the RBI has been coming with a master circular where it consolidates pe-
riodic circulars. In the matter of asset classification, the Master Circular of July 1,
2013”, defines a non-performing asset as follows:
2.1 ‘Non-Performing Assets’
2.1.1 An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank.
2.1.2 A non-performing asset (NPA) is a loan or an advance where;
i. interest and/or installment of principal remain overdue for a
period of more than 90 days in respect of a term loan;
ii. the account remains ‘out of order’ as indicated at paragraph 2.2
below, in respect of anOverdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted;
iv. the installment of principal or interest thereon remains overdue
for two crop seasons for short duration crops;
v. the installment of principal or interest thereon remains overdue
for one crop season for long duration crops;
vi. the amount of liquidity facility i ing for more
dun 90Gaya, inseapest Of4 socurtmamidn Uaatetion een

73. Extracts from RBI's Master Circular—Prudential norms on income recognition, asset classification
74. and
MasterC 10m taining Soak
smerny tothe advances portfolio, dated 4 July, 2002.
a
mm ,|Didocs.rbi.org.in/rdocs/coment/PDFs/62IRAC290613_A pdf(accessedon12th August,
 NPA classification for non-banking, etc.
Sec. 2(1)(j), Syn. 6 813
taken in terms of guidelines on securitisation
dated February 1,
2006;
Vil. in respect of derivative transactions, the
overdue receivables
representing positive mark-to-market value of
a derivative con-
tract, if these remain unpaid for a period of 90
days from the
specified due date for payment.
2.1.3 In case of interest payments, banks should,
classify an account as NPA
only if the interest due and charged during any
quarter is not serviced
fully within 90 days from the end of the quarter.
2.2 ‘Out of Order’ status

An account should be treated as ’out of order’ if

the outstanding balance re-
mains continuously in excess of the sanctioned limit
/drawing power. In cases
where the outstanding balance in the principal opera
ting account is less than the
sanctioned limit/drawing power, but there are no credit
s continuously for 90
days as on date in of the balance sheet, or credits are not
enough to cover the in-
terest debited during the same period, these accounts shoul
d be treated as ‘out of
order’.
2.3 ‘Overdue’
Any amount due to the bank under any credit facility is ’overd
ue’ if it is not
paid on the due date fixed by the bank.
6. NPA classification for non-banking financial companies
Effective 31st March 2002, the meaning of non-performing asset
as applicable
to non-banking financial institutions was also amended to bring the
same at par
with those applicable to banks. The current meaning of an NPA, as given
by the
Non-Banking Financial (Non-Deposit Accepting or Holding) Companies
Pruden-
tial Norms (Reserve Bank) Directions, 2007” (same definition applies
in case of
deposit-taking NBFCs), in case of a non-banking financial company is as under:
“(xill) ‘Non-Performing Asset’ (referred to in these Directions as “NPA’”’)
means: ‘
(a) an asset, in respect of which, interest has remained overdue for a period
of six months or more;
(b) aterm loan inclusive of unpaid interest, when the installment is overdue
for a period of six months or more, or on which interest amount re-
mained overdue for a period of six months or more;
(c) a demand or call loan, which remained overdue for a period of six
months or more from the date of demand or call or on which interest
amount remained overdue for a period of six months or more;
(d) a bill which remains overdue for a period of six months or more;

75. http://rbidocs.rbi.org.in/rdocs/content/pdfs/35DA010713FA.pdf. (accessed on 12th August, 2013).

814 Sec. 2(1j), Syn. 7 Part H—Chap. 1—Pretiminary

(e) the interest in respect of adebt or the income on receivables under the
head ‘other current assets’ in the nature of short term loans/advances,
which facility remained overdue for a period of six months or more,
(f) any dues on account of sale of assets or services rendered or rei:
bursement of expenses incurred, which remained overdue for a period
of six months or more;
(g) the lease rental and hire purchase installment, which has become over-
due for a period of twelve months or more;
(h) in respect of loans, advances, and other credit facilities (including bills
purchased and discounted), the balance outstanding under the credit fa-
cilities (including accrued interest) made available to the same bor-
rower/beneficiary when any of the above credit facilities becomes non-
performing asset:
Provided that in the case of lease and hire-purchase transactions, a
non-banking financial company may classify each such account on the
basis of its record of recovery.”
7. Prudential regulations in case of Financial Institutions
The guidelines of the RBI as applicable to central financial institutions are
largely the same as applicable to banks, after the amendments effective from 31 st
March, 2002. Accordingly, an asset of an FI would be treated as non-performing
if interest and/or installment of principal remain overdue for more than 180 days
with effect from the year ended 31“March, 2002, as against the earlier norm of an
overdue period of 365 days or more in respect of principal and more than 180
days in respect of interest. The amendments made to bring down the delinquency
period in case of banks from 180 days to 90 days would be applicable to financial
institutions as well.
8. Non-performing asset in case of Housing Finance Com-
panies
The definition of “non-performing asset” in case of housing finance companies 9
as per the Housing Finance Companies (NHB) Directions 2010”", is as follows:
(t)“non-performing asset” (referred to in these directions as “NPA”) means:—
(i) a ee ee ee ee eee oe
months;
(i1) a term loan (other than the one granted to an agriculturist or to a person
whose income is dependent on the harvest of crops) inclusive of unpaid
interest, when the installment is overdue for more than six months or on
which interest amount remained past due for six months;
(111) a bill of exchange which remains overdue for six months:

76. Directions are available at: //erorw nhib.org.n/Regulation/NHB-Directions-upto-date pdf.

cessedon 12th August. man (ae-
Non-performing asset in case of housing, etc.
Sec. 2(1)(j), Syn. 8 815
(iv) the interest in respect of a debt or the incom
e on a receivable under the
head ‘other current assets’ in the nature of short
term loans/advances,
which facility remained overdue for a period of six month
s;
(v) any dues on account of sale of assets or servic
es rendered or reim-
bursement of expenses incurred, which remained overd
ue for a period
of six months;
(vi) the lease rental and hire purchase installment, which
has become over-
due for a period of more than twelve months:
(vii) an inter corporate deposit, in respect of which interest or
principal has
remained overdue for a period of six months;
Provided that with effect from March 31, 2005, “non-performing
asset” shall
mean:—
(i) an asset, in respect of which, interest has remained overdue
for a period
of ninety days or more;
(ii) a term loan (other than the one granted to an agriculturist or to a person
whose income is dependent on the harvest of crops) inclusive of unpaid
interest, when the instalment is overdue for a period of ninety days or
more or on which interest amount remained overdue for a period of
ninety days or more;
(iii) a demand or call loan, which remained overdue for a period of ninety
days or more from the date of demand or call or on which interest
amount remained overdue for a period of ninety days or more;
(iv) a bill which remains overdue for a period of ninety days or more;
(v) the interest in respect of a debt or the income on receivables under the
head ‘other current assets’ in the nature of short term loans/advances,
which facility remained overdue for a period of ninety days or more;
(vi) any dues on account of sale of assets or services rendered or reim-
bursement of expenses incurred, which remained overdue for a period
of ninety days or more; ?
(vii) the lease rental and hire-purchase installment, which has become over-
due for a period of ninety days or more;
(vili) an inter corporate deposit, in respect of which, interest or principal has
remained overdue for a period of ninety days or more.
(ix) a term loan granted to an agriculturist or to a person whose income is
dependent on the harvest of crops if the installment of principal or in-
terest thereon remains unpaid:
(a) for two crop seasons beyond the due date, if the income of the
borrower is dependent on short duration crops, or
(b) for one crop season beyond the due date, if the income of the
borrower is dependent on long duration crop.
Explanation.—(1) For the purpose of this sub-clause, “long
duration” crops would be crops with crop season longer than
816 Sec. 2(1j), Syn. 9 Part 1l—Chap. 1—Preliminary

one year and crops, and which are not “long duration” crops,
would be treated as “short duration” crops,
The crop season for each crop means the period up to harvesting of the crops
raised, would be as determined by the StatelLevel Bankers’ Committee in each
state
9. What if the RBI Directions/Guidelines are not applica-
ble?
The consequences of a “default” under this definition are serious and may even
lead to a takeover of the management of the borrower (see, however, for com-
ments under the relevant sections 9 and 15), Therefore, it is necessary to strictly
interpret the provisions of this definition. It is apparent that all the 4 elements of
default under the above definition are mandatory, In cases where neither the di-
rections nor the guidelines of the RBI are applicable, a “default” under this sec-
tion would occur only based on similar conditions. However, it is necessary that
the entity in question maintains books of account in which the asset in question is
characterised as non-performing asset. See also the definition of “non-performing
asset” in section 2(1)(0).

10. Amount in default

Occurrence of default invokes the provisions of this Act relating to enforce-
ment of security interests. However, the mere fact of default is not all—it is also
necessary to find the amount in default. Note that the definition of “default” in
this clause connects with section 13(2) wherein the secured lender may givea
notice demanding payment of the amounts for which the borrower isliable.
The lender may demand such sums as are in default—that is, such sums as are
currently due. In order to understand the amounts in default, it is important to
understand acceleration clauses.
Loan agreements typically contain an acceleration clause. An acceleration
clause makes all monies payable at points of time in future, payable immediately.
For example, if a loan is repayable in year 2010, the acceleration clause bei
applicable will make the whole of the loan payable immediately. Typically,. ac-
celeration clauses are applicable in the event of a default—for example, , if
if the
*

above loan was payable in 5 installments starting from year 2006, then, on on the
installment for 2006 not being paid, the lender may accelerate and make the
whole of the loan payable immediately. The purpose of the acceleration clause is
easy to understand—in absence of such a clause, a lender will have to wait for
several years to recover the whole of his money even when he finds
been made on some of the monies. —
Depending on the wording of the loan agreement, acceleration may either
be
automatic, or may be based on discretion of the lender. In the latter case,
for the defaulted amount to include accelerated future paymen
in order
ts, the lender must
exer rightci se
of acceler ation.
 Loan or advance granted
Sec. 2(1)(k), Syn. 3 817

11. In case of Guarantors

_ The wording of this section and that of
section 13 seems to suggest that the de-
fault by a guarantor cannot be taken
as default under this law, as the books
of

Section 2(1)(k)
(k) “financial assistance” means any loan
or advance granted or
any debentures or bonds subscribed or any
guarantees given or
letters of credit established or any other cred
it facility extended
by any bank or financial institution;

COMMENTS
1. Significance of the definition
This definition, again, is one of the necessary build
ing blocks of this legislation
as it is an ingredient in the definition of “borrower”
. As noted above, the relation
between a borrower and a bank/financial institution
under this law is called a “fi-
nancial assistance”. That is to say, only such relationsh
ips will be subjected to the
major Operative provisions of the law as can be said
to be “financial assistance”
under this law.
2. Comprehensive or inclusive?
When a definition defines the meaning of an item by listin
g its components, the
list can be either inclusive or exhaustive. An inclusive list is
one which is open-
ended, and is subject to expansion by adding more items into
it than are speci-
fied. An exhaustive definition, on the other hand, is a closed
definition and can-
not accommodate anything more than the specified items into it.
The present definition starts with the word “means” which is indicat
ive of an
exhaustive definition. However, the ending part of the definition includ
es a re-
sidual entry called “any other credit facility”. Thus, though the definit
ion is ex-
haustive, one of the items of this exhaustive definition includes an
illustrative and
not definitive item, and this item is flexible enough to accommodate
any relation-
ship that can be said to be a “credit facility”.
3. Loan or advance granted
The word “loan” refers to the money lent with a promise to repay. A loan is es-
sentially a bailment of money. For a number of statutes, even loans in kind are
regarded as loans, but in banking parlance, the word “loan” mostly includes loans
of money only. Not every debt is a loan—a loan creates a debt by casting upon
the borrower an obligation to repay, but a debt by itself is a much wider term.
818 Sec. 21k), Sym. 4 Part db—Chap. Preliminary

with reference lo
The word “advance” implies advancing, that is, preponing
low—ahead of
time. An advance is typically given against some expected cashf
receivables,
the flow. For example, if a trader has sold goods and not realised the
lly real-
a bank may give an advance against the receivables. An advance is norma
ised against the receivables to which it relates.
ob-
In commercial practice, the distinction between loans and advances Is not
served. For example, some banks use the term “loans against shares” while some
call it “advance against shares”.
The common point in both loans and advances is that they are fund-based fa-
cilities, and both imply creation of a debt that is repayable by the borrower. A
mere outlay of money by the bank is not enough to create a “loan or advance’
there must be a corresponding obligation on the recipient to repay such money to
the bank.
4. Originated loans
In banking parlance, a loan may be either originated by a bank, or may be later
acquired by a bank. Inter-bank sale is not a common practice in India, but is quite
common in international markets. The definition uses the word “loan or advance
granted...” The word ‘granted’ implies that the bank in question must have
granted, and not merely acquired the loan.
Loan participations in case of syndicated lending can be regarded as a loan
granted, but in case the bank has purchased participation or sub-participation in-
terest subsequent to the grant of the loan, it would be difficult to take it as estab-
lishing the loan relationship for the purpose of this definition. It is notable that
under accounting standards for financial instruments, e.g., IAS 39, there is a
definition of “originated loans”. Under the said definition as well, loans or inter-
est therein acquired by the entity are not treated as originated loans. JAS 39 pro-
vides as under: “A loan acquired by an enterprise as a participation in a loan from
another lender is considered to be originated by the enterprise, provided it is
funded by the enterprise on the date that the loan is originated by the other
lender. However, the acquis of an ition
interest in a pool of loans or receivables,
for example in connection with a securitisation, is a purchase, not an inats
because the enterprise did not provide money, goods, or services di tothe
underlying debtors nor acquire its interest through a participation with another
lender on the date the underlying loans or receivables were origi wl
5. Subscription
to bonds or debentures
Bonds or debentures are acknowledgements of debts, treated as securities.
Though the legal meaning of the word “debenture” is very wide—every ac-
knowledgement of debt in form of an instrument or indenture is taken as a deben-
ture—the meaning of the word here is clearly a debt security. This becomes clear
 Other credit facilities
Sec. 2(1)(k), Syn. 7 819

Was an issuance of bond/debenture by an issuer, which were subscr

ibed to by the
bank/financial institution.
Though there is nothing in law prohibiting a non-corporate entity from
issuing
a bond/debenture, usually, in India, bonds/debentures have been created by
cor-
porate entities only.
It is clear from the use of the word “subscribed” that in order for a transaction
to be treated as “financial assistance” under this law, the bank/financial institu-
tion in question must be the initial subscriber of the bond/debentures. That is to
Say, if there is a default on debentures bought under a secondary market transac-
tion, there cannot be a case to press this law into service.
6. Guarantees given/letters of credit provided
These, in usual banking parlance, are called “unfunded facilities” as there is a
commitment to fund implied guarantees and letters of credit, but there is no im-
mediate outlay of funds involved. Nevertheless, for the purposes of this legisla-
tion, these facilities are regarded as “financial assistance”. For bank regulatory
purposes, these facilities are also sometimes defined as “direct credit substitutes”,
meaning a facility creating the same risks as assuming a direct fund-based expo-
sure.
It is obvious that a guarantee or a letter of credit will be treated as a financial
assistance not to the person in whose favour such guarantee or letter of credit has
been issued, but the principal debtor.
In either case, an unfunded facility turns into a case of default only after it has
become funded, that is, the bank/financial institution has discharged its obligation
under the guarantee or letter of credit and the claim that arises against the princi-
pal debtor has not been met by the latter. Therefore, there is a creation of a debt,
similar to a loan or advance, in case of guarantees and letters of credit as well.

7. Other credit facilities

This ingredient is most difficult to be interpreted. It can either be given a very
wide meaning so as to accommodate an unlimited variety of various fund-based
and non-fund-based financial services provided by banks, or it can be constrained
to mean only such facilities which are similar to loans and advances. The second
approach finds favour in a traditional principle of interpretation called ejusdem
generis, which means general words, following specific words, must take their
colour from the specific words. That is to say, the word “other credit facilities” is
a generic phrase but cannot include an unlimited amount of facilities, but would
be limited to only those facilities which are illustratively specified in the specific
terms preceding, viz., loans, advances, guarantees and letters of credit.
The purpose of the law is to enforce financial claims to make non-performing
assets of banks and financial assets move. Any interpretation of the word “other
credit facilities” must advance the purpose of the law, so that the operation of the
law is not scuttled by semantical legerdemain. Therefore, the interpretation of
this word cannot be so narrow as to go no further than the specific words “loans,
advances, guarantees and letters of credit”.
$20 See. 1k), Sym. 7 Part Li—Chap. 1—Preliminary

The following are instances of transactions which may not be theated as loans
or advances, but are surely ways of providing fund-based fiaancial assistance and
hence, may be Weated as “financial assistance” under the last ingredient:
e Extension of any financial lease or hire-purchase facility by a bank,
where the intent is not to invest in the value of the asset but to merely
enter into a financial transaction, that is to say, excluding operating
leases (therefore, the exclusion under section 31 becomes meaningful);
e Discounting of a bill of exchange is strictly speaking not a loan, as the
discounter buys the bill, and does not lend or advance money against
the bill. However, there is a “credit facility” involved here,
e Any factoring transaction whereby the bank has bought any receiv-
ables—most such factoring transactions are not technically “loans” but
are substantively loans.
e Any purchase of a commercial paper by a bank—the paper is not a de-
benture or bond, as it is issued as a negotiable instrument, but since it is
an accommodation paper, it should be properly included under “other
credit facilities.”
e Deferred credit on purchase of machinery etc. is also a form of dis-
counting, but the facility is granted by the seller to the purchaser. The
bank merely discounts the commercial bills raised by the seller. There-
fore, strictly, thereis no loan or advance granted to the borrower by the
bank, but on a wide interpretation, such facility should also be included.
e Note the author’s comments pertaining to a ruling of the Rajasthan
High Court holding a forward purchase of foreign exchange facility asa
facility, and therefore, the counterparty as a “borrower”—see notes un-
der “borrower” above.
Such broad definition is found in analogous laws of other countries. For in-
stance, the law relating to the ARC in Malaysia, called Danaharta Law, defines
“credit facility” as under:
“the giving of any advance, loan or other facility in whatever form or
by whatever name called, whereby the person to whom the advance,
loan or facility is given has access, directly or indirectly, to the funds of
the person giving it, and shall include without limitation, any sale and
buy-back arrangement, hire-purchase agreement, lease arrangement,
joint venture arrangement, debt trading, , deferred payment
sale, profit sharing arrangement and other fir arrangements made
in accordance with Islamic banking concepts in whatever form or by
whatever name.”
In certain cases, however, it will not be proper to extend the definition to in-
clude anoutlay of money. For example, ifa bank buys any preference orequity
shares, even though with a commitment to buy-back or redeem the same,
no credit facility” to theissuer. Not every debt can betreated ascredit there is
and not every anting of credit, that is, time for payment, can
facilit y,
be taken as a
credit
on facility.
endliginien transaction or
or claim must certainly be analogous to a lending
:
 Words of different import: financial asset, etc. Sec. 2(1), Syn. 1 821
It is important to understand that credit facility must necessarily
result into a
debtor-creditor relationship. As the bank purportedly extends
the facility, the
bank must be the creditor, and the counterparty must be the debtor.
The relation-
ship may either be existing as on the day the facility is extended, for
example, in
case of funded facilities, or may be contingent, as in case of unfunded faciliti
es
such a guarantees. However, where there is no such relationship at all,
it is doubt-
ful if the transaction may be said to be a credit facility. For a discussion on
whether purchase of trade bills by a bank is a case of credit facility, see discus-
sion in the RBI publication’’The Reserve Bank of India, Vol III:
8. Whether derivatives claims of banks a “financial assis-
tance’”’
See Notes under sec. 2(1)(f) .

Section 2(1)
(1) “financial asset” means debt or receivables and includes—
(i) a claim to any debt or receivables or part thereof, whether
secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge
on, immovable property; or
(iii) a mortgage, charge, hypothecation or pledge of movable
property; or
(iv) any right or interest in the security, whether full or part
underlying such debt or receivables; or
(v) any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such in-
terest is existing, future, accruing, conditional or contin-
gent; or
(vi) any financial assistance;

COMMENTS

1. Words of different import: Financial asset, financial as-

sistance, secured debt, any debt
This legislation, being a combo piece of law, uses various words and phrases,
each of which has a different meaning, and it would not be proper to use them
interchangeably.
The “financial assistance” is related to the definition of a “borrower” and
wherever question arises to enforce any rights granted under this law against a

77. http://rbidocs.rbi.org.in/rdocs/content/PDFs/90071.pdf, at page 112.(accessed on 12th August,

2013).
$22 See. 2(1), Syn. 2 Part li—Chap. 1—Preliminary

-——needs to be
borrower, the word “financial assistance”——see comments above
kept in mind.
wherever
The word “any debt” is obviously wide and includes any debt, that is,
there is anything payable by one person to another, Where such debt is secured
by a “security interest”, the debt becomes “secured debt”.
However, the word “financial asset” is of an even wider importance, It is Nola
ble that “financial assistance” is a part of “financial assets”, All seoured or unse-
cured debts are also part of “financial assets”, and the term is still wider!
nce
the defini
ica
2. Signifof tion
The short title to the legislation reads “Securitisation and Reconstruction of Ti-
nancial Assets..”. Thus, the parts of the law related to securitisation and recon-
struction are related to “financial assets”. Provisions which create any rights of
enforcement against borrowers are enforceable against “borrowers” who have
availed “financial assistance”’—therefore, those rights are availed only where
there is a “financial assistance” which is much narrower than financial assets,
The importance of this definition is directly related to the application of the
provisions relating to securitisation and reconstruction. Therefore, this definition
widens or limits the very scope of operation of the securitisation/reconstruction
limb of the legislation.
3. Meaning
of “financial asset”
The purport of the word “financial asset” in this law goes much farther than the
term “actionable claim” or “debt” or “receivables”. This definition is even wider
than the accounting definition of “financial assets”.
Putting things straight, the word “financial asset” under this definition includes
the following:
(a) All financial assistance, that is, loans, advances, guarantees, letters of
credit; etc.
(b) All existing debt and receivables, besides those created on account of
any financial assistance;
(c) Any security interest underlying any receivables;
(d) Any beneficial interest, that is, not being legal interest, inany receiv-

(e) Any fractional

interest in receivables;
(f) Any future, accruing, contingent or conditional debt.
This clause is directly connected with the assets that can be securitised or trans-
ferred to reconstruction companies. Therefore, the understandable intent of a
widely-defined term “financial asset” is to impart transferability to all these ele-
ments which are covered in “financial assets”. However, the other part ofthe leg-
islation, relating to enforcement of security interests, should not be interpreted to
resemble the wide import of “financial assets” under this clause.
 Accounting standards definition Sec. 2(1), Syn. 5 823

4. UNCITRAL model law

The closest international piece of law that can be compared with the intent
of
this definition is the United Nations Commission on International Trade
Law
(UNCITRAL)’s model law on assignment of receivables. The purpose
of the
UNCITRAL model law is also similar—to render assignability to several receiv-
ables or assets which are either not assignable freely or not assignable at all under
common law. The UNCITRAL on 31st January, 2002, came out with a model
known as United Nations Convention on the Assignment of Receivables in
International Trade”. This is a model for various nations to adopt in their own
laws.
Under UNCITRAL model law, future receivables are assignable, but there are
limitations. Similarly, receivables where there are contractual restrictions on
transfer are assignable only in accordance with such restrictions. In addition, sev-
eral receivables or claims are not treated as “financial assets” as they are dealt
with in accordance with specific procedures or regulations. These are—
(a) Transactions on a regulated exchange;
(b) Financial contracts governed by netting agreements, except a receivable
owed on the termination of all outstanding transactions;
(c) Foreign exchange transactions;
(d) Inter-bank payment systems, inter-bank payment agreements, or clear-
ance and settlement systems relating to securities or other financial as-
sets or instruments;
(e) The transfer of security rights in, sale, loan or holding of or agreement
to repurchase securities or other financial assets or instruments held
with an intermediary;
(f) Bank deposits;
(g) A letter of credit or independent guarantee.
These exclusions are appropriate—these limit the scope of operation of a ge-
neric law relating to transfer of receivables.
The present legislation deals with transfer of “financial assets” and provides an
over-riding transferability to such financial assets. The scope of operation of such
law should not interfere with such assets as are dealt with by specific systems—
for example, security transactions, derivatives deals, foreign exchange transac-
tions, bank deposits etc.

5. Accounting Standards’ definition

Accounting Standards contain the definition of “financial assets’ as the ac-
counting standards on accounting for financial instruments relate to financial as-
sets and financial liabilities.
A financial asset is thus defined under IAS 39 (adopted in India as AS 30):

78. See here: http://www.uncitral.org/pdf/english/texts/payments/receivables/ctc-assignment-

convention-e.pdf. (accessed on 12th August, 2013).
$24 See. 21), Syn. © Pant Li—Chap. - Preliminary

“A financial asset is amy asset thal ts:

(a) cash,
(b) an equity instrument of another entity;
(c) a contractual mght:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with
another entity under conditions that are potentially favourable
to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instru-
ments and is:
(i) a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity's Own equity imstru-
ments, or
(ii) a derivative that will or maybe settled other than by the ex-
change of a fixed amount of cash or another financial asset for
a fixed number of the entity’s own equity instruments, For this
purpose the entity’s own equity instruments do not include put-
table financial instruments classified as equity instruments in
accordance with paragraphs 16A and 16B, instruments that im-
pose on the entity an obligation to deliver to another party a pro
rata share of the net assets of the entity only on liquidation and
are classified as equity instruments in accordance with para-
graphs 16C and 16D, or instruments that are contracts for the
future receipt or delivery of the entity’s own equity instru-
ments.
This definition is intended to create a specific method of accounting for such
assets and therefore, may not be relevant to assist in the interpretation of the
word “financial asset” under this legislation. For example, under this definition,
all investments, including equities, preference shares, bonds, etc. are financial
assets. Even a derivative contract which is in money is a financial asset. But the
meaning of the word “financial asset” under the present legislation is coloured by
the words “debt or receivable”.
In India, though the recognition and measurement of financial instruments are
provided in Ind AS 39” (corresponding AS 30), a financial asset is defined under
ii 32" (corresponding AS 31) and the definition has been adopted from IAS

6. First limb: Any debt or receivable

Under this definition, any debt or receivable is a financial asset. The later
ofthisdefinition starting with words “and includes...” merely expands thepe-
neric meaning of the words preceding, viz., any debt or receivable.

79. Financial Instruments: Recognition Measurement

80. Ruuvid tutes: Peoeme
 Receivables as actionable claims
Sec. 2(1), Syn. 8 825

7. Debt and receivable

The words “debt” and “receivable” are not very different. The
reciprocal of a
“receivable” is a “payable” and a payable implies a debt. In
other words, the
word “debt” is related to the person who is indebted, that is, it means
a liability.
However, the word “debt” has certainly not been used in this law in the
sense of
a liability, as it is included under the broad caption of “financial assets”
. In other
words, if there is a debt payable by some person, such debt is a “financial
asset”
in the hands of the person entitled to receive the same.
In West v. Miller*’, the Judge said: “I myself should have held that the words
‘receivable’ and ‘payable’ were the same thing, and that both were equivalent
to
be ‘vested’; but I am happy to find that the judgment of the MR in Haywar
d vy.
James”, expresses exactly the same conclusion”. In our discussion below,
we use
the words “debt” and “receivable” interchangeably.
8. Receivables as actionable claims
The words “any debt or receivable” are words of wide importance, leave aside
the further widening done by the second limb starting “and includes..”. “Debt”
has been defined as “a sum of money due under an express or implied agree-
ment’. Wherever there is a sum receivable by someone, there is a financial asset.
The word “receivable” can be interpreted as a contractual right to receive, or ac-
tionable claim. The word “actionable claim” is defined in section 3 of the Trans-
fer of Property Act as under:
“Actionable claim means a claim to any debt, other than a debt se-
cured by mortgage of immovable property or by hypothecation or
pledge of movable property, or to any beneficial interest in movable
property not in possession, either actual or constructive, of the claimant,
which the Civil Courts recognise as affording grounds for relief,
whether such debt or beneficial interest be existent, accruing, condi-
tional or contingent”.
The above definition can be broken down as under:
e aclaim to any debt,
e other than a debt secured by
° mortgage of immovable property, or
° by hypothecation or pledge of movable property,
e or to any beneficial interest in movable property
° not in possession,
° either actual or constructive,
° of the claimant,
which the civil courts recognise as affording grounds for relief,

81. (37) LJ Ch 426.

82. (29) LJ Ch 822.
826 Sec. 11), Sya. 9 Part U—Chap. Preliminary

» whether such debt or beneficial interest be existent, acoruing, cond,

tional or conungent.
The word “receivable” or “debt” in the definition in this legislation can be Lik-
ened to the following part of the definition of “actionable claim”——"a Chaim to
any debt, ...whether such debt ..be existent, accruing, conditional or contingent”.
Therefore, any claim to any debt is a receivable under this definition, irrespective
of how such claim was created.
9. Second limb: “Any includes”
The present law provides for transferability of “financial assets” in seouritisa:
tion and asset reconstruction transactions, Receivables being actionable claims
are transferable under the Transfer of Property Act. Section 6 of the Transfer of
Property Act provides for transfers of any property, and a receivable is nothing
but a property. However, the present law extends the meaning of “actionable
claims” under the Transfer of Property Act and “receivables” as commonly un-
derstood, to include certain items that have arguable transferability otherwise.
Therefore, the second limb of the above definition is quite significant.
10. Clause (i): Fractional interests in receivables
Clause (i) of the second limb says: “a claim to any debt or receivables or part
thereof whether secured or unsecured”. The important words in this clauseare “a
claim to any part of any debt or receivables” or “a part of a claim to any debt or
receivables”, depending on where does one connect the word “thereof”. Properly
speaking, this should mean “part of any claim to any debt”, since claim to a part
of any debt is after all a financial asset itself.
Going by this, any part of a claim to any debt or receivable is by itself a “finan-
cial asset”, and the provisions of the legislation relating to securitisation and re-
construction can be applied to such fractional or partial claim.
Independent of this legislation, the position on fractional or joint rights under
the common law is as under: liabilities can be, and usually are, joint and several.
That is to say, where there is a liability cast on two or more persons jointly,
are enforceable against any one of them, or all of them—section 43 of the Indian
Contract Act. However, if there is a joint right, such joint right is exercisable
only jointly—section 45 of the Indian Contract Act. This provision was inserted
with a great insight—if joint rights were to be enforced independently or sever-
ally, the promisor or the obligor will be called upon to face multiple claims and
litigation for the same right. Therefore, section 45 of the Contract law provides
that: “when a person has made promise to two or more persons jointly, then,
unless a contrary intention appears from the contract, the right to claim perform-
ance rests, as between him and them, with them during their joint lives...”, etc.
Based on this rule, in English law, there has been a dispute of authority as to
whether a part of an actionable claim could be assigned. The partial assignment
tuleisapplicab in two le
cases: one, where the assignor himself holds a part of a
receivable, and two, where the assignor holds the whole of a receivable but wants
to transfer a part. In either case, the effect of the transfer will be to create a joint
right in favour of the transferee on the receivable.
 Clause (i): Fractional interests in receivables Sec. 2(1), Syn. 10 827

In English law, the authority on this issue has been divided: in Skipper
and
Tucker v. Holloway and Howard”, it was held that an ascertained part of
a debt
could be assigned. But around the same time, in Forster v. Baker®’, it was
held
that a part of a debt was not assignable. In an often-cited ruling in Re Steel Wing
Co. Ltd.°, it was held that a part of a debt was not legally assignable but merely
created an equitable interest against the debtor in favour of the transferee. This
ruling was also accepted in Walter & Sullivan v. J Murhpy Ltd.*°.
In India too, there have been divergent views in this regard. The English ruling
in Steel Wing has been followed in Rajamier v. Subramaniam*’ , and also Ghisu-
lal v. Gambhirmal”™. The Patna High Court also reviewed English authorities in
Durga Singh v. Kesho Lal.®’, and held, in view of the meaning of “actionable
claim” that even if a part of the debt was assigned, it could not be viewed as an
actionable claim in law.
It is notable that the restraint in common law is not on the assignability of a
part of a debt per se, but on whether the assignee of such part will get a right
against a debtor. In view of the provisions of the Contracts Act, it is clear that a
joint right will invariably be enforceable jointly—so the issue of transferability
does not affect the legal position on enforceability. In other words, even if a part
of the debt is assigned, the assignee can only bring action in collusion with the
other co-owner.
Now, the issue is: how does the
Common law rule against present legislation impact the
partial assignment
above legal position? As between a
>» Under common law, liabilities can be bank/financial institution, and as a
joint and several, but receivables can be
securitisation company/ reconstruc-
either joint, or several, but where they
are joint, they cannot be several. tion company, a fractional or par-
If a transferor transfers only a fraction
tial interest in a financial asset is
of his interest in receivables, he creates transferable. Therefore, any differ-
a joint right, but he cannot contend that ence of authority on the transfer-
the transferee is the independent owner ability itself is eliminated. How-
of the fraction transferred.
ever, as far as enforcement of a
In other words, the transferor and the partial “interest is concerned, the
transferee will be treated as the joint-
owners of the whole, and not whole
transferee of a partial interest can-
owners of the part. not have anything more than the
transferor himself—in case of a
partial right, the interest of the transferor himself is subject to section 45 of the
Contract Act and the transferee cannot have an independent right to enforce the
financial asset against the debtor. In other words, the transfer of fractional inter-
est under this cannot put the transferee on the platform of a full owner of the re-
ceivable.

83. (1910) 2 KB 630.

84. (1910) 2 KB 636.
85. (1921) 1 Ch 349 : (1920) All ER Rep. 292.
86. (1955) | All ER 843.
87. (1929) 52 Mad 465.
88. (1932) 62 Cal 510.
89. (1939) 18 Pat. 839.
 828 See. 2(1), Syn. 11 Part ti—Chap. l-—Pretiminary

In India, partial assignment of a receivable is well recognized by legal instru

ments. The part dealing with direct assignments in RBI guidelines on seouritisa
tion (discussed at length in Chapter 3 of Part | of the book) mandatorily requires
retention of a part passu share by the lender. Hence, every direct assignment of 4
loan in India has to be a partial assignment.
11. Clause (ii): Debt secured by mortgage of immovable
property
The definition of actionable claims, as noted above, excludes claims secured by
a mortgage of immovable property. The intent of this clause is to include what
was excluded under the definition of “actionable claims” under the Transfer of
Property law. “Never pull down a fence, unless you know why it was put up in
the first place” is an old advice, and it seems this advice has been ignored by the
draftsman of this law in the present case. Mortgage debt, that is, debts secured by
mortgage of immovable properties were excluded from the definition of “action-
able claims” by the amendments made in 1900, with the objective of ensuring
that a transfer of such debt did not amount to transfer of the mortgaged interest.
Prima facie, it is not proper to transfer a debt dissociated from the mortgage. The
provisions of the Transfer of Property Act relating to transfer of actionable
claims do not apply to transfer of a mortgage debt, because such debt, being an
interest in immovable property, is treated as immovable property itself. A trans-
fer of a mortgage debt would amount to transfer of the mortgage security, and the
mortgage security itself is an immovable property”’. There are several other cases
on this point: See MULLA ON TRANSFER OF PROPERTY ACT, notes under section
8 and section 130.
This provision treats a mortgage debt as a financial asset. There is another
clause (see notes later) that treats the security interest also as a financial asset. In
other words, it is possibl under ethis law to treat both the mortgage debt and the
mortgage security as financial assets and apply the provisions of law relating to
securitisation and asset reconstruction on such debts. As mortgage is an interest
in immovable property (in case of usufructuary mortgage, even the interest of
physical enjoyment of rents and benefits out of the property), immovable proper-
ties may be transferred as financial assets under this law.
12. Clause (iii): Mortgage, charge, hypothecation or pledge
of movable property
This clause should have properly read: “debt secured by mortgage.
charge,
pothecation orpledge ofmovable property”. Thatisa proper waytointer hy-
pre thee
clause, since the security interest itself is covered by the next clause.
Debts secured by hypothecation or pledge of movable property are
excluded
from the definition of “actionable claims” under the Transfer of
This again wasa conscious exclusion inthatlaw_—which hasbeen Act.
andere innit
present legislation.

9. See
P Tay v.lor
London
T1921) & toe
44Mad ‘ Co. (1901) 2 Ch231,andforanTndian ruiting Perum »,
mins
 Clause (v): any beneficial interest in property, etc:
Sec. 2(1), Syn. 14 829
As far as debts secured by pledge are concerned,
they are included by the
above clause but excluded by section 31. See notes under
section 31.
13. Clause (iv): Security interests underlying receivab
les
Not only is a receivable a “financial asset”, even a security
interest underlying
such an asset is also a financial asset.
We have noted above that the exclusion of mortgage debts
and hypothecation
debts was done to avoid situations whereby transfer of the
debt would lead to
transfer of security interests as well. The present law treats the
security interest
itself as a financial asset.
From the language of the definition, it is even possible to contend
that as be-
tween a transferor and a securitisation/reconstruction company,
the receivable,
and the security backing up the receivable, are independently transfe
rable. That is
to say, the transferor might transfer the receivable and retain the securit
y, or vice
versa. However, doing so might lead to questions on the enforceabili
ty of the
security itself. In a Privy Council ruling in Imperial Bank of India y. Bengal
Na-
tional Bank”, it was held that if there was an unregistered (meaning, unregi
stered
under the Registration Act) transfer of mortgage, the security interest, being
a
mortgage interest and hence, immovable property, was not transferred for want
of registration, but the debt, divorced from the mortgage, was transferred. The
impact of an unregistered transfer of mortgage debt, therefore, was to divest the
debt from the mortgage, and transfer the former without the latter. As a conse-
. quence of this ruling, in Fanny Skinner v. Bank of Upper India™”, it was held that
if such was a case, then the security interest itself was unenforceable. The reason-
ing goes as under: if the debt has been transferred due to unregistered transfer,
there is no debt with the transferor, but the security interest continues. As the se-
curity interest is only to support a debt, there being no debt, there is no right to
enforce the security interest as well.
Therefore, it is advised that banks/financial institutions do not transfer receiv-
ables while retaining security interest, or vice versa.
14. Clause (v): Any beneficial interest in property, etc:
This clause has several ingredients: let us present them item-wise:
e any beneficial interest
° in property,
° whether movable or immovable,
° or in such debt, receivables,
° whether such interest is existing, future, accruing, conditional
or contingent.
Part of this definition apparently comes from the Transfer of Property Act. That
law, in part, reads: “any beneficial interest in movable property not in possession,
either actual or constructive, of the claimant, which the civil courts recognise as

91. (1931) 59 Cal. 377 : 35 CWN 1034 : AIR 1931 Cal 245.
92. (1935) 621A 115: AIR 1935 PC 108.
830 See. (1), Sya. 15 Part U—Chap. — Preliminary

affording grounds for relief, whether such debt or beneficial interest be existent,
accruing, conditional or contingent.”
There are 3 remarkable changes in the original definition under Transter ot
Property Act:
+ First, the words “not in possession” have been dropped, which is an
other example of pulling down the fence without u standing why u
was put up;
e Second, the words “immovable property” have been inserted,
e Three, the word “future” interest has been inserted, with an understand-
able motive, but without necessary supporting word(s).
In Transfer of Property law, beneficial interest in movable property, nor in pos-
session, is taken as an actionable claim. Beneficial interest in movable property,
in possession is not taken as actionable claim because that is ownership of the
propert y Under the current law as well, though the words “not in pos-
or goods.
session” have been dropped, the beneficial interest referred to in here must be
limited to such an interest that is not property in goods.
Beneficial interest in immovable property has not been covered in Transfer of
Property law, for reasons discussed earlier. This law covers such beneficial inter-
est as well. However, here also, the cardinal rule that a financial asset cannot be
extended to include ownership interests in physical assets must be borne in mind.
Thirdly, the word “future” interest has been inserted in this clause. The appar-
ent intent was to remove a difficulty of common law whereby a future debt is
either not assignable or not presently assignable. However, instead of using the
words “interest in future debt”, the placing of the words leads to a wrong con-
struction—“future interest in debt”. However, ironing out the creases of lan-
guage, the present clause seeks to cover future debt, also known as ‘future flows’ ,
as a financial asset.
15. Beneficial interest in property may clash with Trusts
Law
_ A securitisation company acquires an asset ultimately for holding the property
in trust for the investors. It is, in other words, intended to be held as trust prop-
erty. Section 8 of the Trusts Act prohibits a trustee from acquiring trust property
if such beneficial interest is the predominant property of the trust. “No trusts on
trusts” is an important legal principle. Therefore, beneficial interests that can be
acquired by securitisation companies cannot predominantly include property held
in trust by some other person under a subsisting trust.
16. Assignability ofFuture Flows
A future flow or future debt is something for which a contractual right does not
exist today. A future debt is not the same as a debt payable in future, as the latter
cuiviliie forwidch @en sete ae ee
ceiv or whic € is no existing right. A simple to di ish a
debt and existing debt is: if what the recipient needed 'W fe Aen atanate
 Assignability of Future flows:
Sec. 2(I), Syn. 16 831
receive has been done, the debt is an existing receivable. If the
recipient will do
something in future to have the right to receive, such debt is a future
debt.
Future sales, future rentals, future royalties, etc. are examples of
future flows.
On the other hand, receivables on account of loans already given, financi
al leases
written, goods sold, services provided, etc. are existing debts.
Under common law principles, the position on transferability of future debt
can
be very complicated. On one hand, we have a simple and logical maxim of law:
how can you transfer what you do not have (nemo dat quod non habet)? You can
transfer it, when you will have it, but you cannot transfer now, what you do
not
have as of now. On the other hand, there are rulings that seemingly suggest that
future debt can also be transferred now. One such leading case cited world-over
is Tailby v. Official Receiver”.
Tailby v. Official Receiver (supra) involved the equitable assignment by way of
mortgage of all of the book debts—both, those already existing and those that
had not yet come into existence—of a company. When the assignor company
went into bankruptcy, the official liquidator questioned the validity of an assign-
ment of future debt and claimed rights over the amount received from debts cre-
ated after the date of assignment.
The House of Lords rejected this argument. The Court recognised that an as-
signment may be vague in the sense of it being “indefinite and uncertain” in
which case it will be ineffective. However, an assignment of all of the future
book debts of a company was, agreeably, upon their coming into existence, be
identified with certainty. This, in the opinion of the House of Lords, was the
standard to be met: “when there is no uncertainty as to identification, the benefi-
cial interest will immediately vest in the assignee”. Therefore, the issue in ques-
tion as far as assignment is concerned is not whether the debts exist or not, but
whether the assignment is of identifiable and ascertainable debt.
There is no real conflict between the common law rule of nemo dat quod non
habet and the ruling in Tailby (supra). Tailby(supra) merely recognises a future
flow transfer in future—as automatically operative as and when the debt is cre-
ated. Therefore, there is an agreement to transfer today, which matures into an
agreement of transfer as and when the debt is created.
The Tailby(supra)ruling has been followed in several cases, notably, in India in
Bharat Nidhi Ltd v. Takhatmal”,,
Thus, it should be clear that a future debt can be transferred only when it actu-
ally arises, though an agreement can effectively be entered into now, for transfer
in future. The present legislation does not change the above position of law—it
treats a future debt as a financial asset, but that does not affect the point of time at
which the transfer of such debt will become effective. In any case, making a
transfer of a future debt effective, on a day on which such debt does not exist at
all, does not serve any purpose, as the transfer is still of something that does not
exist.

93. AIR 1969 SC 313.

94. (1969) AIR SC 313.
$32 Sec. 2(1), Syn. 17 Part 1l—Chap. |-—Preliminary

17. Assignability of conditional receivables

The provision also treats a conditional or contingent debt as a “financial asset”.
Under the definition of “actionable claim” under the Transfer of Property Act, as
well, conditional, accruing or contingent debts are treated as actionable claims.
However, assignment can only be done as for the benefits of a contract and not
burdens of a contract. That is to say, where a receivable is conditional and the
condition is a burden or obligation of the recipient, transfer of the receivable can.
not lead to transfer of the obligation, Thus, if the benefit and burden of a contract
are unseverable, the benefits can be assigned only when the burdens are dis-
charged.
In JafferMeher Ali v. Budge Budge Jute Mills Co.”’, it was observed as follows:
“The rule as regards the assignability of contracts in this country is that
the benefit of a contract for the purchase of goods as distinguished from
the liability thereunder may be assigned, understanding by the term
benefit, the beneficial nght or interest of a party under the contract and
the right to sue to recover the benefits created thereby. This rule is,
however, subject to two qualifications: first, that the benefit sought to
be assigned is not coupled with any liability or obligation that the as-
signor is bound to fulfil, and next that the contract is not one which has
been induced by the personal qualifications or considerations as regards
the parties to it”.
In InduKakkar v. Haryana State Industrial Development Corporation Lid.”’,
the Supreme Court reiterated the rule as under:
“Assignment by an act of the parties may cause assignment of rights
or of liabilities under a contract. As a rule, a party to a contract cannot
transfer his liabilities under the contract without consent of the other
party. This rule applies both at the common law and in equity (vide
para 337 of Halsbury’s Laws of England, Fourth Edition Vol. 9).
Where a contract involves mutual rights and obligations, an assignee of
a right cannot enforce that right without fulfilling the correlative obliga-
tions. The aforesaid principle has been recognised by a Constitution
Bench of this Court in Khardah Co. Ltd. v.Raymon
and Co. (India) (P)
Lid.,” T.L. VENKATAR
J. who spokeAMIA
for the Bench H,
and has ob-
served thus:
“The law on the subject is well settled and might be stated in si
terms. An assignment of a contract might result by transfer either of the
rights or of the obligations thereunder. But there is a well-recognised
distinction between these two classes of assignments. As a rule obliga-
tions under a contract cannot be assigned except with the consent of the
Promisee, and when such consent is given, itis really a novation result-
ing in substitution of liabilities. On the other hand, rights under a con-
tract are assignable unless the contract is personal in its nature
or the
95. (190 33 Cal
6)702.
9%. AIR 1999 SC 296.
97. ATR 1962 SC 1810 : (1963) 3 SCR 183.
 Significance of the definition
Sec. 2(m), Syn. 1 833
rights are incapable of assignment either under the
law or under an
agreement between the parties.”
In context of conditional receivables, therefore, the recei
vable becomes a “fi-
nancial asset” only when the condition is fulfilled. In the meant
ime, there might
be an agreement to transfer, which has the same effect as in
case of future flows.
The above rule of law is not affected by the definition of “finan
cial asset” in this
law as the definition has existed in the Transfer of Property Act
as well.
18. Clause (vi): Any financial assistance
Any financial assistance is a financial asset. The meaning of financi
al assis-
tance as defined in this law has already been discussed earlier.
The word “financial assistance” includes a guarantee or a letter of
credit as
well. It may be appreciated that both guarantee and letters of credit indicat
e an
obligation of the bank/financial institution until they are discharged. The obliga-
tion turns into an asset only when the bank pays under the guarantee or
letter of
credit and gets a right to reimbursement from the principal debtor. It is that right
which is a “financial asset” and not the guarantee or letter of credit itself.

Section 2(m)
(m) “financial institution” means—
(t) a public financial institution within the meaning of section
4A of the Companies Act, 1956 (1 of 1956);
(ti) any institution specified by the Central Government under
sub-clause (ii) of clause (h) of section 2 of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993
(SI of 1993);
(111) International Finance Corporation established under the
International Finance Corporation (Status, Immunities
and Privileges) Act, 1958 (42 of 1958);
(iv) any other institution or non-banking financial company as
defined in clause (f) of section 45-I of the Reserve Bank of
India Act, 1934 (2 of 1934), which the Central Government
may, by notification, specify as financial institution for the
purposes of this Act.
COMMENTS
1. Significance of the definition
Most of the provisions of this legislation relate to banks and financial institu-
tions. Surprisingly, even the provisions relating to securitisation relate to banks

* The Central Government has specified the “Asian Development Bank” as Financial Institution vide
S.O. 1275(E), dated 30-10-2003.
834 Sec. 2(m), Syn. 2 Part 1i—Chap. 1—Prelimmary

and financial institutions only. Therefore, this definition, read with the definition
of “bank” discussed earlier, forms an important defining parameter for this law.
2. Legislated part
This definition includes two parts—a part which is listed in the law itself, and a
part which is “to be notified” by the RBI in terms of power to notify, granted to
it.
The legislated part includes the following:
|. “Public financial institutions” under section 4A of the Companies Act.
Under this definition as well, there is a “to be notified” part whereby
the Central Government has been notifying institutions over time, The
long list of either legislated or notified institutions is as under:
(i) ICICI Ltd.—This has subsequently merged into ICICI Bank
and will therefore, ceased to be covered by this definition after
its dissolution
(ii) TFCI
(iii) IDBI
(iv) Life Insurance Corporation
(v) UTI
(vi) Infrastructure Development and Finance Company Lid
(vii) Any securitisation company or asset reconstruction company ,
covered within the definition by virtue of this law.
In addition, the following financial institutions have been notified
under section 4A (the list is not exhaustive):
(1) The Industrial Reconstruction Bank of India, established under
the Industrial Reconstruction Bank of India Act, 1984 (62 of
1984) [Subs. By S.0. 2091 dated 9-10-1987].
(2) Me conctal Insurance Corporation ofIndia, established under
the General Insurance Business (Nationalisation) Act, 1972 (57
of 1972).
(3) Ane National Insurance Company Limited, formed and regis-
under the Companies Act, 1956 (1 of 1956).
(4) The New India Assurance Company Limited, formed and
tered under theCompanies Act, 1956 (1 of 1956). —
(5) The Oriental Fire and General Insur
Insurance
ance Company Limited.
formed and registered under the Companies Act, 1956 (1 of 1956).
(6) an United Fire and General Insurance
ormed and registered under the Compeliag ALC tose
1956). [Notificatio
(1 of
$.0.
n 1329 dest Manyant 1978}.
(7) The Shipping Credit & Investment Company
by$.0. 330,dated21-1-1988).
(Ins. <a Lites,
Legislated part Sec. 2(m), Syn. 2 635

(8) Tourism Finance Corporation of India Limited, formed and

registered under the Companies Act, 1956 (1 of 1956). [Ins. by
S.O. 7(E), dated 3-1-1990].
(9) Risk Capital and Technology Finance Corporation Limited,
formed and registered under this Companies Act, 1956 (1 of
1956). [Ins. by S.0. 238(E), dated 20-3-1990].
(10) Technology Development and Informations Company of India
Limited, formed and registered under the Companies Act, 1956
(1 of 1956). [Ins. by S.O. 321(E), dated 20-3-1990].
(11) Power Finance Corporation Limited, formed and registered un-
der the Companies Act, 1956 (1 of 1956). [Ins. by S.O. 674(B),
dated 31-8-1990].
(12) National Housing Bank [Ins. by S.O. 484(E), dated 26-7-1991 ].
(13) Small Industries Development Bank of India (SIDBI), estab-
lished under the Small Industries Development Bank of India
Act, 1989 (39 of 1989). [Ins. by S.O. 812(E), dated 2-12-1991],
(14) Rural Electrification Corporation Limited, formed and regis-
tered under the Companies Act, 1956 (1 of 1956) [Ins. by S.O
128(E), dated 11-2-1992].
(15) Indian Railway Finance Corporation Limited, formed and reg-
istered the Companies Act, 1956 (1 of 1956). [Notification No.
765(E), dated 8-10-1993].
(16) Industrial Finance Corporation of India Limited, formed and
registered under the Companies Act, 1956 (1 of 1956). [Noftifi-
cation No.S.O. 98(E), dated 15-2-1995].
(17) Andhra Pradesh State Financial Corporation.
(18) Assam Financial Corporation.
(19) Bihar State Financial Corporation.
(20) Delhi Financial Corporation.
(21) Gujarat State Financial Corporation.
(22) Haryana Financial Corporation.
(23) Himachal Pradesh Financial Corporation.
(24) Jammu & Kashmir State Financial Corporation.
(25) Karnataka State Financial Corporation.
(26) Kerala Financial Corporation.
(27) Madhya Pradesh Financial Corporation.
(28) Maharashtra State Financial Corporation.
(29) Orissa State Financial Corporation.
(30) Punjab Financial Corporation.
(31) Rajasthan Financial Corporation.
830 See. 2(m), Sya. 2 Pant Li—Chap. Prelimanary

(32) Tamil Nadu ladustrial Investment Corporation Limited, [Sub.

by Notification, No. 859), dated 27-10 1995}.
(33) Uuar Pradesh Financial Corporation.
(34) West Bengal Financial Corporation, (Notification No.0.
247(E), dated 28-3-1995).
(35) Indian Renewable Energy Development Agency Limited,
(Notification No. 843(B), dated 17-10-1995),
(36) North Eastern Development Finance Corporation Limited,
(Notification $.0, No, 529(E), dated 23-7-1996],
(37) Housing and Urban Development Corporation Limited. |Noti/i-
— cation S.O, 857(B), dated 9-12-1996],
(38) National Cooperative artment Corporation
(NCDC)|Notification GSR No 518(E), dated 09-05-2003]
(39) EDC Limited and Tamil Nadu Power Finance and Infrastrue-
ture Devel nt Corporation Limited, |Notification §.O,
20(E) dated 09-01-2007]
(40) Jammu and Kashmir Development Financial Corporation Lim-
ited. [NotificationS.O. 298(E), dated 12-02-2008)
(41) M/s India Infrastucture Finance Company Limited |Notification
§.0. 143(E), dated 14-01-2009]
(42) M/s Kerala State Industrial Development Corporation Limited
[Notification S.0. 110(E), dated 05-01-2009]
Recently, the Ministry of Corporate Affairs framed certain criteria for
declaring a financial institution as a PFI under Section 4A of the Com-
panies Act, vide General Circular No. 34/2011 dated June 2, 2011,
which was revised vide General Circular No. 10/2012 dated May 21,
2012. The eligibility conditions are:
a. A company or corporation should be established under a special
Act or the Companies Act, being a Central Act;
b. Main business of the company should be infrastruc-
tural/industrial financing;
. The company must be in existence for at least 3 years and its
financial statements must show that its income from infrastruc-
tural/industrial financing is more than 50% of its total income;
d. Minimum net-worth of Rs. 1000 crores:
Registration
as an Infrastructure Finance C (IPC) with
RBI,
or a Housing Finance Company (HFC) with 7
; NOC from RBI/NHB, is to be obtained with regard to supervi-
cay, COnceTEn andlUaesaene Call Geenclosed wilh theapplicn-
%

. After being declared as PFls, the IPCs or HPCs are required to

disclose in their audited Financial Statements that they are
 To be notified part
Sec. 2(m), Syn. 3 837
complying with the directions and conditions
laid down by the
Ministry.
However, in case of Central or State Public Sector
Undertakings, no
restriction shall apply with respect to financing speci
fic sectors and net-
worth as stated in points (c) and (d) above, respective
ly.
Pursuant to this, several infrastructure finance comp
anies have been
notified as public financial institutions u/s 4A of the
Companies Act.
2. Institutions specified by the Government under
section 2(h)(ii) of the
Recovery of Debts Due to Banks and Financial Instit
utions Act, 1993.
Section 2(h) of the Recovery of Debts Act reads as under
:
“Financial institution” means—
(i) a public financial institution within the meaning of
section 4A
of the Companies Act, 1956 (1 of 1956);
(ia) the securitisation company or reconstruction company
which
has obtained a certificate of registration under sub-section
(4)
of section 3 of the Securitisation and Reconstruction of Finan-
cial Assets and Enforcement of Security Interest Act, 2002 (54
of 2002);
(ii) such other institution as the Central Government may, having
regard to its business activity and the area of its operation in
India by notification, specify;
notably, here again, there is a “to be notified” part.
3. International Finance Corporation established under the International
Finance Corporation (Status, Immunities and Privileges) Act, 1958—
this clause makes wrong use of the words “established under”. IFC
Washington, is surely not established, but is referred to under the
Status, Immunities and Privileges law.
3. To be notified part
As would be observed from the above discussion, the list of financial institu-
tions covered by the above three clauses is either public financial institutions un-
der section 4A of the Companies Act, or those notified under the Recovery of
Debts law. The vast array of private financial companies which form a larger part
of securitisation market today are all left to be notified.
It will not be surprising, if the RBI adds eligibility conditions while notifying
the list of financial companies that can securitise, as if the ability to securitise is
some kind of a legislative privilege. It should be understood that the ability to
securitise is more a matter for the market to judge, than for the regulators—if the
market is prepared to buy the securitised assets of an originator, the regulatory
approval or disapproval has little relevance. As it is, there is currently no bar on
entities not covered by this law to securitise their assets: therefore, the broader
the ambit of this law, the more uniform will be the marketplace with more regu-
lated entities.
$33 Sec. 2m), Syn. 4 Part L—Chap, 1—Prelinunary

The “to be notified” list empowers the RBI to only notify “financial compa
Under
nies” defined in section 451(f) of the RBI Act, read with section 45l(c).
its busi
section 45(c), a company is weated as a financial company based on
ness—lending, investment, hire purchase, leasing, etc, nancial COMpAnies,
unless exempted from the operation of the law, require registr ation with the RBI.

4. Are housing finance companies, “finance companies”?

The RBI has power under section 45NC of the RBI Act to exempt certain Com:
panies or class of companies from the applicability of the provisions of the RBI
Act relating to financial companies. In pursuance of this power, certain compa
nies, for example, housing finance companies, have been excluded from the op-
erative provisions of the RBI Act. This, however, does not unply that such com-
panies are not financial companies under section 45\(f), The reasoning is simple:
if a certain institution was not a financial institution, there was no need for the
RBI to exempt such companies by way of a notification,
Therefore, since the reference in section 2(m)(iv) of the present legislation is to
“financial companies” as defined in section 451(f) of the RBI Act, housing fi-
nance companies, and other exempted financial entities that are not subject to the
operative provisions of the RBI Act are still companies that may be notified for
the purposes of this legislation.
As regards housing finance companies, the Central Government has, by Notifi-
cation No. S.0. 1282(E) published in Gazette of India 10th, November, 2003,
specified certain housing finance companies registered under sub-section (5) of
section 29A of the National Housing Bank Act, 1987, to be treated as Financial
Institutions for the purpose of the sub-clause (iv) of clause (m) of section | and 2
of the SARFAESI Act, 2002.
5. Infrastructure finance companies:
Not every infrastructure finance company is covered by this Act — only those
that have been notified as “public financial institutions” under section 4A are.
See notes on recent Guidelines framed by the MCA for declaring PFIs under Sec-
tion 4A of the Companies Act,
A question that may arise is, if an infrastructure finance company or housing
finance company is notified as covered by this Act, does the benefit of such noti-
fication go to loans extended prior to such notification? The answer should be
positive, since the retroactive application of the law itself, to loans extended prior
to 2002, is now settled beyond doubt.
6. Applicability
of the Act: Pre or post-Notification
For discussion on applicability of the Act in respect of security interest created
before notification of financial institutions under 2(1)(m)(i
sntheautentehenen 2(1)(m)(iv), see our comments
 Hypothecation means a charge Sec. 2(1)(n), Syn. 2 839

Section 2(1)(n)
(n) “hypothecation” means a charge in or upon any movable prop-
erty, existing or future, created by a borrower in favour of se-
cured creditor without delivery of possession of the movable
property to such creditor, as a security for financial assistance
and includes floating charge and crystallisation of such charge
into fixed charge on movable property;

COMMENTS
As a cardinal rule, no law should attempt to define every word used in the leg-
islation—because, then, one will end up writing the English dictionary. The need
to define a word arises only when the word is intended to have a particular mean-
ing, different from its plain English meaning, for the purposes of the law.
There was certainly no need to define the word “hypothecation”: similarly
other words used in the law viz., mortgage, pledge, charge, etc. have not been
defined. Hypothecation is a well-understood term of law and banking and the
present definition does not advance or recede its commonly-understood meaning.
1. Relevance of the definition
This law uses hypothecation as a mode of creating “security interests”. Security
interest has been defined [see later] as including mortgage, charge, hypotheca-
tion, or assignment. This definition starts with the words “hypothecation means a
charge...”, while a charge itself is one of the modes of security interests enumer-
ated in the definition of “security interest”. In other words, the word “charge” is
much wider in importance—that is another reason why this definition really trav-
els nowhere.
2. Hypothecation means a charge
A hypothecation is one of the variants of a charge—to be more specific, it is
charge on movable property, and it is not a pledge. However, by virtue of this
definition, every charge on movable property which is not a pledge should be
regarded as hypothecation, and hence, the meaning of “hypothecation” will be
co-extensive with the meaning of “charge”. It is imperative to understand the
meaning of “charge”. ;
Section 124 of the Companies Act does not define a charge but merely says a
charge includes a mortgage. Section 100 of the Transfer of Property Act defines
the word “charge”, though in relation to immovable property, in the following
manner:
“Where irnmovable property of one person is by act of parties or op-
eration of law made security for the payment of money to another, and
the transaction does not amount to a mortgage, the latter person 1s said
to have a charge on the property; and all the provisions herein before
contained which apply to a simple mortgage shall, so far as may be, ap-
ply to such charge.”
SHU Sec. 21a), Sym. 2 Part 1i—Chap. 1—Prelummary

Generically reading this line, where any property, movable or immovable, of

one person, is made available as security for the payment of money to another,
there is a charge. In National P & U Bank v, Chanley’, a charge was detined as
under: “Where in a wansaction for value, both parties evidence an intention that
property, existing or future, shall be made available as security for the payment
of a debt, and that the creditors shall have a present right to have it made avail-
able, there is a charge even though the present legal right which is contemplated
can only be enforced at some future date, and, though the creditor gets no legal
right of property, either absolute or special or any legal right to possession, but
only get the right to have the security made available by an onder of the Court”,
In a more recent case of Re.Bond Worth Lid.”, it was said: “In my judgment, any
contract which, by way of security for payment of a debt, confers an interest in
property defeasible or destructible upon payment of such debt, or appropriates
such property for the discharge of the debt, must necessarily be regarde d
as creat-
ing a mortgage or charge, as the case may be.”
In present day commerce, bankers and financiers use myriad different ways to
secure their receivables. Some of these are plain-vanilla hypothecations, but in-
creasingly, various devices, quite often in subterfuges are used for security pur-
poses. Therefore, increasingly, the characterisation of an interest as a charge or
otherwise is becoming more complex. Some modern day devices are documented
as something else but are intended to operate as charges—making such charac-
terisation all the more difficult.
Primarily, there are 3 types of security interests—a mortgage, where an interest
in property is transferred; a charge—where a lien to have the property made
available in case of a default is created; and a pledge—where the physical pos-
session of the property is handed over.
The basic ingredients of a charge are as follows:
¢ A charge is related to a debt—if the transaction in question is not for
security of a debt, there is no charge. For example, if a sale of an asset
operates so as to transfer an interest in the property, it cannot be said to
be a charge. However, if the sale is so made as to be no more than a se-
curity for payment of a debt, it should be treated as a security interest

. An ownership interest may also be security interest—therefore, merely

because there is an assignment or transfer does not mean there is no
charge. Courts have, over time, recognised assignment or transfer for
the purpose of security as a security interest.
* Such interest should be co-terminous with the debt—that is, if the debt
is repaid or discharged, the security interest should stand resurrected in
favour of the grantor. That is also a distinguishing line with sale and
se-
curity interests.

1. (1924) | KB 431.
2. (1980)Ch 228.
3. See, for a more detailed coverage, Chapter 3 inPart I ofthe book.
 Movable property, existing or future
Sec. 2(1)(n), Syn. 3 841
¢ Some property, present or future, should
be made available as a result
of the security interest. A mere right of restraint, or restrictio
charge. For example, a lender having a right n, is not a
to restrain the owner from
selling a property is not a charge.
Under the definition cited above, the meaning
of hypothecation is co-extensive
with charge—that is, as broad as charge, and as
narrow as charge.
While the meaning of hypothecation as a transfer
of a legal possession of a
movable property, is more in the nature of a charg
e than a mortgage, the lack of
clarity about the meaning of hypothecation is evide
nt from several vourt rulings.
In Federal Bank Ltd v. S.K. Rowther’,a hypothec
ation was equated with a mort-
gage of movable property as under:
“Now the TP Act refers only to mortgages of immo
vable property
and the Contract Act refers only to pledges of mova
ble property, and
neither Act deals with mortgages of movable prope
rty. But mortgages
or hypothecations of movables have long been recog
nised by Courts in
India. Law has recognised mortgages of movable prope
rty as also such
remedies as sale and foreclosure, and retained for the
mortgagor the
right of redemption freed from clogs on equity of redem
ption. These
have no statutory sanction, as neither the Transfer of Prope
rty Act nor
the Contract Act applies to mortgages of movables; they
have been
adopted from the law of mortgages of immovable properties
as a matter
of justice, equity and good conscience.”
On the other hand, in Bank of India Bombay v. Yogeshwar Kant
Wadhera’,the
Division Bench held that hypothecation does not amount to either
juridical or
constructive possession of goods being with the creditor. The Court
held:
“Hypothecation of goods is a concept which is not expressly pro-
vided for in the law of contracts, but is accepted in the law merchant by
long usage and practice. Hypothecation is not a pledge and there is no
transfer of interest or property in the goods by the hypothecator to the
hypothecatee. It only creates a notional and an equitable charge in fa-
vour of the hypothecatee and the right to hypothecatee, as already dis-
cussed, is only to sue on the debt and proceed in execution against the
hypothecated goods, if they are available.”
3. Movable property, existing or future
This part of the definition limits the meaning of charges to only movable prop-
erties. In other words, any security interest in immovable property is not covered
by “hypothecation” in this law. From the definition of “charge” under section
100 of the Transfer of Property Act, it is clear that there are charges on immov-
able property which are not mortgages—such charges will neither be covered by
the word “mortgage” used elsewhere in this law, nor by “hypothecation”’.

4. 1981 KLT 678.

5. AIR 1987 P&H 176.
842 See. (1a), Sym. 4 Part i—Chap. 1—Preliminary

Most
In addition, this part includes charges on future properly, This is Wite—in
of the judicial definitions of ‘charge’, a charge on future paoperty is included: A
charge on future property, would, mostly, be treated as a floating charge.
4. Without delivery of possession of the movable property
These words seek to exclude a ‘pledge’ from the meaning ol hypothecation, A
pledge is defined in section 172 of the Contract Act as, “bailment of goods as
security for payment or performance of a promise”,
A pledge by itself is not a mortgage or lien—il is merely a right to hold on to
the goods, right to retain possession.
By virtue of the above exclusion, cases where physical delivery of shares or
movable property is made to the lender will not be treated as hypothecation, but
they may well be covered by the broader connotation of ‘security interest’. |See,
however, the exception contained in section 31],
5. And includes floating charge, etc.
A floating charge is also covered under the definition. A floating charge is a
generic, nebulous charge on the property of the borrower defined by description
rather than specification. For example, a charge on all present and future stocks,
or all present and future receivables, or broader still, a charge on all present and
future assets, is a floating charge.
A floating charge was beautifully described in the following oft-quoted words
of Lord Macnaghten in Governments Stock and Other Securities Investment Co.
Ltd. v. Manila Railway Co.’, “a floating security is an equitable charge on the
assets for the time being of a going concern; it attaches to the subject charged in
the varying conditions it happens to be from time to time. It is the essence of
such a charge that it remains dormant until the undertaking charged ceases to be a
going concern or until the person in whose favour the charge is created, inter-
venes. His right to intervene may, of course, be suspended by agreement. But if
there is no agreement for suspension, he may exercise his right whenever he
pleases after default.”
As a floating charge is usually created on generic property—for example, all
present and future estate, it is difficult to relate a floating charge to movable
property. The intent of the definition above is to limit “hypothecation” to mov-
able property alone. Until crystallisation, a floating charge is still a dormant hy-
pothecation, and upon crystallisation, it is treated as a hypothecation to the extent
it relates to movable property. This is the meaning of the later words of the defi-
nition, viz., “and crystallisation of such charge into fixed charge on movable

A charge on general, unascertainable property, for example, present and future

assets, and generally. charges on current assets, would be in the nature of floating

6.
7. See Chapter
1897 AC 81.3 in Part I for more detailed discussion and recent case law on floating charges.
 Amendments
made by the 2004 Amendment Section 2(1 (0) 843

charges. See for a recent and landmark ruling of the House of Lords on the dis-
tinction between fixed and floating charges.
6. Exceptions under section 31
Eventually, as the definition of hypothecation under this clause is related to
“security interest”, the exclusions carved out in the definition of “security inter-
est” (see below) as contained in section 31 will apply to this definition as well.
See also notes under section 31.

Section 2(1)(0)
(o) “non-performing asset” means an asset or account of a bor-
rower, which, has been classified by a bank or financial institu-
tion as sub-standard, [doubtful or loss asset,—
(a) in case such bank or financial institution is administered
or regulated by any authority or body established, consti-
tuted or appointed by any law for the time being in force,
in accordance with the directions or guidelines relating to
assets classifications issued by such authority or body;
(b) in any other casé, in accordance with the directions or
guidelines relating to assets classifications issued by the
Reserve Bank; ]

COMMENTS
This is another definition that is superfluous. The only place where this defini-
tion has been used is section 13(2), which also uses the word “default”, and de-
fault, as we have noted earlier, has an embedded meaning of the asset having be-
come a “non-performing asset”.
For the meaning of non-performing asset, see comments under “default” above.
1. Amendments made by the 2004 Amendment
The purpose of the 2004 amendments is not to break the nexus of the definition
of non-performing assets with the guidelines of the RBI—in fact, that was one of
the bases for upholding the constitutional validity of the Act in Mardia Chemi-
cals—on the other hand, the purpose of the amendment is to ensure that the defi-
nition is not unnecessarily anchored to RBI norms in case of entities which are
not administered by the RBL
2. Regarding ‘sub-standard’, ‘doubtful’, ‘loss asset’
In Ind Synergy &Anr. v. Authorised Officer &Ors.”, the legality of the RBI
Guidelines was questioned stating that the same is contrary to the provisions of

National Westminste pic v. Spectrum Plus Limited, 2005 UKHL 41.

Bank r
. Subs. by the Amendmen t Act, 2004 (30 of 2004). s. 2 (wet 11-11-2004).
9. 11(2012)BC231Chattisgarh.
B44 Sec. 1p) Part 1l—Chap. Preliminary

Section 2(0) of the SARFAES! Act. The provisions of the Act do not define the
terms sub-standard, doubtful and less asset as used in Section 2(0) of the Act,
however it is the guidelines issued by RBI which defines the terms, The Court,
relying on the observations made in /CICI Bank Lid, v. Official Liquidator of
APS Star Industries Lid. &Ors."* held that the RBI Guidelines are not contwary to
the definition of ‘non-performing asset’ under the provisions of the Act
Section 2(1)(p)
(p) “notification” means a notification published in the Official Ga-
zette;

COMMENTS
This is self-explanatory.

Section 2(1)(q)
(q) “obligor” means a person liable to the originator, whether un-
der a contract or otherwise, to pay a financial asset or to dis-
charge any obligation in respect of a financial asset, whether
existing, future, conditional or contingent, and includes the bor-
rower;
COMMENTS

1. Significance of the definition

The word “obligor” is relevant for section 6. Briefly speaking, an obligor is to a
“financial asset”, what a borrower is to a “financial assistance”. As the word “fi-
nancial asset” is much wider than a loan, the word “obligor” has been used.
2. Meaning of obligor
The simplest meaning of the word “obligor” is the debtor, and the rest of the
definition is merely verbosity. A financial asset, as noted in the comments above,
primarily implies a debt or receivable. If there is a debt or receivable, there must
pe@ counterparty liable topaythesame totherecipient, whoisthedebtor orob-
gor.
The words “whether existing, future, conditional or contingent, and includ
es
the borrower” do not have much significance as such receivables are
already in-
corporated in the meaning of “financial asset”.
Section 2(1)(r)
(r) “originator” means the owner of a financial asset which is ac-
quired by a securitisation company or reconstruction company
for the purpose of securitisation or asset reconstruction;

16. TX (2010) SLT 30=1 (2011)

BC 178 (SC).
 “prescribed”
Sec. 2(1)(t) 845

COMMENTS
This definition has been used onl y in another defi
nition—the definition of “se-
curitisation”. Essentially, a “financial asset” is a
relationship—at one end is the
obligor and at the other end is the Originator. Origi
nator is the person who origi-
nates, and usually owns the financial asset.
In securitisation parlance, the word “originator” is
not necessarily the entity
that transfers the financial assets to a securitisation
vehicle. “Originator” might
be taken to mean the one who originally created the
asset, whereas it is quite
common in arbitrage or conduit transactions for securi
tisation vehicles to buy
assets from persons who did not originally create the
asset, but merely bought
them. For example, a loan thrown into a securitisation
vehicle might have been
bought from elsewhere: therefore, the word “originator”
has not been used in this
law in the sense of original underwriting or creation, but
merely in the sense of a
“transferor”.
It is notable that the word “originator” has not been confi
ned to banks and fi-
nancial institutions. So, in context of securitisation, where
the definition of
“originator” is relevant, this wider ambit would be of relevance.

Section 2(1)(s)
(s) “prescribed” means prescribed by rules made under this Act;

COMMENTS
The power to prescribe is the power of rule-making, granted to the
executive.
The hierarchy of legislative powers is that a power to make a law is given
only to
the Parliament, and the rules governing procedures or matters of detail are
laid
down by the executive. The power of the executive to make rules is usually
lim-
ited to the power to make such rules conferred by the original legislation. Rules
are subordinated legislation, and cannot travel beyond the authority or scope of
the parent legislation.

Section 2(1)(t)
(t) “property” means:—
(t) immovable property;
(ti) movable property;
(tit) any debt or any right to receive payment of money,
whether secured or unsecured;
(iv) receivables, whether existing or future;
(v) intangible assets, being know-how, patent, copyright,
trade mark, licence, franchise or any other business or
commercial right of similar nature;
$40 See. (11), Sya. 1 Part Li—Chap. 1—Preliminary

COMMENTS

1. Was this required?

Again, only a paranoid or the makers of English Dictionary would think of de.
fining all words—so the issue is, was it necessary to define “property”? If the
law-maker wanted to include something which is not included in the generic term
“property”, the proper way should be “property includes...”’.
The word “property” is such an elementary concept of law—as afier all, all law
primarily relates to properties and liberties—that it has been interpreted and un.
derstood over centuries of legal thought. Besides rulings over hundreds of years,
we have a whole law, more than 100 years of age, dealing exclusively with prop-
erties and their transfers.
In light of this, this definition may, at best, only be intended to expand the
common meaning of “property” and wrongly uses the word “means” instead of
“includes”. Notably, the definitions prevailing over more than 100 years have not
dared to define “property” but merely used an inclusive definition to mark the
borderlines.
2. General meaning of property
It is difficult to circumscribe the word “property” in any kind of limits—
therefore, everything that has value is a property. The Transfer of Property Act
does not define the word property—section 5 merely states that all kind of prop-
erty, existing or future, are transferable: “transfer of property” means an act by
which a living person conveys property, in present or in future, to one or more
other living persons, or to himself, and one or more other living persons”.
The English Law of Property Act [section 205] says: “Property includes any-
thingin actionand any interest in real or personal property”. The earlier English
law, Law of Property and Conveyancing Act, 1881 said: “Property, unless con-
trary intention appears, includes real and personal property, and any estate or in-
terest in any property, real or personal, and any debt, and anything in action and
any other right or interest”.
3. Impact
of the definition
Does this definition anyway extend or limit the scope of the word “property”?
Under the Transfer of Property law, property is either movable, or immovable.
What is not immovable property is movable property. Therefore, if itis property.
and not immovable, it has got to be movable property. This definition includes
both movable and immovable property, and therefore, includes all.
As any right or interest, apart from movable and immovable properties is in-
cluded in the generic meaning of property, parts (iv) and (v) of the definition
above may only be clarificatory in nature.
 2004 amendments
Sec. 2(1)(u), Syn. 1 847
Section 2(1)(u)
(u) “qualified institutional buyer” means a financial
institution,
insurance company, bank, state financial corporation,
state in-
dustrial development corporation, "'[trustee or secur
itisation
company or reconstruction company which has been
granted a
certificate of registration under sub-section (4) of section
3 or
any asset management company making investment on
behalf
of mutual fund] or a foreign institutional investor registered
under the Securities and Exchange Board of India Act, 1992
(15 of 1992) or regulations made thereunder, or any other
body corporate as may be specified by the Board;

COMMENTS
This definition makes a reckless use of “or’s and commas and may be
very dif-
ficult to disintegrate. Obviously, its meaning will depend on how the definit
ion is
itemised. Here is a possible itemisation:
¢ A Financial Institution,
e Insurance Company,
e Bank,
e State Financial Corporation,
e State Industrial Development Corporation,
¢ Trustee or any Asset Management Company making investment on be-
half of mutual fund or provident fund, or gratuity fund or pension fund,
¢ Securitisation Company or Asset Reconstruction Company holding a
certificate of registration under this law,
e Or a Foreign Industrial Investor Registered under the Securities and
Exchange Board of India Act, 1992, or regulation made thereunder,
¢ Or any other body corporate as may be specified by the Board.
The 2004 amendment added to the list, but the addition was done between, the
“trustee” and “asset management company” which makes the word “trustee” al-
most stand apart as an odd man out. In fact, the word “trustee” cannot mean any
trustee—it may only mean a trustee acting for a mutual fund, or a trustee acting
for a securitisation or asset reconstruction company.
1. 2004 amendments
The 2004 amendments added a securitisation company or asset reconstruction
company to the list of QIBs under this law. The purpose of the amendment is
difficult to understand. QIBs are those who buy the securities of a securitisation
or asset reconstruction transaction. In other words, they are the investors. A secu-
ritisation company or asset reconstruction company will be engaged in the busi-

11. Subs. by Amendment Act, 2004 (30 of 2004), s. 2 (w.e.f. 11-11-2004).

B45 Sec. (1Mu), Syn. 2 Part 1l—Chap. 1—Preltiminary

ness of securitisation or asset reconstruction respectively. By defimuion, such a

company cannot be an investor in its own transaction, If the idea is to allow
cross-investments, there was clearly no such need.
2. Who is a qualified institutional buyer?
Since only qualified institutional investors are the intended buyers of “seouri-
ties” created as a result of securitisation process under this law, this definition is
very important.
The term “qualified institutional investor” originates from the SEBI's guide-
lines. The Securities and Exchange Board of India (Issue of ve ay and Disclo-
sure Requirements) Regulations, 2009, Regulation 2(1)(zd) nes this term as
under:
“Qualified Institutional Buyer” shall mean—
(i) a mutual fund, venture capital fund, Alternative Investment Fund and
foreign venture capital investor registered with the Board;
(ii) a foreign institutional investor and sub-account (other than a sub-
account which is a foreign corporate or foreign individual), registered
with the Board;
(iii) a public financial institution as defined in section 4A of the Companies
Act, 1956;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and
Development Authority;
(viii) a provident fund with minimum corpus of twenty five crore rupees:
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-
DDII dated November 23, 2005 of the Government of India published
in the Gazette of India;
(xi) insurance funds set up and managed by army, navy or air force of the
Union of India;
(xii) insurance funds set up and managed by the Department of Posts, India:
There is a wide difference between the definition inthis legislation, and under
the SEBI Regulations, which is understandable. The SEBI regulationare
s meant
for placing shares of unlisted companies by book-building proces
the definiti
s:on
toreCapra fundsaemunatity torplacing 2fixed income security ‘86,Willeven-

this legislation. At the same time, insurance companies, pension and provident
funds etc. are included in this definition, but not as per SEBI norms.
 Who is a qualified institutional buye
r? Sec. 2(1)(v) 849
In exercise of the power to notify a body
corporate as a QIB for the purpose of
SARFAESI, SEBI, vide Notification date
d March 31, 2008 “has notified the non-
banking financial companies (NBFCs) regi
stered under section 45-IA of the RBI
Act, provided the following conditions are
fulfilled:
* The NBFC is a NBFC-ND-SI (non-deposit
taking, systemically impor-
tant), with asset size of Rs. 100 croresand
above
* Other NBFC-NDs, having asset size of Rs.
50 croresand above and
“Capital to Risk — weighted Assets Ratio” (CRA
R) of 10% as applica-
ble to non-deposit taking NBFCs as per the last
audited balance sheet.
In addition to specified NBFCs, SEBI has also
notified Alternative Investment
Funds (AIFs), which is a body corporate and
is registered under the SEBI (AIF)
Regulations, 2012, as QIBs for the purpose of
SARFAESI Act, vide Notification
dated August 3, 2012”.

Section 2(1)(v)
(v) “reconstruction company” means a company form
ed and regis-
tered under the Companies Act, 1956 (1 of 1956) for
the purpose
of asset reconstruction;

COMMENTS
“Asset reconstruction” has been defined uw/s. 2(b)
above—See comments
above. Asset reconstruction and securitisation have been
used as Siamese twins
in this legislation—so a company formed for asset reconstructi
on is also, by defi-
nition, formed for securitisation.
This definition says two things:
One, a reconstruction company under this law should be formed as
a company
under the Companies Act. It cannot have any other organisational form.
Alterna-
tively, it could be said that this law applies only where the constitution
of the re-
construction entity is that of a company.
Two, such company must be formed for the purpose of asset reconstruction.
Typically, under the Companies Act, a company is formed with two types of ob-
jects—main objects and other objects. The main objects are objects to be pursued
immediately upon incorporation, and the other objects are the objects that are like
reserved powers. When the law says, “formed for the purpose of asset reconstruc-
tion”, it should imply the main object of the company at the time of its formation
should be carrying on of asset reconstruction and securitisation activities.

12. Notification No.F.No. Te ee eee tkaden eae

http://www.sebi.gov.in/acts/qibnotification.pdf.(accessed on ugust,
2013). bart Geter eetoca, Ahleni detu, cecesrctcteitiee 1348468504478.pdf. (accessed on 12th
August, 2013)
‘ ification No, LAD-NRO/GN/2012-13/09/17427, available at: |
a tah pal a RR 1348468504478. pdf. (accessed on 12th August,
2013)
 850 See. 2 1Mw) Part li—Chap. 1-—Preliminary

There is no stipulation as to whether the company would be a public

or private
company. In view of the flexibility in operations, it may be to const.
tute a reconstruction Company as a private company.
Section 2(1)(w)
(w) “Registrar of Companies” means the Registrar defined in clause
(40) of section 2 of the Companies Act, 1956 (1 of 1956),

COMMENTS
This is yet another example of unwarranted verbosity, There is a clause below
in section 2(2) that does import the meaning of undefined words from the Com-
panies Act. “Registrar” is a word defined in theCompanies Act—and this defini -
tion also imports the meaning from the Companies Act. In other words, if this
definition were not there in this law, it would not make any difference at all.
The only relevance of this definition is in informing the Registrar of Compa-
nies of any securitisation of financial assets for which a charge has been regis-
tered. See notes under Section 6.

Section 2(1)(x)
(x) “Reserve Bank” means the Reserve Bank of India constituted un-
der section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);

COMMENTS
This is self-explanatory.

Section 2(1)(y)
(y) “scheme” means a scheme inviting subscription to security re-
ceipts proposed to be issued by a securitisation company or re-
constr company
uc under
ti theon
scheme;

COMMENTS
, Beets 0 Lead some words inparentheses, thisdefinition revolves
i
— around
scheme means a scheme inviting subscription unde
7 ”
it + ,e * .

r that
So, what is a scheme? The scheme ofthe scheme
seems tohave been borrowed
from the mutual fund practice inthe country where a certain Unit Trus
t ofIndia

This scheme of things, certainly . isinapplicable ts a"thelatitmeaee -

Mostly, securitisation SPVs arediscrete—there isonevehicle per *

issuance.
 A definition that leads nowhere Sec. 2(1)(z), Syn. 2 851

are Cases where master vehicles or master trusts are used, but a master trust is one
vehicle that envelopes several distinct vehicles within itself by setting up separate
trusts, to which interest applicable to an issuance is transferred. It is not common
to have separate pools within the same vehicle, because then, it is not possible to
ring-fence or demarcate the assets attributable to the various issuances.
For a minute, if it is assumed that the assets attributable to various issues can
be segregated, the word “scheme” is not relevant to different securitisation is-
sues, as between such various issues, there may not be any difference of
“scheme” of investments as such. .
However, what is implied by the word “scheme” is an issuance by a securitisa-
tion vehicle.
The word “scheme” is connected with section 7, whereby a securitisation vehi-
cle is supposed to keep separate and distinct account for monies raised by differ-
ent schemes. As said before, there is nothing in the law for ring-fencing or legal
segregation of the assets transferred to a single vehicle, the segregation of ac-
counts will have no meaning unless there is a legal segregation. The only way to
achieve legal segregation will be for a securitisation company, as a parent legal
vehicle, to set up different trusts within the vehicle and hold assets various issues
made by the vehicle.
In other words, the company might be a master vehicle or a “conduit” for dif-
ferent issues and achieve segregation by using the trust device.
See for more, notes under section 7.

Section 2(1)(z)
(z) “securitisation” means acquisition of financial assets by any
securitisation company or reconstruction company from any
originator, whether by raising of funds by such securitisation
company or reconstruction company from qualified institutional
buyers by issue of security receipts representing undivided in-
terest in such financial assets or otherwise;

COMMENTS
1. Asset Reconstruction and Securitisation mixed up
The definitions of “asset reconstruction” and “‘securitisation” mix up one with
the other as said before, like Siamese twins. Securitisation includes asset recon-
struction, and vice versa. There was no reason to mix up the two. However, as
per the definition above, acquisition of assets by a reconstruction company will
be securitisation, and that by a securitisation company will be asset reconstruc-
tion.

2. A definition that leads nowhere

Properly speaking, the act of converting a financial asset into securities, such
that such securities are merely a transformed version of the assets, 1s securitisa-
852 See. 212), Sya. 3 Pari li—Chap. 1-Prelunuinary

uon. The act of aequinng a finaneial assel is AOL SCOUNISAOR——H Is the aotol
Wansforming such assets unto securities . However, this definition relates seounti-
sation to the act of acquisition of financial assets by securitisation COMp~nies.
Therefore, this definition cannot guide one as to the meaning Of seourtisavion,
If one reads the present definition with the next one on “securitisation Com-
pany”, the two lead nowhere. An acquisition of financial assets by a seouritisa
oh Company is securitisation, and a securitisauon company is the one that ac-
quires financial assets for securitisation.
The later part of the definition discusses the mode of funding such assets is
rendered meaningless by the final words “or otherwise’’, If this definition were to
be read in its literal whole, anyone who acquires any financial asset will be a se-
curitisation company, and any such ayn t:will be securitisation, because any
acquisition of financial assets will be funded by some means or the other, which
will be covered by the generic phrase “or otherwise”,
3. What is securitisation?
Securitisation is the process whereby assets, usually representing financial
claims, are converted into marketable securities by transferring the same to a
specially created vehicle, which holds such assets and such assets only, and is-
sues marketable securities, such that the redemption of such securities is prem-
ised almost entirely on such assets, aided by one or more credit enhancements.
Rating agency “Standard and Poor’s” issued a comment titled What is Secu-
ritisation”” that said: “Typically, investors in corporate bonds are repaid from an
issuer’s general revenues. In contrast, investors in securitised bonds, also called
structured financings, are repaid from the cash flow generated by a specific pool
of assets. An originator sells its assets to a trust or corporation, which then issues
securities backed by these assets. The securities are usually obligations that have
been issued by these special-purpose entities. In a traditional securitisation, in-
vestors do not usually have recourse to the seller of the assets, only to the assets
contained within the trust.”
The central feature of securitisation is, therefore, the fact that there is a segre-
gation of assets and issuance of securities that are either collateralised by such
assets or represent beneficial interest in such assets.
There are several cases where there is a segregation of assets, but there is no
creation of securities—for example if A transfers financial assets to B. that is the
end of the story. B’s acquiring financial asset is not itisati itis a loanor

For more on the meaning and mechanics of

Securitisation: The Financial Instrument ofthe Future'® securitsaon, see Vinod Kothari:;

14. Comment dated 28th November, 2000, Thomas G Gillis.

15. Setfordetails, Caper | taPan i ofhieDood,
 Any originator
Sec. 2(1)(z), Syn. 5 853

4. Mode of raising funds

_ In global securitisation parlance, there are prima
rily two modes of raising fund-
ing for a securitisation company—either issua
nce of pass-through certificates
representing beneficial interest in the assets of the
SPV, or debt securities in the
form of promissory notes or bonds, containing an
obligation to pay off the inves-
tors in a certain stated fashion.
As far as this legislation is concerned, it says: “By raisi
ng of funds by such se-
Curitisation company or reconstruction company from
qualified institutional buy-
ers by issue of security receipts representing undivided
interest in such financial
assets or otherwise”. The modes of funding envisaged
by this legislation will de-
pend on where does the phrase “or otherwise” connect.
If it connects to the whole
of the preceding phrase, then the modes of raising funding
are completely open to
the securitisation company. Alternatively, the word “or
otherwise” could be read
as under;
e by raising of funds by such securitisation company or recons
truction
company from qualified institutional buyers
° by issue of security receipts representing undivided interest in
such financial assets
° or otherwise
That is to say, the words “or otherwise” do not provide an alternative to
raising
funding from qualified institutional investors, but merely to the instrument
of-
fered, which may be a security receipt, or any other mode. This is a more reason-
able interpretation of the above definition.
Surprisingly enough, “or otherwise” seems to allow securitisation companies to
fund themselves using means of funding other than security receipts, but the op-
erative provisions, for example, section 7(1) talks of offer of security receipts
only.
“Security receipts” have been defined in the law—see later for comments. The
definition of “security receipts” is not very happily worded—therefore, it may
not be always easy for securitisation companies to depend on this modality. Since
the word “or otherwise” provides enough of flexibility to securitisation compa-
nies to raise funding, the globally-prevalent methods of pay-through securitisa-
tion, viz., by issuing bonds and promissory notes, can be availed of by securitisa-
tion companies.
See also comments under “‘security receipts” later.

5. Any originator
A securitisation might involve the acquisition of assets of “any originator”. For
meaning of “originator’’, see notes under the definition of “originator earlier. In
securitisation parlance, there are broadly two types of securitisation activities—
balance sheet activity and arbitrage activity.
In balance sheet securitisations, the vehicle acquires the assets of only one
originator. This transaction is called a balance sheet transaction as the assets are
854 See. (1M za), Sya. | Part L—Chap. 1-—Prelinunary

to Te
on the balance sheet of the originator, and the motive of the Wansachn is
duce such balance sheet size by putting assets off the balance sheet,
in arbitrage wansactions, the vehicle buys assets of various originators, fornis&
pool, and securitises the same, The purpose here is to makean arbilrage profit
between the rate of return inherent in the portfolio, and the weighted average Cost
of the securities offered to the investors.
If a question arises as to whether a securitisation Company under the present
law can buy the assets of more than One originator, the answer should be, in-
variably, yes. This would be particularly more relevant in the given scheme ol
this law, where it would be practical to take the word “securitisation company” to
mean the sponsor or conduit operator who is behind an SPV,
In addition, securitisation company may acquire assets other than those owned
by banks or financial institutions.

Section 2(1)(za)
(za) “securitisation company” means any company formed and reg-
istered under the Companies Act, 1956 (1 of 1956) for the pur-
pose of securitisation;

COMMENTS
As discussed earlier, this definition, if read with the definition of “securitisa-
tion” results into a small circle with no possible beginning or end.
See also the notes under “reconstruction company”. Like reconstruction com-
panies, securitisation companies may also be either public or private companies,
but in view of the usual restrictions found in the constitutional documents of spe-
cial purpose companies’ ’, it is preferable that securitisation companies are struc-
tured as private limited companies.
1. Qualifications
of a special purpose vehicle
After reading this law, it is quite possible to come to a wrong impression that a
securitisation company is like any other business company with business, offices,
employees and net worth. This forces one to think whether the lawmakers have
thought a “securitisation company” under this jaw to be an SPV itself, or a con-
duit running several SPVs.
As a matter of fact, in securitisation transactions, securitisation SPVs are
merely a legal myth. The best way to understand securitisation companies is to
take them as an incorporated bundle of assets—that is, a portfolio of assets, given
the corporeal form of a company. It is a company that has no more than the spe-
cific portfolio of assets, and no less than the said portfolio.
The essential idea of a securitisation transaction is to transfer an asset,
portfolio ofassets tosubserve investor needs, since investors arepresumably in.

17. Forsamples oftherestrictions intheConstitutional documents, seeAppendix toChapterVi ofPan

Qualifications of a special purpose vehicle Sec. 2(1)(za), Syn. 1 855
vesting not against an obligation of the originator but against the
value of assets.
The transaction, as far as the originator is concerned, should look like
a sale of
assets and realisation of money against such sale. Now, over to the investo
rs who
are “buying” such assets, the assets do not have an instant value, as
the assets
will be serviced over years to fetch the required value or cashflows. In the mean-
time, the assets must be housed somewhere, so that they can fetch the value
that
the assets represent, and pass that value over to the investors. The SPV is the
temporary, made-to-measure construction that houses those assets—it is tempo-
rary because it has no need to stay, once the assets have paid off. That is why
such company is called a ‘special purpose’ company—constructed specially for a
specific and limited purpose.
The investors who are buying the securities of the SPV are in fact buying an
indirect claim over the assets of the SPV. The difference between buying the se-
curities of any other company, and those of the SPV, is that in the former case,
securities of a corporation represent a claim over a business, while in the latter
case, the SPV has nothing, no activity and no business, other than the stated as-
sets.
In order to ensure that the assets transferred by the originator are held for the
sole and simple benefit of the investors, SPVs are structurally and constitution-
ally subject to several limitations. For example,
e It should not get into any business, other than the business of holding
the assets, realising them, reinvesting any cashflows for the time period
between realisation and repayment to investors, etc. If it runs any other
business, it can incur losses, or earn profits, and therefore, it ceases to
be any different from a usual operating company. Its securities can no
longer be said to be anything but a fractional claim on the assets. It is
subject to all the risks and rewards of its business, exposing the inves-
tors to the same.
e It should not be allowed to issue liabilities, as to interfere with the
claims of the investors on the assets.
e It should not employ any permanent employees, because if it does, the
employee benefits may either take precedence over the claims of the in-
vestors, or take it to bankruptcy that may then interfere with the normal
realisation of the assets of the SPV.
e If it uses any outsourced services (which it will have to, as it does not
employ employees), it should obtain an undertaking from the service-
providers that the latter will not file a petition for the winding up of the
SPV for non-payment of any fees.
e The right of the equity holders of the company to resolve for voluntary
winding up should be restricted—this is to ensure that the normal reali-
sation of the assets of the SPV is not disturbed by filing for its prema-
ture winding up.
e The right to merge any other company, or get merged with any other
company, is restricted—because any such merger or reverse merger
will affect the “special purpose” nature of the company.
$50 Sec. 12a), Syn. 1 Part li—Chap. 1—Prelinunary

e There is a legal doctrine called consolidation or “lifung or piercing of

corporate veil” where, under certain clroumstances, a company could be
treated as a subset of some other Company and be consolidated with an-
other company. In order to avoid any such consequence, the SPV
should be structured independent and should not be a subsidiary of any
other company. Subsidiarisation can arise on three counts—
equity ownership, management, and control, Henoe, the SPV should be
independent on all the three counts,
An SPV, structured on the above principles, can be treated as “bankruptcy re-
mote” company. The word “bankruptcy remote” signifies three things:
(i) The company cannot go bankrupt itself, because it cannot run any li-
abilities that can make it bankrupt;
(ii) The assets of the company are subject to a particular “waterfall”, that is,
priority order of payments to various classes of investors, so that the
premature liquidation of the company can in no way be better than the
continued existence of the company, thereby eliminating any motiva-
tion on the part of any of the investors filing for premature liquidation
of the company;
(iii) The company cannot be consolidated with any other person as it is not
the subsidiary of any other company—it is an orphan.
From this viewpoint, the constitutional and organisational structure of the SPV
is an important issue in structuring global securitisation transactions. Rating
agencies have come out with detailed criteria on structuring of SPVs. Even
global accounting standards have put in detailed provisions on a qualifying SPV.
We have provided here some of the requirements for structuring of SPVs. The
following, in particular, merit attention:
e Based on the provisions of the Companies Act, 1956, and the need to
have special provisions in the constitutional documents of a securitisa-
tion company, we have drawn up a list of special features to be incorpo-
rated in the Memorandum and Articles of Association of a securitisa-
tion company. These are given in Appendix 1.
e Rating agency Standard and Poor’s has come out with the detailed legal
criteria for special purpose vehicles (or special purpose entities, as they
are comm referred
only to in the U.S. parl The
ance
details of ).
these cri-
teria have been set up in U.S. context, but large parts are relevant glob-
ally. We reproduce these requirements, with comments as to the provi-
sions that, in our opinion, are not applicable outside of the U.S. or ap-
plicable with modificati
Please referons.
to Appendix 3.
e U.S. accounting standard FAS 140 has also prescibd detailed
cations forSPES, called qualifying SPEs. PleaserefertoAppendit 2.

18. See Appendix | to Chapter VIof Part 2 for sample clauses inthe Constitu
tional documents.
 (Ir) relevance of the definition:
Sec. 2(1)(zb), Syn. 1 857

2. Is “securitisation company” an SPV, or the entity be-

hind the SPV?
It is clear that in the present legislation, what was before the law-ma
ker was a
fwin—a reconstruction company and a securitisation company. A recons
truction
company needs capital, assets, employees, etc. A securitisation SPV, on
the other
hand, does not and should not have any asset other than the financial
assets trans-
ferred by the originator. This law talks of a capital of Rs. 2 crores: securitisation
SPVs internationally have a capital of a few dollars (2 dollars, 2 pounds, etc).
If a
securitisation company meant SPV, and for ring-fencing purposes, there are
sepa-
rate SPVs for each scheme, it would mean a sum of Rs. 2 crores will get blocke
d
for each SPV for no ostensible purpose. As this capital is in form of net
worth, it
will not be possible to retrieve this capital out, except by taking the company
to
winding up, which may be quite a long drawn procedure. Therefore, taking a “se-
curitisation company” in this law to mean SPV would mean to impose a Rs. 2
crore drag on the transaction.
On the other hand, it is possible to interpret the scheme of the law this way—a
securitisation company is the sponsor that sets up SPVs for different schemes, by
constituting trusts. Therefore, the Rs. 2 crore capital is the general fund of the
securitisation company, and the funding of each individual “scheme” is split into
various trusts, of which the securitisation company is the trustee. This seems to
be a practical way round the otherwise-incompatible requirements of the law.

Section 2(1)(zb)
(zb) “security agreement” means an agreement, instrument or any
other document or arrangement under which security interest is
created in favour of the secured creditor including the creation
of mortgage by deposit of title deeds with the secured creditor;
COMMENTS

1. Relevance of the definition:

The term ‘security agreement’ has been used in Section 13(2) pertaining to no-
tice to be served to the borrower by the secured creditor for enforcement of secu-
rity interest, stipulating that the borrower should be under a liability to a secured
creditor under a security agreement.
Though the definition has a one-time use, the significance of the last few words
may be noted. They relate to equitable mortgages. In case of an equitable mort-
gage, there is no instrument or document by which the mortgage is created—
there is merely a record of the intent to create a mortgage by placing the title
deeds. Equitable mortgage is a mortgage by intent rather than documentation.
Therefore, the initial few words of the definition—agreement, instrument or
document, do not properly relate to an equitable mortgage, yet such an arrange-
ment or a record where the mortgage is created by way of deposit of title deeds
will come under the purview of ‘security agreement’.
$58 Sec. 112) Part H—Chap. |— Preliminary

Section 2(1)(ze)
(zc) “secured asset” means the property on which security interest is
created;
COMMENTS

1. Relevance of this definition

This definition may be very important as the enforcement of security interest
under this legislation will relate to “secured assets”. This definition should be
read in conjunction with that of “security interest” below,
Any property, on which security interest is created, as defined below, is a se-
cured asset. The word “property” has a wide meaning, as discussed earlier, The
security interest must have been ‘created’—the word “created” would obviously
mean ‘by a deliberate act of creation of the borrower’, by virtue of any “security
agreement”,
In most cases of security interests, it would not be difficult to identify the asset
on which security interest has been created. However, in some cases, the deter-
mination may be quite difficult.
2. Secured asset in case of floating charges
The nature of a floating charge has been a subject-matter of several rulings in
England and the countries which have adopted fixed/floating charge distinction.
This law provides certain rights against secured assets, and in caseof a floating
charge, the charge “floats” over a generic pool of assets, without being fastened
to any of them.
It would be wrong to say that the floating charge relates to the entire property
over which it floats. Lord Macnaughten observed in /Ilingworth v. Houlds-
worth’’, “...
Ishould have thought there was not much difficulty in defining what
a floating charge is in contrast to what is called a specific charge. A specific
charge, I think, is one that without more fastens on ascertainedand defined prop-
erty or property capable of being ascertained and defined; a floating charge, on
the other hand, is ambulatory and shifting in nature, hovering over and so to
speak floating with the property which it is intended to affect until some event
occurs or some act is done which causes it to settle and fasten on the subject of
the charge within its reach and grasp.”
In other words, no specific assets can be said to be subject to the floating
charge, until the charge crystallises. This view is supported by the fact that there
are powers conferred under this legislation that empowers a secured creditor, for
example, to take possession of the secured asset. If a floating charge is not crys-
tallised, taking any such power against any such asset would sound be-
cause the very purpose of the concept of floating charge is that the borrower is
ecg” Ouyandsellassets subject toa floating charge, untilthecharge iscrystal-

19. (1904) AC 355.

 How to tell a floating charge
Sec. 2(1)(zc), Syn. 4 859

3. Rulings in case of Brumark and Cosslett

The rulings of House of Lords/Privy Council in the case of Brumark
and Coss-
lett have been noted earlier”’. More recently, in National Westminster
Bank ple v.
Spectrum Plus Limited*', the House of Lords discussed at length the
nature of
floating charges. In this ruling, the House of Lords overruled Siebe Gorma
n &
Co. Ltd. v. Barclays Bank Ltd’. The impact of these recent rulings is that
in case
of fixed as well as current assets, if the charge relates to something that is
nebu-
lous, it must be construed as a floating charge.
In light of these recent rulings, we need to discuss two significant issues here:
one,how does one tell a floating charge from a fixed or specific one. And
two,
when does a floating charge crystallise?
4. How to tell a floating charge
A floating charge is one that is, by nature, unspecific as to the assets it covers.
A single charge may be partly fixed and partly floating. For example, a charge
might be on a list of properties specified, and in addition, on all present and fu-
ture property of the company. The second part of the charge is a floating charge.
In Re Yorkshire Woolcombers Association*’, the Court laid down the following
tests:
(a) If it is a charge on a class of assets of a company present and future;
(b) If that class is one which in the ordinary course of the business of the
company would be changing from time to time; and
(c) If you find that by the charge it is contemplated that, until some future
step is taken by or on behalf of those interested in the charge, the com-
pany may carry on its business in the ordinary way ..”
PALMER’S COMPANY LAW puts it as under: “It is evident from the above ob-
servations (Yorkshire Woolcombers ruling cited above) that a floating charge is
an equitable charge which does not fasten upon any specific or definite property,
but is a charge upon property which may be constantly varying: it will normally
be upon the whole of the company’s property, including any which is subject to a
fixed charge, but it can be restricted to a limited class of property, and the prop-
erty which is subject to the floating charge can be dealt with by the company
without consulting the holder of the charge, and may be sold, exchanged, or oth-
erwise dealt with in any way that the directors may think fit provided that it is in
the ordinary course of business”.
In National Westminster Bank plc v. Spectrum Plus Limited’*,it was held that
“the essential characteristic of a floating charge, the characteristic that distin-
guishes it from a fixed charge, is that the asset subject to the charge is not finally
appropriated as a security for the payment of the debt until the occurrence of
some future event. In the meantime, the chargor is left free to use the charged

20. See in Chapter 3 of Part I.

21. (2005) UKHL 41.
22. (1979) 2 Lloyd’s Rep 142.
23. (1903) 2 Ch 284.
24. 2005 UKHL 41.
860 Sec. 21 ze), Syn. 5 Part 1l—Chap. 1—Preliminary

asset and to remove it from the security.” That is to say, if the chargor is Tree to
deal with the asset, the charge must be a floating charge, This is mostly the case
in case of all current assets. Hence, charges on current assets should generally be
floating charges.
Since, in bankruptcy laws, floating charges are superseded by preferential
claims, the wish of banks to designate their security interest over as wide-spread
an asset base as possible, and yet to have it treated as fixed charge, is completely
understandable. However, this is precisely where the distinction becomes rele-
vant—a charge is a fixed charge if it relates to specific property, Merely because
the loan agreement describes the charge as fixed charge, it does not become so.
More unfortunately, there is a loose language quite often used in loan documents
that speaks of bank having “fixed and floating charge” over all current and
future property of the borrower. As the two terms are mutually exclusive, there
can be no charge that is both fixed and floating. Ruling in New Bullas Trading,
which gave rise to the concept of “fixed and floating charge” was overruled by
the House of Lords in Cosslett’s case.
For an articulate coverage of the law of fixed and floating charges, including
decisions of House of Lords referred to above, see Charges over Chattels: Issues
in Fixed/Floating Jurisprudence”.
5. When does a floating charge crystallise?
Palmer’s Company Law deals in detail on the conditions in which a floating
charge crystallises. The respectable authority on company law says: “It is well
settled that a floating charge crystallises: (1) when a company goes into liquida-
tion; and (2) where a receiver is appointed.
6. Application of this law to floating charges
It is very important to carefully interpret the provisions of this law relating to
floating charges. This law provides for a short-cut, non-judicial method of en-
forcement of security interests in respect of secured assets. It is clear that a float-
ing charge is not related to any specific asset, and therefore, a “secured asset”
under a floating charge cannot be identified until the crystallisation takes place. If
the crystallisation itself is dependent on a judicial process, for example, liquida-
tor or appointment of an official receiver, then, the very scheme of the legislation
in granting non-judicial enforcement would be frustrated.
Therefore, it is necessary to understand whether, under this law, taking
of the steps mentioned in section 13(4)is er parva pets any yan
ceiver under a contractual enforcemen of security.
t
Receivership is a mode of enforcement of security by a secured debenture-
bolder. inUK. insetvency iawe, Ghabetate promrolihvs heseomates.te kiran,
trative receivers that have been used very efficiently in that country. In India,
even though the Departme of Company
nt Affairs has clarified that a secured

25.
http://www insolvencydirect.bis.gov. Sst
argesoverchattels.pdf. (accessed on 12th August, 2013).
 Meaning of “secured creditor”
Sec. 2(1)(zd), Syn. 1 861
creditor is entitled to stay outside insolvency proce
edings and have his debt re-
covered by pressing for receivership, the procedure
has not been used exten-
Sively. It is for this reason that we do not have many
precedents on receivership
under Indian corporate laws. Nevertheless, it should be
clear that receivership is
only a tool of enforcement of security interests.
As the proceedings under this legislation for enforcement
of securities provide
for special rights to a secured lender, they should be const
rued as a statutory re-
ceivership rights, and therefore, an action by a creditor under
this law should be
regarded as triggering the crystallisation of floating charges.
If a secured lender intends to take action against assets covere
d by a floating
charge, he must first convert his charge into a fixed charge
by crystallisation.
Crystallisation would also mean that the borrower’s freedom
to deal with the as-
sets is taken away and the assets are frozen. Doing so, of course
, would require
an enabling power in the security agreement.
It is only pursuant to such crystallisation that the rights in respect
of floating
charges would become exercisable.

Section 2(1)(zd)
(zd) “secured creditor” means any bank or financial institution or
any consortium or group of banks or financial institutions and
includes—
(i) debenture trustee appointed by any bank or financial in-
stitution; or
*[(it) securitisation company or reconstruction company,
whether acting as such or managing a trust set up by such
securitisation company or reconstruction company for the
securitisation or reconstruction, as the case may be; or;]
(iii) any other trustee holding securities on behalf of a bank or
financial institution, in whose favour security interest is
created for due repayment by any borrower of any finan-
cial assistance;

COMMENTS
1. Meaning of “secured creditor”
The connecting words at the end of the definition “in whose favour...” are re-
lated to all the previous items in the definition. Properly speaking, the definition
should read as under:
“Secured creditor” means
e any bank, or

* Subs. by Amendment Act, 2004 (30 of 2004), S. 2 (w.e.f. 11-11-2004).

$62 Sec. 2(1 2d), Syn. 2 Part ll—Chap. 1-—Pretiminary

e financial institution, or
¢ any consortium or group of banks or financial institutions, or
« debenture trustee appointed by any bank or financial institution, or
* securitisation company or reconstruction company, whether acting as
such or a trustee for a trust set up by i, or
any other trustee holding securities on behalf on a bank or financial in-
stitution,
in whose favour security interest is created for due repayment by any borrower
of any financial assistance.
It is notable that all the various items separated by so many “or” are essentially
manifestations of banks or financial institutions, So, in essence, there are three
key elements for a “secured creditor”—a bank or financial institution on one
hand as a lender, a borrower on the other hand, and a “security interest”, The
word “security interest”, discussed below, is a key word in this definition and
would be critical in defining whether a relationship makes the lender a “secured
creditor” under this definition.
Also notably, the word “financial assistance” is used in this definition, while
the relevant word, in context of “secured creditor” should have been “secured
debt”.
2. Debenture trustee
The words “debenture trustee appointed by any bank or financial institution”
are bound to create at least two confusions. Apparently the idea was to include
debenture trustees who are holding a security interest on behalf of a bank or fi-
nancial institution. In other words, the debenture holders are banks or financial
institutions, and the trustee is the charge-holder.
However, the word “debenture trustee appointed by any bank” cannot mean
this. Strictly speaking, debenture trustee is not appointed by the debenture holder,
butby the charge-creator, that is, the borrower. More importantly, it will not be
possible to apply this clause where the debentures are also held, at least in part,
by entities other than banks or financial institutions, because by the scheme of the
law, the law is limited to enforcement of security interests by banks/financial in-
stitutions. If debentureholders include others, it is not a matter to be dealt with by
this law, as the trustee enforcing any such security is enforcing on behalf of the
debentureholders.

tions. A trustee isnot exercising any claim for its own benefit. Itis doing
thebenefit ofthebeneficiaries. Ina suit under the RDB Act, the Bombay High
Court held that the amount payable on debentures was not properly a “debt due to
a bank” merely because the trustee was a bank or financial institution. “The Leg
 Effect of 2004 amendments
Sec. 2(1)(zd), Syn. 4 863
islature has not enacted that it wanted to treat suits by banks
and financial institu-
tions for such purpose differently only because the claims were
by banks and fi-
nancial institutions. The intention as seen from all the afores
aid documents in
setting up of Tribunals was only to release the blocked assets
of banks”.
However, from a different standpoint, if the law looks at
the beneficiaries be-
hind a trust, then the basic purpose of the trust law—to vest the
property in the
trustee who merely holds it for equitable interests of the beneficiarie
s, gets frus-
trated. The true effect of a trust is that the persons dealing with a trust
are con-
cerned with the trustee and not with the beneficiaries. The trust puts
a kind of a
cloak that conceals the identities of the beneficiaries—the trustee is the
one deal-
ing with the contracting parties. Exploring beneficial ownership is like ignori
ng
the fagade of the trust, which should only be an exceptional circumstance.
It is notable that merely including the debenture trustee in the definition of
“se-
cured creditor” does not do any good — as the asset in respect of which action
is
proposed to be taken by the secured creditor must have been classified as non-
performing asset in the books of the secured creditor. Surely enough, a defaulted
loan could not have been classified as NPA in the books of the debenture trustee
— it does not appear at all in the books of the debenture trustee.
3. Securitisation Company or Asset Reconstruction Com-
pany
The inclusion of securitisation company or asset reconstruction company in the
definition of a “secured lender” is understandable. One of the essential powers
granted to a securitisation company or reconstruction company ‘is the enforce-
ment of security interests. The reconstruction company does not grant a loan it-
self—it acquires the loans from the originating banks. So, it would not have been
a secured lender but for this definition.
4. Effect of 2004 amendments
The amendments made in 2004 seek to resolve a very significant problem that
would have arisen if these words were not included. The amendments include, in
the definition of “secured lender” not just the reconstruction company but even a
reconstruction company acting as a trustee. In reality, most asset reconstruction
transactions have taken place following the trust route—the reconstruction com-
panies have constituted trusts for individual transactions of purchase of non-
performing assets, and issued securities from such trusts.
As to whether the trusts set up by securitisation companies can exercise powers
under section 13, see comments under the definition of “default” and under sec-
tion 13. Substantial drafting lapse has been committed since the word “default” is
defined to mean an asset being classified as non-performing asset as per the di-
rections of the RBI — which directions are not applicable in case of trusts.
Note that as per the Bombay High Court ruling cited above, in context of de-
bentures, what is relevant is to see not who the debenture trustee is, but who the

26. Krishna Filaments Ltd. v. IDBI, 1 (2005) BC 317 (DB—Bom).

S04 See. 2(1 ze), Sya. 1 Part li—Chap. 1—Preliminary

debentureholders are. Uniess the debentureholders are banks or financial institu:

tions, the special recovery powers of this Act are not applicable.
If a reconstruction company acquires loans in capacity as a Wustee, the same
argument would be applicable. That is to say, it is beneficiaries who would have
to be “secured lenders” as per this definition. While the opinion of the author on
who to look at in transactions with a trustee is different (see above), the amend.
ments, arguably, resolve this difficulty.
5. What if a reconstruction
company acquires assets from
a non-banking company
As per the language of the Act, a securitisation company can do business of as-
set reconstruction and an asset reconstruction company can do business of secu-
ritisation, The two concepts are intertwined in this Act—see detailed comments
under section 3.
While the definition of “asset reconstruction” in section 2(1)(b) seems 10 sug-
gest that reconstruction business shall be limited to assets of banks and financial
institutions only, the definition of “securitisation”, read with that of “originator”
and “financial asset” leave it open for a securitisation company to buy the assets
of non-banking lenders as well.
Here comes the potential for misuse of the special enforcement provisions of
the Act—a non-banking lender who does not have the access to this law other-
wise, transfers his assets to a reconstruction company with such lender being the
beneficiary and the reconstruction company being the trustee, and thereupon, the
reconstruction company will be deemed to be a “secured lender” under this law.
Needless to say, if such circumstances arise in practice where the rights unavail-
able to a lender are sought to be enhanced by a reconstruction company acting as
a trustee for such lender, a court should not hesitate to read down the appropriate
part of this law.
6. Whether trusts of ARCs are “secured creditors’?
As per the express language of the definition, the lawmakers might have
wanted to cover trusts formed by ARCs. However, the key question is, can the
debt held by such ARCs be said to be “non performing” in absence of any direc-
tions as to NPA characterization applicable to such trusts. See Vinod Kothari’
article on this issue: Do pen ee cert by Asset Reconstruction Companies
powers under SARFAES] Act:

Section 2(1)(ze)
(ze) “secured debt” means a debt which is secured by any security
interest;

27. http://india-
financ-
ing.com/Do_trusts_formed_by_Asset_reconstruction
(accessed on 12th Aage, ef - _have_powers_undet_SARFAESI_Act
pat
 Created
Sec. 2(1)(zf), Syn. 2 865

COMMENTS
1. “Secured debt” and “financial assistance”
This law has been loosely using the words
“secured debt” and “financial assis-
tance” at places. Properly speaking, secured
debt relates to such financial assis-
tance which is secured. The word “secured debt
”, meaning any debt which is se-
cured by a security interest, seems to convey
that even if a debt is not a “financial
assistance” (which, as noted earlier, does not
cover all forms of debt), but if such
debt is secured, it will count as a “secured debt
” for the purpose of this law.
However, the meaning of the other similar
words—for example, “secured credi-
tor” does not support this wide meaning. The word “secured
above, is related only to financial assistance. creditor’, as noted
In other words, the word “debt” in this definition
cannot be read as any wider
than “financial assistance”.

Section 2(1)(zf)
(zf) “security interest” means right, title and inter
est of any kind
whatsoever upon property, created in favour of any
secured
creditor and includes any mortgage, charge, hypothecat
ion, as-
signment other than those specified in section 31 f

COMMENTS
1. Right, title or interest
The words “right, title and interest of any kind whatsoever”
(or should they
read, right, title or interest) are a bit too ambitious if they are
left unchecked. A
right, title or interest under this definition can only be covere
d where it is meant
as a security interest. A title conferred in case of sale of property, for
example,
cannot be covered by the above definition. The too-general and wide words
“right, title or interest of any kind whatsoever” will get coloured by the specif
ic
words following—mortgage, charge, hypothecation, assignment, etc.
In other words, if a right, title or interest is similar to mortgage, hypothecation,
charge, etc., it will be covered by “security interest” in the above definition. If a
particular agreement does create a right, title or interest in property in favour of a
lender, but is not a “mortgage” within the restrictive definition (see below), it
may well be covered by the opening words of this definition.
The meaning of hypothecation and charge has been discussed in details ear-
lier—please refer to notes under “hypothecation”. The meaning of mortgage and
assignment is being discussed here.
2. Created
The meaning of “created” here is that the security interests under this definition
will count only where such interest has been created by the borrower. A security
866 See. 11 2f), Syn. 3 Part Ui—Chap. 1— Preliminary

interest that arises due to operation of any law or due to any other incident other
than a deliberate act of creation by the borrower will not count under this defini.
tion.

3. Mortgage”
The word “mortgage” is defined in section 58 of the Transfer of Property Act
as follows: “A mortgage is the transfer of an interest in specific immovable prop-
erty for the purpose of securing the payment of money advanced or to be ad
vanced by way of loan, an existing or future debt, or the performance of an en-
gagement which may give rise to a pecuniary hability”.
Though generically, the word “mortgage” may include any transfer of interest
in property for creation of security, since this law has imported the meaning from
Transfer of Property Act [see section 2(2)], definition in the Transfer of Property
Act will be super-imposed on this law. The definition in the TransferofProperty
Act is limited to immovable properties—however, under this law, a mortgage or
conditional sale of a movable property” may easily come under the generic
opening words of the definition.
The meaning of a simple mortgage is conveyed by section 58(b) of the Transfer
of Property Act, whereby, where a person agrees to the mortgage money, that is,
the money and interest intended to be secured, and upon his failing to do so,
agrees to make available the mortgaged property to be sold by the mortgagee and
the proceeds applied towards payment of such sum, there is a mortgage. In other
words, mortgage intends conferring on the mortgagee the right to sell and appro-
priate a property towards payment of a debt.

the right to use of property is granted as a security. An absolute transfer of a

property to the mortgagee with a right to seek retransfer on clearing the mortgage
debt is called English mortgage. A mortgage by way of title deeds, sometimes
siah tapabaaheadsemen taeda ahaha ae,
gage,
Dy virtue of section 58(1). All other forms ofmortgage are called anoma-
lous mortgages. i
_ Inview of the open-ended generic words in the definition of “ interest”
eee Danian oat toate aoe ae ee sake of
illustration.

4. Assignment
for security
To assign means to designate someone else instead of the contracting party.
Assignment of benefits of a contract would, accordingly, mean assigning the as-

28. See also, generic discussion in Chapter 3 of Part I ofthe book.

29. However, in case of conditional sales, the exclusion in sec. 31 will apply.
See notes under sec 31.
 Implications of inadequate stamp duty, etc. Sec. 2(1)(zg) 867
signee as the beneficiary of the contract. Assignment of receivables would,
in a
like vein, mean designating the assignee as the recipient.
Assignment can either operate as a transfer, or as a security. Assignment that
Operates as a transfer and relates to actionable claims has to comply with section
130 of the Transfer of Property Act, but assignment by way of security does not
have to comply with the procedure laid down in section 130.2
This definition, evidently, uses the word “assignment” as a mode of security,
and therefore, does not include assignments where the intent is to transfer a prop-
erty.
5. Other than those specified in section 31
Section 31 is not limited to assignments—therefore, all security interests cov-
ered by section 31 are excluded from the purview of “security interest” under this
law. See notes under section 31 for security interests excluded from the operation
of this law, and thereby, also excluded from the ambit of “security interest” under
this section.
6. Implications of inadequate stamp duty on the security
agreement
Will the proceedings under the law be affected or vitiated by inadequate stamp-
ing of the instrument creating security interest? The effect of inadequate stamp-
ing of a document has been discussed by courts in various contexts—the impact
is to make a document inadmissible in legal proceedings.
If the mortgage deed is not properly stamped, can the DRT take cognizance of
the mortgage? In Shradha Enterprises v. Washim Urban Co-operative Bank
Ltd.*', the DRT held, though inconclusively, that if the question of stamping of
the mortgage instrument was not still determined, the mortgage cannot be en-
forced.
7. Implications of inadequate stamp duty on the assign-
ment of the debt
Where the secured debt in question has been assigned from lender to another,
or assigned by a lender to an asset reconstruction company, is the borrower enti-
tled to question the adequacy of the stamp duty-on the assignment agreement?

Section 2(1)(zg)
(zg) “security receipt” means a receipt or other security, issued by a
securitisation company or reconstruction company to any quali-
fied institutional buyer pursuant to a scheme, evidencing the
purchase or acquisition by the holder thereof, of an undivided

30. Bharat Nidhi Limited v. Takhatmal, AIR 1969 SC 313.

31. II (2005) BC 101 (DRAT/ DRT).
$08 Section 2(z2z) Part Li—Chap. 1 Preliminary

right, tule or interest in the financial asset involved in seouriti-

sation,

COMMENTS

1. Security receipts and “undivided interest”

Poor and incoherent drafting is not a rarity in this legislation, but this one,
which was certainly meant to be a key mode by which securitisation Companies
were to finance themselves, is indeed a very unhappy piece of drafting. It is ap-
parent that this lacunae was embedded in the original piece of draft legislation as
well. The draft Bill used the word “transferable receipt” to mean “ or other
security issued by a special purpose vehicle to any person pursuant to a scheme
evidencing an undivided right, title or interest of the holder thereof in the finan-
cial asset together with underlying securities, if any, being a subject matter of the
scheme”. The only thing which the Bill said, and which the present legislation
does not say, is that the receipt is transferable. The present legislation does not
talk about transferability of the receipt at all.
A security receipt, under this definition, represents “undivided right, title or in-
terest” in the financial assets, transferred to a securitisation company. The notion
is, however, mistaken.
Primarily, securitisation vehicles issue two types of securities—an equity-type,
or pass-through security, and a debt-type, or pay-through security. Where the
security conveys an undivided beneficial interest in the assets of the securitisa-
tion company, such that the securitisation company merely continues to hold the
legal interest but the beneficial interest is transferred to the investors, the security
is in the nature of equity. This is referred to undivided beneficial interest—
beneficial interest, because the legal interest on the assets transferred to the SPV
is still held by the SPV itself, and undivided, because the interest is in a pool and
not any specific portion thereof.
The other type of security is debt-type, where the SPV issues obligations or
debt securities, but since in any case an SPV is nothing but a limited bundle of
assets, such debt is as good as the assets transferred by the originator. In other
words, the debt is nothing but an allocation of the cash flows emanating from the
assets. However, these debt securities can, in no case, be said to be of “beneficial
interest” in the assets of the SPV as the residual interest, however small, is held
by the equity class.
The definition uses the words “undivided right, title or interest”, which should
properly speaking be construed as “undivided beneficial right, title or interest”.
Surely, issuance of the securities by the SPV does not mean conferment of any
legal interest initsassets, but merely a beneficial interest. Ifthe security receipt
were to mean undivided legal interest of the security receipt holder, it would

in the assets of the securitisation company, which means the securitisation

com-
pany is left with no legal interest atall. Ifthis meaning were to apply, a securiti-
ce ene 27,Way oeeeaete cone & lennes comuaity.s0-
 Undivided interest Sec. 2(1)(zg), Syn. 3 869
Even if the “security receipt” be construed to mean beneficial interes
t certifi-
cates, the security interest merely partakes the character of pass-through
certifi-
cates. Pass-through certificates, being equity-type instruments, will not be
suit-
able in most cases of securitisation. If this definition restrains the nature of
secu-
rities issued by an SPV to merely pass-through certificates, it is an imprac
tical,
and al] the more, unwarranted restriction.
The second issue with the definition is bad use of the word “receipt”. Selected
portions of this definition read “the security receipt means a receipt ... evidencing
the purchase”. A receipt in this context is obviously a receipt of money, because
that is all that the securitisation company receives, and a receipt is not an evi-
dence of purchase. A receipt is merely an evidence of having received money: it
does not by itself represent any transfer of property. It is not an evidence of title.
If it does represent title or property, then a receipt also becomes an “instrument”
as defined in the Stamp Act. A receipt is merely an acknowledgement of having
received—see the definition of “receipt” in section 2(23) of the Stamp Act.

2. Receipt or other security

The opening words of the definition provide “receipt or other security issued
by a securitisation company”. Properly put, this would have allowed a complete
flexibility to a securitisation company in choosing its manner of funding—in
terms of the nature as well as tenure. However, it appears that the later words
“evidencing the purchase by the holder thereof..” seem to be relating to either
form of security issued by the securitisation company, and therefore, irrespective
of whether it is receipt or any other security, the nature of the security receipt
remains the same.

3. Undivided interest
The only way to resolve this predicament is to interpret the words “right, title
or interest” appearing in the later part of this definition in a wide fashion. The
word “interest” may be read in a very wide connotation, and even security inter-
est is interest. So, in case the securitisation company decides to issue debt, which
is secured by undivided security interest held by a trustee in favour of the secu-
rity holders, the security issued by the securitisation company represents undi-
vided security interest in the assets transferred to the securitisation company.
In other words,
e A securitisation company may issue either a “receipt” or any other se-
curity.
e The word “other security” should be read in light of the Securities Con-
tracts Act that enumerates a broad band of securities. Therefore, a secu-
ritisation company may issue debt securities as well.
e These securities might represent either undivided beneficial interest, or
undivided security interest in the assets being securitised.
870 See. (1 ag), Syn. 4 Part Li—-Chap. 1-—Preliminary

4. Security receipts as securities

This law also makes an amendment to the definition of “seourity” under the
Securities Contracts (Regulation) Act whereby security receipts are how deemed
to be securities. In other words, all the provisions of the Seourties Act and the
provisions of the Companies Act that are related to securities (Most provisions of
the later Act are related to shares and debentures) will also apply to seountty re-
ceipts under this law. Besides, if a security receipt is issued in the form of an ac-
knowledgment of debt, it may also be treated as a “debenture” under the Compa-
mies Act,
5. Transferability of security receipts
The ostensible purpose of inserting provisions regarding “transferable receipts”
in the original draft of the legislation was that there were doubts, though un-
founded, expressed by certain people that a pass-through certificate itself is an
actionable claim, and as formalities of section 130 need to be complied with for
transfer of actionable claims, similar formalities need to be complied with for
transfer of the pass-through certificates as well’, The draft legislation intended to
take care of these issues by providing for a form of security that will be transfer-
able.
There is nothing in this legislation on the transferability of a security receipt,
except that a security receipt is treated as a “security” under the Securities Act.
This inclusion by itself does not have anything to do with the transferability of a
security receipt.
Section 137 of the Transfer of Property Act provides that the provisions of sec-
tion 130 are not applicable to transfer of shares, debentures or negotiable instru-
ments. There is no exclusion under this section for “securities” —the exclusion is
limited to shares and debentures only. If a security receipt is issued as a deben-
ture, there cannot be any issue as to its transferability, since section 82 of the
Companies Act provides that debentures are transferable, and in any case, section
137 of the Transfer of Property Act also covers debentures.
However, in case a security receipt is a beneficial interest in property, that is, a
pass-through certificate, is it by itself an actionable claim, and therefore,
ma ais ic eat hears anton of section 130 of the Transfer of Property Act?
is
Hethissue not been
omaha answered7 by defining
fining a
a security
i receipt
ipt as a security un-

. ether covettesiien teem aaa

securitisation company, for the benefit of the security receipt
holders. This is precisely a situation of a trust—the itisation com-
There is no need to “form” a trust as such—by its very nature, a trust
automatically comes into existence.

32. Some market players were following strange s of effecting transfer of pass-through
cates—a buy-back of certifi
thepass-through interest bythetrustandits
re-issue totheimonding buver
 Sponsor and originator
Sec. 2(1)(zh), Syn. 1 871
* The right of a beneficial interest holder is not an “acti
onable claim” or a
debt against the trustee. The definition of “actionable
claim” under the
Transfer of Property Act is clear—it includes only
debt or debt-type
claims, and a beneficial interest is not an actionable claim
.
* Beneficial interest in a trust, which a security receipt
evidencing benefi-
cial interest in property invariably is, is transferable by virtue
of section
58 of the Trusts Act.
* With a “security receipt” defined as security under the Securi
ties Act, it
becomes a “marketable security” under section 2(16A)
of the Stamp
Act. That Act defines a “marketable security” as “a securi
ty of such a
description as to be capable of being sold in any stock marke
t in India
or in the United Kingdom”. With the Securities Act Clearl
y covering a
security receipt as a “security”, it is clearly capable of being
sold in a
stock market in India, and hence, a marketable security. The impac
t of
“marketable security” characterisation is only that a mortgage
of a mar-
ketable security is charged with a nominal duty under section 23A, but
as far as the duty applicable on a “conveyance” is concerned, the excep-
tion is only for “transfer” covered by Item 62 of the Schedule, and Item
62 covers only transfers of shares and debentures, and not marketable
securities in general. In other words, if a beneficial interest is a prop-
erty, an instrument whereby transfer of such interest is effected may
well be regarded as “conveyance”.
* From this point of view as well, it is preferable that the securities of a
securitisation company are issued in form of debenture or promissory
note.

Section 2(1)(zh)
(zh) “sponsor” means any person holding not less than ten per cent
of the paid-up equity capital of a securitisation company or re-
construction company;

COMMENTS
This definition is relevant from the viewpoint of independence of the board of
directors—section 3(3) contains conditions-about directors of a Securitisation
company not being nominees of a sponsor, and a sponsor not being a holding
company of a securitisation company.
1. Sponsor and originator
This law uses both the terms—sponsor and originator. Originator, as we have
noted earlier, is the one who transfers financial assets to a securitisation com-
pany. Sponsor, however, is defined with reference to holding of equity capital—
anyone who holds 10% or more of the paid up equity of a securitisation company
or reconstruction company is a sponsor.
872 See. 112k), Syn. 2 Pant LU—Chap. 1-—Prelaminary

Clearly, therefore, 4 sponsor and an originator can be different, A seourusauion

company may not have any sponsor at all, In other words, there may be no per
son whose holding reaches the 10% mark, However, for every financial asset
securitised, there will be an originator, A sponsor does not have to be an origina:
tor and vice versa. At the same time, the sponsor may be the originator and vice
versa.

The distinct use of the terms sponsor and originator further swengthens the
point we have made earlier that under this law, it is possible for a securitisation
company to serve a continuing conduit to several originators either in a row or
simultaneously.
2. Legal equity and economic equity
The definition of a sponsor as above, as also in section 3(3) below are related
to legal equity and not economic equity. Legal equity, obviously, is equity as de-
fined under the Companies Act. Under the Companies Act, a share is a share in
the share capital of the company, defined in its constitutional documents, and an
equity share is one that is not a preference share.
Economic equity is one that provides a secular support to an enterprise and
bears the risk of first losses. Accounting standards define “equity” as residual
economic interest in an enterprise.
In securitisation parlance, it is quite common for an originator to provide a
first-loss support, which may be by way of buying the junior-most security, or a
zero coupon bond or any other similar obligation. This serves the purpose of an
economic equity, but is not considered as legal equity.
There might be more than one person holding 10% or more equity interest,in
which case, every such person will be treated as a sponsor.

Section 2(1)(zi)
(zi) “State Bank of India” means the State Bank of India constituted
rane) section 3 of the State Bank of India Act, 1955 (23 of
);

Section 2(1)(zf)
(qj) “subsidiary bank” shall have the meaning assigned to it in
clause (k) of section 2 of the State Bank of India Subsidiary
Banks) Act, 1959 (38 of 1959); ~ ;

COMMENTS
ofwen imo definitions areself-explanatory andareimported intothedefinition
a “bank”.
Respectively assigned Sec. 2(2), Syn. 1 873

Section 2(2)
(2) Words and expressions used and not defined in this Act but defined
in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property
Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Se-
curities and Exchange Board of India Art, 1992 (15 of 1992) shall have
the same meanings respectively assigned to them in those Acts.

COMMENTS
1. Respectively assigned
There are several statutes listed above, and in case a particular word has been
defined in more than one law, the laws above shall be taken in sequence. That is
to say, the meaning assigned in the Contracts Act shall take priority over that un-
der the Transfer of Property Act, and so on.
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 CHAPTER II

REGULATION OF SECURITISATION AND

RECONSTRUCTION OF FINANCIAL ASSETS
OF BANKS AND FINANCIAL INSTITUTIONS

(1) No securitisation company or reconstruction company shall

commence or carry on the business of securiti-
S. 3. Registration of gation or asset reconstruction without—
securiusation companies
or reconstruction com- (a) obtaining a certificate of registration
panies granted under this section; and
(b) having the owned fund of not less than two crore rupees or
such other amount not exceeding fifteen per cent, of total fi-
nancial assets acquired or to be acquired by the securitisa-
tion company or reconstruction company, as the Reserve
Bank may, by notification, specify :
Provided that the Reserve Bank may, by notification, specify dif-
ferent amounts of owned fund for different class or classes of secu-
ritisation companies or reconstruction companies:
Provided further that a securitisation company or reconstruction
company, existing on the commencement of this Act, shall make an
application for registration to the Reserve Bank before the expiry
of six months from such commencement and notwithstanding any-
thing contained in this sub-section may continue or carry on the
business of securitisation or asset reconstruction until a certificate
of registration is granted to it or, as the case may be, rejection of
application for registration is communicated to it.
(2) Every securitisation company or reconstruction company
shall make an application for registration to the Reserve Bank in
such form and manner as it may specify.
(3) The Reserve Bank may, for the purpose of considering the
application for registration of a securitisation company or recon-
struction company to commence or carry on the business of secu-
ritisation or asset reconstruction, as the case may be, require to be
satisfied, by an inspection of records or books of such securitisation
$76 Sec. M1) Part 1l—Chap. Ll— Regulation of Securitisation, et

company or reconstruction company, or otherwise, that the follow.

ing conditions are fulfilled, namely:—
(a) that the securitisation company or reconstruction company
has not incurred losses in any of the three preceding finan-
cial years;
(b) that such securitisation company or reconstruction company
has made adequate arrangements for realisation of the fi-
nancial assets acquired for the purpose of securitisation or
asset reconstruction and shall be able to pay periodical re-
turns and redeem on respective due dates on the investments
made in the company by the qualified institutional buyers or
other persons;
(c) that the directors of securitisation company or reconstruc-
tion company have adequate professional experience in mat-
ters related to finance, securitisation and reconstruction;
(d that the board of directors of such securitisation company or
~

reconstruction company does not consist of more than half

of its total number of directors who are either nominees of
any sponsor or associated in any manner with the sponsor or
any of its subsidiaries;
(e) that any of its directors has not been convicted of any of-
fence involving moral turpitude;
(f) that a sponsor, is not a holding company of the securitisation
company or reconstruction company, as the case may be, or,
does not otherwise hold any controlling interest in such se-
curitisation company or reconstruction company;
(g) that securitisation company or reconstruction company has
complied with or is in a position to comply with prudential
norms specified by the Reserve Bank.
‘[(h) that securitisation company or reconstruction company has
complied with one or more conditions specified in the
delines issued by the Reserve Bank for the said purpose.] =
4) The Reserve Bank may, after being satisfied that the condi-
tions specified in sub-section (3) are fulfilled, grant a certificate of
registration to the securitisation company or the reconstruction
ee ee eh reenumence of carry onbusiness ofsecuritisation or
as-
reconstruction, subject to such conditions, which .
sider. fit to impose. “netted

1. Ins. by the Amendment Act. 2004 (30 of 2004). <3 (wef 11-11-2004),
 Registration of securitisation companies, etc.
Sec. 3(1) 877
(5) The Reserve Bank may reject the application made under
sub-section (2) if it is satisfied that the conditions specified in sub-
section (3) are not fulfilled:
Provided that before rejecting the application, the applicant shall
be given a reasonable opportunity of being heard.
(6) Every securitisation company or reconstruction company
shall obtain prior approval of the Reserve Bank for any substantial
change in its management or change of location of its registered of-
fice or change in its name:
Provided that the decision of the Reserve Bank, whether the
change in management of a securitisation company or a recon-
struction company is a substantial change in its management or
not, shall be final.
Explanation.—For the purposes of this section, the expression
“substantial change in management” means the change in the
management by way of transfer of shares or amalgamation or
transfer of the business of the company.
SYNOPSIS
SECTION 3(1) 3. Condition (b): Ability to pay
: ital periodical returns and redeem
1. Business of securitisation............s-+000+ 878 investments jas lke Stik: 887
2. Business of asset reconstruction............. 879 4. Arrangement for realisation of
3. No securitisation company.............0++++0 880 PUMRARNSOl SMES ot tacn nec sctcccinasnd 887
4. Isa securitisation company an SPV?..... 881 5. Ability to pay returns and redeem
5. Does an SPV have to be a INVESUMETIES iibvss....0dccs-ceseesuovevubos-sectetone 888
Securitisation COMpaNny?..............:00c0000 881 6. Condition (c): Professional expertise
6. Net worth requirement ............---seessees 882 rhe’ ;a ae ee 888
7. Provisions for existing companies......... 883 7. Condition (d): Independent directors... 888
8. Condition (e): Clean directors ............. 889
aeacants tons 9. Condition (f): Independent company... 889
1. Preconditions for registration as also 10. Condition (g): Prudential norms.......... 890
continued registration................:cc0sceeee 886 | 11. Condition (h): Compliance with
2. Condition (a): No losses...............0cccc0000 886 conditions in the Guidelines ................ 890

Section 3(1)
(1) No securitisation company or reconstruction company shall com-
mence or carry on the business of securitisation or asset reconstruction
without—
(a) obtaining a certificate of registration granted under this section;
and
(b) having the owned fund of not less than two crore rupees or such
other amount not exceeding fifteen per cent, of total financial
assets acquired or to be acquired by the securitisation company
878 Sec. X1), Syn. tl Part ll—Chap. 1l—Regulation ef Securitisation, etc.

or reconstruction company, as the Reserve Bank may, by notifi-

cation, specify :
Provided that the Reserve Bank may, by notification, specify different
amounts of owned fund for different class or classes of securitisation
companies or reconstruction companies:
Provided further that a securitisation company or reconstruction
company, existing on the commencement of this Act, shall make an ap-
plication for registration to the Reserve Bank before the expiry of six
months from such commencement and notwithstanding anything con-
tained in this sub-section may continue or carry on the business of se-
curitisation or asset reconstruction until a certificate of registration is
granted to it or, as the case may be, rejection of application for regis-
tration is communicated to it.

COMMENTS

1. Business of securitisation
The first instinct of a typical regulator is that it takes away all, and then selec-
tively gives! As discussed before, the idea of this legislation could not have been
to regulate securitisation or reconstruction—but since the template used for this
law was the one for financial companies under Chapter IIIB of the Reserve Bank
of India Act, the first thing that the law puts is a prohibition.
Section 3 puts a general prohibition on “business of securitisation”, except un-
der a registration granted under this Act.
This legislation seems to have gone under a mistaken premise that securitisa-
tionis some kind of business, such as the business of banking, lending, leasing,
etc. Securitisation is a mode of funding—raising structured finance, same as rais-
ing finance by issuing bonds, debentures or other financial instrument. Itis inap-
propriate to say, for example, that a company issuing debentures for its funding
requirements is engaged in the business of issuing debentures. A securitisation
vehicle is employeby d an originator purely as a passive housing device for the
isolated assets, but there is no “business” as such done by a securitisation vehicle.
There are number of supportive parties in a securitisation transaction—the
in-
vestment banks which structure securitisation deals, trustees, rating agencies
and

As we have discussed earlier, though apparently the word “securitisation com-

pany” seems to be generally pointing to a securitisation vehicle, because that
4 . c
 Business of asset reconstruction Sec. 3(1), Syn. 2 879

various originators and forms various SPVs under the same umbrella. In other
words, the securitisation company forms various trusts as SPVs, and acts as trus-
tee for such trusts, thus engaging itself in the business of securitisation. In other
she a single securitisation company can have numerous SPVs under its um-
rella.
Unless such a meaning is adopted, the requirements of this law as to net worth,
registration, etc. applied to each SPV will be an unwarranted drag on securitisa-
tion transactions.
The use of the word “business of securitisation” can give rise to two more que-
ries:
e First, a securitisation vehicle does not necessarily make any profit, par-
ticularly in a pass-through transaction. So, can it be said to be engaged
in a business at all? Though by business, an activity with a gain or
profit is implied, several business entities are instrumentalities of others
and they need not be making a profit for themselves. A securitisation
vehicle is interposed in a transaction for a gain of the investors—better
security interests, and that, in turn, leads to a gain for the originator in
terms of cheaper funding. So, a securitisation vehicle is a part of a lar-
ger design of asset-based funding, and therefore, lack of profit motive
for the vehicle itself is not a relevant consideration.
e Two, it might also be queried as to whether a single securitisation
transaction on a one-off basis is a “securitisation business” to require
registration under this legislation. For income-tax purposes, there are
several rulings where a single venture has been regarded as a business.
Though these definitions are not applicable here, the essence of the
definition is to bring all “securitisation activities” involving assets of
banks and financial institutions under the regulatory ambit. Therefore,
the fact that there are isolated vehicles for discrete transactions should
not make a difference.

2. Business of asset reconstruction

While it is difficult to understand the meaning of “business of securitisation”, it
is much easier to identify the “business of asset reconstruction”. Securitisation is
not a business by itself, while asset reconstruction is. Reading section 2(1)(b)
with section 3, the mandate of the law is clear: no company shall engage itself in
the business of asset reconstruction, that is, acquisition of “financial assistance”
for the purpose of realisation thereof, without complying with the requirements
of section 3. The use of the name “asset reconstruction” by such company 1s not
important—if the business of company involves buying of “financial assistance
for the purpose of realisation, it is an asset reconstruction company. There is an
acquisition of financial assistance by every securitisation company as well, but
the distinction there is that the purpose of such acquisition is not the realisation
but the securitisation of such assistance.
880 ©.See. 1), Syn. 3 Part ll—Chap. 1l—Regulation of Securitisation, etc.

Literally interpreting, it might even seem likely that a factoring companyts

also an asset reconstruction company, if it acquires loan receivables. Once again,
the stress on the word “realisation” is important—implying that there were some
difficulties in the realisation of the receivables by the originating banks or finan.
cial institutions, and the reconstruction company is acquiring the same for the
purpose of such realisation.
The word “reconstruction” is obviously a misnomer, as the clear purpose of the
asset reconstruction company is to realise the debt and reconstruction or restruc-
turing might only be one of the ways in which a reconstruction company might
do the same. This is clear from the definition of “asset reconstruction”,

3. No securitisation company
Though it is not a good idea to interpret what the law does not say, yet in this
case it is necessary to do so, since section 3(1) is a prohibitory section and the
confines of the prohibition can only be understood by knowing where the prohi-
bition does not extend, that is, what the law does not provide.
First, the law does not say: “No one shall commence or carry on the business of
securitisation”.
Secondly, the law also does not say: “No company shall commence or carry on
the business of securitisation”. _
The law says: “Nosecuritisation ..company shall commen or carry ceon the
business of securitisation..”. In other words, the prohibition of the law is intended
only for securitisation companies, that is, those companies that have been formed
for the purpose of securitisation.
It is notable that this legislation does not provide a sweeping prohibition on se-
curitisation activity as such. It only prohibits a securitisa companytion from un-
dertaking the business of securitisation without compliance with the law. The law
does not rule out transactions of securitisation outside the Act in which case, nei-
ther will the regulatory scheme of the law be applicable, nor will the transaction
be able to avail of any of the advantages conferred by the law.
Since the regulatory framework of the Act is applicable to itisation com-

ing adviser isconcerned, even ifthe adviser specialises in securitisation,

viserperforms anadvisory roleandcannot besaidtobe
engaged inthebrome’,
ofsecuritisation. The security trustee and the investor trustees areessentially
 Does an SPV have to be a securitisation company
? Sec. 3(1), Syn. 5 881
trustees to hold some security interest or some inves
tor interest and do not ex-
actly perform the function of securitisation. The only entity
that really transforms
assets into securities, and thus literally performs the function
of securi
tisation is
the issuer, which is typically a special purpose vehicle.
Special purpose vehicles can either be discrete, that is, limite
d to a particular
transaction, or may be conduits or agencies available to securi
tisation activity in
general. In absence of any exclusion for discrete SPVs, all discre
te and conduit
SPVs should be regarded as engaged in the business of securitisati
on, as they are
formed for the purpose of securitisation, that is, transformati
on of assets into se-
Curities.

4. Isa securitisation company an SPV?

While the condition of net worth, registration and pre-conditions for
registra-
tion listed in section 3(2) would have tempted one to believe that securitisation
company is not the SPV, but there are several reasons to conclude that actuall
y,
the securitisation company is the SPV—at best, it can be conduit sponsor, which
provides securitisation services to several originators. The reasons why an SPV
fits into the definition of “securitisation company” are:
(a) In securitisation transactions, the SPV is the transferee of the assets of
the originator as also the issuer of the securities. Under the law, the se-
curitisation company is both the transferee of the assets of the origina-
tor, as also the issuer of the securities—see section 5(1) and section 7(1).
(b) The limits on the nature of business of the securitisation company under
section 10(1) are not exactly compatible with the structural features of
an SPV, but since a securitisation company under this law has a re-
stricted business, it is close to the classic meaning of an SPV.
(c) A securitisation company is one that is formed for the purpose of secu-
ritisation—this is the essential function of an SPV as well.
Thus, though there are some conflicts between the classic concept of a securiti-
sation company and the role of an SPV, a securitisation company under the law is
very close to an SPV.

5. Does an SPV have to be a securitisation company?

Globally, SPVs are structured as companies, trusts, LLCs or in other organisa-
tional forms depending on convenience of local legislation. It is not necessary for
an SPV to be incorporated as a company. Under the present law, there is no man-
datory provision that requires a securitisation transaction to be routed through a
securitisation company. An SPV can well be structured as a non-corporate body,
é.g., a trust. A trust is, of course, not a legal entity: the trustee is. If the securitisa-
tion entity is not a company, it is not a securitisation company, and hence, falls
outside the ambit of this law.
 882 See. M1), Syn. 6 Part 1l—Chap. ll—Regulation of Securitisation, etc.

6. Net worth requirement

There are two pre-conditions for a securitisation company and a reconstruction
company—net worth, and certificate of registration by the RBI. The certificate of
registration itself implies several preconditions listed in section 3(3), on which
we deliberate below. Obviously due to the fact that the requirements relating to
securitisation Companies and reconstruction companies have been intermixed,
there are certain conditions which are inappropriate for securitisation Companies.
The law fixes a minimum “owned fund” requirement of Rs, 2 crores for both
securitisation companies and reconstruction companies, There is a power vested
in the RBI to increase the same, but such an increased minimum capital require.
ment cannot be higher than 15% of the total financial assets “acquired or to be
acquired” by such company. In other words, the RBI has no power to reduce the
net worth requirement as laid down by law; it can only increase it, and can in-
crease to the maximum of 15% of acquired financial assets.
The word “owned fund” has not been defined in the Act. There are several
statutes referred to in section 2(2) from where meaning of undefined words in
this Act has to be imported but none of them clearly define the word “owned
fund”. It cannot be denied that the basic template for this enactment is Section45
I of the RBI Act; therefore, that is the closest statute from where the meaning of
this word should come. Explanation below Section 45-1 of the RBI Act defines
the word “net owned fund”; however, since the word “net” is missing in this law,
presumably with intent, the amounts to be deducted from owned funds under part
(b) of the definition given in the said Explanation can be ignored. Therefore,
“owned funds” must be taken to mean the aggregate of paid up equity capital and
free reserves as disclosed inthe latest audited balance sheet of the company after
deducting therefrom accumulated losses, deferred revenue expenditure and other
intangible assets.

sheet” inthe above definition must only relate tothe “free reserves” and
not paid
up capital, because if the latter interpretation were to be taken, a newly
company
-form ed
can never qualify for registration as a securitisation company
or asset
 Provisions for existing companies
Sec. 3(1), Syn. 7 883
It is most common for originators to provide credit enhancemen
ts to SPVs, but
it is rare for such an enhancement to be in form of “owned
funds” of the SPV.
Originator-enhancement comes in the form of over-collate
ralisation, or retained
cash, or subordinated securities, but all of these are structured as
the obligations
of the SPV, and not its owned funds. In any Case, it is one of the requi
rements of
registration that the sponsor is not the holding company of the
securitisa-
tion/reconstruction company: therefore, the owned funds cannot be
contributed
by the originator.
Under this Act, the securitisation company can run various “schemes”’.
In order
for mutual ring-fencing of the assets of these various schemes, each such
scheme
will be constituted into a pool or a trust; therefore, the net worth of the
securitisa-
tion company will not be available as a credit enhancement to the investors
in the
“schemes” except in circumstances in which the trustee’s own assets can be
used
to discharge the obligations of the trust. Even if the securitisation company issues
bonds or debentures to raise funding, such bonds are issued in terms of the water-
fall provisions of the indenture of trust, under which only the cash inflows from
the assets transferred by the originator can be used to pay off the bonds and there
is no general claim which the bondholders have against the securitisation com-
pany.
Therefore, the net worth requirement remains both perfunctory and inappropri-
ate. Its only use can be in cases where a conduit sponsor runs a general securitisa-
tion programme securitising the assets of various originators, and offers the net
worth of the securitisation company as a programme-wide credit enhancement.
For credit rating purposes, as long as the net worth of the securitisation com-
pany is ring-fenced from the assets acquired by the securitisation company, it
would not be possible for the rating companies to treat the net worth of the secu-
ritisation company as a credit enhancement.
See Chapter 9 of Part I of the book — the capital requirement currently being
required is Rs 100 crores.

7. Provisions for existing companies

The second proviso relates to existing securitisation companies and reconstruc-
tion companies. Existing securitisation companies and reconstruction companies
are allowed a time frame of 6 months to make application for registration with
the RBI’ and then continue to carry on business until the application is rejected
by the RBI. It is not exactly clear as to what will be the fate of such companies
who either fail to make application for registration by the stipulated date, or
whose applications are rejected, since quite obviously, botha securitisation com-
pany and a reconstruction company can only pay off their investors from out of
the assets which realise over the original term envisaged by the transaction.

fective date of application of the law is 21st June, 2002, though the law was passed as an Act
- mao endiNov. The RBI had not even finalised the requirements of registration till the eo
of December, 2002. Therefore, obviously, the requirement of filing applications for registration by
20th December, 2002 could not have been complied with. It appears that the Central stadt th
has, by order dated 21" December, 2002, extended the last date for existing companies ‘em 31st
March, 2002. As per e-mail from the Deptt of Non-banking Supervision addressed to the author.
884 Sec. X2) Part Ui—Chap. li— Regulation af Securitisation, etc.

For exisung companies as well, the requirements of registalion are equally ap:
plicable—net worth as well as the pre-conditions for registrauion referred to in
section 33).

Section (2)
(2) Every securitisation company or reconstruction company shall
make an application for registration to the Reserve Bank in such form
and manner as it may specify.

COMMENTS
RBI, vide Notification No.DNBS.1/CGM(CSM)-2003 dated March 7, 2003°
prescribed the form in which an application for certificate of registration (CoR)
to commence or carry on the business of the securitisation Company or recon:
struction company. Later, vide Notification No.DNBS,2/CGM(CSM)-2003,
dated April 23, 2003, RBI issued the Securitisation Companies and Reconstruc-
tion Companies (Reserve Bank) Guidelines and Directions, 2003" which has
been updated from time to time. The Guidelines and Directions, at present’,
stipulate the following, as regards registration:
(a) Every Securitisation company or Reconstruction company shall apply
for registration in the form specified vide Notification dated March 7,
2003” and obtain a CoR.
(b) On obtaining a CoR, a Securitisation company or Reconstruction Com-
pany can undertake both securitisation and asset reconstruction activi-
ties. Therefore, no separate registration is required for securitisation ac-
tivity and for reconstruction activity; a single CoR will serve the pur-
pose.
(c) Business is to be commenced within six months from the date of ob-
taining CoR. An extension of maximum one year from the grant of CoR
is possible on an application being filed.
(d) Provisions of section 45 -IA, 45-IB and 45-IC of RBI Act, 1934 shall
not apply to non-banking financial company, which is a securitisation
company or reconstruction company registered with the Bank under
Sectio 3 ofntheSARFAESI Act. Sections 45 -IA, 45-IB and 45-IC deal
with requirement of registration and net owned fund for NBFPCs, main-
tenance of percentage of assets, and reserve fund requirements for
NBFCs. Therefore, in case an NBFC undertakes securitisation activity
or reconstruction activity under the SARFAESI Act and obtains regis-
tration to commence and carry on the same, the specific requirements
3. http://rbidocs.rbi.org.in/rdocs/noti
PDFs/35
ficati
9 15on/
pdf.(acces
on12th August,
sed 2013)
4. http://rbidocs .rbi.org.in/rdocs/notification/PDFs/359 16.pdf. (accesse
d on 12th 2013)
5. Notification as amended upto June 30, 2013 -The Securitisation Companies antennae HS
Companies (Reserve Bank) Guidelines and Directions, 2003: ~_
hetp-//rbidocs.rbi.org.in/rdocs/comtent/pdfs/S4CC0107 1 3DA pdf. (accessed on12th
August, 2013)
6 RSI hanpeblished teapplication fonnlan on April 5, 2013-
hntp:/irbidocs.r6i.ore.in/raoce/Forme/PDs/34802. parqeannd on 12th August, 2013)
 Provisions for existing companies
Sec. 3(3) 885
under Sections 45 -IA, 45-IB and 45-IC of RBI Act,
1934 will not apply
to such NBFCs.
(e) The Guidelines and Directions also clarify that
“any entity not regis-
tered with the Bank under Section 3 of the Act may condu
ct the business
of securitisation or asset reconstruction outside the
purview of the
Act,;”

Section 3(3)
(3) The Reserve Bank may, for the purpose of considering
the appli-
cation for registration of a securitisation company or recon
struction
company to commence or carry on the business of securitisa
tion or as-
set reconstruction, as the case may be, require to be satisfied,
by an
inspection of records or books of such securitisation company
or re-
construction company, or otherwise, that the following conditions
are
fulfilled, namely:—
(a) that the securitisation company or reconstruction company has
not incurred losses in any of the three preceding financial years;
(b) that such securitisation company or reconstruction company
has made adequate arrangements for realisation of the finan-
cial assets acquired for the purpose of securitisation or asset
reconstruction and shall be able to pay periodical returns and
redeem on respective due dates on the investments made in
the company by the qualified institutional buyers or other
persons;
(c) that the directors of securitisation company or reconstruction
company have adequate professional experience in matters re-
lated to finance, securitisation and reconstruction;
(d) that the board of directors of such securitisation company or
reconstruction company does not consist of more than half of its
total number of directors who are either nominees of any spon-
sor or associated in any manner with the sponsor or any of its
subsidiaries;
(e) that any of its directors has not been convicted of any offence
involving moral turpitude;
(f) that a sponsor, is not a holding company of the securitisation
company or reconstruction company, as the case may be, or,
does not otherwise hold any controlling interest in such securiti-
sation company or reconstruction company;
(g) that securitisation company or reconstruction company has
complied with or is in a position to comply with prudential
norms specified by the Reserve Bank.
886 06©=._—sSee. K3), Syn. 1 Part U—Chap. ll—Regulation ofSecuritisation, ete.

'\(h) that securitisation company or reconstruction company has

complied with one or more conditions specified in the guidelines
issued by the Reserve Bank for the said purpose.|

COMMENTS

1. Preconditions for registration as also continued regis-

tration
The conditions for grant of certificate of registration by the RBI are also the
pre-conditions for continued registration—see section 4(1 )(d),
In view of the words “the Reserve Bank .. may require to be satisfied”, these
preconditions should be merely treated as illustrative, and they are neither man-
datory nor exhaustive. However, barring some confusion generated by the com-
mon conditions for securitisation companies and reconstruction companies, the
conditions seem to be easily understandable and it does not stand to reason that
there should be an attempt to avoid any of them.

2. Condition (a): No losses

The proper meaning of this condition is that the company in question should
not have incurred losses in any of the 3 financial years preceding the date of ap-
plication. Not having incurred losses is not the same as “having made profits”—
therefore, this condition does not imply that the applicant company should have
been in existence for at least 3 years and should have made profits.
Notably, reading this condition as a condition for continued registration, it
simply means—no loss for any year, since the registration is liable to be can-
celled under section 4(1)(d).
As far as securitisation companies are concerned, barring the income, the com-
pany would be making on its own assets (resulting from the net worth require-
ment of this law), there is very little chance for it to make any profits. A securiti-
sation transaction does not give any income to the securitisation company, ex-
cept, where it is a trustee, by way of trustee fees. If the transaction is structured
as a pass-through, the income received by the securitisation company is deemed
to be income beneficially received by the investors and is, therefore, not treated
as the income of the SPV. On the other hand, if the SPV issues its own obliga-
tions in the form of notes or bonds, it is usual for the SPV to carry a residual ob-
ligation by way of a deferred purchase price payable to the originator, or interest
on a subordinated loan, or redemption price of a zero coupon bond, which essen-
tially neutralises the income of the SPV. Lest it should lead to a double taxation.
SPVs are normally not left with residual profits—hence, it isunlikely that
there
will be profits left with a discrete securitisation company.

7. Ins. by the Amendment Act, 2004 (30 of2004), s. 3 (wef. 11-1 1-204).
 Arrangement for realisation offinancial
assets Sec. 3(3), Syn. 4 887
On the other hand, if the securitisation company
is a conduit offering services
tO various originators, it would be perfectly
alright for the company to get paid
for what it does.
As for reconstruction companies, the condition
of “no losses for past three
years” becomes even more difficult. A reconstruc
tion company will invest in dis-
tressed assets, and it is extremely hard to envisage
that the consideration paid or
promised to be paid at the time of acquisition
will necessarily be less than the
ultimate realisation. So, losses for reconstruction
companies cannot be ruled out.
Since the condition of “no losses” is applicable for cont
inued registration as well,
it would be hard for reconstruction companies to be
eligible for continued regis-
tration.
The only way out would be to acquire assets with
a contingent purchase price,
on ‘I-pay-you-more-if-earn-more’ basis, but that is not
a feature of an arms-length
transaction. Given the fact that the condition of “own
ed funds”, which is net of
accumulated losses, is satisfied on a continued basis, the condition
of no-lo
sses is
actually perfunctory, and would only reduce independen
t decision-making by
reconstruction companies, as one of the essential princ
iples of this business is
that the management has a strong will power to sell assets
at a loss, instead of
waiting endlessly for a better price, and probably end up with
more losses.

3. Condition (b): Ability to pay periodical returns and re-

deem investments
There are two parts to this condition, and both are inappropriate for
securitisa-
tion companies. The two conditions are—arrangement for realisation of
financial
assets, and ability to pay periodical returns and redeem the investments.

4. Arrangement for realisation of financial assets

In order to be qualified to act as securitisation or reconstruction companies,
prospects will have to demonstrate their arrangement to realise financial assets.
As for securitisation companies, they do not usually concern themselves with
realisation of the receivables. The collection function is performed by a servicer
who is mostly the originator himself, and in exceptional circumstances, the
backup servicer. Therefore, the only way a securitisation company can demon-
strate arrangement to realise the assets it acquires is by falling back upon the ser-
vices of the servicer. As such, it is the servicer who must be shown to have made
arrangement for realisation of the financial assets, and not the securitisation com-
pany.
As for reconstruction companies, since their core business consists of realisa-
tion services, it is important for them to demonstrate that ability.

8. See the preconditions for success of AMCs in Chapter 2 of Part I.

BSS Sec. 33), Syn. 5 Part Li— Chap. 1l—Regulation of Seourtivation, etc.

5. to pay returns and redeem investments

Ability
if related to asset-backed securities, the ability to pay periodic returns and re
deem investments cannot be the assurance of the secuntisauon semper That is,
indeed, the promise, whatever that is worth, of the assets Wansferred by the onigh
nator. The very difference between asset-backed securities and entity-backed se-
curities will disappear if the securitisation company were to make any promises
on either the returns or the repayment, It is unlikely that the assets of the origina
tor will be in place to demonstrate such ability at the time of making application
to the RBI. In any case, the very principle of structured finance is that some in-
vestors must be willing to write losses for the others to stay afloat, Therefore, the
promise that all securities of QIBs will be redeemed, is completely out of the
world as far as structured finance securities are concerned,
And obviously, making such a promise in case of ARCs is all the more diffi-
cult, since they deal in junk.

6. Condition (c): Professional expertise of directors

This condition requires the directors of the securitisation or reconstruction
company, as the case may be, to have adequate experience in the relevant field,
viz., securitisation and asset reconstruction. Typically, securitisation SPVs are
managed by professional service providers who provide on outsourcing basis
SPV management services. The employees or executives of such service provid-
ers act as directors on the boards of several SPVs. As a typical SPV is a passive
rapt not much securitisation-related knowledge is required for the directors of

Obviously, not all directors of the securitisation company are required to pos-
sess the qualifications referred to in the clause.

7. Condition (d): Independent directors

_ This clause stipulates that not more than half of the directors of the securitisa-
tion company or asset reconstruction company should be nominees, or associates
of the sponsor or any of the sponsor’s subsidiaries. The sponsor is defined as any
person holding 10% or more of the paid up equity capital of the company. Obvi-
ously, this clause is not the usual “independent directors” requirement found in
the listing agreement or under corporate governance codes. As per this clause,
half of the directors of the securitisation/reconstru company may ction
be the
nominees of the sponsor, as the same would neither violate this clause nor condi-
tion (f) explained below.
It isnot necessary for a securitisation/reconstruction company to have spon-
sorasdefined inthelaw:inwhich casethisclause isautomatically satisfied.
The word “nominees” should be understood in the same manner in which
“nominee directors” are understood in corporate governance. These are the per-
sons who are nominated by the sponsor. They are appointed at the will of the
 Condition (f): Independent company
Sec. 3(3), Syn. 9 889
sponsor and are removed as per the will of the sponsor. Quite
often, the nominees
are the employees of the sponsor. The mere fact that the
name of a director des-
ignated is suggested by the sponsor will not make him a nomin
ee. As a cardinal
rule, all those persons who are either appointed by the Board
of directors or by
the shareholders in general meeting should not be treated as
nominees of the
sponsor. “Associated in any manner with the sponsor’ is a much
wider phrase,
and would take in its sweep the employees of the sponsor, its
directors, close af-
filiates, etc.

8. Condition (e): Clean directors

None of the directors of the company should have been convicted
of any of-
fence involving moral turpitude. There is a disqualification relating to
moral tur-
pitude under the Companies Act [section 274(1)(d)], but that disqual
ification is
firstly subject to a floor of imprisonment for 6 months, and has a cleansing period
of 5 years of conviction, after which the disqualification does not hold. The
dis-
qualification in the present clause is both absolute and permanent, as is the case
with a managing director or whole time directors under section 267(1)(c) of
the
Companies Act.
“Moral turpitude” is not defined in laws but various courts over the years have
tried to interpret these words. Essentially, not every violation of law is an offence
involving moral turpitude. In Mangli v. Chakki Lal’, the Allahabad High Court
succinctly put the features of moral turpitude as under:
“(1) Whether the act leading to a conviction was such as could shock the
moral conscience of society in general;
(2) Whether the motive which led to the act was a base one; and
(3) Whether on account of the act having been committed, the perpetrator
could be considered to be of a depraved character or a person who has
been looked down upon by the society”.

9. Condition (f): Independent company

This condition implies that the securitisation company or the reconstruction
company should be self-standing independent and should not be either controlled
by the sponsor or be a subsidiary of the sponsor.
The sponsor should not be a holding company of the securitisation/reconstruc-
tion company. “Holding company” should be interpreted in the same manner as
defined in section 4 of the Companies Act. Though most subsidiary companies
are subsidiaries by voting control, it is also possible for a holding company to
control the management of the subsidiary, by way of a power to appoint or re-
move all or a majority of the directors of the subsidiary.
“Controlling interest” is not defined in the Companies Act. The generic mean-
ing of “controlling interest” is such interest as can give a power to control. The

9. AIR 1963 All 527.

890 See. 3),Sya.10 Part /i—Chap. Regulation ef Seourttisation, ete,

words “substantial interest” and “controlling interest” are not the same, Under
SEBI (Substanual Acquisition of Shares and Takeovers) Regulations, “oonwol” as
defined to include the night to appoint majority of the direotors or control the
management or policy decisions. Since companies are controlled by the man-
agement, there can be no other meaning of contro! than the management contol
envisaged in section 4(1)(a) of the Companies Act, Such concept of “control
leads to the same meaning as “holding company”—theretore, the only proper
meaning of “controlling interest” in this clause can be a de facto control which
merely expands the meaning of a “holding company”, a situation of de jure con-
trol.
In global practice, securitisation SPVs are always structured as not merely in.
dependents, but as orphans, with no clear owner at all.'” This is done to ensure
that there is no attempt at consolidating the SPV’s assets with those of the origi-
nator on bankruptcy of the latter, as also to apparently establish an arms-length
transaction.

10. Condition (g): Prudential norms

The RBI may impose prudential norms relating to securitisation companies and
reconstruction companies. Such norms need to be retrospectively and prospec-
tively complied with by the prospect.
The RBI has come out with “The Securitisation Companies and Reconstruction
Companies (Reserve Bank) Guidelines and Directions, 2003’, in pursuance of
this power. For text and comments, see later in this Book.

11. Condition (h): Compliance with conditions in the

Guidelines
This condition was added by the 2004 Amendment, from which it seems that
there was something missing earlier in the statute that the amendment tried to
plug in. In fact, compliance with prudential norms was already covered by condi-
tion (g). The only worry of the administrators might have been that the had
issued the 2003 Directions as “Directions and Guidelines”. Possibly to allow the
RBI to take measures in case of non-compliance of the Guidelines, the new con-
dition seems to have been inserted. For text of the 2003, Directions and Guide-
see later in
lines ,this Book.

Section 3(4)
(4) The Reserv Bank e
may, after being satisfied that the conditions
specified in sub-section (3) are fulfilled, grant a certificate of registra-
tion to the securitisation company or the reconstruction company
to

10. See Append 2 and 3 ofix

this Part.
11. See Part Ill of this book.
 Comments
Sec. 3(6) 891
commence or carry on business of securiti
sation or asset reconstruc-
tion, subject to such conditions, which it may
consider, fit to impose.

COMMENTS
There is a bit of inconsistency between the lang
uage of sub-section (3) and sub-
secuion (4). From the language of the present sub-s
ection, it seems that the condi-
tions of sub-section (3) are mandatory.
In any case, the RBI’s grant of registration is no guara
ntee of any sort as to the
ability of the securitisation or reconstruction company
as to the business it wants
to engage in.
While granting registration, the RBI imposed conditions
—notably, there is no
mention of any residual conditions in section 3(3) as
the list there is a closed list.

Section 3(5)
(5) The Reserve Bank may reject the application made
under sub-
section (2) if it is satisfied that the conditions specified
in sub-section
(3) are not fulfilled:
Provided that before rejecting the application, the applicant
shall be
given a reasonable opportunity of being heard.

COMMENTS
From a plain reading of this sub-section, it is apparent that the only ground
on
which the RBI can reject an application for registration is that one or more
of the
conditions listed in sub-section (3) are not satisfied. That is to say, as
long as a
prospect satisfies the conditions listed in sub-section (3), there is no extraneous
ground or condition because of which the RBI may turn down an application.
An order of an administrative authority must be a speaking order. The RBI
while rejecting any application cannot keep the reasons either implicit or vague.
The right of hearing before rejection has been made mandatory under this sub-
section.

Section 3(6)
(6) Every securitisation company or reconstruction company shall
obtain prior approval of the Reserve Bank for any substantial change
in its management or change of location of its registered office or
change in its name:
Provided that the decision of the Reserve Bank, whether the change
in management of a securitisation company or a reconstruction com-
pany ts a substantial change in its management or not, shall be final.
892 Sec. 4 Part li—Chap. li—Regulation af Seouritisation, etc.

Explanation.—For the purposes of this section, the expression “sub-

stantial change in management” means the change in the management
by way of transfer of shares or amalgamation or rransfer of the busi-
ness of the company.
COMMENTS
There are similar requirements imposed on non-banking finance companies
from where the template of this sub-section seems to have been drawn,
In global practice, there are restrictions on merger or amalgamation of SPVs, as
that may destroy the bankruptcy-remote feature of the company, This clause re-
quires RBI approval for:
— change of name
— change of situation of registered office
— substantial transfer of shares
— amalgamation or merger of the securitisation/reconstruction company
with any other company, or vice versa
— transfer of business to another company.
It is difficult to understand how something purely administrative as the change
of name might concern the RBI.

(1) The Reserve Bank may cancel a certificate

S. 4. Cancellation of Of registration granted to a securitisation com-
certificate of registration pany or a reconstruction company, if such
company—
(a) ceases to carry on the business of securitisation or asset re-
construction; or
(b) ceases to receive or hold investment qualified in-
stitutional buyer; or om or
(c) has failed to comply with any conditions subject to which the
certificate of registration has been granted to it; or
(d) at any time fails to fulfil any of the conditions referred to in
clauses (a) to (g) of sub-section (3) of section 3; or
(e) fails to—
(i) comply with any direction issued by the Reserve Bank
ender theprovidens ofGt kak er”
(ii) maintain accounts in accordance with the
ments of any law or any direction or order issued
the Reserve Bank under the provisions of this Act: or
 Cancellation of certificate of registration
Sec. 4(1) 893
(iii) submit or offer for inspection its books of
account or
other relevant documents when so demanded by
the
Reserve Bank; or
(iv) obtain prior approval of the Reserve Bank requi
red
under sub-section (6) of section 3:
Provided that before cancelling a certificate of registrati
on on the
ground that the securitisation company or reconstructi
on company
has failed to comply with the provisions of clause (c)
or has failed
to fulfil any of the conditions referred to in clause (d)
or sub-clause
(iv) of clause (e), the Reserve Bank, unless it is of
the opinion that
the delay in cancelling the certificate of registration granted
under
sub-section (4) of section 3 shall be prejudicial to the publi
c interest
or the interests of the investors or the securitisation comp
any or
the reconstruction company, shall give an opportunity to
such
company on such terms as the Reserve Bank may specify for takin
g
necessary steps to comply with such provisions or fulfilment
of
such conditions.
(2) A securitisation company or reconstruction company ag-
grieved by the order of '*[* * *] cancellation of certificate of regis-
tration may prefer an appeal, within a period of thirty days from
the date on which '[such order of cancellation] is communicated to
it, to the Central Government:
Provided that before rejecting an appeal such company shall be
given a reasonable opportunity of being heard.
(3) A securitisation company or reconstruction company which is
holding investments of qualified institutional buyers and whose ap-
plication for grant of certificate of registration has been rejected or
certificate of registration has been cancelled shall, notwithstanding
such rejection or cancellation of certificate of registration, be
deemed to be a securitisation company or reconstruction company
until it repays the entire investments held by it (together with in-
terest, if any) within such period as the Reserve Bank may direct.

Section 4(1)
(1) The Reserve Bank may cancel a certificate of registration granted
to a securitisation company or a reconstruction company, if such com-
pany—
12. The words “rejection of application for registration or’ omitted by the Amendment Act, 2004 (30 of
2004), s.4 (w.e.f. 11-11-2004). SR,
13; tin by si Amendment Act, 2004 (30 of 2004), s. 4, for the words “such order of cancellation
(w.e.f. 11-11-2004).
894 See. 4(1) Part 1l—Chap. li—Regulation of Securitisation, etc.

(a) ceases to carry on the business of securitisation er assel recon:

struction; or
(b) ceases to receive or hold any investment from a qualified institu
tional buyer; or
(c) has failed to comply with any conditions subject to which the
certificate of registration has been granted to il; or
(d) at any time fails to fulfil any of the conditions referred to in
clauses (a) to (g) of sub-section (3) of section 3; or
(e) fails to—
(i) comply with any direction issued by the Reserve Bank un-
der the provisions of this Act; or
(ii) maintain accounts in accordance with the requirements of
any law or any direction or order issued by the Reserve
Bank under the provisions of this Act; or
(iii) submit or offer for inspection its books of account or other
relevant documents when so demanded by the Reserve
Bank; or
(iv) obtain prior approval of the Reserve Bank required under
sub-section (6) of section 3:
Provided that before cancelling a certificate of registration on the
ground that the securitisation company or reconstruction company has
failed to comply with the provisions of clause (c) or has failed to fulfil
any of the conditions referred to in clause (d) or sub-clause (iv) of
clause (e), the Reserve Bank, unless it is of the opinion that the delay in
cancelling the certificate of registration granted under sub-section (4)
of section 3 shall be prejudicial to the public interest or the interests of
the investors or the securitisation company or the reconstructicom- on
pany, shall give an opportunity to such company on such terms as the
Reserve Bank may specify for taking necessary steps to comply with
such provisions or fulfilment of such conditions.

COMMENTS

farasexisting investments areconcerned. Itappears from secti

on 4(3) below that
 The Reserve Bank may cancel a certificate, etc.
Sec. 4(2) 895
There is no specific power for any forced change
in the management of the se-
curitisation Company or reconstruction company,
nor any direct power for prema-
ture liquidation of a scheme, except those implied by
section 12 see below.
The first condition in section 4(1)(a) relates to cessa
tion of business by the se-
Curitisation or reconstruction company. An activity of
securitisation is triggered
at a point of time and lasts over a period of time. For
example, a one time acqui-
sition and securitisation of residential mortgage recei
vables may last for about 30
years, or may be, more. A securitisation SPV that thus
buys receivables and stays
with the same, without continuously acquiring any furth
er receivables, cannot be
said to be have ceased to carry on the business of securitisa
tion. The word “busi-
ness” in the context of securitisation would only be taken
to be ceased when all
financial assets have either been realised or a clean up call
has been exercised. A
discrete SPV would usually be wound up when this happens.
Asset reconstruction companies as well, if formed for a specif
ic purpose, are
usually wound up after their purpose is over. The best examples
are the Resolu-
tion Trust Corporation of the U.S.A. and Securum of Sweden.
The second condition is extremely difficult to understand. It might have
been
the intent of the law that the securitised products will be initially sold
to qualified
institutional buyers, but there cannot be a ban on secondary market activit
y com-
pletely. Therefore, it is an illogical condition that a securitisation
company
should wind up its business if the qualified institutional buyers sell their invest-
ments to non-qualifying buyers. There is no basis for this condition, and if
such
cancellation of registration happens, it only adversely affects the interests
of the
investors.
The third condition refers to the further conditions for grant of registration
that are imposed under section 3(4). It is notable that there are no further condi-
tions under section 3(3) for considering an application for registration, but there
might be conditions that the RBI might impose while granting registration.
The fourth condition is a derivative of the conditions for eligibility for regis-
tration under section 3(3).
The fifth condition is a bunch of several conditions, or ‘vanities’ —essentially
meaning to say, if you are not a good boy, we will cancel your registration.
The proviso essentially ensures that before cancellation of registration on
grounds of an error of commission or omission, the errant company will be first
allowed to mend its ways before the guillotine is used.

Section 4(2)
(2) A securitisation company or reconstruction company aggrieved
by the order of '*[* * *] cancellation of certificate of registration may
prefer an appeal, within a period of thirty days from the date on which

14. The words “rejection of application for registration or’ omitted by the Amendment Act, 2004 (30 of
2004), s. 4 (w.e.f. 11-11-2004).
896 See. 4(2), Sya. i Part 1l—Chap. li—Regulation of Securitisation, etc.

such order of cancellation] is communicated to il, to the Central

Government:
Provided that before rejecting an appeal such company shall be given
a reasonable opportunity ofbeing heard.

COMMENTS
Appellate powers have been conferred on the Central Government, originally
relating to both rejection of an application for registration as also cancellation of
registration, and after amendment of the Act in 2004, only relating to cancellation
of registration. No particular official has been specified in the law before whom
such appeal may be presented: however, since the RBI is administratively gov-
erned by the Ministry of Finance, an appeal may be preferred before the Secre-
tary, Ministry of Finance, Government of India,
No format of appeal has been specified either. The usual format for an a 1 is
to state the facts of the case, grounds for the appeal and the relief sought. is
no mention of any fees payable on such appeal in the law.

1. Effect of amendments made in 2004: No power of ap-

peal for rejection of application?
The 2004 amendments have dropped words relating to rejection of application
for registration. Does this mean there is no appeal against rejection of an applica-
tion for registration? In fact, it would have been better for the law to provide for a
redressal mechanism for rejection of registration application. The reason is—if
the law does not provide for such machinery, an aggrieved applicant will have no
option but to go for Constitutional writ under Article 226.
Whether there is an appeal procedure or not, the RBI, sitting on an application
for registration, performs a significant administrative function, and therefore, all
requirements relating to administrative accountability are applicable on such ac-
tion. In other words, the order for acceptance or rejection should be made within
a reasonable time and should be a speaking order.

Section 4(3)
(3) A securitisation company or reconstruction company which is
holding investments of qualified institutional buyers and whose appli-
cation for grant of certificate of registration has been rejected or cer-
tificate of registration has been cancelled shall, notwithstanding
such
rejection or cancellation of certificate of registration, be deemed to be
@ securitisation company or reconstruction company until itrepays
the

15. Subs. by the Amendment

Act, 2004 (30 of 2004) “
(w.e.f. 11-11-2004). : +S. 4, forthewords “such onder ofcancellation”
 Acquisition of rights or interest in financial
assets Sec. 5 897
entire investments held by it (together with inter
est, if any) within such
period as the Reserve Bank may direct.

COMMENTS
There are two possible implications of this section. One
relates to the continued
regulation of a securitisation or reconstruction compa
ny, even after cancellation
of registration or rejection of application for registration
(apparently in case of
existing companies applying for registration), as long as
it holds the investments
of QIBs. The meaning of this clause is that a company
cannot claim immunity
from regulation or compliance, merely because its certif
icate has been cancelled.
The second implication is that on rejection or cancellation
, the RBI may direct
the repayment of investments held by it. This is not a direct
assertion of this sec-
tion, since it is only an elaboration of how long after the cancel
lation or rejection
will the company continue to be regulated. However, it is appar
ent that the logi-
cal repercussion of a cancellation of registration must be a time-
bound pay-down
of the investments and bar on acquisition of new assets.

(1) Notwithstanding anything contained in any agreement or any

other law for the time being in force, any secu-
_>. 5. Acquisition of yitisation company or reconstruction company
seat alesse 1" 8 may acquire financial assets of any bank or fi-
nancial institution—
(a) by issuing a debenture or bond or any other security in the
nature of the debenture, for consideration agreed upon be-
tween such company and the bank or financial institution,
incorporating therein such terms and conditions as may be
agreed upon between them; or
(6) by entering into an agreement with such bank or financial
institution for the transfer of such financial assets to such
company on such terms and conditions as may be agreed
upon between them.
(2) If the bank or financial institution is a lender in relation: to
any financial assets acquired under sub-section (1) by the securiti-
sation company or the reconstruction company, such securitisation
company or reconstruction company shall, on such acquisition, be
deemed to be the lender and all the rights of such bank or financial
institution shall vest in such company in relation to such financial
assets.
(3) Unless otherwise expressly provided by this Act, all contracts,
deeds, bonds, agreements, powers-of-attorney, grants of legal rep-
resentation, permissions, approvals, consents or no-objections un-
 98 Sec. 5 Part 1i—Chap. ll—Kegulanon of Securitisation, et

der any law or otherwise and other instruments of whatever nature

which relate to the said financial asset and which are subsisting or
having effect immediately before the acquisition of financial asset
under sub-section (1) and to which the concerned bank or financial
institution is a party or which are in favour of such bank or finan-
cial institution shall, after the acquisition of the financial assets, be
of as full force and effect against or in favour of the securitisation
company or reconstruction company, as the case may be, and may
be enforced or acted upon as fully and effectually as if, in the place
of the said bank or financial institution, securitisation company or
reconstruction company as the case may be, had been a party
thereto or as if they had been issued in favour of securitisation
company or reconstruction company, as the case may be.
(4) If, on the date of acquisition of financial asset under sub-
section (1), any suit, appeal or other proceeding of whatever nature
relating to the said financial asset is pending by or against the bank
or financial institution, save as provided in the third proviso to sub-
section (1) of section 15 of the Sick Industrial Companies (Special
Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be
discontinued or be, in any way, prejudicially affected by reason of
the acquisition of financial asset by the securitisation company or
reconstruction company, as the case may be, but the suit, appeal or
other proceeding may be continued, prosecuted and enforced by or
against the securitisation company or reconstruction company, as
the case may be.
'$[(5) On acquisition of financial assets under sub-section (1), the
securitisation company or reconstruction company, may with
the
consent of the originator, file an application before the Debts
Re-
covery Tribunal or the Appellate Tribunal or any court
or other
Authority for the purpose of substitution of its name
in any pend-
ing suit, appeal or other proceedings and on receipt of
such appli-
cation, such Debts Recovery Tribunal or the Appellate
court or Authority shall pass orders for the substi Tribunal or
tution of the se-
curitisation company or reconstruction company
suit, appea
in such pending
l or other proceedings. ]

a ee Teen
16. Inserted by\ the Enforcement of Securi;
ty Interest and Recovery Deh
2012(1 of 2013).
s.3(wef. 15-1-2013) ¥ of Det s Laws (Amendment) Act,
 Purport of the section
Sec. 5(1), Syn. 1 899

SYNOPSIS
i ade Parsi 5(1) SECTION 5(2)
2.: TheTPOMt OF the SECTION ..........cccecscececeecceses
sweep of the non obstante clause. 899
900 ; ae re
PFOVISION! cnt tees. 906
; < all be deemed to be the lender............ 906
3. Notwithstanding the agreement.............. 900 | 3 Modification of ch
4. Notwithstanding any other law............... 907
901 BHR Ste brs yeas ai
5. Financial assets of banks/financial
MRSC ot ke eee 901
6. By issuing a debenture .............ccccccccccce-s. 901
7. Does the debenture-route help? oc... SECTIONS)
902 | 1 Purport of the PrOViSION......... seeeseeseseeseees 908
8. By entering into an agreement................ 903 | 2. Against or in favour Of......ccccccececececee-s.... 908
9. Transfers by oral or executory SECTION 5(4)
Po) Sg pete ara a oat 903 ;
10. Assignability of — loans :
and 1. Continuation of legal proceedings.......... 909
CORSIGEANOR caatect need 904 | 2. Issue of notice under section
11. Assignment and Winding up .................. 13(2)
12. Assignment of loans: Binding nature of 904 by assignor; continuation of proceedings
DYCASSIOMCO. Fics tc... ccs-.nccetiac
Ee. 909
the RBI Guidelines........0.......c.csecscssesese.s. 904
13. Assignment a contractual right—no writ SR RIED)
of mandamils {1.291 28) 6) 20Ibe Si 905'')le* Implication 284006268
Yiub onmigia 910
2. Consent of the originator ........cccceccsccceee. 911

Section 5(1)
(1) Notwithstanding anything contained in any agreement or any
other law for the time being in force, any securitisation company or re-
construction company may acquire financial assets of any bank or fi-
nancial institution—
(a) by issuing a debenture or bond or any other security in the na-
ture of the debenture, for consideration agreed upon between
such company and the bank or financial institution, incorporat-
ing therein such terms and conditions as may be agreed upon
between them; or
(b) by entering into an agreement with such bank or financial institu-
tion for the transfer of such financial-assets to such company on
such terms and conditions as may be agreed upon between them.

COMMENTS

1. Purport of the section

As far as transferability of financial assets is concerned, this section is an eXx-
tremely important provision, and leaving aside the regulatory tone of the law, is
the crucial enabling provision. It is not that in absence of this enactment, trans-
fers of financial assets were disabled, but there were stumbling blocks on the way
to transfer of financial assets, in several common law instruments, as also indi-
vidual contracts.
This section starts with a non obstante clause. As this statute is a special statute
and is specifically related to securitisation and reconstruction of financial assets,
 900 =See. S11), Syn. 2 Part Li—Chap. Regulation af Seourtiivation, etc.

this enactment may be taken as a Complete code by iself as tar as Wanstorability

of financial assets is concerned. See also notes under section 35,
The meaning of a non obstanie Clause is to overcome anything which is incon.
sistent with the provisions of this law. That is to say, if there is a clash between
this law and any other law or instrument, such that the two either cannot be car-
ried together or one defeats the other, then, as far as transfer of financial assets
for securitisation and reconstruction is concerned, this law should survive, The
Court in Jaibharat Synthetics Lid. & Ors, v. State Bank of India," stated that the
non obstante clauses, as per the scheme of the Act, have been intwoduced to give
overriding effect to the provisions of the Act in the interest of a healthy and
growth oriented economy in India, further substantiated by Section 34 of the Act,
which ousts the jurisdiction of the civil court,
However, a notwithstanding clause does not do away with all “friction costs”
associated with transfers of financial assets. For example, if there is a taxation or
a stamp duty associated with the transfer, the same is not a provision inconsistent
with this law to be toppled by this law.

2. The sweep of the non obstante clause

The non obstante clause is only intended to provide for a mode of transfer of
financial assets between a bank and a securitisation company/reconstruction
company. It cannot be interpreted to do away with all consents or equities that a
transferring bank might owe to various interested parties.
For instance, if there is an agreement with the obligor, either containing a re-
striction on the transfer, or any precondition (for example, satisfaction of a mu-
tual obligation or right of set-off) etc., the same needs to be complied with.
Another example may be the rights of the creditors of the bank/financial insti-
tution with whom the bank may have agreed to a restriction on transfer. There
might be a charge that the creditors might hold, or may have imposed restraint on
the transfer of assets by the bank. This section cannot be interpreted such that all
suchrestri arecti
renderedons
nugatory. This law provides for a mode of trans-
fer—therefore, restrictions on transfer, if any, are not inconsistent with the provi-
sions of this law, will prevail.

3. Notwithstanding the agreement

The first non obstante clause relates to “ar agreement”. Prope
rly speaking,
law should have provided for “notwithstands 1 aaiyiguana was tadoads.

17. See for case law on the i

18. 1(2011)BC214 Bom -— of non obstante clauses, notes under section 35.
 By issuing a debenture Sec. 5(1), Syn. 6 901
tage, as the purpose of this law is merely to facilitate transfers and not to affect
the priorities or equities that such claimants might have against the bank.

4. Notwithstanding any other law

The impact of this provision should be that mode of transfer as permitted by
this law should prevail over any other law.
The common law instrument on transfers of actionable claims in general is sec-
tion 130 of the Transfer of Property Act. Under this law, a written instrument is
required for transfer of actionable claims. If the actionable claims in question
represent any interest in immovable property, registration of such transfer is also
mandatory under the Registration Act. Both these provisions may be regarded as
inconsistent with the flexibility that this law seeks to provide, and therefore, may
be read in favour of this law.

5. Financial assets of banks/financial institutions

A securitisation company or reconstruction company may acquire the financial
assets of banks/financial institutions. As both securitisation and reconstruction
companies have been treated alike, there is no bar on a securitisation company
buying non-performing receivables, and a reconstruction company buying per-
forming assets. See also notes under section 2, definition of “reconstruction com-
pany”.
In addition, there is no bar on either a securitisation company or reconstruction
company buying assets other than financial assets of banks or financial institu-
tions. Of course, the mode of transfer permitted by this law shall not operate in
such cases, but the provisions of section 5 should be deemed to be permissive
rather than prohibitive. Notably, the definition of “securitisation” in section 2(1)
talks of assets of “any originator”. See for more, comments under section 2, defi-
nition of “securitisation” and “securitisation company”.

6. By issuing a debenture
There are three parts to this clause—(a) issuance of debenture, bond or other
security; (b) for agreed consideration; and (c) incorporating the terms and condi-
tions of transfer.
A debenture is essentially an acknowledgement of debt. Though the definitions
of the Companies Act are to be imported into this law, the definition of “deben-
ture” in section 2(12) of the Companies Act, does not help much. There have
been several court rulings where courts have delineated upon the meaning of
“debenture”. In an oft-cited UK ruling, it was stated: “What the correct meaning
of ‘debenture’ is, I do not know. I do not find anywhere any precise definition of
it. We know that there are various kinds of instruments commonly called deben-
tures. You may have mortgage debentures, which are charges on property. You
may have debentures which are bonds; and if this instrument were under seal, it
be a debenture of this kind. You may have a debenture which is nothing more
 902 Sec. (1), Syn. 7 Part ll—Chap. ll— Regulation afSeouritiyation, etc.

than an acknowledgement of indebtedness.”'” If the last line of this decision is

taken into consideration, any acknowledgement of a debt is a debenture.
A bond is also an obligation to pay. The distinction between bonds and deben-
tures in capital market jargon is a mere matter of semantics, In US legal jargon,
the word “indenture” or “debenture” refers to the instruments under ich secu-
rity interest is created in favour of the bond holders, whereas the security issued
is called bonds. Under UK jargon, the security creation document is referred to as
the “debenture trust deed” and the security is called debentures,
The words “any other security in the nature of the debenture” are both bad
English as also redundant, as such other security is anyway a debenture,
In either case, by issuing bonds or debentures, the securitisation/reconstruction
company acknowledges debt to the transferring bank, which is the case if the
consideration for the transfer is not being paid immediately and a mere acknow!l-
edgement is given. Obviously, an acknowledgement of a debt will arise only
when a debt has been created. In the context of a securitisation or asset recon-
struction transaction, a debt is created only when there is a transfer of an asset
from the bank/financial institution to the securitisation/reconstruction company,
and the latter, in consideration, issues a debenture. It is the transfer that leads to
the issue of debentures/bonds, and not the other way round. In other words, it is
important to understand that the nature of such an instrument is first a deed of
transfer, and thereafter a debenture, rather than a debenture alone.
As per the clause, such debenture will also contain the consideration for the
transfer, and the terms and conditions agreed upon. Obvious enough, these terms
and conditions must relate to the terms of the transfer, as also the terms of re-
payment of the debenture.
The terms and conditions of the transfer ofthe financial assets are very impor-
tant and are usually quite compendious. Among other things, the transferor
makes several representations and warranties at the time of transfer, which forms
an important safeguard for the securitisation company, because any breach of
these representations and warranties will entitle the buyer to either annul the
transfer or require compensation.
The terms and conditions of transfer also include any restrictions on re-transfer
of the assets by the buying company, any call right including clean
up call re-
tained by the transferor, manner of determination of the consideratio
n and any
deferred Consideration, manner ofcomputing theprice incase of
anycallbythe

7. Does the debenture-route help?

The issuance of debentures by reconstruction
companies against
performing assets ofa transferor isfairly comm
on.”” However, incase of sos.
nusation , astheessential objective oftheoriginator isto
raise liquidity, theques-

19. British Inia Seoum Navigation Co». TRC (1881) 7 QBD

20. See for more, Chapter 2 inPart
> I. InThailThail nd. and, forj
165
mstance. TAMC issues bonds. In Korea as well,
 Transfers by oral or executory agreements Sec. 5(1), Syn. 9 903
tion is: what was the intent of the law-maker to provide for issuan
ce of deben-
tures?
One of the perplexing issues in securitisation transactions has been the
stamp
duty on transfer of receivables. The law-maker seems to have been impres
sed by
the view that if the instrument by which the transfer is effected is treated
as a de-
benture, the stamp duty applicable on such instrument would be the one applica
-
ble to debentures.
This, however, is an erroneous view. As discussed earlier, a debenture is only a
way of settling the consideration for the transfer. If the subject-matter of an in-
strument is the transfer of an asset, it cannot be interpreted as a debenture merely
because it is worded as such. It is a settled law that the stamp duty applicable on
an instrument is based on its essential nature and not based on the nomenclatures
parties assigned to it.
In terms of this law, either parties have an agreement, as covered by section
5(1)(b), or they have a debenture, provided by section 5(1)(a), or they have both
a debenture and an agreement. The agreement by which the financial assets are
transferred is a conveyance, and the debenture, which is essentially an agreement
of transfer will also be treated as a conveyance. In worst case, the two can be
stamped independently, but there is certainly no way to have an agreement of
transfer that is treated as a debenture.

8. By entering into an agreement

The other mode provided in section 5(1)(b) is mutual agreement. In any case,
any contract is preceded by mutual agreement: the only impact of section 5(1)(b)
is that such an agreement does not necessarily have to be a written agreement.
That is to say, a transfer of assets by parole is permitted by section 5(1)(b) which
is not permitted by section 130 of the Transfer of Property Acct.
A combined operation of section 5(1)(a) and (b) can lead to interesting possi-
bilities: an oral transfer; followed by a debenture, recording the terms and condi-
tions of such transfer. However, it would remain a contentious question as to
whether the recording of such terms and conditions was merely a memorandum
of record, or was that the very basis of the transfer.

9. Transfers by oral or executory agreements

As mentioned above, this law throws open the possibility of assignment with-
out an agreement in writing. The obvious intent of this permission is to avoid the
applicability of stamp duty. If there is an agreement of assignment, and the
agreement is in writing, it must be treated as a “conveyance” for stamping pur-
poses. If such conveyance is followed by issue of debentures, it must invite fur-
ther duty on the debenture as well.
However, it would be possible to transfer receivables orally, on the strength of
a written agreement to assign. An agreement to assign is an executory document,
which is merely indicative of the mutual agreement of parties to the terms of the
 YU Sec. 31), Sya.10 9 Purt li—Chap. li-—-Regulation af Seourvisation, etc.

assignment. The actual assignment might take place by mere delivery of the
originating documents, such as the loan agreement. Such an agreement to assign
is not a conveyance, and might escape stamp duty
In State of Maharashtra v. Atur India Pvt. Lid.,”" the Supreme Court, after re-
viewing English and Indian authorities as to distinchon between an agreement of
lease and an agreement to lease held that the latter was not liable to stamp duty,
The same principles will hold as far as assignments of actionable claims are con,
cerned.

10. Assignability of loans and consideration

The Hon'ble Supreme Court in /C/C/ Bank v. Official Liquidator of APS Star
Lid. & Ors**.,relied upon Camdex International Lid. y, Bank of Zambia’, and
upheld that, “The assignment of a debt will not be contrary to public policy
solely on the grounds that the assignee has purchased the debt at a considerably
discounted price or where the price is only payable after a period of credit or
where the assignee may make a profit due to the transaction because commercial
entities would never purchase debts if there was no prospect of earning a profit.”
On assignability of loans, see also Kotak Mahindra Bank Lid. v, Chopra Fabri-
cators and Manufacturers Pvt. Ltd.””

11. Assignment and Winding up

In V. K. Jain v. Pegasus Assets Reconstruction Pvt. Lid. & Anr.’’, the DRAT,
in the context of Sections 446 and 536 of the Companies Act, that stipulates
avoidance of transfers, etc. after commencement of winding up, remarked that
Section 5 of the SARFAESI Act permits assignment of debt and that debt cannot
be acquainted with the shares or assignment of the company.

12. Assignment of loans: Binding nature of the RBI Guide-

Section 5 (1) contains a non obstante provision over-riding any contra

ry law or
regulation that stifles the right of an asset reconstruction company
buying any
receivables. However, the guidelines of the RBI on sale of
ing loans
crovisiOne ofthe fon companies cannot betaken asa Tule incons
istent with the
provisions is law and hence overridden. On the contrary, these guidelines
have been issued forsale ofnon-performing loans toasset
reconstruction compa-

a Celiac te cee
(201 )BC
Lid, (2011) 1178BC(SC); See also, InternationalAsset
168(DRAT) sset R Reconstruction Co. v. Rohini, Chemicals (P)
23. (1998) Q.B. 22 (CA).
24. TI(2011) BC 566 All. (DB).
25. IV (2011) BC 92(DRAT-Dethi).
 Assignment a contractual Right, etc.
Sec. 5(2) 905
nies and are consistent with the provisions of this
law. They are mandatory — see
ruling of the Delhi High court in Haryana Steel and
Alloys Ltd. v. IFCI Ltd.
The Hon'ble Supreme Court in JCICI Bank y. Official
Liquidator of APS Star
Industries Ltd.~’, upheld that the RBI guidelines are issue
d to improve the quality
of assets in the banks; they seek to restructure the NPA’
s and not eliminate the
same.

13. Assignment a contractual right—no writ of mandam

us
In Paresh Spinners Limited v. State Bank of India*®, the Madhy
a Pradesh High
Court observed that in a contractual matter like assignment of
NPA, pursuant to
the RBI’s guidelines, it is not open for the borrowers to challe
nge assignment of
debts with underlying securities and no writ of mandamus could
be issued for
enforcement of pure contractual right. That is to say, the assig
nment of assets by
the assignor bank to the assignee is exercise of a contractual right,
and not exer-
cise of a statutory right or power, and a writ of mandamus does
not lie in such a
case. There are several other rulings on the issue that in contractual matter
s, writ
of mandamus does not lie — see the ruling of the Delhi High Court
in Haryana
Steel And Alloys Ltd. v. IFCI Ltd.*’ which discusses this issue and cites
several
other rulings on the point, viz.,: (i) Orissa State Financial Corporatio
n vy.
Narsingh Ch. Nayak.*° (ii) National Highways Authority of India y. Ganga
En-
terprises.”’ (iii) ABL International Ltd. v. Export Credit Guarantee Corpo
ration
of India.*? (iv) Master Marine Services (P.) Ltd. v. Metcalfe and Hodgk
inson
(P.) Ltd.?? (v) Binny Ltd. v. V. Sadasivan.”* 3 (vi) Orix Auto Finance (India) Ltd.
v.
Jagmander Singh.” (vii) Data Access India Ltd. y. Mahanagar Telephone Nigam
Ltd.*°

Section 5(2)
(2) If the bank or financial institution is a lender in relation to any fi-
nancial assets acquired under sub-section (1) by the securitisation
company or the reconstruction company, such securitisation company
or reconstruction company shall, on such acquisition, be deemed to be
the lender and all the rights of such bank or financial institution shall
vest in such company in relation to such financial assets.

26. AIR 2007 Del 65 : 2007 136 Comp Cas 584.

27. 1 (2010) BC 178 (SC)
28. IV (2009) BC 523. ‘'
29. AIR 2007 Del 65 : 2007 136 Comp Cas 584.
30. 120 Comp Cas 279 (SC).
31. AIR 2003 SC 3823 : III (2003) BC 621 SC.
32. (2004) 3 SCC 553.
33. (2005) 6 SCC 138.
34. 2005 AIR SC 3202.
35. II (2006) BC 108 (SC)
36. 126 (2006) DLT 617.
900 See. (2), Syn. 1 Part ll—Chap. ll—Regulation of Securitisation, etc.

COMMENTS

1. Mandatory provision
In view of the discussions below, many a bank or financial institution might be
tempted to limit the transfer of financial assets to merely the receivables under a
loan and not to lead to a complete mutation of the loan in favour of the securitisa-
tion/reconstruction company. However, the apparent reading of the above clause
implies that the provisions of this clause are automatic and mandatory and do not
leave a leeway for transferors to choose to retain the lender-relationship,
Besides, this clause apparently also conflicts with the transfer of fractional in-
terest in a loan, sought to be permitted by the expansive meaning of “financial
assets” under this law. If such fractional interests are transferred, in view of the
deeming provisions of this clause, it is doubted if the original lender can retain
his position as a lender to the extent of the retained interest,

2. Shall be deemed to be the lender

The transfer of a financial asset conveys the rights of the transferor to the trans-
feree. The second part of this sub-section, therefore, says the obvious. However,
it isdifficult to understand the first part of this sub-section, except as an elabora-
tion of the second part. The first part implies that post-transfer, the securitisation
company/reconstruction company shall be deemed to be the lender in relation to
the loan, whose receivables have been transferred. It should have been enoughto
say that the rights of the lender would stand transferred to the transferee: that the
transferee shall also be deemed to be the lender is merely a surplusage, as that is
anyway unimportant.
On the contrary, this section may only lead to difficulti A loan
es.is a contract
between the lender and the borrower, and the receivables are the rights or bene-
fits arising out of the contract. The rights or benefits are assignable without lead-
ing to an assignment of the contract. This section provides that on the acquisition
of the financial assets by the securitisation/reconstruction company, such com-
pany “shall be deemed to be the lender”. Being deemed to be the lender, and hav-
ing acquired the rights under the loan, are not the same thing—which the law-
maker seems to have ignored here. The substitution of the securitisa-
tion/reconstruction company as the lender would amount to novation of the
original contract in terms of section 62 of the Contracts Act, while an as i
of rights under the loan is merely an assignment of a property. The cardinal rule
of law is that the benefits under a contract are assignable and not the obligati
under it. “The law on the subject is well settled and might be stated in
1
terms. An assignment of a contract might result by transfer ei of the rights or
of the obligations thereunder. But there isa well-recognised distinction
between
these two classes of assignments. As a rule, obligations under a contract
cannot
be assigned except with the consent of the promisee, and when such
consent is
given, it is really a novation resulting in substitution of liabilities. On
hand, rights under a contract are assignable unless the contract the other
ispersonal inits
 Modification of charge
Sec. 5(3) 907
nature or the rights are incapable of assignment either under
the law or under an
agreement between the parties.’’
_ If the securitisation/reconstruction company is deemed to
be the lender, this be-
Inga case of novation or statutory variation of the original contra
ct, an obligor
notification becomes necessary. In practice, this is logistically
so difficult that it
is almost never done.
Loans given by banks are not subjected to withholding tax on interest
paid by
the borrower. As the loan would now be deemed to have been given by
the secu-
ritisation company/reconstruction company, it cannot be said to be a
loan given
by a bank.

3. Modification of charge
The fact that the lender has been changed, in case of any loan where a security
interest has been created, will also amount to a modification of the charge.
In
case of corporate borrowers, this will require registration of the particulars of
modification of the charge with the Registrar of Companies, which also amounts
to obligor notification. In case of loans against motor vehicles, where particulars
of a hypothecation have been endorsed on the Registration Certificate, the said
particulars will also require to be modified, which might be a stupendous task.

Section 5(3)
(3) Unless otherwise expressly provided by this Act, all contracts,
deeds, bonds, agreements, powers-of-attorney, grants of legal repre-
sentation, permissions, approvals, consents or no-objections under any
law or otherwise and other instruments of whatever nature which relate
to the said financial asset and which are subsisting or having effect
immediately before the acquisition of financial asset under sub-section
(1) and to which the concerned bank or financial institution is a party
or which are in favour of such bank or financial institution shall, after
the acquisition of the financial assets, be of as full force and effect
against or in favour of the securitisation company or reconstruction
company, as the case may be, and may be enforced or acted upon as
fully and effectually as if, in the place of the said bank or financial in-
stitution, securitisation company or reconstruction company as the
case may be, had been a party thereto or as if they had been issued in
favour of securitisation company or reconstruction company, as the
case may be.

37. Khardah Co. Ltd. vy. Raymon and Co. (India) (P.) Ltd., AIR 1962 SC 1810; See also Indu Kakkar v.
Haryana State Industrial Development Corporation Ltd., 1998 SCC 950.
QOS See. 33), Syn. 1 Part 1l—Chap. ll—Regulation of Securitisation, etc.

COMMENTS

1. Purport of the provision

What this section says in so many words is a verbose version of the simple
canon of law that if a receivable is transferred, all securities and equities that at
tach thereto are also transferred. Section & of the Transfer of Property Act also
incorporates the said principle.
For easy reading, it would help to read parts of this clause at a time, For in-
stance, “all contracts .. which relate to the said financial asset .. and to which the
concerned bank or financial institution is a party ., shall ...be of as full force and
effect against or in favour of the securitisation company ..as if, in the place of the
said bank or financial institution, securitisation company .. had been a party
thereto..” In other words, all contracts relating to the transferred financial assets
shall stand mutated to the securitisation company/reconstruction company. This
is also a difficult proposition and may lead to difficulties in practice. The law
talks of “all contracts.. which relate to the said financial asset” and not “all con-
tracts with the obligor which relate to the said financial asset”. For instance, if a
bank has a financial asset, and has entered into an agreement to sell the same to
another bank, it cannot be that such an agreement shall also stand mutated to the
securitisation company. As mentioned earlier, it is only benefits arising out of a
contract that are assignable, and not the burdens. The wide wording of this clause
may have the effect of exposing the securitisation/reconstruction company to eq-
uities, burdens or encumbrances to which the transferring bank might have sub-
jected itself.

2. Against or in favour of
Though the law uses the words “in favour of” at several places in this clause, it
also says, with respect to the several enumerated instruments, that the same shall
be effective “againorstin favoof” ur the securitisation/reconstruction company.
This further exacerbates the difficulties created by the loose language of this
law. If a securi company
tis acquire
ati s the on
financial assets subject to the obli-
gations or equities to which a bank had subjected itself, it would be hard
for it to
assthe
essquality of the receivables.

Section 5(4)

(1), any suit, appeal or other proceeding of whatever

nature
the said financial asset is pending by or against the bank relating to
or }

1985(1 of 1986) the same shall not abate, or be

discontinued or
any way, prejudicially affectedby reasonofhe
asset by the secu
acqulanten afnananiat
ritisation companyor reconstruction
company, as the
 Continuation of legal proceedings
Sec. 5A 909
case may be, but the suit, appeal or othe
r proceeding may be contin-
ued, prosecuted and enforced by or against
the securitisation company
or reconstruction company, as the case
may be.

COMMENTS

1. Continuation of legal proceedings

This section is a usual provision found in most
laws on continuation of legal
proceedings.
The proceedings that can be continued are those
relating to the financial asset,
and not those having to do with offences of any kind
committed by the transferor.
In Allahabad Bank vs. Rajinder Mehra & Ors. %°
the bank assigned the loan to
a ARC, but the borrower continued paying rent to
the bank, also the action taken
by the bank u/s 13(2) & 13(4) was questionable
and the DRT (trial court) was yet
to adjudicate
. So, the DRAT dismissed the appeal of the Bank seeki
its name from array of parties, which had cited Sec.5(4) ng deletion of
in seeking so. The same
could not be done till the alternate remedy asked for by
the borrower u/s 17(1)
has been adjudicated upon. Thus, until then, both the assig
nor as well as the as-
signee were held to be necessary parties to this case.

2. Issue of notice under section 13(2) by assignor; con-

tinuation of proceedings by assignee
There are several situations where one or more of measures under
sec. 13 have
been taken by the originating bank already, and thereafter, the bank
assigns its
rights under the loan. Note that the language of this sub-section is
“any suit, ap-
peal or other proceeding”. Later words, viz, “continued, prosecuted
and en-
forced” also seem to be suggesting that the reference in the sub-section
is to
pending litigation. However, in Sashi Agro Food (P) Ltd. v. Andhra Bank,
SSI
Branch And Anr.”, ruling dated 31st December, 2007, a single Judge of the
AP
High court held that the word “proceeding” under the sub-section includes notice
under sec. 13(2) as well.
Let us visualize the following situations:
* Notice issued under sec 13 (2), borrower’ s representation pending
* Notice issued under sec 13 (2), borrower’s representation received
* Possession taken under sec 13 (4), actual or symbolic
It is settled law that an assignment can transfer rights; it cannot transfer any ob-
ligations. If the lender has served a notice under sec. 13(2), the lender has the
obligation to redress the representation of the borrower under sec. 13(3A). The
lender cannot transfer this obligation to the assignee. It is not justifiable that the

38. IV (2011) BC 185 (DRAT Delhi).

39. IV (2008) BC 298 (AP)..
910 See. 5A Part ll—Chap. 1l—Regulation ofSecuritisation, etc.

borrower gets a nouce from someone else, and he expects redressal trom the as:
signee. Therefore, this author's view is that the lender may assign the loan only
after the lender has discharged his obligation of answenng the representanon,
If the repossession of the secured asset has been taken over, the lender may sull
assign his right. The right in that case will represent the right to make sale of the
y acquired by way of repossession, as also the night to recover the balance
of the debt. In that case, the assignee may proceed with the sale of the property,
Of course, the drafting of the assignment agreement has to clearly include the
collateral as well.

Section 5(5) |
“1(5) On acquisition of financial assets under sub-section (1), the se-
curitisation company or reconstruction company, may with the consent
of the originator, file an application before the Debts Recovery Tribu-
nal or oa llate nis or any court heother Aut jor the
purpose of substitution of its name in any ing suit, or other
mr a and on receipt of such upplloation, such Debts Recovery
ribunal or the Appellate Tribunal or court or Authority shall pass or-
ders for the substitution of the securitisation company or reconstruc-
tion company in such ng suit, appeal or other proceedings. ]

COMMENTS

1. Implication
The purport of this provision is quite simple — substitution of the name of the
assignee in pending litigation. In many cases, there is a pending litigation be-
tween the bank and the borrower, and in the meantime, the bank assigns the loan
to an ARC. The usual practice in such cases was to make a substitution applica-
tion to the relevant judicial forum.
_ The section now expressly permits substitution of the name of the securitisa-
tion company or the asset reconstruction company in place of the name of the
secured creditor in any pending suit, appeal, or other proceedings. However, the
same is subject to the consent of the originator. The authority before which the
application has been filed has to pass the order for such substitution. The sub-
section can be read as an addition to sub-section (4).
Sub-section (4) covers continuation of proceedings: sub-section (5) seeks to in-
troduce the name of the assignee in the proceedings and provides for a procedure
for the same, while at the same time forcing the judicial forum to substitute.

LN

40. Inserted
12 (1 of by2013). of
< 3(wetnt 34
the Enforceme Interest and Recovery of Debts Laws (Amendmerit) Act.
 Transfer ofpending applications, etc.
Sec. 5A 911
2. Consent of the originator
As stated earlier, provisions of Section 5(2) are
automatic and mandatory; and
the securitisation company/asset reconstruction
company is deemed to be the
lender, with no option provided either to the lende
r or the SC/ARC to retain the
lender-relationship. Further, Section 5(4) expressly
allows continuation of pro-
ceedings by or against the SC/ARC. Under such a
situation, requirement of the
consent of originator for substitution of name in pend
ing suits, appeals, other
proceedings, seems a redundant requirement.

(1) If any financial asset, of a borrower acquired by

a securitisa-
tion company or reconstruction company, comprise
of secured
debts of more than one bank or financial insti-
“IS. 5A. Transfer of tution for recovery of which such banks or
pending
fi-
applications
any one of Debts Recov-to
pancial institutions has filed applications before
ery Tribunals in certain
‘WO Or more Debts Recovery Trib .
unals, the se-
cases curitisation company or reconstruction com-
pany may file an application to the Appellate
Tribunal having jurisdiction over any of such Tribunals in whic
h
such applications are pending for transfer of all pending appli
ca-
tions to any one of the Debts Recovery Tribunals as it deems fit.
(2) On receipt of such application for transfer of all pending ap-
plications under sub-section (1), the Appellate Tribunal may, after
giving the parties to the application an opportunity of being heard,
pass an order for transfer of the pending applications to any one of
the Debt Recovery Tribunals.
(3) Notwithstanding anything contained in the Recovery of Debts
due to Banks and Financial Institutions Act,.1993 (51 of 1993), any
order passed by the Appellate Tribunal under sub-section (2) shall
be binding on all the Debts Recovery Tribunals referred to in sub-
section (1) as if such order had been passed by the Appellate Tri-
bunal having jurisdiction on each such Debts Recovery Tribunal.
(4) Any recovery certificate, issued by the Debts Recovery Tribu-
nal to which all the pending applications are transferred under
sub-section (2), shall be executed in accordance with the provisions
contained in sub-section (23) of section 19 and other provisions of
the Recovery of Debts due to Banks and Financial Institutions Act,
1993 (51 of 1993) shall, accordingly, apply to such execution.]

41. Ins. by the Amendment Act, 2004 (3 of 2004), s. 5 (w.e.f. 11-11-2004).

912 Sec. 5A, Syn. | Part 1l—Chap. Hi--Regulation of Seouriiisation, et

COMMENTS

1. Consolidation of DRT jurisdiction

One of the important features of ARCs is the consolidation of loans given by
various lenders to a particular borrower. In case there are loans given by various
banks to a particular borrower, for which there are pending applications belore
different DRTs, the reconstruction company may apply for consolidation of all
such pending applications before a single DRT. This application shall be filed
with the Appellate Tribunal having jurisdiction over any one of the DRT's,
(1) The bank or financial institution may, if it considers appro-
priate, give a notice of acquisition of financial assets by any secu-
ritisation company or reconstruction company,
5. 6. Notice to obligor to the concerned obligor and any other con-
and discharge of obliga cerned person and to the concerned registering
tion of such obligor, authority including Registrar of Companies in
whose jurisdiction the mortgage, charge, hy-
pothecation, assignment or other interest created on the financial
assets had been registered.
(2) Where a notice of acquisition of financial asset under sub-
section (1) is given by a bank or financial institution, the obligor, on
receipt of such notice, shall make payment to the concerned secu-
ritisation company or reconstruction company, as the case may be,
and payment made to such company in discharge of any of the ob-
ligations in relation to the financial assets specified in the notice
shall be a full discharge to the obligor making the payment from all
liability in respect of such payment.
(3) Where no notice of acquisition of financial asset under sub-
section (1) is given by any bank or financial institution, any money
or other properties subsequently received by the bank or financial
institution, shall constitute monies or properties held in trust for
the benefit of and on behalf of the securitisation companyor recon-
struction company, as the case may be, and such bank or financial
institution shall hold such payment or property which shall forth-
with be made over or delivered to such securitisation company or
reconstruction company, as the case m or its
authorised in this behalf. dog agent duly
SYNOPSIS
1. Obligor notification 20. 913 5. Swh-section (2): Effect of notice
2. Obligor notification under common 6. Obligor ta > names 4 of i
law aia woverevs wereverwereresevovovesseesevsvatees 913 SEITE ncssassrtensnsnsnmranieamscniesidtimatainitinns
aA — 916
notification under the present 7. Sub-section (3): Effect
serermmansaenenies aracmegeenneees 914 | 8 “Shall forthwith be made over or 916of no-notice ..
_ Notice to the concerned registering ieee
TOOROTHY i ittieccreentte SAS | Dy Co-entingfling senvenests hn Tea 917
its sssssinanuncadnserns, OG
 Obligor notification under common law
Sec. 6, Syn. 2 913

COMMENTS

1. Obligor notification
A financial asset is essentially a right to receive from
the obligor, and since
such right to receive is sought to be transferred by the transf
eror, it affects the
obligor. It, therefore, stands to reason that the obligor shoul
d be notified of such
transfer. However, in securitisation practice, obligor notifi
cation is almost as a
rule never done. Quite contrary to this, in case of asset reconstruc
tion companies,
obligor notification is the norm.
There are commercial reasons for either practice. In case of
securitisation
transactions, the servicing function is usually retained by the origina
tor. The se-
curitisation company is a legal shell that does not have the wherewithal
to collect
any receivables. As, in any case, the collections are handled by
the originator,
there is no mundane need to notify the transfer. The obligors are numero
us, and
may run in thousands in case of retail transactions, making it logistically impos-
sible to notify the obligors. The obligors are mostly performing obligors:
obligor
notification is seen as adversely affecting the relations of the originator with
the
obligors.
In sum, obligor notification is a power reserved with the transferee, but seldom
exercised.
In case of reconstruction companies, the obligor is already a non-performing
asset and the prime objective of the transfer of the debt is to bring in place a body
that has stronger legal powers and administrative machinery. As the collection
function is transferred, obligor notification is a mundane requirement. In addi-
tion, the notice of transfer to the reconstruction company is also viewed as a psy-
chological advantage against the defaulting obligor.

1. Obligor notification under common law

In most common law countries, obligor notification is required by law. For ex-
ample, Section 136(1) of the English Law of Property Act, 1925, provides:
Any absolute assignment by writing under the hand of the assignor
(not purporting to be by way of charge only) of any debt or other legal
thing in action, of which express notice in writing has been given to a
debtor, trustee or other person from whom the assignor would have
been entitled to claim such debt or thing in action, is effectual in law
(subject to equities having priority over the right of the assignee) to
pass and transfer from the date of such notice: (a) the legal right to such
debt or thing,in action; (b) all legal and other remedies for the same; (c)
power to give a good discharge for the same without the concurrence of
the assignor.
Thus, express written notice of the assignment is necessary to complete the as-
signment against the obligor. This is also true for most other common law coun-
tries.
914 Sec. 6, Syn. 3 Part ll—Chap. li—Regulation af Securitisation, etc.

In England and in common law countries, an assignment of achonable claims

where notice of assignment has not been given to the obligor is treated as an eq-
uitable assignment. In Performing Right Society vy. London Theatre of Varie-
ties,” it was held that although the assignor could not transfer his legal title to the
assignee, equity would recognise the assignment of his equitable interest, pro:
vided that the assignor was joined as party to the action, either as plaintiff if he
consented to the action or as defendant if he did not, Thus, the impact of an equi-
table assignment is that the assignee will obtain a good discharge if he pays the
assignor. Notice to the debtor is also essential if the assignee is to have priority
over subsequent assignees.
In India, in 1900, the requirement of notice to obligors was removed and the
transfer was made effective upon execution of the instrument, However proviso
to section 130 enables the transferor of an actionable claim to deal with it, and
such dealing shall be valid against such transfer, unless the debtor has express
knowledge of such transfer. This rule seems to be similar to the English law on
equitable assignment—hence, there is no basic difference between lish law
and Indian law, except that what is recognised by English law as equitable as-
signment is a legal assignment in India, though ineffective as against the obli
without express notice. This is, though, compatible with the rule that Indian
courts do not recognise equitable rights as distinct from legal rights.
Under the Transfer of Property Act [section 131] a notice of assignment can be
given by the transferor, or, in case the transferor refuses to give the notice, it can
be given by the transferee. This is a significant safeguard since it is the transferee
whose interest is adversely affected in the absence of a notice of assignment.
Commenting on the pre-1900 text of the corresponding section 132, which did
not allow for the transferee to give notice, it was held in Ragho v. Narayan””’, that
not allowing the transferee to give notice of assignment was a slip, as the notice
was require d of interes
for the perfection of the transferee.
t

2. Obligor notifi
under
ca theti
preseon
nt law
If not allowing the transferee to give notice of assignment was considered to be
a slip in Ragho v. Narayan (supra), the present law repeats the same after more
than 100 years. The present law clearly empowers the transferor togive notice
of
assignment, and nowhere provides for a notice of assignment by the transfe
ree. It
'sclear from section 6(3) ofthis law that an obligor paying in absenc
e
of assignment will get a valid discharge from his debt. Though the of notice
implications
of un-notified transfer under section 130 do not apply here (that
nevertheless, thetransferee maryberinnee ec nateror will is, even if the
notBelegally valid),
cranefer atanytiene afer thedatethereof os OF > -

(1924) AC 1.
v. Dunlop Rubber Co., 1905 AC 454.
v. Hall, (182 3 Russ
8) 1.
(1897) 21 Bom 60.
 Notice to the concerned registering authority Sec.6,Syn.4 915
This law says: “The bank or financial institution may, if it considers appropri-
ate, give a notice..”. In other words, the notice of assignment is not only to be
given by the transferor but also at the discretion of the transferor. Such a stipula-
tion is difficult to understand. In Paresh Spinners Limited v. State Bank of In-
dia*’, the Madhya Pradesh High Court observed that no prior notice to the bor-
rower is required before the assignment of NPA. The High Court has not taken
into consideration the provisions of sec. 130 of the Transfer of Property Act and
was merely meaning to say that the borrower cannot object to a transfer. Obvious
enough, all that is required is a notice to the borrower — if the borrower anyway
knows about a transfer and challenges the same, he cannot be pleading the lack
of notice.
In securitisation transactions, though the collection function is usually retained
by the transferor, the transferor merely acts as an agent of the transferee for the
collections. Under certain circumstances, the transferee retains the right to have
the originator removed from the servicing function. This is unlikely to be a happy
parting of ways between the transferor and the transferee, such that the transferee
would certainly like to notify the obligors, and the transferor might not cooperate.
Strictly speaking, this law does not leave room for a notification of transfer by
the transferee, though the same should be surprising since by virtue of section 5,
irrespective of the notification, the transferee assumes ownership rights over the
financial assets.
The only way, therefore, would be for transferees to retain the power to notify
the obligor as an agent of the transferor.

3. Notice to the concerned registering authority

The reference to Registrar of Companies was not there in the Ordinance and
seems to have been added in the process of introduction of the Bill in the Parlia-
ment.

The law also “empowers” the transferor to serve notice of the transfer to the
concerned registering authority. In the context of this. law, the concerned register-
ing authority could mean several things. There is a provision in this law [section
22] about registration of security interests. In addition, security interests could be
registered under several other laws—section 125 of the Companies Act, registra-
tion of hypothecation of a motor vehicle under the Motor Vehicles law, etc.
A change of a security-interest holder is certainly a modification of the security
interest, and therefore, it is necessary to register the same with the registering
authority. Section 24 of the present Act requires such modification to be regis-
tered. Section 135 of the Companies Act similarly requires modifications to be
registered. Hence, the opening language of this section which provides that the
transferor “may, if considers appropriate” give notice of the transfer of a security
interest to the registering authority is to be tampered with the mandatory re-
quirements of other laws/other provisions of this law.

46. IV (2009) BC 523.

 916 See. 6, Syn. 5 Part ll—C hap. li—KRegulation af Seourtiisation, etc.

lt would be unlikely that a modification of registration Of seourity interest

would take place completely at the back of the debtor—so this provision also
virtually forces an obligor moufication. As far as the registration of modification
of charge is concerned, it will require obligor’s signatures.

4. Sub-section (2): Effect of notice

As against the requirement of common law statutes, the notice to the obligors is
not necessary for giving effect to the transfer of financial assets: the transfer is
effective even in absence of the notice. The effect of the notice is laid down in
sub-section (2): the obligor is obliged to pay to the securitisation/reconstruction
company on and from the date of receipt of notice by him. This implies, which is
any way the common law, that in absence ofa notice, an obligor having paid 10
the transferor gets a valid discharge. This law provides that post-notice, the obli-
gor will be obliged to pay to the transferee and he gets good discharge if does so.
[t is notable that the obligor’s liability post-notice is no different from his li-
ability in absence of a notice. It is only a question of whom does he pay to, but
the transfer of financial assets merely transfers to the securitisa-
tion/reconstruction company what existed on the date of transfer and no more.

5. Obligor notice with retention of servicing

This law does not seem to have envisaged the retention of servicing rights by
the transferor, while at the same time still notifying the obligor. That is to say, the
transferor cannot notify the transand fer yet continue to collect and service, be-
cause the law provides that post-notice-of-transfer, the obligor must start paying
to the transferee instead. There is no scope in the language of section 6(2) for
making payment to any other person, even if so instructed by the transferee. This
is obviously a product of drafting ineptitude.

6. Sub-section (3): Effect of no-notice

This sub-section operates in case notice of transfer ofthe financ
ial asset has not
been given. Since the obligor has not been notified ofthe transfer,
there isnoim-
arises between the transferor and the transferee.
The transferor shall hold “
money orothe r properties” subsequently received byhim intrustfor
thetrans.

assets, it is quite a complicated question to deci

de as to what rights/benefits
transferred and what are retained by the transferor.
thetransferor holds intrust forthetransfer i von
ee isobviously the one that ;
transferred by him. The words “ mone Of prope
y rties” are confusing, ae
bereadin context withtheintentofthepart
ies = =
 Co-mingling
Sec. 6,Syn.9 917
Similarly, the word “subsequently” which obvi
ously means subsequent to the
date of transfer, is also to be read in context of
the transfer agreement. The trans-
fer agreement may transfer the receivables after
a particular date and upto a par-
ticular date.
The transferor who receives any money or other
property that relates to finan-
cial assets that have been transferred merely holds
such money in trust for the
transferee. This clause uses several words to indicate
this intent—“held in trust
for the benefit of and on behalf of’. To hold somethin
g in trust for a beneficiary
as the same as to hold it for the benefit of the beneficiar
y, but to hold something
“on behalf of’ of someone is to hold it as an agent.
The transferor might have
been appointed by the transferee as the agent (servicing
agent), in which case he
collects and holds such money on behalf of the trans
feree. If there is no such
agency relationship, the transferor holds such money as a
trustee.
What this clause provides is no different from the requiremen
ts of an equity. A
constructive trust or a relief by way of restitution arises
where a property has
been transferred by the transferor but payment is wrongly
received by the trans-
feror. Section 94 of the Trusts Act also covers such relationship
s.

7. “Shall forthwith be made over or delivered”

The law unnecessarily fills in what should have been left for the transfe
ror and
transferee to write in their mutual agreement. On a plain reading, the
law also
does not have a clause such as “save as otherwise may be agreed upon by
the
parties”. Therefore, on a literal reading, the law provides that all collections
done
by the transferor must “forthwith” be made over to the transferee or the trans-
feree’s agent. Needless to say, the transferor himself may be the agent of the
transferee, as is the case, in case of servicing arrangements, but there is certainly
an unavoidable logistical gap between the date of collection and the date of pay-
ment to the transferee. In case of most retail financial assets (such as residential
mortgage loans, car loans, etc.), it is most common for the transferor to collect
receivables during a month, and pay them over to the transferee or a designated
account within certain days from the end of the month. If the prescription of the
law were to be literally complied with, a transferor must transfer all collections
on a daily basis to the transferee, which is practically ruled out in most cases.

8. Co-mingling
Though this law states that the amounts collected by the transferor are amounts
held in trust for the transferee and must be made over “forthwith”, there is neces-
sarily a lag between the collection and payment, even if such a payment is a pay-
ment to a designated account. During this intervening period, the amount col-
lected by the servicing agents gets co-mingled with the other collections made by
the agent. Once the money collected by the agent is not physically severable from
the agent’s own money, an obligation on the part of the agent to make over the
money collected in agency capacity is no different from his own obligation to
pay—this is called co-mingling risk, which is a risk on the servicing agent.
918 See. 7 Part U—Chap. ll—Regulation af Seourtiivation, ek

the
As long as the servicer is also in the business ol making collections from
obligors oa his own account or on account of others, such co ming Ling risk oan
ser
not completely be avoided. The only way of mitigating this risk is by active
vicing reports and surveillance, and by a penodic servicer advancing system,
in terms of legal protection, section 66 of the Trusts Act contains much
swonger provisions on co-mingling than this law, Section 66 provides that
“where the trustee wrongfully mingles the trust property with his own, the bene
ficiary is entitled to charge on the whole fund for the amount due to him,” That is
to say, the securitisation company gets a claim on the entire amount collected by
the servicer, including his own money,

(1) Without prejudice to the provisions contained in the Compa-

nies Act, 1956, (1 of 1956), Securities Contracts (Regulation) Act,
1956 (42 of 1956) and the Securities and Ex-
S. 7.Issue of security change Board of India Act, 1992 (15 of 1992),
ae
un y
receiptOF any securitisation company or reconstruction
ofsecuritisation
company or reconstruc. COmpany, may, after acquisition of any finan-
tion company cial asset under sub-section (1) of section 5, of-
fer security receipts to qualified institutional
buyers (other than by offer to public) for subscription in accor-
dance with the provisions of those Acts.
(2) A securitisation company or reconstruction company may
raise funds from the qualified institutional buyers by formulating
schemes for acquiring financial assets and shall keep and maintain
separate and distinct accounts in respect of each such scheme for
every financial asset acquired out of investments made by a quali-
fied institutional buyer and ensure that realisations of such finan-
cial asset is held and applied towards redemption of investments
and payment of returns assured on such investments under the
relevant scheme.
“[(2A) (a) The scheme for the purpose of offering security re-
ceipts under sub-section (1) or raising funds under sub-section (2),
may be in the nature of a trust to be managed by the securitisation
company or reconstruction company, and the securitisation com-
pany or reconstruction company shall hold the assets so acquired
of Ce cated en woaaring theassets, intrust forthebene-
it qualified institutional ers holding the secu receipts
sxivtss whensthe Gadipene ined = ~

47. Ins. by the Enforcement of Security Interest and Recovery of Debt:s Laws (Amendment) Act. 2004 (30
of2004), s. 6 (wef. 11-11-2004).
 Issue of security by raising of receipt or funds, etc. Sec. 7(1) 919

(b) The provisions of the Indian Trust Act, 1882 (2 of 1882) shall,
except in so far as they are inconsistent with the provisions of this
Act, apply with respect to the trust referred to in clause (a) above.]
(3) In the event of non-realisation under sub-section (2) of finan-
cial assets, the qualified institutional buyers of a securitisation
company or reconstruction company, holding security receipts of
not less than seventy-five per cent of the total value of the “*[secu-
rity receipts issued under a scheme by such company], shall be en-
titled to call a meeting of all the qualified institutional buyers and
every resolution passed in such meeting shall be binding on the
company.
(4) The qualified institutional buyers shall, at a meeting called
under sub-section (3) follow the same procedure, as nearly as pos-
sible as is followed at meetings of the board of directors of the se-
curitisation company or reconstruction company, as the case may
be.

SYNOPSIS
SECTION 7(1) és Trust to. be managed by the
1. Purport of the section .........c.cccceeeeeee 920 S€curitisation COMPANY .............eeceeeeeees 925
2. Issue of security receipts ..............:000000 920 | 4. Nature of security receipts in case ;
3. Law pertaining to issuance of of a CUSE ........sesesereesseerserncene acncenneee 5H 925
SEARING raat antaninx oznndscetis <4 920 5. Complete mechanism for issue o ops
4. After acquisition of the financial security receipts in trust form............00.

ASSIS Toei nn theses iniddl stteaetesenneenees 921 SECTION 7(3)

5. Other than by offer to public................ 921 es
SECTION 7(2) Ti. Investors’ rights........-scerencevscnsenessscorennes 927
- 2 2. Investor meetings in case of bonds......... 927
Epis ‘enb-scotions(2yansependent ef 3. Investor meetings in case of pass-
sub-section (1)........ sik at eb ey 922 through Certificates .........ccscesceceeseeeseeseees 927
2. Schemes for acquiring financial 4. Investor meetings in case of
ASSES ..........0000000. sesessagessces seogereresvepaseseeses 922 SECUTity FECCIPES ..-osssseseseeesssoseseseeesseeeeen 927
3. The question of ring-fencing................ 923 5. Tabular comparison for investor
4. Various classes under a scheme........... 923 decision-making in various cases ........-- 928
SECTION 7(2A) 6. In the event of non-realisation................ 928
1. Scheme may be in nature of a trust...... 924 Taped eT MILES ss carhin-oe
vanecossssvenseugensencevecenes 929
em WEMENS MNRINDESS caszsscRe>scoctessassedacyeczpsessare? 924 8. In case of Demat Securities ................0.. 930

Section 7(1)
(1) Without prejudice to the provisions contained in the Companies
Act, 1956, (1 of 1956), Securities Contracts (Regulation) Act, 1956 (42
of 1956) and the Securities and Exchange Board of India Act, 1992 (15
of 1992), any securitisation company or reconstruction company, may,
after acquisition of any financial asset under sub-section (1) of section

48. Subs. by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 (30
of 2004), s.6 (w.e.f. 11-11-2004).
 920 Sec. 711), Sya. I Punt Li—Chap. li—Kegulation af Securitisation, etc,

5, offer security receipts to qualified institutional buyers (ather than by

offer to public) for subscription in accordance with the provisions of
those Acts.
COMMENTS

1. Purport of the section

This section permits a securitisation/reconstruchion company to issue security
receipts to QIBs. This section speaks of only “security receipts” and if one were
to wrongly interpret this section, this section may take away far more than it
gives. One may be tempted to believe that a securitisation/reconstruction com-
pany can only issue security receipts, because this section nowhere talks of any
other mode of funding.
However, it is necessary to understand the meaning of “without prejudice to the
provisions of..”. These words let the Companies Act and the Securities Act have
a free play. Neither are the provisions of those statutes prejudiced by this law, nor
does this law prejudice the powers conferred on a company under those laws, A
securitisation/reconstruction company is like any other company under the Com-
panies Act and can issue all types of securities that a company may ordinarily
issue under the Companies Act. A security receipt is a specific security permitted
by this law for securitisation/reconstruction companies, but this certainly does
not close the options for such companies.
Hence, a securitisation/reconstruction company may issue debt instruments in
form of bonds or debentures, equity or equity-type instruments such as pass-
through certificates, instruments with embedded derivatives, self-standing deriva-
tives, etc.

2. Issue of security receipts

tion company to transfer legal interest in the assets that itacquires,

because ifthat
is the case, then issuance of security receipts would amount
to disposal of the
assets. The securitisation company is a device of transformation,
and not transfer,
of the financial assets. If it acquires financial assets, and transf
ers financial assets
by way of undivided shares, it is left with no assets atall.

Be Law pertaining to issuance of security receipts

As mentioned above, a securitisation company may
issue security receipts as
also other forms ofsecurities permitted bylaw (whi
ch would actually mean, not
Prohibited by law). Needless to say, all those
other securities will beissued in
compliance with the provisions ofthe Companie
s Act, Securities Act. etc. This
law provides thattheissuance ofsecurity receipts
willalso beincompliance with
 Other than by offer to public
Sec. 7(1), Syn. 5 921
the provisions of those laws. In addition, the issuance
of security receipts will be
in compliance with this law.
The word “security” is defined under the Companie
s Act by importing its
meaning from the Securities Act, and Securities Act
has been amended to include
security receipts. In other words, a security receipt is a
security under the Com-
panies Act, 2013 as well as the Securities Act. The provi
sions in the Companies
Act relating to issuance of securities (Chapter IV, correspond
ing to Part III of the
Companies Act, 1956) mostly relate to issue of shares or
debentures. Security
receipts are neither; therefore, such provisions are inapplicab
le to issue of secu-
rity receipts. Some of the recently inserted provisions in the
Companies Act use
the word “securities” and hence will be applicable to security
receipts. This in-
cludes sections 60A and 60B, but by the very nature, the issue of
security receipts
will hit neither of these two sections.
Provisions of the Securities Act do not relate to issue of securit
ies, but those re-
lating to listing will be applicable to security receipts as well.
As per SEBI law, the general control on issue of securities by listed compan
ies
or those intending to get their securities listed lies with the SEBI. This law
pro-
vides that the issue of security receipts will not be a public offer—therefore,
the
Guidelines relating to Investor Protection issued by SEBI should not, prima
facie,
be applicable to issue of security receipts.
In other words, the only rule applicable on security receipts seems to be that
they are to be issued to QIBs and not to the public.

4. After acquisition of the financial assets

The law provides, though in an apparently casual manner, that the security re-
ceipts will be issued after the acquisition of the financial assets. Usually, in secu-
ritisation business, the practice is to the contrary: the securities are issued first
and the proceeds thereof are used to acquire the financial assets. In lots of cases,
there is a longer ramp up period over which the originator is allowed to create
assets, though the funding is raised right away by the SPV. The SPV does not
have sources of funding of its own—so, if it were to have the assets first and then
raise funding by way of issue of securities, it will need to organise a bridge fund-
ing.

5. Other than by offer to public

The law provides that the issue of security receipts must be made to QIBs and
it must also not be a public offer. The former also seems to be saying the latter-
that an offer to QIBs must obviously be a private offer and not a public one. But
the way a public offer is defined in section 67 of the Companies Act, if an offer is
so made that it is likely to result into applications being made by persons other
than to those to whom it is made, it might be construed as a public offer even if it
is offered to a section of the public [Section 67(1) and section 67(3)(a)]. There-
fore, even an offer to QIBs should not be a public offer—that is, made to any
922 Sec. 7(2) Part ll—Chap. lil—Regulation of Securitisation, etc.

QIB addressed as a genre. It must be made in specie, and should not be calow
lated to result into applications for investment being pul up by QLBs to whom the
offer was not made.

Section 7(2)
(2) A securitisation company or reconstruction company may raise
funds from the qualified institutional buyers by formulating schemes for
acquiring financial assets and shall keep and maintain separate and
distinet accounts in respect of each such scheme for every financial as-
set acquired out of investments made by a qualified institutional buyer
and ensure that realisations of such financial asset is held and applied
towards redemption of investments and payment of returns assured on
such investments under the relevant scheme.

COMMENTS
1. Is sub-section (2) independent of sub-section (1)
Sub-section (1) referred to raising of funding by securitisation/reconstruction
companies by issue of security receipts. This sub-section talks about raising of
funds under various schemes. The issue is: are these independent ways of raising
funding by the securitisation/reconstruction companies, or is this sub-section a
mere furtherance of sub-section (1)? It would be appropriate to take this sub-
section as a mere furtherance: a securitisation/reconstructioncompany may raise
funding by issuing securities, and such issuance could also be identifiable with
reference to different schemes.

2. Schemes for acquiring financial assets

See notes under the definition of “scheme” under section 2. We have noted that
the construction of both the definition of “scheme”, as also this section with ref-
erence to securitisation
companies,
/reconsis inappropriate.
tructio A securitisa-
n

Reading the word “scheme” here as not ing investment objecti

funding relating to various asset-backed transactions.
 Various classes under a scheme
Sec. 7(2) 923

3. The question of ring-fencing

The law requires that if a securitisation/reconstruction company raises funds
under various schemes, it must maintain separate accounts in respect of each, so
as to apply the realisations relating to a particular scheme towards return on/of
such scheme. In other words, the company must earmark its cash inflows for the
specific scheme to which they belong to.
If there are assets acquired in respect of different schemes by a single com-
pany, all such assets become the assets of such company, and therefore, appar-
ently, all the creditors of the company have claims against all the assets. There is
no legal device to “ring-fence” the assets pertaining to one scheme from those
pertaining to the other. For instance, if a company runs Scheme A and issues
bonds against assets acquired under this scheme, and similarly Scheme B, even if
each of the bondholders are secured by specific charge over the assets acquired
out of each scheme, the bondholders in Scheme A will still have a residual claim
on the assets under Scheme B.
Several jurisdictions are developing the idea of a “protected cell company” or
cellular company, where a single company has various cells or pools of assets
and liabilities, and each cell is protected inter-se from other cells. Since this re-
quires a legislative backing, the present form of company law in India does not
allow for such cellularisation. The only way of ring-fencing the assets of differ-
ent schemes is for the securitisation company to hold each such pool as a separate
trust, and hold the assets attributable to each such trust as a trustee. As the assets
of a trust cannot be co-mingled with those of the trustee or those of other trusts of
which the trustee is also a trustee, a ring-fencing is automatically achieved.

4. Various classes under a scheme

In securitisation practice, it is common for every “scheme” or every issuance to
have several tranches or classes such as senior, mezzanine and junior classes, or
Class A, B, C and so on. These classes might have different payment priority and
payback period and method. This law provides that the securitisation/recon-
struction must ensure that the realisation on account of each scheme is applied
towards redemption/returns on each such scheme. Obvious enough, such redemp-
tion or payment of returns is done based on the cashflow allocation or “waterfall”
for each such scheme. Some of the classes in the scheme might be zero coupon
classes, while others might be regularly amoritising classes. Some classes might
come for a controlled amortisation structure, while some might have a bullet
payment at the end. Obviously, the allocation of cashflows must ensure scheme-
wise earmarking, but cannot rule out the agreed waterfall structure for each such
scheme.
 924 See. 7(2A) Part Li—Chap. ll—Regulation ofSecuritisation, etc.

Section 7(2A)
*\(2A)a) The scheme for the purpose of offering security receipts
under sub-section (1) or raising funds under sub-section (2), may be in
the nature of a trust to be managed by the securitisation company or
reconstruction company, and the securitisation company or reconstruc-
tion company shall hold the assets so acquired or the funds so raised
for acquiring the assets, in trust for the benefit of the qualified institu-
tional buyers holding the security receipts or from whom the funds are
raised.
(b) The provisions of the Indian Trust Act, 1882 (2 of 1882) shall, ex-
cept in so far as they are inconsistent with the provisions of this Act,
apply with respect to the trust referred to in clause (a) above. |

COMMENTS

1. Scheme may be in nature of a trust

The draftsman’s lack of clarity as to what exactly is a “scheme” in a securitisa-
tion or asset reconstruction transaction gets deeper when this sub-section, added
by the 2004 Amendment, says that the scheme may be in the nature of a trust. In
fact, what the draftsman might have wanted to say is—the vehicle used for carry-
ing out the scheme referred to in sub-section (1)or financing referred to in sub-
section (2) may be in the nature of a trust. In other words, instead of issuing the
security receipts by the securitisation company or raising funding as a liability of
the securitisation company, the security receipts or the funding may emerge out
ofa separate vehicle, in the form of a trust.

2. Whis
ata trust?
In English common law. a trust is not a legal entity—a trust ismerel
y an obli-
gation attached to property to hold the property for the benefit of
a ,
That istosay, ifa property is owned or held, not for the benefit
of the owner or
holder, but for the benefit ofsome other beneficiary, the obliga
tion to $0hold the
property for the beneficiary’ s interest gives rise to a trust.
The trustee is thelegal owner ofthe assets of a trust,
and
thebeneficial owners. Thebeneficial owners donothold the beneficiaries are
legal title—they merely
have the right tocompel the trustee tosatisfy the purpo
se ofthe trust, that isto
say, hold the property for the benefit ofthe beneficiary.
A itust isnota separate legal entity but surely
a separate legal property—it
entity as2 mee oene fencing device. Thisis becau se theproperty heldbyany
y aS| a trustee is not countedas the proper oftythe entity in
in bankruptcy pro-

49. Ins. by the Enforcementof

of2004), s. 6 (w.ef 11-11-2004). - ory ofDebts Laws (AmendmAct,
ent)
2004(30
 Complete mechanism for issue of security
, etc. Sec. 7(2A), Syn. 4 925
3. Trust to be managed by the securitisation
company
The law uses the language “trust to be managed
by the securitisation company
or reconstruction company”, which is a flawed
language. The securitisation com-
pany is the trustee of the trust, not its manager.
Manager may be the entity who
manages the affairs of the trust. In appropriate cases
, there might even be a sepa-
rate asset manager.

4. Nature of security receipts in case of a trust

In case the vehicle used by the securitisation company
is a trust, then the in-
strument offered to the investors, appropriately, is not
a “security receipt” but a
beneficial interest certificate. In the definition of “secu
rity receipt” (see com-
ments under the Definitions), the concept of beneficial
ownership is unfortu-
nately missing. However, in reality, in India, almost unive
rsally, the trust form of
vehicle has been used. In such a case, irrespective of wheth
er it is called a secu-
rity receipt or a pass through certificate, the nature of the
instrument offered by
the trust is to evidence beneficial interest in the assets of the
trust.

5. Complete mechanism for issue of security receipts in

trust form
The mechanism of holding the assets by the trust and the QIBs
is exactly as
under:
* The ARC/securitisation company sets up a trust—the trust is set up
by
settling some money by way of initial corpus of the trust which will be
held for the benefit of the beneficiaries.
°* The ARC is also the trustee of such trust.
* The trustee prepares a scheme for acquisition of the specified assets—
non-performing assets in case of a reconstruction scheme.
* The beneficiaries are invited to put in their subscription to the beneficial
interest in the trust. The beneficial interest is denominated in terms of
undivided beneficial interest, proportionate to the monetary value of
beneficial interest certificate held by each beneficiary. The value of the
certificates comes down as there is distribution of principal on the cer-
tificates. Beneficial interest certificates are not in the nature of debt—
therefore, they should not carry an obligation of the trust to pay any
coupon or interest. They may entitle the beneficial interest holders to
participate in the income of the trust either to an unlimited extent, or to
a limited extent. In case the beneficiary has the right to participate in
the income of the trust to a certain extent, such rate may be specified—
this is what is called the “pass through rate”.
* As the beneficiaries put in money into the trust, there is an asset, viz.,
cash. The trustee holds this asset in trust for the beneficiaries.
926 See. 1(3) Part li—Chap. 1i—Regulation ofSeouritisation, ete,
. As per the scheme, the trust funds are invested in buying the relevant
assets. Once the assets are bought, the assets are held in tust for the
beneficiaries.

© Thus. the trustee continues to be the legal owner of the assets. The
beneficiaries are undivided beneficial owners of trust property, to the
extent of the denomination of the beneficial interest certificates held by
the investors.
® The beneficial interest certificates may be “classified”—that is to say,
they may not all have the same priority or seniority of interest. There-
fore, the trust may create beneficial interest certificates of different
classes.
* It would be prudent to always create a “residual class”. Since the inter-
est of investors is limited to the value of the beneficial interest certifi-
cates held by them, the question is—should the trust have a surplus, that
remains after all such investors have been redeemed, who gets the re-
sidual cash? If the residual cash goes to the trustee or the reconstruction
company, then the reconstruction company may be deemed to be the
holding company of the trust for consolidation purposes, In addition,
there might be consequences of consolidation from a legal viewpoint
also. It would also be necessary for the trustee to disclose the residual
interest of the trustee to the beneficiaries, as a trustee cannot make any
undisclosed profits out of a trust.
* Normally, to create independent and distanced trust vehicle, the residual
beneficial interest in the trust is declared for public charitable purposes.
This conceptis called an orphan vehicle—one that has no clear residual
interest holder. This completely avoids the problem of consolidation.

Section 7(3)
(3) In the event of non-realisation under sub-section (2) of financial
assets, the qualified institutionalbuyers of a securiti , ‘ oleeny or
reconstruction company, holding security receipts of not less than sev-
enty-five per cent of the total value of the [security receipts issued un-
der a scheme by such company], shall be entitled to call a meeting of
all the qualified instituti buyers and every resolution passed in
such meeting shall be binding on the company.

SO. Subs. by theEnforcement

of Security Interest
tah skewel nitaee and Recovery ofDebts Laws (Amendment) Act,2004 (30
 Investor meetings in case of security receipts Sec. 7(3),Syn.4 927

COMMENTS

1. Investors’ rights
This section deals with the rights of investors in a securitisation scheme: so it is
an extremely important provision, but left in a very sketchy form by the lawmak-
ers.
The rights of investors in a securitisation/asset reconstruction scheme would
depend on (a) the nature of the security issued; and the (b) the terms and condi-
tions of the issuance. This sub-section is a mere residual provision that would
apply only when the terms of issuance do not contain specific rights. In most
cases, the terms of issue of the securities will contain details of investor rights
that will be far more compendious than the faint silhouette of investor rights
given under this provision.

2. Investor meetings in case of bonds

In case the securitisation/reconstruction company issues debt-type securities
which can be treated as “debentures” under the Companies Act, section 170(2) of
the Companies Act will apply to the meetings of the debenture holders. The pro-
cedural requirements for such meetings are substantially similar to general meet-
ings of the company. The rules on debenture holders’ meetings are contained in
Annexure C to Companies (Central Government) General Rules and Forms. A
meeting can be convened at the instance of a company. In case of difficulties,
debenture holders can also apply to the Company Law Board to convene a meet-
ing—See section 186 as modified under Annexure C to General Rules and
Forms. Normally, decision-making at corporate meetings is done by ordinary
resolutions, which means simple majority.

3. Investor meetings in case of pass-through certificates

A pass-through certificate is a certificate of beneficial entitlement. Since it is
not clearly defined as a “security” under the Securities Act, and is not covered by
the definition of “security receipt” under this law, it is possible to construe that a
pass-through certificate is not a security. The holder of a pass-through certificate
is a beneficiary of the trust. The Trusts Act does not lay down any procedures for
meetings of beneficiaries, though there are certain areas where collective deci-
sion-making of the beneficiaries will be required. For instance, for revocation of
trusts, under section 78, unanimous consent of all the beneficiaries is required.
Usually, the trust deed will contain provisions about seeking of beneficiaries
consent on matters.

4. Investor meetings in case of security receipts

This law provides that the meetings of holders of security receipts will be held,
as far as possible, in the same manner, as meetings of board of directors of a
 928 See. 7(3), Syn. 5 Part 11—Chap. ll—Regulation of Securitisation, etc.

company. Hence, provisions of sections 286 to section 289 of the Companies Act
will be applicable in this case. Importantly, as in case of board meetings, resolu.
tions can be passed by circulation.

5. Tabular comparison for investor decision-making in

various cases

Holdersof at least 75% o

the security receipts
As per provisions of € No specific length of notice,
trust deed notice in writing required
As per provisionsof t No specific provision
trust deed
As per provisions of the . rd o total num.
trust deed ber, or two, whichever is

i : j : i ; |
tors inthe security receipts have against the securitisation company.

put toprejudice, orthere is anactual orpotential violation

pooling and servicing agreement, the indenture of trust,
This is cer-
security
may meet any time they have a feeling that their rights are adversely
affected
oftheterms ofthe
etc.
This clause isto beread alongwith clause (2)—it says
“in the event ofnon-
realisation under sub-section (2) offinancial assets”. In sub-s
reference ection
torealisation offinancial assets that will be used toretir , there is
e invest-
 75% of OIBs
Sec. 7(3), Syn. 7 929
In most securitisation tranches, hard bull
et classes, that is, a Class that requires
payment by a certain date, failing which
it is taken as a default, are most uncom-
mon. Most classes carry a soft bullet feat
ure whereby the repayment schedule is
indicative but not mandatory. It is only on
legal maturity date that a default can
be construed.

7. 75% of QIBs
The provisions of this law on convening and
decision-making at meetings of
security interest holders are strange. It says at least
75% in value of the holders of
the security receipts can call a meeting, but does
not provide the requisite major-
ity for resolutions at such meeting. As stated earli
er, this part of the law is an ex-
tremely important and investor-sensitive provi
sion, and it is a pity that the law
leaves this area as sketchy. The several questions
that the law leaves unanswered,
and their possible answers are as under:
* Required majority for resolutions—As a matte
r of usual rule for cor-
porate decision-making, the required majority for
resolutions is ordi-
nary majority. In fact, the requirement of at least 75%
of the holders of
security receipts for calling the meeting itself is too
steep. The corre-
sponding provision in the Companies Act is section
169 under which
holders of at least 10% of the shares can convene a meeti
ng.
° In corporate decision—making—The required major
ity implies ma-
jority in value of the holders attending and voting at a meeti
ng. Since
this clause applies a 75%-in-value clause for merely conve
ning a meet-
ing, the calling or convening of the meeting will require a huge
consen-
sus, but at the meeting, resolutions can be passed merely by
a simple
majority of the holders present and voting.
* 75% of a scheme, or of the whole—The wording of section
7(3), prior
to the amendment in 2004 was “not less than 75% of the fotal value
of
the security receipts issued by such company”. This prompted us to
make the following comment in the last edition of the book:
° A very significant question left completely unanswered is—
does the number 75% relate to the entire security receipts is-
sued in the name of a particular company, or just one scheme?
Literally, the sub-section says: “not less than 75% of the total
value of the security receipts issued by such company” which
could imply the total value of security receipts of all schemes
taken together. That would, however, be ridiculous. In case a
securitisation company issues security receipts under various
schemes, due to ring-fencing, there might be a default under
one scheme while the other scheme or schemes might be run-
ning perfectly alright. There is no question of the holders of se-
curity receipts of the performing scheme having any grudge or
grievance, to join in the calling of a meeting by the aggrieved
investors in the defaulting scheme. Since sub-section (3) refers
to non-realisation in terms of sub-section (2), and sub-section
930 ~—s-See. 7(3), Syn. 8 Part 1l—Chap. li—Regulation of Securitisation, etc.

(2) relates to schemes of investment, the 75%-in-value should

relate to the scheme and not to the securitisation Company,
© Our commentary has been heeded to, and the amendment made
in 2004 has removed the confusion to relate the 75% value of
the security receipts issued under a scheme.
* 75% of value issued, or value outstanding: Literally, the law uses the
words: “not less than 75% of the total value of the security receipts is.
sued by such company”. Security receipts would often have different
maturity dates, and usually the senior-most classes are retired first, It is
quite likely that by the time defaults start accumulating, the senior
classes would have already been paid, The question here is; should the
meeting be convened by holders of 75% of the security receipts issued,
or those outstanding? One must fill in the gap and read the law as
meaning 75% of the security receipts issued and outstanding.
* Junior holders not excluded: An extremely important error of com-
mission made by the draftsman is to equate all security-receipt holders
for decision-making at the meetings. Security-receipts, as all securitised
instruments, can have various tranches and various classes of seniority.
Typically, the junior-most class, representative of the economic equity
of the transaction, will be held back by the originator himself. In most
real-life transactions, for the purpose of investor meetings of the exter-
nal investors, the junior-most class is kept outside the decision-making,
since that class is held by the originator himself. This law requires con-
sent of 75% of the security-receipt holders. In a case where 25% of
more of the total value of security receipts represents the junior inter-
ests, held by the originator, the originator may never cooperate and
completely hold back the external investors from exercising their rights
under this clause.

8. Incase of Demat Securities

A question may arise: in case of security receipts issued in dematerialised form.
who would exercise the voting or meeting rights—the investors or the deposi-
tory? Legally, all security receipts will be issued to the depository who will be
the legal holder thereof, and the actual investors will merely be the beneficial

The answer tothis question should come from section 10(3) ofthe Depositories
Act, 1996, under which all voting and other rights relating
to securities ;
demat form will be exercised by the beneficial owners. _

Section 7(4)
(4) The qualified institutional buyers shall, ata meeting called unde
sub-section (3) follow the same procedure, as nearly as
r
possible as is
 Purport of the section Sec. 8, Syn. 1 931
followed at meetings of the board of directors of the securitisation
company or reconstruction company, as the case may be.

COMMENTS
See notes under sub-section (3).

Notwithstanding anything contained in sub-

S. 8. Exemption from S€Ction (1) of section 17 of the Registration Act,
registration of security 1908, (16 of 1908)—
receipt ‘ oO il
(a) any security receipt issued by the secu-
ritisation company or reconstruction company, as the case
may be, under sub-section (1) of section 7, and not creating,
declaring, assigning, limiting or extinguishing any right, title
or interest, to or in immovable property except in so far as it
entitles the holder of the security receipt to an undivided in-
terest afforded by a registered instrument; or
(b) any transfer of security receipts,
shall not require compulsory registration.

SYNOPSIS
1. Purport ofthe sectiony:...i....:...0...ses00c0.-- 931 2. Registration of the transfer of financial
ease 932
SBOE 5 2c eee vce cts oh schnactus ss tivonscadlcedt

COMMENTS

1. Purport of the section

This section is an exception to the rule on registrations contained in section
17(1) of the Registration Act. Section 17 of the Registration Act deals with
documents that are registrable. Section 18 deals with instruments that are option-
ally registrable.
Under section 17(1)(b) of the Registration Act, non-testamentary instruments
which purport to create, declare, assign, limit or extinguish a present or future
right, title or interest in an immovable property are compulsorily registrable.
We have noted earlier that a mortgage itself is treated by law as an interest in
immovable property, and therefore, assignment of a loan backed by a mortgage is
transfer of an interest in immovable property. ”!
Under this law, securitisation/reconstruction transactions may bring forth three
incidents which require registration:
(a) Transfer of the financial assets, if such financial asset is backed by a
mortgage of immovable property, since transfer of such financial asset
is also accompanied by a transfer of the interest in the mortgage;

51. See notes under the definition of “financial asset” under section 2 (1).
 932 See. 8,Syn.2 Part Li—Chap. i—Regulation of Seouritisation, etc,
(b) Under this law, issuance of a security receipt is conveyance of an undi-
vided interest un the financial assets. Lf the financial
asset ua question is
backed by mortgages, the issuance of security recerpt must also be reg-
istrable under section 17(1)(b).

(c) Every wansfer of any security receipt is also a Wwansfer of undivided in-
terest in ummovable property: therefore, every such Wanster must also
be registrable.
This section grants an exemption to (b) and (c) above from regiswation re-
quirements. There is no exemption to (a), that is, the very wansfer of financial
assets backed by mortgages. The only way, therefore, to avoid registration re-
quirements for the transfer of mortgage loans, is by stretching section 5 to have
the effect of over-riding provisions of the Registration Act——See notes under sec-
tion S(1).
It is quite difficult to understand the meaning of the words “except in so far as
it entitles the holder of security receipt to an undivided interest afforded by a reg-
istered instrument”. A security receipt, by very definition under this law, trans-
fers undivided interest in the financial asset: so, if the financial asset is backed by
immovable property, the security receipt is. In view of the extremely confusing
language of section 8(1)(a), it is not easy to understand whether the law grants or
denies exemption to issue of security receipts where the original transfer of fi-
nancial assets required registration.

2. Registration of the transfer of financial assets

receipts itself remains

Incase of receivables backed by equitable mortgages, the equit
able
itself may be construed as a mere deposit oftitle deeds with
no writing
the basis ofthe bargain, but there isno doubt that a written agree
of the receivables will amount totransfer of mortgagee’s
ment for transfer
interest: hence, such
agreement for transf er must require registration.
 Measures for assets reconstruction
Sec. 9 933
Without prejudice to the provisions cont
ained in any other law
for the time being in force, a securitisation
company or reconstruc-
tion company may, for the purposes of asse
t reconstruction, having
regard to the guidelines framed by the Rese
S. 9. Measures for as- Bank rve
sets reconstruction
in this behalf, provide for anyone or
more of the following measures, namely:—
°

(a) the proper management of the business of

the borrower, by
change in, or take over of, the management of the
business of
the borrower;
(b) the sale or lease of a part or whole of the busi
ness of the bor-
rower;
(c) rescheduling of payment of debts payable by the
borrower;
(d) enforcement of security interest in accordance with
the pro-
visions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance
with the
provisions of this Act.
**T(g) to convert any portion of debt into shares of a
borrower
company:

Provided that conversion of any part of debt into shares of a

borrower company shall be deemed always to have been
valid, as if the provisions of this clause were in force at all
material times.]

SYNOPSIS
1. Powers of securitisation 9. Takeover of management .................00-.-. 938
companies/asset reconstruction 10. Section 9(b): Sale or lease of business
CONIRANICS ..Msatitytien. cmrbiue,. ane 934 of bomowet rankity. iagacates.uacae 938
2. The basic issue: Can the statute give 11. Section 9c): Rescheduling of
more than the parties intended?............ 934 PUY THCTIS BA Kobe. .ed ilove R bets crcl Ades deusenesse¥: 940
3. For the purposes of asset 12. Section 9(d): Enforcement under
he 936 SOLOS iterahcrvestettre atest trttrsstsancis 940
4. The only qualifying requirement is the 13. Section 9(e): Settlement of dues
Guidelines of the RBI........0.cccccceeceee 936 payable by the borrower ...........c.ccc0000000 940
5. Section 9 or section 13? ......ccccesscsseeees 936 | 14. Section 9(f): Right to take possession... 941
6. Are the powers available to a trust of 15. Section 9(g): Conversion of debt into
an asset reconstruction company?........ 937 GMLOO WT Mistrrertierttirtreeciteeme eee 941
7. Section 9(a): Change or takeover of 16.) Right of appeal..s ida 942
management of the borrower ............... 937 | 17. Takeover Guidelines of the RBI............. 943
8. Change in management.................0.000+ 938

52. Inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act,
2012 (1 of 2013), s. 4 (w.e.f. 15-1-2013),
934 See. 9, Syn. l Part Ll—Chap. li—Regulation ofSecuritisation, ec.

COMMENTS

1. Powers of securitisation companies/asset reconstruction

companies
This section is an extremely important section in the law and will, quite natu
rally, be used and abused extensively, and is bound to be subject-matier of litiga:
uon.
With intent or otherwise, this section has been tucked in Chapter I], which is
essentially related to “Regulation of Securitisation and Asset ; struction”.
This section has nothing to do with regulation of securitisation or reconstruction
companies, and instead, passes a bunch of very far-reaching powers to such com-
panies.
There are some important points that need to be noted about this section:
e The powers here are common to both asset reconstruction companies
and securitisation companies. Companies that focus on securitisation
business might have nothing to do with asset reconstruction, and vice
versa; nevertheless, all powers under this law are common to both the
variants. Therefore, though this section is titled “Measures for asset re-
construction”, it has been extended to securitisation companies as well,
e From a reading of the section (though the RBI guidelines to be framed
may provide otherwise), the powers under this section are not limited to
non-performing asset. The word used in the law is “asset reconstruc-
tion”, which, as defined in section 2(1)(b) is merely “acquisition for..
realisation”. Though the definition does imply that there might be some
problem with realisation of the financial asset as such, it is not neces-
sary that the receivable must have become a non-performing asset.
e The powers under this section are in addition to powers under section
13, since a securitisation company/reconstruction company is also a
“secured creditor” for the exercise of such powers.

2. The basic issue: Can the statute give more than the par-
ties intended?
This law essentially grants certain powers for asset reconstruction, which, in
plain English, is realisation of a financial asset. A financial asset is created under
a contract, which is a bargain between the lender and the borrower. The contract
between the parties defines the terms of the bargain. The lender’s rights and the
ener Cathtaee an te Nenist's tigins ofenterveminm dheee thebor-
rower fail to meet his obligations, are essential parts of this bargain ;
down in the contract. ; iheaen
The asset reconstruction company was not a part of the bargain—itit acquired
the rights of the lender. Since it has taken over the part of the lender. it is no dif-
ferent from a party tothe loan contract. Itisclear from section 5 that the rights of
 The basic issue: can the statute give more than, etc. Sec. 9, Syn. 2 935
the lender are the rights of the securitisation/reconstruction company. There
are
several rights that this section gives which are normally not found in loan agree-
ments—for instance, right of takeover of management, right to sell the whole of
the business of the borrower, etc. It will remain a key question as to whether the
lender could confer more rights to the reconstruction company than what the
lender himself had? If the right of takeover or sale of the whole business was not
a right that the borrower conferred on the lender, the lender obviously could not
have transferred such right to the reconstruction company. So, what is the source
of the right of the reconstruction company? No doubt, the rights conferred by
section 9 are original rights and not derivative rights—they are conferred by stat-
ute and not by the parties by mutual bargain. But the issue of propriety is—could
an externality of law confer on a party to a contract more powers than the coun-
terparty ever granted, ever agreed, or ever was a privy to?
There are similar powers vested in State Financial Corporations (SFCs) under
section 29 of the State Financial Corporations Act. Section 29 authorises SFCs to
take over the management or possession or both of an industrial concern on de-
fault of a loan or advance to the SFC. There have been several cases where the
vires of this power have been questioned before Courts. However, in these cases,
the courts have been preoccupied with the image of the SFC as a developmental
body and as a pool of public money. For instance, in one of the strongest of the
recent cases on the powers of the SFCs, in Haryana State Financial Corporation
v. Jagadamba Oil Mills*’, the Supreme Court remarked: “The Corporation as an
instrumentality of the State deals with public money. There can be no doubt that
the approach has to be public oriented.” Probably in every case where the justice-
ability of section 29 was in question, Courts took to the issue of public money.
See, for example, Himachal Pradesh State Financial Corporation v. Prem Nath
Nanda.”™* “The Corporation deals with public money for public benefit. Default in
payments of the loans and advances thus, ultimately affects the public at large.”
In this case the SC went even further to say: “The activities of the Corporation
are visualised not as a profit earning concern but as an extended arm of the State
to harness the business potential of the country to benefit the common man”’.
There is no scope for such a special approach in case of exercise of rights by
reconstruction companies, as they would not necessarily limit themselves to de-
faulted loans of public sector banks. In fact, as ground reality indicates, asset re-
construction companies in India are a business model by themselves, and entre-
preneurs have got into the game with the same profit motive with which a bor-
rower takes a loan from a bank.
There is no doubt that all over the world, there is a concern as to speedy and ef-
fective enforcement of secured loans and therefore, several countries have given
to a secured lender the right to enforce security interests without running up to
civil courts. But notably, this section grants to the reconstruction company not
merely rights over the ‘assets charged by the borrower, but the whole of his busi-
ness.

53. 110 Com Case 20.

54. 104 Com Cases 281 (SC).
 936 Sec. ¥, Syn. 3 Punt Li—Chap. Regulation of Seourtiisation, etc

3. For the purposes of asset reconstruction

As meationed before, the word “reconstruction” is a misnomer as the simple
meaning of “asset reconstruction” in secuon 2 is realisauion of the asset, There-
fore, the words “for the purposes of asset reconstruction” do not do much by way
of qualifying the scope of the powers under this section, except that would be
necessary for the reconstrucuon company, while exercising any of the enumer-
ated powers, to establish that such exercise is likely to result into better realisa-
tion of the financial asset.
It is important, however, to understand that the word “asset reconstruction” is
defined as acquisition and realisation of financial assets by the reconstruction
company. Before the question of realisation comes, the reconstruction company
must acquire assets, that is, buy them, A reconstruction company also has power
to recover assets on agency basis under section 10(1)(a), but since those assets
ure NOt assets acquired by the reconstruction company, none of the powers under
this section extend to such assets. See also notes under section 10,

4. The only qualifying requirement is the Guidelines of the

RBI
The law by itself does not specify how long will the powers of the reconstruc-
tion company prevail over the borrower’s business. For instance, this section em-
powers the reconstruction company to change the management of the borrower
for the purpose of realisation, but does that signify that once the debt has been
realised, the management will be restored? There is a provision to this effect in
section 15. See notes under section 15. Though section 15 has been placed in the
Chapter related to enforcement of security interests, it should be taken as con-
necting to this section rather than section 13.

5. Sectio
9 or sectio
n n 13?

security i
tion, though arguably, allows powers over the entire busin
ess. Besides, the :
ersunder this section include those under section 13 vide clause
(d)ofsection 8

mg
State Financial Corporation v. Gar Re-rolling Mills
mon. as commonty understood, would, thus, not be Comp Cas 140
phraseology used”. viz, attracted under the m of the express
without prejudice to the provisions ofsection 29 ofthis
Act”
 Section 9(a): Change or takeover of mana
gement, etc. Sec. 9, Syn. 7 937
Therefore, it would serve the interest of
the reconstruction company to press the
powers under this section rather than sect
ion 13.

6. Are the powers available to a trust of an

asset recon-
struction company?
We have discussed in Chapter 8 of Part 1 that most
of the asset reconstruction
companies in India have acquired non-performing
loans in the name of trusts of
which they act as trustees. Note that the definition
of “secured creditor” in sec-
tion (1)(zd)(ii) include a trust of which the asset reconstruc
tion company is a
trustee. However, the extended meaning has not
been given to the word “securiti-
sation company” or “reconstruction company” — there
by implying that the trusts
cannot exercise any of the powers listed in this secti
on. Since virtually all non-
performing loans are acquired in the name of these
trusts, this would practically
render section 9 worthless.

7. Section 9(a): Change or takeover of management of

the
borrower
There are two parts of this clause—change in management
and the takeover of
management. By usage, “change” implies bringing in some
new management to
manage the borrower’s business, and “takeover” implies the recons
truction com-
pany itself taking over the management.
India has had a long history of takeover of concerns, under the Industr
ies (De-
velopment and Regulation) Act as also under several specific statute
s. There are
plenty of case laws on takeover or change of management. There
is, however, a
significant difference between the takeovers under those laws and that
under this
law. Takeover under either the Industries Act or under specific laws,
or change of
management under section 388E of the Companies, are in exercise of powers
by
the executive, that is, the Central Government ora similar functionary. The ac-
tions of such functionary are administrative actions and may be reviewed by
Courts. However, under this law, the formation of an opinion as also the action of
change or takeover of management is by the reconstruction company, which
steps into the shoes of the lender.
The broad principles of change/takeover of management, however, should be
the same as in case of administrative decisions. The fundamental canon of justice
is that any change or takeover of management is to encroach upon the proprietary
interest of the existing management. In State of Punjab vy. Gurdial Singh’, Jus-
tice Krishna Iyer of the Supreme Court, made these apposite observations in his
usual cothetic style:
“.... It is fundamental that compulsory taking of a man’s property is a
serious matter and the smaller the man the more serious the matter.
Hearing him before depriving him is both reasonable and pre-emptive
of arbitrariness; and denial of this administrative fairness is constitu-

56. AIR 1980 SC 319.

938 Sec. 9, Syn. 5 Part Li—Chap. li—Regulation of Securitisation, etc.

y where
tional anathema except for good reasons. Save in neal ungenc
public interest does not brook even the minimum time needed to give i
hearing, land acquisition authorities should not, having regard to arth
cles (14 and 19), burke an enquiry under section 17 of the (Land Aoguir
sition) Act.”
This clause primarily talks about “proper management” of the business of the
borrower, with the overall purpose of an improved position as regards the realisa:
tion of the financial assets. It is, therefore, necessary that the reconstruction Com:
pany frames an opinion that the existing management 1s Hol proper and that the
incumbent management is proper. As emphasised in court rulings relating to
takeover by the Central Government, an opportunity of hearing Lo the borrower is
an important part of natural justice and must be adhered to.

8. Change in management
The power under this section should be read with section 15, which provides
for manner of takeover of management, though there are inconsistencies between
the two sections.

9. Takeover of management
As far as the right of the reconstruction/securitisation company to takeover the
management of the borrower is concerned, it may be contended that such right
clashes with the section immediately succeeding—section 10. Right of takeover
would imply that the reconstruction company starts managing the business of the
borrower, while under section 10, a reconstruction company may only engagein
certain specific businesses. It is difficult to establish as to how managing the
business of the borrower by the reconstruction company would amount to better
realisationof the financial assets, given the fact that the reconstruction company
is only formed for a certain purpose.
A takeover of a unit may not exactly be a bed of roses for the reconstruction
company. In Kinetic Engineering v. M.P. Finance Corporation” ”.it was held that
on takeover of a unit, the taking over party steps into the shoes of taken-over
party: therefore, all claims of third parties that existed against the taken-over
party as on the takeover date shall now be exercisable against the taking-over
party.
Takeover of management is not the same as takeover of management of assets
under section 13—see notes under section 13(4).

10. Section 9(b): Sale or lease of business of borrower

An analogous provision exists with the State Financial Corporations under
tion 29oftheSFC Act.Itisimportant tonote a distinction between this clause
and section 29 of the SPC Act. Under the latter provision, an SPC is entitled to a

57. 105 Com Cases 237.

 Section 9(b): Sale or lease of business of borrower Sec. 9, Syn. 10 939
“..right to transfer by way of lease or sale and realise the property pledged, mort-
gaged, hypothecated or assigned to the Finance Corporation”. In other words, the
right of sale is limited only to the assets charged in favour of the SFC. However,
under this clause, the reconstruction company is entitled to sell or lease a part of
or the whole of the business of the borrower. This might obviously conflict with
several sections of interests.
Unlike section 13, there is a power granted to the secured lender to sell the se-
cured assets. This power is subject to multiple claims and sanction of at least
75% of the security interest holders. Further, this right is subject to compliance
with section 529/529A of the Companies Act.
As far as this clause is concerned, the law grants to a reconstruction company
much wider power compared to section 13, and absolutely with no regard as to
the claims of other secured lenders, other interested parties, and more particu-
larly, the claims of the workers u/s. 529/529A of the Companies Act. The transfer
of a financial asset by one or more lenders to a reconstruction company cannot
put other creditors of the borrower to any prejudice. Therefore, the rights of both
the residual claimants as also the workers need to be protected. When a business
goes into defaults, there is a delicate balance of powers with each interested party
trying to extract the maximum to its own advantage. But notably, any single
penny more than any interested party derives is to the detriment of the other
claimants—therefore, this law cannot intend to disturb the balance of powers in
the claims of the secured and unsecured creditors and the workers.
This section gives to the reconstruction company the right to sell the business
of the borrower, but can the reconstruction company appropriate the sale pro-
ceeds to repayment of the receivables that it has taken over? The section nowhere
provides for the appropriation of money received on sale of the business. Let us
Suppose a reconstruction company acquires an outstanding debt of Rs. 50 lakhs,
secured by assets having a value of Rs. 40 lakhs. The rest of the assets of the
business, say, have a value of Rs. 60 lakhs (hence, total assets worth Rs. 100
lakhs), and the total other claims against the borrower are Rs. 80 lakhs (hence,
total claims Rs 130 lakhs). As per rules of appropriation, the secured lender must
have first claim on the assets securing the debt, and therefore, appropriate the
whole of the Rs. 40 lakhs realised from the secured assets. For the balance out-
standing, the secured lender ranks at par with the unsecured lenders, and there-
fore, must only get a proportionate share out of the residual assets of Rs. 60
lakhs. Those assets would be pro-rated between the secured lender (Rs. 10 lakhs
left uncovered) and the general claimants (Rs. 80 lakhs).
In the above example, this law cannot empower the reconstruction company to
appropriate the whole of sale proceeds to first satisfying its own claim, and leave
only the rest for the unsecured claimants, because doing so is to the disadvantage
of the unsecured lenders.
In the above example, if there were workers’ dues, section 529/529A of the
Companies Act will come into play and the workers’ dues will rank at par with
the claims of the secured lenders. In other words, though the reconstruction com-
pany has wider powers under this section, those powers are only meant for reali-
sation of the outstanding receivables, but not to allow a higher share of the real-
ised amount to the reconstruction company.
 Yh) Sec. 9, Sya. 11 Part li—Chap. 1l—Regulation of Securitisation, etc.

The law relating to the nght of sale by SROs has been disqussed elaborately in
several cases. Since the provisions in the present Act allow a similar night to ne:
construction companies, such power should be subjected to the same principles
as enunciated by courts relating to SFCs. Krom these rulings, it is clear that the
Statutory mghts of the reconstruction company can only be exercised subject to
the rights of the pari passuw chargeholders under section 529/529A of the Compa:
nies Act.” In this law, the Court also held that there is no inconsistency between
section 529/529A of the Companies Act and section 29 of the SFC Act and there.
fore, both should prevail. Other rulings on the right of sale were discussed al
length in an elaborate ruling of the Pull Bench of Kerala High Court in Kerala
Financial Corporation v. Syndicate Bank®.
In addition, the priorities/interests of other secured creditors need to be main-
tained and the ARC cannot put itself above the claims of all other secured credi-
tors.

11. Section 9(c): Rescheduling of payments

There is nothing special about this power: in any event, every lender inherently
has the right to reschedule the payments, if such rescheduling only makes the
terms of the loan more convenient for the borrower. However, no rescheduling
which increases the liability or makes the agreement more difficult for the bor-
rower can be done unilaterally. Generally, rescheduling is done as an accommo-
dation of the borrower.

12. Section 9(d): Enforcement under section 13

Securitisation/reconstruction companies are defined as “secured creditor”,
only impact of including this clause here is that the remedies under this
the
section
can be pursued simultaneously while also triggering those under sectio
n 13, For
details, see notes under section 13.

13. Section 9(e): Settlement of dues payable by the bor-

rower
Having acquired the financial assets, a securitisa
tion/reconstruction company
Stands in the footing ofthe original lender. Therefore,
always implied. This section may only mean “mutual a right tosettle the dues is
question ofthe reconstruction company being the settlement” —there is no
arbiter ofits own case and uni-
laterally settling anyofthe dues ofthe borrower
borrower.
without theconcurrence ofthe

i
58. Maharashtra State F.inanc : ‘ened
59. 101 Com Cases 496” O7POration v. Official Liquidator, 82 Com Cases 342 (Bom),
 Section 9(f): Right to take possession
Sec. 9, Syn. 14 941
14. Section 9(f): Right to take Possessio
n
This clause is clearly an overlap as clause
(d) incorporates all the rights of the
secured lender.
}

15. Section 9(g): Conversion of debt into

shares
The clause has been inserted vide the Amendmen
t Act of 2012. It allows the
SC/ARC to convert any portion of the debt grant
ed to the borrower into shares of
the borrower company. As is very evident, the
clause was inserted only to impart
validity to conversion of debt into shares alrea
dy done by some ARCs. The
clause will have very little value prospectively, since
there is no guidance in the
clause at all as to what will be the price of the share
s, in case the lender proposes
to convert debt into equity. Obviously, since
the measures under section 9 are
forced upon the borrower, the lender cannot expect
to have the borrower’s con-
currence on the conversion.
Also, if the conversion of debt into equity amounts to
acquisition of a majority
Stake, that amounts to a takeover, for which there is a separ
ate provision.
Not for Secured Creditors
The amendment is specific to Section 9 only, therefore the
measure can be un-
dertaken by the SC/ARCs only. The alternative has not been
extended to Section
13, as such the secured creditor cannot resort to such a measu
re.
“Any portion of debt”
The Amendment Act allows any portion of debt to be converted
into shares of
the borrower company. However, the term used is “any portion
of debt”, which
imparts ambiguity to the clause. Any portion may mean 99.99%
or even 100%.
The intention seems to impart flexibility to the SC/ARC as to determ
ine what
amount of debt it wants to convert into shares. According to the author
, there is
no bar no converting full amount of outstanding debt into shares.
Status of the Borrower
This step is usable only against a borrower company, and not against any other
borrower (individual or otherwise). Further, in case the borrower is a private lim-
ited company, such conversion may require conversion of the company into pub-
lic limited company. In case the borrower is an unlisted company, there might be
stipulations on the part of the SCs/ARCs that the shares be listed. At this junc-
ture, it is also important that the company has sufficient unissued capital in its
kitty, or else the conversion may require increment in the authorized capital and
resultant formalities.
‘‘Shares”’
“Shares” have not been defined specifically under the SARFAESI Act. In such
a situation, the definition under the Companies Act will be of relevance. The
Companies Act includes only equity shares and preference shares in the share
capital of a company limited by shares. Therefore, the debt can be converted into
942 Sec. 9, Sym. 15 Part li—Chap. li—Regulation of Seouritisation, #ic.

t
equity or preference. There is no provision for conversion of debt into conver
ble debentures, convertuble later into equity,
Motivation to convert into shares
Though this alternative relieves the borrower from a lot of burden and allows
them struct of theuri ngnt, the measure does not seem to be too mo-
debt compone
tivating for the SCs/ARCs.
Generally the share prices of a company which has defaulted, or is nearing
bankruptcy, is close to zero. Once a debt gets converted into equity, It ceases Lo
be debt — hence, the lender will lose all rights under this Act or under the DRT
law in respect of such debt which has been converted, Therefore, there may be
little incentive for a lender to convert debt into equity. This once again buttresses
the point made above that this clause was simply inserted to impart validity to
actions already taken.
Dilution of Shareholding
Conversion of debt into equity may lead to dilution of holdings, that may not
be acceptable to shareholders. The measure operates as an unrestricted power in
the hands of the SC/ARC.
What about the Takeover triggers?
Regulation 10 (1) (e) of the SEBI (Substantial Acquisitions and Takeovers)
Regulations, exempt the acquisition of shares by SC/ARC pursuant to SAR-
FAESI from the obligation to make an open offer under Regulation 3 and Regu-
lation 4. However, the SC/ARC may have to comply with the provisions of sub-
regulations (5) and (6) of Regulation 10 of the Regulations.
Retrospective effect
Proviso to the clause imparts deemed validity to the conversion of debt into
shares prior to the Amendment Act coming into force. It is in view of the fact
that the loan agreement originally entered into between the borrower and the se-
cured creditor might not have any stipulation for conversion of debt into equity,
as a result of which on the transfer of the financial asset, the right would not have
been available to the securitisation company/asset reconstruction company. Addi-
tion of the proviso allows the SC/ARC to convert debt into equity, irrespective of
ee a ne ee enrins oe Renteaaenee

16. Right of appeal

Unlike action by a secured creditor, the actions of the reconstruction company,
taken under this section, are not appealable before DRTs. Therefore, civil juris-
pr wl he bs er unthis de section.
r See also notes
 Takeover Guidelines of the RBI Sec. 9, Syn. 16 943

17. Takeover Guidelines of the RBI

On 21st April 2010, a good 8 years after the enactment of the Act, the RBI
came with guidelines pertaining to takeover of the business of the borrower under
section 9(a) of the Act. The text (latest) of the Guidelines has been given in An-
nexure 5 to Chapter 9 in Part 1 of the book.
The Guidelines define two terms — change in management and takeover of
management, as two different concepts. Change is defined as change of the guard
by the borrower himself, at the instance of the ARC. Takeover of management is
defined as the ARC taking the responsibility of managing the business of the bor-
rower. As we have mentioned earlier, it would be curious to see how an ARC
satisfies itself that it is in a better position to run the business of the borrower
than the borrower himself. In addition, it would be interesting to see how such a
takeover complies with the provisions of sec 10 whereby an ARC cannot be do-
ing any business other than that of reconstruction. Needless to say, the provisions
of sec. 9 (a) have not been tested.
Para 3 of the Guidelines echo the strange and completely unimaginative provi-
sion of section 15(4) of the Act — that after realisation of the dues, the secured
creditor hands over the management back to the borrower. See comments under
sec. 15(4) — it is difficult to envisage as to how the change in or takeover of man-
agement amounts to realisation of dues, and how the ARC taking over manage-
ment may establish that the takeover leads to realisation of dues.
Para 5 lays down several grounds, in which change of management/takeover
can be done. The grounds are abstract and may not be objectively verifiable. The
grounds are:
(i) the borrower makes a willful default in repayment of the amount due
under the relevant loan agreement/s;
(ii) the ARC is satisfied that the management of the business of the bor-
rower is acting in a manner adversely affecting the interest of the credi-
tors (including ARC) or is failing to take necessary action to avoid any
events which would adversely affect the interest of the creditors;
(iii) ARC is satisfied that the management of the business of the borrower is
not competent to run the business resulting in losses/non-repayment of
dues to ARC or there is a lack of professional management of the busi-
ness of the borrower or the key managerial personnel of the business of
the borrower have not been appointed for more than one year from the
date of such vacancy which would adversely affect the financial health
of the business of the borrower or the interests of the ARC as a secured
creditor;
(iv) the borrower has without the prior approval of the secured creditors
(including ARC), sold, disposed of, charged, encumbered or alienated
10% or more (in aggregate) of its assets secured to the ARC;
(v) there are reasonable grounds to believe that the borrower would be un-
able to pay its debts as per terms of repayment accepted by the bor-
rower;
 O44 Sec. 10 Part 1l—Chap. 1l—Regulation of Securitisation, etc.

(vi) the borrower has entered into any arrangement or compromise with
creditors without the consent of the ARC which adversely affects the
interest of the ARC or the borrower has committed any act of insol:
vency:
(vii) the borrower discontinues or threatens to discontinue any of its busi
nesses constituting 10% or more of its turnover;
(viii) all or a significant part of the assets of the borrower required for or es:
sential for its business or Operations are damaged due to the actions of
the borrower,
(ix) the general nature or scope of the business, operations, management,
control or ownership of the business of the borrower are altered to an
extent, which in the opinion of the ARC, materially affects the ability of
the borrower to repay the loan;
(x) the ARC is satisfied that serious dispute/s have arisen among the pro-
moters or directors or partners of the business of the borrower, which
could materially affect the ability of the borrower to repay the loan;
(xi) failure of the borrower to acquire the assets for which the loan has been
availed and utilisation of the funds borrowed for other than stated pur-
poses or disposal of the financed assets and misuse or misappropriation
of the proceeds;
(xii) fraudulent transactions by the borrower in respect of the assets secured
to the creditor/s.
The meaning of “willful defaults”, “diversion of funds” etc is the same as in
case of case of banks.

(1) Any securitisation company or reconstruction company regis-

tered under section 3 may—

(b) section 13omsuch focceein Clause (c) ofsub-sect

ion (4)of
section 13 on as mutually agreed upon
tween the parties; mn a
(c) act as receiver if appointed by any court or trib
unal:
Provided that no securitisation company
or reconstruction com-
mh shall actaati if acting as such give
pany
s rise to any pecu-
(2) Save asotherwise provided insub-section (1),
company or reconstruction company whic nosecuritisation
h has been granted a cer-
 Business of the securitisation company
Sec. 10, Syn. 2 945
tificate of registration under sub-section
(4) of section 3, shall
commence or carry on, without prior
approval of the Reserve
Bank, any business other than that of securiti
sation or asset recon-
struction:
Provided that a securitisation company or
reconstruction com-
pany which is carrying on, on or before the
commencement of this
Act, any business other than the business of
securitisation, or asset
reconstruction or business referred to in sub-
section (1), shall cease
to carry on any such business within one
year from the date of
commencement of this Act.
Explanation.—For the purposes of this section,
“securitisation
company” or “reconstruction company” does
not include its sub-
Sidiary.

SYNOPSIS
1. Any business other than that of .............. 945 Je ASSELMUADABEL.D.c ee
2. Business of the securitisation company.. 946
945 6itMegenernhiprny 208.00 van E29i9 947
3. Business of reconstruction company ...... 946 7. Sub-section (2): Any other business
4. Recovery agentii25..145.0. OS. 946 Wie REP approval 2 ccs 947
8. Existing Companies .........ccsccecccsescsescoeees. 948

COMMENTS

1. Any business other than that of

This section imposes restrictions on the business rights of
securitisa-
tion/reconstruction companies. The word “business” here should be
understood
in a narrow sense of an organised activity with a view to gain or profit.
Activities
incidental or ancillary to attainment of the permitted business of the company
do
not constitute business. For instance, if the securitisation company is required to
have a certain net worth, the same, to the extent not required for the purposes of
its business, needs to be invested somewhere, and such investment is not
a busi-
ness. The mode of investment should not signify a venture by itself.

2. Business of the securitisation company

The list of permitted businesses of a securitisation company in this section
clearly conflicts with the idea of a special purpose vehicle, and makes the secu-
ritisation company a limited purpose vehicle, or an operating company, though
with a limited sphere of activities. The idea of an SPV is merely that of an asset-
to-security transformer with no additives, leakages or liabilities in the process,
such that the securities of the vehicle are no different from a modified claim on
the assets of the vehicle. If the vehicle were to get into any business at all, no
matter how small or limited, it may make profits, and such profits will add to the
assets of the vehicle, thereby providing to the securities of the vehicle more meat
than the mere assets transferred in the securitisation process. Since the securities
940 See. 10, Syn. 3 Part li—Chap. 1i—Regulation ofSecuritisation, etc.

in a securitisation ansaction are the securities of the SPV order for them to
in ,
remain asset-backed securities, they must bebacked by no other assets, revenues
or interests than those transferred by the originator.
Hence. no business, no assets, no incomes, no liabilities, are the distinotive Tea
tures of SPVs.
As this law permits securitisation companies to have certain businesses, and
therefore, a source of income and assets, the securitisation co under this
law is not strictly an SPV, but the template-provider for SPVs, Unless a proper
ring-fencing device is used to segregate the assets/obliga tions of the securitisa-
tion from those that are used for asset-backing, it is quite possible that the rating
of the securities issued by the SPV may be capped at the rating of the securitisa-
tion company, This is the result of deviating from an asset-backed security tea-
ture.

3. Business of reconstruction company

Reconstruction companies are limited purpose vehicles, but not special purpose
vehicles. They do not necessarily issue asset-backed securities.

4. Recovery agent
Clause (a) authorises the securitisation/reconstruction company to act as recov-
ery agent for banks/financial institutions. Business of reconstruction itself implies
recovering defaulted assets. However, the only difference here is that the recoy-
ery function is envisaged as an agency function, and not as a principal.
It is notable that where the reconstruction company merely acts as an agent of a
bank or financial institution, it can only exercise such rights as the bank/financial
institution
had itself. It cannot use any of the powers specified in section 9 as
those are only available in case of asset reconstruction, which necessarily pre-
supposes acquisition of the asset by the reconstruction company.

5. Asset manager
Globally, reconstruction companies are known as “asset management compa-
nies”, as they manage the assets that they takeover in the process of realisation.
The business envisaged in this clause is, infact, anintegral part of the business of
realisation of assets, as realisation of security interests, and such realisa-
tion, the management of assets, is inherent in the process. . here, as in
the previous clause, the business of management is not in respect of the assets
acquired bythereconstruction company, butasanagent forother banks orfinan-

@. fer anon he enue of DY 1 im Part

pany incection2. SeealsoAppendix 2 and4 ofthie part. ont ™tSefinition ofsecuritisation com.
 Sub-section (2): Any other business with RBI approval Sec.10,Syn.7 947
The proviso below sub-section (1) apparently qualifies the business of asset
management. The intent behind this provision is an impression that a securitisa-
tion company must not incur any losses/liabilities, as that may interfere with the
asset-backed nature of the security. This is, however, a misconception. A secu-
ritisation company must not only incur losses; it must also not make profits.
Losses or liabilities are only the other side of profits and assets, and SPVs must
steer clear of either.
This proviso states that the securitisation/reconstruction company must not act
as a manager, if so doing results into a pecuniary liability. Usually, a manager is
an agent or employee of the principal, and his conduct in usual course will bind
the principal—so the pecuniary liabilities will ordinarily fasten as to the princi-
pal. However, there is no contractual relationship that can be completely free of
pecuniary liabilities. For instance, an agent will be liable for a breach of the
agency agreement, or a loss caused to the principal for dereliction of duty or
gross negligence. It is impossible to literally comply with the condition set out in
the proviso.

6. Receivership
The law-makers have obviously thought that the business of receivership is
closely affiliated to the business of resolution of non-performing assets, and
therefore, the reconstruction company might also add receivership to its permit-
ted arena. The receivership envisaged under this clause is pursuant to appoint-
ment by a Court or Tribunal, and not private or administrative receivership. It is
notable that receivers may also be appointed privately, in terms of a debenture
trust deed or other security instrument.

7. Sub-section (2): Any other business with RBI approval

The limits on the business of a securitisation/reconstruction company as set out
in sub-section (1) are removed by sub-section (2), though under the aegis of the
RBI. The combined reading of sub-sections (1) and (2) is that as for the business
listed in sub-section (1), the approval of the RBI is not required. However, with
the prior approval of the RBI, the securitisation/reconstruction company may ini-
tiate any business.
A question that may arise here is: can a securitisation company securitise assets
other than those of banks/financial institutions? Though the section limits the
business of a securitisation/reconstruction company to securitisation/reconstruc-
tion, the definition of the word “securitisation” in the Act relates to assets of any
originator—therefore, there is no bar on the securitisation company securitising
assets of any originator, ‘whether a bank, financial institutions or otherwise.
If the same question was raised in respect of an asset reconstruction company,
the answer may be different. The business of “asset reconstruction” as defined in
the Act, relates only to acquiring the assets of banks and financial institutions.
Therefore, it appears that except with the approval of the RBI under sub-section
 Y4s See. Li, Sya. 1 Part Li—Chap. li Regulation af Seourtiisation, etc.

(2), 4 recomsiruction Company Cannot agguire the assets of orginators other than
banks/financial Lasuitulions.
Can 4 securitisation company do the business of reconstruction, and vice versa’
In view of the scheme of drafting of this law, the answer to this question must be
in the affirmative.

8. Existing companies
No matter what might be the difficulties in identifying an existing seouritisa
tion/reconstruction company, any such company after the commencement of the
Act has two options—either cease the business of securitisation or reconstruction
immediately, or it must cease the other businesses within | year from the date of
commencement of the Act.
Where any dispute relating to securitisation or reconstruction or
non-payment of any amount due including interest arises amongst
any of the parties, namely, the bank, or finan-
S. 11. Resolution of cial institution, a securitisation , or re-
disputes construction company or qualified institutional
buyers, such dispute shall be settled by concilia-
tion or arbitration as provided in the Arbitration and Conciliation
Act, 1996, (26 of 1996) as if the parties to the dispute have con-
sented in writing for determination of such dispute by conciliation
oreen and the provisions of that Act shall apply accord-
ingly.

SYNOPSIS
1. Purport
ofthe section ...0....cccccccccscsesso0 948 | 3. Parties covered bythis section ............... 949

COMMENTS

1. Purport of the section

The purport of this section is toensure that disputes between integral parties
to
a securitisation transaction, viz.., the transferor, transferee (securitisatio
n/recon-
thislaw itated ane ueinvestors, must besettled byarbitration.
By vier of
Fi s law,ony
it sha presumed that there existe
xisted d an arbitr ation agreement between
itrati

This law refers to settlement by arbitration and conciliation Arbit

resolution of a dispute by a non-judicial arbitral tribunal.
.
. _ -
ration i
Conciliation, however
1 isthe

is @ mutual amicable settlement ofa dispute. Arbitral

tribunals may encourage
suchsettlementas
nan prprofor
vidunder ed
section itrati on
30 of the Arbitrati .
and Concilia-
 Parties covered by this section
Sec. 11,Syn.3 949
2. Implication of arbitration agreement
By section 8 of the Arbitration and Conciliati
on Act, if there is an arbitration
agreement between the parties in relation to any
matter, a party to any suit in re-
lation to such matter may, at the first submissi
on before the Court on the sub-
stance of the case, apply to the Court to refer the
matter to arbitration, and the
Court shall be required to refer the matter to arbitration.
In other words, where
arbitration agreement exists between parties, resol
ution of the dispute through
arbitration is a must if any of the parties so prefers.
Section 7 of the said Act defines an arbitration agree
ment as a written agree-
ment between parties to refer a matter to arbitration, either
by way of a clause to
the contract or by way of a separate agreement. Unde
r section 8(2) of the said
Act, while praying for transfer of a matter to arbitratio
n, the party that so seeks to
refer to arbitration must enclose a copy of the original arbit
ration agreement or a
duly certified copy thereof. Sub-section (2) provides: “The
application referred to
in sub-section (1) [that is, application to have the dispu
te referred to arbitration]
shall not be entertained unless it is accompanied by the
original arbitration
agreement or a duly certified copy thereof.”
This law inserts a deeming provision—whereby it shall be deeme
d that there is
an arbitration agreement between the parties. If there is no actual
agreement be-
tween the parties relating to arbitration, there is nothing that can
be produced be-
fore the Court as required by section 8(2) of the Arbitration Act.
However, it was upheld in the case of Standard Chartered Bank v. LIC
Hous-
ing Finance Ltd. & Ors.*! that, in the absence of an arbitration
agreement, the
dispute between the parties shall be decided by the learned DRT as per law and
not by arbitration as per Section 11.
But, again in Oriental Bank of Commerce v. Canara Bank & Ors.” , the DRAT
held that where there is a dispute between the banks, inter se the DRT does not
have jurisdiction to try the securitisation application under the SARFAESI Act,
in view of Section 11 of the Act. The same was followed in Punjab National
Bank v. State Bank of India & Ors.”, ,

3. Parties covered by this section

It is notable that this section includes the transferor, viz., the bank or the finan-
cial institution, the transferee, viz., securitisation/reconstruction company, and the
investors, viz., the QIBs. There is nothing in this section relating to arbitration of
disputes involving the obligors. Therefore, any such dispute where the obligor is
also a party will be compulsorily referred to arbitration only where there is an
arbitration clause in the agreement with the obligor as well. In addition, in case of
an enforcement of security interest by the bank as against a borrower under
Chapter III of this Act, there is no question of applicability of this section.

61. (2011) If BC 45 (DRAT).

62. (2011) IV BC 14 (DRAT-Delhi),
63. (2012) I BC 34 (DRAT-Delhi).
64. D. Dhananjaya Rao v. Bank of India, M1 (2005) BC 604 (AP).
950 See. 12 Part Ll—Chap. li—Regulation of Seourttivation, et

Therefore any dispute between a secured creditor and a debior in relation to the
security interest or secured debt does not fall for arbitration under this provi
65°
si0n.
(1) If the Reserve Bank is satisfied that in the public interest or to
regulate financial system of the country to its advantage or to pre-
vent the affairs of any securitisation company
5S. 12. Power of Re or reconstruction company from being con-
deermne ducted in a manner detrimental to the interest
verve Bank wo
—, of investors or in any manner prejudicial to the
interest of such securitisation company or re-
construction company, it is necessary or expedient so to do, it may
determine the policy and give directions to all or any securitisation
company or reconstruction company in matters relating to income
recognition, accounting standards, making provisions for bad and
doubtful debts, capital adequacy based on risk weights for assets
and also relating to deployment of funds by the securitisation com-
pany or reconstruction company, as the case may be, and such
company shall be bound to follow the policy so determined and the
directions so issued.
(2) Without prejudice to the generality of the power vested under
sub-section (1), the Reserve Bank may give directions to any secu-
ritisation company or reconstruction company generally or to a
class of securitisation companies or reconstruction companies or to
4 securitisation company or reconstruction company in particu-
r as to—
(a) the type of financial asset of a bank or financial institution
which can be acquired and procedure for acquisition of such
assets and valuation thereof;
(b) the aggregate value of financial assets which may be ac-
quired by any securitisation company or reconstruction
company.

COMMENTS
_This section gives to the RBI wide supervisory powers over securitisa-
tion/reconstruction companies. The template for this section is largely the same
as section 45JA of the RBI Act, relating to NBFPCs. Therefore, several clauses
have come up in this section that are seemingly inappropriate for securitisa-
tion/reconstruction companies. For example. norms of capital adequacy on the
basis of risk-weighted assets are wholly inappropriate for securitisation compa-
nies. Globally, one of the prime reasons why securitisation became an attractive
proposition for banks was that banks could shift their assets from their regulatory

65. Pushpalata v. State Bank of Travancore Wil (2009) BC 613.

 Power of Reserve Bank to call, etc. Sec. 12A 951
balance sheets and attain capital relief, that is, relief from capital adequacy
re-
quirements, because similar requirements were not applicable to securitisation
SPVs. In fact, the very economic essence of a securitisation transaction lies in its
ability to attain a much higher leverage than is permitted by the balance sheet of
the originator. Capital adequacy norms essentially put a limit to leverage: so, if
the leverage permitted for a securitisation transaction is the same as that for the
originator, the very economic rationale for securitisation goes away.
There is no case whatsoever for regulatory control on the extent of leverage for
a securitisation transaction. The universal rule of securitisation is that it is the
quality of the asset and desired rating for the securities, and not extraneous fac-
tors, that determine the required extent of leverage (reciprocal of the required
extent of credit enhancements).
Similarly,deployments of funds. These words originate from section 45JA of
the RBI Act relating to NBFCs, and might have had relevance there, but there is
no case for any regulatory worries as to deployment of funds for securitisation
transactions. The funding raised in securitisation transactions is used to acquire
the intended assets, and that is all as far as deployment.
By the time of writing this, the RBI had come out with draft prudential guide-
lines, and general directions for securitisation and reconstruction companies.
They are reproduced in Part III of this book.
The Reserve Bank may at any time direct a securitisation com-
pany or reconstruction company to furnish it within such time as
may be specified by the Reserve Bank, with
“[S. 12A. Power of such statements and information relating to the
Reserve Bank to call for business or affairs .of such securitisation
statements and informa- $ : com-
tion pany or reconstruction company (including any
business or affairs with which such company is
concerned) as the Reserve bank may consider necessary or expedi-
ent to obtain for the purposes of this Act].
COMMENTS
This is a general administrative power of a regulator and is common in case of
all entities governed by the RBI.

66. Ins. by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
(30 of 2004), s.7 (w.e.f. 11-11-2004).
 St aa oe Ae
ae gan,
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 CHAPTER III
ENFORCEMENT OF SECURITY
INTEREST
(1) Notwithstanding anything contained in section 69 or
section
69A of the Transfer of Property Act, 1882, (4 of
S. 13. Enforcement of 1882) any security interest created in favour of
security interest any secured creditor may be enforced, without
the intervention of court or tribunal, by such
creditor in accordance with the provisions of this Act.
(2) Where any borrower, who is under a liability to a secured
creditor under a security agreement, makes any default in repay-
ment of secured debt or any instalment thereof, and his account in
respect of such debt is classified by the secured creditor as non-
performing asset, then, the secured creditor may require the bor-
rower by notice in writing to discharge in full his liabilities to the
secured creditor within sixty days from the date of notice failing
which the secured creditor shall be entitled to exercise all or any of
the rights under sub-section(4).
(3) The notice referred to in sub-section (2) shall give details of
the amount payable by the borrower and the secured assets in-
tended to be enforced by the secured creditor in the event of non-
payment of secured debts by the borrower.
' [(3A) If, on receipt of the notice under sub-section (2), the bor-
rower makes any representation or raises any objection, the se-
cured creditor shall consider such representation or objection and
if the secured creditor comes to the conclusion that such represen-
tation or objection is not acceptable or tenable, he shall communi-
catee *[within fifteen days] of receipt of such representation or ob-
jection the reasons for non-acceptance of the representation or ob-
jection to the borrower:

1, Ins. by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 (30 of
2004), s. 8, (w.e.f. 11-11-2004). .
2. Subs. for the words “within one week” by the Enforcement of Security Interest and Recovery of
Debts Laws (Amendment) Act, 2012 (1 of 2013), s. 5(a) (w.e.f. 15-1-2013).

953
954 Sec. 13 Part Li—Chap. li—Enforcement af Security interest

Provided that the reasons so communicated or the likely action of

the secured creditor at the stage of communication of reasons shall
not confer any right upon the borrower to prefer an a plication to
the Debts Recovery Tribunal under section 17 or the Court of Dis»
trict Judge under section 17A.)
(4) In case the borrower fails to discharge his liability in full
within the period specified in sub-section (2), the secured creditor
may take recourse to one or more of the following measurers to re-
cover his secured debt, namely:—
(a) take possession of the secured assets of the borrower includ-
ing the right to transfer by way of lease, assignment or sale
for realising the secured asset;
‘I(b) takeover the management of the business of the borrower
including the right to transfer by way of lease, assignment or
sale and realising the secured asset:
Provided that the right to transfer by way of lease, assign-
ment or sale shall be exercised only where the substantial
part of the business of the borrower is held as security for
the debt.
Provided further that where the management of whole of
the business or part of the business is severable, the secured
creditor shall take over the management of such business of
the borrower which is relatable to the security for the debt;]|
(c) appoint any person (hereafter referred to as the manager),
to manage the secured assets the possession of which has
been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has
acquired any of the secured assets from the borrower and
from whom any money is due or may become due to the bor-
rower, to pay the secured creditor, so much of the money as
is sufficient to pay the secured debt.
(5) Any payment made by any person referred to in clause (d) of
sub-section (4) to the secured creditor shall give such person a valid
discharge as if he has made payment to the borrower.
‘[(5A) Where the sale of an immovable property, for which a re-
serve price has been specified, has been postponed for want of a bid
of an amount not less than such reserve price, it shall be lawful for

3. Subs. by the Enforcement

of Security Interest
and Recov
(30 of 2004), s. & (wef. 11-11-2004), ery ofDebts Laws (Amendment)
Act, 2004
4. Ins. by the Enforcement of Security and Recov
(1 of 2013),s.506) (wee-f. 15-1-2013). Recovery ofDebts Laws (Amendment)
Act,2012
 Enforcement of security interest
Sec. 13 955
any officer of the secured creditor, if so authorised by the secure
d
creditor in this behalf, to bid for the immovable property on behalf
of the secured creditor at any subsequent sale.
(SB) Where the secured creditor,referred to in sub-section (5A), is
declared to be the purchaser of the immovable property at any
subsequent sale, the amount of the purchase price shall be adjusted
towards the amount of the claim of the secured creditor for which
the auction of enforcement of security interest is taken by the se-
cured creditor, under sub-section (4) of section 13.
(SC) The provisions of section 9 of the Banking Regulation Act,
1949 shall, as far as may be, apply to the immovable property ac-
quired by secured creditor under sub-section (5A).]
(6) Any transfer of secured asset after taking possession thereof
or take over of management under sub-section (4), by the secured
creditor or by the manager on behalf of the secured creditors shall
vest in the transferee all rights in, or in relation to, the secured as-
set transferred as if the transfer had been made by the owner of
such secured asset.
(7) Where any action has been taken against a borrower under
the provisions of sub-section (4), all costs, charges and expenses
which, in the opinion of the secured creditor, have been properly
incurred by him or any expenses incidental thereto, shall be recov-
erable from the borrower and the money which is received by the
secured creditor shall, in the absence of any contract to the con-
trary, be held by him in trust, to be applied, firstly, in payment of
such costs, charges and expenses and secondly, in discharge of the
dues of the secured creditor and the residue of the money so re-
ceived shall be paid to the person entitled thereto in accordance
with his rights and interests.
(8) If the dues of the secured creditor together with all costs,
charges and expenses incurred by him are tendered to the secured
creditor at any time before the date fixed for sale or transfer, the
secured asset shall not be sold or transferred by the secured credi-
tor, and no further step shall be taken by him for transfer or sale of
that secured asset.
(9) In the case of financing of a financial asset by more than one
secured creditors or joint financing of a financial asset by secured
creditors, no secured creditor shall be entitled to exercise any or all
of the rights conferred on him under or pursuant to sub-section (4)
unless exercise of such right is agreed upon by the secured credi-
956 See. 13 Part 11—Chap. 11—kEnfercement of Security Interest

tors representing not less than *|sixty per cent,] in value of the
amount outstanding as on a record date and such action shall be
binding on all the secured creditors:
Provided that in the case of a company in liquidation, the amount
realised from the sale of secured assets shall be distributed in ac-
cordance with the provisions of section 529A of the Companies Act,
1956 (1 of 1956):
Provided further that in the case of a company being wound up on
or after the commencement of this Act, the secured creditor of such
company, who opts to realise his security instead of relinquishing
his security and proving his debt under proviso to sub-section (1) of
section 529 of the Companies Act, 1956 (1 of 1956), may retain the
sale proceeds of his secured assets after depositing the workmen’s
dues with the liquidator in accordance with the provisions of sec-
tion 529A of that Act:
Provided also that the liquidator referred to in the second proviso
shall intimate the secured creditor the workmen’s dues in accor-
dance with the provisions of section 529A of the Companies Act,
1956 (1 of 1956) and in case such workmen’s dues cannot be ascer-
tained, the liquidator shall intimate the estimated amount of
workmen’s dues under that section to the secured creditor and in
such case the secured creditor may retain the sale proceeds of the
secured assets after depositing the amount of such estimated dues
with the liquidator:
Provided also that in case the secured creditor deposits the esti-
mated amount of workmen’s dues, such creditor shall be liable to
pay the balance of the workmen’s dues or entitled to receive the
excess amount, if any, deposited by the secured creditor with the
liquidator:
Provided also that the secured creditor shall furnish an undertak-
ing to the liquidator to pay the, balance of the workmen’s
dues, if
any.
Explanation.—F
or the purposes of this sub-section,—
(a) “record date” means the date agreed upon by
the secured
creditors represen
notti
lessng
than “[sixty per cent.] in value
of the amount outstanding on such date;

5. Subs. by the Enforcement of Security Interest and

(1 of 2013), Recovery of
s. 5(c), for the words “three fourth” (wef. 1% fee
Laws (Amnendiment) Act, 2012
6. Subs. by’ the Enfor
n cement of Securi ty Interest and Recov ery of Debts Laws
(1 of 2013), s. S(c), for the words “three fourth” (wef. 15-1-2013),
s (
ee
 Enforcement of security interest
Sec. 13 957
(6) “amount outstanding” Shall include prin
cipal, interest and
any other dues payable by the borrower to the
secured credi-
tor in respect of secure d asset as per the book
s of account of
the secured creditor.
(10) Where dues of the secur ed creditor
are not fully satisfied
with the sale proceeds of the s ecured assets,
the secured creditor
may file an application in the form and manner
as may be pre-
scribed to the Debts Recover y Tribunal havi
ng jurisdiction or a
competent court, as the case may be, for reco
very of the balance
amount from the borrower.
(11) Without
prejudice to the rights conferred on the
secured creditor under or by this section, secured credi
tor shall be
entitled to proceed against the guarantors or sell the pled
ged assets
without first taking any other measures specified
in clauses (a) to
(d) of sub-section (4) in relation to the secured
assets under
this Act.
(12) The rights of a secured creditor under this Act may
be exer-
cised by one or more of his officers authorised in this behalf in
such
manner as may be prescribed.
(13) No borrower shall, after receipt of notice referred to in
sub-
section (2), transfer by way of sale, lease or otherwise (other than
in
the ordinary course of his business) any of his secured assets
re-
ferred to in the notice, without prior written consent of the secured
creditor.

SYNOPSIS
SECTION 13(1) 18. Selection of assets to enforce security
interests: Uncontrolled discretion of
1. Significance of this Chapter .............ss00 959 DANES T CAA dist... ketenes. 967
2. Significance of this section ..............0..-+. 960! 19, Enforcement of security interest: Over
3. Enforcement of security interests........... 960 all the secured assets or only a
4. Object of the SectiOn .......ce-esssrssssee 961 DUTTA DMT site ncueetety tee, 969
5. What security interests does the law 20. Will a Stay by State Government of
COVER ...AD ML VIEILLE AIL. .ccccsccsoscescscstore 962 the revenue recovery proceedings be a
6. Notwithstanding section 69/69A of TP bar on proceeding under SARFAESI
AChevseesessersesssnssesserscnnssnecsestecssessnnnnaniseeesee 962 sn enee ee 970
7. Scope of the non-obstante clause........... 963)21. Choice of remedies .......c..ssssseeeee0000...e 970
8. The spirit of a security interest: 22. Can parallel proceedings be run under
Section 67 Of TP ACt .......ssssseseseessnsesssee 964 OR LIM val citi dicissd sss:av¥ssalatyvees 971
itbeen
De ACERN SOC NIMOY studs castesnsh ely seoosenpsnopoich 9641 23. Position after the Amendment Act ......... 973
10. Suit for foreclOsure....cr...ssosscerersseesseesoeeee 965] 24. Position after Transcore Ruling ...........+: 976
Be SMILKON SAUC teeccccrdoaiel ALA ERORR SAE IE 965] 25. Remedies under DRT Act and NPA
12. Mortgage of public facilities............. esas 965 Act not parallel remedies... 976
13. Enforcement in case of joint 26. Doctrine of Election of Remedies—
Li et |fA MR ms Rl, aa AI 965 applicability thereof... Afra 977
14. Construction on mortgaged property ..... 966] 27, Can winding up proceedings be filed
15. In case ofother security interests............ 966 along with action under SARFAESI
16. Impact of the present law on common ee cere Rev acne -aparacdaithenDp 977
LAN OTINCIDION:). ; pre sasds es <p0j41->-<esespssoforo-erh ae 28. Common defenses of borrowefS ............. 978
17. Action to be fair and equitable...............
 See. 13 Part ll—Chap. Hl—Enforcement of Security Interest

Enforcemeat of sccumty mierests by 12. Clause (a): Takeover of possessionof

wust of uchon
asset recornsir - }.noashnuh Uh ahh SSARRRRSDES STEEDS NOREEDDRDDS 1008

c ) eee SBI) 13. Manner of taking over possession .....,... 1008

Enforcement of Secunty Interests 982
14. Can physical possession “be wken
under seotion 1 B(A)GA)? ..c00 cree 1010
Rules
SECTION 132) 15. Prounder ced ure
Civil Procedure QCode., 1011
16, Effec taking over ofpossession
of t ........ 1014
Elements of action under this section... 983) 47, —=— olene oF colin iatealayeiesy 1018
Scope of Notice ... ik, 7 over of possession in GAse
Classification as NPA. before the date ee 0e
LenANted PLOPENtieS .........0.00. ren 1Ol4
Ce nn oatnnanneneeneneeneeene ve 19. Power of +oy oolto create
Relevanc e ........0006
of recall MOtiCe 98S tenancy rights in the property .......0605 1016
60 days’ NOUC E
UD WITHIN.. . 00. 985 20,Poston 1a eden
No bar on issue of notice more ThAN — | ggpPEMEN .....ccerseseevrensnnnrmennvvnrcmnnnrennenvnr 1018
CURDO necanivnnsaghnscsssccscreserentuesveunenenetensiretestes 21. ernie of a bu of wnEND
Will Second notice mean fresh 60 = le mae. ~ » 1019
days’ Period? neo eccserneneens « 987) 92, poy en impediments, otc 1020
B sete a tobe issued by the ‘oe! 23 Takeoverof asnets ie
SIGN GRE one ictccntetiins af Rk OeORY ohs.i,tepey-attegamnnins’ }
Notice tothe BIWOT oo. cevsee ens snsenerennen 988) 24, Provisos o leadaes 15(1) of Sick
Techni cal
defects in the NO1ICE .........-.+» 98S Industrial Companies Act........... sedemia: C92
Maintainability of writ petitions — | 28, Manner of taking
NOTICESE
AMU asc csccseesevuserenenesntnsenes ‘ B08 UO GW hirsccrisrsviessscsiersscase 1025
SECTION 143) 26. Clause (b): tnmmymnyy ofA. ,
: of assets (clause as it ior to
Contents
of the MOtICE .........-.coeeeereeseeeneee 991 ry partly reeeee eae - rt 1026
Evidencing
the amount due ........0.....000.+. | 29, Clause
(b); Takeover of
do Amount
ad determined under a ° of b usi | Gee eon dine
decree/order of DRT—applicability
SARFAESI Act for .
of 99
business
it stood after 2004
(
amendments): ........... 1026
as
FECOVETY: ----0000--eoeree 2%. S ntow Ga obbandian 0028
ra Mode of service of the notice ................. 993 ‘ ,
| 29. Conflict between section 9 and section
SECTION 13(3A) - po a thee CTE satsspeapepigsipts aaa iad a
Power to make representation ete see's H DOs GAIGBTINGE OT CS FTN oasis setcncesis
<a0sb0VPoaee
Mandatory
nature of the provision......... 31. Will the section also apply o 4
Time limit of one week (now fifteen Ǥ-|-_ |___FAN? one ec cccseteeesseeceressensnnesseees 1028
9 directory provision .....0.0.0.000000.4. | 32. (c): Appointment of manager ind 1029
Post-Amendment Act of 2012: Time 33. Clause (d): Right to attach receivables
limit extended to 15 days 22.....2...:c0000000- é on sale of secured assets! .......00.0ccceceee. 1030
Only one representation or more than 34. Sale of the asset by the secured
nn 5 CROUIE ossassctscceredinai
tense tatessili 103)
The representation process is not a 35. Duties of the secured creditor ......00.000004.. 1032
i-judicial proceeding .............2.2.200... 5, 36. care of the secured asset.............. 1032
Reply to representation cannot be 37. Dutyto get the best price 0.00...0.cccc0-..0 1033
+ ew eeweereceeseeereereeseseseesesesersseeseee . 38. conduct .... om 1035

Certain significant
points about the 39. eS SE nae
wo
>
sy Application
na
een by the borrower for 4. cites fatten dade detio 13(4) ... , 1037
NII, hccccrccrnrecenroaranapeness SECTION 13/6)
SECTION 13(4) 1. Can there be a sale without
Signific
of the ance
sub-section .............. 100 ena sttataiienabidlassbiiiiapslilidiiditadmedsacse . 1041
Discof liability m
harg efall .................. 1001; 2. of sale by the creditor ............... . 1041
Measures fo recover secured 3. of 8 A OF
a 1002, 4. Sale when and absolute? ........ 1043
One or more measures 2c eeceeeeees 02} 5. Can the secured creditor refuse to
Istherea dutyofgoodfaithinexercise Confirm the SAC? sc ccccecsessnrensenncenn VOSS
eterna et NT aE 1002, 6. Whocan be the buyer? _ 7044
Pre-possession notice before taking 7. Warranties and conditions made by
Post-Possession
Notice 0.0000. . 1005, 8 UCC law on warranties
in sdle by
Time limit for taking measures 00... 15 RS rn sth ad
Meaning
of expression “at any time”... |. int CT -
weMeaseres incaseof« congumty
Pee
Ave SECTION 13(7)
ihn hall 1. Action has fom, taken against a
Measures in case of floating charges ..... v borrower. Sa eee CLE OPTS EET TEES bee sdbes a. 1045
 Significance of this Chapter Sec. 13(1), Syn.1 959
2. All costs, charges and expenses ............. 1045 12. Sale of assets when company is in
3. Money shall be held in trust ...........c00000. 1046 winding up: Whether sanction of court
4. Meaning “in absence of any contract Th RR a a eB a Ra te 1065
ithe cuuery. 1047 13. Court rulings holding leave of the
5. Question of priorities ..........ccceeseseeeesees 1047 winding up court required..............ccc.0.0- 1065
G. Statutory, Charges sic.s.c...cccccscceseesscasesecsces 1050 14. Court rulings holding leave of the
7. Residue of the money ...0..........cccccsssseseses 1051 Courrnol required 2.08. 2.4 sca... 1065
8. Analogous UCC provisions.................... 1051 16. At what point of time does section
SECTION 13(8) 529A apply to the secured creditor......... 1069
1. Equity of redemption....0.0.0.0...cccceccceeees 17. Pari passu charge under section 529A... 1069
1052 18. Senior and subordinated charges under
SECTION 13(9) BSOCHON SID: .....c.ncncocessccncssesecvaeseseete
nee 1071
1. Wrong placing of the provisos below BS PSO ROIS oo SE, 1072
| ee a 1056 20. Second to fifth proviso ........ccccccccececeseeees 1073
2. Purport of this sub-section..............0...... 1057 21. Dues of the secured creditor versus
3. Multiple security interests on the asset .. 1059 Giles Of thes Crow sai ci, 1073
4. Will this section apply where the SECTION 13(10)
“secured lender’ is not a “secured 1. Jurisdiction for the application ............... 1075
CHOTAEES ET 1060 2. Form and manner prescribed .................. 1075
5. Pre-Amendment of 2012: Three- 3. Powers of the Tribunal ....0.00.0.....ccceoee 1076
ROWUTETS TRANG he pen teac hence tines | 1060
6. Post Amendment Act of 2012: 60% in SECTION 13(11)
Valea 2ST RUA BES AG 1061 1. Purport of this sub-section.....0.0...00.c.c...-. 1076
7. Effect of the agreement among secured 2. Proceeding against the guarantor............ 1076
Pe 2 ahaa As — ea ell alia i a 1062 3. Sale of pledged assets ...............c.scseseceee- 1078
8. Is there any restraint on sending notice
under Section 13(2), in case of joint-
SECTION 13(12)
ANON? 5 byots sasn re ctezeveentic to-tatht..
e 1063 Be ORINCS Serie St Leese, LL LYE a 1078
9. Distribution rules for companies not in 2. Can notice be given through
Aa ali ta ae Aah Mask on SA 1063 MGVOCAE MOOS Sua Ste) 1079
10. Distribution rules for companies in SECTION 13(13)
MAUEMEMINON Doos ised oarsan aces tietoegiases 1063
11. Rights of a secured creditor to stay 1, Freeze on secured assets ............0ecess000s 1079
OO ie. en 1064 Zs ERECEOL COMMAVENUON .......ic0.0-.00seeseoe0- 1080

Section 13(1)
(1) Notwithstanding anything contained in section 69 or section 69A
of the Transfer of Property Act, 1882, (4 of 1882) any security interest
created in favour of any secured creditor may be enforced, without the
intervention of court or tribunal, by such creditor in accordance with
the provisions of this Act.

COMMENTS

1. Significance of this Chapter

Of all the provisions of this Act, the provisions relating to enforcement of secu-
rity interest are, unarguably, the most significant. This Act, both at the time of its
discussion in the Parliament’ as before and after, was popularly called the NPA
Act. Evidently, the problem of sticky loans with banks and financial institutions
is far stronger than their urgency to securitise their assets.

7. See comments under the Preamble of this Act.

960 See. 131), Syn.2 Part 1/—Chap. 1ll—Enforcement of Security Interest

As these provisions relate to the power of the lender to enforce security inter,
ests, they are likely to undergo extensive litigation al various levels, as in the case
of the RDB Act.

2. Significance
of this section
Of all the sections in this Chapter, this section is clearly the most significant, as
this is the one that gives powers of enforcement of security interest to seoured
lenders.

3. Enforcement of security interests

As is implied both by the title of the Chapter as well as by the wording of sec-
tion 13, the powers under this Chapter relate to enforcement of security interests,
A security interest, as defined in section 2(1)(zf), is the right, title or interest of
any kind created in favour of a secured creditor. Obviously, this implies that the
security interest holder is a secured creditor, and the right title or interest is cre-
ated to secure the rights of the secured creditor. It is such security interest, as cre-
ated by the parties that can be enforced by means of this section. This section is
not a new means of enforcing the claims of the secured creditor, other than the
rights by way of security interest. In addition, this section cannot be i
to grant any new security interest other than the interest created by the parties by
way of their security agreement. This section is only one that allows a new means
to enforce an existing security interest.
The broad tenets of section 13 can be defined as under:
. If there is no security interest in case of a claim, there is no question of
making use of section 13. For meanin of security
g interests, and inter-
ests that are not security interests, see notes under the definition of “fi-
nancial assistance”, “security interest” and “secured lender”.
e Every lender, secured or otherwise, has a claim against the borrower—
for payment of the moneys payable under the loan agreement. In case of
secured loans, such claim is backed by a security interest. This section
is not concerned with the enforcement of the covenant or claim of the
lender against the borrower, but the claim on the secured assets backin
g
up the monetary claim. This section isnot a statement of the
powers of
the secured creditor against the borrower: it isthe powers of the
secured
creditor against the secured assets. The provisions of section 13(4)
must
stand conditioned by this essential principle.
. As this section only empowers enforcement of security
interests
interests ofthecreditor asfarasthemachinery of
this section ieoon
cerned are limited only to the assets on which security interests
were
 Object of the Section
Sec. 13(1), Syn. 4 961
e The essence of this section is self-enforce
ment. This essence is captured
in the opening line of section 13(1), which says
that a creditor may en-
force the rights conferred in this section without
the intervention of any
Court or Tribunal. The meaning of this line
is that under common law
or other laws, what rights were available Subj
ect to the intervention of
the Courts or Tribunals are now exercisable by
the creditor of his own.
But the rights that can be enforced under this secti
on are only the rights
conferred by the security agreement, that is, the
rights which the parties
have mutually bestowed under the agreement.
e To the extent the interests of the secured lende
r cannot be satisfied by
the secured assets, the secured lender ranks at par
with other unsecured
creditors, or, in case of winding up, stands at
par with other secured
creditors. The secured lender cannot claim any prior
ity or better rights
by virtue of this section for such unsecured receivable
s.
e Generally speaking, the rights of a security intere
st holder are not the
same as those of a proprietor. Centuries ago, this princ
iple was en-
shrined in the maxim: once a mortgage, always a mortg
age, implying
that the rights of a security interest holder do not go beyon
d the security
interest, even after repossession of the asset. A security
interest essen-
tially implies the right to sell the secured asset to realise the
outstanding
amount. A lender cannot become proprietor of the secured
assets. Even
if the lender takes possession of the secured asset, he does so
for the
purpose of sale and not to own the asset or run it.

4. Object of the Section

The Object of the NPA Act is to enforce the security interest belonging
to the
Bank/Fls by virtue of the contract between the parties or by operation of
common
law principles or by law. The object of section 13 is recovery by
non-
adjudicatory process. In Transcore v. Union of India*, the Apex Court explai
ned
the object and scope of section 13 in the following words;
“The very object of section 13 of NPA Act is recovery by non-
adjudicatory process. A secured asset under NPA Acct is an asset in
which interest is created by the borrower in favour of the bank/FI and
on that basis alone the NPA Act seeks to enforce the security interest by
non-adjudicatory process. Essentially the NPA Act deals with the rights
of the secured creditor. The NPA Act proceeds on the basis that the
debtor has failed not only to repay the debt, but he has also failed to
maintain the level of margin and to maintain value of the security at a
level is the other obligation of the debtor. It is this other obligation
which invites applicability of NPA Act. It is for this reason, that section
13(1) and 13(2) of the NPA Act proceeds on the basis that security in-
terest in the bank/FI needs to be enforced expeditiously without the in-
tervention of the Court/Tribunal; that liability of the borrower has ac-
crued and on account of default in repayment, the account of the bor-

8. 1 (2007) BC 33 (SC).
962 Sec. 1X1), Syn. 5 =Part li—Chap. 1l—Enforcement ofSeourity Interest

rower in the books of the bank has become non-performing. hor the
above reasons, NPA Act states that the enforcement could take place by
non-adjudicatory process and that the said act removes all fetters under
the above circumstances on the rights of the secured creditor.”

5. What security interests does the law cover

e As emphasised earlier, if there is no security interest, there is no lis or
cause under this Act — as this Act is concerned with enforcement of a
security interest that exists. Hence, in situations where the security crea-
tion is deficient, this law cannot provide any help.
e Where loan was granted on the basis of forged documents, on facts, i
was held in the case of Chief Manager, Bank of India v Gunvantiben
Bhawarlal Mehta (Smt)’, that the appellant bank was not a secured
creditor and therefore taking recourse to provisions of SARFAESI Act
was unauthorized and illegal. Similarly, when equitable mortgage in fa-
vour of bank was created by the borrower after she had ceased to be
owner thereof, the DRT-Mumbai in Mumtaz Shahnawaz Sakarvala vy.
Bombay Mercantile Co-operative Bank Lid."’, held creation of mort-
gage as illegal and therefore, the action taken by the Bank under the
SARFAESI Act was also held to be illegal. In Shoklingam Kappuswami
Mudliyar v. Indian Bank'', it was held that a copy of the conveyance
deed simpliciter cannot create any right, title and interest in favour of
the creditor-bank. In the absence of any security interest, there can be
no question of any enforcement of any security interest in accordance
with provisions of the Securitisation Act. In this case, the original title
deed of the property had not been handed over by the Registrar as it
bore deficient stamp duty. Hence, the borrower placed a photocopy of
the deed with the bank, and the original was obtained subsequent to the
creation of the mortgage. The court did not opine on whether the mort-
gage was lawfully created or not, but seemed to suggest that it was not.
¢ Subject to the above, it does not matter whether the security interest
was created before the passage of the law or after it.'? The same princi-
Be ne 1 notification ofanentityasa “secured creditor” wn-

6. Notwiths
sectio
ta n 69/69A
ndin of TPgAct
This section provides an exception to the provisions of sections 69/69A. Sec-
tion 69ofthe TPAct provides for cases where a mortgagee can enforce
case ofa
rights i
mortgage without seeking thehelp ofa Court, andsection 69A
provides

Sor Eri es Be ts Lama a ma te

12. See Unique Engineeri
Works
ng v.Union

(2009) BC443.Seeseonoteunin mane

India, Ni(

| + =
 Scope of the non-obstante clause Sec. 13(1), Syn. 7 963
for appointment of a receiver for the purpose of enforcing such rights.
The word-
ing of section 69 is clear that only in the cases covered by section
69, the mort-
gagee has a right of self-help enforcement: in all other cases, the interv
ention of
Courts is required. However, this section overrides the provisions of section
69
and provides for enforcement of rights in cases of mortgages, as also in case
of
other security interests, without the intervention of judicial authorities.

7. Scope of the non-obstante clause

This section starts with the words “notwithstanding anything contained in sec-
tion 69 or section 69A of the Transfer of Property Act’. This section does not
have a general non-obstante clause that overrides all other conflicting or compet-
ing provisions of other laws. Therefore, the question is: will this section be able
to overcome the obstacles put by other laws?
A possible answer is in section 35, which says that the provisions of this law
shall have effect notwithstanding anything inconsistent in any other law. In other
words, if there is a conflict between provisions of this law and those of other
laws, this law shall prevail. However, a counter-thought is possible: if the provi-
sions of this law were to generally prevail and ride over inconsistencies in all
other laws, why did section 13 have to mention only sections 69/69A of the
Transfer of Property Act?
There is no doubt that this law is intended as a stand-alone solution to en-
forcement of security interests, and the provision in section 35 is to overcome
any barriers posed by general laws. However, section 69 of the TP Act specifi-
cally provides for intervention of Courts for enforcement of mortgages other than
in the specific cases mentioned in that section: therefore, it was obviously
thought fit to make a specific mention of that section. The scope of the non-
obstante clause is, therefore, not limited to section 69 of TP Act alone”,
Therefore:
e The provisions of this law overcome all inconsistencies of all other
laws, and specifically override section 69 of the TP Act;
e While section 69 of the TP Act is applicable only in case of mortgages,
the provisions of this law apply for all security interests;
It is important to understand, however, that a non-obstante clause only has the
effect of toppling inconsistent provisions of other laws. A provision is said to be
inconsistent which will mar the intent and spirit of this law. If there is any provi-
sion that can be complied with without so foiling the purpose of this law, it is not
an inconsistent provision, and should be complied with simultaneously.

13. The Kerala High Court in Pushpangadan vy. Federal Bank Ltd.’ 11 (2012) BC 115 (Ker) (FB), while
deciding upon the overriding effect of the SARFAESI Act over the provisions of the Kerala Build-
ings (Lease and Rent Control) Act, opined that the specific mention of Sections 69 and 69A of the
TP Act in the non obstante clause in Section 13(1) of the SARFAESI Acct is an indication of the ex-
clusion of the other provisions in the TP Act from the purview of the non obstante clause. However,
at the same time owing to Section 35, provisions of the TP Act inconsistent with the SARFAESI
Act will have no say over the SARFAESI Act.
Yo4 Sec. 13(1), Sya.8 =Part i/—Chap. lll—bnforcement of Security Interest

in Todkar Associates v. Shree Veershaiva Co-operative Bank Lid."", the deed of

mortgage entered into in 200! contained a clause ary By on the
secured creditor to sell the property only through intervention of the Court. When
the secured creditor invoked the provisions of section 13 of this Act, it was con.
tended that the property cannot be sold without intervention of the Court in
breach of the expressed covenant. The Presiding Officer held that by virtue of
non-obstante clause in section 13, the fetiers put on the powers of the secured
creditor to put the secured property for sale without intervention of the Court
stands removed. He further observed that the logical conclusion of the said non-
obstante clause is that the secured creditor can put the secured property for sale
even after there is covenant for sale of the property through court, In the opinion
of the author, this is a wrong conclusion as the non-obstante provision only
overrides adverse provisions of other laws, not contractual provisions between
parties.

8. The spirit of a security interest: Section 67 of TP Act

This section does not exclude the operation of section 67 of the TP Act, and
generally speaking, the provisions of section 67 of the TP Act cannot be said to
be inconsistent with the provisions of this law to be diffused by section 35 of this
law. Hence, the essential spirit of security interests and the limits laid by section
67 should be taken as applicable to any action under this law.’
A mortgagee essentially has 3 rights against the borrower: (a) enforcement of
the covenant, that is, right to claim the debt secured by the mortgage; (b) suit for
sale, that is, sale of the mortgage property to realise the debt; and (c) suit for
foreclosure, that is, forfeiture of the security and assumption of proprietary inter-
est in the mortgaged property. Sections 67/68 set the principles of exercising
these rights.©

9. Claim
for money

tion 68. Generally, loan contracts contain a personal covenant. A claim

for :
ment ofthemoney secured bythemortgage isessentially anenforcement
ofper.
sonal covenant, and not an enforcement of the security interest.

- pol 2008) BC230 (DRAT ORT).

~ For more on enforcement of security interests under common law,
16. These sections ofTransfer ofProperty Acthavebeen Chapter
reprod uced inPartI ofthieBae
 Enforcement in case of joint interests
Sec. 13(1), Syn. 13 965
10. Suit for foreclosure
Foreclosure is a legal term that implies forfeiture
of the mortgaged property.
“A suit to obtain a decree that a mortgagor shall be
absolutely debarred of his
right to redeem the mortgage property is called a suit for
foreclosure”. A suit for
foreclosure is an exception to the borrower’s right of
redemption—that a bor-
rower may repay the mortgage debt and redeem his prope
rty. If a foreclosure is
ordered, the mortgaged property is forfeited: it becomes
the property of the mort-
gagee.
Under section 67(a) of the TP Act, a suit for foreclosure
can be instituted in
case of a conditional mortgage or an anomalous mortgage
with a right of foreclo-
sure. A conditional sale is a case where the mortgagor conve
ys property to the
mortgagee, with a condition that on clearance of the debt,
the title will revert to
the mortgagor. In this context, a suit for foreclosure would mean
the mortgagor’s
equity of redemption, that is, the right to get back the property
will get forfeited
and the property will become the absolute property of the mortgagee.
Foreclosure or forfeiture is a remedy that is presumed by law to be harsh
for
the borrower and hence allowed only in exceptional cases. It is harsh for
the bor-
rower since the value of the property might oftentimes be more than the
out-
standing debt. On the contrary, an order for sale more appropriately adjusts
the
rights of the parties. Therefore, the statutes in both England and India provide for
an order for sale rather than foreclosure—see also section 91 of the U.K. Law of
Property Act.

11. Suit for sale

As discussed above, the law provides the mortgagee with a right to apply to a
Court for decree of sale. Section 69 lists the circumstances in which a mortgagee
can enforce the mortgage without approaching the Court, but in general, en-
forcement of a sale is Court-directed, for which detailed provisions exist in the
Code of Civil Procedure.

12. Mortgage of public facilities

Section 67(c) provides that the mortgagee of a railway, canal or other work in
the maintenance of which the public are interested will not be allowed to institute
a suit for either foreclosure or sale of the facilities. In such cases, the proper
course is appointment of a receiver to realise the earnings of the facilities as a
:
going concern.

13. Enforcement in case of joint interests

As per section 67(d), in case of several mortgagees having right over the prop-
erty, a single mortgagee cannot proceed in respect of his own share, on the prin-
ciple of indivisibility of the mortgage security. Therefore, foreclosure proceed-
ings have to be taken against the entire mortgage property, and if the other mort-
gagees do not join in the action, the mortgagee must join the other mortgagees as

17. Gardner v. London Chatham & Dover Railway Co., (1867) 2 Ch App 201.
966 Sec. 13(1), Sya. 14 Part l/—Chap. ll—Enforcement of Security Interesi

co-defendants in such action. For elaborate discussion of this legal position, see
Mulla on Transfer of Property Act, notes under secon 67,

14. tion
on mortgaged
Construc property
Under section 70 of the Transfer of Property Act, if any accession is made to
the mortgaged property after the date of mortgage, the mortgagor alone in the
absence of any contract to the contrary, is entitled to such accession. Thus, in the
absence of any contract to the contrary even after any accession is made, the se-
cured creditor is entitled to have the benefit of the same, This was the view taken
by DRAT-Chennai in M.K. Ramesh Kumar v, Asset Reconstruction Company
(India) Lid.".
15. In case of other security interests
Though section 67 is applicable on mortgages alone, broadly the principles of
section 67 are applicable to other security interests as well.

16. Impact of the present law on common law principles

Since the present law provides for an exclusion of the Court's intervention, the
common law set out above will stand modified to this extent. However, the gen-
eral principles of section 67 will continue to apply. On a combined operation of
section 67 of the TP Act and section 13 of this law, the position regarding seou-
rity interests will be as follows:
* A secured lender, if covered by this law, will be allowed to enforce se-
curity interests, that is, sell the secured assets, or if required for the pur-
pose of the sale, to take possession of the secured assets without the in-
tervention of Courts, by following the procedure of section 13.
* However, the secured lender has no right of forfeiture or foreclosure
except in case of conditional sales. Conditional sales, strangely, are ex-
cluded from the operation of this law by section 31.
* In case of joint security interests, the position discussed in section 67(d)
above will stand modified due to the express provisions of section
13(9). See notes under sub-section (9) below.

17. Action to be fair and equitable

Though section 13(2) provides all the powers to the banks to enforce their se-
curity interest howsoever harsh the action may be, the Jharkhand High Court in
Amit Raj Enterprises v. UCO Bank"®, in a case where one-time pro-
posal was being discussed and on the direction of the Court, the borrower had
deposited 25% of the amount asked by the bank for entertainment of compromise
proposal, held that for the ends of justice, the bank should consider the offer of
the borrower in right perspective and pass a reasoned order in accordance
with

18. TV (20BC07)
75 (DRAT).
BLIR 394.
19. (205608)
 Selection of assets to enforce security interests:, etc. Sec. 13(1), Syn. 18 967
law. The High Court allowing the writ petition observed that
the bank is a na-
tionalised bank and it has to act in fair and equitable manner. A nation
alised bank
1s not expected to behave like a private money lender.
When it comes to being equitable and fair, the opinion of the author is that
not
only nationalised banks, there is no reason why anyone can be less equitab
le or
less fair. If the case falls under one-time settlement scheme for SMEs, banks
are
mandated to follow a non-discretionary approach as per guidelines of the
RBI.
These guidelines are mandatory.

18. Selection of assets to enforce security interests: Uncontrolled dis-

cretion of banks?
There could be several properties mortgaged to the bank. There could be prop-
erty of either the company or its present directors or retired directors or guaran-
tors or even outsiders mortgaged to the bank. The question that comes for con-
sideration is whether it is the sweet will of the bank to pick and choose the prop-
erty it wants to be sold for the satisfaction of its dues. It is explicit from the
scheme of SARFAESI Act that the secured creditor’s right to choose is undeni-
able.
In practice, it is mostly seen that banks regard residential or commercial prem-
ises as hot property for SARFAESI Act action. This is for several reasons. One,
the threat value in residential properties is the maximum. Two, with real estate
values going up, properties have become highly valuable. Three, properties have
liquid markets, which most productive plant and machinery will not have.
In Ashok Sharda v. Small Industries Development Bank of India”’, the Division
Bench of AP High Court stated that neither the 1993 Act nor the 2002 Act con-
tain any provision which precludes or prohibits the banks or financial institutions
or secured creditors from taking measures for recovery of their dues from the
mortgaged assets simply because similar action has not been taken against the
assets of the borrower or primary securities furnished by him. The Appellate Tri-
bunal in S.K. Viji v. Indian Overseas Bank’', held that the bank is at liberty to
bring any one of the items or all the items of properties secured and the appel-
lants/borrowers have no say over the matter.
However, in Shyam Kishore Prasad v. Bank of Baroda’’, the Patna High Court
observed that while the right to choose is undeniable, the action of choosing is
not dependent on the sweet will of the bank, for bank functioning to finance and
acting in public law domain is bound by Article 14 of the Constitution in every
aspect of its decision making power which affect the rights of third party. In a
case where the bank proceeded against the properties of persons who has re-
signed from Directorship over ten years leaving property of existing directors and
the borrowers itself, the Patna High Court in Shyam Prasad’s case (supra) set
aside the action taken by the bank to proceed against the property of retired direc-
tors, observing that though the bank has discretion in choosing the property or the

20. (2007) 5 ALD 866 (DB).

21. III (2006) BC 148 (DRAT/DRT).
22. II (2009) BC 311.
908 See. 13(1), Sym. 18 Part 1/—Chap. 1l/—Enforcement of Seourity Interest

person from amongst many available to ut for the purpose ot satisfying its debts,
surely the discretion is neither absolute nor unfettered norunguided or .
The discretion must be exercised based on sound principles and in transparent
manner giving Ho party a cause to complain, Merely because the lability of the
debtors, sureties, guarantors are Coextensive, they being jountly and severally hi
able does not mean that the actions of the bank in exercising ils discretion in the
matter is unquestionable. All exercise of discretionary power has to be tested and
must satisfy the test of Article 14 of the Constitution in regards tainess, reason:
ableness, non-arbitrariness and non-discriminatoriness of acuion,”
The Uttaranchal High Court in Unique Engineering Works v, Union of India
(UOL *, made some recommendations to the RBI regarding banks Choosing to
enforce security interests. The recommendations would have done great service
to the cause of equity, but these beautiful recommendations remained only worth
textbook quotes, (a) because the court itself diluted their significance by em-
phatically saying that the recommendations were not man for the RBI; and
(b) subsequent rulings such as Transcore seem to be providing liberty to the
banks. Two of the recommendations of the Uttaranchal High Court are:
“(d) We are also recommending to Reserve Bank of Indiato formu-
late directions regarding circumstances under which the security inter-
est could be sold through public auction and circumstances under which
the security interest couldbe sold through private treaty, In this connec-
tion, we may point out that shares of the company particularly control-
ling shares are required to be sold after proper valuation. In certain
cases they can be sold through public auction. In other cases they can
be sold through private treaty. Hence, particular directions are required
to be issued by RBI for valuation of such properties.
(e) As far as sale of residential houses are concerned Banks
should try to recover the loan amount from principal borrower. They
should try to encash securities other than the residential property in the
first instance and it is only if the balance remains after selling other
securities that the Banks can sell the residential property after giving
notice. In other words, residential house should be sold as a matter of
last resort.”
_ Equitable considerations in choice of the asset may involve significant social
interests. In Chapter 7 of Part 1 of the book, we have done detailed discussion on
chotce ofremedies andtheconnected social issues. Ina scenario where even fell-
ing of a tree is frowned upon, the society cannot disregard a creditor selling
anindustrial unitotproductive inttramentality thatprovides iveldhaods tein,
eral persons. In fact, the question of workers’ interest has not been argued before
judicial forums and may be very serious question to take into consideration in
allowing a free hand to the secured creditor.

23. Ti(2009)
BC 311.
24. 11 (2004)
BC 241.
 Enforcement of security interest: Over all, etc.
Sec. 13(1), Syn. 19 969
19. Enforcement of security interest: Over all the secu
red assets or
only a sufficient part?
A very significant question that may arise as regards enfor
cement of security
interests is—over how much of the secured assets is the lender
entitled to enforce
Security interest? If the secured assets are substantially highe
r in value than the
outstanding debt, and the secured assets are several, is the secur
ed lender entitled
to enforce security interest only over so much of the assets as
would be sufficient
to meet the outstanding claims?
It is important to note that the purpose of enforcement of security
interest is to
realise the monetary claims of the lender, and not to prove the power
of the se-
cured lender. We have reiterated above that the secured lender
has a monetary
and secondary interest in the property—his basic interest is in realisa
tion of his
dues. The enforcement of security interest is only the means to realise
the debt.
The lender cannot make any profit by enforcement of security interest;
on the
other hand, a secured lender doing a flagrant enforcement against several proper
-
ties where one or some would suffice his purpose is only taking the onerou
s re-
sponsibility of making a sale, getting the best price and returning the surplus
to
the borrower. The enforcement action does no good to either party—the borrow
er
is dispossessed of a property that has more value in use than in disposal, and the
secured lender in any case cannot stand to any gain. Therefore, the enforcement
action by the secured lender should be taken as an exceptional step, and only to
the extent necessary to realise the claims of the secured lender.
In Ambati Narasayya v. M Subba Rao”, the Supreme Court deprecated the ten-
dency of Courts to auction all property of the borrower even while some of it
would have been sufficient to meet the dues. In Central Bank of India v. Apple
Finance Limited’, the Mumbai DRAT similarly ordered that where the out-
standing claim of the bank was only Rs. 4.85 crores, and the property was worth
Rs 300 crores, the bank may auction only so much of the floor space as required
for realisation. In Todkar Associates v. Shree Veershaiva Co-operative Bank
Ltd’’, when the taking over of possession of the secured property itself was chal-
lenged on the ground that part of the property was sufficient to realise the dues of
the bank, the DRT Pune dismissed the challenge of the borrower stating that the
question would be relevant at the time of actual sale. It further observed that no
doubt the sale of property must be commensurate with the amount due and the
property can be sold in piece meal so as to realise dues.
In fact, it is not necessary that all the secured properties should be put to sale
simultaneously. In Wasan Shoes v. Chairperson, DRAT**, the Allahabad High
Court held that it is open to a secured creditor to move against any secured assets
and it is not essential that all the secured properties should be put to sale simulta-
neously. If by sale of one property substantial recovery could be made, it is not
necessary that all the properties should be sold or possession be taken under sec-
tion 13(4) of the Act.

25. AIR 1990 SC 119.

26. IV (2004) BC 233 (DRAT—DRT).
27. Ill (2006) BC 230 (DRAT—DRT).
28. IV (2009) BC 344 (All).
970 See. 13(1), Sya. 20 Part 1i—Chap. 11l—Enforcement of Seourity Interesi

The author, however, would comment that if only some of the properties are
sufficient to satisfy the claim of the lender, then there is no reason why acon
should be taken against all the assets of the borrower. Once again, the sole pur
pose of enforcement of security interests is to realise the dues of the lender,
Banks cannot be pursuing enforcement of security interests either as a device of
teaching a lesson to the borrower, or to prove their might, Lender's interest is not
proprietary — it is only limited to recovery,

20. Will a Stay by State Government of the revenue recovery pro-

ceedings be a bar on proceeding under SARFAESI Act
In the case of Abdul Navas v, Dhanalakshmi
Bank Limited’, the Petitioner
availed facility from the respondent bank. On default, the bank initiated proceed-
ings under the Revenue Recovery Act, The matter was carried to the State Gov-
ernment and an order of stay of the revenue recovery proceedings was granted on
condition of payment of 10 percent of the total outstandings and for remitting the
balance in 50 equal instalments. The bank then issued notice under section 13(2)
of this Act, which was challenged before the Kerala High Court on the ground
that stay order was issued by the State Government and the bank cannot proceed
under the SARFAESI Act. The High Court held that Schedule VII of the Consti-
tution would show that banking, negotiable instruments, currency, etc are the
matters that fall in the Union List and hence beyond the legislative and executive
competence of the State. There is no shred of authority for the State Government
to interfere with the recovery proceedings in relation to bank loans initiated under
the Revenue Recovery Act. The Court also observed that the Government can be
gracious, compassionate and benevolent. But such exercise could be done, only if
they have power to do so and only in relation to cases where the recovery pro-
ceedings are for money due to the Government and not otherwise, unless such
power is expressly conferred.

21. Choice
of remedies
With the enactment of the present law, a secured lender has several options
available for enforcement:
¢ Winding up proceedings
e Direct action against secured assets under this law
e Proceedings
under the RDB law
The lender has to choose between these parallel remedies. The provisions of
this law are partly parallel and partly independent of the RDB Act. While
RDB Act isfor enforcement of claims of banks, this law isonly for enforc the
of security interests such that for the balance of the claim of the bank, ement
may still pursue the remedy of the RDB Act. A secured lender
the bank
may also enforce
the claim on secured assets, and for the residual claim, fi application under
the RDB law.
_—

29. 11 (2009) BC 160.

 Can parallel proceedings be run under other laws? Sec. 13(1), Syn.22 971
Of course, electing to take recourse under this law or the RDB
law, the secured
creditor stays outside the winding up proceedings. A secure
d creditor cannot
claim the benefit of security in winding up proceedings, except
as permitted by
section 529A.

22. Can parallel proceedings be run under other laws?

Questions have been raised in various forums as to whether the procee
dings
under the Securitisation Act can be carried simultaneously with those
under vari-
ous other similar laws. Possible areas of overlap commonly are—pr
oceedings
before the DRT under the RDB Act, proceedings for winding up, etc.
The answer to the question lies in the nature of proceedings under the Act.
The
distinction is clear—the proceedings under the Securitisation Act are not for re-
covery of money owing to the lender; these proceedings are for enforcement of
security interest. These proceedings are in the nature of execution proceedings —
that is, taking action against the asset. There is no action against the borrower
under this Act. The proceedings under the RDB Act, on the other hand, are for
recovery of debts due to the lender. Winding up is a different matter altogether—
where the creditor insists that the business of a company has become unviable
and should be taken into dissolution. Winding up proceedings for corporates are
similar to insolvency proceedings for individuals. A winding up proceeding is not
a claim for money but for dissolution of the company.
The nature of proceedings under the Securitisation Act has been discussed in
several Court rulings—notably, the Allahabad High Court in Salim Ahmad vy.
State Bank of India*®, the Gujarat High Court in Apex Electricals Ltd. vy. ICICI
Bank Ltd.*', and more recently, the decision of the Appellate Authority under the
RDB Act in Indusind Bank Ltd. v. Deva Tools and Forgings.**
The Allahabad High Court in Salim Ahmad v. State Bank of India (supra), held
that the remedy under the Securitisation Act is an alternative remedy and the bor-
rower cannot find a fault with the bank pursuing other available remedies. The
Court held as under:
“Next question that arises is whether during pendency of the suit, the
defendant-Bank can resort to section 13(4). To answer the question,
reference may be made to Sections 35 and 37 of the Act. The former
section provides that provision of the Act will override other laws and
so far latter section is concerned, it envisages that provisions of this Act
or the rules made thereunder shall be in addition to and not in deroga-
tion of the Recovery of Debts Due to Banks and Financial Institutions
Act and other Acts as mentioned therein.
So when alternative method has been prescribed to recover the
amount which the petitioners are liable to pay and the Bank in order to
enforce payment has taken recourse to the Act which has the overriding

30. WP 13559/2003 decided on 8-4-2003.

31. (2003) 107 Com Cases 117 (Gu)j).
32. 1(2005) BC 97.
972 Sec. 13(1), Sya. 22 Part 1/—Chap. 1l/—Enfercement ofSecurity Interest

effe ct
over other laws, no fault can be found with the defendant Bank in
proceeding under the Act.”
The Gujarat High Court in Apex Electricals Lid. vy. ICICT Bank Lid, (supra),
has gone into the nature of proceedings under the Act at length, The Court also
came to a similar conclusion on the Act being a special and alternative proce-
dure:
“Therefore, it can be said that the present Act is providing for an
additional procedure for enforcement of security interest in secured as-
sets by a certain class of secured creditors.”
The doctrine of election was brought before the Gujarat High Court, This doc-
trine suggests that where an aggrieved party has elected to resort one out of sev-
eral remedies provided for by law, it must stick to the elected one and cannot
seek to invoke several remedies that have substantially similar impact. This issue
was also rejected by the Court—the argument was similar to the one put forth by
the author in the Book—that the nature of proceedings under this Act was in rela-
tion to the assets, not in relation to the borrower. The High Court held:
“\...Hence, when two modes of recovery of the realisation of the
dues are provided out of which one is limited to secured assets or secu-
rity interest in secured assets and the another is against all assets includ-
ing personal assets of the debtor, it cannot be said that such remedies
are inconsistent to each other. The remedy provided under the present
Act is restricted remedy to secured creditors that too a certain class of
secured creditors, whereas the law for providing the normal remedy for
all classes of creditors is a wider remedy. There is nothing as such in-
consistent in both such remedies, save and except, when the question
arises of resorting to both the remedies simultaneously gua the secured
assets, which shall be dealt with hereinafter. As such the question of
considering the doctrine of election would arise only when there are

While holding so, the High Court put up a limitation that the judicial forum
where the two alternative remedies are being pursued must be the same. If the
judicial forum is different, the Court held as under laying down a significant
of protocol:
principl e
“....In a situation, where proceedings are pending before the compe-
tent Forum under any other law for the time being in force and the Bank
also resorts to remedy provided under section 13 of the present Act,
then the fair play action and the basic principles of rule oflaw and jus-
tice do require that qua the very secured assets, the before
other Forum under any other law for the time being inforce are stayed
to the extent and only relating to secured assets and itmay continue
on
other aspects and qua the right ofthe parties other than that of
secured
An additional question raised before the Gujarat High Court
Provisions oftheActcouldalsoapplytodefaults whether
thathadalreadytaken plens
 Position after the Amendment Act
Sec. 13(1), Syn. 23 973
prior to enactment of the Act. The Court answered
the question in the affirma-
live:
“No person can be allowed to contend that since the
procedure is
changed of facing the consequences of default, may
be through the in-
tervention of the Court initially or afterwards such proce
dural laws
should be read as prospective only and it would not apply
to the de-
faults which have already become due when the Act came
into force....”
As such the Act intends to cover all transactions of loan alread
y en-
tered into subject to the provisions of within the period of limita
tion and
the defaults in making repayment and the debts already classi
fied as
non-performing assets and such future contingencies too,
therefore, the
said contentions raised on behalf of the petitioners fail and hence
are re-
jected.”
The aforesaid decision of the Gujarat High Court was also follow
ed by the
same Court in Vandanaben Rasik Dagli v. Royal Co-op. Bank Ltd.*°.
In yet another ruling, the Kerala High Court in Abdul Azeez y. Punjab
National
Bank” also held that the procedure under the SARFAESI was an additional
rem-
edy and could be pursued simultaneously with civil remedies.

23. Position after the Amendment Act

The position as to simultaneous proceedings before the DRTs under the RDB
Act and under the Securitisation Act seems to have apparently changed after the
Amending Act. There was no need for this provision, with the rulings of the High
Courts cited above, but nevertheless, the draftsmen of this law continued the by-
now-familiar style of casual, callous drafting. Accordingly, three new provisos
were inserted below in section 19(1) of the RDB Act as under:
“Provided that the Bank or financial institution may, with the per-
mission of the Debts Recovery Tribunal, on an application made by it,
withdraw the application, whether made before or after the Enforce-
ment of Security Interest and Recovery of Debts Laws (Amendment)
Ordinance, 2004 for the purpose of taking action under the Securitisa-
tion and Reconstruction of Financial Assets and Enforcement of Secu-
rity Interest Act, 2002, if no such action had been taken earlier under
the Act:
Provided further that any application made under the first proviso for
seeking permission from the Debts Recovery Tribunal to withdraw the
application made under Sub-section (1) shall be dealt with by it as ex-
peditiously as possible and disposed of within thirty days from the date
of such application:
Provided also that in case the Debts Recovery Tribunal refuses to
grant permission for withdrawal of the application filed under this sub-
section, it shall pass such orders after recording the reasons therefor.

33. (2006) 65 SCL 11 (Gu)j).

34, (2005) 1 KLT 243 : (2005) 64 SC 144 (Ker).
974 See. 131), Sym. 23) Part //—Chap. Ll—bnfercement afSeourity Interest

After enactment of the aforesaid provision, it seemed that the intention of the
Parliament is to avoid simultaneous proceedings. Once again, it is necessary to
note that the proceedings under the RDB Act are for recovery of the money due
to the bank, while those under the SARFAES] are for enforcement of seourity
interests.
In view of enactment of the above provision, the general perception now seems
to be that the lender will have to withdraw the application under the RDB Act to
press in service the provisions of the SARFAESI Act, The llate ‘Tribunal
under the RDB Act, in Application No, 227 of 2004, dated 23-12-2004, in Jn-
dusind Bank Ltd. v. Deva Tools and Forgings’, held as under:
“I am also of the view that the intention behind the amendment to
section 19(1) of the Act of 1993 by providing these three provisos is
that Banks and financial institutions shall pursue one of the remedies
only, either under the Act of 1993 or under the Securitisation Act, at a
time. Because, even under the general law the Banks and financial insti-
tutions have the right to withdraw any O.A. pending before any Debts
Recovery Tribunal. But, the purpose of this specific proviso is to allow
the Banks and financial institutions to withdraw the O.A. with liberty
to, and for the purpose of pursuing the remedy under the Securitisation
Act. Therefore, though the word “may” has been used, I am of the view
that it should be read in the context as “shall”, and that it is
for the Banks and financial institutions to apply to the DRT for with-
drawing the pending O.A. (original application under the RDB Act—
Added by author for clarification) for the purpose of taking action un-
der the Securitisation Act”.
In Asset Reconstruction Company (India) Limited v. Kumar Metallurgical
Corporation®’, the DRAT Chennai differed from the ruling in Deva Tools (su-
pra). The DRAT held that the remedies sought to be provided by the RDB law
and by the SARFAESI law operate in different spheres. The RDB law is basi-
cally an adjudicatory law. The SARFAESI Act is basically an executory law, and
there is no scope for adjudication until the measures provided for by the law have
been taken. The RDB law is applicable to both secured and unsecured claims,
while the SARFAES]I is limited to security interests. Hence, the two laws are
complimentary. Discussing as to whether the effect of the Amendment Act w
to necessarily require the secured lender to first withdraw the pending application
before the DRT, the Appellate Tribunal held that this was a choice granted to the
bank. The word “may” can only be read as “may” and not as“shall”. The Appel-
late tribunal held that the doctrine of election of remedies is applicable only in
case of competing or alternative remedies, not in case ofremedies that operate in :
different fields.
 Position after the Amendment Act Sec. 13(1), Syn. 23 975
thus, held that the secured creditor might run proceedings under
both the RDB
Act and the SARFAESI law. In addition, the chairperson also held
that since, for
the portion of secured debts that could not be recovered by SARFSAES
I action,
if the secured creditor had to proceed after taking the SARFAESI action,
it was
not certain how much time those proceedings would take to get comple
ted, and
by that time, the proceedings under RDB law might get barred by limitat
ion.
Similar views were expressed in Central Bank of India v. Cyber Quest
Systems
Pvt. Ltd.**. The Presiding officer taking limitation into consideration, observed
that the secured creditor is not expected to lose his remedy by lapse of time while
proceeding under the SARFAEST Act. The period of limitation would not stop
running by taking recourse of SARFAESI Act and therefore, the proceedings
before the Tribunal under the RDDBFI Acct are to be initiated within limitation
period.
A Division Bench of the Kerala High Court in Abdul Azeez v. Punjab National
Bank’, held, in view of section 37 of this Act, that the provisions of the Act are
in addition to and not in derogation of other laws, and therefore, there is nothing
wrong in the secured creditor pursuing remedies under both the RDB law and
under this law.*” Also see similar DRT views in Central Bank of India v. Cyber
Quest Systems Pvt Ltd.*'. There is another ruling of the Division Bench of Kerala
High Court in Sahir Shah v. Bank of India, wherein the Court has considered
the amended provisions of the RDB Act and held that there is a scope for the
bank to seek the permission of the DRT for withdrawing the case before it, but
the very fact that a case is already before the DRT is not a bar against taking
measures under the SARFAESI Act. See also DRAT Kolkata ruling in Corpora-
tion Bank v. Ruia Kotex”. The AP Hi gh Court in Hotel Rajahamsa International
v. Indian Overseas Bank™, also held that even if the bank had already availed of
remedy under the Recovery Act, nothing prevents them from invoking the provi-
sions of the SARFAESI Acct.
The Punjab and Haryana High Court, in Kalyani Sales Company v. Union of
India®, differed from the above ruling of the Kerala High Court and held that the
bank has to elect as to whether to proceed under the RDB law, or under this law.
The P&H High Court relied upon a Supreme Court ruling in A.P. State Financial
Corporation v. Gar Re-Rolling Mills.*°
The discussion above shows that there were opposite views of Courts on the
choice of remedies. However, the position changed after the ruling of the Su-
preme Court in Transcore, discussed below.

38. LI (2006) BC 27 (DRAT—DRT) Pune.

39. 2005 (1) ISJ (Banking) 363 : (2005) 64 SCL 44 (Ker).
40. See also, similar ruling in Sahir Shah v. Bank of India, (2006) 66 SCL 14 (Ker).
41. Ill (2006) BC 27 (DRAT—DRT).
42. 11 (2006) BC 386 (DB).
43. 11 (2006) BC 250 (DRT/DRAT).
44. 1 (2007) BC 438.
45. 1 (2006) BC | (DB).
46. (1994) 2 SCC 647.
976 See. 1X1), Syn. 24 Part //—Chap. Ill—Enforcement ofSeourity Interest

24. Position after Transcore

Ruling
The issue as to whether the bank could resort to exercise its rights under the
NPA Act even after initiating a proceeding under the DRT Act is no longer res
integra after the judgment of the Supreme Court in the case of Transcore v, Un
ion of India.” in paragraph 49 of the order, the Apex court observed as follows:
“49. For the above reasons, we hold that the withdrawal of the O.A,
pending before the DRT under the DRT Act is not a pre condition for
taking recourse to NPA Act. It is for the Bank/FI to exercise its disore-
tion as to cases in which it may apply for leave and in cases where they
may not apply for leave to withdraw. We do not wish to spell out those
circumstances because the said first proviso to section 19(1) is an ena-
bling provision, which provision may deal with myriad circumstances
which we do not wish to spell out herein”,
From the Transcore ruling (supra) it is clear that the object behind introducing
the first proviso and the third proviso to section 19(1) of the DRT Act was to
align the provisions of DRT Act, the NPA Act and Order 23 CPC, The Hon'ble
Apex Court in clear and categorical terms permitted the bank to invoke its reme-
dies under the NPA Act, 2002, even after having elected to seek remedy in terms
of the DRT Act, 1993, for realising the secured assets without withdrawing or
abandoning the O.A. filed before the DRT under the DRT Act.

25. Remedi
under DRTes
Act and NPA Act not parallel remedies
Further, the Transcore ruling (supra) also clarified that the remedies available
to a secured creditor under the DRT Act are distinct and separate from remedies
available under the NPA Act. In Para 43 of its order the Apex Court observed as
under:
“...apart from obligation to repay, the borrower undertakes to keep
the margin and value of securities hypothecated so that there is no mis-
match between the asset-liability in the books of the bank/FI. This obli-
gation is different and distinct from the obligation to repay. It is the
former obligation of the borrower which attracts the provisions of the
NPA Act which seeks to enforce it by measures mentioned in section
13(4) of NPA Act, which measures are not contemplated by DRT Act
and therefore, itiswrong to say that the two acts provide parallel reme-
dies asheld by the judgment of the High Court in Kalyani Sales Co.
as
stated, the remedy under DRT Act falls short as compared to NPA
Act
which refers to acquisition and assignment of receivables to
the asset
reconstruction company and which authorizes banks Fis to
take
sion or to take over management which is not there in the
DRT Act. It
Is forthis reason that NPA Act istreated asanadditional
remedy (Sec-
tion 37), which is not inconsistent with the DRT Act”

47. 1 (2007)
BC 33 (SC).
 Can winding up proceedings be filed along, etc.
Sec. 13(1), Syn. 27 977
26. Doctrine of Election of Remedies—applicability
thereof
The doctrine of election of remedies arises only when
there are two or more co-
existent remedies at the time of election, which are repug
nant or inconsistent. If
there is no repugnancy or inconsistency between the two
remedies, the doctrine
of election has no application. Observing that the borro
wer’s obligation to keep
merging and the value of securities hypothecated is different
and distinct from his
obligation to repay, the Apex Court in Transcore’s case (supr
a) held that the Se-
Curitisation Act is an additional remedy under section 37 of the
said Act which is
not inconsistent with the DRT Act. Therefore, both the remed
ies constitute one
remedy and as such the question of doctrine of election of remed
ies does not
arise.
Relying on Transcore Judgment (supra), the Division Bench of
Orissa High
Court in the case of Rakesh Kumar Mahajan v. State Bank of Bikane
r & Jaipur™,
rejected the contention advanced on behalf of the Petitioner that once
the bank
had initiated proceedings under the DRT Act and have also obtained
a decree
therefrom, it is not permissible for such a bank to initiate proceeding under
sec-
tion 13(2) of the NPA Act and held that the impugned notice is within the
juris-
diction of the bank. In a case where an appeal from decree/order of DRT
was
pending and steps under Securitisation Act was taken, the Division Bench
of Al-
lahabad High Court relying on Transcore’s judgment held that the process under
the Securitisation Act is an additional remedy and a non-adjudicatory process and
therefore, the doctrine of election of remedies cannot be available.’
Remedy under the SARFAESI Act is an additional remedy; was also reiterated
in [shrat Enterprises (P.) Ltd. v. Punjab & Sind Bank’, CeePee Traders vy. Pun-
jab & Sind Bank’'; Fortune International Ltd v. Central Bank of India’, Sho De-
signs & Ors. v. Allahabad Bank & Ors.>’.
In an interesting case,“ where action under the SARFAESI Act was initiated
on 27-11-2004 (after 11-11-2004 on which date section 19 of RDDBFI Act was
amended) and the secured property was auctioned on 6-1-2006 (before the
Transcore’s decision given on 29-11-2006), the DRAT held that the appellant
cannot take advantage of the Transcore’s judgment to justify the auction sale
held on 6-1-2006; Notice under section 13(2) of the SARFAESI Act and the pos-
session notice which had become extinct earlier thereto could not come to life
again after the whole show came to an end.

27. Can winding up proceedings be filed along with action under

SARFAESI Act?
As noted earlier, winding up proceedings are not for recovery of money. Re-
covery of money may be the ultimate result of a winding up proceeding, but the

48. IV (2009) BC 659 ( (DB).

49. Ace Media Advertisers Pvt. Ltd. v. Bank of Baroda, IV (2009) BC 356 (DB).
50. IV (2008) BC 35 (DRAT Delhi).
51. II (2008) BC 86 (DRAT Delhi).
52. III (2008) BC 82 (DRAT Delhi).
53. IV (2010) BC 55 (DRAT). .
54, ao of gow v. Veena Chandyoke,|{ 1 (2010) BC 93 (DRAT Delhi)].
978 See. 13(1), Sya. 28 Part //—Chap. ll—kajorcement af Seourity Interest

proceedings are essentially for breaking up the company and ratable distribution
of its assets. Hence, there is no conflict between the recovery action under this
Act, and winding up proceedings.»
A question may arise as to whether a secured creditor remains a secured cred)
tor even after the enforcement of security interest? Until such time, the enforce.
ment of security interest has been done, that is, one or more of the measures pro.
vided for in section 13(4) have been resorted to, the secured creditor remains a
secured creditor. After taking of such measures, even though pending sale of the
asset, it would be proper to construe that the secured creditor is now merely a
creditor, as the security interest has already been encashed.
While we have opined above that a secured lender may initiate winding up pro-
ceedings even after exercising the rights available under this Act, it is a different
issue whether the secured lender would really like to do so, It is notable that once
liquidation proceedings have been triggered, the rights of the workmen get initi-
ated, which would force the secured lender to cede a pari passu interest in favour
of the workmen.

28. Common defenses of borrowers

Below are some of the defenses put up by borrowers; some of these purely fac-
tual, and some involve substantial questions of law. The list is, by no means, ex-
haustive. With nearly 8 years of experience in implementation of the law, there
are still thousands of questions waiting to be resolved — hence, the body of
knowledge on this law will continue to expand:
¢ Questions on the legality/valid of the security ity
interest: As mort-
gages in India are mostly created as equitable mortgages, borrowers
may try to find flaws with the creation of the mortgage. For example,in
Shoklingam Kappuswami Mudliyar v. Indian , the Gujarat High
Court held that a copy of the conveyance deed simpliciter cannot create
any right, title and interest in favour of the creditor-bank. In absence of
any security interest, there can be no question of any enforcement of
any security interest in accordance with provisions of the Securitisation
Act. In this case, the original title deed of the property had not been
handed over by the Registrar as it bore deficient stamp duty. Hence, the
borrower placed a photocopy of the deed with the bank, and the original
was obtained subsequent to the creation of the mortgage. The court did
not opine on whether the mortgage was lawfully created or not, but
seemed to suggest that it was not. Similarly, if the deed inpossession of
the bank is contended to be a forged deed, there will be no equitable
mortgage at all. Questions may also arise on whether the document
in
Possession ofthe bank is a “deed of title”, as an equitable mortgage is
created by placing the deeds oftitle. There isa long history of
case law
on what is “title deed” to create an equitable mortgage. However. with
annsuenetetiemenssiasneneenen
SS. Bank
See The BankofNova
Limited, Scotiav.RPG Transmission Limited and Minerva Telelink Limited v.1CICT
ape Delhi+4High Court order dated 23rd Nov 2004-
Lid., (2001) 33 SCL.135 (Bom) - Bank
2 : Viral Filaments Lad. v. Indusind
56. 11 (2008)
BC 637.
 Common defenses of borrowers Sec. 13(1), Syn. 28 979
variety of practices prevailing in the country, there is no
clear line of
authority on whether it is only a registered title deed that can
create an
equitable mortgage. In Syndicate Bank v. Estate Officer
& Manager,
A.P.I.I.C. Ltd.°’, the Supreme Court cited several English and
Indian
authorities on what is a deed of title to create an equitable mortg
age, but
then left the issue unanswered by referring it to a larger bench.
Disputes as to title: Borrowers, particularly individuals, tend
to raise
disputes about the title of the land. References are typically made to
family partitions etc. whereby some members of the family claim to
have right in the asset and therefore, either the right of the borrower to
create the mortgage itself is disputed, or persons who are not the bor-
rowers claim right on the whole or a part of the mortgaged property.
Tenancy agreements: Commonly, borrowers contend that there was a
tenancy created on the mortgaged property. The tenant in question
claims to have the right in the property. The law is that if a tenancy is
validly created either before or during the pendency of the mortgage,
and possession is taken by the secured lender, the right of the tenant
cannot be taken away. However, on the question whether tenancy rights
can be validly created during the pendency of the mortgage, note the
provisions of section 6SA of the Transfer of Property Act. See also dis-
cussion under the heading Power of the Mortgagor to Create Tenancy
rights in the Property, in notes under section 13(4).
Disputes on amount demanded by bank: One of the most common
defenses taken by borrowers is to dispute the amount demanded by the
banks. Banks quite often do not provide transparent details of the
amount demanded by them. This act adds to the confusion, and quite
often, borrowers have justifiable disputes as to the amount demanded.
At the stage of right of representation, the bank should try giving full
clarity on the amount demanded. Though bankers’ books are deemed to
evidence, but the evidentiary value of bankers’ book cannot be ex-
tended to the dues added by the bank itself. Hence, a mere demand
made by the bank cannot be treated as “debt” due for the purposes of
invoking action under the Acct.
Allegations against the bank regarding the untimely lending or ex-
cessive rate of interest: These are commonplace allegations, particu-
larly by business entities. They would either complain that the bank did
not lend when the bank was supposed to, or did not lend the full sanc-
tioned amount without assigning any reason. Hence, borrowers would
lay the blame for the failure of their business on the bank. These are
common allegations, sometimes right, but are normally not considered
as good defense against SARFAESI Act action.
e Disputes pertaining to OTS or restructuring offer: This is, once
again, a common complaint of borrowers — that the borrower had made
a restructuring or one-time settlement proposal, and the bank initially

57. (2007) 8 SCC 361.

Ysu See. 131), Sya. 28 Part 1i—Chap. lll—Enforcement af Seourity Interest

had showa inclination for accepting the same but later on went back
without assigning amy reason. lt may be noted that in case of SMBs,
there are corporate debt restructuring schemes and one-time settlement
schemes which are non-discreiionary (see Chapter 7 of Part 1), unless
the account is a case of willful default, If the borrower qualifies under
the schemes and makes a case for either One-time settlement or restruc-
turing, the bank must consider the case as per RBI guidelines. Note that
the RBI guidelines have been regarded by courts as mandatory ~ several
rulings of the Supreme court in this regard were cited in Sardar Associ
ates v. Punjab and Sind Bank™.,
In Shyam lee and Cold Storage (P) Lid. & Ors, v. Syndicate Bank &
Ors.””, it was held that during the pendency of the proposal for OTS, i
is not permissible for the bank to proceed to take steps under the provi-
sions of the SARFAESI Act. If permitted, it would amount to wielding
the sword and the stick at the same time. Mere default in the payment of
some instalments would not mean that the defaulter be dealt a double or
multiple blow. The scheme for OTS is under RBI Guidelines, therefore
having statutory force; so the defaulter has the statutory right for their
application/proposal for OTS filed. It is only after the proposal gets re-
jected (or if accepted, the defaulter does not comply with the terms of
settlement) that the bank can proceed to recover the dues under the
SARFAESI Act.
¢ Questions of the legality/service of notice: Questions are very com-
monly raised on the notice — often claiming that the borrower did not
receive the notice. This is actually a juvenile defense and does not last
long.
¢ Questions on the right of representation: Borrowers commonly con-
tend that the borrower made a representation which was not responded
to by the bank, or that the representation was given, and the bank sim-
eee pene answer to the representation. It is notable that
as right of representation was given in pursuance of the Supreme
Court's directions in Mardia Chemicals, inten this provision
ding to be a
tool of natural justice, the representation cannot be treated as a mere
formality.
* Questions on the right of the bank on transfer of the loan: As trans-
actions in non-performing assets have become quite common among
banks, it might be that the loan might have been transferred by the bank
to another bank or to an asset reconstruction company. The Gujarat
High court passed an order against assignment of loans by banks, which
is pending review in Supreme Court. So, borrowers may sometimes
claim that the legality of the transfer of the loan is not established.
* Questions on the right of the trust acquiring the NPAs: While a trust
under ARCs buying the assets of the bank is treated as secured credit
or,
58. AIR 2010 SC 218.
59. Iii (2012) BC 573 (DB) (Andhra).
 Enforcement of security interests by trusts, etc. Sec. 13(1), Syn. 29 981
the trust is not covered by the guidelines of the RBI as regard
s non-
performing assets. Hence, there are doubts as to whether
a trust can re-
sort to the measures under section 13 at all. See comme
nts under the
heading Enforcement of Security Interests by Trusts of ARCs below.
* Exemptions under section 31: This is another common defense,
and
usually, the contention is that the land mortgaged to the bank is agricul
-
tural land. Evidence of use of the land, either wholly or partly, for agri-
cultural purposes, is produced. We have discussed the meaning of “ag-
ricultural land” in comments under section 31. Essentially, on such
land
which is predominantly factually used for tilling is to be regarded as ag-
ricultural land.
* Question as to whether remedy equitable: Sometimes, questions may
be raised as to whether the remedy being exercised by the bank is equi-
table. This question would particularly be strong in case of enforcement
of security interests against residential properties, where there are busi-
ness assets against which the bank has not exercised security interests.
Questions may be raised as to whether the bank has elected to use the
remedy merely for arm-twisting, or wisely.

29. Enforcement of security interests by trusts of asset reconstruction

companies
If the enforcement of security interest is being done by asset reconstruction
companies, then a very interesting question may arise. ARCs in India commonly
buy the NPLs in the name of trusts, of which ARCs act as trustees. This practice
sprung because RBI Directions and Guidelines on asset reconstruction companies
exempted the assets acquired in the name of the trusts from several requirements
of the SARFAESI Act and the Guidelines. Specifically, paragraphs 4, 5, 6, 9,
10(i), 10Gii) 12, 13, 14 and 15 of the Guidelines and Directions do not apply to
trusts formed by the ARCs.
Needless to say, the trusts are distinct from the ARC. The trust is not an asset
reconstruction company — it is not a company at all. The books of the trust are
different from those of the ARC. The assets of the trusts are not reflected in the
balance sheet of the ARCs — if that were so, the whole purpose of forming the
trusts would go away. ,
So, if the trust is not an ARC, neither a bank, does the trust have the right to
exercise any of the powers granted to an ARC or a secured lender under the
SARFAESI Act? If one looks at the definition of “secured creditor” in section
2(1)(zd), one sees that the trusts are also included in the definition specifically.
However, there are two more significant words in section 13(2): “default” and
“non-performing asset’. In order to invoke section 13(2), there must have been a
default, and the asset in question must have been characterised as a non-
performing asset in the books of the secured creditor. The word “default” is de-
fined in sec. 2(1)(j) and “non-performing asset” is defined in sec. 2(1)(0). Read-
ing both the provisions, it is clear that in order for constituting a default within
the meaning of sec. 13(2), the asset in question must have been classified as non-
982 See. 131), Sya.42 Part li—Chap. 1l-—Enforcement afSeounity Interest

performing asset in the books of the secured creditor seeking recourse to the
rights uader sec. 1 3(2).
In case of assets acquired by the trusts of the ARCs, the asset was orginally an
NPA in the books of the bank. The bank sells the NPA to the ARC, In the books
of the bank, the asset disappears — there in no ques the asset still being an
oftion
NPA in the books of the bank. lt cannot be said that the assel continues to be an
NPA in the books of the buyer as well, since the RBI norms in case of sale of
NPAs to financial system actually provide that where an NPL is sold by a bank,
the buyer may treat it as a performing asset and observe the track record of re
coveries versus expected recoveries, It is based on such wack record that the asset
may once again become an NPA in the books of the buyer, but surely, the NPA
tag does not go with the asset, What is even more important is that the NPA clas-
sification norms are explicitly excluded in case of trusts of ARCs.
So, if the trust is not covered by the NPA norms of the RBI, it is clearly not
possible for the trust to claim that the asset in question is characterised as an
NPA in the books of the trust, or even if actually so characterised, the characteri-
sation cannot be as per the directions of the RBI, which are not applicable to the
trusts.
That leads to the conclusion — the trusts have no power to exercise any of the
rights under sec. 13(2). Also note thai the powers under sec. 9 are not applicable
to trusts at all, as the extended definition of “secured creditor’ including the
trusts is not applicable to sec. 9 — section 9 is limited to asset reconstruction
company only.

30. Enforcement
of Security Interests Rules
_ The Central Government has framed rules relating to enforcement of security
interests. While cross referenc
to the relevant
es rules appear atappropriate places
aT) ENEOR ONE EM CONS ANE GRRE POE: Gee

Section 13(2)
(2) Where any borrower, who is under a liability to a secured credi-
tor under a security agreement, makes any default in repayment of se-
cured debt or any instalment thereof, and his account in respect of such
debt is classified by the secured creditor as non-performing asset, then,
the secured creditor may require the borrower by notice in writing to
discharge in full his liabilities to the secured creditor within sixty
from the date of notice failing which the secured creditor shall be enti-
tled to exercise all or any of the rights under sub-section (4).

@. See our comments

under section 9.
Elements of action under this section
Sec. 13(2), Syn. 1 983

COMMENTS
1. Elements of action under this section
The elements required for exercising the remedies under
this section are laid
down in this section. These are:
(a) The person against whom action is to be taken must be
the “borrower”.
See notes under section 2 for elaborate meaning of borrower.
The word
includes a guarantor and a provider of security interest
by way of a
mortgage.
(b) In respect of a guarantor or security provider having a vicarious liabil-
ity, there is a discrepancy in the language of the section create
d by the
words “his account in respect of such debt is classified..”. Obviou
sly,
the secured creditor maintains the account of the principal debtor
, and
not that of the guarantor. Therefore, the question of the guarantor
being
classified as non-performing asset does not arise. The language of the
section presupposes that the borrower is the principal debtor, and not
the guarantor.
(c) The person intending to enforce security interest must be the “secured
creditor”. See notes under section 2 for meaning of ‘secured creditor’.
The word includes subscriber of a bond or debenture (not any other
holder of debenture or bonds), a debenture trustee and a securitisation/
reconstruction company.
(d) The borrower must be under a liability to the secured creditor. Not only
should there be a liability, the corresponding receivable must have been
accounted for by the secured creditor, because in absence of this, there
would be no question of the account of the borrower being classified as
NPA. See note above for the implication of this wording in relation to
guarantors and third-party-security-providers. Also notes under the
definitions of “default” and “non-performing asset” under section 2.
(e) The liability must be a liability covered by the security agreement, that
is, the one by which the security interest was created, and not extrane-
ous liabilities or general claims against the borrower.
(f) The default covered by this section apparently seems to be in respect of
the entire secured debt, including interest. See notes under section 2 re-
garding the meaning of ‘debt’. However, the word “repayment” would
indicate that it is only a default of what was paid to the borrower that he
has failed to repay. The principal under a loan is repaid, and the interest
thereon in paid, not repaid. The casual use of the word “repayment” in
this section might give rise to problems in cases where the outstanding
amount represents only interest, though in view of appropriation rules,
it is unusual that the principal would have been paid and the interest
would be outstanding.
(g) The account of the borrower in respect of the defaulted debt must be
classified by the secured creditor as NPA. NPA classification norms
Y34 Sec. 132), Sya.2 Part 1/—Chap. 1l-—Lajorcement afSeourity dnieresi

that are relevant here are those pronounced by the RBI and not the per-
sonal norms of the creditor. In Signal Apparels Pvt, Lid, & Anr, v, Ca
nara Bank & Anr.®’, it was held that an asset has to be declared as non
performing for the invocation of Section 13(2) in accordance with the
RBI guidelines. Reasons may or may not be cited for making a declara-
tion for an asset to be a non-performing asset,
There is no bar to issue notice under Section 13(2), even when a case belore
DRT is pending™.
2. Scope
of Notice
The notice to the borrower in respect of the defaulted debt is not merely a show
cause notice. It is a notice of demand for repayment of secured debt which has
become non-performing. In Transcore v. Union of India (supra), the Supreme
Court explained the scope of notice under section 13(2) in the following words:
“ ...The scheme of Sub-sections (2), (3) and (3A) of section 13 of
NPA Act shows that the notice under section 13(2) is not merely a
show-cause notice, it is a notice of demand. That notice of demand is
based on the footing that the debtor is under a liability and that his ac-
count in respect of such liability has become substandard, doubtful or
loss. The identification of debt and the classification of the account as
NPA is done in accordance with the guidelines issued by RBI. Such no-
tice of demand, therefore, constitutes an action taken under the provi-
sions of NPA Act and such notice of demand cannot be compared to a
show cause notice.”
Citing other sub-sections of section 13, the Apex Court reiterated its view that
notice under section 13(2) is not merely a show cause notice but a notice of de-
mand and further added that the notice under section 13(2) in effect operatesas
an attachment/injunction restraining the borrower from disposing of the secured
assets and, therefore such a notice, is not a mere show cause notice but it is an
action taken under the provisions of NPA Act.
In Sheeba Philominal Merlin & Anr. vs. The Repartriates Co-Op Finance &
Development
Bank Ltd °° , the Court stated that issuance and service of notice u/s
13(2)& 13(4) is mandatory. In the absence of such a notice as per Rule 3 of the
Rules of 2002, the entire proceedings initiated by the bank under the Act and
Rul invalid.
arees
3. Classi
as NPAfi
beforeca
the date
ti of on
the Notice
In Prakash Khadelwal v. State Bank of India™, the DRT-Mumibai clarified that
the account of the borrower is required to be classified as NPA before invocation
of section 13(2) of SARFAESI Act and issuance of notice thereunder.

61. 11 (2011)BC 124 (DB).

® Associ v. Canara
ateBank &
sAnr. 1(201 Shar)
63. IT (2011) BC 7 (Mad.) (DB). Epagponinn ‘
64. 11 (200BC 6) 102
 60 days’ Notice in writing
Sec. 13(2), Syn. 5 985
As per the case of Chembeti Brahmaiah Chowdary v.
State Bank of Hyderabad
& Anr.”, proceedings validly initiated in accordance
with the Act after an ac-
count has been legitimately classified as an NPA canno
t be interdicted by the
contrivance of the borrower making payments for bring
ing the account out of the
NPA classification as this would amount to frustration of the
purposes of the Act.
4. Relevance of recall notice
In common banking transaction, the loan may be due for repay
ment in several
instalments. When there are persistent defaults, banks accele
rate all future pay-
ments and demand the entire amount due at once. This, in
banking parlance, is
commonly called “recall notice” or notice of acceleration. In
the notice under
section 13(2), banks would demand payment of the entire loan along
with over-
due interest, and not merely such instalments as have fallen due. Hence,
it is ap-
propriate that either a recall notice is issued prior to the issue of notice
under this
sub-section, or the working of the notice under this sub-section
is such that it
amounts to a recall notice as well.

5. 60 days’ Notice in writing

The law requires the secured creditor to serve a notice demanding the borrower
to discharge his liabilities within a period of 60 days. The word used in the sub-
section is “may”, but the permissive word “may” only indicates that if the se-
cured lender chooses to enforce the remedies of this law, the secured lender must
serve a notice as required by this section. In other words, the word “may” refers
to the choice of remedy offered by this law, and not the service of notice itself.
The service of notice is mandatory, and in Mahavir Plantations Ltd. y. ICICI
Bank Ltd.°°, the DRAT at Chennai opined that the use of the word “may” might
be a draftsman’s oversight. In the same case, the DRAT held that sub-sections
(2), (3) and (3A) of this section are necessary to the scheme of the self-
enforcement provisions of this Act, and they should be complied with in letter
and spirit.
The procedure regarding the service of notice is contained in the Security In-
terests (Enforcement) Rules.°’ Rule 3 provides that the notice may be served by
delivering or transmitting at the place where the borrower or his agent, empow-
ered to accept the notice or documents on behalf of the borrower, actually and
voluntarily resides or carries on business or personally works for gain, by regis-
tered post with acknowledgement due, addressed to the borrower or his agent
empowered to accept the service or by Speed Post or by courier or by any other
means of transmission of documents like fax message or electronic mail service.
In Noorbari Tea Co. (P) Ltd v. UCO Bank®, the petitioners contended that they
did not receive notice and the bank stated that they have sent notices to the bor-
rower and their representative by registered post, the Gauhati High Court held

65. IV (2010) BC 218 (AP) (DB).

66. IV (2005) BC 154 (DRAT—DRT).
67. See in Part III of this book.
68. I (2008) BC 668.
986 Sec. 13(2), Syn. 6 = Part 1/—Chap. I1l—Enforcement ofSecurity Inieresi
to
that the bank could not have done anything more than that to send the notice
the borrowers and their representatives by registered post.
in Narender Singh v. Punjab & Sind Bank®’, in spite of having acquired the
knowledge of the death of the guarantor, the notice under section 13(2) was is-
sued to the dead person. The Appellate Tribunal held issuance of notice to a dead
person as nullity and any subsequent action under section | 3(4) including auction
of the property to be a nullity unrecognisable at law,
in Tripta Bhambi vs. State Bank of Hyderabad”, the learned Chainperson of
DRAT said that when a notice u/s 13(2) of the SARFAESI Act is issued and the
borrower is denying of receiving it, the postman can be cross — examined before
the Court. Consequently a notice was issued to the concerned postman for his
cross examination.
The notice is to be served on the “borrower”, and not to any particular officer
of the borrower. However, for the purpose of addressing, as the Rules provide,
the notice may be addressed to an officer or agent who is normally entitled to
accept such notices. In view of the significance of the notice, it will make good
sense to have the notice served on the Board of Directors, with a copy to the op-
erating head of the Branch, unit or factory where action for repossession is 10
actually take place. The rules provide that “where the borrower is a body corpo-
rate, the demand notice shall be served on the registered office or any of the
branches of such body corporate”. Serving the notice on a branch but not serving
it on the registered office is not desirable. The address for notices, if spelt
out in
the security agreement, failing which the registered office, is advisable.
See also comments under the Rules in Part III of this book.

6. No bar on issue of notice more than once

There is absolutely no bar for the secured creditor in issuing any fresh notice
under section 13(2). TheSARFAESI Act does never stipula anywhere that
te once
a noticeis issuedunder section 13(2), it is inevitably to be followed by the meas-
ures contemplated under section 13(4). In other words, rights and liberties of the
secured creditors who had chosen
to issue notice under section 13(2), are not
barred from considering the matter afresh on the basis of the objections to be
submitted by the borrower in response to the notice as provided under Sub-
section (3A) to section 13 and to proceed with further steps as found to be fit and
proper after effecting the corrections/modifi cations,
if so necessitated, based on
the objections; which otherwise will make the chance to file objections, an empty
formality, which cannot be the position anymore after the decision in Mardia
Chemicals case and after incorporation ofsection 3A. There isnospecific bar
under the Statute to issue a corrected/fresh notice under section 13(2).

69. TV (20BC
00984 (DRAT).
)
70. 111 (2011)
BC 111 (DRAT-Defhi).
71. v. LIC Housing Finance Limited, TV (20BC
09)
564 (Ker).
 Will Second notice mean fresh 60 days’ period?
Sec. 13(2), Syn. 7 987
Similar views were also expressed in Pradeep D. Kothari v.
UTI Bank’. The
DRAT-Chennai observed that issuance of notice for the secon
d time does not
mean that the bank has given up the original cause of action.
In Hotel Payal & Anr. vs. Central Bank of India & Anr ”, the
Court said that
the purpose of the notice u/s 13(2) is to give the borrower a chance
to pay off his
debt and thus to avoid steps u/s 13(4) of the SARFAESI Act. There
is no statu-
tory prohibition against issuing more than one notice u/s 13(2). The
borrower’s
failure entitles the creditor to enforce all or any its rights. The secure
d creditor’s
decision not to exercise its rights cannot prejudice the borrower. The
court said
that there is nothing wrong if the creditor decides to waive off its rights
u/s 13(4)
and issues a fresh notice u/s 13(2). However, a fresh notice can never be
for the
same liability of the borrower; it is bound to change with each passing day.
However, in Allena (I) Agencies vy. North Kanara GSB Co-op Bank Ltd.”,
the
petitioner issued two notices under section 13(2) on 12-6-2003 and 14-10-2
004.
In the first notice the date of classification of account as NPA was mentioned
as
1-4-1999 whereas in the second notice the NPA date was mentioned as 31-3-
2000. The Presiding Officer held that the Second notice was not a mere reitera-
tion of the first notice and as the very foundation (NPA classification) is differ-
ent, the bank by the subsequent notice has abandoned and gave up rights under
the first notice.

7. Will Second notice mean fresh 60 days’ period?

In Pradeep D Kothari v. UTI Bank (supra), the DRAT-Chennai was of the
view that if no action is taken after the expiry of 60 days from the date of issu-
ance of the notice under section 13(2) and the measures to be taken under section
13(4) are postponed, it will no way affect the rights of the borrower. Likewise, if
a notice under section 13(2) is issued once again or for the second time, it would
enure to the benefit of the borrower to get one more 60 days’ time, to pay the
amount.
However, in Pooran lal Arya v. State of Uttaranchal’, when a second notice,
though not required under this act, issued to the borrower provided for fifteen
days’ time to clear the dues, the Uttaranchal High Court held that there was sub-
stantial compliance and considering the fact that the first notice was in strict
compliance of the provisions of section 13(2) the Petitioners actually got more
time than required to be given under section 13(2) and no injustice was done to
them.
The time limit after notice should, however, be reviewed in the setting of the
facts matrix of the case. For instance, a bank serves notice on Ist date, and then
the borrower engages the bank in dialogue about restructuring/settlement. There
is interest shown by the,bank in the proposal. Ultimately, however, the discussion
reaches a deadlock, and the bank once again issues a notice under sub-section
(2). At this stage, the borrower should surely be given a time of 60 days.

72. IV (2007) BC 53 (DRAT—Chennai).

73. Ul (2011) BC 363 (Cal).
74. 11 (2006) BC 100 (DRT—Mumbai).
75. Ill (20007) BC 285 (DB).
YRS See. 13(2), Syn. 8 =Part 1/—Chap. 11]—Enforcement of Seourity Interest

Yet another point to be noted is that if significant latitude is shown by the bank,
a notice may become redundant on account of latches. For example, a bank is-
sues 4 notice 2 years back, and does nothing in pursuance of the notice, Now, if
the bank suddenly wakes up and wants to take action under the Act, the notice
issued long time ago may be taken to have become extinct due to latches. See
discussion under sub-section (4) under the heading ‘Time Limit for Taking
Measures.’

8. Is notice required to be issued by the assignee of debt

In terms of section 5(4) of the Act any suit, appeal or other proceeding relating
to a financial asset is pending by or against the bank or financial institution, the
same shall not abate or be discontinued or be prejudicially affected by reason of
the acquisition of financial assets and the said suit, appeal or other proceeding
may be continued, protected or enforced by or against the securitisation company
or reconstruction company, as the case may be.
In Sashi Agro Food (P.) Ltd vy, Andhra Bank", a notice under section 13(2) was
issued by bank. After the issue of notice, the debt was assigned by the bank in
favour of Asset Reconstruction Company (1) Limited. Subsequent thereto discus-
sions were held between the petitioner and POA holder of ARCIL. Thereafter,
ARCIL proceeded with taking possession of secured assets under section 13(4)
with the assistance of CMM in terms of section 14 of the Act. An issue was
raised before the AP High Court that no notice under section 13(2) was issued by
the assignee, which is sine qua non before invoking section 14 of the Act. As
such the proceedings by the Assignee under section 13(4) are bad in law. The
High Court held that in light of the language of section 5(4) of the Act, the notice
issued by bank under section 13(2) would fall under “proceedings” in normal
circumstances and the assignee is entitled to continue such proceedings further to
its logical end. The assignee steps into the shoes of the bank and is entitled in law
to continue the recovery proceedings.

9. Notice to the guarantor

Note that in the scheme of the Act, the word “borrower” includes the guarantor
and security provider as well, and hence, a notice under this sub-section needs to
be served on the guarantor as well, particularly where the bank intends to enforce
the claim against the guarantor’s property. In Mahavir Plantations Ltd. v. ICICI
Bank Ltd. , the DRAT at Chennai held that the notice to the guarantor is manda-
tory, so as to allow the guarantor to either persuade the borrower to pay, or to

not about enforcement of guarantees, but about enforcement of

security interests:
hence, if there is a personal guarantee by a guarantor and
there is no creation of

76. TV (2008)
BC 294 .
77. TV (2005)BC 154 (DRAT—DRT)
78. 112008)BC 63(RAT_Momn
 Technical defects in the notice
Sec. 13(2), Syn. 10 989
security interests, there is nothing for the bank to do against the guarantor.
Hence, the bank may avoid notice to the guarantor, but as a matter of good prac-
tice, it is always recommendable to keep the guarantor into the loop for any legal
action the bank prosecutes either against the borrower or against the secured as-
sets.
The Supreme Court in United Bank of India v. Satya
wati Tandon & Ors.” held
that, initiating an action against the borrower before the
guarantor or the surety is
not a requirement for issuing notices for the recovery of
debt under section 13(2)
and 13 (4) of the SARFAESI Act.
Coming to the cases where the principal borrower and the
creditor enter into a
compromise arrangement, excluding the guarantor who exten
ded his guarantee
for the original transaction, the question arises whether the credit
or can initiate
proceedings against the said guarantor under Section 13(2) of the
Act. Answer is:
liability of the guarantor, in view of the compromise between
principal borrower
and creditor bank entered into in exclusion of the guarantor, comes
to an end, and
the guarantor is so absolved of his liability. Therefore, it is not open
for the bank
to initiate proceedings against the guarantor either by filing execution
petition or
by initiating proceedings under Section 13 of the Act. Hence, the notice
issued
under Section 13(2) to the guarantor is required to be quashed. [See
N.B. Gu-
rudeva v. State Bank of Mysore & Ors.*"]

10. Technical defects in the notice

Since the notice is essential in the initiation of process under the Act, technical
defects in the notice may vitiate the action taken. There have been several cases
where the proceedings were invalidated due to defects in the notice. See some of
the points below. Also see comments under the Security Interest Enforcement
Rules in Part IIL.
In Kaypan Vanijya P. Ltd. v. Uco Bank*', a notice was struck down as it was
served without waiting for the period of 90 days for a debt to become non-
performing. The date on which the debt became an NPA was not mentioned. A
contradictory view was taken in Aditya Dudani v. Canara Bank®, where the
Court opined that merely because the date of NPA Account is not given, the no-
tice under Section 13(2) cannot be quashed and set aside. Similarly, the notice
under Section 13(2) cannot be termed as bad in law for want of facility-wise de-
tails of the account, as was held in Kotak Mahindra Bank Ltd. v. Marvel Indus-
tries Ltd. & Anr.*°. This author has opined above that the purpose of the notice is
to give an intelligible break-up of the amount demanded by the lender, so that the
borrower may understand the bank’s claim. If the notice is opaque, the purpose
of the notice is frustrated. Of course, the borrower may, pursuant to the notice,
always call upon the bank to provide such details as may be necessary. However,
if the bank neither gives the desired particulars in the notice, nor furnishes the

79. III (2010) BC 495 (SC).

80. Ll (2012) BC 60 (Kar).
81. II (2006) BC 96 (DRAT—DRT).
82. 1 (2011) BC 638 (Shar).
83. 1(2011) BC 98 (DRAT-Mum.).
QW) Sec. 13(2), Sym. 11) Part //—Chap. /1/—Enfercement ofSeouruy inierest

same on requisition, the proceeding based on such notice may be held as arbitrary
and therefore, illegal. It must be noted that the proceedings under this Act are
intended to be completely non-judicial — therefore, there is no benefit of judicial
oversight at any stage. Hence, the action of the lender must be transparent, and
must show fair play and eye for justice at all stages. The provisions of this law
must not be used to demonstrate the might of the bank, or highhandedness, or
vengeance. Also see notes under sub-section (3),
In Ashok Brothers v. Bank of India™, the notice was quashed as the amount
mentioned in the notice and the statement of account was materially different, In
the said case, it was also held that non-mentioning of account number and the
wrong date of NPA are not crucial facts to invalidate the notice,
Similarly, in Santosh Traders vy. Bhusaval People's Co-operative Bank L1d.”,
where the notice did not clarify that the facilities granted/sanctioned were by way
of renewal and not fresh facilities, it was held that there is no requirement of be-
ing so precise and particular in the notice. The whole idea of notice is to call
upon the party to make payment and appraise him with the fact that on default
further action under the Act may be taken.
In Veerbhadra Shetkari Sahakari Dal Prakriya Sansthan Maryadit v. Nanded
District Central Cooperative Bank Lid“ in the notice under section 13(2) the de-
scription of the secured assets was not mentioned. The notice merely referred to
Schedules to the mortgage deed, but the copy of mortgage deed was not annexed
to notice. As such, the DRT held that the omission is vital and goes to the root of
the action under the Act. It was held that the notice did not comply with the man-
datory provisions of section 13(3) of the Act.
In Yarnala Leela Krishna Prasad v. Central Bank of India*’, the notice issued
on 23-7-2005 under section 13(2) was issued in old format and as such inadver-
tently the word “Ordinance” was printed in place of “Act”. It was contended that
the secured creditor is purporting to take action under a repealed ordinance with-
out any authority. The High Court stated that the error was only accidental and
not intentional and granted the bank liberty to further proceed with the matter in
accordance with law.

11. Maintain
of writ abil
petitions against
ity notice
There are several
rulings about maintainability of writs
wri against
; the notice. See
Pecepee hatter eg , ity of

Section 13(3)
(3) The notice referred to in sub-section (2) shall give details of the
amount payable bytheCorremerand thesocated ditem tedendatin te

84. TI (2006) BC 137 (DRT—DRAT).

85. Il (2006) BC 176 (DRAT—DRT).
86. ITI (2006) BC 205 (DRAT/DRT).
87. TIT (2008) BC 325.
 Contents of the notice
Sec. 13(3), Syn. 1 991
enforced by the secured creditor in the event of
non-payment of secured
debts by the borrower.
COMMENTS
1. Contents of the notice
The law mandatorily requires the notice to give details
of the amount payable
by the borrower as well as the assets in respect of which the
security interests are
intended to be enforced.
Questions are bound to arise as regards the level of details
of the amounts due
and the secured assets required to be specified in the notice. Thoug
h the answer
to this question is bound to be case-specific, the intent of the law
Clearly is to al-
low the borrower to understand the nature of his liability, and
the consequences
he is likely to suffer if he does not act on the notice. Therefore,
the details must
explicitly itemise the liability, and unless the previous correspond
ence between
the borrower and the secured lender has given a break up of such liabili
ty, give
such break up as may allow the borrower to reconcile the liability with
his own
records. Quite often, secured lenders disguise a huge amount of claim under
a
vague heading such as “other sums”. Though the notice under this section is
not a
verdict on the finally reconciled claims, and it is quite possible that the secure
d
lender and the borrower have differences on the amount claimed in the notice
, it
is important to understand that the notice should not be reduced to a plain legal
formality preparatory to the final act of seizure. The notice is a demand for pay-
ment, and, therefore, should be clear as to what is being demanded, and why.
However, it is not necessary to give the full details of the non-performing asset
such as loan account number, date of classification, etc in the notice. It is suffi-
cient to mention that the account has become non-performing asset along with
the quantum of loan i.e. liability recalled. *
In Mahavir Plantations Ltd. v. ICICI Bank Ltd.®, the DRAT at Chennai held
that the notice should give such details as the borrower has fair knowledge about
what is due by him. In Cyril Kotian v. The Bharat Co-operative Bank (Mumbai)
Ltd. so! the DRT Mumbai struck down a possession where the notice under section
13(2) had substantially increased the amount demanded earlier (from roughly Rs.
10 lacs to Rs. 62 lacs). In this case, the Tribunal also demanded the bank to pay
compensation of Rs. 500/- per day from the date of taking possession to the date
of returning possession. It is not clear whether the possession was only symbolic
or actual.
Should the notice state that it is a notice under section 13(2) of the Act? As an
important consequence of the notice is the freeze on transfer of assets, it is logi-
cal that the borrower must be made aware that the notice is a notice under this
law. A mere demand fot payment, demanding payment within 60 days, may not
strictly comply with this law, and in any case, will not achieve the effect of sec-
tion 13(3).

88. MM Carpet Industries v Punjab Nationa Bank, I (2007) BC 44 (DRAT-AIl).

89. IV (2005) BC 154 (DRAT—DRT).
90. IV (2004) BC 175 (DRAT/DRT).
 992 Sec. 13(3), Syn. 2 Part []—Chap. I11—Enforcement of Security Interest

2. Evidenci ngdue
the amount
Generally speaking, the bankers’ own books shall provide evidence of the sum
demanded. Uniess rebutted, the bankers’ books are good as evidence of the sums
shown there. The Banker's Books Evidence Act, 1891 provides that “a certified
copy of any entry in a banker's books shall in all legal proceedings bereceived as
prima facie evidence of the existence of such entry, and shall be admitted as @VI-
dence of the matters, transactions and accounts therein recorded in every case
where, and to the same extent as, the original entry itself is now by law admissi-
ble, but not further or otherwise.” [Section 4]
The term “banker's books” is defined to mean “ledgers, day-books, cash-
books, account-books and all other records used in the ordinary business of a
bank”. [Section 2(3)]
Notices demanding money under the Act include the claims of the bank, in-
cluding extras like service charges, overdue interest or other sums. The term
“banker's books” seems to be referring to financial books, not memorandum
books. As the purpose of the bankers’ books is to serve as evidence not merely of
the claims of the bank, but also of the claims of the customers of the bank, the
evidentiary value should be restricted only to books that are contained in respect
of customers’ transactions. For instance, if the bank has a claim against a cus-
tomer, for example, service charges or penal interest, which was never debited to
the customers’ accounts, the admissibility of such claim would be doubtful.
The law does not specify whether the notice of the bank demanding payment
should be backed by evidence. However, in the representations of the customer,
there might be a genuine contest about the claim of the bank, and the customer
may insist on evidence backed by a certified copy of the banker’s books. The
manner of certification is laid down in the Banker’s Books Evidence Act.
Can the amount demanded by the bank include items that are not supported by
the books of the bank? For instance, sometimes, banks charge amounts such as
compensation, penalty, penal interest, etc, which are not borne out by the books
of the bank. As the borrower may seek evidence as to whatever the bank is de-
manding, it is incumbent upon the bank to provide evidence, and what better evi-
dence than the books of the bank, to support the claim of the bank.

3. Amount determined under a decree/order of DRT—applicability

ofSARF AE
Act for SI
recovery:
If the sum of money due by the borrower to the bank is deter
mined in a decree/
order of the Court, whether the bank will be able toproce
ed under the takeover
Procedure prescribed in the SARFAESI Act for any
amount, or for the amount
determined under theorder/decree of DRT isa question to
on the ruling of the Apex Court in Transcore’s case (supr beclarified. Relying
of theAllahabad High Court’' through Justice Amitava Lalaa), the Division Bench
under the Securitisation Act is anadditional remed held that the process
y and a non-adjudicatory pro-
cess. Determination ofa claim under a non-adjudicatory process cannot
override
91. Ace Media Advertisers Pvt. Ltd. v. Bank of Baroda, TV
(2009) BC 356 (DB).
 Mandatory nature of the provision
Sec. 13(3A), Syn. 2 993
the determined amount of adjudicatory proc
ess i.e. decree/order of DRT. A de-
cree/order of a judicial adjudicatory process
will always have a prevailing effect
over and above that of the non-adjudicatory proc
ess. Further, both under the DRT
Act as well as the Securitisation Act the foru
m of adjudication is the same either
for the original proceedings or for appeals. Ther
efore, the recovery will be avail-
able under the Securitisation Act only with rega
rd to the determined amount by
the DRT subject to decision, if any, by the higher
courts.
4. Mode of service of the notice
See Rule 3 of the Security Interest (Enforcement) Rules
and notes thereunder.

Section 13(3A)
213A ) If, on receipt of the notice under sub-section (2),
the borrower
makes any representation or raises any objection, the secur
ed creditor
shall consider such representation or objection and if
the secured
credi
;
tor come s to the concl usion that such repre senta tion or objection
is not acceptable or tenable, he shall communicate : ODA:
[within fifteen
days] of receipt of such representation or objection the reaso
ns for
non-acceptance of the representation or objection to the borrower:
Provided that the reasons so communicated or the likely action of the
secured creditor at the stage of communication of reasons shall not
confer any right upon the borrower to prefer an application to the
Debts Recovery Tribunal under section 17 or the Court of District
Judge under section I7A.]

COMMENTS
1. Power to make representation
The power of making representation and the requirement that the bank should
give a reasoned decision thereon is more or less a perfunctory requirement. The
notice given under section 13(2) is itself to be served by an authorised officer
who is of a certain level of seniority [see definition of “authorised officer” in Se-
curity Interest Enforcement Rules and comments thereunder]. A representation
would have been fruitful if it was considered and commented upon at a very sen-
ior level, say the general manager of the bank. In reality, the representation is
merely a rebuttal of the points made by the borrower.

2. Mandatory nature of the provision

As the provision in this sub-section was inserted at the instance of the Supreme
Court’s ruling in Mardia Chemicals case, it has been held several times that the

92. Ins. by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 (30 of
, 8. 8, (w.e.f. 11-11-2004).
93, Sube.i aa ercea BE Seeaitity Interest and Recovery of Debts Laws (Amendment) Act, 2012
(1 of 2013), s. 5(a), for the words “within one week” (w.e.f. 15-1-2013).
 D4 Sec. 1§&3A), Syn. 2 Part l/—Chap. Ill-—Enforcement afSecurity tnteresi

requirements of this provision are mandatory, and their non-compliance will ren-
der the next steps unfructuous.' Section 13(3A) of the SARFAESI Act is manda-
tory and omission to consider representation is fatal.’
M.R. Gawai Enterprises v. Vidarbha Urban Co-operative Bank Lad.’, the
Mumbai High Court held that it was mandatory for the bank to consider the nep-
resentation of the borrower with due application of mind, and get back to the bor-
rower with a reasoned answer. In Jagrit Foods Private Lid. v, United Bank of
India’, the Gauhati High Court held that the secured creditor has to fulfill all the
requirements contemplated in section 13(3A) of the Act, 2002 and rule 3A of the
Security Interest (Enforcement) Rules, 2002 before taking up one of the steps
contemplated in section 13(4) of the Act. In Tensile Steel Lid. v, Punjab & Sind
Bank’, the Gujarat High Court held that section 13(3A) enjoins the bank to con-
sider and decide such reply/objection and to communicate the decision thereof.
Unless and until the exercise is completed, the bank is not authorised to proceed
further and take any of the measures under section 13(4). In another well-worded
judgment in the case of Krishna Chandra Sahoo v, Bank of India’, the division
Bench of the Orissa High Court held that a conjoint reading of section 13(3A)
and rule 3A makes it clear that it is obligatory on the part of the authority first to
consider and dispose of the objection by a speaking and reasoned order and then
communicate the order to the borrower. It is a condition precedent for issuance of
notice under section 13(4) of the Act. The authority cannot ignore the statutory
provisions treating them merely to be decoration pieces in the statutes rather
they
require strict adherence for the simple reason that the financial institutions
have
been conferred with certain privileges for making expeditious recovery
borrowers by-passing onerous and lengthy procedure of civil suits. from the
In Malhotra
Tractors v. State Bank of India’, the Allahabad High Court echoed
the respondents (Bank) have no right to proceed with the recovery the view that
unless they decide the objection or representation of the proceedings
borrower or guarantor.
In M/s Tetulia Coke plant v. Bank ofIndia *,the Jharkhand High Court
thepossession notice referring toits judgment made quashed
in M/s Jayant Agencies v.
Canara Bank & Ors.” that the provision under section 13(3
-A) of theSARFAES]

Ashok Brothersv.Bank of,India. Tl (2006) BC 137 (DRAT—DRT).

(2005) 57SCL. 290(Bon)
5

&PRA
 Time limit of one week — directory provision.
Sec. 13(3A), Syn. 3 995
its roots in the fundamental principle of fair play and natura
l justice. Reference
was also made to the case of QO’ Reilly Vs. Mackman
and Others''. In that case
Lord Diplock, speaking in the House of Lords, said that a
person whose right is
to be adversely affected by any order has to be given a fair
opportunity of hear-
ing. The right is so fundamental to any civilized legal syste
m that it is to be pre-
sumed that the Parliament intended that a failure to observe it
should render null
and void any decision reached in breach of the requirement.
In a situation where the borrower asserts that he has sent the repres
entation and
the bank says that it has not received the same, the High Court consid
ering the
object of the provisions and in the interest of justice allowed the borrow
er an op-
portunity of representation/objection.'* In a case where pOssession notice
was
given earlier to the communication of the reasons for non-acceptance of the
ob-
jections raised by the borrower, the Madras High Court in Industrial Develo
p-
ment Bank of India v. Kamaldeep Synthetics Limited", stating that the basic
ob-
ject of sub-section (3A) of section 13 of the SARFAESI Act is to ensure the ele-
ment of transparency and fair play in the implementation of the provisions of
SARFAESI Act, considered it as mere irregularity and held that the bank has
substantially complied with the provisions of section 13(3A). In Prakash Khan-
delwal v. State Bank of India’, when the borrower sought for information about
the basis on which the account was classified as NPA in reply to notice under
section 13(2), it was held that the borrower did not submit any representation or
objection to the notice, and, therefore the bank’s omission to given any reply to
the clarification sought will not vitiate the proceedings under the SARFAESI
Act.

3. Time limit of one week (now fifteen days) - directory provision

Time limit of one week (now 15 days) is provided in the section for communi-
cation to the borrower the reasons for non-acceptance of his representa-
tion/objection. Any failure to communicate reasons for rejection of the represen-
tation/objections within one week’s time would not cause any prejudice or loss to
the borrower. However, there should not be any undue delay in the proceedings
once action has been initiated by issuing notice under section 13(2), In Kirandevi
Bansal y. D.G.M. Small Industries Development Bank of India’, the Gujarat
High Court held that the legislation has fixed the time limit of one week in sub-
section (3A) of the Act to see that the proceedings initiated under section 13 of
the Act be expedited. Every prescription of a period within which an act must be
done is not the prescription of a period of limitation, with painful consequence, if
the act is not done within that period. The time-limit of one week prescribed un-
der section 13(3A) is only a directory provision and the non-compliance of the
time limit will not vitiate the proceedings initiated under section 13(4) of the Act,
provided the reason for rejection of the objection is communicated to the bor-
rower, before taking action under section 13(4) of the Act.

11. (1983) 2 AC 237.

12. D.N. Motors v. State Bank of India, 1 (2009) BC 331.
13. (2007) 2 CTC 397.
14. II (2006) BC 102 (DRAT—DRT).
15. IV (2009) BC 56 (DB).
YO See. 133A), Syn. 4 Part li—Chap. 1ll-—Enforcement af Seourity Inieresi

Views taken in Kurandevi Bansal case (supra) were reiterated in Clarity Gold
Pvt. Lid. & Ang. v. State Bank of India & Ors."*.

4. Post-Amendment Act of 2012; Time limit extended to 15 days

The Amendment Act of 2012 has extended the time limit from 1 week to 15
days, thereby providing more time to the secured creditor to communicate the
reasons. Indeed the earlier time limit of 7 days was proving to be too impractical
for the bank to frame a sensible, reasoned response.

5. Only one representation or more than one representation?

See author's comments below under heading Certain Significant Points about
the Representation.

6. The representation process is not a quasi-judicial proceeding

The process of representation by the borrower and response by the secured
lender is not to afford the opportunity of audi alteram partem (both parties to a
dispute must be heard). The rule of audi alteram partem is applicable in judicial
and quasi-judicial proceedings. The proceeding under the present section is not
administrative. It is a simple enforcement of contractual rights by the lender,
without involving any adjudication or administration of justice. The proceeding
under this section, including the process of representation, is completely contrac-
tual, until the stage of first complaint to the Debts Recovery Tribunal is reached.
In Siddh Industries Limited v. Union Bank of India'’, the Madhya Pradesh High
Court held that the rule of audi alteram partem is not applicable to the section.
While this ruling was rendered before the Mardia Chemicals case, the High
Court has, in the opinion of the author, correctly analysed the provisions of the
section.

7. Reply to represen
cannottati
be perfunctor
ony:
While it is not necessary that the secured creditor has to make a detailed reply
to the representations made by the borrower, nonetheless it is imperative for him
to give a reply after due application of mind and consideration of the representa-
tions made by the borrower. The Supreme Court in Mardia Chemicals’ case
stated that after service of notice under section 13(2) if the borrower raised any

to the borrower. It is notable that the provision of sub-section (3A) was

insefted
for providing a forum for seeking natural justice — hence, itis not a mere formal
-
ity and the bank, must be meaning to provide justice, where due.
In R. Shanmugam v. Union Bank of India", the Madras High Court reiterating
the views ofthe Apex Court in Mardia Chemicals’ case concluded that reply to

16. [fl (2012) BC 416 (DB-Bom).

17. 1 (2004) BC 402.
18. TV (2008) BC 104.
 Certain significant points about the represen
tation Sec. 13(3A), Syn. 8 997
the notice must be considered with due appl
ication of mind and the reasons for
not accepting the objections howsoever brief
that may be must be communicated
to the borrower. The High Court further obse
rved that a person in respect of
whom steps under section 13(4) of the Act
are likely to be taken cannot be denied
the right to knowthe reason for non-acceptance of his objection.
ing of the Orissa High Court in Krishna Chandra See also the rul-
Sahoo y. Bank of India'®, dis-
cussed above.

8. Certain significant points about the representation

e Does the notice under section 13(2) have to state
that the borrower may
make a representation? While it is not necessary for
the notice to state
So (as the contents of the notice under sub-section
(3) do not require the
same), it would be a good practice for the notice to make
the borrower
aware of his rights. The noble intent in the Supreme
Court’s insistence
on the right of representation was that the entire process
of enforcement
of security interest is not unilaterally conducted at a parti
cular level in
the bank’s hierarchy. The process of enforcement, including
the deci-
sion to evoke the section, should be given a considerate thought.
Hence,
a responsible bank should encourage the borrower to exercise the powe
r
of making a representation.
¢ There is no time limit specified by the law for the borrower to
make a
representation. This means, strictly, that the borrower may make a rep-
resentation at any time before the bank proceeds under section 13(4).
However, in Prabir Chakraborty y. State of West Bengal & Ors.*°, the
Calcutta High Court opined that since the borrower was required to pay
the demanded amount within 60 days from the date of section 13(2) no-
tice, then the representation under section 13(3A) was required to be
made within 60 days from the date of section 13(2) notice. Even if the
secured creditor waives its right under section 13(4) or keeps silence, it
would not keep the borrower’s right to-submit a representation under
section 13(3A) alive until a measure is taken under section 13(4). So, as
per the Court’s interpretation, the time limit is 60 days from the date of
notice under section 13(2), after which the right to representation
lapses, whether or not the secured creditor decides to take steps under
section 13(4),
In the author’s view, it is not correct to interpret that a time limit of 60
days is fixed by the law for making of payment, and, therefore, the rep-
resentation may be made only within that time limit — there is no time
limit for representation and may be made any time before the bank pro-
ceeds to take any of the steps under section 13(4). At the same time,
there is no time limit for the bank to take its action under section 13(4)
after having served the notice under section 13(2). The bank does not
have to proceed with the measures under section 13(4) on the 61” day

19. II (2009) BC 635 (DB).

20. 1 (2012) BC 45 (Cal).
 t
99s See. 13(3A), Syn. 8 Part 1—Chap. li-—Enforcement of Security Interes

of the notice. It is illogical for a bank to contend that if the borrower did
not make the representation within 60 days, he has lost his night to do
so: of course, the action taken by the bank after expiry of 60 days of no
tice cannot be held illegal if the borrower did not make a representation
in the meantume..
e What does the representation contain? The law enables the borrower to
make a representation or make an objection. An objection is by way of
a contest—contesting the rights of the bank to take action, Objections
may most commonly go into the amount demanded by the bank. Some-
times, objections may be more fundamental—whether the bank in ques-
tion is a “secured lender” within the meaning of this law at all’ Repre-
sentation, on the other hand, is more in the nature of a plea—pleading
with the bank not to go ahead with the proposed action, Commonly,
borrower's responses include mix of both. Individuals mostly come
back with reasons as to why they failed to clear the loan—a sickness in
the family, business not doing well, etc. Corporate or business borrow-
ers mostly come back with reasons as to why the business of the entity
did not do well, and mostly would also hold the bank responsible for
the same. Many would contend that the bank did not lend when it was
supposed to, or that the bank charged exorbitant rates of interest that
made the business unviable, etc. In either case, the bank must come
back with a passionate, detailed answer to each of the objections or
pleading put by the borrower. In practice, we have observed, most
bankers give flat, unreasoned, mechanical denials of the borrower's
contention. Such responses fail to answer the call of natural justice for
which the Supreme Court directed the insertion of this process in the
law. In the author’s view, a DRT/court should not hesitate to strike
down an action taken by a bank ignoring representations made by the
borrgoing ower to the very root of the claim by the bank.
e Who answers the representation? While the law has not made any ex-
press provisions, it is logical that the representation is answered by
someone senior to the authorised officer who served the notice in the
first place. There is very little justice done by the same officer, who
served the notice in the first place, reviewing the objections of the bor-
rower. It may be a good practice for banks to have a committee of sen-
lor officers and the objections may be reviewed by a committee instead
of by just one officer. While there is no guidance at all on the manner of
phi So er aa eoticiehen area in time to come, it is almost
certain that either due to insistence of judiciary or codes from the regu-
lators, banks will have to constitute a proper level of authority for re-
sponding to these notices.

denial of whatever the borrower has represented or obj to.

response should be a speaking, reasoned response. If there is a reference
 Application by the borrower for preventive, etc.
Sec. 13(3A), Syn. 9 999
to any facts, the same should be backed by evidence.
For instance, if the
borrower has disputed the amount demanded by
the bank, the bank’s
reply should adduce evidence to back up the claim
of the bank.
e Can the borrower make another representation?
The process of repre-
sentation is only to allow a fair Opportunity to the borro
wer to make his
case. If there is something significant that the borro
wer has to say,
which he could not put in his earlier objection/representa
tion, or there is
a follow up/counter-representation to the reply made by
the bank, the
borrower may make a representation any time before the
actual action
under section 13(4). It would be wrong for a bank to turn
down a sec-
ond representation merely on the ground that the borro
wer, having
made his representation, has exhausted his right to do so. The
borrower
may make a follow up representation — if the response to the
first one
left certain questions unanswered. In the opinion of the author,
there is
nothing like “exhaustion” of the right to make representation.
Represen-
tation, as a right, always exists in all proceedings. Section 13 is
a con-
tractual proceedings — there can never be a situation where a contractin
g
party may take a view that the counterparty has lost its right of commu-
nication, unless, of course, such communication is merely a dilatory
tactic.
¢ Is the failure to respond to the representation a justiciable ground? The
proviso to section 13(3A) provides that the reasons for rebutting the ob-
jections of the borrower, or the apprehended action, cannot be a ground
for taking a case to the DRT. However, the question remains whether
the failure of the bank to make a rebuttal is an appealable ground?
While section 17 allows only a first complaint against action taken un-
der section 13(4), the failure to respond to the representation of the bor-
rower may also be a ground to take a matter to justice. We have com-
mented earlier (as also, see notes under section 3(4)) that it a bad law
which does not allow the borrower any right of relief where there is a
breach of a statutory obligation, or transgression of statutory rights by
any party to a contract. The legal dictum ubi jus ibi remedium prevails
and the administration of law should not leave citizens with something
which is completely unremediable. If the DRT fails to take cognizance
of the matter, the author is of the opinion that civil courts will have a ju-
risdiction, going by the oft-repeated rulings of courts that ouster of civil
jurisdiction is applicable only for the matters that DRTs have been em-
powered to decide.

9. Application by the borrower for preventive injunction:

Proviso to section 13(3A) expressly rules out any application under section 17
in respect of a likely action of the secured lender. The law uses the language “at
the stage of..” which is completely unnecessary and undesirable. On an exten-
sion, this might mean that before the discussion of reasons, or after the reasons
have been discussed and communicated, the borrower may make an applica-
tion—which is not the intent.
1000 =See. LM) Part i— Chap. Li—bnforcemeni af Seourity lnieresi

in Mardia Chemicals’ case, the Apex Court stated thatedthetoreason s for not ac
cepting the objections of borrower must be communicat the borrower and
the reasons so communicated shall only be for the purpose of the information/
knowledge of the borrower without giving rise to any right loapproach the Debts
Recovery Tribunal under section 17 of the Act, at this stage.
On the generic question, that is, does the borrower or any other Concerned per-
son, have the nght to make an application even before the action under section
13(4) has been taken, there is a difference of opinion, See later for notes, We
have expressed a view that the right to seek justice, either for a wrong done, or
preventive justice for a wrong apprehended, is the basic right of a citizen in a
civil society. Protection of property is a fundamental right, and if the secured
lender's action is expropriatory in nature, there is no reason why the borrower
cannot seek justice to protect his property. This is precisely the scope for civil
remedies in grossly palpable cases, pointed out by the Supreme Court in the case
of Mardia Chemicals.
The following seem to be the scope for preventive action under this law:
e Grossly unjustified action on the part of the secured lender.
e Cases falling under the exclusions in section 31,
e Cases where the status of the other party as a “secured lender”, or the
facilityas a “financial assistance” is disputable.
e Cases where the bank has failed to respond to the representation.
¢ Where any other person holding a security interest on an asset is ag-
grieved by a threatened action on the part of a particular secured lender,
etc
See also notes under section 17 relating to stay ofproceedings
by DRTs.

Section 13(4)
(4) In case the borrower fails to discharge his liability infull within
the period specified in sub-section (2), the secured creditor may take
recourse to one or more of the following measur to recover
ers his se-
cured debt, namely:—
(a) take possession of the secured assets of the borrower including
the right to transfer by way of lease, assignment or sale for real-
ising the secured asset;
” [(b) takeover the management of the business of the borrower in-
cluding the rightto tran bysfway of
er lease, assignment or
and realising the secured asset: pe

21. Also see Sri Lakshmi Products ¥. India

Bank ofIndia. vane AIR 2007 SC 148: B Shanmugam v. Union
22. Subs. by the Enforcement of Security Interest Recovery
of2004),s.8 (w.e.f. 11-11-2004), 4 OfDebts Laws (Amendment)
Act, 2004 (30
 Discharge of liability in full
Sec. 13(4), Syn.2 1001
Provided that the right to transfer by way
of lease, assignment or
sale shall be exercised only where the subs
tantial part of the busi-
ness of the borrower is held as security for
the debt.
Provided further that where the manage
ment of whole of the
business or part of the business is severabl
e, the secured credj-
tor shall take over the management of such
business of the bor-
rower which is relatable to the security
for the debt;]
(c) appoint any person (hereafter referred
to as the manager), to
manage the secured assets the possession
of which has been
taken over by the secured creditor;
(d) require at any time by notice in writing,
any person who has ac-
quired any of the secured assets from the borr
ower and from
whom any money is due or may become due to
the borrower, to
pay the secured creditor, so much of the money
as is sufficient to
pay the secured debt.

COMMENTS
1. Significance of the sub-section
Since this sub-section lists the powers of the secured credit
or against the se-
cured assets, this sub-section is unarguably one of the most
significant provisions
of this law. This sub-section is the source of power to take
possession of the se-
cured assets of the borrower and contains substantive provisions
entitling the se-
cured creditor to take possession of the secured asset’, as
well as realise the
same by way of transfer, lease, assignment or sale. In fact, the
standalone power
of taking possession will not be of much help to the secured credit
or unless it is
vested with rights to realize its dues using the secured asset. The view
has been
upheld in Sri Manicka Vinayagar Spinning Mills v. State Bank of India
& Ors.“
by the Madras High Court that, if by means of an interim order the Bank is al-
lowed to take possession under section 13(4)(a) but not allowed to transf
er the
secured asset by way of lease, assignment or sale for realising the secured debt,
it
will render section 13(4) redundant and ineffective for all purposes.
For broad principles of action under section 13, see notes under sub-section (1)
above.

2. Discharge of liability in full

The opening words of the clause provide the condition in which action under
this sub-section can be taken. Accordingly, the borrower must discharge his li-
ability in full. This section does not provide any method of adjudication of such
liability: therefore, in case of a dispute or difference between parties relating to

23. Ashok Sharda v. Small Industries Development Bank of India, U1 (2008) BC 466 (Andhra Pradesh)
(DB) ).
24. 1(2011) BC 42 (Mad.) (DB).
1002 See. 134), Sym.3 Part l-—Chap. lll- Enforcement afSecurity lnteresi

l to the DRT um
what is the liability, it appears that the only recourse is an appea
der section 17. See notes under section 17,

3. Measures to recover the secured debt

d debt.
Though this section uses the words “measures to recover the secure
ion of this
such measures would be conditioned by the essential scope of operat
dis-
section, viz., enforcement of security interests, The Transfer of Property law
tinction between enforcing the covenant or personal liability of the borrow er, and
enforcing the rights over the secured assets, has been noted earlier, This section
cannot travel beyond the scope of its intended operauon—enlorcement of secu
rity interests, and be a method of enforcing claims of the secured creditor.

4. One or more measures

The language of the section seems to permit exercise of powers under one or
more of the clauses of section 13(4). The secured creditor, therefore, is at liberty
to take recourse to any one or more of the measures provided in clauses (a) to (d)
to recover his secured asset. Section 13(4) gives choice to the secured creditor, it
should be left to the wisdom of the secured creditor to adopt any of the measures.
So, the borrower has no right to say that the notice be served to parties who have
acquired the borrower’s assets with the knowledge of the secured creditor. [Sesha
Saila Power & Engineering Pvt. Ltd..& Ors. v. State Bank of India & Ors.””|
Essentially, a secured creditor has the right to sell the assets to realise his dues.
If the secured lender takes the measures provided in section 13(4)(a) and sells the
assets, the security interest has already been liquidated, and the remaining dues of
the secured lender are now unsecured. In other words, the secured lender is no
more a secured lender. Hence, the question of taking over the management of the
business of the borrower, or wielding any other power under this section would
not arise. Hence, the use of the words “one or more measures” by the draftsman
surely indicates an optimistic drafting, but may be of use only in limited and ap-
propriate cases.

5, _Isthere a duty of good faith in exercise of the measures?

Article 9 of the UCC, U.S.A. repeatedly imposes the duty of good faith on a
lender seeking to enforce security interest—see later under this section. This law
confers drastic powers unto the secured lenders, and there is obviously a question

25. TV (2012) BC 490 (Andhra Pradesh) (DB).

 Is there a duty of good faith in exercise, etc.
Sec. 13(4), Syn. 5 1003
count of either of these measures? Is there a duty of
good faith on the part of the
secured lender in choice of the several measures listed
in section 13(4)?
Obviously, this question can be highly contentious, and
one expects this ques-
tion to be discussed at length in legal forums. In the case
of PNL Depositors Wel-
fare Association v. Union of India*®, which involved a
sale of a sugar mill by the
bank, there were several writ petitioners, one of whom
was a workers’ represen-
tative. On behalf of the workers, it was very cothetically
argued by the counsel
that the bank cannot ignore the other alternatives available
to it—viz., lease the
factory, or have it run by someone else, etc. While these argum
ents were turned
down by the Court, in the opinion of the author, the Court
was possibly
Over-impressed by the fact that the sale proceeds of the facto
ry far exceeded
the amount due to the bank, and that the workers could get the retre
nchment
compensation from out of the sale proceeds. It was also not
either argued
or considered in this case whether (a) the sale of the mill by the bank
would
leave the borrower company in nothing but bankruptcy; and (b) in the
event of
bankruptcy, the workers had a protection that they did not have in
the
present case. In the event of bankruptcy, aka winding up, the workers had
a pari
passu right with the secured lenders. See also discussion under sub-sectio
n (1) on
selection of assets for taking the measures; also see Chapter 6 of Part I of
the book.
In the case of UCO Bank v. Achal Bansal’, the bank proceeded against mort-
gaged property provided as collateral security by the respondent when the princi-
pal security of the borrower itself was sufficient to discharge the liability. On a
writ petition, interim stay was granted by the High Court. Thereafter, the bank
sold the properties of the principal borrower and recovered its dues in full. The
respondent moved an application before the DRT seeking compensation and
costs. The Tribunal did not allow compensation but allowed costs. Being ag-
grieved by the order, the petitioner herein approached the Appellate Tribunal.
Upholding the decision of the Tribunal, the Appellate Tribunal held thus:
“...It is significant to observe that the power to do an act is one
thing, the justification to do the same is another. The arguments of the
learned counsel for the bank founded on theoretical theme are com-
pletely divorced from the desired practicability and the methodology
which was required to be adopted in proceeding against the secured as-
sets for the realization of the dues of the bank. While implementing the
provisions of the SARFAESI Act to achieve the objective of speed re-
covery of the dues of the banks and financial institutions, it is also be
ensured that no unnecessary hardship, harassment or distress is caused
to the borrower in recovery process. The power with which the bank of-
ficers are clothed have to be exercised with due application of mind, in-
stead of in a’mechanical and arbitrary manner. Fairplay has to be the
mainstay in proceeding against the secured assets for the realization of
the dues of the bank.”

26. (2005) 64. SCL 115 (Mad). _

27. IU (2009) BC 63 (DRAT-Delhi).
 1004 See. 134), Sya.6 Part 1i—Chap. Ill—Enforcement of Security Interest

In Palpap Ichinichi Software International Lid. v. Indian Bank” m the Court re.
marked, “The Bank is a responsible body. The SARFAESI Act gives wide pow:
ers to the bank to take action to recover the amount..... Therefore, the bank is ex:
pected to conduct the procedure in a bona fide manner, The dealings of the bank
should be fair and transparent...the attempt of the bank should be to aucvon the
property for the maximum amount and to adjust it towards the dues and in case
of any excess amount after meeting the liability, to refund the same to the bor-
rower. By reducing the market value and the reserve price and by purchasing the
property for the alleged distress value by the secured creditor themselves, th pub-
lic sale has become a mockery.”
See also Pragati Builders & Promoters & Ors. v. Ram Murthy Pyara Lal &
Ors” wherein it was held that the process of auction should be fair with mean-
ingful participation in order to ensure that the best price is obtained,
The principles of fair dealing and transparency have also been emphasised in
Jay Electric Wire Corpn.Employees union vs. Praveen Gada & Ors.” .
This enactment is a special power granted to banks. Behind this enactment,
there were issues of benevolence and social cost on account of non-performing
loans. Banks were seen as pools of public money, and not paying the banks was
seen as a crime against the society. In other words, non-performing loans were
taken as a social cost, and the enactment was a remedy to undo the same, Courts
will surely be inclined to invoke principles of good faith and responsible action if
bankers’ action under this law is itself responsible for social costs.
6. Pre-poss
notice before
essi taking on
measures
In Mardia Chemicals’ case, the Apex Court stated that a person who does not
respond to the notice under section 13(2) of the SARFAESI Act, 2002 should be
considered to be aware of the consequences that will follow. If a borrower has

In Punjab National Bank v. Mohit Garg’', referr

to the
ingMardia Chemicals’
case, the Appellate Tribunal held that a pre-section 13(4) notice is not require
d
either in the section or in the Apex Court’s judgment.
However, a contrary view has been taken in the case of Subhas Chandra
v. Panda
Stof atOriss
ea” In this case, it was held that a notice is requir to be given
under section 13(4) before the financial institution takes any ofedthe
specified inthat sub-section. The division Bench of the Orissa measures
pressed its view that notice under section 13(4) is a must.
High Court ex
Unless notice under
section 13(4) isgiven, the right of appeal which is given
under section 17 of the

28. IM (2012) BC 324 (Mad) (DB).

29. IM (2012) BC 835 (DB-Dethi).
38. 1 (2013) BC 37 (Cn) (DB).
31. TV (2009) BC 113 (DRAT).
32. 1 (2009) BC 443 (DR).
 Time limit for taking measures
Sec. 13(4), Syn. 8 1005
statute becomes illusory. The DRAT-Delhi in
held that the bank cannot profess
JCICI Bank Lid v. Pahwa Steels,®
to take action under section 13(4) of
secretly or clandestinely. the Act
Further, any inadvertent defect in the
Possession notice, where the secured
creditor acts in accordance with law, will
not render the Possession notice inva-
lid. In a case the possession notice was
challenged on the ground that the entire
area of the property in question was ment
ioned in notice under section 13(2) of
the Act as also in the possession notice unde
r section 13(4), though the actual
secured asset was only 1/5" of the total area.
This, the petitioner (who was the
owner of another 1/5" share in the property
) claimed to be illegal and thus liable
to be quashed. However, as the Court held, it
was evident that the same was on
account of an inadvertent mistake, and that the
bank took possession of only 1/5"
of the property (i.e. the mortgaged property) and
undertook not to touch the share
of the petitioner. Therefore, it was held that
no Cause of action survives to the
petitioner. [Upasana Garg v. State of U.P. & Ors.
**]
7. Post-Possession Notice
As noted above, whether notice is required to be
given before taking measures
under section 13(4) remains a matter of dispute, it
is pertinent to note that rule
8(1) of the Secur ity Interest (Enforcement) Rules, 2002 requires
creditor to give post-possession notice in case constructi the secured
ve possession has been
taken by the secured creditor. If actual possession has
been taken, question of any
notice does not arise. Where constructive possession is
notice, the notice is notice
to public that the property is now juridically in possession
of the lender.
8. Time limit for taking measures
No time limit is prescribed for taking recourse under sub-section
(4) of section
13 of the Act. However, the secured creditor has to take recourse
to the measures
prescribed therein within a reasonable time depending upon the facts
and circum-
stances of each case. In State of Gujarat v. Patil Raghav Natha®?, the
Supreme
Court dealing with the scope of section 211 of the Bombay Land Reven
ue Code,
1879 held that though no period of limitation is provided in section 211 of
the
Code, that power must be exercised in a reasonable time and the length of rea-
sonable time must be determined by the facts of the case. Where no time limit is
prescribed for exercise of a power under a statute, it does not mean that it can be
exercised at any time.
If, after issuance of notice under sub section (2) of section 13 of the Act, in the
absence of any indulgence shown by the secured creditor to the borrower, re-
course to sub-section (4) is taken after a considerable long time,itmay be con-
tended that proceedings under section 13(2) have to reach its logical conclusion.

33. 1 (2009) BC 62 (DRAT).

34. II (2012) BC 438 (DB).
35. (1969) 2 SCC 187.
36. hg ide Kavi Mohamad Amin v. Fatmabai Ibrahim, (1997) 6 SCC 71.
1006 See. 134), Syn.9 Part 1i/—Chap. 1il-—-Enfercement af Security interes!

ES!
Since no time limit is prescribed for exercise of a power under the SARFA
Act. it must be exercised within a reasonable ime.
However, the mere fact that drastic provisions have been made under the Act to
assist the secured creditorto realise its dues does not mean that the secured credi-
tor after issue of notice under section 13(2) cannot show lenien cy to
to a debtor
discharge full liabilities by extending to him facilities such as One-time Settle
ment Scheme, etc. This indulgence of the secured creditor shall not boomerang
on the ground that the statute has not fixed any time limit and the secured credi-
tor should have acted within a reasonable time, In a case where the seeured oredi-
tor has shown indulgence for about five years to the borrower and even scaled
down the debt by offering One-time Settlement Scheme, it was held that the cor-
respondences exchanged between the parties and various discussions between
them for One-time Settlement have kept alive the notice issued under sub section
(2) of section 13 and the entire proceedings initiated by the secured creditor un-
der sub section (2) of section 13 of the Act was not lapsed or vitiated,”*
9. Meaning of expression “at any time”
The words “at any time” do not confer upon any statutory authority an unfettered
discretion.’ The words “at any time” are not charter for the exercise of an arbi-
trary decision. They do not have exemption from all forms of limitation for un-
explained and undue delay.” In other words, the words “at any time” would
mean “within reasonable time”

10. Measures in case of a company under liquidation

In a case where an order for winding up has been made, can a secured creditor
exercising his rights under this section proceed without the approval of the com-
pany court under which the winding up is pending? There is a long history of
litigation in cases of banks and State Finance Corporations, and the consensus
emerging out of the ruling of the Supreme Court in Allahabad Bank v. Canara
Bank seems to be that the intervention of the company court, if the secured credi-
tor has stood outside winding up proceedings, is not called for.
There is no necessity of associating the Official Liquidator in the sale in exer-
cise of powers by a secured creditor under Section 13(4)
of theSARFAESI Act.
The remedies of the Official Liquidator with respect to such a sale are only be-
fore the DRT in accordance with Section 17 of the SARFAESI Act and not be-
fore the Company Court. SARFAESI Act is a latter legisla to thetion
incorpora-
tion of Section 529A in the Companies Act, 1956 thus prevails over the Compa-
nies Act and sale as provided for under the SARFAESI Act holds good during
the pendency of winding up petition against the and
also after a winding up order is made and remains unaffected therefrom. [Sec
Kotak Mahindra Bank Ltd. v. Megnostar Telecommunications Pvt. L1d.*")

strial of
39.
- Chairman, Indore Vikas Pradhikaran v. Pure Industrial Coke & Chemi(cals Lid
(2007) & SOC 705.
 Measures in case offloating charges
Sec. 13(4), Syn. 11 1007
See later in notes under this section.

11. Measures in case of floating charges

Can the measures under section 13 be taken in
respect of property subject to a
floating charge? Section 13 provides for taking of
measures against specific as-
sets, because by their very nature, the rights of a
secured lender referred to in sec-
tion 13 are rights against specific assets.
The meaning of floating charge has already been discu
ssed in notes under sec-
tion 2. In cases relating to winding up of companies,
the distinction between
fixed and floating charges did not matter much as float
ing charges became crys-
tallised in winding up. However, this section provides
for enforcement of secu-
rity interests without taking the company to winding
up. More specifically, the
issue under section 13 is: is a floating charge a charge
on any specific asset or a
claim over the general property of the borrower, and, there
fore, can the measures
under section 13 be taken in respect of such charges?
The meaning of a floating charge is explained in HALSBURY’S
LAWS OF ENG-
LAND, 3rd edition volume 6, page 472, paragraph 914,
thus:
“The terms ‘floating security’ and ‘floating charge’ mean a securit
y
or charge which is not to be put into immediate operation (empha
sis
supplied), but is to float so that the company is to be allowed to
carry
on its business. It contemplates, for instance, that book debts may be
extinguished by payment, and other book debts may come in and take
the place of those that have disappeared. While a specific charge is one
that, without more, fastens on ascertained and definite property or prop-
erty capable of being ascertained and defined, a floating charge moves
with the property which it is intended to affect, until some event occurs
or some act is done which causes it to settle and fasten on the subject of
the charge within its reach and grasp. It is of the essence of a floating
charge that it remains dormant until the undertaking charged ceases to
be a going concern, or until the person in whose favour the charge is
created intervenes. His right to intervene may be suspended by agree-
ment, but if there is no such agreement he may exercise his right when-
ever he pleases after default.”
In the case of Brumark, the House of Lords reviewed the more than a century
old tradition of case law on floating charges and held as under: “So here: in con-
struing a debenture to see whether it creates a fixed or a floating charge, the only
intention which is relevant is the intention that the company should be free to
deal with the charged assets and withdraw them from the security without the
consent of the holder of the charge; or, to put the question another way, whether
the charged assets were intended to be under the control of the company or of the
charge holder.”
For the purposes of this law, the crucial question will be: can a floating veils
holder exercise the powers contained in this section? Obviously, the answer wil
have to come from the document creating the charge that enumerates the powers
of the chargeholder to crystallise the charge. Crystallisation of the charge would
 1008 See. 1344), Syn. 12 Part 1/—Chap. 111—Enforcement of Security Interest

obviously mean that the debtor's freedom to deal with the assets is withdrawn
and the assets are brought under the control of the creditor, This is normally done
by appointment of a receiver, in terms of the power conferred by the security
agreement. Before such crystallisation takes place, no particular asset of the bor
rower can be subject to the charge of the creditor,
Such a construction is also necessary to maintain the prionty of fixed changes
over floating charges. Suppose creditor X has a fixed charge, and creditor Y has a
floating charge on the asset. Can Y activate rights over the asset under this sec-
tion? The answer is obviously no, But can X take the measures under this section
on the asset without the consent of Y? The answer is going to be, yes, since Y's
rights are not specific to the asset but is a general right on the residual assets of
the enterprise. Thus, it is logical that unless the floating chargeholder has con-
verted his charge into a fixed charge, the security interest does not fasten to any
particular asset. ©”
In Serene Industries Ltd. vy. ING Vysya Bank"’, the agreement between the bank
and the borrower provided for creation of the following “mortgage”’:
“(a) a first mortgage and charge in favour of the lenders in a form satisfac-
tory to the Lead Institution of (on?) all the Borrower's immovable
properties, both present and future”.
The DRT Mumbai held that the agreement in the above form can only be con-
strued as an agreement to create a mortgage, which was a personal obligation and
not an obligation on any property. On a proper construction, even if the above
clause did create any kind of mortgage or charge, it would be in the nature of a
floating charge and would not fasten on any specific asset. It is not clear whether,
in this case, there was an actual filing of a charge with the Registrar of Compa-
nies in respect of any property, but even if there is a filing, the filing by itself
does not create a charge. The filing is simply an evidence of a mortgage or a
charge, and does not lead to creation.

12. Clause (a): Takeover of possession of secured assets

As the taking over of possession under this clause is for the purpose of en-
forcement of security interest, itisessential to see what the security interest was.
A security interest is generally a special interest in the secured asset and not a
proprietary or general interest. A right to foreclose the secured asset is available
only in the cases specified under section 67(a) of the Transfer of Property Act,
discussed above. As mortgage by way of conditional sales and
mortgages are very uncommon in the banking world, any security interes
t
ofsimple mortgage, hypothecation orpledge willnotgivetothesecur
ed onde,
any more than a special interest, that is, the right to sell the
. Therefore,
the taking of possession by the secured lender isonly preparatory
to the sale of
reading, “including thecat ian in Ot this,thelaterpantofdheclaase
reading including ight to transfer by w of lease, assignment «
realising thesecured asset”isonlya surplasage
[—_™

42. See also Chapter 3 of Part I for detailed discussion

43. TMi(2005) BC 124 (DRAT_DR-” ea
 Manner of taking over possession Sec. 13(4), Syn. 13 1009
Whether recourse to take possession of the secured assets of the
borrower un-
der section 13(4) of the Act comprehends the power to take actual
possession of
the immovable property came for consideration of the Apex Court in Transc
ore’s
case (supra). After discussing the provisions of sections 13 and 17 and the
Rules,
the Apex Court held that the word “possession” is a relative concept and not
an
absolute concept and, therefore, drawing of dichotomy between symbol
ic and
actual possession does not find place in the scheme of the NPA Act read with the
2002 Rules. Hence, possession taken may be either actual or constructive.
Further, the possession of the secured property can be taken over either from
the borrower/guarantor or any other person, as was held in Kotak Mahindra Bank
Ltd. v. State of Maharashtra & Ors.™. This follows from the scheme of sections
13, 14 and 17 of the Act. The right to appeal under section 17 against the order
passed under section 14(2) of the Act is available to any party from whom pos-
session has been taken.

13. Manner of taking over possession

The law does not lay down what exactly is meant by “taking over possession”.
Taking over possession, literally, is applicable in case of tangible property, and
not intangibles such as debts or actionable claims. However, the Security Inter-
ests Enforcement Rules, which provide for methods of “taking possession” even
extend to actionable claims, shares, etc. In fact, the Rules seem to have read the
words “taking possession” as equivalent of attachment. The Rules provide the
following formalities for different types of property:
e In case of movable property: the authorised officer of the secured
lender shall take possession of such movable property in the presence of
two witnesses after a Panchanama drawn and signed by the witnesses.
This obviously refers to physical repossession, that is, physical custody
of the assets. There is no provision in the Act or the rules for a symbolic
possession, that is, without taking physical custody of the assets, except
by appointing a manager as provided for in clause (b). If there are any
detailed provisions in this regard in the security agreement, the same
shall prevail.
In case of shares: the secured lender may direct the borrower to trans-
fer the same to the secured creditor and also notify the concerned body
corporate to not transfer such sharesin favour of any person other than
the secured creditor. In other words, it is clear that the transfer deed for
the shares will still have to be executed by the borrower without which
the concerned body corporate will not be obliged to recognise the trans-
fer.
e In case of actionable claims: the authorised officer may prohibit the
borrower from recovering the debt or any interest thereon and the
debtor from making payment thereof and may direct the debtor to make
such payment to the authorised officer.

44, 1(2012) BC 603 (Bom) (DB).

 1010 See. 1344), Syn. 14 Part /i/—Chap. 111—Bnforcement of Seourity Interest

* In case of movable property not in possession of the borrower the

authorised officer may call upon the borrowers and the person i pos:
session to hand over the same to the authorised officer and the author
ised officer shall take custody of such movable property in the same
manner as provided above. Complex questions will arise as to what are
the rights of such third party, who has taken a lawful possession of the
assets, etc. Will the rights of such third party prevail over the rights of
the secured lender? In Bank of Baroda v. Fairgrowth Financial Services
Lid.*’, the Special Court held that even if property is subject to the lien
of the banker, the property may still be lawfully attached or transferred
in pursuance of a law. In the same vein, if the possession of the prop-
erty has been lawfully transferred by the borrower to some other per-
son, the banker will have the same rights as such other person has in the
property. This Act cannot prejudice the rights of such third person law-
fully granted to him.
¢ In case of immovable property: the authorised officer shall take or
cause to be taken possession, by delivering a possession notice to the
borrower and by affixing the possession noticeon the outer door or at
such conspicuous place of the property — see rule 8(1) of the Rules.
From the reading of this rule, it is possible to imply that the possession
has to be taken by mere delivery of notice — which means the notice is
constructive and not actual. Though the Supreme Court ruling in
Transcore has cleared doubts as to whether actual possession may be
taken in the first instance itself, the wording of the rule remains confus-
ing.

14. Can physical possession be taken under section 13(4)(a)?

time of issuing notice under section (Nahot dieAtco ostoEite

tine
tion of his representation or objection by the Debts Recovery Tribu ademen
physical possession can be taken bythe bank orthefinancial nal. The
institution byfol
lowing the procedure laid down in section 14 of the Act
of after the sale j
firmed interms ofrule 9, particularly sub-rule (9)ofrule
9 ofSecurity Interest
(Enforcement) Rules, 2002.” Following Kalyani Sales’(sup
ra) decision, the
45. (1994) 80 Com Cas 857 (Bom
46. 1 (200
BC 6)
1 (DB). ‘
 Procedure under Civil Procedure Code Sec. 13(4), Syn. 15-1011

DRAT-Delhi in Punjab & Sind Bank v. Arun Kumar Arora*’, also held that tak-
ing physical possession of the property is permissible by following the procedure
laid down under section 14 of the SARFAESI Act or after the sale is confirmed
in terms of rule 9.
However, the Supreme Court in the case of Transcore gave liberty to the bank
to choose to take actual or symbolic possession as per its discretion. In most
cases, it may not be practical for the bank to take actual possession at the first
instance, but the legal position seems to be established after the ruling of the Su-
preme Court.
As stated in Jaibharat Synthetics Ltd. & Ors. v. State Bank of India.**, meas-
ures under section 13(4) include possession, both symbolic and actual of the se-
cured assets of the borrower.
The Madras High Court in Sri Manicka Vinayagar Spinning Mills v. State Bank
of India & Ors.*” stated that, when permission is sought to run an industrial unit
(here secured asset), the borrower is to be allowed into the premises of such asset
and when a secured creditor takes control over such secured asset it amounts to
taking physical possession as there does not exist anything like ‘symbolic posses-
sion’. If the interim order, passed in favour of the borrower allows for running an
industrial unit (secured asset) by entering into the premises of the secured asset, it
would amount to the redelivery of possession of the secured asset, which cannot
be granted unless decided by the DRT by way of a petition under section 17.
A view taken by the Appellate Tribunal-Mumbai in the case of Kanji Manji
Kothari & Co v. UCO Bank, that the possession contemplated under section
13(4)(a) of the SARFAESI Act cannot be other than the actual possession i.e.
physical possession of the property, was overruled by the High court in UCO
Bank v. Kanji Manji Kothari & Co.”°

15. Procedure under Civil Procedure Code

Though the procedure laid down in the Civil Procedure Code (CPC) is not
strictly applicable to the proceedings under section 13 of this Act,” in view of the
analogous nature of the powers of the secured lender as the powers of the attach-
ing officer in case of decrees against property under the CPC, the authorised offi-
cer under this Act can benefit from the rich heritage of rules and rulings under
the CPC.
Order 21, rules 43 and 43A of the CPC deal with attachment of movable prop-
erty in possession of the judgement debtor. Rules 44 and 45 relate to agricultural

47, I1 (2006) BC 232 (DRAT).

48. 1 (2011) BC 214 (Bom) (DB).
49, 1 (2011) BC 42 (Mad) (DB).
50. (2008) 3 Bom CR 290.
of the Sind High Court
51. In Shambhoo Khimiji v. Baloch Roze, AIR 1947 Sind 32, a Division Bench
“attachm ent and sale" in section 60(1) of the CPC do not apply to enforcement
held that the words cour st
point include Madras High
of mortgages or liens. Several other rulings on this Ree teats seed “sie
Mad 249, by the Nagpur High Court in
Beevi v. Canara Bank, AIR 1984 Vilasam AE Bi len
Kshema
AIR 1938 Nag 544, the Kerala High Court in Kochumariam v. Basayya Mathad v. Yya’
Court in Shivayya
78: and a recent ruling of the Karnataka High
Bank,(1998) 94 Com Cases 16 (Kar).
 1012 See. 134), Sya. 15 Part li—Chap, lll--tajorcement afSecuruy diierest

produce. Rule 46 relates to shares, debt and property Dol Mi possession ol the
judgement debtor. Rule 54 relates to immovable properties,
43 provides that in case of movable property not being agnoultural pro-
peethe oe emer shall be made by actual seizure, and the attaching ofthoes
shall keep the property in his own custody or in the custody of his subordinates,
and shall be responsible for the due custody thereot, The word “seizure” is used
in connection with movable property, while the word “king Of possession” is
used in connection with immovable property, According to its dicuionary mean
ing, the word “seize” means to lay hold of suddenly, to forcibly take hold of, to
reach and grasp, to clutch, It is meant “to take possession of, or appropriate, in
order to ary the force or operation of a warrant, order of court or other le-
gal process”. where the property concerned is movable property of which
actual physical possession can be taken, the word is “seizure” but where the
property concerned is an immovable property, the words used are taking posses-
sion”.
Affixing warrant to outer door of the debtor’s warehouse is actual seizure,”’
Under rule 43A, if movable property is such which cannot conveniently be re-
moved from the location, it can be kept there in the custody of a respectable per-
son or custodian.
Rule 43 applies in case the whole of the movable property is owned by the
judgement debtor: where the judgement debtor is only a part-owner of such prop-
erty, rule 47 will apply, in which case the attachment is only by way of prohibit-
ing the judgement debtor from transferring his sharein the movable property.
Rule 46 relates to attachment of property being debt (not secured by negotiable
instrument), shares and any other movable property not in possession of the
judgement debtor. The provisions of rule 4(5) of the Security Interests Enforce-
ment Rules are almost the same as rule 46. In case of a debt, the attachment shall
be made by prohibiting the creditor from recovering and the debtor of such debt
from paying the same. In case of a share, the attachment is done by prohibiting
the holder thereof from either transferring the same or receiving any dividend
thereon. In case of a movable property not in possession of the judgement debtor,
the person holding the same may be prohibited from handing it over to the
judgement debtor. However, in either case, the effect of the attachmentis merely
a bar on private alienation by the j debtor: there is no transfer of title to
the decree holder or attaching officer. Where the attachment relates to money or
property inthe hands of a third person, itis known as garnishment, and the per-
son in whose hands such money is attached is known as garnishee.
Rule 49 relates to attachment of partnership property. It provides that
usually,
cution of a decree unless the decree ispassed against the firm or the
partners of
the firm. Incontext of this Act, this rule can be read to mean that unles
rower happens to be the partnership firm, the measures referred s the bor-
to in section 13
cannot be taken against the property belonging to a partnership
firm. The only
52. Tnarmendrasing Dolubha Zala v. Stare Bank ofSaurashtra,
53. Multan v. (1998) 91 Com Cas 290(Gu).
of Madras, (1904) 27 TLR Mad 347.
54. Official Receiver vy.Lakshminarayana, (193 54 TLR1)
Mad 727.
 Rights of third parties Sec. 13(4),Syn.16 1013

way of attaching the interest of a partner in a firm is by way of attaching his

share, and designating a receiver to receive the share of profits or other interest of
the partner.
Rule 5! relates to attachment of a negotiable instrument that is also done by ac-
tual seizure, and the instrument shall be subject to Court orders. Since the action
under section 13 of this Act is without any judicial intervention, it is not clear as
to what the secured creditor can do with such instruments.
Rule 54 relates to attachment of immovable property. In this case, the attach-
ment is done by prohibiting the judgement debtor from transferring or charging
the property, and all persons from taking benefit of the property. The order shall
be proclaimed, that is, publicly announced, near or adjacent to the property by
beat of drum or other customary mode. A copy of the order shall also be affixed
at a conspicuous part of the Court-house, and where the property pays land reve-
nue to the Government, a copy of the order shall also be affixed at the office of
the Collector of the district or Gram Panchayat.
The rules under this Act merely provide for affixation of the notice of posses-
sion under section 13(4) on the property. The format of the notice is provided in
Appendix IV of the Rules, and provides for notifying the public that the author-
ised officer of the secured lender has taken possession of the property. The bor-
rower in particular and the public in general are thereby cautioned not to deal
with the property and any dealings with the property will be subject to the charge
of the secured lender. It has been held in several cases that the attachment under
rule 54 of the CPC is also a prohibition against alienation of the property. Hence,
the legal effect of taking of possession under this Act is the same as under rule
54.

16. Effect of taking over of possession

The effect of attachment under the CPC has been discussed in several cases: at-
tachment is merely a prohibition against private alienation and does not pass any
title to the attaching officer. Nor does it create any security, charge or lien in fa-
vour of the attaching officer,” which, in context of this law. where a lien or
charge was already held by the secured lender, would mean that the possession
does not enhance the security interest of the secured lender. It merely converts a
legal possession into a physical possession.”
17. Rights of third parties
In the short experience of implementation of this Act, several cases relating to
rights of third parties aggrieved or affected by a repossession action have come
up, and very surely, more.cases will continue to come up. The rights of third par-
ties may be numerous — someone claiming to be a tenant, or coparcener, Or oth-
erwise having any claim or covenant on the asset.
an
In a case where a third party had filed insolvency proceedings and obtained
Court held
order of status quo on the assets of the borrower, the Bombay High

Dhian v. Secretary ofStat e,

ATR 1945 Nag 91.
se De yee sion onthe nature ofrights under a hypothecation, seeChapter 3 in PartI.
 i
1014 See. 134), Sya. 18 Part 1i/—Chap. 1ll-—Enforcement of Securuy lnieres

that the bank is not party to the said insolvency proceedings and the bank alse
es thabanksinootpartywoeewidinnehenes pameatee
Where a tenant (as a third party) is neither a guaranto the repaymentof
for r
thee loan taken by the borrower, nor the movable goods belonging to the tenant
are the subject matter of the security, then the bank is not entided to take steps
under the SARFAES! Act to take the goods belonging to the tenant, In such ou»
cumstances, taking possession through Court of law does not mean that the
SARFAESI Act enables the bank to take possession lawfully, as was held in
Priya v. Indian Overseas Bank”.

18. Taking over of possession in case of tenanted properties

If the borrower had lawfully created a lease, whether before or after the mort-
gage of the property, the rights of the secured lender do not include night to evict
the tenant. The principle that the secured lender acquires the property subject to
such equities, limitations and encumbrances as the borrower has lawfully created
applies here.
In A. Stephen Samuel v. Union of India®’, which was a case under the RDDBF!
Act, the Madras High Court held “when the property was in occupation of the
tenants at the time when it was sold, the auction purchaser would be entitled to
symbolic possession of such property, but he would not be entitled to claim that
the tenants should be directed to hand over actual possession of the respective
portions of the property in their possession. In Manoj Prakashan v. Lakshmi Vi-
las Bank Ltd.” the Appellate Tribunal relying on Stephen Samuel's case (supra)
protected the tenants by restoring possession, who could establish themselves as
tenants and were in possession of the property before they were evicted except by
due process of law.
In Indian Oil Corporation Limited, Nagpur v. Shikshak Sahakari Bank Limited,
Nagpur®', the DRT held that where a tenancy was lawfully created in favour of
the lessee, the lessee will continue to have the same rights in the property despite
the taking of possession by the bank. The bank will now become the lessor of the
property and the lessee needs to pay lease rentals to the bank. In the said case, it
was also held that the bank cannot be restrained from selling the property.”
Similarly, in Pushpangadan v. Federal Bank Ltd."’ the Court viewed that the
provisions of the SARFAESI Act do not confer any right on the secured creditor
to trench upon the rights of the tenant inducted by the borrower/owner before the
security interest is created. The Court made some noteworthy observations:

Ill (2007)BC 417.

IV (2012) BC 68 (Mad) (DB).
Ill (2003)BC 469.
II(2008) BC 89 (DRAT).
Ratan Kumar Khaitanv. United Bank of India, IH (20BC04)
224 (Cal).
SSABSRA
ff
nna(2012) BC ; Indian Bank v. Nippon Enterprises South & Ors. | 4 (2042)
 Taking over of possession in case, etc. Sec. 13(4), Syn. 18 1015

e “If the building is already let out to a tenant, how could the secured
creditor create a lease without terminating the lease created by the land-
lord?”
e “On the creation of the lease, the lessor as well as the lessee have cer-
tain rights and liabilities against each other. A third party cannot inter-
fere with the rights and liabilities of the lessor and lessee without any
right conferred on the third party to do so.”
e The expression ‘take possession of the secured assets of the borrower’
occurring in Section 13(4)(a) “only indicates the right of the secured
creditor to take possession to the extent it is possible.”
Section 13(4)(a) of the SARFAESI Act empowers the secured creditor
to exercise his right to require the tenant to pay the rent to the secured
creditor, exercising the power under Section 13(4)(d) of the SARFAESI
Act,
e If the borrower fails to discharge his liability post the Section 13(2) no-
tice, his “existing rights” in the property would be dealt with under
SARFAESI Act. By taking recourse to the provisions of the SAR-
FAESI Act, “the pre-existing rights of strangers in the property could
not be affected, annihilated, dealt with or denied.”
Under the Rent Control Act of Kerala, a landlord can get an order of
eviction only if the grounds enumerated in the said Act are established.
There is no specific provision in the SARFAESI Act that affects the op-
eration of the said Act. Even Section 35 of the SARFAESI Act does not
deny the legitimate rights of strangers available to them under the TP
Act and the said Act, so long as those rights are not inconsistent with
the provisions in the SARFAESI Act™.
However, in Delhi Punjab Goods Carrier (P) Ltd. v. Bank of Baroda,*’the
Court rightly upheld that, with regard to enforcement of security under Section
13(4) of the SARFAESI Act, a tenant who has obtained possession subsequent to
the period of creation of mortgage will have no right to resist the financial institu-
tion from taking possession. Note, however, the provisions of section 65A of the
Transfer of Property Act discussed below.
In Faris Fathima y. Bank of Baroda®’, the DRT denied the appellant relief as
lessee as the appellant could not establish the fact that she was in enjoyment of
the appeal mentioned property as lessee for more than two years. On facts, the
DRT was of the view that the appellant and borrower in a collusive act have cre-
ated the said lease agreement with a sole intention to delay the recovery of the
amounts due to the respondent bank from the borrower.

ruling.
64. See also discussion under comments on Section 35, with reference to the same
65. 2008 (2) I.S.J. (Banking) 61.
66. II (2007) BC 6 (DRAT—DRT).
L016 See. 134), Sya. 19 Part li—Chap. 11L-—-Enforcement af Seourity inieresi

19. Power of the mortgagor to create tenancy rights in the property

Section 65A of the Transfer of Property Act contains elaborate provisions as to
rights of the mortgagor to create leases on the mortgaged property, The text of
the said section is as under:
(1) Subject to the provisions of sub-section (2), a mortgagor, while law-
fully in possession of the mortgaged property, shall have the power to
make leases there of which shall be binding on the mortgagee,
(2) (a) Every such lease shall be such as would be made in the ordi-
nary course of management of the property concerned, and in
accordance with any local law, custom or usage.
(b) Every such lease shall reserve the best rent that can reasonably
be obtained, and no premium shall be paid or promised and no
rent shall be payable in advance,
(c) No such lease shal] contain a convenant for renewal,
(d) Every such lease shall take effect from a date not later than six
months from the date on which it is made,
(e) In the case of a lease of buildings, whether leased with or with-
out the land on which they stand, the duration of the lease shall
in no case exceed three years, and the lease shall containa
covenant for payment of the rent and a condition of re-entry on
the rent not being paid with a time therein specified.
(3) The provisions of the sub-section (1) apply only if and as far as a con-
trary intention is not expressed in the mortgage deed; and the provisions
of the sub-section (2) may be varied or intended by the mortgage deed
and, as so varied and extended, shall, as far as may be, operate in like
manner and with all like incidents, effects and consequences, as if such
variations or extensions were contained in the in that sub-section.
In Sree Lakshmi Products v. State Bank of India,*’ the Madras High Court held
that any tenancy created by the mortgagor after the mortgage incontravention
of
section 65A would not be binding on the bank/financial institution and in any
event such tenancy right shall stand determined once action under section 13(4)
has been taken by the bank/financial Institution.
In Allahabad Bank v. Bank of Rajasthan Ltd. & Ors.", reliance was placed on
section 48 of the Transfer of Property Act to state that:
“This section reproduces the well-established equitable maxim i prior est
tempore potior estjure andlays down thatthetransferor cannot prejad
ice the
rights of the transferee by any subsequent dealing with the property.
words, In other
if there are successive transfers of the same property, the later
transfer is

68. Hi(2011) BC 1477 (DRAT' ). See also Punjab

National Bank y } Union Bank of India Vi
; Punjab National 1) BC 53
40rs. tl i) BC 62
Dethi): Corporation
 Power of the mortgagor to create tenancy, etc. Sec. 13(4), Syn. 19 = 1017

Subject to the prior transfer. It follows that in the case of two successive mort-
gages, the later or puisne mortgage is subject to the prior mortgage.”
In this case, the Delhi DRAT cited the case of The State v. Rajah Ram Varu”™,
whereby the Andhra Pradesh Court stated that “even if there be any equitable or
floating or such other specific charge created on the same property, the specific
charge which is first in point of time taken priority over the second.” This Court
also stated that “the mortgagee can claim security not merely in respect of the
land mortgaged but also the buildings and the machinery fixed to the earth sub-
sequently”, thus upholding the principle of mortgage on the constructions or fixa-
tions on the mortgaged land.
Thus, the rights of the first mortgagee be satisfied first in time thereafter the
debts of the subsequent mortgagees be satisfied from the residue amount.
In Praveen Kumar v. Allahabad Bank & Ors. ”', a borrower, A had availed loan
facilities from the bank, against the property which he owned. Due to non-
payment of the debt, the bank held auction for the sale of property under section
13(4) of the Act and issued a sale certificate in favour of purchaser. A’s sister had
allegedly created tenancy right in favour of B, who unaware of the mortgage later
entered into an agreement to sell with A and had paid a certain sum with regard
to the purchase of the said property. On learning of the mortgage, B communi-
cated to the bank his willingness to buy the property and as per the DRT’s ver-
dict, paid the bank for the same. The auction of the mortgaged property was set
aside by the DRT. The appellant thereby approached the Appellate Tribunal.
In its ruling, the DRAT held that the alleged tenancy of B was in contravention
of the provisions of section 65A of the Transfer of Property Act, 1882 as this ten-
ancy had not been created by the mortgagor but by another who did not have title
or interest in the said property. Moreover, there was only an agreement to sell
which does not create a title in favor of B which subsequently makes him a mere
trespasser on the property. With regard to the auction sale, the Court also upheld
that, “it can occur even without the physical possession of the premises in dispute
and also that the proceedings cannot be set aside in the absence of the auction
purchaser,” which took place in this case. Thus the auction sale by the bank was
held valid.
In State Bank of India v. Abhijeet Singh”, the tenancy was held not be genuine
on the following grounds: |
(a) the mortgage in respect of the property was created much before the
rent deed/agreement came to the fore.
(b) The rent deed/agreement was executed by the son of the owner and not
by the owner himself.

69. See also G.R. Chopra y. Asset Care Enterprises Ltd. & Ors. [I (2012) BC 93 (DRAT-Delhi)],
wherein the DRAT held that the mortgage deed will have preponderance over any other ae
in the light of Section 48 of the TP Act. All other actions or execution of documents done a a a
mortgages are subject to the mortgages; Central Bank of India vs. Ram Kishan Ml (2011) B ;
(DRAT Delhi).
70. AIR 1966 AP 233 (DB).
71. I1 (2011) BC 75 (DRAT).
72.1V (2008) BC 38 (DRAT).
 i
1018 See. 134), Sya. 20 Part 1i—Chap, lil--Enforcement afSecurity Interes

(c) The alleged tenancy was for a period of three years and required regis:
uation under the Registrauion Act
(d) Since it contained a condition of renewal, it violated the provisions of
section 65A of the Transfer of Property Act
in Kowti Finance Lid v. Indian Bank”, the appellant claimed tenaney rights
from the period prior to the loan transaction by producing Income Tax Returns i
support of its contention and resisted the taking Over of possession by the secured
creditor. However, the lease deed was unregistered though mandatorily required
under section 17(1)(4) of the Registration Act. The Appellate Tribunal based on
facts as well as law did not accept the appellant's claims of tenancy, Relying on
the Madras High Court's judgment in Sree Lakshmi Products v, State Bank of
India”, the Appellate Tribunal observed that if the claim was based on an unreg-
istered document so as to affect the rights of the secured creditor, such claimant
is not a protected tenant and the continuance of possession of such claimant is
contrary to the provisions of section 65A of the Transfer of Property Act,

20. Position in case of leave and license agreement

In MTV Networks (India) P. Lid. v. Oriental Bank ofCommerce”, the DRT
Mumbai has held that a leave and license agreement granted by the mortgagor,
subsequent to the equitable mortgage of the property given to the bank, is not an
“obligation attached to the ownership of the property” within the meaning of sec-
tion 40 of the Transfer of Property Act, and, therefore, does not operate against
the bank. There was no elaborate argument about the nature of a leave and li-
cense agreement, nor was there a reasoning as to why would the bank have a bet-
ter claim over the property than the mortgagor himself. The key issue for deter-
mination in cases like this is—was the mortgagor obligated to recognise the
claim of the license-holder? If so, the same obligation will hold as against the
bank. It may also be arguable that determination of a contention or a dispute be-
tween the mortgagor and the contending license-holder is not the domain of the
DRT and, therefore, the said matter must go to civil courts. Such. nats
will obviously have an impact on the rights of the bank, and therefore, it may be
argued that the determination of the right of the license-holder should precede the
question of the bank exercising its rights over the property.
Film star Yukta Mookhey took a case to the Bombay igh Court in Yukta
Mookhey ». Bank of Inia".orderdated20°March,2006,Here,Bankof India
given a to Sanjivani Properties, backed by an equitable mortgage of a
fat.Sanjiveni, in torn,ledgrands Vel hallcela af teeBato Yolen apa
eed cope Of Rs. 7.50 Tacs. The loan was defaulted and thebank had
served a repossession notice, and subsequently taken constructive possession on
15th June 2004. The contention of the petitioner was that the SARFAESI Act did
not affect the interests of third parties. It was contended that if a leave and license
was created after the date of service of the notice by the bank. it would have
ho

75. TV (2005) BC 215 (DRAT—DRT).

76. 2006 (3) Bom CR 26, 2006 (4) Mh LJ 61.
 Claim of a buyer of mortgaged property Sec. 13(4), Syn. 21 1019

validity, in view of the provisions in section 13(13) but the Act cannot obliterate
the rights created prior to the service of the notice by the bank. In its ruling, the
Bombay High Court went solely on the factual issue—that the licensee had ter-
minated the license right by her own letter to Sanjivani.

21. Claim/Rights of a buyer of mortgaged property/encumbered

property
In O.P. Khanna v. Union Bank of India’, it was argued that the petitioner had
bought the property from the mortgagor, who misrepresented about a pre-existing
mortgage, and the borrower, unaware of the mortgage, bought the same for con-
sideration. Apparently, this was a case of fraud by the mortgagor. The court held
that the bank could not be affected by the fraud and hence, the right of the bank
to seek repossession of the asset was upheld.
However, in Allahabad Bank v. Bank of Rajasthan Lid. & Ors.”, referring to
section 48 of the Transfer of Property Act, the Tribunal quoted their Lordships,
Dalip K. r J. and D.P.Wadhwa J. in Sh. Ishar Dass Malhotra v. Dhanwant
Singh & Ors’ whereby it was held that “a subsequent sale cannot have priority
over a mortgage by deposit of sale deeds created before the sale.”
It was also held in Rajneesh Kumar Tialang v. Oriental Bank of Commerce &
Ors.” that the prior mortgagee will always get preponderance over the rights of
the subsequent purchaser or subsequent mortgagee.
In P. Vinodh Kumar v. The Recovery Officer, DRT-2, Chennai & Ors.”’, the
Court judged that the purchaser of a secured asset, that too after knowing fully
well as to the security created over the property, cannot challenge the measures
taken by the secured creditor against the borrower or the guarantor, as the case
may be. The grievance could be made only against the borrower under other
laws, namely the owner of the property who, in contravention of section 13(13),
sold the secured asset to the purchaser. The auction sale notice cannot be ques-
tioned in the writ petition by the purchaser.
In K. Ravindranath v. Indian Bank & Ors.”, the bona fide purchaser of the
property sold in auction by the bank in pursuance of action taken under section
13(4), was not aware of the proclamation and attachment of the property for
claim of the EPF Commissioner. The Court, relying on the view taken in A.
Senthil Kumar v. Assistant Commissioner (CT); Koyambedu Assessment Circle,
Chennai and Others”, held that the EPF Commissioner is not justified in making
claim from the petitioner; the responsibility lies on the bank that executed the
sale certificate stating that there has been no encumbrance over the property. The
EPF Commissioner has got priority right in respect of the claim, but such priority
right can be exercised only from the bank, and the purchaser having purchased
the property as a bona fide purchaser, cannot be effected by the claim of the EPF
77. (2005) 62 SCL 390 (Del).
78. 11(2011) BC 147 (DRAT).
79. AIR 1985 Delhi 83(DB).
$0. IV (2011) BC 70 (DRAT-Dethi).
81. [I (2012) BC 331 (Mad). (DB).
82. 1 (2012) BC 613 (Mad).
83. (2011) I CTC 828.
 1020 See. 13(4), Sym. 22 Part 11—Chap. 11l—Enforcement of Security Interest

Commissioner. The purchaser, being a bona fide buyer for valuable considera:
tion, without knowing the defective title, his right over the property cannot he
affected.

22. Removal of fixtures, impediments, etc,

In the process of taking repossession of assets, the secured lender may have to
dismantle fixtures, remove any impediments, etc. The general law in this regard
is that the secured lender taking possession of goods must take as much care of
the goods he is repossessing as a reasonable person would take in case of his own
goods. While the secured lender cannot be said to be a bailee of the borrower, the
duties cast upon the secured lender will be similar to that of a bailee.
Article 9 of the UCC, U.S.A. makes clear provisions on removal of fixtures,
etc. While it allows the right of removal of the fixtures to the secured creditor, if,
in the process, the secured creditor causes damage to a third party's property, the
secured creditor is required to reimburse the same. Section 604(d) provides that
“A secured party that removes collateral shall promptly reimburse any encum-
brancer or owner of the real property, other than the debtor, for the cost of repair
of any physical injury caused by the removal. The secured party need not reim-
burse the encumbrancer or owner for any diminution in value of the real property
caused by the absence of the goods removed or by any necessity of replacing
them. A person entitled to reimbursement may refuse permission to remove unti!
the secured party gives adequate assurance for the performance of the obligation
to reimburse”. In other words, the secured lender has no right to cause damage to
a third party’s property for the purpose of seeking repossession.

23. Takeo
of possession
ver of assets of sick company
Note the provisions of the Schedule to the Act which has amended section
15(1) of the Sick Industrial Companies Act to provide that to the extent there is a
reference pending under the SICA, the said reference shall abate if the secured
creditors representing 75% of the financial assistance availed by the borrower
have taken measu res
under section 13(4)
of this Act.
This, provision was interpreted by the Division Bench of the Orissa High
Court. The court held that there is a lot of difference between a reference pend-
ing. and an order declaring sick company, passed under the SICA. The i
oftheamendment made insection 15(1) oftheSICA is forthereference teBIPE
to give way to proceedings under this Act. The court held as follows:
“The proceeding has gone far ahead of that and culminated in an or-
der by which the company was declared sick on 14-11-2006. The said
order was passed by the BIFR after hearing the bank and by the said or-
der the bank was appointed anoperating agency with a direction to
pre-
pa the
re revival scheme. Therefore, in the facts of this case, the refer-
ence cannot abate since the matter under SICA is not pending
ence before the BIFR. Even though the bank is a party tothe in refer-
said order
it has neither filed any appeal therefrom nor has it
asked for consent
84. Noble Aqua Pvt. Lrd. v. State Bank ofIndia, 1 (2009) BC $34 (DB).
 Takeover of possession of assets of sick company Sec. 13(4), Syn. 23 1021
under section 22 to proceed against the petitioner company. Theref
ore,
this argument raised by the learned Counsel for the Bank cannot be
ac-
cepted”.
The view was reiterated in Sand Plast (India) Ltd vs. Punjab Nation
al Bank &
Anr.”, “it is settled law that secured creditors representing more than
75% of the
secured debt can take recourse to section 13 of Act No. 54 of 2002 notwithstand
-
ing any proceeding pending before BIFR.”
See discussion under section 37; see also discussion in Notes under Schedul
e to
the Act.

24. Provisos to section 15(1) of Sick Industrial Companies Act

This Act has amended section 15(1) of the Sick Industrial Companies Act
(SICA), by inserting two provisos therein. As with the rest of the provisions of
this Act, these two provisos also lack elementary drafting skills, and direction,
except that they show an over-eagerness to let SARFAESI Act override every
other law and every other economic policy of the country.
For ready reference, section 15 (1) appears as follows:
Reference to Board.- (1) When an industrial company has become a
sick industrial company, the Board of Directors of the company, shall,
within sixty days from the date of finalisation of the duly audited ac-
counts of the company for the financial year as at the end of which the
company has become a sick industrial company, make a reference to
the Board for determination of the measures which shall be adopted
with respect to the company:
Provided that if the Board of Directors had sufficient reasons even be-
fore such finalisation to form the opinion that the company had become
a sick industrial company, the Board of directors shall, within sixty
days after it has formed such opinion, make a reference to the Board for
the determination of the measures which shall be adopted with respect
to the company:
Provided further that no reference shall be made to the Board for Indus-
trial and Financial Reconstruction after the commencement of the Secu-
ritisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, where financial assets have been acquired
by any securitisation company or reconstruction company under sub-
section (1) of section 5 of that Act:
Provided also that on or after the commencement of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security In-
terest Act, 2002, where a reference is pending before the Board for In-
dustrial and Financial Reconstruction, such reference shall abate if the
secured creditors, representing not less than three-fourth in value of the
amount outstanding against financial assistance disbursed to the bor-

85. IL (2011) BC 117 (DRAT-Delhi).

1022 Sec. 13(4), Sya. 23 Part 1/—Chap. 1ll—-Enforcement of Security Interest

rower of such secured creditors, have taken any measures to recover

their secured debt under sub-section (4) of section 13 of that Act,
The second proviso is most curiously worded, It said reference shall not be
made to the BIFR if “financial assets” have been acquired by an ARC, The pro-
viso does not specify the extent of financial assets to be acquired by an ARC, The
proviso has been interpreted by the Division Bench of the Bombay High Court in
Paper Prints (India) Pvt. Lid vs Phoenix Arc Pvt, Lid order dated 20th July,
2012” to mean any extent of assets. That is to say, even if 1% of the loans taken
by a sick company have been acquired by an ARC, there is no scope for making
reference to the BIFR. In essence, such a company loses its very chance of re-
vival. Does that mean the scheme of the Act is that once ARCs come into picture,
a borrower will be nursed back to health, if there is a potential for doing so, by
the ARC rather than by the BIFR? As we have noted at several places in this
book, the nomenclature “reconstruction” is only a misnomer in this Act ~ ARCs
do not do any reconstruction at all. They simply do realization, often by using the
most coercive methods. It could not have been the scheme of the policymaker to
say, between BIFR which is a revival body, and ARCs, which are a realization
body, we choose ARCs, irrespective of the potential for revival. In fact, if the law
says, reference to BIFR shall not be made, even the preliminary investigation into
whether the unit is fit for revival or not will not be done. But for purely one-sided
and over-enthused drafting of the amendments made by this Act into the SICA,
this could not have been the intent of the law.
While the second proviso is ridiculous,
the third proviso is ruthless. It has the
effect of saying that if creditors amounting to 75% of the borrowings of the sick
unit have taken action under this Act, the reference before the BIFR shall abate.
We have commented elsewhere in this book that allowing the creditors a free
play with total disregard to revival proceedings is not a well-thought policy.
Whether the reference abates or not, if the secured creditors have done enforce-
ment of security interest and repossessed the core assets of an entity, there is
really nothing to revive.
However, the abatement of reference is a more serious issue, as it throws the
very matter of revival out of the BIFR. This provision goes against the very root
of SICA. If the wishes of the creditors were supreme, revival proceedings or
bankruptcy proceedings will both lose their meaning completely. In the matters
of revival of entities, SICA gives primacy to the jurisdiction of the BIFR. The
third proviso to section 15(1), however, reduces BIFR to the position of a slave
of the discretion of secured creditors. If secured creditors have chosen to repos-
sess rather than restructure, it is the creditors’ wish that runs supreme. The issue
is, will any revival ever happen if it were to be left to the wishes of the creditors?
From this viewpoint, courts may have to examine whether SARFAESI could
be allowed an absolute unbridled play, totally overriding SICA as welll asliquida-
ofponicyunadiets Teavemonte een nnn bySitepeafanicies, ht
if policymakers have made insen laws sitiv
as the second proviso
e to section
15(1), courts may have to step in. b

86. 1 (2013)
BC 225.
 Takeover of possession of assets of sick company Sec. 13(4), Syn. 23 1023
There have been some rulings where the constitutional validity of the third
proviso to section 15(1) has been discussed before courts. In Girish Upadhy
ay
Plant Operator v. Paschim Petrochem Ltd.*", a Division Bench of the Gujarat
High court, and in Creative Home Fashions Limited v. Union Of India And Oth-
ers , a Division Bench of the Delhi High court went into the question of consti-
tutional validity of the third proviso. In both the cases, the court refused to get
into the issue, primarily on the ground that courts should not normally interfere in
policymaking, which is the job of the executive. In the opinion of the author,
courts need to understand the difference between an explicit policy of the execu-
tive, and garbled or over-exuberant language of the draftsman overtaking the pol-
icy. There cannot be an explicit policy of the Government that SICA has failed to
serve its purpose and that industrial units need not be nursed to revival if they
have been under the weather due to systemic factors, or say, even for misman-
agement. It cannot be an explicit policy of the Government that henceforth,
ARCs will do what BIFR was doing all this while. It needs to be pointed out to
the judiciary that FDI rules now permit ARCs to be 100% owned by non-
residents, and there are several international funds which are realistically called
“vulture funds” and presentably called “special situations funds” or “distressed
assets funds” which are on the prowl to take over assets of sick companies. Vul-
tures have no interest in revival; in fact, revival does damage to their interest.
They are quite often looking at underlying properties — land. In any case, given
the scheme of ARCs in the country, it is not even possible that an ARC will lend
a helping hand to revive a unit. If secured creditors and ARCs were to have the
upper hand over BIFR (or NCLT as the Companies Bill intends to transfer these
powers to NCLT), then the very scheme of revival or reorganization fails. This is
the case elsewhere in the world too — there is a role of creditors’ committees in
reorganization, but of course, reorganization cannot be left to the discretion of the
creditor.
There have been several rulings where the meaning of expression “reference is
pending” has been discussed. In Noble Aqua Pvt. Ltd. v. State Bank of India®’ , a
Division Bench of Orissa High Court held that once the stage of reference has
crossed and the proceedings before BIFR had gone far ahead, culminating in an
order declaring the company to be sick, the third proviso inserted under section
15(1) of SICA could not be invoked. The Court made references to a number of
cases to hold that once any reference under SICA is registered, then prohibition
u/s 22 of SICA shall immediately come into play. Further, attempting to give a
harmonious constriction to SARFAESI and SICA Act, the Hon’ble High Court
held that section 37 of SARFAESI makes it clear that SICA shall not be in dero-
gation of SARFAESI and as a result the proceeding under SICA cannot abate and
the bank cannot proceed u/s 13(4) of SARFAESI.
While the Orissa High court was inclined to let SICA and SARFAESI survive
both, several other court rulings have allowed SICA to completely give way to
SARFAESI. In fact, BIFR has been treating references to it abated in lots of

87. C.A. No. 541 of 2010 decided on 27.04.2011.

88. AIR 2011 Delhi 140; (2011) 164 Comp Cas 422.
89. AIR 2008 Ori 103.
 1024 See. 1M4), Syn. 23 Part 1/—Chap. I1l-—Enforcement of Security Interest

cases with action by 75% of the creditors. In Punjab National Bank v. AATIPR™
the Delhi High Court did not concur with the decision of the Orissa High Court
in the case as above. The High Court further held that once the jurisdiction of the
BIFR was divested by the mandatory impact of the proviso to section 15(1), the
BIFR could not pass any orders under the SICA notwithstanding the subsequent
developments. In the same case, a plea for harmonious construction for simulta-
neous operation of both statutes was also taken. However, the High Court struck
the same down on grounds that the deeming proviso divesting the jurisdiction of
the BIFR being incorporated in the SICA itself. Interestingly, in this case, the
Delhi High Court also held that reference pending as used in the third proviso
would include a scheme of rehabilitation being formulated stag to the
scheme. See also Nowveaw Exports Private Lid v, Appellate Authority for Indus-
trial and Financial Reconstruction Company91, In M/S.Salem Textiles Limited v
The Authorized officer, M/S Phoenix ARC Pvt. Ltd. and Ors”, the court used in-
teresting expression to express the sweep of the abatement powers — to say that
that once an action is initiated in terms of section 13(4) of the Securitisation Act,
2002, by the secured creditors representing three-fourths in value of the total
amount outstanding, the proceedings before BIFR would automatically abate.
This is the position irrespective of whether the reference is at the stage of bud-
ding under section 15 or at the stage of blossoming under sections 16 and 17 or at
the stage of fruition under sections 18 and 19 or at the stage of rotting (deserving
only winding up) under section 20.
In a ruling before the Calcutta High court, the question whether the operating
agency, appointed by the BIFR, itself could take repossession action, was taken
up. This is essentially the same as if the doctor could be allowed to kill the pa-
tient. The language of the proviso did not leave much scope for the court to rule
otherwise. See Imperial Tubes (P) Ltd. And Anr. vs Board For Industrial And
Financial Reconstruction And Ors.”
In Ravi Spinning Ltd. And Ors. vs Union Of India (Uo
And
i)Anr.” a Division
Der TOvISS Ci ey ftish Court heldthatthereference having been abated as
Per proviso (11) to section 15(1) of SICA, the matter gets completely
dissolv
and there is nothing for the BIFR to do thereafter. In Triveni Alloys Limited ed,
y.
Board forIndust
andria
Financi
lal Reconstru cti
a Divisio on”of,the
n Bench
Madras High Court held that once a decision is taken

proceedings before the BIFR would abate. The contention

of the petitioner that
the proviso to section 15(1) would apply only at a stage
where the reference is
Hee out nottoa stage where anappeal ispending, wasrejected bythe
Divi-
In this cont ext, it is important to note that the provisio
onte)
and rehabilitation have isions ns pertaining to revival
been shifted from SICA to the Companies
Act, 2013.

90. AIR 2008 Del 192.

91. AIR 2010 Bom 159.
92. (201 53)
MLI 1.
93. ATR 2008 Cal 15.
94. (200 2MhL
6)j 145
95. (2006) 132 Com Cas. 190 (Mad)
 Manner of taking possession: analogous UCC law _ Sec. 13(4), Syn. 24 1025

Chapter XIX (consisting of sections 253 to 269) of the 2013 Act deals with the
same’. Provisions of the 2013 Act are remarkably different from those under
SICA. Further, as per Section 434(1), any reference made to BIFR, any inquiry
pending before BIFR, any appeal preferred to AAIFR, or any proceedings pend-
ing before BIFR/AAIFR shall stand abated on commencement of the 2013 Act.
The company may, within 180 days of such commencement make a reference to
the NCLT”’.
The 2013 Act too, provides for abatement of proceedings before the NCLT, but
only after a draft scheme for revival and rehabilitation has been submitted by the
secured creditor/company under sec. 254(1) of the 2013 Act. In other words, tak-
ing of measures under sec. 13(4) of the SARFAESI Act by the said 75% major-
ity, will not lead to abatement of reference before the NCLT, if the reference is
still at the first stage (i.e. at the stage of determination of sickness), and no refer-
ence has been made as yet for determination of measures (i.e. the reference has
not reached the second stage). Looking barely at the first proviso to section 254
(1) of the Companies Act 2013, one gets a feeling that the abatement will not
apply if the reference is still at the first stage. However, the only purpose of keep-
ing the reference alive, and not making it abate, is to take it to the second stage,
that is, preparation of scheme. But then, once the reference reaches the second
stage, it collapses as the abatement provisions apply. In essence, there will be no
point in taking the reference to second stage at all. The net result of this will be
that the situation under the Companies Act 2013 will be the same as under SICA
— the reference shall stand abated if 3/4""s of the creditors have taken action under
section 13 (4).
The 2013 Act also expressly bars making of any reference before the NCLT
under sec. 254(1) if measures under sec. 13(4) of the SARFAESI Act have been
taken.
Not only during the reference stage, the 2013 Act confers right on the secured
creditors to go for measures under sec. 13(4) of the SARFAESI Act, even during
the implementation stage where an application for modification of the sanctioned
scheme/winding up of the company is pending before the NCLT (Section 264).
It is also pertinent to note here that in case an application is made under Section
253(2) of the 2013 Act, that no suit for the enforcement of any security against
the company shall lie or be proceeded with, the NCLT may pass an affirmative
order that will remain operative for 120 days, and under such conditions the se-
cured creditors cannot take action under the SARFAESI Act.

25. Manner of taking possession: analogous UCC law

Article 9, section 609 provides:
(a) Possession; rendering equipment unusable; disposition on debtor’s
premises. After default, a secured party:
(1) may take possession of the collateral; and

14th September, 2013).

96. Provisions not yet effective, as not yet notified. (Information updated as on
97. ibid.
1026 See. 134), Sya. 25 Part 1/—Chap. I1l-—Enforcement ofSecurity interest

(2) without removal, may render equipment unusable and dispose

of collateral on a debtor's premises under section 9-610.
(b) Judicial and nen-judicial process. A secured party may proceed under
sub-section (a):
(1) pursuant to judicial process, or
(2) without judicial process, if it proceeds without breach of the
peace.
(c) Assembly of collateral. If so agreed, and in any event after default, a
secured party may require the debtor to assemble the collateral and
make it available to the secured party at a place to be designated by the
secured party which is reasonably convenient to both parties.

26. Clause (b): Takeover of management of assets (clause as it stood

prior to 2004 amendments):
There is a significant difference between the language of this clause and that of
section 9a). Section 9(a) talks about takeover of the management of the business
of the borrower for the purpose of asset reconstruction. This section is merely
concerned with enforcement of security interest and provides for taking over the
management of the secured assets. Therefore, the purport of this clause cannot go
beyond a taking over of symbolic possession of the assets, for the purpose of
sale. The Delhi High Court has considered the difference between taking over of
management for the purpose of sale, and taking over of management for better-
ment of business. The takeover under this clause should only be restricted to a
takeover for the purpose of sale, as a creditor cannot prima facie have the right to
replace the owner of the business to whom he lends. “Takeover of management is
quite distinct from takeover of possession for the purpose of sale of the estab-
lishment. In the former case, action is resorted to with a view to nurse and reha-
bilitate the establishment by providing better management which is not the posi-
tion in the latter case... This position is well settled and there cannot be any dis-
pute that takeover of management of an undertaking is quite distinct from
Over of itsassets for thepurpose ofsale thereof forsatisfaction ofthe dues ofthe
State financial corporation.
_ Takeover of management of the business of the borrower could not
intended by this section due toits broad character, viz, enforcemen have been
t
interests. See also notes under section 15. A takeover of management of security
of the busi-
ness ofthe borrower could have been implied only where
the lender has security
interest over the entire business of the borrower, with a
management of the
right to takeover the
business.

27. Clause (b): Takeover ofmanagement

of business of
(clause as itstood after 2004 amendments): —
'n Our comments above onthe language ofthe
amenciments in2004, we had clearly opined Clau se asitstood prior to the
thewords “takeover ofmanagement

98. Micronix India v. Disco Electronics

Ltd., (1999) 96 Com Cases 950 (Del),
Clause (b): Takeover of management of business, etc. Sec. 13(4), Syn. 26 1027

of assets” did not mean takeover of business of the borrower. The lawmakers
seemed strongly inclined to include takeover of management of business, and
hence the amendment.
There is nothing analogous to this section in Article 9 of the UCC—in fact,
such a clause is unthinkable under the scheme of Article 9 of UCC or other secu-
rity interest enforcement laws.
With the amendment of this sub-section, section 15 now relates to takeover of
management of business by an asset reconstruction company under section 9 as
also a takeover of management of business under this sub-section.
We have earlier commented that the right of a lender is not equivalent to the
rights of a proprietor. Further, the whole scheme of the Act relates to enforce-
ment of security interest, and this law can only be limited to providing effective
remedies for enforcement. The law cannot provide enhanced security interest to
the lender. It may be noted that the position of state finance corporations that
provide developmental finance to assisted units is very different from that of
banks. Commercial banks of today are commercial in the fullest sense—they lend
against credit cards and cars and dreams of all kinds, and the marketing that is
done for selling loans leaves no scope to believe that they had a developmental
motive in mind.
Essentially, the right to takeover of business would be applicable only in case
of floating charges where the secured lender has an all-pervasive security interest
extending to all or substantially all the assets of a business, such that taking over
the management of the assets would logically mean takeover of business. The
position seems to be similar to the administrative receivership rules of the U.K.
insolvency law where the administrative receiver steps in to takeover the reins of
the business to prevent from getting into insolvency.
The first proviso below the sub-section seems to suggest that the right to take-
over the management of the business of the borrower exists in all cases of se-
cured lending—it is only the right to lease, assignment or sale of the business that
requires the secured lender to have security interest over “substantial part of
business of the borrower”. Obviously, this provision cannot be carried to its lit-
eral extent, for several reasons.
loan
First, it would be blatantly illogical for a lender, who gave me a
to repay the loan
to buy my car, to takeover my business when I failed
not on my
on my car. The lender’s security interest was on my Car,
business.
of the busi-
Second, the secured lender taking over the management
anaged or not effi-
ness must believe that the business is being mism
business better.
ciently managed, and that the lender can manage the
the business has the
Third, whoever takes over the management of
stakeholders, including the
same responsibilities to other creditors and
the borrower himself had. There-
shareholders of the borrower entity, as
may be a thorny cap to put on.
fore, takeover of management of business
Oo 22. 2 eee eee
99. See also notes below section PS;
 1028 See. 134), Sya.27 Part li-—Chap, lil-—baufercement af Seourity Inieresi

Fourth, there is a significant principle underlyang section | 4—gi ving

credit for the sale proceeds to the borrower, and claiming deficiency oF
returning the surplus to the borrower. IU is the opinion of the author that
even if the right of a secured lender to takeover the management of the
business of the borrower is upheld, it can only be for the limited pur-
pose of disposal of assets, While the section speaks of “takeover the
management of business of the borrower, including the right to Wans-
fer...”, ete., the purpose of such takeover cannot be otherwise than for
transfer of the secured assets,

28. Second proviso below the sub-section

Quite in line with the incoherent drafting of this law, the second proviso makes
an equally confusing provision. It refers to the severability of the management of
the business, whereas the reference should really be to the severability of the
business. As we have opined earlier, there is no question of takeover of the man-
agement of anyone’s business unless the security interest is a floating charge
covering the whole or substantially the whole of the undertaking of the borrower.
Read in that light, the purport of this proviso is that if there is a floating charge
over a specific and severable business, the management of that business may
taken over by the secured lender.

29. Conflict between section 9 and section 13(4)(b)

Asset reconstruction companies, under section 9 have been given several pow-
ers for restructurin of a business,
g which include the power to takeover the man-
agement ofa business. However, this power can be exercised only subject to
regulatory restraints, as the section talks about the guidelines of the RBI.
While it would be quite logical that the powers of an asset reconstruction com-
pany are wider than those of a secured lender, it is surprising that there are no
fetters placed by the law on the right ofa secured lender totakeover manag
ement
of business under this clause.

30. Guidelof
inthe
esRBI
See notes under section 9 as regards the guidelines of the RBI
on takeover of
manage
of me
the borrow
nter.

31. Will the section also apply to a guarantor?

On the face ofit,itmight seem that, since the guaranto
law astheborrower, theprovisions are applicable r isalso defined j this
would behardtothink ofthesecured lender taki toa guarantor. However
ng overthebusiness ofthepuar-
antor. It isdiffic to think
ultof floati charge over substantially all the assets of a
gu ieede
ar haemm
which,
an den
as we
toof a r,
have discussed above. should be unders totoo
be a dpre-
 Clause (c): Appointment of manager Sec. 13(4), Syn. 32 = 1029

of a guarantor, the guarantor may be a promoter or director, not having any busi-
ness as such.
While there are significant differences between provisions of section 29 of the
SFC Act and those under this sub-section, it may not be out of place to mention
that the opinions of Courts on whether the rights under section 29 of the SFC Act
extend to the property of the guarantor differ. In N. Narasimhaiah v. KSFC Ban-
galore,’ the Division Bench of the Karnataka High Court held that section 29 of
the State Finance Corporations Act did not give the corporation a right to take
over the business of the guarantor, as the language used by the law hinted at tak-
ing over the “industrial concern”. The full bench of the Allahabad High Court has
held in Munnalal Gupta v. Uttar Pradesh Financial Corporation that the right
would not extend to the property of the guarantor. However, the Kerala High
Court in Thressiamma Verghese v. Kerala State Finance Corporation, has ruled
differently. Several conflicting rulings were reviewed by the Division Bench of
Bombay High Court in Padma Prafulla Shirke v. Maharashtra State Financial
Corporation,’ and the Bombay High Court followed the Kerala High Court rul-
ing above.

32. Clause (c): Appointment of manager

It is notable that this clause is operative only in case of properties that have
been attached under clause (a). After taking over of possession under clause (a), a
duty is cast upon the secured lender to take proper care of the assets: therefore, if
the assets in question require to be “managed”, it is a duty, and much less the
power, of the secured lender to manage the same. This clause refers to the ap-
pointment of a manager to manage the attached asset as a measure for recovery
of the secured debt, from which a possible inference can be that the secured
lender may run the attached asset and recover money by so running them. It is,
however, doubtful if the rights of a secured lender include the right to run and
manage an asset to recover his dues. As stated before, this section cannot en-
hance the rights of the secured lender.
The word “manager” under this clause should be interpreted as “receiver and
manager”, as the appointment of manager under this clause is in enforcement of
security interests. The distinction between a “manager” and “receiver and man-
ager” was thus brought out by Jenkins LJ in re B Johnson & Co. (Builders) Tia...
where the judge said:
“The phrase ‘manager of the company,’ prima facie, according to the
ordinary meaning of the words, connotes a person holding, whether de
jure or de facto, a post in or with the company of a nature charging him
with the duty of managing the affairs of the company for the company s
benefit; whereas a receiver and manager for debenture holders is a per-
son appointed by the debenture holders to whom the company has
given powers of management pursuant to the contract of loan consti-

. 1 (2004) BC 49.
. AIR 1986 Ker 222.
IV (2004) BC 371.
sep(1955) Ch 634.
1030 See. 134), Syn. 33 Part 1/—Chap. 1li-—-Enforcement afSecurity Interest

tutedby the debenture, and, as a condition of obtaining the loan, to ene

able him to preserve and realise the assets comprised in the seourity for
the benefit of the debenture holders, The company gets the Joan on
terms that the lenders shall be entitled, for the purpose of m their
security effective, to appoint a receiver with powers of sale and of man-
agement pending sale, and with full discretion as to the exercise and
mode of exercising those powers.”
Under section 69A of the Transfer of Property Act, a mortgagee having the
power to sell a secured asset also has the power to appoint a receiver of the in-
come of the property or any part thereot, The practice of appornting receivers
grew up in England since a mortgagee possessing the property humself was
bound under duty of care [see later under this section]. Receivership was seenas
a device to preserve the benefits of possession, while avoiding any duty of care
of the property since a receiver is, under law, deemed to be the agent of the mort-
gagor. [section 69(3)].
This section provides for appointment of “manager” but does not lay down the
duties of the manager akin to section 69A, nor does it provide who would be re-
sponsible for the lapses, if any, of the manager. Therefore, unlike under section
69A, the manager may well be taken as the agent of the secured lender.

33. Clause (d): Right to attach receivables on sale of secured assets:

This clause is very confusing and may be the reason for serious controversyor
misunderstanding. One might get a feeling that a secured lender may attach the
receivables of the borrower to recover his debt. First of all, it must be reiterated
that this section is not a way for a lender to recover his money, but to enforce his
security claim. The security claim can extend only to the assets over which the
lender has a security. If the receivables themselves happen to be the secured as-
set, the right over such receivables is exercisable under clause (a) and not under
clause (d).
Clause (d) relates to receivables arising out of sale of a secured asset. For in-
stance, if a machine or building was subject to the charge of the lender, and the
borr ower
rightly or wrongly,
, sells the same to someone, the receivables that
arise from such sale can be attached under this clause.

subject | to the lender’sS charge.. An

An asset subjectto a
a floatin
ing g char
can be
ge
bought
and sold freely, and the buyer acquires the asset free ofthe lender’s charge
. It
cannot be said that an asset subject to a floating charge was a secure
d asset, be-

In Nutan Warehousing Co.b P. Ltdv.

, Indian Bank’,; the DRAT
affirming the action of the bank in requiring a recei an
ee ver odli chen aala tes
S. TV (2004) BC 214 (DRAT/DRT).
Sale of the asset by the secured creditor Sec. 13(4), Syn. 34 = 1031

leased godowns as a valid action under section 13(4)(d)—there was no analysis

whether the receiver can be said to have “acquired” the secured asset and as to
therefore, whether the case fell under section 13(4)(d).

34. Sale of the asset by the secured creditor

As reiterated earlier, the purpose of exercise of any of the powers referred to in
section 13(4) is the realisation of the security: therefore, as soon as may be expe-
dient after takeover of possession of the assets, the secured creditor must arrange
to sell the asset. The secured creditor is entitled to sell the secured assets of the
borrower for realising its outstanding liability by any and every mode.° Since the
sale proceeds on sale of the asset go to the credit of the borrower, an undue delay
on the part of the lender to sell the asset after repossession may invite litigation,
as the borrower’s liability continues without being adjusted, even though he has
been dispossessed of the asset.’ See also comments under the Security Enforce-
ment Rules in Part I[]—neither the law nor the rules fix any limit within which
the lender is required to dispose of the asset, giving rise to questions of propriety,
adjustment of the account of the borrower, and charge of further interest after
possession.
Compliance with the procedure laid down in the Security Interests Enforce-
ment Rules is mandatory. Where there was departure from the Rules, the sale has
been set aside. In Manoj D. Kapasi v. Union of India®, the Division Bench of the
Bombay High Court set aside a repossession action taken by the bank where the
public notice was published on the 30th October 2004 and the last date for ten-
ders was fixed as 5th November 2004. The tender document required the bidder
to pay 25% forthwith, but the amount was actually not paid until 19th January
2005. In this case, not only was the sale made by the bank set aside, but since the
borrower has a right of redemption any time before the sale, the borrower was
allowed to redeem the property by tendering the amount demanded by the bank.
Notably, the property had been sold by the bank for Rs 15 crores, while the re-
demption was done merely by settling the bank’s dues of Rs. 4.55 crores. The
sale notice was held to be not as per rule 8 when valuation of the secured asset
was not obtained from the approved valuer, sale notice was not published in two
local newspapers, encumbrances on the secured assets were not stated in the sale
notice and reserve price was not quoted therein.
Can the secured creditor sell the assets to himself? On this, the consistent view
of the author has been the right of a secured creditor holding security interest
cannot be equated with someone holding proprietary interest, and therefore, a
secured creditor cannot cause a sale to himself. There is a limited carve-out out
of this principle in sub-section (5A), but sub-section (SA) only reinforces the ge-
eco-
neric rule that a secured creditor cannot sell to himself or anyone whose
nomic interest is the same as that of the seller.

M11 (2009) BC 245 (DB).

6. Milestone Gears Pvt. Ltd. v. Industrial Fi nance Corporation of India,
may, even after repossession, pur-
by him and
7. A creditor is not bound to sell the asset repo ssessed
under this section under caption Effect
sue monetary remedies or sue the guarantor. See als © notes
of Action under section 13(4).
8. Ill (2009) BC 592 (DB).
e Cooperative Bank Ltd., I (2007) BC 236.
9. CS Hotel Pvt. Ltd. v. Ahmedabad Peopl
1032 See. 134), Sya. 35 Part li—Chap. 1l—tnfercement afSeounity dnteresi

35. Duties of the secured creditor

Courts in England, India, and nay, the rest of the world, have dealt with the du.
ties of the secured creditor exercising rights over the secured asset, This law has
been evolving over almost one and half century, While courts had in mind suri
ous mortgage lenders before, the law has taken a definitive pro-banker stance of
late with emergence of professional banking entities.
The duties of the secured creditor are discussed under the headings below,

36. Proper care of the secured asset

In England, old rulings of courts have held that not only does a mortgagee have
a duty not to act “fraudulently, wilfully or recklessly”,'” but also he has an im-
plied duty to act with reasonable care."
In a recent English ruling, the Court of Appeal in Cuckmere Brick Co, v. Mu-
tual Finance Ltd."*, had an occasion to deal with the duty of the mortgagee to get
the best price. In that case, the claim was for the carelessness of the mortgapee’s
selling agent in failing to describe the property accurately in the publicity mate-
rial. The agent omitted to mention that the land in question had a planning con-
sent for a block of 100 flats, with the consequence that developers interested in
land for flats would not have attended the auction sale. The Court of Appeal, up-
holding the decision of the judge, held that the selling mortgagee was under a
duty “to use reasonable care to obtain a proper price for the r property”
Salmon LJ said “The mortgagoris vitally affected by the result of the sale, but its
preparation and conduct is left in the hands of the mortgagee. The proximity be-
tween them could scarcely be closer. Surely they are “neighbours”.”
Not only is the duty of proper care owed to the debtor, it is also owed to the
surety, that is, the guarantor. Lord Denning MR, in Standard Chartered Bank v.
Walker’, held that a secured lender owed a duty of care in tort to all those fore-
seeably likely to be affected by the conduct of the sale, including the debtor it-
self, and any sureties. In addition, the like duty of care was ow by a receiver,
acting as agent for the mortgagor. The surety was held entitled to defend the ac-
tion brought by the creditor on that ground. In American Express Bank v. Hur-
ley - the surety succeeded after a trial inreducing his liability by reliance on the
existence of a duty of care.

16 Konmedy ».deTrafford (1897) AC 180.

v. Vanderzee. (1896) 17 WR 547; National Bank ofAustralia
(187
ay 9)4 4App ( 391: TomlliTnomli v. Luce, (1889) 43 Ch D 191;1; McHughv.».Unit
App Cas ed Hand inHand
Union Bank: of ate
12. (1971) Cho4o
13. (198 1 WLR
2) 1410.
14. (198 3AN5)ER 546.
 Duty to get the best price Sec. 13(4), Syn. 37 1033

37. Duty to get the best price

The duty of proper care explained above cannot be stretched to a point where a
mortgagee is required to Put his Own interests behind those of the borrower. In
Kennedy v. De Trafford'’, LINDLEY, LJ said: “A mortgagee is not a trustee of a
power of sale for the mortgagor at all; his right is to look after himself first. But
he is not at liberty to look after his own interests alone, and it is not right, or
proper or legal for him either fraudulently, of willfully, or recklessly, to sacrifice
the property of the mortgagor; that is all.” Almost one century later, in Downs-
view Nominees v. First City Corporation"®, the Court was to express the same
view, albeit a little more emphatically in favour of the lender. LORD TEMPLEMAN
said:
“Several centuries ago equity evolved principles for the enforcement
of mortgages and the protection of borrowers. The most basic principles
were, first, that a mortgage is security for the repayment of a debt and,
secondly, that a security for repayment of a debt is only a mortgage.
From these principles flowed two rules, first, that powers conferred on a
mortgagee must be exercised in good faith for the purpose of obtaining
repayment and secondly that, subject to the first rule, powers conferred
on a mortgagee may be exercised although the consequences may be
disadvantageous to the borrower. These principles and rules apply also
to a receiver and manager appointed by the mortgagee. It does not fol-
low that a receiver and manager must immediately upon appointment
seize all the cash in the coffers of the company and sell all the com-
pany’s assets or so much of the assets as he chooses and considers suf-
ficient to complete the redemption of the mortgage. He is entitled, but
not bound, to allow the company’s business to be continued by himself
or by the existing or other executives. The decisions of the receiver and
manager whether to continue the business or close down the business
and sell assets chosen by him cannot be impeached if those decisions
are taken in good faith while protecting the interests of the debenture
holder in recovering the moneys due under the debenture, even though
the decisions of the receiver and manager may be disadvantageous for
the company.”
LORD TEMPLEMAN went on to say:
“If a mortgagee exercises his power of sale in good faith for the pur-
pose of protecting his security, he is not liable to the mortgagor even
though he might have obtained a higher price and even though the
terms might be regarded as disadvantageous to the mortgagor. Cuck-
mere Brick Co. Ltd. v. Mutual Finance Ltd.,'’ is Court of Appeal au-
thority for the proposition that, if the mortgagee decides to sell, he must
for any
take reasonable care to obtain a proper price but is no authority
also owes the
wider proposition. A receiver exercising his power of sale
ee UO e ee
15. (1896) 1 Ch 762.
16. (1993) AC 295 (Privy Council).
17. (1971)Ch 949.
1034 See. 13(4), Sya. 37 Part 1/—Chap. 1ll-—Enforcement of Security Interest

same -ific duties as the mortgagee. But that apart, the general duty
of a be and manager appointed by a debenture holder, as defined
by JENKINS LJ in re B Johnson & Co, (Builders) Lid., leaves no room
for the imposition of a general duty to use reasonable care i dealing
with the assets of the company, The duties imposed by equity onu
mortgagee and on a receiver and manager would be quite unnecessary
there existed a general duty in negligence to take reasonable care in the
exercise of powers and to take reasonable care in dealing with the assets
of the mortgagor company.”
In India, there have been several cases relating to sale of assets particularly by
state financial corporations. In Mahesh Chandra v. U.P. Financial Corporation” ,
the Supreme Court had set extensive list of lender responsibilities, labeled as
principles of natural justice, which have been considerably weakened in Haryana
Financial Corporation y, Jagadamba Oil Mills”’, While the ruling in Jagadamba
Oil Mills (supra) does not discuss the principles that will govern a secured lender
exercising the power of sale, the essential principle of unreasonable conduct shall
continue to govern the lender. See also, the Supreme Court ruling in Karnataka
State Industrial Investment Corporation v. Cavalet India Ltd.”' In SJS Business
Enterprises (P.) Ltd. vy. State of Bihar”, the Supreme Court ruled; “..in over-
ruling the decision in Mahesh Chandra (supra), this Court has affirmed the view
taken in Chairman and Managing Director, SIPCOT, Madras v. Cantronix P.
Lid.”’, and said that in the matter of sale under section 29, the State Finance
Cor-
poration must act in accordance with the statute and must not act unfairly, ie.,
unreasonably. If they do, their action can be called into question under Article
226. Reasonableness is to be tested against the dominant consideration to secure
the best price for the property to be sold.” See also Gajran Jain v. State of Bi-
har**, where a sale ata consideration apparently undervalued, without obtaining a
valuation of the assets, was struck down. In Sun Star Future Wood Ltd. y.
Authorised Officer Stressed Assets Stabilisation and Fund’, the Gujarat High
Court observed that an attempt must be made by the bank to fetch the maximum
price of the property, so that the property may not be sold away at a throw away
price. The bank shall act as the trustees of the property and shall make sufficient
attempt to realise the maximum money of the property.
In rulings relating to sale under section 29 of State Finance Corporations law,
courts have time and again stressed the need to secure the best sale price. These
rulings were given in a particular set of circumstances. Since SFCs are public

(1955)Ch 634, 661.

(1993) 2 SCC 279.

(1995)4 SCC 595.

Tl (2004)
BC 514 (SC).
1 (2009)
BC 460.
 Commercially reasonable conduct Sec. 13(4), Syn. 38 = 1035

However, the position of the secured lender is quite different. Best price cannot
be an overriding objective, and there can be no presumption that best price can be
obtained only at public auctions. In asset resolution business today, the key prin-
ciple is not the highest price, but the highest value, which might most likely mean
expeditious sale. In a fast changing world of technology, delaying a sale in a bid
to get the best price might do more harm than good. Besides, though the benefit
of the sale price goes directly to the borrower, the interest of the secured lender in
maximising the sale price cannot be ignored—after all, he is only an unsecured
lender for the part of the outstanding amount that could not be realised by way of
the sale proceeds on the secured assets. Hence, English law has, rightly in the
opinion of the author, stressed more on reasonable conduct than the duty to se-
cure the best price.
Let aside the rulings of the English courts spanning over 100 years, the Secu-
rity Interests (Enforcement) Rules seem to impose on the lender the same duty
that LORD TEMPLEMAN says is not applicable. Rule 6(1) provides for several
methods of sale “to secure the maximum sale price’. In sum, though a lender
cannot be accused of not having got the best of the best sale prices, a lender
would be failing in his duty if he ignores the interest of the borrower since the
sale price gives credit to the borrower and the lender exercising his rights under
this section cannot assume a callous attitude to the interests of the seller merely
because what he is selling is not his own property.

38. Commercially reasonable conduct

While it may be debatable whether the seller is duty-bound to secure the best
price, it is a fundamental principle of law that the conduct of the seller in enforc-
ing security interest and the action thereafter must be commercially reasonable.
He is not a trustee or an agent of the borrower, but he cannot be a prodigal with
the asset.
The commercial reasonableness test is one of the strong planks of Article 9 of
the UCC of USA. Article 9, section 610(b) provides:
Every aspect of a disposition of collateral, including the method,
manner, time, place, and other terms, must be commercially reasonable.
If commercially reasonable, a secured party may dispose of collateral
by public or private proceedings, by one or more contracts, as a unit or
in parcels, and at any time and place and on any terms.
under:
As to what is “commercial reasonableness’, section 627 provides as
no preclu-
(a) Greater amount obtainable under other circumstances;
sion of commercial reasonableness
a collec-
The fact that a greater amount could have been obtained by
time or in a
tion, enforcement, disposition, or acceptance at a different
1s not by itself
different method from that selected by the secured party
lishing that the col-
sufficient to preclude the secured party from estab
disposition, or acceptance was made in a com-
lection, enforcement,
mercially reasonable manner.
1036 See. 134), Sya. 39 Part //—Chap. 11l-—tnfercement of Securuy Interest

(b) Dispositions that are commercially reasonable

A disposition of collateral is made in a commercially reasonable
manner if the disposition is made:
(1) in the usual mannon er any recognised market;
(2) at the price current in any recognised market at the time of the
disposition; or
(3) otherwise in conformity with reasonable commercial practices
among dealers in the type of property that was the subject of
the disposition,
(c) Approval by court or on behalf of creditors
A collection, enforcement, disposition, or acceptance is commer:
cially reasonable if it has been approved:
(1) in a judicial proceeding;
(2) by a bona fide creditors’ committee,
(3) by a representative of creditors; or
(4) by an assignee for the benefit of creditors.
(d) Approval under sub-section (c) not necessary; absence of approval
has no effect
Approval under sub-section (c) need not be obtained, and lack of
approval does not mean that the collection, enforcement, disposition, or
acceptance is not commercially reasonable.
The meani of “commercial
ng reasonable has to be circular,
ness”as it appears
in clause (b)(3) above. However, the important point that emerges from the above
definition is that the commercial reasonableness of a sale cannot be
merely on the ground that the price realised on sale could have been higher. This
is also the significant conclusion in the rulings under English law cited above:
hence, the duty cast by this law on realisation of the best price can only be seen
in light of commercial reasonableness test above.

39. Payment of expenses in relation to the secured asset

_ Is the secured creditor, having taken possession of the secured asset, liable to
incur expenses with respect to the asset? These expenses may relate to several
counts such as preservation of the asset, perfection oflegal title, paymen
t of any
outstanding legal expenses, etc? To the extent that the sale procee
ds of the asset
g0 to the credit ofthe borrower, the secured creditor has the
obligation of main-
taining, safekeeping and preservation of the asset.
Incertain cases, there might be a need to incur legal expenses
asset. For example, a motor vehicle might have unpaid in relation tothe
taxes and the secured
creditor might be required to pay the same. In Vija
y Kumar Mane y. Regional
Transport Officer”. theDivision Bench of the Karnataka High Court held that
a
26. 11 (2004)
BC 311.
 Effect of actions under section | 3(4) Sec. 13(4), Syn. 40 = 1037
State finance corporation seizing a motor vehicle under section 29 of the SFC
Act
has to pay the arrears of taxes on the motor vehicle. The Court treated the SFC
as
a “successor in interest” but in the opinion of the author, the secured lender ac-
quiring an asset in terms of a security interest does not become a successor in
interest, except for the limited purpose of causing a sale. The bank or the finance
corporation, for example, has no right to run the vehicle seized by it as it is not
the owner of the asset. It only has the right to transfer ownership to a buyer, but
not rights of ownership by itself.
In S. Seshadri v. The Recovery Officer’’, the Chennai DRT held, in a case un-
der the RDB Acct, that the bank causing a sale of the property is required to clear
the prior dues on the property so as to pass good and unencumbered title to the
auction buyer. The bank may, in turn, add such dues to the amount recoverable
from the borrower.
On the other hand, in Sapthagiri Pee Gee Fruits Processing (P.) Ltd. v. Uco
Bank**, the DRAT held that the property in question, being plant and machinery,
was sold on as-is-where-is basis, and the electricity dues thereon had to be paid
by the auction buyer. The DRAT held that section 55A of the Transfer of Prop-
erty Act, requiring a seller to disclose all material defects in the property that the
seller is aware of, had no application in the present case as relevant information
known to the Tribunal was disclosed in the notice inviting tenders.

40. Effect of actions under section 13(4)

What is the effect of the action taken under section 13? Does it release the
surety? Does it release the debtor from his obligation towards personal remedy?
A secured creditor has primarily three sources of repayment. He may seek re-
payment by forcing the debtor to pay, or may sell the secured asset, or may claim
payment from the guarantor. These remedies are not mutually exclusive. This
law is not a complete code on recovery of secured loans it is limited only to en-
forcement of security interests. The secured lender will have to pursue the other
two remedies either under the RDB law or other usual civil procedures, or may
choose to take the borrower and/or guarantor to winding up.
Following any one course does not prejudice the other. In China & South Sea
Bank v. Tan’’, LORD TEMPLEMAN beautifully put it as follows;
“The creditor had three sources of repayment. The creditor could sue
the debtor, sell the mortgaged securities, or sue the surety. All these
remedies could be exercised at any time or times simultaneously or con-
temporaneously or successively or not at all. If the creditor chose to sue
the surety and not pursue any other remedy, the creditor on being paid
in full was bound to assign the mortgaged securities to the surety. If the
creditor chosé to exercise his power of sale over the mortgaged security
he must sell for the current market value, but the creditor must decide in
his own interest if and when he should sell. The creditor does not be-

27. II (2004) BC 200 (DRT/DRAT).

28. IV (2004) BC 227 (DRAT/DRT).
29. (1990) 1 AC 536.
1038 See. 1X5) Part ll—Chap. Hl—Bufercement of Seourity Interest

come a trustee of the mortgaged securities and the power of sale for the
surety unless and until the creditor is paid in full and the surety, having
paid the mortgaged debt, is entitled to a transfer of the mortgaged secu
rities to procure recovery of the whor ol parteof the sum he has paid to
the creditor.”
“The creditor is not obliged to do anything. If the creditor does noth:
ing, and the debtor declines into bankruptcy, the mortgaged securities
become valueless and the surety decamps abroad, the creditor loses his
money. If disaster strikes the debtor and the mortgaged securities, but
the surety remains capable of paying the debt, then the creditor loses
nothing. The surety contracts to pay if the debtor does not pay and the
surety is bound by his contract. If the surety, perhaps less indolent or
less well-protected than the creditor, is worried that the mortgaged se-
curities may decline in value, then the surety may request the creditor to
sell and if the creditor remains idle then the surety may bustle about,
pay off the debt, take over the benefit of the securities, and sell them.
No creditor could carry on the business of lending if he could become
liable to a mortgagor and to a surety or to either of them for a decline in
value of mortgaged property, unless the creditor was personally respon-
sible for the decline. ...it appears to their Lordships that in the present
case the creditor did no act injurious to the surety, did no act inconsis-
tent with the rights of the surety and the creditor did not omit any act
which his duty enjoined him to do. The creditor was not under a duty to
exercishise power of sale over the mortgaged securities at any particu-
lar time or at all.”

Section 13(5)
(5) Any payment
made by any person referred
to in clause
(d) of sub-
section (4) to the secured creditor shall give such person a valid dis-
charge as if he has made payment to the borrower.

COMMENTS
This clause relates only to the receivables relating to purchase of secured assets
referred to in section 13(4)(d). There is no analogous provision applicable in a
case where the receivable itself isthe secured asset and has been attached by the
secured creditor. However, by sub-section(6 i ;
debt shellgeta valid ~ (6) following, the garnishee of such

Section 13(5A)
ISA) Where the sale of an immovable property, for which
Ri] a

reserve
price has been specified, has been postponed for
want ofa bidofan
30. Ins. by the Enforcement of Security Interest
(1oF 2013), 8.506) (wef IST 20) nerd OFDes Laws(Amendment)
Act,2012
 Effect of actions under section 13(4) Sec. 13(5) 1039

amount not less than such reserve price, it shall be lawful for any offi-
cer of the secured creditor, if so authorised by the secured creditor in
this behalf, to bid for the immovable property on behalf of the secured
creditor at any subsequent sale. ]

COMMENTS
Debt satisfaction in “kind”
The amendment, in a way, operates, as satisfaction of debt in kind. The secured
creditor can participate in a bid and acquire the immovable property on auction,
and adjust the purchase price against its claim.
Pre-requisites for participation of the Secured Creditor
The secured creditor is not at liberty to participate in the first sale itself; there
must be circumstances existing as stipulated under the newly inserted sub-
Section, under which the secured creditor can proceed to participate in the bid-
ding:
(a) The property must be immovable, the provision is inapplicable to sale
of movable property;
(b) The secured creditor must have taken steps to sell it off by the method
of public auction as specified under rule 8(5) of the Security Interest
(Enforcement) Rules, 2002, and by no other method specified therein. It
is so, because the bids are relevant to auctions only and not to sale by
inviting tenders or to any other mode of sale.
(c) The sale of the immovable property must have been postponed. There
might be cases where the sale was concluded and the auction purchaser
fails to pay the consideration, due to which the sale stands cancelled.
section 13(5A) does not apply to such cases.
(d) The postponement must be due to want of a bid at least equal to the re-
serve price. This means, at the time of sale, there was not even a single
bidder who bade for the property at a price which is not less than the re-
serve price fixed for the property. No other reason for postponement,
will allow the secured creditor to participate in the subsequent sale.
(e) The participation must be through any officer authorised by the secured
creditor. It is to be noted that the officer under this provision shall not
be the one as defined under rule 2(a) of the Rules. The authorised offi-
cer conducting the auction, and the one participating in the auction can-
not be the same. Moreover, the person authorised under this Section can
be any officer, while the authorised officer under Rule 2(d) can be any
person or authority which exercises powers of superintendence, direc-
tion and control of the business or affairs of the secured creditor,
‘it shall be lawful”- Was/is it unlawful otherwise?
creditor to have a
The amendment allows an authorised officer of the secured
in the provision, to intici-
liminted opportunity, in the circumstances mentioned
er, the question is, 1s there a
pate in the sale of the immovable property. Howev
1040 «=See. LMS) Part 1l—Chap. 111—Enforcement of Security Interest

general right of a secured creditor to participate in a sale? The Court in Palpap

Ichinichi Software International Lid. v. Indian Bank” remarked there is NO provi-
sion akin to that of Order 21 rule 72 of the Code of Civil Procedure in the SAR-
FAESI Act disentitling the decree holder from participating in the auction with-
out the express permission of the Court’. However, the consistent view of the
author has been that the right to cause a sale does not include the right to buy
oneself. See notes under the heading Sale of Asset by Secured Creditor, under
sub-section (4).

Section 14(5B)
(SB) Where the secured creditor, referred to in sub-section (SA),is
declared to be the purchaser of the immovable property at any subse-
quent sale, the amount of the purchase price shall be adjusted towards
the amount of the claim of the secured creditor for which the auction of
enforcement of security interest is taken by the secured creditor, under
sub-section (4) of section 13.]

COMMENTS
Adjustment to the claim of the secured creditor
Very similar to Order 21, rule 72(2) of the Code of Civil Procedure, the new
sub-section allows adjustment of the amount of the purchase price of the immov-
able property against the amount of the claim of the secured creditor.

Section 13(5C)
feo + apie: of section 9 of the Banking Regulation Act,
s as far as may be, apply to the immovable pr acquired
by secured creditor under sub-section (5A). ] disiahad
COMMENTS
Section 9 of the Banking Regulation Act: What it says?
win
Before we analyse, let us read what section 9 of the Bankin
j g Regulation
; Act
“Disposal of »-banki i a ithstandi hi biked ts
howsoever

31. TH (2012) BC 324 (Mad.) (DB).

32. Order 21 rule 72 ofthe Code of Civil Procedure prohibits e
TreoeatressPermission oftheCont. ® decree holder tobidfororbuyproperty
(1 of2013), s. S)(wef 151.01)
& Ins. Recovery ofDebts Laws(Amendment Act,2012
)
hy the Enforcement ofSecurity Freres
(1 of 2013). s SOD) (8 1ST IOPR) ee Onn OfDens Laws (AmmenamEM)
_ oo. Act,2012
 Nature of sale by the creditor Sec. 13(6), Syn.2 1041
such properly shall be disposed of within such period or exten
ded period, as the
case may be:
Provided that the banking company may, within the period of seven
years as
aforesaid deal or trade in any such property for the purpose of facilit
ating the dis-
posal thereof:
Provided further that the Reserve Bank may in any particular case
extend the
aforesaid period of seven years by such period not exceeding five years where
it
is satisfied that such extension would be in the interests of the depositors of the
banking company.”
Therefore, a banking company cannot hold an immovable property for more
than 7 years, except for its own use. The immovable property has to be disposed
off within 7 years. Power to extend the period to further 5 years has been vested
in RBI.
Coming to sub-section (SC) of section 13, it requires that the aforesaid provi-
sions, shall be, as far as may be, applied to the immovable property acquired by
the secured creditor under sub-section(SA). As such the secured creditor
(bank/FI), cannot hold the immovable property acquired for more than 7 years,
unless the same has been held for own use of the bank/FI. It is to be noted that
the BR Act applies the restriction to a banking company; however, the amend-
ment extends the provisions of section 9 of the BR Act to FIs too, for the purpose
of this sub-section only.

Section 13(6)
(6) Any transfer of secured asset after taking possession thereof or
take over of management under sub-section (4), by the secured creditor
or by the manager on behalf of the secured creditors shall vest in the
transferee all rights in, or in relation to, the secured asset transferred
as if the transfer had been made by the owner of such secured asset.
COMMENTS

1. Can there be a sale without possession?

The measures referred to in sub-section (4) relate to taking over possession, or
management of the assets, and it is necessary that any sale of the asset by the se-
cured lender be preceded by such takeover of possession or management. This 1s
implied by the language of this sub-section. However, there is nothing in this law
as to how long before the sale should the measures under sub-section (4) be
taken. The Rules, however, provide for a 30-day notice before sale to the bor-
rower [rule 6(2) and rule 8(6)], which becomes the mandatory minimum gap be-
tween the takeover of possession/management and the sale.

2. Nature of sale by the creditor

of powers
A sale made by the secured credit or is a sale made in pursuance the! dala-as
granted by the security agreement. The secured creditor does not make
 1042 See. 186), Syn. 3 Part /l—Chap. 11l-—Enforcement of Seourity Interest

the agent of the actual owner, nor as a trustee. He does not have any property
rights im the asset himself—he merely forces a sale, and the transfer of the asset
is done under such forced sale to the actual buyer, That is why, as this clause
states, the transfer gets sucheerights in relation to the secured asset as the actual
owner had. The words of this law saying “as if the transfer had been made by the
owner of the secured asset” merely say the obvious, because the transfer iy in law
a forced sale made by the actual owner,
Stated negatively, the nights of the buyer are not better than the rights of the ac-
tual owner, that is, the debtor, except that the asset has been freed from the
claims of the secured creditor making the sale. In almost like a Passing Comment,
the Division Bench of the Punjab and Haryana High Court in Sant Nirankari
Mandal v, Punjab National Bank”*, a case dealing with a sale under the RDB
Act, held that the buyer of a property “cannot get any better right or title to the
property in question than what are the rights of the owner-mortgagor or the Bank,
that too in accordance with the law”,

3. Manner of making the sale

Under common law, a security interest holder may sell the secure
d asset by
private treaty or by public auction, and it is not necessary that
the asset will be
first put up for sale by public auction,”°
The Security Interests (Enforcement) Rules also provide
for several modes of
conducting the same. The authorised officer of the secur
ed lender may sell the
secured assets taken possession of in one or more lots by
adopting any of the fol-
lowing methods to secure maximurn sale price for the assets, to be so
sold—
(a) obtaining quotations from parties dealing in the
secured assets or oth-
erwise interested in buying such assets; or
(b) inviting tenders from the public; or
(c) holding public auction: or
(d) by private treaty.
The Rules also provide that the authoris
ed officer shall serve to the borrower a
notice of thirty days forsale ofthe mov
able secured assets. See also comments
Part III. In Dayanath Pandey vy. State of U.P.”’, the noti in
ce under section 13(4)

35
36. Ranegematham v. Govt
7 MT(2008) BC634(DB M.
ag” (1955) 2 MILII:’ AIR1955 SC604,
Can the secured creditor refuse, etc. Sec. 13(6), Syn. 5 = 1043

certificate is subsequent to the sale and mentions the date on which the sale takes
place. The certificate under this law is by itself the evidence and source of the
sale. In S. Sudhakar Singh v. Government of India, Finance Department’, the
Madras High Court refused issue of sale certificate in the name of stranger and
held the auction sale not completed.
Since the authorised officer has power to convey title in the buyer, it seems that
in case of shares, debentures, etc, the authorised officer may himself execute
transfer deeds relating thereto.
One of the major concerns in the process of sale by the secured lender is the at-
tempted maximisation of the sale price. See comments under section 13(4) above
as regards the seller’s duty to maximise the sale price.

4. Sale when complete and absolute?

Whether the sale of the secured asset in public auction is complete upon issu-
ance of sale certificate as contemplated in the Rules or is complete only upon
registration thereof under the provisions of the Registration Act? The question
was raised before the division Bench of the Madras High Court in K. Chidam-
bara Manickam vy. Shakeena.*? Considering the relevant provisions of the Regis-
tration Act, the Madras High Court was of the view that sale of the secured asset
in public auction as per section 13(4) of the Act, which ended in issuance of sale
certificate under rule 9 is a complete and absolute sale for the purposes of the
SARFAESI Act and the same need not be registered as per section 17(2)(x1i) of
the provisions of the Registration Act. The view was reiterated in Saroj Shivk-
hare & Ors. v. Gaurav Enterprises & Ors.*° wherein it was held that the right of
redemption will not prevail over sales already effected under SARFAESI Act and
once the sale has been confirmed under the provisions of the Act, the sale be-
comes complete.
However, this view may not be practicable since registration under the Regis-
tration Act is conducive for maintaining land records and title searches. In fact,
there is a proposed Land Titling Bill’! which seeks to make land titles electronic
documents. Hence, while the high court in the case above was concerned with the
date when the sale is complete, the need for registration of the certificate of sale
still remains.

5. Can the secured creditor refuse to confirm the sale?

India’, the
In a very interesting case, Shabbir Ahmed Khan vy. Central Bank of
ised offi-
petitioner was the highest bidder of the secured property and the author of the
ted 25%
cer confirmed the auction in his favour. The petitioner also deposi
e 75% of the bid
bid amount immediately and was required to pay the balanc
officer by letter dated
amount on or before 24-1-2007. However, the authorised au-
that his higher
4-1-2007 declined to accept the balance bid amount stating
LT

38. IV (2009) BC 363 (Mad—DB).

39. III (2008) BC 6 (DB).
40. IV (2012) BC 93 (Madhya Pradesh High Court) (DB). sed on 10"" September, 2013).
l. (acces
41. See www.dolr.nic.in/landtitlingbill_notice.htm
42. IV (2008) BC 155.
 1044 See. 136), Syma. 6 9Part Li—Chap. ll—bajerncement afSeouruly dnienest

thorities did not confirm the auction sale. The Peutoner challenged the refusal of
the bank to confirm sale in a Writ Petition before the Andhra Pradesh High
Court. The main contenti bank was that out of inadvert
of theon Could not
i ence
issue notice under rule 8(6) to the owners of the secured property, Who are also
some of the guarantors. lt was also contended that the authorised officer and se:
cured creditor are not one and the same authority whereas as per rule 9(6), only
on confirmation of sale by secured creditor and if the terms of payment are com-
plied with, the authorised officer shall issue a certificate of sale, Therefore, un-
less the sale is confirmed by the secured creditor, the auction purchaser has no
right to make any claim for sale of secured assets and for issuance of sale certifi-
cate in his favour. The High Court after due consideration of the circumstances
and the Rules observed that it is no doubt true that a banking institution after the
conduct of sale normally cannot go back, but there may be several circumstances
under which the banking institution on verification may come to the conclusion
that there are certain defects, which may result in some further consequences or
some litigations and is not inclined to confirm the sale, the same cannot be found
fault. The High Court, however, also observed that when the bidder or auction
purchaser is prepared to take the property with defects, the banking institution
may have to confirm the same.

6. Who can be the buyer?

An impo question
rtan in this tregard is: can the secured lende buy the r
assets
himself? In case of private sales made under section 69 of the Transfer of Prop-
erty Act, courts have held that that the mortgagee cannot be a buyer himself as no
man can convey to himself.*’ Yet another reason why a mortgag ee’s
sale tohim-
self can be assailed is because his bona fides may then be doubted as he would
not have tried to obtain the best price.“ The mortgagee also cannot sell the asset
to his nominee.*°
Under the Civil Procedure Code as well, there is a bar on purchase by a decree
holder. Order 21, rule 72 provides that a holder of a decree cannot bid for the
purchase except with the express permission of the court. Rule 72A enacts a
faitplay | momeaeee. Thisrulehasbeen explained asanessential ruleof
air play.

property does not include the power tosell to himself, orto assum
e proprietary
rights. Nor can the secured lender sell the assets to any such
person where his
bona fide effort to obtain the best price can be questioned.
The ing secured
lender isnot a trustee for the borrower, but asheistrustee for
the i value

43. Natio
Bank of
nalAustralia v. United Hand inHand
rupammal. AIR 1943 Mad 30, "i _ (1879) 4 App Cas 391; EBSociety v. Aba-
44 Tse Kwong Lam v. Wong Chit Sen, (1983) 3
4S. V.P. Padm All BR $4 PC
avathi Amma
o le
v. P.S. r
Swaminatha Iyer,
Iver.AYR
AIR1975
193 Mad 343,Williams v. Wellingborough
 All costs, charges and expenses Sec. 13(7), Syn.2 1045

7. Warranties and conditions made by the seller

A very significant question is—does the secured lender making a sale under
this section give to the buyer the basic implicit conditions and warranties of a
sale? We have discussed above that the sale is being made by the secured lender
in his own special capacity, and not in capacity as an agent of the borrower. Un-
less specifically excluded, the normal conditions and warranties applicable to a
sale of the property in question will be applicable as against the secured lender.

8. UCC law on warranties in sale by secured lender

Section 610(d) provides that a contract for sale, lease, license, or other disposi-
tion includes the warranties relating to title, possession, quiet enjoyment, and the
like which by operation of law accompany a voluntary disposition of property of
the kind subject to the contract. However, by express record, these warranties
may be disclaimed.

Section 13(7)
(7) Where any action has been taken against a borrower under the
provisions of sub-section (4), all costs, charges and expenses which, in
the opinion of the secured creditor, have been properly incurred by him
or any expenses incidental thereto, shall be recoverable from the bor-
rower and the money which is received by the secured creditor shall, in
the absence of any contract to the contrary, be held by him in trust, to
be applied, firstly, in payment of such costs, charges and expenses and
secondly, in discharge of the dues of the secured creditor and the resi-
due of the money so received shall be paid to the person entitled thereto
in accordance with his rights and interests.

COMMENTS

1. Action has been taken against a borrower

The loose language of this clause confuses between action against a
borrower and action against the secured assets. Action under section 13 of
this law is essentially an action against the secured assets and not against
the borrower.

2. All costs, charges and expenses

The law provides for recovery of “all costs, charges and expenses” from the
sale proceeds of the asset. It is clear by reference that these are all costs, charges
and expenses relating to the taking of the action under this section, which would
include repossession, upkeep or management of the asset, and the sale thereof.
n of =
The law also provides for recovery of “expenses which, in the opinio
not a meee
secured creditors, have been properly incurred”. The expenses are
The opinion only
opinion—they are a matter of fact, and must be proved as such,
1046 See. 137), Sya.3 0 Part /i—Chap. I1l—Enfercemeni afSecurity Interest

relates to the propriety of the same. Note that in section 69(4) of the Transfer of
Property Act (below), there is ao reference to any such Opinion,
in reference to the word “properly incurred” under seetion 13(7), the Andhra
Pradesh High Court upheld in the case of Badugu Vijayalakshmi v. State Bank of
India® that expenses can be incurred in a variety of ways but if such expenses are
not properly incurred, they are not liable to be recovered from the borrower,
When the bank engaged a security personnel to guard the secured asset, the
Karnataka High Court in Syndicate Bank v, Basalingappa’ , relerring to rule 8(4)
of the Security Interest Rules held the action of the bank as proper and in accor-
dance with law.

3. Money shall be held in trust

In common law, a secured lender exercising his right against the secured asset
is not a trustee for the borrower. He is only a trustee in respectof the surplus
amount received by him. Section 69(4) of the Transfer of Property Act provides
as under:
(4) The money which is received by the mortgagee, arising from the
sale, after discharge of prior encumbrances, if any, to which the sale is
not made subject, or after payment into Court under section 57 of a sum
to meet any prior encumbrance, shall, in the absence of a contract to the
contrary, be held by him in trust to be applied by him, first, in payment
of all costs, charges and expenses properly incurred by him as incident
to the sale or any attempted sale; and, secondly, in discharge of the
mortgage-money and costs and other money, if any, due under the
mortgage; and the residue of the money so received shall be paid to the
person entitled to the mortgaged property, or authorised
to give receipts
for the proceeds of the sale thereof.
As could be seen, the language of section 69(4) is almost the same as sub-
section (7)
of this law. Notably, this provision is also analogous
to section 105 of
the Law of PropeAct,
rty U.K.
Notably, the words “subject to prior encumbrances” appearing in the Transfer
of Property Act are missing in this law. That, however, does not give to a secured
lender taking recourse to measures under this section a right to overlook the in-
terests ofany lender having prior interest on the secured asset. Irrespective ofthe
provisions of sub-section (9) discussed later, all prior encumbrances on the
asset
also need tobesatisfied. Not only this, Courts have even held that ifthere are
any
eoedyent mortgages ontheproperty ofwhich thesecured creditor is
aware, the
secured creditor must pay the same before making payment to
the borrower.

en

46. IV (2010) BC 189 AP (DB).

= IH (2008) BC 274. ,
West London Commercial Bank v. Reliance Perm
an
Building
en Socie
tty. (18®$) 29 Ch D 954,
 Question of priorities Sec. 13(7), Syn. 5 = 1047

4. Meaning “in absence of any contract to the contrary”

The words “in absence of any contract to the contrary” cannot be related to al-
together different contract of different loan transaction or different property alto-
gether. They would be applicable to the contract, if any, pertaining to such prop-
erty or realisation of the security interest of such property, or to such contract
incidental to the principal transaction of creation of security interest or realisation
of security interest. In Gauranghbhai Bipinbhai Pandya v. Bank of Baroda’’, the
Gujarat High Court was of the view that the words “in absence of any contract to
the contrary” cannot be related to any contract, which is not directly or indirectly
concerned with such loan transaction, or a different contract all together pertain-
ing to a different loan transaction. The High Court in Para 15 of its order ex-
plained its view in following words:
“e“
oni Therefore, in view of the specific words used by the Legisla-
ture in the later part of the section 13(7) so far as return of the money is
concerned, the strict interpretation is called for and it cannot be inter
mixed with the other rights of the secured creditors, pertaining to other
contract of different loan transaction. It is hardly required to be stated that
the person holding money in fiduciary capacity owes more responsibility
and accountability, and he cannot inter mix his personal rights to the
money held by him in fiduciary capacity. Therefore, if the secured credi-
tor who is holding the position of the trustee is required to retain money
of the surplus amount, he cannot be permitted to retain money or appro-
priate money or permitted to exercise any so called right based on sepa-
rate transaction of loan of separate property, which is not concerned with
the loan transaction in question for which the security interest was cre-
ated,, and is enforced by exercising power under Securitisation Act.”
Similar views have also been reiterated in Union Bank of India v. General
per tSO
Workers Union.

5. Question of priorities
Is the secured creditor taking action under this section liable to the other credi-
tors who did not join in such action? In context of section 19(19) of the RDB
Act, the Supreme Court has held in the case of Allahabad Bank v. Canara
Bank’', that a secured creditor who stood outside the process of winding up has
no right to claim any dividend out of money realised by a creditor proceeding
under the special machinery of the RDB law. However, this interpretation arose
out of the wording of section 19(19), which provides for distribution among se-
cured creditors in the same manner as provided by section 529 of the Companies
Act. In addition, jurisdiction is granted under that law to the Debt Recovery Tri-
bunal to decide priorities, which is not the case under the present law. In the pre-
sent law, there is no reference to section 529 except in sub-section (9). Nay, there
is no reference to the interests of any other creditor at all.

49, 2008 (2) GLR 1513.

50. III (2009) BC 459.
51. AIR 2000 SC 1535.
1048 See. 13(7), Sya.5 =Part /i—Chap. Ll—Lnforcement af Seourity Interest

However, the pari pussu rule, thal is, equality of all seoured creditors, is an Mn
portant rule of equity, and cannot be ignored by a secured lender taking achon on
a secured asset. Ln other words, a subordinated secured lender cannot assume pri-
ority over a senior lender, and a pari passu lender cannot become a senior lender,
unless so implied or enacted by legislation. Parallel laws on enforcement of seou-
rity interests in other countnes contain detailed provisions on prioriies-—tor ex
ample, section 9.312 of Article 9 of the UCC in the U.S.A., or thePersonal Prop:
erty Security Act, 1999 of New Zealand. This law, by not specifically making
any such provision, has left open a major area of dispute,
In the case of Allahabad Bank v. Canara Bank (supra), the Supreme Court,
though, respected the jurisdiction of the Tribunal in ordering priorities, it gave a
general guidance to the Tribunals, as follows:
e In case of any company which has not been ordered to be wound up, the
Tribunal may decide priorities bearing in mind the principles of section
73 of the Code of Civil Procedure and the principles of natural justice.
section 73 of the Code of Civil Procedure provides for rateable distribu-
tion of the proceeds of an execution sale.
e In case of a company in winding up, the situation will differ based on
whether the secured creditor has stood outside winding, or has preferred
claim in winding up. This position is discussed in notes under sub-
section (9) below. |
An important difference between the RDB law and this law is that there is no
adjudicating authority with judicial or quasi-judicial powers to determine priori-
ties. In the ruling above, the Supreme Court equated the powers of the DRT with
that of the civil court under section 73 of the Code of Civil Procedure. A secured
creditor taking action for recovery under this law is neither a court nor a judicial
authority. Strictly, it is a party working for its own benefit and for the benefit of
its stakeholders, and is not bound by any principles of natural justice for others.
Under section 73 of the CPC, the civil court can decide ratable distribution
among
the claimants who prove their debt before the Court. Incaseof DRTs. the
Supreme Court
has held the same principle applicable.
But there can be no case
that a secured creditor taking action under this section sits in the same position
and can decide the interests of other competing or conflicting stakeholders hav-
ing interestin the asset.

Ifthee arete nd,'0distribution cannot applytotherecoveries under thislaw.

may be rule of the jungle, but not in a civil system. ie “oe

Even under section 73 of the CPC, the rights of persons holding a mortga
ge or
charge over the asset are protected. Proviso to section 73 provides as
under:
“(a) where any property issold subject to a mortgage or charg
e, the mort-
gagee or encumbrancer shall not be entitled to share in surplus ari
ing from such sale: o sl
(b) where any property liable to be sold in execution of a decree 1sj subject
to a mortgage or charge, with the Court may, with the consent of the
 Question of priorities Sec. 13(7), Syn. 5 1049

mortgagee or encumbrancer, order that the property be sold free from

the mortgage or charge, giving to the mortgagee or encumbrancer the
Same interest in the proceeds of the sale as he had in the property sold;
(c) where any immovable property is sold in execution of decree ordering
its sale for the discharge of an encumbrancer thereon, the proceeds of
sale shall be applied—
first, in defraying the express of the sale:
secondly, in discharging the amount due under the decree;
thirdly, in discharging the interest and principal monies due
on subsequent incumbrances (if any); and
fourthly, rateably among the holders of decrees for the pay-
ment of money against the judgment-debtor, who have, prior to
the sale of the property, applied to the Court which passed the
decree ordering such sale for execution of such decrees, and
have not obtained satisfaction thereof.”
From clauses (a) and (b) above, it is clear that the rights of the secured lender
over the sold asset rank before any rateable distribution can be done.
Under section 57 of the Transfer of Property Act (applicable to immovable
properties only), where a property subject to any encumbrance is sold either pur-
suant to a decree of court or out of court, the court may, on an application by a
party to the sale, direct payment into the court of an amount sufficient to meet the
encumbrance and thereafter declare the property to be free of the encumbrance.
The provisions of the present Act do not specifically exclude section 57 of the TP
Act, nor does it apparently hit the “general inconsistency” trigger contained in
section 35. Therefore, if any secured creditor has not exercised the powers under
this law, he may still prefer an appeal to a court under section 57 of the TP Act.
Though not unarguably, applying common insolvency rules, section 73 of the
CPC and rules of equity, the priority of distribution is as follows:
e Prior encumbrances :
e Costs and expenses properly incurred for the sale
e Dues of the secured creditor, and other pari passu interest holders, (in-
cluding workers under section 529/529A of the Companies Act in case
of a company under liquidation)
¢ Dues of subsequent secured creditors holding interest in the secured
asset, of which the secured creditor has notice
e The residue left to be handed over to the borrower.
As for the residue left, the secured creditor is also liable to payment of interest
from the date of the sale till the date of actual payment made to the borrower. In
the case of H.P. State Financial Corporation, Shimla v. Prem Nath Nanda,” the
Supreme Court was not inclined to order interest to be paid by the State Financial

52. Haji Abdul Rahman v. Haji Noor Mohomed, (1892) 16 Bom 141.
53. (2000) 8 SCC 528.
1050 See, 17), Sym. 6 Part 1i—Chap. Il—Enforcement afSeourity Inierest

Corpor on the ati onheld by it, but this was based on the facts of
excess amount
the case and cannot demolish the general principle discussed above.

6. Statutory Charges
In Central Bank of India v. State of Kerala”, the Supreme Court was con-
cerned with the significant question whether the statutory first charges created by
various central and state laws will prevail over the claims of the secured lender
even while disposing of assets under the DRT law or the SARFAESI Act, After
considering a series of rulings given in the past, such as Bank ofBihar v, State of
Bihar’, Dena Bank v, Bhikhabhai P Parekh & Co.”, Central Bank of
India v. Siriguppa Sugars & Chemicals Lid.’ State Bank of Bikaner & Jaipur v.
National Iron & Steel Rolling Corporation”, the Supreme Court came to the
conclusion that the primacy of statutory first charges prevails even in case of re-
covery under the DRT law and the SARFAESI Act.
Some quick principles to decide the stacking order of priorities thal emerge out
of the SC ruling are as follows:
e Central law prevails over a state law — hence, if a Central law provides
for a statutory first charge, it has to gain primacy over a conflicting
state law.
e Section 38C of the Bombay Sales Tax Act, clearly states that: “.... if
any Central Act provides for first charge, the charge created under sec-
tion 38C of Bombay Sales Tax Act is overridden”
e As usual, the doctrine that a later law prevails over an earlier law ap-
plies here too. So, if there are several central laws providing for prior-
ity, the later law will prevail over the earlier one.
¢ Unless the law clearly provides for a “first charge”, a mere provision
for attachment or recovery as land revenue does not by itself create a
first charge.

The principles laid down have been followed by the Courts time and again In
Kotak Mahindra Bank v. District Magistrate, the Gujarat High Court held that
im any

(2009) 4SCC 94.

(1972) 3 SCC 196.
(2000) 5 SCC 694,
(2007) 8 SCC 353.
(1995) 2 SCC 19.
1 (2007) BC 82.
SSRARAL
Hi(2011)BC 249: (2011) 1 GLR 18.
 SE LO OO ORI SS OO OD” | Wr Dee
wore SAINI LVUIL=" Lit

cannot claim any priority of claim over the claim of the

money
very vague provision about distribution of the residual sur-
n unlikely. The secured lender cannot ignore the interest of
mants since, if the money is returned to the borrower, the
become unsecured. Therefore, the secured lender needs to
as practicable, about the subordinated interests. The law, by
le statement requiring the secured lender to pay the residual
d thereto in accordance with his rights and interests”, has
lled only by judicial precedents. However, the author is of
ciples of ratable distribution as per civil law shall be appli-
€ provisions of Article 9 of UCC below.

'C provisions
08 contains provisions regarding application of sale pro-
roperty by the secured lender. The section provides as un-

ty interest or agricultural lien secures payment or perform-

ligation, the following rules apply:
ired party shall apply or pay over for application the cash
collection or enforcement under this section in the follow-

easonable expenses of collection and enforcement and, to

xtent provided for by agreement and not prohibited by law,
mable attorney's fees and legal expenses incurred by the
red party;
atisfaction of obligations secured by the security interest or
ultural lien under which the collection or enforcement is
>; and
atisfaction of obligations secured by any subordinate secu-
eee Se See! 2 eee” eee | ee}, Bee ee oe ee ee ee Leee ek! hUue ll
1052 See. 13(8) Part 1l—Chap. 1ll—Enforcement of Security Interest

the subordinated lenders, putting the secured lender almost in the same position
as 4 bankruptcy court admitting debts to proof,

Section 148)
(8) If the dues of the secured creditor together with all costs, charges
and expenses incurred by him are tendered to the secured creditor at
any time before the date fixed for sale or transfer, the secured asset
shall not be sold or transferred by the secured creditor, and no further
step shall be taken by him for transfer or sale of that secured asset,

COMMENTS

1. Equity ofredemption
A sale of the secured asset by the secured lender is a final foreclosure of the
borrower's equity of redemption, but this section importantly preserves the bor-
rower’s equity of redemption at any time before the actual sale of the asset by the
secured lender.
Equity of redemption is an important right of the borrower. It is a principle of
natural justice and courts have tried to preserve this right over years of history of
enforcement of security interests. Though popularly known as “equity of redemp-
tion”, in India, the right of the borrowerto redeem his property is not an equita-
ble but a statutory right, contained in section 60 of the Transfer of Property Act.
A clog on equity of redemption, that is, any provision in the loan document that
disentitles the borrower from redeeming his asset, is usually struck down.
According to this section, the equity of redemption continues right upto the fi-
nal date fixed for the sale by the secured lender. It is notable that under the Rules,
the secured lender is required to give a 30 days’ notice to the borrower before a
sale is made. The reference in this section to the “date fixed for sale” should be
read as date fixed for sale as per this notice.
The sco ofpe
section 13(8) was stated by the Supreme Court in Mardia Chemi-
cals’s case in the following words:
Moe where a borrower tenders to the creditor the amount due
with costs and expenses incurred, nofurther steps for sale ofthe
prop-
erty are to take place. In this connection, a reference has also been
made
by the learned Attorney General to a decision reported in MANU
0363/1976, Naraindas Kavsondas y. §.A. Katam which
/SC/
provides that a

said that right ofredemption ofproperty iscompletely lost. Incases

where nosuch dispute isthere, theright can beexercised and inother
 Equity of redemption Sec. 13(8), Syn. 1 1053

cases the question of difference in amount may be kept open and got
decided before sale of property.”
It is thus clear that the right of redemption of mortgage can be exercised before
the sale of property, and not thereafter.
Transfer, therefore, is complete when the sale is confirmed. Prior to the same
or transfer, there lies no rub for the creditor and borrower to enter into a com-
promise. [See Pushpendra Rana v. Central Bank of India & Ors.°']
In Kishan Lal Gahlot v. UCO Bank &Ors., the Delhi DRAT upheld that the
words ‘at any time before the date fixed for sale or transfer’ means that, “there
can be no transfer unless the sale is confirmed and sale certificate is given to the
auction purchaser.”
In India Finlease Securities Ltd., Chennai vy. Indian Overseas Bank ©, the
Court held that the borrower is permitted to redeem immovable secured asset
after secured asset was sold but before confirmation of sale by secured creditor
under rule 9(6) of the Rules. Issuance of directions by Tribunal giving liberty to
borrower to pay amounts within time stipulated, before sale is confirmed by se-
cured creditor, is not without jurisdiction. Also under section 13(8) the phrase ‘at
any time before the date fixed’ has application both for ‘sale’ and ‘transfer’ and
not exclusively for ‘sale’ only and exclusion of ‘transfer’ is contrary to intention
of Legislature. Further, confirmation of transfer takes place when sale is con-
firmed by ‘secured creditor’ as required rule 9(6) and not by ‘authorised officer’
who conducts auction proceedings and accepts the bid subject to the acceptance
of the secured creditor.
In K. Chidambara Manickam, Tirunelveli v. Shakeena™, the High Court re-
fused to accept the borrower’s contention to redeem the property after the issu-
ance of sale certificate but before its registration. It held that if the argument of
the borrowers that even after the issuance of the sale certificate, prior to registra-
tion, they are entitled to redeem the property is accepted, it would make the pro-
visions of the SARFAESI Act redundant and the very object of the SARFAESI
Act enabling the banks and financial Institutions to realise long term assets, man-
age problems of liquidity, asset liability mismatch and to improve recovery of
debts by exercising powers to take possession of securities, sell them and thereby
reduce non-performing assets by adopting measures for recovery and reconstruc-
tion would fall and would open a pandora’s box for the litigations upsetting the
sale confirmed in favour of the bona fide auction purchasers, who invested huge
money.
In K. Chidambara Manickam’s case (supra), the Madras High Court also re-
fused the contention that not allowing redemption before the registration of sale
is in derogation of section 60 of the Transfer of Property Act in view of the sec-
tion 37 of the SARFAESI Act. It held that a sale in public auction becomes com-
plete and absolute on the date of issuance of sale certificate and the said certifi-
cate does not require any registration as per section 17(2)(xii) of the Registration

61. 1(2011) BC 175 (DRAT).

62. Ll (2010) BC | (DRAT).
63. 1(2013) BC 18 AP (DB) (CN).
64. ILI (2008) BC 6 (DB).
1054 See. 138), Syn.1) 9Part l/—Chap. 1l—Enforcement af Seourity Inieresi

Act. A right to redeem mortgage as provided in section 60 can be eroreised be

fore it is foreclosed or the estate is sold and not after the praperty is sold in public
auction and the sale is absolute and complete.
Similarly, in Ram Murthy Pyarelal vy. Central Bank of India”, when the ‘bor
rower exhibited his desire to redeem the property after 28 months of the issuance
of sale certificate in favour of auction purchaser, the Delhi DRAT held that the
sale became complete with the issuance of sale certificate, it did not require reg:
istration and therefore, the right of redemption cannot be exercised by the bor:
rower.
In Gaurav Enterprises v. State Bank of India & Ors.” it was confirmed that it
is not open for the bank to accept the amount from the borrower after the date of
sale and return the amount to the auction purchaser, “This action runs contrary to
the scheme of the SARFAESI Act and the rules made thereunder”, Again, the
settlement arrived at between the borrower and the bank will not bind the auction
purchaser, which was not a party in the said settlement, Keeping the same in
view, the bank was directed to handover possession of the property to the auction
purchaser.
It was upheld in Ram Murty Pyara Lal & Ors. v. Central Bank of India &
Ors.®’, that on a conjoint reading of section 13(8) and sections 17 (2) and (4), it
can be concluded that though the right of redemption is to be ordinarily exercised
before the fixed date of sale or transfer as per section 13(8), however, this auction
sale proceedings may be cancelled in case the DRT concludes that the measures
taken by the secured creditor are not in compliance with Section 13(4).
In another case, the redemption was allowed even though the bank had sold the
property already and collected the price, as there was procedural non-compliance
with the Rules relating to sale. In Manoj D. Kapasi v. Union of India,” the Divi-
sion Bench of the Bombay High Court set aside a repossession action taken by
the bank where the public notice was published on the 30th October, 2004 and
the last date for tenders was fixed as Sth November, 2004. The tender document
required the bidder to pay 25% forthwith, but the amount was actually not paid
until 19th January, 2005. In this case, not only was the sale made by the bank set
aside, but since the borrower has a right of redemption any time before the sale.
the borrower was allowed to redeem the property by tendering the amount de-
manded by the bank. Notably, the property had been sold by the bank for Rs. 15
crores, while the redemption was done merely by settling the bank’s dues of Rs.
4.55 crores. In CS Hotel Private Limited v. Ahmedabad People Cooperative Bank
Ltd. , , the DRT-Ahmedabad while expressing his opinion that section 13(8) is
not happily worded, held that merely depositing the entire sale would
not defeat the mortgagor's right of redemption. The right of is lost
only when the auction purchaser succeeds in obtaining the sale
legal con-
veyance in his name. Thus, when certificate of sale was not issued
in the name of

65. 1 (2010) BC 85 (DRAT-Del).

66. 11 (2012) BC 377 (MP).
67. 1 (2011)BC 125 (Del) (DB).
68. ITT (2005) BC 592 (DR).
69.1 (20007) BC 236 (DRAT/DRT).
 In the case of financing of a financial asset, etc. Sec. 13(9) 1055
the third party and the borrower has deposited the entire amount stipulated in
sale
notice, he is as of right entitled to reclaim their secured assets.”
In Malti Devi Kakkar & Ors. vs. Allahabad Bank & Ors."', the DRAT allowed
the appeal as because even though mortgaged property, sold by virtue of Sec. 91
of the TP Act, right of redemption of such property continues to be there. In the
given case although the Bank has taken possession of the property from the ap-
pellant and has also subsequently put the property to auction and also received
10% from auction purchaser, now even though the appellant did not pay the
whole amount of dues to the secured creditors (Rs. 1 Crore), he has paid such
sum which is more than the current value of the said ancestral property (Rs 8 lacs
against Rs 7.5 lacs) and it would be appropriate for the bank to permit redemp-
tion of property by returning the title deed to the appellants. However this order
of redemption will not preclude Bank to recover its remaining dues from bor-
rower and guarantor.
In another case, the sale was set aside and the borrower was allowed to exercise
the right of redemption even after the property got transferred from the auction
purchaser to a third party the secured creditor failed to observe the provisions of
section 13(3A), and mandatory provisions pertaining to notice under Rule 8S of
the security Enforcement Rules. [See LIC Housing Finance Ltd. vs. Om Prakash
& Ors’”.]

Section 13(9)
(9) In the case of financing of a financial asset by more than one se-
cured creditors or joint financing of a financial asset by secured credi-
tors, no secured creditor shall be entitled to exercise any or all of the
rights conferred on him under or pursuant to sub-section (4) unless ex-
ercise of such right is agreed upon by the secured creditors represent-
ing not less than ™ [sixty per cent.] in value of the amount outstanding
as on a record date and such action shall be binding on all the secured
creditors:
Provided that in the case of a company in liquidation, the amount real-
ised from the sale of secured assets shall be distributed in accordance with
the provisions of section 529A of the Companies Act, 1956 (1 of 1956):
Provided further that in the case of a company being wound up on or
after the commencement of this Act, the secured creditor of such com-
pany, who opts to realise his security instead of relinquishing his secu-
rity and proving his debt under proviso to sub-section (1) of section
529 of the Companies Act, 1956 (1 of 1956), may retain the sale pro-
ceeds of his secured assets after depositing the workmen’s dues with
70. 1(2007) BC 236.
71. 1(2013) BC 99 (DRAT acetal
- 1) BC 36 (DRAT-Delhi). | ‘
Laws (Amendment) Act, 2012
73 Subs,byif aaa of Security Interest and Recovery of Debts
(1 of 2013), s. 5(c), for the words “three fourth” (w.e.f. 15-1-2013).
1056 See. 1369), Syn. 1) Part 1}—Chap. I1}—Enforcement of Seourity Interesi

the liquidator in accordance with the provisions of section 529A of thai

Act:
Provided also that the liquidator referred to in the second proviso shall
intimate the secured creditor the workmen's dues in accordance with the
provisions of section 529A of the Companies Act, 1956 (1 af 1956) and in
case such workmen's dues cannot be ascertained, the liquidator shall in-
timate the estimated amount of workmen's dues under that section to the
secured creditor and in such case the secured creditor may retain the sale
proceeds of the secured assets after depositing the amount of such esti-
mated dues with the liquidator:
Provided also that in case the secured creditor deposits the estimated
amount of workmen's dues, such creditor shall be liable to pay the bal-
ance of the workmen's dues or entitled to receive the excess amount, if
any, deposited by the secured creditor with the liquidator:
Provided also that the secured creditor shall furnish an undertaking
to the liquidator to pay the, balance of the workmen's dues, if any.
Explanation.—For the purposes of this sub-section,—
(a) “record date” means the date agreed upon by the secured credi-
tors representing not less than ' [sixty per cent.] in value of the
amount outstanding on such date;
(b) “amount outstanding” shall include principal, interest and any
other dues payable by the borrower to the secured creditor in
respect of secured asset as per the books of account of the se-
cured creditor.

COMMENTS
1. Wrong placing of the provisos below the sub-section

: in liquidati
therene oNisos arenotrelated toa so-called “joint financing”. Inother
there is a complete disc
words.
betwe
on en ne
the sub-se
ct ction provisos’ place
below the sub-section. eee

74. Subs. bythe Enforcement of Security Interest and

(1 of2013), s 5c), forthewords“vee fourth” (ere ISTIDLy eae)
MeLBOND
 Purport of this sub-section
Sec. 13(9), Syn.2 1057
2. Purport of this sub-section
This sub-section deals with one of the most complex aspects
of secured lend-
ing: dealing with multiple security interests. In addition, the provis
os to this sub-
section also deal with a very sensitive issue: protection of interes
ts of workmen
under section 529/529A of the Companies Act, 1956” in case of
companies in
winding up. This law does not deal with the issue of priorities
and apparently
treats all secured creditors holding security interests on the asset
at par, which
only means that priorities and subordination shall be as per mutual agreem
ent,
failing which, as per insolvency rules.
The wording of this very important section is extremely lousy, even if one
were
to ignore the recurring bad English. Of the several blemishes, the one that
will
cause real damage to the intent of the section is the intermixing of “secured as-
set” and “financial asset”. “Financial asset” is the loan, and “secured asset”
is the
security that backs up the loan. Thus, the words “financing of a financial asset”
appearing at the start of this sub-section, and “amount outstanding... in respect of
a secured asset” in the definition of “amount outstanding” are both wrong, as “fi-
nancial asset” is actually the funding itself, and the amount outstanding is in re-
spect of a financial asset, and not a secured asset.
Although it is not a recommended practice to insert or import words into a stat-
ute, the words in the beginning of this sub-section should be read as “financing of
a secured asset’.
Besides, the words “financing of a financial asset”, even if read as “financing
of a secured asset” by more than one lender are bound to confuse, as the idea be-
hind this section is not whether the acquisition of the secured asset by the bor-
rower was funded by more than one lender, but whether more than one lender has
a security interest on the asset. For instance, a lender might have given a loan
against asset X, and obtained security interests on asset Y. If yet another lender
has funded asset Y and also has security interest in it, it is a case of competing or
conflicting security interests and this section should apply. However, if one were
to over-emphasise the loose words “financing of a financial asset”, it might seem
that asset Y was merely funded by a single lender and, therefore, this sub-section
should not be applicable. The word “joint financing” is also a wrong usage, as
what is intended is joint or pari passu security interests, and not joint financing.
Even more unclear is the application of this sub-section in the following cases:
(a) The charge of one lender is first charge and the charge of another lender
is a second charge.
(b) The charge of one lender is created first, and the charge of another
lender is created next in terms of time of creation, though it might rank
pari passu.

75. Corresponding isi

provisions in ions
i the newly enacted Companies Act, 2013 are sections 325 and 326
wane fy The winding up provisions contained under the Companies Act, 2013 have not been
made effective as yet. (Information updated as on 14th September, 2013). Therefore the discussion
ahead relating to winding up or liquidation has been made keeping in view the provisions of the
Companies Act, 1956.
1058 See. 139), Syn.2 Part /i—Chap. /1l-—-Enforcement of Security Interest

(c) The charge of one lender is a fixed charge, and the charge of another
lender is a floating charge.
(d) The charge given to one lender is as a borrower, and the change given to
another lender is as a guarantor, that is, the guarantor obtained no fund
ing from the lender.
Prima facie, the intent of this sub-section is to avoid a chaos that might arise
due to simultaneous and competing repossession action against secured assets by
several lenders. The intent is that the lenders must take action in collaboration
rather than conflict. Therefore, this sub-section should be applicable in all cases
where the assets are subject to security interest of more than one lender, whether
the acquisition of the asset was actually funded by the lender or not, Except in
case of specific asset-based funding, it is impossible to tell assets funded by one
lender from those funded by another, except by way of the charges they hold.
However, the most contentious issue left unanswered by this sub-section is
whether all lenders will be treated at par irrespective of the priority of their inter-
ests? That is to say, will a first charge holder have to take the consent of a second
charge-holder, and will a fixed charge holder have to take the consent of a float-
ing charge holder? By common logic, it is inequitable to treat the senior and sub-
ordinate charge-holders at par, and, therefore, the reference to financing of a se-
cured asset by more than one lender should only mean lenders having paralle|
security interests. In Nagpur Foundries Limited v. United Commercial Bank",
the Nagpur DRT held that in case of multiple security interests, all secured lend-
ers must have the same priority and must stand on the same footing. The DRT
held that section 13(9) of the Act is not aimed at demolishing the basic position
that the second charge-holders only have a residual interest in the asset.
As far as floating charge-hare olders
concerned, as stated before, the charge
they hold is not activated and attached to any secured asset unless they trigger the
rights under their loan agreement to crystallise the charge.
In a very interesting judgment in Dhanlakshmi Bankld Ltd vy. Bank of India”’,
the advance was first granted by each of the banks but the security was to
be shared in common, the Chairperson held that the case would not fall within
section 13(9) of the SARFAESI Act. He stat that ed
section 13(9) contemplates
that the financing of a financial asset should be by more than one secured creditor
or there has to be a joint financing of a financial asset by secured creditors; the
cases of subsequent ceding charge on pari passu basis would not fall under sec-
tion 13(9) of the SARFAESI Act. Inthe opinion of the author, this ruling
isnot
correct.

76. 11(2005) BC 112 (DRAT—DRT).

77. TH (2006) BC 183 (DRAT—DRT, Mumbai).
 Multiple security interests on the asset Sec. 13(9), Syn.3 1059
“Joint financing of a financial asset by secured creditors”, which appear as alter-
nativesin the sub-section, should both be regarded as referring to the same—
consortium lending or a joint loan.
This construction would have actually resolved much of the difficulty that
would arise due to this sub-section, by greatly limiting the scope of this sub-
section, but this construction could not have been intended. In case of consortium
lending, the rights of the consortium participants are dealt by the consortium
agreement and there is no need for a provision such as this to be superimposed on
the agreement. If the loan is one, and has several participants, the parties may
choose their own course of action. The law as a supervening externality should
only apply in cases of unrelated lenders who cannot be united by mutual agree-
ment.
It may be noted that the definition of “amount outstanding” in Explanation (b)
refers to any amount outstanding in “respect of the secured asset’, reinforcing the
view that this sub-section is concerned about multiple interests in the same asset,
and not multiple interests in the same loan.
Therefore, the provisions of this section should be construed as a statutory ex-
ception to the need under section 67(d) of the Transfer of Property Act to ensure
that an action under a mortgage is taken by all mortgagees. See also below for
Transfer of Property Act principles.
The provision of this section is very important, no doubt, and the flawed lan-
guage would surely result into both practical difficulties and litigation. While the
intent is clear—that if the asset is subject to multiple security interests, there
should not be an attempt at enforcement by any one of the secured lenders, the
reference to “joint financing”, etc, as commented above has created a lot of con-
fusion. So much so, that in Swift Finlease (India) Ltd v. Bank of India™, the DRT
Chennai held that the section would have no application if there was a creation of
pari passu charge subsequent to the first financing of the asset. The DRT held,
very wrongly in the opinion of this author, “the provision contemplates that the
financing of a financial asset should be by more than one secured creditor or
there has to be joint financing of financial asset by secured creditors. In my view,
the cases of subsequent ceding charge on pari passu basis like this one would not
fall under section 13(9) of the SARFAESI Act.”
3. Multiple security interests on the asset
This law requires mutual resolution by at least 60 per cent majority” in case of
common security interests. Such resolution, by this law, is binding on the dissent-
ing minority.
In common law, there is a principle of indivisibility of a mortgage. Neither can
a joint-mortgagor redeem his fractional interest in a mortgage [last proviso under
section 60 of the TP Act] nor can a joint-mortgagee foreclose or sell his frac-
tional interest in a mortgage [section 67(d) of the Transfer of Property Act]. Un-
der section 67(d), the mortgagees may sever their interest in the mortgage with
1n case of
the consent of the mortgagor. The proper remedy for a part-mortgagee

78. IV (2005) BC 197 (DRAT/DRT). nd ;

79. Prior to Amendme nt Act of 2012, 75% majority was required,
1060 =See. 139), Syn. 4 0 Part 1i/—Chap, 1ll-—-Enforcement af Seourtty dnieresi

4 mortgage sul where other mortgagees do nol join, is 40 Sue the other mor
gagees as co-defendants and sue to realise the whole of the mortgage debi,
The enforcement procedure under this secuon does not involve any suit, and,
therefore, the action against the secured asset should, likewise, be a joint action,
If some lenders having security interest do not concur or joun in the action, this
sub-section provides for a mandatory consent, provided the action has been as:
sente dat least 60% of the secured lenders,
to by

4. Will this section apply where the “secured lender” is not a “se-
cured creditor”?
Take the case of an asset where there are multiple security interests, Bank A
has a loan outstanding of Rs, 10 lacs, and XYZ (not a bank) has a loan out-
standing of Rs. 10 lacs. Let us suppose both have a pari passu interest in @ par-
ticular mortgage property. XYZ is not a bank or financial institution, and, there-
fore, does not fall within the ambit of “secured creditor” under this law. Bank A
is a bank, and is therefore, a “secured creditor”, leading 10 a Curious situation
where two secured lenders have a parallel! interest in a security, One is entitled to
take action under this law, and the other is not, So far, it is though a discrimina-
tion, but arguably an intelligible discrimination since XYZ is not a regulated {i-
nancial intermediary.
However, all equity will be violated if Bank A were to take action of recovery
without the consent of XYZ. This law might have given special rights to a bank
being a secured lender, but cannot undermine or negate the rights of other lend-
ers. Rights of security are equivalent to property rights and cannot be expropri-
ated except by specific legislation, and for a specific purpose—this principle was
beautifully applied by the Supreme Court in JC/C/ Bank Lid. v. SIDCO Leathers
Lid.”, decision dated 28-4-2006. Therefore, though the special powers of recov-
ery under this section have been granted only to banks and financial institutions,
as far as this sub-section is concerned, the word “secured creditor” must be inter-
preted to include every secured creditor. There is always a scope to enlarge the
meaning of a word beyond the ambit of the definitions section [section 2 of this
law], since the definitions given in the law are applicable unless the context oth-
erwise requires. See the opening words of section 2(1).

5. Pre-Amendment of 2012: Three-fourthsin value

This sub-section provides that the rights under section 13(4) shall not be exer-
cisedunlessatleast3/4thin valueofthecreditorsagreeto thesame i"
suc agreement among the creditors will also provide for matters
relating to such
action, such as, who will actually take such action, or who will be the
the assets, how will the assets be sold, etc. It would make good sense manager of
to appoint
for lenders
one of them as a leader and entrust decision-making.
; The first questio
. n that arises in this context is:: is a lender Propos : to
tion under thissection supposed tobeaware ofotherlende ing
take
rs’ interests? We have
earlier opined that onproper construction, the security intere
sts that matter for a
88. (2010 06)
SCC 452:
 Post Amendment Act of 2012: 60% in value Sec. 13(9), Syn.6 1061
lender are only those which are parallel or pari passu interests, becaus
e it does
not make sense to include subordinate interests based on the loan amount,
though
Such interests are not competing interests. If this view is accepted, a
lender
Should be aware of other pari passu security interest holders. Howeve
r, if the
security interests under this section are of all strata, a lender will have
to search
for other security interest holders, which is not difficult in case of corporate bor-
rowers, but of course, impossible, without the co-operation of the borrower, in
case of non-corporate borrowers.
This law requires consent of lenders having 3/4th interest in value: therefore,
the definition of “value” is as important as the date on which such value is recog-
nised. The value is based on the amount outstanding (principal, interest and other
dues) as per books of the lender. The law uses the words “books of account”. In
case of non-performing assets, interest and other incomes are not recognised after
the asset becomes non-performing. However, there is no reason to exclude such
charges from the definition of “amount outstanding”. How about other charges,
Say, service charges, which have not been recognised in books but are payable as
per the loan agreement? If these charges have not been accrued in books, they
cannot be taken as “amount outstanding” as per this law. In other words, “amount
outstanding” needs to be computed by including amounts that have not been ac-
crued due to NPA accounting rules, but excluding amounts that have never been
accrued.
The definition of “record date”, which is crucial in determination of the 3/4th
share, is circular. As per the definition, the record date is a date agreed to by
3/4th in value of the secured creditors, and the 3/4th in value itself needs to be
computed on a record date. Though instances where shares of lenders on the se-
cured assets have oscillated widely are very remote, but if there are such cases,
the circular definition of “record date” may be really of no help.

6. Post Amendment Act of 2012: 60% in value

The floor limit of 75% acted as an impediment in many cases where large ac-
counts have fragmented share of borrowed amount, across various banks/FIs.
Therefore, the amendment seeks to ask for “sufficient majority” requirement.
However, the Act still remains silent on the rank of charge-holders who must be
included in 60% value. The provision does not differentiate between different
classes of charges. Inclusion of secured creditors having sub-ordinate charges
in
the 60% value, may make the whole procedure non-competing and affect the in-
terest of other secured creditors having a pari passu or senior charge than that of
the secured creditor taking the enforcement action. Therefore, there must have
been a requirement that secured creditors initiating enforcement action need to
have consent of all charge holders ranking senior to and pari passu with them
only, i.e. consent of secured creditors representing at least 60% in (value a the
outstanding amount as on a record date and having senior or part passu charge
with the secured creditor taking enforcement action), should have been the crite-
ria under the provision. |
Now, what about the cases where the secured creditor has already taken action
under section 13(2), before the amendment coming into force? In such cases,
1062 See. 139), Syn.7 Part ll—Chap, Ill-—-Enforcement af Security Interest

what would be the minimum consent limit to initiate action under section 13(4)
post-amendment -75% or just 60%? In the opinion of the author, in such cases
the post-amendment minimum limit of 60% will apply and not 75%, Though no-
tice under section 13(2) is an essential pre-requisite for initiating action under
section 13(4), yet every section 13(2) notice need not necessarily Culminate into
section 13(4) proceedings. Therefore, when a secured creditor has already sent a
section 13(2) notice prior to the amendment, bul wants to lake recourse to section
134) after the amendment, it can take consent of 60% majority and proceed to
do so,
Further, another point worth noting is with respect to abatement of proceedings
under SICA. Third proviso to section 15(1) of SICA provides for abatement of
references pending before BIFR on or after the commencement of SARFAESI,
on the conditi onat least 75% majority in value of secured credito
that rsin-
has
voked the measures under SARFAESI Act. The stipulation of 75% majority was
derived from section 13(9) of the SARFAESI Act. However, now when the limit
has been reduced from 75% to 60% in Section 13(9) of the SARFAES! Act, there
is no corresponding change/amendment in SICA, resulting into disconnect, Even
the Companies Act, 2013 that seeks to take over SICA, requires a 75% majority
(see first and second provisos to Section 254(1) of the Companies Act, 2013),
7. Effect of the agreement among secured creditors
It is notable that the agreement among secured creditors under this sub-section
is only for the purpose of taking ofaction under section 13(4). This sub-section
provides that the decision of the 60% majority shall be binding on all creditors.
Such decision relates only to the taking of the action against the asset, and not to
the sharing of the sale proceeds.
So, the issue will be: will the dissenting creditors who have not consentedto
the taking of action under this section will have the same rights in the secured
asset as the creditors who joined in the action? Another situation can be: if a sin-
gle lender had more than 60% in value of interest, as defined in this section
against the asset, can he proceed and take action against the asset without the
consent of the other lenders and thereby deprive them of their dividend?
It is notable that the priorities among the creditors are either fixed by law or
mutual agreement. Thelawdealing withpriorities inIndia, forcompanies woti
winding up, unless otherwise agreed upon by the parties, is the order of registra-
tion of charges in case of companies, and insolvency rules. The decision among
creditors to take resort to the measures under section 13 cannot anyway distort
such priorities asthis law has nothing to say on distribution of sale proceeds. It
is
a noted doctrine of construction that unless a law specifically alters a
common
law rule, common law rules should not be deemed to have been drastically
tered by
al-
the law. Therefore, even creditors who did not join in the action
possession shall be entitled to dividend as per rules of di of te-
j
 Distribution rules for companies in liquidation Sec. 13(9), Syn. 10 = 1063

8. Is there any restraint on sending notice under Section 13(2), in

case of joint-financing?
The stipulation of 3/4" majority is required in respect of exercise of powers
under section 13(4), and there is no bar in issuing notice under section 13(2) of
the Act. In Sesha Saila Power & Engineering Pvt. Ltd. & Ors. y. State Bank of
India & Ors.*', the AP High Court expressly stated that the compliance of provi-
sions of section 13(9) are applicable only in respect of matters covered under sec-
tion 13(4) and it has nothing to do with section 13 (2) which enables the secured
creditor to issue notice to the borrower for recovery of the liability.

9. Distribution rules for companies not in liquidation

In case of Allahabad Bank v. Canara Bank®, the Supreme Court had held that
in case of companies under liquidation, the DRT should adjudicate between the
claims of competing lenders based on the principles of section 73 of the Civil
Procedure Code. Section 13(7) of the present Act also seems to provide that the
residue left after satisfying the dues of the secured creditor shall be paid to the
persons entitled thereto in accordance with their respective rights and interests.
Section 73 of the CPC applies to distribution of proceeds of an execution sale.
Under this law, there is a sale of an asset, but without a decree, under the author-
ity of this law.
Section 73 being a part of the civil law of the country should be regarded as a
part of basic public policy. Since rules of distribution have not been laid down
under this law, the rules of section 73 should be taken to be applicable, with the
exception that since there is no provision for any decree, the part dealing with
creditors applying for decree is inapplicable. Provisions of section 73 have been
discussed earlier, along with their application to this law.

10. Distribution rules for companies in liquidation

The five provisos to this sub-section provide for the rules applicable in case of
companies in winding up. These provisos incorporate the basic principles of law
that developed pursuant to rulings of the Supreme Court in A.P. State Financial
Corporation vy. Official Liquidator *\ that the provisions of section 29 of the State
Financial Corporations Act could not override proviso to section 529(1) and sec-
tion 529A of the Companies Act, 1956. The provisos in this law make the provi-
sions of this law consistent with section 529A of the Companies Act, 1956. Ob-
viously, these provisos are applicable only where the borrower1s a company, and
is being wound up. The first proviso deals with companies In liquidation, and the
other 4 provisos deal with cases where companies go into liquidation on or after
the commencement of the Act.

81. IV (2012) BC 490 (Andhra Pradesh High Court) (DB).

82. AIR 2000 SC 1535.
83. 2000 (7) SCC 291.
1064 See. 19), Sym. 11 Part Li—Chap. 1ll-—bafoncement af Seourtly dntenesi

11. Rights of a secured creditor to stay outside winding up

The rights of a secured creditor to realise his security by slaying outside wind
ing up proceedings have been honoured by courts over years. The dictum that has
been followed over almost 5 decades was laid down by the Supreme Court i
M_K. Ranganathan vy. Government of Madras™. This ruling has been reiterated in
several rulings, for instance, in Industrial Credit and Investment Corporation of
India Lid. v. Srinivas Agencies”, the Supreme Court stated:
“The foundational premise of the aforesaid points is that it is a settled position
by now that a secured creditor stands outside the winding-up proceeding and un-
der the law he can proceed to realise his security without the leave of the wind-
ing-up court, if by the time he initiated the action the company has not been
wound up. This view has been holding the field ever since a three-judge Bench
decision of this court in M. K. Ranganathan vy. Government of Madras,”
PENNINGTON’S COMPANY LAW (Fourth edition, page 762) thus succinetly dis-
cusses the rights of a secured creditor:
“A creditor who has a mortgage, charge or lien on the property of the
company as security for his debt may either:
(a) sell the property subject to his security and prove in the wind-
ing up for the balance of his debt after deducting the amount
realised, or
(b) surrender his security to the liquidator and prove for the whole
of his debt as an unsecured creditor; or
(c) estimate the value of the property subject to his security, and
prove for the balance of his debt after deducting the estimated
value; or
(d) rely on his security and not prove in the winding up.”
This was broadly held applicable to India as well.
12. Right of a secured creditor to maintain a petition for winding up
without giving up the security
In Kotak Mahind
Bank ra
Limited v. Eastern Spinning Mills and Industries Lim-
ited”, theCalcuna High Com came apwith theGacstigk shader « sacumea
creditor was within its right to maintain a petition for winding up without giving
up its security and without pleading that the security the creditor had, would be
insufficient tosatisfy their claim. Itwas apparent that the assets that were
kept as

$4. (1955) 2 SCR 374.

85. (1996) 86 Com Cases 255.
Canfin Homes Ltd. vy. Lloyds Steel Industries Lid.
87. A.P.O. No. 469 Of2012,decidedon13” Februar, (2001) 106Com Cases $2(Bom),
R46.
 Court rulings holding leave of the Court not required Sec.
13(9), Syn. 14 1065
have taken resource to other civil action to realise their dues.”
The creditor’s peti-
tion for winding up was held to be maintainable in view of Sectio
n 433 (e) and
(f) read with Sections 439 (1) (b) of the Companies Act, 1956.

13. Sale of assets when company is in winding up: Whether sanction

of court required
While the right of the secured creditor is available at any time before the com-
pany has been wound up, a question has been raging in courts whether, where
a
company is in winding up, does the secured creditor have to seek the leave of the
company court. Section 537 of the Companies Act, 1956 under which any sale of
the property or effects of the company after commencement of winding up, with-
out leave of the court shall be void? Courts have opined on either side.

14. Court rulings holding leave of the winding up court required

In Maharashtra State Financial Corpn.**, it was held (rejecting the argument
that on winding up, the assets of the company vest in the Court): “... Therefore,
the official liquidator cannot demand possession of the property from a mort-
gagee lawfully in possession of it. Also, the rights conferred on a financial corpo-
ration as a mortgagee under section 29 of the State Financial Corporations Act
are not obliterated when the company is in winding up. It may have to exercise
its right to take possession with the permission of the court.”
In Shivmoni Steel Tubes Ltd.”, the Division Bench of the Karnataka High
Court held that section 537(1)(b) will apply to sale by the secured creditor, in a
case where the sale is after the date of winding up.
Similar rulings exist from the Rajasthan High Court in Boolani Engineering
Corporation v. Asup Synthetics and Chemicals Ltd.”°, and State Bank of India v.
Spintex Tubes and Constructions Ltd.”’.

15. Court rulings holding leave of the Court not required

In A.P. State Financial Corporation y. Official Liquidator”, after referring to
the decisions of Maharashtra State Financial Corporation (supra) it was ob-
served:
“Having regard to the fact that the financial corporation has taken
recourse to section 29 of the Act, it was not necessary to approach
the court to take permission to stay outside the winding up proceed-
ings.”
Recently, it was held by the Karnataka High Court that section 537 of the
Companies Act is not applicable to a sale by a secured creditor staying outside
winding up proceedings.

88. (1995) 82 Com Cas 342 (Bom).

89. (1998) 94 Com Cas 1.
90. (1994) 81 Com Cas 872.
91. (1995) 82 Com Cas 290.
92. AIR 1995 AP 302.
 t
1066 See. 139), Syn. 15 Part l—Chap. il— Enforcement af Security lnteres

16. So, what is the answer’

The Supreme Court considered this issue in Allahabad Bank », Canara Bank
ea-
case (supra). in this particular case, the Supreme Court was dealing with the
clusive jurisdiction of the DRTs in respect of claims covered by that law, and
held that no purpose will be served by taking approval of the winding up court
under section 537 of the Companies Act, 1956 in view of the exclusive jurisdic
tion under the RDB Act. The Court held as under; “We are of the view that the
appellant's case under the RDB Act—with an additional section like seouon
34—is on a stronger footing for holding that leave of the company court is not
necessary under section 537 or under section 446 for the same reasons. If the ju-
risdiction of the Tribunal is exclusive, the company court cannot also use its
powers under section 442 against the Tribunal/Recovery Officer, Thus, sections
442, 446 and 537 cannot be applied against the Tribunal.”
Recently, the issue of seeking the sanction of the winding up court/official lig-
uidator once again came before the Supreme Court in Rajasthan Financial
Corpn. v. The Official Liquidator™. In this case, the Apex Court was concerned
with whether RSFC, which had not properly initiated proceedings under section
29 of the SFC Act, could seek to dispose of the secured assets outside winding up
process without taking the liquidator into confidence. The Supreme Court was
apparently trying to resolve an alleged conflict between the rulings in Allahabad
Bank v. Canara Bank and International Coach Builders Limited v. Karnataka
State Financial Corporation”.
In Rajasthan Financial Corpn. v. The Official Liquidator”, the Supreme Court
held that “once a winding up proceeding has commenced and the liquidator is put
in charge of the assets of the company being wound up, the distribution of the
proceeds of the sale of the assets held at the instance of the financial institutions
coming under the Recovery of Debts Act or of financial corporations i
under the SFC Act, can onlybe with the association of the Official Liqui
and under the supervision of the company court. The right of a financial institu-
tion or of the Recovery Tribunal or that of a financial corporation or the Court
which has been approached under section 31 of the SFC Act to sel] the assets
may not be taken away, but the same stands restricted by the requirement of the
Official Liquidator being associated with it, giving the company court the right to
ensure that the distribution of the assets in terms of section 529A of the Compa-
nies Act takes place”.
Thus, with the ruling above, a new concept, viz., “association” of the liquidator
inthe process of disposal of assets by a secured lender emerges. What exactly is
this “association” has been summarised by the apex court thus:
“In the light of the discussion as above, we think it proper to 3
the legal position thus: soaks |

93. BPL Limitedv. Inter Modal Transport Technology Systems Karnataka) Liquidation)
(2001) 107 Com Cas 313 (Kar). mS. ——
94. (2005)
8 SCC 190).
95. (2003)
10 SCC 482.
%. (2005)
8 SCC 190.
 So, what is the answer? Sec. 13(9), Syn. 15 1067

(i) A Debts Recovery Tribunal acting under the Recovery of Debts

Due to Banks and Financial Institutions Act, 1993 would be en-
titled to order the sale and to sell the properties of the debtor,
even if a company-in-liquidation, through its Recovery Officer
but only after notice to the Official Liquidator or the liquidator
appointed by the Company Court and after hearing him.
(ii) A District Court entertaining an application under section 31 of
the SFC Act will have the power to order sale of the assets of a
borrower company-in-liquidation, but only after notice to the
Official Liquidator or the liquidator appointed by the Company
Court and after hearing him.
(iii) If a financial corporation acting under section 29 of the SFC
Act seeks to sell or otherwise transfer the assets of a debtor
company-in-liquidation, the said power could be exercised by it
only after obtaining the appropriate permission from the com-
pany court and acting in terms of the directions issued by that
court as regards associating the Official Liquidator with the
sale, the fixing of the upset price or the reserve price, confirma-
tion of the sale, holding of the sale proceeds and the distribu-
tion thereof among the creditors in terms of section 529A and
section 529 of the Companies Act.
(iv) In a case where proceedings under the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 or the SFC Act
are not set in motion, the concerned creditor is to approach the
company court for appropriate directions regarding the realisa-
tion of its securities consistent with the relevant provisions of
the Companies Act regarding distribution of the assets of the
company-in-liquidation.”
With great respect, the ruling above does not lead to clarity on the mutually
competing, if not conflicting, claims of several claimants on the assets of a com-
pany that, by definition, has a deficit on its balance sheet. Involving the liquidator
as a party to the enforcement of security interest either by a secured lender or by
the DRT does not help matters anyway. The liquidator is surely concerned with
the claims of the workers, but as workers have been given a pari passu status, the
interests of the secured lender do not conflict. with those of the workers. Hence,
nothing positive can be expected to be gained from the liquidator’ s association
with the enforcement of security interests. On the contrary, if the past track re-
cord of the liquidation proceedings is any indication, it would only exacerbate the
problem by adding delays to a deficiency.
Under the present law, there is no exclusive jurisdiction referred to by the Su-
preme Court. However, in view of the apparent objective of granting to the se-
to be
cured creditor the right of making an expeditious sale, this law is also
and Sec-
treated as a special law on the issue of enforcement of security interests,
In any case,
tion 537 must submit before this law to allow this law to take effect.
pyhete Bee se-
the second proviso below section 13(9) squarely applies in cases
of winding up.
cured creditor takes the repossession action after commencement
1068 See. 13(9), Syn. 15 Part /i—Chap. I1l—Enforcement af Seourity Interest

In view of the express provisions contained in the law, the ruling of the Supreme
Court above, regarding “association” of the liquidator, should not be applicable
in case of proceedings under this Act.
The stand taken by the author is reflected in Kotak Mahindra Bank Lid vs
Megnostar Telecommunications’ , wherein the Delhi High Court held the con-
trary of what was held in Rajasthan Financial Corporation (supra), relevant ex
tracts of the judgment are as under:
“(even where the debtor/borrower/mortgagor is a Company in liqui-
dation) there is no necessity of associating the Official Liquidator in the
sale in exercise of powers by a secured creditor under Section 13(4) of
the SARFABSI Act. The sale, without associating the Official Liquida-
tor cannot thus held to be bad or illegal. It clarified that the dicta in Ra-
jasthan Financial Corporation of associating the Official Liquidator in
sale, in the context of the SFC Act and the DRT Act in both of which
sale is through the intervention of the District Judge or the DRT, is not
applicable to a sale under the SARFAESI Act, sale whereunder is with-
out the intervention of the Court,
The remedies of the Official Liquidator with respect to such a sale are
only before the DRT in accordance with Section 17 of the SARFAESI]
Act and not before the Company Court. SARFAESI Act being a latter
legislation to the incorporation of Section 529A in the Companies Act
thus prevails over the Companies Act and sale as provided for under the
SARFAESI Act holds good during the pendency of winding up petition
against the debtor/borrower/mortgagor and also after a winding up or-
der is made and remains unaffected therefrom.”
The Delhi High Court, however, clarified that the sale proceeds in custody of
the bank are subject to the claims, if any, under Sections 529 and 529A of the
Companies Act, 1956 and that the bank has to accordingly comply with the pro-
visos to Section 13(9) of the SARFAESI Act and highlighted that the Supreme
Court recently in Employees Provident Fund Commissioner Vs. Financial :
dator of Esskay Pharmaceuticals Limited ** has also held the dues under the
ployees Prov iden
Fund t
and Miscellaneous Provisions Act, 1952 to be a
first
charge on the assets of an establishment and to be paid in priority to all other
debts while distributing the sale proceeds.
In Prime Industries, Bangalore vs. Official Liquidators( OL) of B. igerators
Itd., Bangalore & Anr.”’, the Court held that SARFAESI ype beebi
provi-
sions of Sec 537 of Companies Act and the secured creditor is entitled
to sell as-
sets belonging to company in liquidation by exercising right under Sectio
Sieti
n 13 of
es Wien and Rules 8,9 of Security Interest (Enforcement)
Rules 2002,
iectines saa doing
wever .wh ing so ia is to be adopted by secured credi-;

97. [2013] 176 Com. Cas. 246 (Del.

98. (2010 11)
SCC 727. a
99. 1 (2013) BC 700 (Kar).
 Pari passu charge under section 529A Sec. 13(9), Syn. 17 1069
17. At what point of time does section 529A apply to the
secured
creditor
In case of companies under liquidation, the workmen’s dues
rank at par with
the claims of the secured creditor, while in case of companies not
in winding up,
they do not. Hence, a very significant question is: at what point of time
does the
applicability of section 529A arise for the secured creditor?
In BPL Limited v. Inter Modal Transport Technology Systems (Karnataka)
Ltd.
(In Liquidation),' it was held that any sale by the secured creditor standin
g out-
side the winding up proceedings, before the passing of the winding up order,
will
not be affected by the pari passu charge as per section 529A.
The High Court in Sasidharan Pillai v. Indian Overseas Bank’, relied upon
National Textile Workers Union v. P.R. Ramakrishnan?and Allahabad Bank v.
Canara Bank & Anr.*,and stated that:
“on a plain reading of the first and second provisos to sub-section (9) of section
13, it is clear that the workmen of a company, who claim priority in distribution
of assets by virtue of section 529A of the Companies Act, are not entitled to raise
any objection against proceedings initiated by the secured creditor against the
secured assets of the company, unless the company is ordered to be wound up or
any proceedings for winding up of the company is pending.”
Under this law, the date of sale is the date on which the secured creditor gives a
certificate of sale. Thus, even if the assets have been attached or seized by the
secured creditor, and in the meantime the company goes into winding up, the
provisions of section 529A shall be applicable.

18. Pari passu charge under section 529A

Section 529 of the Companies Act generally makes insolvency rules applicable
to winding up of companies as well. Sections 46 to 50 of the Presidency Towns
Insolvency Act and sections 45 to 50 of Provincial Insolvency Act deal with the
rights of different classes of creditors. The general rule is laid down in section 47
of the Provincial Insolvency Act which provides that a secured creditor may real-
ise his security, and may prove, that is, queue up, before the bankruptcy court for
the balance, or may relinquish his security and queue up for the whole of this
claim before the Court.
In other words, the cardinal rule of secured credit is that the secured creditor
may enforce his claim on the security and queue up for the balance, or, at his
choice, may queue up for the whole of his claim.
The first proviso to section 529(1) makes an important change as to the rights
of the secured lender. By law, the claims of the workers are brought in as addi-
tionality and put at par with the claims of the secured creditors. Proviso to section
529(1) states that the security of the secured creditors shall be deemed to be sub-

- (2001) 107 Com Cas 313.

. IL (2011) BC 286.
. AIR 1983 SC 75.
=
WN. (2004) 4 SCC 406.
 !
1070 See. 13¢9), Syn. 17) Part 1/—Chap. 11l-—Enforcement ofSecuruy Interes

to the pari passu charge of the workmen to the extent of the workme n
s dues
lect
— — words. the secured creditors’ claims, and those of the workmen,
will stand pro-rated as far as security interest is concerned,
While security interest is only limited to the secured assets, by section 529A,
the debts payable to secured creditors and the dues of workmen shall rank in pri-
ority to all other debts. In other words, the general assets of the company are al-
tributed in first priority to the claims of the secured creditors and the workmen,
In case of insufficiency of the assets, these claims shall abate in equal propor-
trons.
The Supreme Court, in Jitendra Nath Singh v. Official Liquidator & Ors,,>
lied on the observations made in Allahabad Bank vy, Canara Bank & Anr.” and
Andhra Bank y. Official Liquidator & Anr.’ and provided interpretation of the
provisions of Section 529 and 529A, as under:
“i) a secured creditor has only a charge over a particular property or
asset of the company. The secured creditor has the option to either real-
ize his security or relinquish his security. If the secured creditor relin-
quishes his security, like any other unsecured creditor, he is entitled to
prove the debt due to him and receive dividends out of the assets of the
company in the winding up proceedings. If the secured creditor opts to
realize his security, he is entitled to realize his security in a proceeding
other than the winding up proceeding but has to pay to the liquidator
the costs of preservation of the security till he realizes the security.
ii) over the security of every secured creditor, a statutory charge has
been created in the first limb of the proviso to clause (c) of sub- section
(1) of Section 529 of the Companies Act in favour of the workmen in
respect of their dues from the company and this charge is pari passu
with that of the secured creditor and is to the extent of the workmen's
portion in relation to the security of any secured creditor of the com-
pany as stated in clause (c) of sub- section (3) of Section 529 of the
Companies Act.
iii) where a secured creditor opts to realize the security then so much of
the debt due to such secured creditor as could not be realized by him by
virtue of the statutory charge created in favour of the workmen shall ro
the extent indicated in clause (c) of the proviso to sub-section (1) of
Section 529 of the Companies Act rank pari passu with the workmen’ s
dues for the purposes of Section 529A of the Companies Act.
iv) the workmen’s dues and where the secured creditor to realize
hissecurity, thedebtfothesecured creditor totheexten itYanks par
passu with the workmen’s dues under clause (c) of the proviso to sub-
section (1) of Section 529 of the Companies Act shall be paid in prior-
ity over all other dues of the company.” (emphasis ours)

5. TV (2012) BC 566 (SC).

6. 1 (2000) BC 627 (SC).
7. 11 (2005) BC 425 (SC).
 Senior and subordinated charges under section 529 See. 13(9), Syn. 18 1071
In short, secured creditor does not have pari passu charge with workmen over
all the properties of company under sections 529 and 529A of the Companies
Act. It is not to be paid along with workmen’s dues in priority to all other debts
of the company. Only where under second limb of proviso to section 529(1)(c)
secured creditor opts to realize security and unable to realize portion of his dues
because of pari passu charge created in favour of workman under first limb of the
proviso, he has pari passu charge to the extent indicated in clause(c) of proviso to
section 529(1).Where the borrower is a company under the Companies Act as per
the scheme of the Companies Act, the workers’ dues are to stand on pari passu
charge with the secured creditor. In a case where a unit is closed and the posses-
sion of the security assets are taken over by the secured creditor after closure of
the unit or in a case where on account of the possession taken over by the secured
creditor, the unit is closed and it has resulted in unemployment of the workers, it
would be reasonable to hold that the workers’ dues if the borrower is a company
have to stand on pari passu charge with the dues of the secured creditor. There is
no reason to read the powers of the secured creditor under section 13(7) with sec-
tion 13(9) to appropriate full amount of the sale proceeds towards secured inter-
est by totally ignoring the claim of the workers’ dues in a case where the workers
are unable to recover dues from the company-employer ° This author has ex-
pressed similar views in the earlier editions of this book too.

19. Senior and subordinated charges under section 529

The Supreme Court, recently, in ICICI Bank Ltd. v. SIDCO Leathers Ltd.’,
considered the question whether, in terms of section 529/529A of the Act, the
mutual priority amongst the secured lenders, as first and second or subsequent
charge holders, had any significance. In a beautifully worded ruling, the Apex
Court held that the mutual arrangement of creditors’ rights was a matter of prop-
erty rights, and the Parliament cannot take away property rights of citizens by
mere presumption. The Court held:
“While enacting a statute, the Parliament cannot be presumed to have
taken away a right in property. Right to property is a constitutional
right. Right to recover the money lent by enforcing a mortgage would
also be a right to enforce an interest in the property. The provisions of
the Transfer of Property Act provide for different types of charges. In
terms of section 48 of the Transfer of Property Act claim of the first
charge holder shall prevail over the claim of the second charge holder
and in a given case where the debts due to both, the first charge holder
and the second charge holder, are to be realised from the property be-
longing to the mortgagor, the first charge holder will have to be repaid
first. There is no dispute as regards the said legal position.
Such a valuable ri ght, having regard to the legal position as obtaining
in common law as also under the provisions of the Transfer of Property
Act, must be deemed to have been known to the Parliament. Thus,
while enacting the Companies Act, the Parliament cannot be held to

8. Union Bank of India v. General Workers Union, ILI (2009) BC 459.

9, (2006) 10 SCC 452;
1072 See. 139), Syn. 17 Part I!—Chap. I1l—Enforcement of Security Interest

have intended to deprive the first charge holder of the said right, Such a
valuable right, therefore, must be held to have been kept preserved.

20. First proviso

Since the second proviso is to apply in case of companies going into winding
up on or after the commencement of the Act, it should be presumed that the first
proviso shall be applicable only in case of companies already in liquidation as on
the commencement date.
This law merely states that in such case, the sale proceeds of the secured assets
shall be distributed in the manner provided in section 529A, Section 529A relates
to overriding priority of the claims of the secured creditors and workers, and inter
se, those claims being put on the same footing. The Supreme Court has held that
section 529A deals only with those creditors who have stood outside Figg foo
that is, who have not chosen to relinquish their security and prove their clair
before the bankruptcy court. Obviously, a secured creditor exercising his Ma
under this Act is the one who has preferred to stay outside winding up, is ,
therefore, covered by section 529A.
By law, the powers of the secured creditor, in case of companies under hiquida-
tion, have been subject to the claims of the workers. Section 529A deals with
workmen's dues, and the dues of secured creditors. “Workmen's dues” are de-
fined in section 529(3)(b), and “workmen” has been defined in section 529(3)(a).
Section 529A is to be read with clause (c) of the proviso to section 529(1), under
which so much of the debt due to the secured creditor as could not be realised by
him by virtue of the pro-rating of the secured asset with the workmen’s
shall rank above all other claims. The Supreme Court in Allahabad Bank v. Ca-
nara Bank held that “the words “so much of the debt due to such secured creditor
as could not be realised by him by virtue of the foregoing provisions of the
viso” obviously mean the amount taken away from the private realisation of the
secured creditor by the liquidator by way of enforcing the charge for workmen’ s
dues under clause (c) of the proviso to section 529(1) “rateably” against each se-
cured creditor. To that extent, the secured creditor—who has stood outside the
winding up and who has lost a part of the monies otherwise covered by secu-
rity—can come before the Tribunal to reimburse himself from out of other mon-
ies available in the Tribunal, claiming priority over all creditors, by virtue of sec-
tion 529A(1)(b).”
Let us take a few examples to understand the application of section 529A:
¢ The amount realised by sale of the secured asset is Rs. 10 lacand s, the
dues of the secured creditor are Rs. 8 lacs and those of the workmen are
Rs. 4 lacs. The sale proceeds of the asset are to be shared in the ratio
of
2:1, and for the balance of their claim, both the secured credit
ors and
the workmen will rank ahead of all other claims under sectio
n 529A.
* The amount realised by sale of the secured asset is Rs. 2
dues ofthesecured creditor areRs. 8 lacsandthose ofthewarms
ne
19. Aas of Firestone Tyre and Rubber
Co. of Inia
(P.) 14d v. Managemen, (1973) 1 9OC
 Dues of the secured creditor versus, etc.
Sec. 13(9), Syn. 21 1073

Rs. 4 lacs. The sale proceeds of other assets of the company

are Rs. 10
lacs. The sale proceeds of the secured asset will be split in the
ratio of
2:1. On the balance of the assets as well, the secured credit
or and the
workmen will have a prior claim in the same ratio of 2:1. Evidently,
no
unsecured creditor will be able to realise any sum in the instant case.
e The amount realised by sale of the secured asset is Rs. 2 lacs, and
the
dues of the secured creditor are Rs. 8 lacs and those of the workmen are
Rs. 4 lacs. The sale proceeds of other assets of the company are Rs. 5
lacs. Obviously, the assets not sufficient to discharge in full the claims
of the secured creditor as well as the workmen. As per section 529A(2),
both will have to abate in the same proportion.

21. Second to fifth proviso

The second proviso applies in case of companies put into winding up after the
commencement of the Act. Properly speaking, this proviso applies when the se-
cured assets are sold by the secured creditor after the commencement of winding
up, and the winding up commences after the inception of this law.
The second proviso sets the law, and the third-to-fifth provisos are merely an
elaboration. The main rule in the second proviso is that where the secured credi-
tor takes action of repossession after commencement of winding up, he can still
retain the sale proceeds but, in view of the application of section 529A, shall de-
posit an amount representing the dues of the creditors.
The wording of this section is not clear—it might give an indication that the
secured creditor shall have to deposit the whole of the amount payable to the
workmen. In fact, the amount to be deposited by the secured creditor is only “the
workmen’s portion” defined in section 529(3)(c) of the Companies Act, that is to
say:
The value of the secured assets X workmen’s dues/(workmen’s dues +
secured creditor’s dues)
Practically, it would not be easy to apply the section in its current form. En-
forcement of security interest would typically be for a portion of the company’s
assets. Complicated questions of fair valuation of the assets, and determination of
the proportion that the secured creditor will have to deposit, will arise if the en-
forcement of security interests is only for a portion of assets of the company.
In fact, workmen, in their own interest, should apply to a court and initiate
winding up proceedings while security interests are sought to be enforced by a
secured lender. If the company is not put in liquidation, workmen have no pari
passu Claim on the assets of the company to the extent of security interests being
enforced by a secured lender.

22. Dues of the secured creditor versus dues of the Crown

Is the secured creditor also liable to the dues of the State that might have, under
taxation or land revenue statutes, rights over an asset? The question was exam-
1074 See. 13(10). Syn. 1) Part //—Chap. 11l—Enforcement of Security Interest

ined by the Supreme Court in the case of Dena Bank v. Bhikhabhai Prabhudas
Parekh and Co.'', where the Apex Court held as follows:
The general maxim of law is that if the rights of the Crown, and the
rights of the subject, are concurrent, the Crown shall have priority over
the subject. However, the Crown's preferential right to recovery of
debts, over other creditors is confined to ordinary or unsecured cred.
tors. The common law of England or the principles of equity and good
conscience (as applicable to India) do not accord the Crown a preferen-
tial right of recovery of its debts over a mortgagee or pledgee of goods
or a secured creditor. It is only in cases where the Crown's right and
that of the subject meet at one and the same time that the Crown is in
general preferred. Where the right of the subject is complete and perlect
before that of the King commences, the rule does not apply, for there is
no poin t at which the two rights are at conflict, nor can there be
of time
a question which of the two ought to prevail in a case where one, that of
the subject, has prevailed already. In Giles v. Grover,'’ it has been held
that the Crown has no precedence over a pledgee of goods, In Bank of
Bihar v. State of Bihar,’’ the principle has been recognised by this court
holding that the rights of the pawnee who has parted with money in fa-
vour of the pawnor on the security of the goods cannot be extinguished
even by lawful seizure of goods by making money available to other
creditoof rsthe pawnor without the claim of the pawnee being first fully
satisfied. Rashbehary Ghose states in Law of Mortgage (Seventh edi-
tion, page 386)—“It seems a Government debt in India is not entitledto
precedence over a prior secured debt”.
In the case above, the SC came to a conclusion that the Crown, in fact, had a
priority over the dues of the secured creditor, because the law of the State Gov-
ernment provided for a prior right over the rights of a mortgagee as well. How-
ever, unless the law specifically provides for a priority of State rights over the
rights of the secured lender, the latter’s rights prevail.
Many of the present-day statutes of states provide for the state dues to be prior
to the claims of any secured creditor.

Section 13(10)
(10) Where dues of the secured creditor are not satisfied with
the sale proceeds of the secured assets, the sornrae (emir
may file an
applicationin the form and manner as may be prescribed to the Debts
Recovery Tribunal having jurisdiction or a competent court
case may be, for recovery of the balance amount from the , as the
borrower.

11. TLR 1992 Kar 2659.

12. (1832) 131 ER 563.
13. (1971)41Com Cas 591 - ATR 197]
SC 1210.
 Form and manner prescribed Sec. 13(10), Syn. 2 1075

COMMENTS

1. Jurisdiction for the application

Under this section, the secured creditor has an option to file a claim for recov-
ery of his balance amount, should the whole of his claim not be satisfied by sale
of the asset. The purpose of this sub-section is only clarificatory and this sub-
section is not concerned with enforcement of security interests as such.
There is a major anomaly in the wording of this section. DRT jurisdiction is
applicable to banks and financial institutions. The word “secured creditor” under
this law includes banks and financial institutions too, but is wide enough to in-
clude financial companies, should the RBI so notify. If the RBI notifies financial
companies as financial institutions, they will be entitled to exercise the rights of a
secured creditor, and would, by virtue of this sub-section, come under DRT ju-
risdiction, though they are not meant to be covered by the same. Possibly, the
answer in such cases is—competent court.
Under section 1(4) of the RDB law, the provisions of the RDB law are not to
apply if the debt due to the bank/financial institution is less than a notified
amount. The debts due, under the present section, will be the amount left after
adjusting the sale proceeds of the asset.

2. Form and manner prescribed

Though the Act provides for application to the DRT or competent court, imply-
ing that in cases where the matter does not fall under the jurisdiction of DRTs
(e.g., in case of secured creditors other than banks/financial institutions, and in
case of debt due being less than the notified sum), the proper forum will be civil
courts, the Security Interest Enforcement Rules provide for application to DRTs
only. The rule obviously cannot add, alter or override the law and will, therefore,
be applicable only in cases where jurisdiction of DRTs is applicable, with the
consequence that in case of court jurisdiction, the relevant court rules will con-
tinue to apply.
Rule 11 of the Enforcement Rules provides that the application under this sec-
tion shall be presented to the Debts Recovery Tribunal in the form annexed as
Appendix VI to the Rules by the authorised officer or his agent or by a duly
authorised legal practitioner, to the Registrar of the Bench within whose jurisdic-
tion his ease falls or shall be sent by registered post addressed to the Registrar of
Debts Recovery Tribunal. The provisions of the Debts Recovery Tribunal (Pro-
cedure) Rules, 1993 shall mutatis mutandis apply to any such application, and the
relevant fees shall be payable by the secured creditor.
ed by
As far as jurisdiction is concerned, the jurisdiction of the DRTs is govern
-
section 19(1) of the RDB Act. This section provides for making of the applica
whose local limits
tion by the bank or financial institution to the Tribunal within
for gain, or the cause
either the defendant resides, carries on business, or works in
19(1) is the samas e
of action, wholly or in part, arises. The wording of section juris-
re, the principles of
case of section 20 of the Civil Procedure Code. Therefo
cases.
diction of the DRTs are the same as in case of civil
1076 See. 1310), Sym. 3 Part Li/—Chap. 11/—Enforcement afSeourity dnieres!

As regards the limitation for filing the application, the DRAT in Maary Set
ware International Lid. y. Axis Bank Lid."*, held that an application under section
13(10) can only be filed after the sale is over and that Article 137 of the Limita
tion Act would apply to determine the time from which the limitation period be
gins to run. As such, the period of limitation would start at the date of the last
sale made by the secured creditor.

3. Powers of the Tribunal

The DRTs have wide powers, primarily contained in section 19, These powers
include attachment of property, sale, issue of certificate of recovery, etc,

Section 13(11)
(11) Without prejudice to the rights conferred on the secured creditor
under or by this section, secured creditor shall be entitled to proceed
against the guarantors or sell the pledged assets without first taking
any other measures specified in clauses (a) to (d) of sub-section (4) in
relation to the secured assets under this Act.

COMMENTS

1. Purport of this sub-section

Again, the purport of this section is clarificatory and this section does not, by
itself, grant any new power. This section provides for enforcement of powers
against the guarantor, and, in case of a pledge, sale of the pledged assets, without
first taking the action under section 13(4). The meaning of this sub-section shal!
be that this law cannot be deemed to tie the hands of the secured creditor obligat-
ing the secured creditor to first resort to the remedies under this law before pro-
ceeding against the guarantors or pledged assets. If the secured creditor could
have done so in absence of this law, he will be permitted to do the same in spite
of this law. But any such exercise of powers against the guarantor or against the
secured assets will be “in spite of” and not “because of” this law.

section (2) that provides for the account of the borrower being treated
thesecured lender does not maint jacmmenlnarenmenionentin
the account of the primary debtor. Therefore, the provisions of sectio
n 13 are not

ps Ace © matt
14. TV (2011)BC 106 (DRAT-Chennai).
 Proceeding against the guarantor Sec. 13(11), Syn.2 1077
entirely congruent with claims against security interests provided by
guarantors,
but this inconsistency may be ignored as merely technical.
In case the primary debtor has not created any security interest, and the guaran-
tor has, even then, the provisions of section 13(4) are applicable on the secured
asset of the guarantor.
However, where the secured creditor does not hold any security interest pro-
vided by the guarantor, any claim against the guarantor is only a claim to enforce
a covenant, and is not a claim under this law.
In case the secured lender holds security interest granted both by the primary
debtor as also by the guarantor, can he take measures under this section against
the assets of the guarantor, before doing the same against the assets of the
debtor? If the guarantee agreement so permits, this Act is not a bar, as clarified
by section 13(11).
An important right has been conferred on the guarantor under section 141 of
the Contract Act. It provides that a surety is entitled to the benefit of every secu-
rity which the creditor has against the principal debtor at the time when the con-
tract of suretyship is entered into, and if the creditor loses or, without the consent
of the surety, parts with such security, the surety is discharged to the extent of the
value of the security. It cannot be contended that the secured creditor, by not tak-
ing action against the principal borrower under this law, has committed a loss of
security. LORD TEMPLEMAN’S comments in Privy Council ruling in China and
South Sea Bank Ltd. v. Tan", are relevant in this regard: the only effect of the
creditor choosing to take action against the guarantor will be that the securities
granted by the principal debtor shall stand mutated in favour of the guarantor.’
Where, for whatever reason, proceedings to enforce security interest against the
principal debtor cannot be launched, can the creditor seek to do so against the
property of the guarantor? If the terms of the guarantee so admit, the right to en-
force security interest against the assets of the principal debtor and those of the
guarantor are independent rights. That the creditor chooses not to enforce his
remedies against the assets of the principal debtor, or-cannot do so for whatever
reason, will not be a bar against the creditor proceeding against the assets of the
guarantor. In S K Agarwal v. Oriental Bank of Commerce ’, it was contended that
since the proceedings against the principal debtor could not be launched as it was
a sick industrial company, an action to recover the assets of the guarantor will
also be barred. This contention was rejected by the court.
In Mrs. N. Sumathi and Mr, L Namachivayam v. The Authorised Officer and
Branch Manager, The Lakhsmi Vilas Bank Ltd.'*, the Madras High Court relied
on the Apex Court’s judgment in Anumaji v. Punjab National Bank ’, wherein,
referring to the decision of the Calcutta High Court in Nath Bank Ltd. v. Sisir
Kumar Sarkar’, the SC had held that during the joint lives of two account hold-

15. (1989) 3 All ER 839. ti 9 '

16. ed tie Industrial Finance Corporation of India Ltd. v. Cannanore Spinning & Weaving Mills Ltd.,
110 Com Cas 685 (SC) for a detailed discussion on the impact of section 141.
17. (2006) 1 BC 562 (DB).
18. II (2013) BC 99.
19. (2004) 8 SCC 498.
20. AIR 1954 Cal 303.
1078 See. 1311), Sya.3 Part 1/—Chap. 11l-—-Enforcement ofSecurity interes!

holders
ers, the Bank could not set off the debt due from one of the joint acount that
Court held
against such a joint debt. In view of the same, the Madras
e one, so
even though the guarantee of the second deposit holder was a genuin
or, the
long as the deposit remained as a joint one, payable to either or surviv
of
Court did not find any justifiable ground to uphold the action of the Bank
freezing the fixed deposit maintained by the petitioners to satisty the debts due to
the Bank.

3. Sale of pledged assets

The meaning of pledge, as different from hypothecation, has been discussed
earlier—see notes under section 2, In case of a pledge, the pawnee has the right
of retainer [section 173 of the Contract Act] and the right of sale [section 176 of
the Contract Act]. By section 31(b), this Act is not applicable to pledges, for
which the rules under the Contract Act will continue to apply.
Action against the guarantor and the sale of pledged assets are mentioned as
two alternative remedies of the secured lender. It is not to be understood that the
remedies against the guarantor are limited to sale ofpledged assets.”'

Section 13(12)
(12) The rights of a secured creditor under this Act may be exercised
by one or more of his officers authorised in this behalf in such manner
as may be prescribed.

COMMENTS

1. Rules
qagepttrrs ot Soctw-atiat™ Ctx. 1007teil dai Tame eee

According to the Rules, the authorised officer, who can take action under this
Act shall be an officer not less than a chief manager of a public sector bank or
pmlc a pana Eppley ior enga radii nace Lot
secured creditor or any other person
or authority exercising superin-
tendence, direction and control of the business or affairs Aapanscabss pa
as the case may be. In V.V.R. Thangaraj v. UCO Bank. itwas held that itis
mandatory that the rights conferred under section 13 of the Act shall be exercised
only by such officers who has been authorised in this behalf. In this case, where
notice under section 13(2) was issued by the manager of the Respondent Bank
who was below the rank of Chief Manager, the presiding officer quashed the pro-
ceedings holding that the power to be exercised under section 13 of the Securiti-
sation Act read with Rules thereto has been conferred only with an officer not
less than a Chief Manager of a Public Sector Bank.

21. S.K. Agarwal vy. Oriental Bank ofCommerce, 1 (2006)

22. 1 (2006)
BC 251 (DRAT/DRT Chena) iii tiie
 Freeze on secured assets Sec. 13(13), Syn. 1 1079

2. Can notice be given through Advocate?

A bare reading of section 13(2) shows that notice has to be given by a secured
creditor. A question arises as to whether the notice can be given only by the
authorised officer of the secured creditor or can it be given through its advocate.
This sub-section uses the word “may”, which is apparently permissive and not
imperative. So, if a question arises as to whether the secured creditor can em-
power independent agencies to take such action under this section, the answer
should be in the affirmative. If the secured creditor chooses to exercise the rights
himself, it is in the name of the authorised officer, but the secured creditor is not
bound to self-execute each and every bit of the process implied under this sec-
tion.
In Santosh Traders v. Bhusaval People’s Co-op Bank Ltd”, it was held that it
cannot be said that section 13(12) of the Act means that the authorised officer
comes into the picture at the stage of issuance of the notice under section 13(2) of
the Act and, therefore, if the bank can give notice, the same can be given through
an advocate.

Section 13(13)
(13) No borrower shall, after receipt of notice referred to in sub-
section (2), transfer by way of sale, lease or otherwise (other than in
the ordinary course of his business) any of his secured assets referred
to in the notice, without prior written consent of the secured creditor.

COMMENTS

1. Freeze on secured assets

This section creates an important safeguard for a secured creditor: the service
of notice under section 13(2) shall automatically put a freeze on any “transfer” by
way of sale, lease or otherwise, of the secured assets referred to in the notice,
without the consent of the secured creditor. The important points as regards such
prescription are as follows:
e The freeze is effective upon service of the notice under section 13(2).
As noted in comments under section 13(3), the notice must state that it
is a notice under this law, otherwise, this sub-section will not be appli-
cable as there is no way for the borrower to know the consequences ofa
simple notice demanding payment. The manner of serving the notice 1s
also laid down in the Rules and has been discussed in notes under sec-
tion 13(2) and section 13(3).
e The freeze is on “transfer by way of sale, lease or otherwise’’. Sale and
lease are two modes of transfer specified in the law. The word trans-
the
fer’ has not been defined in this Act but by section 2(2) of this Act,
that law 1s
definition of the Transfer of Property Act must be applied, as

23. II (2006) BC 176 (DRAT—DRT).

1080 See. 1313), Sya.1 Part li—Chap. ll—Enforcement afSeounity dnieresi

ihe most perunenat law on transfers of properties. Under section 5 of the

Transfer of Property Act, a transfer is defined as any act by which a liv-
ing person conveys property to another living person. The word “con-
vey” has been interpreted in a wide sense to include mortgage, lease,
assent, vesting declaration, vesting instrument, disclaimer, etc, How.
ever, a charge is not a transfer, Creation of an easement is also not a
transfer. For what is, and what is not, a transfer, see cases under section
5 of the Transfer of Property Act,
e In this law, the wide meaning of “conveyance” discussed above is nar-
rowed down, to an extent, by the use of the specific words “sale or
lease”. By the doctrine of ejusdem generis, general words in a law bor-
row their colour from the specific words. Therefore, the transfers that
are covered by this law are only those, which are similar to sale or
lease. Thus, there is no bar on the borrower from creating further en-
cumbrances, including subordinate charges, on the secured assets.
e In order for the asset to be subject to the freeze, the asset must both be a
secured asset, as also must be the asset the particulars whereof have been
specified in the notice. There is no question of any freeze on sale of as-
sets not covered by the notice, or assets that are not secured assets.
e This law provides that the freeze does not apply to the sale of the assets
in ordinary course of business. If the charge on any asset is a fixed
charge, there is no question of the borrower selling or disposing of the
same without the consent of the lender in any event. If the charge is a
floating charge, the borrower is always freeto sell the assets in ordinary
course of business. Therefore, this section does not alter the position of
the borrower as far as fixed versus floating charges are concerned. An
asset subject to a fixed charge is not expected to be sold in ordinary
course of business; and on the contrary, if the asset is expected to be
sold ordinarily, the charge isnot a fixed charge. 4
In Sree Lakshmi Products v. State Bank ofIndia”, the Madras High Court held
that section 2 Coltowet Kn diiguelily Gfa sees Dire
restraining the borrower from disposing of the secures assets, and,
, any
tenancy created after such notice would be null and void.

2. Effe
of contrct
avention
the permission
quired underthislaw,whatistheimpact ofthesale? Will of the seller
against the purchaser? Notably, the freeze under this secti theenine heinnaia
on isnot different from

24. 207
= See,
for
(2)the i 193,ofratings
CTC ralines ;
inthecases of Brumark and Cosslen, Chapter 3.of Part 1.
 Chief Metropolitan Magistrate or District, etc. Sec.14 1081
Penal provisions of section 29 will be applicable on the borrower.

(1) Where the possession of any secured asset

S. 14. Chief Metro-
IS required to be taken by the secured creditor
seo sr imi ut
oe if any of the secured asset is required to be
ts oe ditor in
SOld or transferred by the secured creditor un-
taking possession ofGer the provisions of this Act, the secured
secured asset creditor may, for the purpose of taking posses-
sion or control of any such secured asset re-
quest, in writing, the Chief Metropolitan Magistrate or the District
Magistrate within whose jurisdiction any such secured asset or
other documents relating thereto may be situated or found, to take
possession thereof, and the Chief Metropolitan Magistrate or as the
case may be, the District Magistrate shall, on such request being
made to him—
(a) take possession of such asset and documents relating thereto;
and
(b) forward such asset and documents to the secured creditor.
**TProvided that any application by the secured credi-
tor shall be accompanied by an affidavit duly affirmed by
the authorised officer of the secured creditor, declaring
that—
(i) the aggregate amount of financial assistance granted and
the total claim of the Bank as on the date of filing the applica-
tion;
(ii) the borrower has created security interest over various
properties and that the Bank or Financial Institution is holding
a valid and subsisting security interest over such properties and
the claim of the Bank or Financial Institution is within the limi-
tation period;
(iii) the borrower has created security interest over various
properties giving the details of properties referred to in sub-
clause (ii) above;
(iv) the borrower has committed default in repayment of the
t;
financial assistance granted aggregating the specified amoun
-
uent upon such default in repayment of the finan
classified as
cial esatehée the speaniit of the borrower has been
a nonperforming asset;
Laws
of Security Interest and Recovery of Debts
26. The provisos inserted by the Enforcement
s. 6(a) (w.e.f 15-1-2013).
(Amendment) Act, 2012 (1 of 2013),
1082 See. 14 Part U—Chap. Li—baforcement of Security lieresi

(vi) affirming that the period of sixty days notice as required

by the provisions of sub-section (2) of section 13, demanding
payment of the defaulted financial assistance has been served on
the borrower;
(vii) the objection or representation in reply to the notice re-
ceived from the borrower has been considered by the secured
creditor and reasons for non-acceptance of such objection or
representation had been communicated to the borrower;
(viii) the borrower has not made any repayment of the fi-
nancial assistance in spite of the above notice and the Authorised
Officer is, therefore, entitled to take possession of the secured
assets under the provisions of sub-section (4) of section 13 read
with section 14 of the principal Act;
(ix) that the provisions of this Act and the rules made there-
under had been complied with:
Provided further that on receipt of the affidavit from
the Authorised Officer, the District Magistrate or the Chief
Metropolitan Magistrate, as the case may be, shall after sat-
isfying the contents of the affidavit pass suitable orders for
the purpose of taking possession of the secured assets:
Provided also that the requirement of filing affidavit
stated in the first proviso shall not apply to proceeding pend-
ing before any District Magistrate or the Chief Metropolitan
Magistrate, as the case may be, on the date of commence-
ment of this Act.]}
sad|
(1A) The District Magistrate or the Chief Metropolitan Magis-
trate may authorise any officer subordinate to him,—
(i) to take possession of such assets and documents relating
thereto; and
(ii) to forward such assets and documents to the secured
credi-
tor.]
(2) For the purpose of securing compliance with
the provisions
sub-section (1), the Chief M i Mewletrate aitthseDisteiea
Magistrate may take or cause to be taken such step
s and use, or
cause tobe used, such force, as may, in his opinion, be nece
ssary.
(3) No act of the Chief Metropolitan Magist
Magistrate “[any officer authorised by District
the Chief Metropolites
27. Ins. by the Enforcement of
(1 of 2013
s.6(b),
) (wef Ty eee Recove Debts Laws (Amendment)
ofry Act, 20/12
 Purport of the section: Sec. 14,Syn.1 1083

Magistrate or District Magistrate] done in pursuance of this section

Shall be called in question in any court or before any authority.

SYNOPSIS
1. Purport of the Section .............:cscsseeeeees 1083) 8. Is Chief Judicial Magistrate same as
2. Constitutional validity of section 14...... 1084 Chief Metropolitan Magistrate? ............. 1094
3. Nature of powers of CMM/DM: 9. When should the assistance of
Before and after 2012 Amendment........ 1088 DM/CMM be sought?.............cccceeeeeee 1095
4. Exercise of police powets: ..............:00+ 1091} 10. Can the action of the CMM/JM be
5. Is the power of CMM/DM restricted challenged? :stis. 3.324 oe rors 1096
only to movable properties?: .................+. 1092} 11. Notice to borrower by _ Secured
6. Exercise of powers after symbolic CTEQNOR enact scssttecsecpesscet ceet 1097
possession of asset by secured 12.Notice to borrower by CMM/DM................ 1097
Pe(a3 Se ee So ENE See 1092} 13. Can possession be taken under section
7. Delegation of powers: Pre and post 14 when an appeal is pending under
eli 1g) |) ke mek. aan 1093 Crs 1Co I ee ea ee 9” 1098

COMMENTS

1. Purport of the section

The meaning of this section is that the secured creditor may, instead of doing a
completely self-help possession, may seek the help of the Chief Metropolitan
Magistrate (CMM) or the District Magistrate (DM). Several laws contain similar
provisions. For instance, section 29 of the Sick Industrial Companies (Special
Provisions) Act provides:
29. POWER TO SEEK THE ASSISTANCE OF CHIEF METROPOLI-
TAN MAGISTRATE AND DISTRICT MAGISTRATE.—(1) The
Board or any operating, agency, on being directed by the Board may, in
order to take into custody or under its control all property, effects and
actionable claims to which a sick industrial company is or appears to be
entitled, request, in writing, the Chief Metropolitan Magistrate or the
District Magistrate within whose jurisdiction any property, books of ac-
count or any other documents of such sick- industrial company be situ-
ate or be found, to take possession thereof, and the Chief Metropolitan
Magistrate or the District Magistrate, as the case may be, shall, on such
request being made to him,
(i) take possession of such property, books of account or other
documents; and
(ii) cause the same to be entrusted to the Board or the operating
agency. |
ons of
(2) For the purpose of securing compliance with the provisi
District Mag-
sub-section (1), the Chief Metropolitan Magistrate or the
or cause to be
istrate may take or cause to be taken such steps and use
used such force as may, in his opinion, be necessary.

Ms 2 tse Soe AIS nt) Act, 2012

Interest and Recovery 0 f Debts Laws (Amendme
28. Ins. by the Enforcement of Security
(1 of 2013), s.6(c) (w.e.f. 15-1-2013).
1084 See. 14, Syn. 2 Part 1l—Chap. 111—Enforcement of Security Interest

(3) No act of the Chief Metropolitan Magistrate or the Distriot Mag-

istrate done in pursuance of this section shall be called in question in
any court or before any authority on any ground whatsoever,
However, as interestingly pointed out in K.R. Chandrasekran & Ors, v, Union
of India & Ors’, section 14 is vulnerable to possible misuse by certain unserupu-
lous landlords. As observed, the landlords can take advantage of the “draconian
provision” of section 14 of the SARFAESI Act in order to take possession from a
tenant, who is entitled to protection under Tamil Nadu Rent Control Act, by bor:
rowing an amount from a bank or FI; wantonly committing default, and thereby
obtaining an order through the secured creditor under section 14 of the SAR-
FAESI Act to throw away the bona fide tenant.

2. Constitutional validity of section 14

While the vires of entire legislation was for consideration before the Supreme
Court in Mardia Chemicals’ case, the constitutionality of section 14 specifically
came for consideration in the case of Siddhi Vinayak Hotels (P.) Lid. v. Union of
India™ (Writ Petition No. 26663 and 27553 of 2005, judgment dated17-2-2006).
The court upholding the constitutionalityof section 14 stated thus:
“An analysis of the above reproduced provisions show that
by virtue
of non obstante clause contained in Sub-section (1) of section 13 any
security interest created in favour of any secured creditor may be en-
forced without the intervention of the court or Tribunal. In terms of
Sub-section (2) the secured creditor can issue notice
to the borrower re-
quiring the latter to discharge his liabilities within sixty days from the
date of notice. Such notice is required to be delivered in accordance
par adenine vaginas seamen singer© newrl na ar
(2), the borrower can make a representation or raise objection against
the demand. The secured creditor is required to consider such represen-
tation or objection. If it is found that the representation or objection is
not acceptable or tenable, then the secured creditor is duty- bound to
communicate the reasons for non- acceptance to the borrower. If the
borrower fails todischarge his liability infull within a period of sixty
days specified in Sub-section (2), the secured creditor can take resource
to one or the other mode as specified in Sub-section (4). One of the
modes is to take over the secured assets of the borrower including the
right totransfer by way of lease, assignment or sale for realising the se-
cured asset. The secured creditor can also appoint any person
to manage
the secured assets ofwhich possession has been taken over. Any person
who may have acquired any of the secured assets from the borrowet can
also becalled upon to pay such sum of money as may be sufficient
Pay thesecured debt. Section 14(1) lays down that where the possession
ofany secured asset isrequired tobetaken bythe secured creditor orif
any ofthe secured asset isrequired to besold of
cured creditor, then he may, for the purpose oftransferred
taking
bythe se-
possession or
SU
29. Ti (2012) BC $27 (Madras High Courty
3B. Cited in Ashok Shardav Sail aves
Dovchepmane Gallef thasSubteh naioae
 Constitutional validity of section 14
Sec. 14, Syn.2 1085
control of any such secured asset make an application in
writing to the
Chief Metropolitan Magistrate or the District Magistrate within
whose
jurisdiction any such secured asset or other documents relati
ng thereto
is situated or is found for taking possession thereof. On receip
t of such
request, the Chief Metropolitan Magistrate or as the case may be,
the
District Magistrate shall take possession of the asset or document
and
forward the same to the secured creditor. Sub-section (2) of sectio
n 14
empowers the Chief Metropolitan Magistrate or the District Magistrate
to take appropriate steps or use, or cause to be used, such force, as may
be necessary for taking possession of secured assets and documents re-
lating thereto. Sub-section (3) of section 14 declares that any action
taken by the Chief Metropolitan Magistrate or the District Magistrate
under section 14 shall not be called in question by any Court or before
any authority. Section 17 which is captioned as “Right to appeal” lays
down that any person (including the borrower) aggrieved by any of the
measures taken under Sub-section (4) of section 13 by the secured
creditor or his authorised officer can make an application to the Debts
Recovery Tribunal within forty five days from the date of taking such
measures. Under Sub-section (2) of section 17 the Debts Recovery Tri-
bunal is required to consider whether any of the measures taken by the
secured creditor under Sub-section (4) of section 13 for enforcement of
security is in accordance of the provisions of the Act and Rules made
thereunder. If the Tribunal comes to the conclusion that such measure is
not in accordance with the provisions of Securitisation Act and Rules,
then it may require restoration of management of business to the bor-
rower or restoration of possession of the secured assets and declare that
the action taken by the secured creditor is invalid. The Tribunal can
pass any other appropriate order in regard to the steps taken by the se-
cured creditor under section 13(4). If the Tribunal declared that the ac-
tion taken by the secured creditor is in consonance with Sub-section(4)
of section 13 then such creditor can take recourse to one or more of the
modes mentioned in section 13 for the purpose of recovery of secured
debts.
A conjoint reading of sections 13(4) and 14 makes it clear that the source of
power to take possession of the secured assets of the borrower can be traced in
section 13(4) and not under section 14, which has been enacted as an aid for exe-
cution of decision taken by the secured creditors to take possession of the secured
assets or documents. To put it differently the substantive provision entitling the
secured creditor to take possession the secured assets in contained in section
13(4) and section 14 merely contains a provision to facilitate taking over of if
session without any impediment. If a person feels aggrieved by the action 0 ee
secured creditor to take possession of the secured asset, then he can file an appli-
cation under section 17(1) before the Tribunal and Tribunal can, after pir
age
the facts and circumstances of the case and evidence produced by the 1
Aoi ak Max
clare that the action taken by the secured creditor 1s not in
to restore the posses
tion 13(4). The Tribunal can also direct the secured creditor
sion of secured assets of the borrower.
1086 See. 14, Syn. 2 Part li—Chap. lll—Enforcement of Security Interest

are inclined to
in view of the above analysis of the relevant provisions, We
n available to
agree with Mr. Mohan Parasaran that right of appeal/representatio
the secured
the aggrieved person under section 17 can be exercised as and when
chall enge order
creditor decides to take possession of the property, He can also
the case
passed by the Chief Judicial Magistrate or the District Magistrate, as
may be, under section 14 of the Securitisation Act.
If section 14 is read in the manner indicated above, it is not possible to accept
the argument of the learned Counsel for the petitioners that the same is violative
of Article 14 of the Constitution.”
The vires of Section 14 have been questioned time and again. In Rameshwaram
Cotton Industries (Gujarat) Pvt, Ltd. v. District Magistrate and Others’', the Gu-
jarat High Court upheld the constitutional validity of section 14, observing that,
“any action on the part of the secured creditor in taking possession of the secured
asset, if not in accordance with the Act or the Rules framed thereund er, such
measures as deemed to be taken under sub-section(4) of section 13, one can chal-
lenge such action or measures taken by filing petition under section 17 of the Se-
curitisation Act, but such illegal action will not render section 14 bad in law.”
The question of constitutional validity of Section 14 again came up before the
Gujarat High Court in Mansa Synthetic Pvt. Ltd. v. Union ofIndia & Anr.”’ in the
context of the contention that no appeal has been provided against an order
passed under section 14 of the Act. In this respect, the Court relied upon
Rameshwaram Cotton Industries (supra) and made the following noteworthy
observations:
“The word "Appeal" has not been defined anywhere. An appeal in legal
parlance is held to mean the renewal of a cause from an inferior or sub-
ordinate to a superior tribunal or forum in order to test and scrutinise
the correctness of the impugned decision. It amounts in essence and
pith to a complaint to a higher forum that the decision of the subordi-
nate tribunal is erroneous and, therefore, liable to be rectified or set
right. The right of appeal is a creature of the statute. In no one it adheres
as a right unless it is positively created by a legislative device. Be itthe
parent legislation or subordinate legislation. The right of appeal is a
statutory right and if it is not so provided in the statute then a litigant
cannot claim that right or plead that on that ground alone the provision
1s unconstitutional. We shall deal with this issue hereinafter in detail as
to whether absence of appeal will render the provision of Section 14 of
the Act unconditional or not. We may only say that the legislature de-
signedly
tion
did not provide an appeal against an order passed under Sec-
14 of the Act because under Section 14 of the Act the authority
does not adjudicate any of the rights ofthe respective parties or deter-
mines any lis between the parties. What can be appealed before the
high forum is a decision which would decide some rights between the
parties and ifthere is any error inthe same, the superior
forum may

31. L.P_A No. 165 of 2010 in $.C.A No

32. THT(2012) BC&57 (DB-Gajarat), idle decided sane
on4"February, 2010
apes
 Constitutional validity of section 14 Sec. 14,Syn.2 1087
scrutinize the correctness of the impugned decision. Under Section 14
of the Act, as we have discussed in the earlier part of our judgment, the
authority concerned is not empowered to decide the question of legality
and propriety of any of the actions taken by the secured creditor under
Section 13(4) of the Act.” [emphasis supplied]
Relying on the judgments delivered in Munnilal and Another v. Town Ration-
ing Officer, Gorakhpur and Another*’, Prakash Amichand Shah v. State of Guja-
rat and Others™, Chinta Lingam and Others v. The Government of India and
Others”, K.L. Gupte and Others v. The Municipal Corporation of Greater Bom-
bay and Others*®, and Mardia Chemicals Limited case (supra) the Court held that
the fact that a right of appeal is not available against the order passed under sec-
tion 14 of the Act does not render the said provision unconstitutional and void as
being violative of Articles 14 and 19 of the Constitution of India on the ground of
arbitrariness and reasonableness. Added, as held by SC, the factors that have a
bearing in deciding whether a piece of legislation is violative of Articles 14 and
19, are:
(a) The status of the person on whom the power is conferred;
(b) The nature of the power which has been conferred;
(c) Whether the exercise of power depends upon subjective satisfaction of
the authority or body or is to be exercised objectively by reference to
some existing facts or tests;
(d) is the power quasi-judicial requiring observance of the principles of
natural justice and passing of a speaking order, in which event, the or-
der would be subject to judicial review under Article 226 of the Consti-
tution. The Supreme Court in clear terms has observed that when the
power has to be exercised by one of the highest officers, the fact that no
appeal has been provided for, is a matter of no moment.
Therefore, section 14 of the Act was held to be a valid piece of legislation and
was declared intra vires.
On the other hand, there are instances where the Courts have refused to go into
the question of constitutional validity of section 14 of the Act, holding that valid-
ity of the Act has already been upheld by the Supreme Court in Mardia Chemi-
cals case (supra). In K.R. Chandrasekran & Ors. v. Union of India & Ors’, the
Court expressed:
“But when the Supreme Court has considered the validity of the SAR-
FAESI Act as a whole, even though no express opinion has been made
by the Supreme Court about section 14 of the SARFAESI Act, and the
vires of the SARFAESI Act has been upheld, in the guise of applying
the principle ‘of sub silentio it is not possible for this Court to go nto
Salmond
the validity of section 14 of the SARFAESI Act. As stated by

33. (1995) 4 SCC 641.

34. (1986) 1 SCC 581.
35. AIR 1971 SC 474.
36. AIR 1968 SC 303(1).
37. Ill (2012) BC 527 (Madras High Court) (DB).
1088 See. 14, Sya. 3 Part 1l—Chap. 11 —Enforcement of Security Interest

isprudence,elicited above, may be in cases where a point of law

al in the decision is not perceived by the Court and the Court
while deciding a particular point has made a reference about another
point, the principle of sub silentio may be made applicable in respect of
another point in relating to which a reference has been made,

3. Nature of powers of CMM/DM: Before and after 2012 Amend-

ment
As is apparent, the CMM/DM only exercises the power of execution under this
law, and is not expected to adjudicate, There is no power to decide upon the
claim of the secured creditor, or to give an opportunity of hearing to the con-
cerned borrower. The function of the CMM/DM under this section is administra-
tive, and not judicial.
It has been the consistent view of the courts that the powers of CMM/DM are
executionary in nature and the Magistrate is only rendering assistance to the se-
cured creditor in taking possession of the secured assets as provided under sec-
tion 13(4) of the Securitisation Act.
The powers exercised by the CMM/DM are purely executionary in nature, The
said authority is only required to take action of taking sion of the assetsor
documents, once an application is made by the creditor pointing out that
he is entitled to take possession of any secured assets under the provisions of the
said Act and that such assets are situated within the jurisdiction of the said CMM/
DM.
In Mansa Synthetic Pvt. Ltd. v. Union of India & Anr.’’, the Court held that the
CMM/DM is bound to assist the secured creditor in taking the possession, but is
not empowered to decide the question of legality and propriety of any of the ac-
tions taken by the secured creditor
under section 13(4)
of the Act.””
As was held in Trade Well v. Indian Bank’, atthe time of passing order under
section 14 of the NPA Act, the CMM/ DM will have to consider only two as-
pects. He must find out whether the secured assets falls within his territorial ju-
risdiction and whether notice under section 13(2) of the NPA Act is given or not.
No adjudication of any kind is contemplated at that state.’
Similarly, in Ramdas Agarwal v. Collector (District Magistrate), Distri
& Anr.*. theHon'ble HClaiddown thescope ofpower exercisable byact Chicr
Durg

IDB! Bank Lad.vs.District

. Magistrate,
- : Nomont
a tik & Anr. [2011 (1) DRTC. 513 (Guj9)::
_ 207) CENa of rh heeCe CN CTD Bc
India & Ors. v. State of Maharashtra &
) (BY.
Asset Recovery Corporation India Ltd. v. State of Maharasht OAT Cann ee
an oy Apar ite Bank Ltd. v. State of Miberadlore & Ors (0
11(2012) Bom 351 (DB)]
5 [CAT
Tt (2011)i:BC
396227-
(BorSee
Asset Reconstruction Co. Put ad. +. Unio
alc SI.COM. Lid. v. District Magis
n) (On
ofIndia
n & Ors
trate/Collector Nagper & Ore. TV
 Nature of powers of CMM/DM
Sec. 14, Syn.3 1089
“Under the provisions of section 14 of the Act, the
CMM or the DM
has to arrange to take possession of such assets and docum
ents relating
thereto and forward such assets and documents to the secur
ed creditor.
There cannot be any adjudication on the nature of the land
or on the
question as to whether any due was payable or whether payme
nts were
made or not.”
The CMM/DM is not empowered to decide the question whether the
claim of
the secured creditor is genuine or not. [See IDBI Bank Ltd. y. Hytaisun Magnet
ics
Ltd. & Ors.“In Muhammad Ashraf v. Union of India, the Kerala High Court
held that under section 14 of the Securitisation Act, the Magistrate is only render-
ing assistance to the secured creditor in taking possession of the secured assets.
The Magistrate can consider whether secured property is identifiable and whether
60 days’ notice was issued under section 13(2) of this Act.
In Puran Maharashtra Automobiles’ case (supra), the Division Bench of
Mumbai High/Court further held that if the two conditions stipulated in section
14 are satisfied, then the CMM/DM has no other option but to take steps for tak-
ing possession of the secured assets and documents relating thereto and forward
such assets and documents to the secured creditor. It can thus clearly be seen that
no element of quasi-judicial functions are to be performed by the DM/CMM
while exercising powers under section 14, but he is only required to perform act
of executionary nature in taking possession and delivering it to the secured credi-
tor. No element of quasi-judicial function or application of mind is required
while exercising the said powers.”
In Ayishumma v. Hassan*’, the Kerala High court also observed that no power,
jurisdiction, competence or expertise is intended or vested with the Magistrate to
deal with any claim as to the nature of the property in question or as to the merits
or demerits with regard to other aspects involved in connection with the loan
transaction but for considering the fact whether the property in question is a “se-
cured asset”.
In Union Bank of India & Ors. v. State of Maharashtra & Ors.*, it was held
that the Magistrate under Section 14 had no jurisdiction or authority to adjudicate
and decide the issue of the status of lands as excluded under Section 31 (i) since
the District Magistrate cannot entertain disputes relating to the jurisdiction of
secured assets.
The CMM/DM is not empowered to decide the question of genuinity/propriety
of documents, including those signed or agreed between the borrower and the

44, IV (2011) BC 541 (Guj). (DB).

. IL (2009) BC 612 (DB). ; ;
wherein ene 88
46 Seo (ih Canara ra v. Sulay Traders &Ors. | Ill (2010) BC 578 (Guj)]
iene ppc) Cree i
that the CMM/DM will not be required to adjudicate on the sapere LN aharashi
i .; Saraswat Co-operative Ban Lv.
i no jurisdiction to
(Gup DEI Were the Court held that the Collector has
an CPeAaGLES OTS
enter upon adjudication of merits of claim of bank.
47. IV (2009) BC 214.
48. 11 (2011) BC 459.
 1090 ~—sSee. 14, Syn. 3 Part ll—Chap. Li1—Bnforcement ofSecurity Interesi

secured creditor; and is bound to assist the secured creditor, as was held in /DB/
Bank Lid. v. District Magistrate, Navsari & Anr.”.
In Bank of India v. Pankaj Dilipbhai Hemnani and Ors,”, the High Court
stated that <. role envisaged by the legislature insofar as the authority is con-
cerned, is a ministerial role in the form of rendering assistance and exercising
powers by the virtue of the authority vested in the DM/CMM including use of
force as may be necessary. The said authority is not vested with any adjudicatory
powers. In the guise of acting under section 14 of the Act the authority cannot be
permitted to usurp statutory powers vested in the Tribunal, The authority can
only assist, and is bound to assist the secured creditor, Any dispute raised before
him cannot be gone into and the aggrieved person has to be relegated to seek
statutory remedy in an applicunder ation section 17 of the Act,
It is also pertinent to note that in Muhammad Ashraf v. Union of India (supra)
the Division Bench of the Kerala High Court also held that even though there is
no scope for adjudication or trial of a dispute under section 14, the Chief Metro-
politan Magistrate or District Magistrate is not like an Amin of the court execut-
ing a court order. The fact that authority is entrusted with a similar functionary
shows that the Magistrate must satisfy himself that petition is maintainable. Arbi-
trary and high handed action at the instance of secured creditor also has to be
avoided as taking possession of the property may sometimes affect substantia!
rights which may not always be curable by subsequent restoration of possession.
Similarly, in R. Shiva Subramaniyan v. State Bank of India & Ors.”, the Court
remarked though the CMM discharges only ministerial function and no adjudica-
tionis necessary, having regard to the right to property under Article 300 is in-
volved, certain minimum requirement of application if mind is necessary.
The Madras High Court in K.R. Chandrasekran & Ors.(supra)”’ remarked that
when once greater power has been conferred on the CMM/DM under section 14.
the same has to be exercised with greater care and onerous responsibility”.
— while such powers, the CMM/DM shall follow the following guide-

nea tetBiving notice under section 13(2), the secured creditor requires the

While classifying the dues as NPA, the bank/FI has followed

enunciated under SARFAESI:
ocedure
oteti
Notice under section 13(2) was given to the borrower in accordance
Rules: thenotice has been received bythe borrower. etc. _—
bas
If vapt
the ied
borrower
than has
a woos
made a representation
‘ion under section 13(3-A),
- the bank/FI
Se
49. [TV (2011) BC 655 (Guj) (DB)}
50.
e n AIRa9
200)
7 BC
Guj 2
201.1 (2008) BC ; 355, (2007) 2 GLR 1810.

2 (Mad)
~ See ER 1S OB). a
5* Coon(O KR. Chandrasekr, an& Ors. v. Union of
of India & Ors. (IM (2012) BC 527 (Ma
dras High
55. also Memalatha Ranganat
han vs.Indian Bank {i(2013) BC43 (Ma
d) (BY)
 Exercise of police powers: Sec. 14,Syn.4 1091
Notice of possession under section 13(4) has been given;
In case where the borrower/guarantor is not in possession of the secured asset,
whether the bank/FI has scrupulously followed rule 8(1) of the Rules. If not, the
CMM/DM, if necessary, may direct the bank/FI to do so.
Thereafter pass appropriate orders, which shall contain laconically the above
said considerations to evince that there has been an application of mind by the
authority.
Further, the consequences of an order passed by the CMM/DM under Section
14 especially relating to the force to be used for the purpose of taking possession
under section 14(2) of the Act without giving an opportunity to the person who is
in occupation, is ostensibly draconian, as remarked by the Court in K.R.
Chandrasekran & Ors. v. Union of India & Ors”’.
Post-Amendment Act of 2012
The confusion pertaining to the powers of the CMM/DM will possibly come to
rest after the 2012 Amendment. The Act now requires an affidavit to be filed by
the secured creditor, duly affirmed by its authorized officer confirming therein
the aggregate amount of financial assistance granted, total claim existing as on
the date of filing application, details of properties of the borrower on which secu-
rity interest has been created, and declaring that the borrower has made a default
in repaying the financial assistance, that his account has been classified as an
NPA, that notice has been served under section 13(2), that reply has been given
under section 13(3A), that the secured creditor is entitled to take steps under sec-
tion 13(4), and in general that all the provisions of the Act and the rules made
thereunder have been complied with. The scope of the affidavit is all pervasive;
which at the first instance makes one believe that the amendment seeks to relieve
the CMM/DM of applying his mind on such issues.
But, the second proviso inserted makes it amply clear that the CMM/DM shall
pass suitable orders for taking the possession after being satisfied with the con-
tents of the affidavit. Therefore, the guidelines as discussed in K.R. Chandrasek-
ran & Ors.(supra)’’ get reflected in this proviso. The role of CMM/DM is no
longer executionary or merely ministerial; verification of facts stated in the affi-
davit has now become necessary, even if the matters are not under any dispute.

4. Exercise of police powers:

Employment of any physical power to dispossess even in terms of a statute or
the State.
enforceable order could be only had in exercise of the police power of
Even a court does not have the power to dispossess by force, through its officer,
but has the power to secure it only through the police machinery of the State.
That power cannot be’conceded to any individual or institution paper Tee 10
take possession, except in cases where the power to physically tag a li
expressly conferred. Section 14 of the Act contains provisions by which t mae
lice powers of the state to lawfully evict persons who continue in De ton THD)
spite of measures taken under section 13(4), following notice under section I-
OZ. 10) (205) Be ee
(DB).
56. Ill (2012) BC 527 (Madras High Court)
57. IV (2012) BC 105 (DB).
1092 =See. 14, Syn. 5 Part ll—Chap. Ll—knfercement afSecurity Interest

is vested in the District Magistrate or the Chief Metropolitan Magistrate and not
in @ secured creditor.”
in Hemalatha Ranganathan vs. Indian Bank”, it was held that question of giv-
ing direction to police to give assistance to execute warrant and tobreak open the
lock, etc. would arose only in case Commissioner is not in a position to lake pos:

5. Is the power of CMM/DM restricted only to movable properties?

Considering the words “forward such asset and docu the secured s
toment credi-
tor” used in section 14(1)(b), it was contended that an immovable property can-
not be forwarded and, therefore, the operation of section 14 must be limited only
to movable property. Negating the contention, the Bombay High Court in the
case of Prashant Khushe v, State of Maharastra”, held that while it is true that
an immovable property cannot be forwarded to the secured creditor, it would be
sufficient compliance of section 14(1)(b) if the title deeds in respect of such im-
movable property are forwarded to the secured creditor.

6. Exercise of powers after symbolic possession of asset by secured

creditor?
In a very interesting case of Kottakkal Co-operative Urban Bank Lid v. Balak-
rishnan®', proceedings were initiated under section 13(2)
of the Act by the Peti-
of the property leaving the borrower in de facto physical possession. Notice of
such action was published. The property was brought to sale wherein a third
party was a successful bidder. The sale was confirmed and a sale-certificate was
issued in favour of the auction purchaser. The secured creditor then approached
the CJM under section 14 of the Act for taking possession and control of the
property. The CJM refused to exercise its powers on the ground that the secured
creditor has already taken possession (symbolic) of the secured asset and has sold
Sake Poet Utcen: thesecuted cteditor toseckassistance ofGeeCIM so
€ possession or contr ne propertyfor effecting sale; such provision can-
not be invoked after the possession is taken, sale is effected and sale certificate
issued. An appeal was preferred by the secured creditor against the order of the
CJM. In a beautifully worded judgment, the Kerala High Court held thus:
“4. While there is a vestingof right, exclusivelywith the transferee
until a sale in terms of section 13(6), such vesting of sale gives
the
transferee the right to demand the secured creditor for actual physical
possession. Such vesting, by operation of section 13(6) is inrelation
the secured asset as if the transfer has been made by the owner to
of such

$8. Sundaram
BNP Paribas Home
(2013)
$9. Hl BC42
BC
(2007) (Mad) (DB). Pinance Lad.¥. StateofKerdla, Th(200) BC360.
417.
si. TV (2008)
BC 480,
 Delegation of Powers:
Sec. 14,Syn.7 1093
take only de jure possession, leaving the secured debtor
with actual
possession, Therefore the secured creditor who has taken over
de jure
Possession continues to be a secured creditor duty bound to
give the
transferee de facto possession and such liability of the secured credit
or
gives sufficient standing to sustain the application for dispossession of
the secured debtor of de facto possession over the security interest by
recourse to section 14 of the Act. On this count also, a secured credit
or
who has not taken de facto possession but has proceeded and completed
transfer on the basis of de jure possession is entitled to apply for assis-
tance of the CMM/DM, as the case may be, for taking over actual
physical possession from the secured debtor. The result of that proceed-
ings would be that the secured debtor would be dispossessed of actual
possession and de facto possession would be taken by the secured credi-
tor who would then, duty bound, as he is, transfer such de facto posses-
sion to the transferee of rights under section 13(6) of the Act.”

7. Delegation of powers: Pre and post amendment 2012

Can the CMM/DM delegate the power to a deputy? Before the Amendment
Act of 2012 coming into force, there were clouds of doubt on the issue. In Asset
Reconstruction Company (India) Limited v. Kumar Metallurgical Corporation
India”, the DRAT held that the wording of the section—“cause to be taken” in
sub-section (2) expressly permits delegation of power by the DM/CMM. In any
event, from the borrower’s perspective, taking offence to the delegation of power
by the DM/CMM is quite a strange ground, as in any event, the borrower cannot
be said to be have been prejudiced by any such delegation.
In Citibank, Bangalore v. Sudeep Singh’, the Karnataka High Court held that
the DM/CMM cannot simply assign the job of repossession of the asset to the
police to do the needful after issuing notices to the respondents. While it does not
mean the DM/CMM will carry out the task himself, the case essentially meant
that there is no process such as issue of notices etc. under the section.
The Kerala High Court in the case of Sundaram BNP Paribas Home Finance
Limited v. State of Kerala”, explained the manner of delegation permitted under
section 14. It observed that “....the repository of the statutory power under sec-
tion 14 is the District Magistrate or the Chief Metropolitan Magistrate, as the
case may be. The Act does not authorize delegation of that statutory power. Be-
reft of that, the repository of that statutory power has to exercise that power by
himself and cause the relief to be worked out under his control. That cannot be
delegated. He may for such purpose, issue a commission, even to a ig Sag in
the official hierarchy, to supervise or/and authorize the police force to take fur-
ther action. But this can ASbe done onlyé under 5 his control and orders.” Also reiter-
ated in Aseena v. Sub-divisional Magistrate .

62. Ill (2005) BC 44 (DRAT—DRT).

63. IV (2004) BC 529.
64. III (2009) BC 360.
65. III (2009) BC 145 (DB).
1094 See. 14, Syn. 5 Part 1l—Chap. 1ll—Enforcement afSeourity Interest

on the view
However, in SK Akbar Ali v. State of West Bengal & Ors”, relying
the Caloutta
taken in Harun Ali Mallick v. The State of West Bengal & Ors.’
onal DM,
High Court held that once the power is duly conferred on an Addiv
the Act, It is
such ADM is competent to decide an application under secvion 14 of
devi RK So-
not necessary that the power has to be exercised by the DM. In Manju
rred
mani v. Union of India , it was held that unless an ACM was expressly confe
14 of
the power by way of a notification to entertain an application under Section
the SARPAESI Act, he would have no jurisdiction to deal with such a proceed-
ing.
The insertioa of sub-section (1A) removes the ambiguity existing till now, The
step has been taken in view of delay in disposing off applications under secuon
14 in spite of repeated instructions of High Courts to dispose off the applicavions
in a time bound manner. At this juncture, it is import ant
to note that delegation
has been allowed to the extent of taking possession of assets and documen ts re-
lating thereto, and forwarding the same to the secured creditor, the power to take
steps or use force in accordance with section 14(2), cannot be delegated.

8. Is Chief Judicial Magistrate same as Chief Metropolitan Magis-

trate?
The authority specified under section 14 is not exercising any judicial or quasi-
judicial functions and no adjudicatory process is involved, only the authorities
specified under section 14 can render assistance to the secured creditor. The au-

this context a question arose whether a Chief Judicial Magistrate

can exercise the
powers under section 14.
In Solaris Systems Pvt. Ltd. v. Oriental Bank ofCommerce”,
a single judge of
the Kerala High Court held that Chief Judicial Magistrate can exercise the power
under section 14 as the words “Metropolitan Magistrate” would include Chief
Judicial Magistrate also if the area in question is not a metropolitan area as the
functions assigned to both the Magistrates are similar. In Dhanlakshmi Bank Lim-
itedv. Kovai Foods & Beverages’, the Madras High Court held that the power
conferred with the Chief Metropolitan Magistrate is equal to the Chief Judicial
Magistrate in the District level. The District Magistrate will be seen only as Chief
Judicial Magistrate. In an appeal against the Solaris Systems’ case and other
cases, the division Bench of Kerala High Court in the case Muhammad Ashraf v
Union
ofIndia”, held that Chief Judicial Magistrates inmetropolitan areas are

66. Til(2012)BC 261 (Cal).

67. AIR 2011
Cal 45.
68. TV (2006)
BC 536.
69. il (2007)
BC 612.
70. 11 (2009)
BC 612.
 When should the assistance, etc.
Sec. 14, Syn.9 1095
are Magistrates, the powers can be exercised by the Chief
Judicial Magistrate
also,
In V.N.Radhakrishnan, Venmelil v. State of Kerala", another division Bench of
the Kerala High Court reiterated that the Chief Judicial Magistrate
in a non-
metropolitan area can exercise the powers of the Chief Metropolitan Magist
rate
in a metropolitan area under section 14 of the Act.”
However, a contrary view has been taken by the Aurangabad Bench of Bombay
High Court in the case of Indusind Bank Ltd v. The State of Maharashtra”, (Cri
WP nos. 214 and 215 of 2008). In Muhammad Ashraf’s case (supra) the Kerala
High Court (DB) dissented with the Bombay ruling.

9. When should the assistance of DM/CMM be sought?

It is quite clear from the wording of the section that the power to seek assis-
tance of the CMM/ DM is at the option of the secured lender. There is nothing in
the section to mandate the seeking of such assistance.” In other words, the se-
cured creditor need not necessarily approach the Chief Metropolitan Magistrate
to take possession of the secured asset. The secured creditor through its author-
ised officer can itself take possession or is entitled to delegate the power to any-
one to take possession of the property.” In Bhartia Trades (P.) Ltd. v. UCO
Bank’®, the Calcutta High Court reiterated that the bank is not under any statutory
obligation to follow the process of section 14. By issuing notice under section
13(4) it was empowered and entitled to take possession of the flats. Section 14
conferred a statutory right on the secured creditor, and a corresponding statutory
obligation on the CMM/DM concerned, it did not create any right of the debtor,
or any statutory duty or obligation of the secured creditor.
In the U.S. Article 9 of the UCC, there is a limit imposed on self-help enforce-
ment—there should not be an apprehension of breach of peace. If in enforcing
any security interest, a breach of peace is apprehended, the secured lender should
seek judicial intervention.
While the provisions of this section are purely voluntary, it would be logical to
hold that in cases where breach of peace is apprehended, the assistance of law
enforcing agencies should be sought. After all, the purpose of the law is not to
create anarchy and lawlessness.
Further, as held in K.R. Chandrasekran & Ors. v. Union of India & Ors”, the
power of the bank or financial institution to resort to Section 14 is only in con-
tinuation and after the process enumerated under section 13(4) of the Act; it can-
not be said that straightaway, the secured creditor can approach the CMM or DM

71. CRL.M.C.NO. 4369 of 2008, dated 20"" November, 2008. The judgmen
j t isis avai available on the website
(accessed
of the Kerala High Court at http://judis.nic.in/judis_kerala/qrydisp.aspx ?filename=8 1795
on 16th September, 2013).
72. Ill (2009) BC 343.
73. (2008) 110 Bom LR 2880.
(Ker).
74 See re Aboobacker v. Punjab National Bank, (2005) 64 SCL 42
Chennai).
75, Pradeep D. Kothari v. UTI Bank, 1V (2007) BC 53 (DRAT-

77.
De IV
AN (2012) OSHCBC 105 (Madras Hig h Court) (DB)
; ; See also K.R. Chandrasekran & Ors. v. Union of
(DB)].
ae & As [ III (2012) BC 527 (Madras High Court)
1096 = See. 14, Sym. 10 Part Li—Chap. Li— Enforcement af Security Interest

hinges
under section 14 of the Act. As such, section 14 is not independent and it
Non.
upon the measures taken by the secured creditor under section 13/4),
on of as-
satisfaction as to following of mandatory procedure may lead to rejecti
sistance lo secure possession.

10. Can the action of the CMM/JM be challenged”

lt is clear from the scheme of the law that the JM/CMM js not carrying oul @
judicial or quasi-judicial function under the law, He ts merely doing an executive
function. As such, there is no application of mind or exercise of discretion by the
executive authority. The actions of the CMM/JM cannot be challenged, The party
to a dispute may only challenge a substantive act, based on which the executive
action follows. See DRT decision in Bharatbhai Kamalshi Mehta v. The Kapol
Cooperative Bank Lid.” Also see the language of sub-section (3),
In Radhakrishnan v. State of Kerala”, the Division Bench of the High Court
held that the petition under section 482 of the Code of Criminal Procedure chal-
lenging the proceedings of the Chief Judicial Magistrate is not maintainable.
ln Muhammad Ashraf v. Union of India,” the Kerala High Court observed that
no appeal any other proceeding will lie against the order passed under section 14.
However, right of judicial review under Article 226 and 227 of the Constitution
cannot be taken away. The Gujarat High Court, in Mansa Synthetic Pvt. Ltd. v.
Union of India & Anr"'., reiterated the same but added that the power under the
said Articles can be exercised only in cases where the concerned Magistrate or
the Commissioner, as the case may be, exceeds his power or refuses to exercise
his jurisdiction vested in him under the law.
The Court in Union Bank of India & Ors. v. State ofMaharashtra & Ors.”’,
stated that since the SARFAESI Act provides finality to the act of the Magistrate
under the scheme of section 14, thus the District Magistrate’s act stands excluded
from the purview of section 21 of the General Clauses Act which enables to add,
amend or vary any order of the Magistrate.
As per Raj Rani Singh & Anr. v. State of UP & Ors.*’, section 14 is only acon-
sequential provision and exists for the purpose of executing the measures taken
under section 13(4) of the SARFAESI Act, therefore an order under Section 14
cannot be challenged under Section 17.
The Apex Court in Kanaiyalal Lalchand Sachdev & Ors v State of Maharash-
tra & Ors” confirmed that an action under section 14 of the Act constitutes an
action taken after the stage of section 13(4), and therefore, the same would fall
within the ambit of section 17(1) of the Act. Thus, the Act itself contemplates an
efficacious remedy for the borrower or any person affected by an action
under

I (2006) BC 127 (DRT/DRAT).

Ill (2009) BC 343 (DB).
TI (2009)BC 612 (DB).
TH (2012)BC 857 (DB-Gujarat).
fi (2011) BC 459. :
Iyn yh(All) h(DB),
(2011) BC 667 ph dalso Virend
See | raa KumarJaiswalv. Chief Metropolitan Magistrate,
ESS2322
1 (201
BC 698
1) (SC).
 Notice to borrower by CMM/DM: Sec. 14, Syn. 12 1097
section 13(4) of the Act, by providing for an appeal before the DRT.
See also
Bharatbhai Ramniklal Sata v. Collector & District Magistrate & Anr.*.

11. Notice to borrower by Secured Creditor

Section 14 of the Act, while providing for taking recourse through the Chief
Judicial Magistrate, does not contemplate any adjudication or inquiry after hear-
ing both the parties. The secured creditor is not required to give any prior notice
to the borrower while moving the application under section 14 of the Act.
In State Bank of India y. Katthikai Tea Plantations*®, Justice S Palanivelu of
the Madras High Court has lucidly expressed the following view on the legisla-
tive intent in relation to issue of notice:
“....Before taking aid of section 14 of the Act, the secured creditor is
expected to have exhausted the procedures contained in section 13 of
the Act. Hence, the legislature thought fit not to incorporate any explicit
provision in section 14 of the Act to issue notice to the borrower nor to
adjudicate the matter upon hearing him. In other words, it could be
stated that since all the precautionary measures have been suggested
and directed to be accomplished by the secured creditor in section 13 of
the Act, the legislature found it appropriate not to include any express
requirement of hearing the borrower. The corollary thereof would be no
notice need be sent to the borrower while the Court deals with section
14 of the Act on an application filed by the secured creditor. In case, if
the Court issues notice to the borrower not only it would be out of
scope of the provisions adumbrated in section 14 of the Act but also be
unlawful. To put it in nutshell, since no adjudication or roving inquiry
is needed under section 14 of the Act, issuance of notice to borrower is
alien to the special statute viz., the Act.”
In framing the above views, the Madras High Court relied on its earlier deci-
sion in Sundaram Home Finance Limited v. K. Raja ’ and Indian Overseas Bank
v. Sree Aravindh Steels Ltd.™*.

12. Notice to borrower by CMM/DM

CMM/DM acting under section 14 of the NPA Act is not required to give no-
tice either to the borrower or to the 3rd party.
In Prashant Khushe v. State of Maharastra®’, the Bombay High Court held that
the requirement of natural justice has been expressly provided under section 13
of the Securitisation Act. Once the rule of natural justice is followed by the pro-
cedure under section 13 of the Act, no further notice is required under section 14
of the Act which is a provision in the statute to enforce the acts permitted under

85. II (2010) BC 293.

86. IV (2009) BC 674.
87. AIR 2009 Mad 151.
88. (2009) 1 CTC 341.
89. III (2007) BC 417.
1098 See. 15 Part li—Chap. lil—Enforcement af Security Interest

section 13 of the Act which acts only be valid by following rules of natural jus-
lice.

In Sosanuna Abraham v State Bank of Travancore”, the Kerala High Court

held that the proceedings under section 14 are not judicial proceedings in which
any person had any night to notice of heanng,
Similarly, in Trade Well & Anr, v. Indian Bank & Anr.”’ it was held that
CMM/DM acting under section 14 is not required to give notice to the borrower
or to the third party. The view was upheld in /nernational Asset Reconstruction
Co. Pvt. Ltd. v. Union of India & Ors. * wherein in addition to the guidelines laid
down in Tradewell (supra), the Court also held that the borrower/mortgagor or
any other person has no locus to participate/object/be heard at the time of passing
of order or any other stage including the execution or implementation of the or-
der.

13. Can possession

be taken under section 14 when an appealis
pending
under section 17
In Arun Kumar Arora y. Union of India’, a division bench of Punjab and Ha-
ryana High Court taking note of the judgment in Kalyani Sales Company v. Un-
ion of India™, observed that section 14 of the Securitisation Act cannot be inter-
preted to defeat the rights granted to a third party, who under section 17 of the
Act is entitled to have his objection adjudicated. Section 14 of the Act has to be
read with the provisions of sections 34 and 17 of the Act and cannot be inter-
preted to defeat the right of the parties under section 17 of the Act. Yet another
division Bench of the Punjab & Haryana High Court in the case of Unitex Steels
Pyt Lid v. Bank of India.”*, relied on Arun Kumar Arora’s case (supra) and
quashed the action taken by the bank for possession of mortgaged property im-
aia after issue of notice of possession under rule 8(1) of the Security Inter-
est Rules.

SNe ee ee ee See
over by a securicompany
tisati or reconstruc-
on
secs 5, andef- tion company under clause (a) of section 9 or,
Manner
sarees as the case may be, by a secured creditor under

KKRELSLS
S.
; ; 7
the Enforcement
3 3 i
of Security Interest
(30of3004), <. 9 (wef 11-11-2004), and Recovery ofDebts Laws (Amendment)
Act, 2004
 Manner and effect oftakeover of management Sec.15 1099

ofthe borrower is situated, appoint as many persons as it thinks

it—
(a) in a case in which the borrower is a company as defined in
the Companies Act, 1956 (1 of 1956), to be the directors of
that borrower in accordance with the provisions of that Act;
or
(b) in any other case, to be the administrator of the business of
the borrower.
(2) On publication of a notice under sub-section (1),—
(a) in any case where the borrower is a company as defined in
the Companies Act, 1956 (1 of 1956), all persons holding of-
fice as directors of the company and in any other case all
persons holding any office having power of superintendence,
direction and control of the business of the borrower imme-
diately before the publication of the notice under sub-section
(1), shall be deemed to have vacated their offices as such;
(b — any contract of management between the borrower and any
director or manager thereof holding office as such immedi-
ately before publication of the notice under sub-section (1),
shall be deemed to be terminated;
(c) the directors or the administrators appointed under this section
shall take such steps as may be necessary to take into their cus-
tody or under their control all the property, effects and action-
able claims to which the business of the borrower is, or appears
to be, entitled and all the property and effects of the business of
the borrower shall be deemed to be in the custody of the direc-
tors or administrators, as the case may be, as from the date of
the publication of the notice;
(d) the directors appointed under this section shall, for all pur-
poses be the directors of the company of the borrower and
such directors or as the case may be, the administrators ap-
pointed under this section, shall alone be entitled to exercise
all the powers of the directors or as the case may be, of the
persons exercising powers of superintendence, direction and
control, of the business of the borrower whether such powers
are derived from the memorandum or articles of association
of the company of the borrower or from any other source
whatsoever.
ower, being a
(3) Where the management of the business of borr 0 f 1956) ) is
nv as defined i the Companiesi , Act, 1956 q_
in
notwithstanding anything
aii over by the secured creditor, then
1100 «See. 15, Syn. 1 Part 11—Chap. 11l—Enforcement of Security Interes!

contained in the said Act or in the memorandum of articles of asso-

ciation of such borrower,—
(a) it shall not be lawful for the shareholders of such company
or any other person to nominate or appoint any person to be
a dire of ct ory;
the compan
(b) no resolution passed at any meeting of the shareholders of
such company shall be given effect to unless approved by the
secured creditor;
(c) no proceeding for the winding up of such company or for the
appointment of a receiver in respect thereof shall tie in any
court, except with the consent of the secured creditor,
(4) Where the management of the business of a borrower had
been taken over by the secured creditor, the secured creditor shall,
on realisation of his debt in full, restore the management of the
business of the borrower to him.

SYNOPSIS
1. Our comments on the pre-amendment 4. Takeover of management by the
text of the section: A section out of FECONSIFUCTION COMPANY vaseccecc ccc 1102
place, Cat OE NG csi. snccseteriesnstanede 1! 5. Overall scheme of takeover ....0..0....0000.. 1102
2. 2004 : Section gets 6. Change of management .....0.60.0.000000000 1102
parentage, but language remains 7. Restraint on corporate powers ................ 1102
initiate nibovatoswiiassisthedediledesse 1101) 8. Returningof elie sss0sss00000., 1
3. Takeover of management by D, APB ay. mutes uaetin ge ierivies. 1103
POC Silly es Tepeaitln 1101} 10. Guidelines of the Reserve Bank............. 1104

COMMENTS
1. Our comments on the pre-amendment
text of the section: A sec-
tion out of place, out of nexus
We had sharply criticised the language of the section as it stood prior to
the
2004 Amendment. Considering it may be of interest, this is what we
wrote:
__Properly speaking, this section should either be struck down
some
judicial authority, ormust beread down. Thissection start
s veh the
words when (where?) the management of business of
a borrower is
taken over ..". There is no provision inthe Chapter III dealin
g with en-
borement of‘security interests formanagement ofthe
business ofthe
borrower ‘ing taken over, and no such power can
be implied. Therei
a provision in section 9(a), but that is a
St en te
 Takeover of management by the secured lender
Sec. 15, Syn.3 1101
This and the following section are amended replicas of sections 32A
to 32E of the State Financial Corporations Act, but those provisions
flow from section 29 which allows the financial corporation to take
over the management of the “industrial concern”. The powers grante
d
under this section are confined to “taking over the management of the
secured asset”, which is very different from taking over the manage-
ment of the business of the borrower.
As discussed before [see notes under section 13], no such power to
take over the management of the business of the borrower could ever be
deemed to be “enforcement of security interest”. Even if the loan
agreement contains a power to take over the management of the busi-
ness of the borrower, such power is not a “security interest” and there-
fore, cannot be enforced under this law.

2. 2004 amendments: Section gets parentage, but language remains

incomplete
The section was an orphan prior to the 2004 amendment, as the section related
to takeover of management of business by a secured lender, for which there was
no corresponding provision in the law. Now that section 13(4)(b) has been
amended to empower the secured lender to take over the management of business
[see our comments under section 13(4)], there is a parent provision for this sec-
tion. However, the language still has gaps. For instance, while the beginning part
of section 15(1) starting with “when the management of business ...” has been
amended to include takeover by an ARC under section 9 or a secured lender un-
der section 13(4)(b), the continuing part still says—‘“the secured lender may, by
publishing a notice....”. Sub-sections (3) and (4) continue to refer to “secured
lender” only. Obviously, the draftsman has not taken the job of drafting with the
seriousness it deserves.

3. Takeover of management by the secured lender

The section now contains the machinery provisions for takeover both by the
secured lender as also by the reconstruction company. While the purpose of an
asset reconstruction company taking over a business is to restructure the business
so as to revive it, the purpose of the secured creditor taking over business, if at all
permitted, can either be (a) something akin to administrative receivership permit-
ted in the U.K. insolvency laws; (b) effective realisation of security interests.
We have earlier opined that first of all, in order for a secured lender to takeover
the management of business, the secured lender must have a generic peerna
charge over the “general enterprise” of the borrower. Even if the ras of t e
one
secured lender is a charge on the generic undertaking of the secured len ee
nt ot py ng
cise of such right would predicate crystallisation, which is equivale
suc oa
the business of the borrower on hold. The document for creating HaeHh
and the siaciny
must entitle the secured lender to crystallise the charge, g
next steps after the
doing the same. This section can only provide the
charge has been crystallised.
1102 See. 15, Syn. 4 Part tt—Chap. 11 —Enforcement of Security Interesi

Even if this section is taken to empower the secured lender to takeover man
se
agement of business, the necessary mechanism provided yn the section for
cured creditors is—realisation of security interests, giving credit for the sale pro.
ceeds, claiming of the deficit and returning of the surplus. The biggest emgma is
af the takeover of business means changing of board of directors, etc, how does
that help the secured lender, because eventually, the realisation has to come only
from cashflows from the assets.

4. Takeover of management by the reconstructi on

company
It would be hard to think of the ARC taking over management, but reconstruc-
tion companies have often engineered takeover of management of entities, This is
commonly the case in many global bankruptcies, See notes under section 9,

5. Overall scheme of takeover

The combined effect of this section, and the next section will be that the per-
sons holding office as directors shall cease to hold office, and instead, the per-
sons appointed by the secured creditor shall take office. No compensation for
loss of office shall be payable to the persons whose offices have been so termi-
nated. The most drastic provision is in sub-section (3) that restrains the corporate
powers of the shareholders of the company by making the exercise
of such pow-
ers subject to the sanction of the secured lender.

6. Change
of management
_ The basic scheme of the section is to provide for change of management, which
is to be achieved, in case of companies, by change of directors, and in case of
other entities, by change of “administrator”. The word ‘administrator’ is surely a
wrong word—administrator is only concerned with administrative duties. In con-
text in which it is used, the intent of the law is to refer to the manager of the
business entitled to general powers ofmanagement, supervisi on
and control.
Sub-section 2(a) provides for vacation of office by directors and “all persons
pope toy bogs having power of superintendence, direction and control”, As
aw is tosay that the persons holding “key managerial posit ons”
will lay down their office, this section will result into only such persons laying
equivalent to “manager” in case of companies.
For instance, there is no question of the financial controller
vice-president
(marketing), laying
down his office. one
This becomes more transparent when onelooks atsub-section
created by vacation of office under (1) since thegap
section (2) i
pointed under sub-section (1). oo (2) isfilled up by the persons ap-

L Restraint on corporate powers

holder auton (3) restrains thecorporate powers oftheshareholders

the shareholders cannot appoint any person asa director. The law does not say
cannot remove the directors appointed bythe secured lender, but
 Appeal Sec. 15, Syn.9 1103
the lack of that statement will possibly be made good by clause (b) which
says,
any resolution passed by the shareholders shall not have effect until it
is ap-
proved by the secured creditor. In other words, the secured creditor becomes the
extra-constitutional boss of the entity.
It is important to note that the vote of shareholders made subjected to the ap-
proval of the secured lender; however, the vote of shareholders does not become
redundant. That is to say, on matters on which the vote of shareholders is re-
quired, it will continue to be so required. There is nothing in the law that allows
the directors to obviate the need to take shareholders’ sanction. Nor can the direc-
tors force the shareholders to abide by their wishes. Hence, shareholders can be
overruled by the secured creditor, but cannot be dictated.

8. Returning of management
The strangest part is sub-section (4): which talks of restoration of the manage-
ment of the business of the borrower when the secured creditor has realised his
dues. First of all, it is unconceivable as to how does takeover of the management
of the business help the secured creditor to recover his dues, and in any case, if
he does so, in what manner does he realise his dues? If the secured creditor runs
the business of the borrower instead of selling the secured assets, it would
amount to stepping into the shoes of the borrower with all the trials and tribula-
tions inherent. Instead, the common remedy of disposing of securities and realis-
ing debts is much more equitable and commercial remedy.
A secured creditor who takes over the management of the borrower’s business
would obviously put his own interests on the top of the interests of other credi-
tors, and, therefore, can easily be accused of unfairness by other creditors. A se-
cured creditor having security interest in specific assets of the borrower, under
this section, takes over the management of all the assets of the borrower.
If this section is taken as an offshoot of section 13(4), then, here again, the pro-
visions of section 13(9) will be applicable.

9. Appeal
We have mentioned above that there is no appeal as for action taken in section
9. This section, as it stands after the amendment, is a combined offshoot of sec-
tions 9 and 13(4)(b). As for a takeover made by secured creditor under section
13(4)(b), application under section 17 will lie. Since section 9 does not appar-
ently have any right for appeal, civil action shall lie.
An important question is—at what stage will the appeal lie? ce. fol-
; 13(4)(b ), there will be a preced ing notice,
In case of action under section
publication of ne
lowed by publication of the notice under section 15(1). The
and, therefore, the appli-
notice itself is a measure taken under section 13(4)(b),
cation under section 17 immediately lies.
any, there is no process of
In case of takeover by an asset reconstruction comp
orming; howe| ver, the takeover of
demand. The loans are admittedly non-perf
by surprise. In fact, the only basis
management may virtually take the borrower
1104 See. 16 Part 1l—Chap. 111—Enforcement of Security interest

for the secured leader being aware of any such imminent proceeding is the acqui
sition of the debt by the reconstruction company.
10. Guidelines of the Reserve Bank
For a detailed discussion on the guidelines of the RBI on takeover, see Notes
under section 9. For text of the guidelines, see Chapter 9 of Part 1.

(1) Notwithstanding anything to the contrary contained in any

contract or in any other law for the time being
5. 16. No compense- jn force, no managing director or any other di-
ton Jodirectors Fr 1°88 Peetor, or a manager or any person in charge of
management of the business of the borrower
shall be entitled to any compensation for the loss of office or for the
premature termination under this Act of any contract of manage-
ment entered into by him with the borrower.
(2) Nothing contained in sub-section (1) shall affect the right of
any such managing director or any other director or manager of
any such person in charge of management to recover from the
business of the borrower, moneys recoverable otherwise than by
way of such compensation.

COMMENTS
See notes under section 15.

(1) Any person (including borrower) aggrieved by any of the

measures referred to in sub-section (4) of sec-
S. 17. Rightto appeal tion 13 taken by the secured creditor or his
authorised officer under this Chapter, ’’[may
make an application along with such fee, as may be prescribed,] to
the Debt Recovery Tribunal having jurisdiction in the matter
within forty-five days from the date on which such measures had
been taken.
** [Provided that different fees may be prescribed for making the
caer” DY the borrower and theperson other than the bor
T}.
-
99
[Explanation.—For the removal of dou it is hereby declared
thatthecommunication ofthereasons tothe
borrower tethe
97. Subs. by the Enforcement
" of Security Interest and R ecov
2 ion.bytshen Debts Laws (Amendment 20004
21-6-2002) for the oueds “lay preferun
B.. fe Entorcem of Secur
emt
os -
ity Inter
(30 of 2004), s. 10a ii) (wef 21-6-200 est ecovery of Debts Laws Amendm
ent 20004
3 - Ins. by the Enforcement of Security Inter2)est me *
(30 of 2004 ), s.1O(a and Recovery of Debts Laws (Amendme hi
nt) Act. 2004
iii) (wef
\ . 11-11-2004),
 Right to appeal
Sec.17 1105
secured creditor for not having accepted his represen
tation or objec-
tion or the likely action of the secured creditor at the
stage of com-
munication of reasons to the borrower shall not entit
le the person
(including borrower) to make an application to the Debts
Recovery
Tribunal under this section.]
' [(2) The Debts Recovery Tribunal shall consider whether
any of
the measures referred to in sub-section (4) of section 13 taken
by
the secured creditor for enforcement of security are in accordance
with the provisions of this Act and the rules made thereunder.
(3) If, the Debts Recovery Tribunal, after examining the facts and
circumstances of the case and evidence produced by the parties,
comes to the conclusion that any of the measures referred to in sub-
section (4) of section 13, taken by the secured creditor are not in ac-
cordance with the provisions of this Act and the rules made there-
under, and require restoration of the management of the business to
the borrower or restoration of possession of the secured assets to the
borrower, it may by order, declare the recourse to anyone or more
measures referred to in sub-section (4) of section 13 taken by the se-
cured creditors as invalid and restore the possession of the secured
assets to the borrower or restore the management of the business to
the borrower, as the case may be, and pass such order as it may con-
sider appropriate and necessary in relation to any of the recourse
taken by the secured creditor under sub-section (4) of section 13.
(4) If, the Debts Recovery Tribunal declares the recourse taken
by the secured creditor under sub-section (4) of section 13, is in ac-
cordance with the provisions of this Act and the rules made there-
under, then, notwithstanding anything contained in any other law
for the time being in force, the secured creditor shall be entitled to
take recourse to one or more of the measures specified under sub-
section (4) of section 13 to recover his secured debt.
(5) Any application made under sub-section (1) shall be dealt with
by the Debts Recovery Tribunal as expeditiously as possible and
disposed of within sixty days from the date of such application:
Provided that the Debts Recovery Tribunal may, from time to time,
extend the said period for reasons to be recorded in writing, so, how-
ever, that the total ‘period of pendency of the application with the
Debts Recovery Tribunal, shall not exceed four months from the date
of making of such application made under sub-section (1).

ry of Debts Laws (Amendment) Act, 2004

1. Subs. by the Enforcement of Security Interest and Recove
(30 of 2004), s. 10(b) (w.e.f. 11-11-2004).
1106 See. 17, Sya. 1 Part li—Chap. ll—Enforcement of Security Interesi

on such applica
pending application by the Debts Recovery Tribunal.
(7) Save as otherwise provided in this Act, the Debts Recovery
Tribunal shall, as far may be, dispose of application in accordance
with the provisions of the Recovery of Debts Due to Banks and Fi-
nancial Institutions Act, 1993 (SI of 1993) and the rules made
thereunder.|

SYNOPSIS
1. From “appeal” to “application” .............. 1} 16. Sub-section (2) post-Amendment:
2. Other wrong things ...0...000....0.c.ccccccceneenees 1107 DRT to consider the measures................ 1129
3. Appellate Proceedings or _ initial 17. Sub-section (3): Undoing the damage .... 1130
| Le a 18. Sub-section (4); if the measures are
4. Scope and powers of DRT 2.00.0. 0ccccccccce. 1108 SOOO eeetiscsmtnecentearsnmmannaaninns
annem anes) 113)
5. Post OGG cesccscsvtizsevittnsvtvielticesrish 1113) 19. Can DRT by an interim order restore
GC Who cam appeal? nao ccsccsisscssscssistesees toss 11) possession to the borrower? .......04..cc:c00 113)
7. Is “appeal” a suit to enforce a right 20. Can restoration of possession of the
arising from a contract! 2000000000000. 1 secured asset be made only in favour
8. Jurisdiction of the Debts Recovery Of the boteewer? 0.545145: edcidbis..iived, 1132
a eN 1116 21. Sub-sections (5) & (6): Time limit for
9. Stay of proceedings by the DRT ............ 11 disposal of application 00000000000 1132
10. Mlustrative ogni where of ae 22. Sub-section (7): Provisions of RDB
Was granted o.oo. eee. ! Act to apply on disposal of
11. Tlustrative cases where SCMDRaasireasnty, dante tticrane- ayes. a1133
roceedings was not granted .................. 1121) 23. Review by the DRT oiicccccccccccsccccneesneee 1133
12. Limitation for filing of appeal sisthttedcs eed 1122) 24. Pecuniary limit for DRT jurisdiction... 1134
13. Applicability of section 5 25. Ad valorem fees for filing of appeals..... 1134
NT i esis ninscacctseestipanend 1122) 26. Fees payable on an appeal from an
a. San Of85 days: from when? B.. 112 Vihbh i. aad 1135
. Sub-section (2) as itstood prior to 27. Whether fees payable when more than __
2004 Amendment: Deposit money CON SM TAI sins ss ssh dns snagssedoaens 1136

1. From “app
toea
“applica
l” tion”
In the first editio of this
n book, the relief available to the borrower
sec was
tappe
io arin g in under this
n the law as an “appeal”. And this is what we had
mented: com-
There are several strange things in this sect
ion.
poor) English. The word “appeal” is wholly inap-
measures adopted by a se-
seek redresfors a
lower judici
or quas
ali-
 Other wrong things Sec. 17, Syn.2 1107
judicial forum. For instance, there is a provision for appeal to a higher
Court, or appeal against the decision of an Income-tax Tribunal or a In-
come-tax Officer. In each such case, there is an order passed by an au-
thority of law, against which an appeal is being filed. A secured creditor
taking an action on the authority of this law is only a party to a commer-
cial contract, enforcing his rights under the contract. The aggrieved per-
son may filed a “complaint” or “application”, but surely, the word “ap-
peal” is most inappropriate here. (Other “strange things” below)
In the case of Mardia Chemicals, exactly the Apex Court stated:
We may like to observe that proceedings under section 17 of the Act,
in fact are not appellate proceedings. It seems to be a misnomer. In fact
it is the initial action that is brought before a Forum as prescribed under
the Act, raising grievance against the action or measures taken by
one of the parties to the contract.
Our observation was completely upheld by the Supreme Court. We had sug-
gested that the word “application” better fits the scheme of the section, and the
amendment provides exactly for replacement of the word “appeal” in this section
by “application”.
However, lapses remain. For instance, the marginal heading of the section still
remains “right to appeal”.

2. Other wrong things

While the first wrong that we mentioned above was one of language, the other
wrongs are more substantive, and unfortunately, some of them still remain.
The second wrong is as follows. The aggrieved person has a right to file a
complaint against wrongful measures adopted by the secured creditor: therefore,
the right to take the grievance to a forum cannot be exercised only after the
measures have been taken. This section seems to suggest that the appeal before
the DRT can be filed only after the measures under section 13 have been taken
by the secured creditor’. If there is indeed anything wrong in the measures
adopted by the secured creditor (which, itself, is a matter of decision by the
DRT), the aggrieved must be allowed to approach a judicial authority either be-
fore or after the measures have been taken.
The third wrong mentioned by the author in the last edition was as under:
this section talks of an appeal before the DRT, but does not specify
the powers of the DRT. In other words, it does not spell out the powers
for the
of the DRT to redress the grievance, if any. It merely provides
sly,
disposal of the appeal in accordance with the RDB law, but obviou
214 (Bom.) .) ((DB)] it was
1. In Jaibharat Synthetics Ltd. & Ors. v. State Bank of India| {I (2011) BC ae eg
ESI Act, id i
held that when a notice is serve a ithiiek Section 13(2) of the SARFA to by se-
ich is i
requir ed to: be respon ded
i jectitions, the non-acceptance; of which ola Bh cence,
were raised ia he Oar Fes
ee eo fact that objections ‘ pee
i tion for the borrower to knock at the by such
borrower are in relati on to the measu res taken
pec saane ‘Piaoce the Aaachink of the
creditor under Section 13(4) of the Act.
1108 See. 17, Syn. 3 Part Li—Chap. Hl—knforcement af Securuy dnieres!

the purpose of the RDB law is Hol to like care of the excesses, I any,
a
committed by banks under this law, Even if the law were to make
vague reference to the powers of the DRT, it should have said some
thing similar to this: “The DRT, in disposing an appeal under this sec-
tion, can pass such orders as it may deem fit’,
This lapse of the original enactment has been taken care the 2004 Amend-
ment. Sub-sections (2), (3) and (4) have been inserted to pro for the power of
the DRTs. See comments relating to sub-sections (2), (3) and (4),
The fourth issue is: if the provisions of this Act are extended by the RBI to fi-
nancial ¢ ies, is the action appealable before the DRT? Obviously, DRTs
do not have Tcisdiction in matters relating to claims by financial Companies.
Even a trust constituted by the asset reconstruction companies is deemed to be a
lender under this law—question of jurisdiction will arise in respect of all such
entities which are not clearly covered by the DRT law. For e le, the provi-
sions of the Act have been extended to housing finance companies, which are
otherwise not under the coverage of DRTs. So, the propriety of such cases being
dealt by the DRTs needs to be examined.

3. Appellate Proceedings or initial action?

As stated above, what is to be filed under section 17(1) of the Act is not an
‘appeal” but an “application”. However, the marginal heading of the Section still
remains “Right to Appeal”. The Apex Court in Transcore v. Union of India,’ he\d
that the marginal note to section 17(1) cannot control the text and the content of
section 17(1) which states that the borrower aggrieved by any of the measures in
section 13(4) may make an application
to the Debts Recovery Tribunal.
Relying on the decision in Mardia Chemicals Ltd’s case (supra), the Apex
Court in Transcore’s case (supra) further held that the Tribunal acts in an origi-
naljurisdiction
under section 17 of the Act and that the proviso to section 17(1)
indicates that the Tribunal under section 17(1) exercises original jurisdiction.
The Kerala High Court in Jayan v. Hong Kong And Shanghai Banking Corpo-
ration Limited’, following Mardia Chemical’s out. held that the proceeding un-
der section 17 of the Act is not an appellate proceeding, but rather an initial ac-
tion which is brought before a Forum prescribed under the Act, and is like a suit
under the Code of Civil Procedure, 1908, in the court of first instance and that as
a matter of fact proceedings under section 17 of the Act are in lieu of a civil suit
which remedy is ordinarily available but for the bar under section 34 of the Act.
Similar views also expressed by DRAT-Chennai in S. Sri Natarajan v. Indian

4. Scope and powers

of DRT
In Mardia Chemicals’ seas
section 17 i en: case (supra), the Supreme Court explaining the scope of

SV2. VII
a0 (20006)
oeSLT
Ek617 :(2006)
817: (2006) i135DLT(SC)151 ; 1 (2007)
BC33(SC).
4. 1(2007) BC 114 (DRAT/DRT).
 Scope and powers of DRT
Sec. 17,Syn.4 1109
“62. As indicated earlier, the position of appeal under sectio
n 17 of
the Act is like that of a suit in the Court of the first instance under
the
Code of Civil Procedure. No doubt, in suits also it is permissible,
in
given facts and circumstances and under the provisions of law to
atta-
ché the property before a decree is passed or to appoint a receiver and
to make a provision by way of interim measure in respect of the prop-
erty in suit. But for obtaining such order a case of the same is to be
made out in accordance with the relevant provisions under the law.
There is no such provision under the Act.....”
Thus, the Supreme Court has clearly held that the proceedings under section 17
of the Act are in lieu of a civil suit, which remedy is already available, but barred
under section 34 of the Act. The proceedings under section 17 are required to be
decided as such after examining the facts and evidence placed on record by par-
ties as provided under section 17(3) of the Act. In Aas Mohmad vy. Punjab Na-
tional Bank’, the Delhi Appellate Tribunal held that an application under section
17 cannot be dismissed at the stage of considering interim prayer related to pos-
session and has to be decided after examining the facts and circumstances of the
case and the evidence produced by the parties.
The wording of section 17(1) may give the impression that the power of redres-
sal under the section is limited to the taking of the measures under section 13(4),
and that the section does not cover the grievances that the borrower may have for
the subsequent actions of the bank. For example, if the borrower does not want to
contest the fact that the bank has taken possession of the asset, but wants to con-
test the sale of the asset, or the sale price or process of sale, etc, can he do so?
Sometimes, the borrower may like to contest the fact that the bank having taken
possession of the asset is not causing sale of the asset in good time. The dilemma
is intensified by the fact that the time limit for the application to the DRT is set as
45 days from the date of the measures under section 13(4). The actual sale may
not happen within 45 days of the taking of the measures under section 13(4).
Hence, an apparent reading of section 17(1) may lead to the impression that the
draftsman had in mind only protest against the measures adopted under section
13(4) and not the actions beyond that.
The Supreme Court has addressed this question in Indian Overseas Bank. v.
Ashok Saw Mill’ ruling dated 16th July, 2009. The SC held that “We are unable
to agree with or accept the submissions made on behalf of the appellants that the
DRT had no jurisdiction to interfere with the action taken by the secured creditor
after the stage contemplated under section 13(4) of the Act. On the other hand,
the law is otherwise and it contemplates that the action taken by a secured credi-
tor in terms of section 13(4) is open to scrutiny and cannot only be set aside but
even the status quo ante can be restored by the DRT”. The case was referred in
that
Bank of India v. Development Credit Bank Ltd.’, wherein it was also held
when section 13(9) is
remedy under section 17 of the Act is an effective remedy

5. 1 (2009) BC 72 sty,
6. Ifl (2009) BC 64 ;
Court) (DB).
Pia i B01) BC 409 (Andhra Pradesh High
1110) See. 17, 5yna.4 Part ll—Chap. Hi— Enforcement afSecurity Interest

r secured
allegedly contravened by one of the secured creditors vis-a-vis anothe
creditor . 7 ere
But then, what happens to the ume limits under the section? S ing the bor-
rower’s grievance is that having taken possession of the asset, the bank has not
disposed off the asset for good 6 months, how can the borrow er file an applica-
tion to DRT within 45 days of the taking of the measures’? With respect, the apex
court did not have the occasion to go into these questions of detail, The fact re-
mains that the draftsman did not have in mind the grievances of the borrower in
the post-13(4) situation, Section 17 has not been drafted as a holistic remedy to
the aggrieved borrower or another person.
In the case of UCO Bank, Churchgate Branch y. Kanji Manji Kothari and Co.”,
the Bombay High court made certain significant observations:
In an application under section 17, the DRT cannot entertain a debate on the
question whether the debt has become due or not because the NPA Act proceeds
on the basis that the liability is crystallised and the debt has become due. The
liability is crystallised. It cannot be adjudicated upon.
Section 17 covers borrower as well as aggrieved third parties.
All grievances relating to measures under section 13(4) not having been taken
in accordance with the NPA Act and the rules made thereunder can be raised un-
der section 17(1).
Proceedings
under section 17 are an original action to the above extent,
In Jaibharat Synthetics Ltd. & Ors. v. State Bank of India & Ors."”, the Court
denied the availability of the remedy under section 17 to cases where objections
raised by the borrower were rejected by the secured creditor. Doors of DRT can
be knocked only when the measures as envisaged under section 13(4) by the se-
cured creditor.
The right of the borrower to resort to section 17 matures on measures having
been taken under section 13(4) and he can file an appeal till the sale of the se-
cured assets. There can be no appeal after the sale. In the opinion of the author, if
it be contended that the appeal under section 17 cannot question the manner of
sale or the sale price, then one of the major objectives of section 17 will be lost,
as one of the most significant grievances of the borrower, deprived of the prop-
erty under this Act, will be the sale of the asset. It is not uncommon

apa a Ta Selatan Wentinkv. Jignesh Jayantilal Ramanuj & Anr. (1V (2012)
BC
Bom CR 290 : 2008 (110) Bom LR 744.
BC (DB).
 Scope and powers of DRT
Sec. 17,Syn.4 1111
risdiction. However, if the only objective of limiting disputes
under this Act was
to remit these matters to specialised forums, that objective is
not being met at all.
A question arose whether the scope of section 17 is restricted to the compli
ance
of the provisions of the Act alone and other matters relating to demand
of
amount, failure to follow RBI guidelines, offer of one-time settlem
ent, calcula-
tion of interest, nature of secured creditors, etc, cannot be gone into by the
Debt
Recovery Tribunal. The Madras High Court (DB) in the case of Misons Leather
s
Limited v. Canara Bank", held that all such actions/ground, which render the
action of bank/financial institution illegal such as the claim of the bank/financial
institution being barred by limitation or the amount paid not adjusted or wrong
calculation of interest, etc, can be raised before and adjudicated by the Debt Re-
covery Tribunal in the proceedings under section 17 of the Act. In other words,
all the objections which can be legally raised in reply to notice under section
13(2) can also be raised in proceedings under section 17 of the Act. In Punjab
National Bank y. SI (Engineering) Pvt. Ltd.'*, the DRAT refused to accept the
contention of the borrower that the presiding officer in disposing of an applica-
tion under section 17 may also decide the exact amount due to creditor-bank
from the borrower in exercise of his power under RDDBFI Act, 1993.
In Ashok Wamanrao Babhulkar v. Akola Janata Commercial Co-op Bank", the
Nagpur DRT observed that bare reading of section 17(2) of the SARFAESI Act
makes it clear that the legislatures in their wisdom have restricted scope of appli-
cation (appeal) in as much as this Tribunal has to only consider whether any of
the measures referred to in section 13(4) taken by the secured creditor for en-
forcement of security are in accordance with the provisions of the SARFAESI
Act and rules made thereunder’. In Analkumar Rajkishore Mishra & Ors. v.
Dena Bank & Anr. 1 the Gujarat High Court held that the notice for possession,
preparation of Panchnama of such possession, notice to sell the property, to take
assistance of DM/CMM for taking over possession, one or other step as referred,
amounts to measures taken under section 13(4), and therefore, an appeal under
section 17 against such measure is maintainable.
In K.R. Chandrasekran & Ors. v. Union of India & Ors"’, it was held that the
jurisdiction of the DRT is restricted to find out as to whether the provisions of the
SARFAESI Act have been followed scrupulously or not and there is no provision
for the DRT to decide as to whether the occupant, being a bona fide tenant, is
liable to be removed from the place for the purpose of securing the secured assets
by the secured creditor. Even if DRT is assumed to have the power to restore the
possession to the tenant, damage has already been done to an innocent person and
there is also a possibility that unscrupulous landlords/borrowers might have 1n-
ducted any person as a tenant by creating unregistered lease deeds.

12. 1 (2008) BC 440.

13. 1 (2010) BC 20 (DRAT). tere:
. DRAT— }
nly isean Neste
15, nie aL Naeed Sahakari Bank ngrhv. RiekintltOak ‘
i the Court held
rt) (DB) ], wherein tha
tenancy dispute. Proceedings between
Hie asvaleea apees eek the Rent Act, and decide
Rent Act.
landlord and tenant are to be decided by Court under the
16. 1 (2012) BC 622 (Guj.) (DB).
17. III (2012) BC 527 (Madras High Court) (DB).
1112 See. 17, 5ya.4 Part Li— Chap. l—knforcement af Securuy dnieresi

As held in Canara Bank v. Supreme Ceramics Lid."’, DRT in exercise of juris

of
diction under section 17 is only required to consider the question of validity
actions taken by the secured creditor, and is not required to adjudicate the exact
amount of debt due to secured creditor.
Baroda y. Union ofIndia’, the Patna High Court held that the juris-
er ageroeDRT to Pree matters pertaining to the SARFAESI Act arises
only when an appeal in terms of section 17 of the Act is tiled, otherwise Ht has no
jurisdiction over actions taken under section 13(4) of this Act, If no appeal in
terms of section 17 of the Act is filed, then the Tribunal cannot assume or usurp
jurisdiction nor cant the same be conferred on itby acts of parties,
In Daya Kishan Sharma v. Punjab National Bank’, the DRAT-Delhi held that
the applicant cannot be precluded from leading evidence in support of the appli-
cation made under Section 17 by it.
In Pranjivan Purushottam Zaveri & Anr. v, Dena Bank & Ors.”', it was held
that legality and validity of security interest created in the form of a mortgage, on
the ground and allegations of fraud, would be definitely one of the relevant con-
siderations, if genuinely raised under section 17 of the Act.
In Jose Antony y. Anil Kuruvilla Kattottil & Ors’’., the Court observed that
there is no provision in theSARFAESI Act which enables the ite partyto
make a plea of set-off or counter-claim in the DRT. The DRT while exercising
power under the SARFAESI Act has no jurisdiction to entertain suits even in the
nature of cross-suits. Therefore, a request to transfer the suits from a sub-court to
the DRT cannot be allowed even in the exercise of power under Article 227 of
the Constitution. However, in Vijaya Bank v. B. L. Gupta & Ors.”’, the DRAT
held that the applicati on 17 of the SARFAE
under section Act is toSI be treated
as a civil suit. It is open to the borrower/guarantor/mortgagor to demonstrate be-
fore the DRT that the resort to section 13 is not permiss ible
by law. In a given
case, the claim of the bank/FI may be barred by limitation and there may be
cases, where the adjustment of the amount paid is not reflected in the notice or
the calculation of interest may not be in accor with thedance
contract between the
parties. Therefore, a counter-claim can be filed.
In Sumathiv.Sengottaiyan & Ors.™, the Court held the DRT has an authority
even to invalidate or nullify any action already taken if it is established that any
error or wrongful use of the powers has been established before it, invoking un-
der section 17 of theSARFAESI
Act.
It was held in Corporation Bank v. N.K. Malhotra & Anr.”°, that granting pen-
dente lite andfuture interest isa discretionary power givento Tribunals which
should be exercised fairly. ete 2 -

Il (2012) BC 3 (DRAT-Dethi).
Til(200BC9) 349.
Et(2008) BC169(RAT),
(2011) BC 558 (Guj.) (DB).
Ht (2012)BC635 (Ker ;
) BC 1 (DRAT-Dethi).
Il (2010) BC 157 ). ¥
x
SS
BSS
AR 1119(2011
DRAB» DRATS: Seealso ,
Punjab andSind Bank ».Rakesh Gupta & Ors. TV (2010) BC
 Post facto appeal?
Sec. 17,Syn.5 = 1113
5. Post facto appeal?
As stated before, the true purport of this section is not an “appea
l” but an appli-
cation or a plaint, which may even plead for injunction. There
was a question
raised as to whether a DRT has a right to grant injunction, and
more so, ad in-
terim or ex parte injunction. In ICICI Ltd. y. Grapco Industries
Ltd.*°, the Su-
preme Court equated the powers of the DRTs with those of civil courts
, though
without the procedural fetters of the latter: “It will, thus, be seen
that while there
are no limitations on the powers of the Tribunal under the Act, the legisl
ature has
thought fit to restrict the powers of the authorities under various enactments
while exercising certain powers under those enactments. We have to give mean-
ing to section 22 of the Act as here the Tribunal is exercising powers of a civil
court while trying a money suit. Further, when power is given to the Tribunal to
make an interim order by way of an injunction or a stay, it inheres in it the power
to grant that order even ex parte, if it is so in the interest of justice and as per the
requirements as spelt out in the judgment of this Court.”
Relying on Mardia Chemicals’ case, the AP High Court in Branch Manager,
State Bank of India, Commercial Branch, Ongole v. Chinigepalli Lathangi”’, held
that having taken away the jurisdiction of the civil courts, the legislature did not
fail in their duty to accord necessary safeguards to the aggrieved parties by way
of approaching the Debt Recovery Tribunal, in which event, the Tribunal is
couched with the duty under section 17(3) of this Act whereby the Tribunal is
authorised to pass any interim orders as deemed fit and proper.
The words “within 45 days from the date on which such measures had been
taken” cannot take away the right of the borrower to approach a Tribunal, or, in
exceptional circumstances, the civil court, to redress the grievance, even before
the damage has been done. See notes below under the caption ‘Stay of Proceed-
ings by DRT’. See also notes under section 34.
While the issue of the redressal machinery under this law being post facto was
brought up before the Supreme Court in the case of Mardia Chemicals, the courts
would surely take a view based on the merits of the cases that come before the
courts. Mardia Chemicals’ case was one of outright default. However, it is not
always to be presumed that the borrower is the wrong-doer, and the bank is the
one that has been wronged-against. In present day world, banks are business enti-
ties—they exist for any noble objective other than making of money and, there-
fore, there might be instances where the impending action of the bank is appar-
ently harsh. This author is of the view that in such cases, courts will not hesitate
to grant injunction against action as well. While the constitutional validity of the
RDB Act was being agitated before the Supreme Court in Union of India v. Delhi
High Court Bar Association”, it was a strong ground that the tribunals under the
RDB law are independent bodies and are part of the judicial system of the at
try. Under the RDB law, there is a system of making a claim before the Tribunal,
claim for set-off by the borrower, and counter claim. Under this an pe 8
provision for any such claim or counter claim as far as the secured creditor 1:

26. 1999 (4) SCC 710.

27. Il (2007) BC 35.
28. (2002) 4 SCC 0275 (SC).
1114 See. 17, Sya.6 Part ll—Chap. ll—Enforcement afSecurity Interest

a demand, and
concerned. Under section 13, the seoured creditor simply vaises
wer cannot con-
then he can proceed to take the action. At this stage, ifthe borro
test, he is denied of the basic right of self-defe justice.
and nse

6. Wh appeal?
can e
Under this section, any person aggrieved may prefer an appeal, The law says
“including the aman which is obviously a euphemism, since ul at all there is
any person likely to be aggrieved by the acon under section 13(4), itis first of
all the borrower. The lender is the one who takes the measures under this section:
therefore, the lender cannot have any cause of action, But then, among the sev-
eral other interested parties who might have a grievance, are: other lenders in-
cluding other senior or subordinated lenders, other creditors, workers, sharehold-
ers of the borrower, etc.
The words “person aggrieved” have been interpreted in various judicial pro-
nouncements, one of these being Hindustan Petroleum Corporation Lid. v. Debts
Recovery Tribunal & Ors.”’, wherein a lessee in respect of a part of the entire
property dragged into the main dispute between the land owner and the bank, was
held to be a “person aggrieved” for the purpo se 17(1)
of section and Rule 13 ” of
the Security Interest (Enforcement) Rules. The High Court relied on the judicial
interpreta tion
made in Sidebotham’' in which it was held that a person aggrieved
must be a man who has suffered a legal grievance, a man against whom a deci-
sion has been pronounced which has wrongfully deprived him of something, or
wrongfully refused him something, or wrongfully affected his tithe to something.
, Rowen
in Reed,
Further and Co.” the “person aggrieve d”as: a
has been defined
person aggrieved must be a man against whom a decision has been
which has wrongfully refused him something which he had a right to defend. In
Santosh Kumar Agarwalla v. State of Orissa’, “person aggrieved” was held to
include a person, who has genuine grievance because an order has been made
iciall
which prejudaffects y
his interest.
on— Court in United Bank of India v. Satyawati Tandon and Others”

“Any person” appearing in section 17(1) of the Act is of wide import. It takes
within its fold, not only the borrower but also the guarantor or any other person
Rasy beaffected bytheaction taken under section 13(4) orsection 14 ofthe

InAllahaba
Bankd v. Canara Bank & Ors. *°. itwas held that there is no such
requirement of law under section 17 that only such aggrieved person can ap-

= te td ek 737 (Orissa High Court) (DB).

the ity Interest (Enforcement Rules, 2002 provides
appeals under Section 17 andSection 18 ofthe @ARFARS] Ae applications
31. (1880) 14 Chancery Division 458. rae 7
32. (1887) 19 QBB 174.
33. AIR 1973 Oriss217.a
Sh ‘ Sedeehomsi omeBhansali v.
‘anna Lal Axis Bank Ltd. Ors. | 1 (2012) BC 443 way
ps
36. TV (2012) BC yon
227 (Al )-): See also State Bank of India ». Tigishat bon B. Sanghont & Ors
i (TV (2011)
.
 Who can appeal? Sec. 17,Syn.6 1115

proach thereunder whose claim would lie before the DRT. Any person who is
aggrieved by any of the measures referred to in section 13(4) can approach under
section 17 of the Act.
In the case of Pankaj Shah v. Cosmos Cooperative Bank Ltd.*’, the goods be-
longing to a third party who had given the same for job work to the borrower
were confiscated by the bank, which took possession of the factory. The right of
the third party making application to the DRT was upheld. In CS Hotel Pvt Ltd v
Ahmedabad People Cooperative Bank Ltd.”, it was held that considering the
scheme of the SARFAESI Act, the purchaser cannot be allowed to participate in
the proceedings between the borrower and secured creditor unless and until it is
proved that the third party has locus. In another interesting case viz, Surender
Kumar vy. State Bank of Mysore’, when an auction purchaser applied for being
impleaded in an appeal wherein the pre-auction action of the bank was under
challenge, the Chairperson, DRAT-Delhi declined the application stating that the
validity of sale to him is dependent upon the affirmation or negation by the Tri-
bunal below of the validity of pre-auction action of the bank and he would have
locus only after the pre-auction action taken by the bank is sustained. However,
when the challenge was against the conduct of auction and auction purchasers
after the sale has been confirmed and sale certificate has been issued, the DRT-
Delhi in Ram Murti Pyarelal v. Central Bank of India™, justified the In a beauti-
ful ruling of the Nagpur bench of the DRT in Ashok Wamanrao Babhulkar v.
Akola Janata Commercial Cooperative Bank’, it was held that the applicant was
neither the borrower nor the guarantor, but since he was in actual physical pos-
session of a portion of the property mortgaged to the bank, he was a person ag-
grieved, and had the right to prefer the application. In Ram Kumar v. Ravinder
Kumar Gulati”, the bona fide purchaser of a secured asset unaware of the secu-
rity interest thereupon, approached the High Court on the ground that he was nei-
ther a borrower nor has any concern with the Bank and, therefore, cannot ap-
proach DRT. The Delhi High Court held that the words “any person” used in sec-
tion 17 has wide connotation and there lies no legal impediment for the person
who claims to be bona fide purchaser to approach the DRT and ventilate his
grievance.
See also the observation of the Bombay High court in Kanji Manji Kothari
sec-
case (supra) on on the right of third parties to make an application under this
tion. é
ent Mrs.
In State Bank of Bikaner & Jaipur v. Vandana Rani*, the respond
claiming that
Vandana Rani, a third party, made an application before the DRT
owner by a regis-
she had purchased the property in question from the original I ore, action
ty, and, theref
tered sale deed and had title over the mortgag ed proper
property was improper and
of the bank to takeover possession of the mortgaged n. On appeal.
the possession be restored to her. The DRT allowed her applicatio
T).
IV (2005) BC 217 (DRAT/DRmeda
1 (2007 ) BC 236 (DRA T—Ah bad).
Ill (2008) BC 157 (DRA T).
. IV (2009) BC 44 (DRAT).
1 (2006) BC 34 (DRT/DRAT).
Il (2007) BC 224.
III (2008) BC 151 (DRAT).
SSsssee
1116) ©See. 17, Sya. 7 Part Li—Chap. ll— Enforcement af Security Interest

the DRAT observed that the sale deed in favour of Vandana Rani is of a date
subs eq
to that ue
of notice nt
under section | 3(2) and has no sanctity in the eyes of
law; her nght was non-existent and a third party with no right could not claim to
be aggrieved seeking redressal against the action of the bank.
in Anushree Sah v. Bombay Mercantile Bank Lid“, the DRT held that the pro-
visions of section 17 can be invoked when any of the measures referred to in sec:
tion 13(4) of SARPABSI Act are taken by secured creditor, Where the ACN Is
taken for enforcement of security, the person against whom the action is taken
and in addition borrower is also allowed to invoke the provision, but no other
person, not even a guarantor simpliciter,

7. Is“appeal” a suit to enforce a right arising from a contract;

Section 69(2) of the Partnership Act states that no suit to enforce a right arising
from a contract shall be instituted in any Court by or on behalf of a firm against
any third party unless the firm is registered and the persons suing are or have
been shown in the register of a firm as partners in the firm. In a case where an
appeal was filed under this section before the Debts Recovery Appellate Tribunal
against a notice issued under section 13(2) and invocation of provisions of sec-
tion 13(4), a preliminary objection was raised regarding the maintainability of
such a proceeding on the ground that the applicant before the Debts Recovery
Appellate Tribunal was an unregistered firm and, therefore, the bar under section
692) of the Indian Partnership Act, 1932 was applicable. The Debts Recovery
Appellate Tribunal accepted the contention and the appeal was dismissed.” In a
Writ Petition challengingthe said order of Debts Recovery Appellate Tribunal,
the Division Bench of the Madras High Court in the case of R.S. Leather Exports
v. Central Bank of India“, held that it cannot be said that a ip firm,
while it invokes the jurisdiction under section 17 of theSARFAESI Act, is trying
to enforce a right arising from a contract but is trying to defend itself against any
action taken by the Bank under section 13 of the SARFAESI Act. Thus, appeal
proceedings under section 17 does not tantamount to enforcing a right arising
pom @ contract andbarunder section 69ofthePartnership Actis notavailable to
rai

8. Jurisd
of the Debts
ict Recovery
ion Tribunal

swf law
~
Principles, it; should bethedomicile ofthesecured credit , Ye ‘ne °Y vil
borrower?

44. 11 (2008) BC 63 (DRAT).

45. RS. Leather Exports v.
46. TV(2000)BC 350 DB) OM oFIndia, MEK(2009) BC21(RAT),
 Jurisdiction of the Debts Recovery Tribunal
Sec. 17,Syn.8 1117
However, the borrower or any other person aggrieved can
file an appeal based
on ‘cause of acon , principles whereof are the same as
in case of civil courts
under section 20 of the Civil Procedure Code.
In Shridhar Construction Pyt. Ltd. v. Shetrunjay Co-operative Housin
g Society
Ltd."’, the DRAT-Mumbai in a well-considered ruling held that when
under sec-
tion 17 of the SARFAESI Act the jurisdiction is conferred on “the DRT
having
jurisdiction in the matter” it would mean the DRT which is having jurisdiction
as
provided under section 19 of the RDDBFI Act of 1993 and rule 6 of the
DRT
(Procedure) Rules, 1993. Thus, so far as territorial jurisdiction is concerned it has
to be decided on the basis of the provisions of the RDDBFI Act under which
place of residence or place of business of the secured creditor or the place where
the cause of action arises confers the jurisdiction and not the situs or locus of the
immovable property. The concept of jurisdiction based on the situs of the prop-
erty is not provided either in the RDDBFI Act or in SARFAESI Act except under
section 14 of the latter Act for the limited purpose of taking possession of the
secured property.
Similar views were expressed in Punjab and Sind Bank v. Tripurari Prasad
Kesari’*. In this case, the question as to the jurisdiction of the DRT where the
S.A. could be entertained and decided also came for discussion. In this case, an
O.A. was filed by the bank before DRT-II, Delhi for recovery of its dues under
the RDDBFI Act. It also proceeded with action under SARFAESI Act and in-
voked provisions of section 14 thereof. Several person claiming to be owners and
occupants of the secured property filed S.A. before DRT-III. The said DRT-III
restored possession of the mortgaged property to the appellants. Challenging the
order of DRT-III, the bank argued before the Appellate Tribunal that when an
OA was pending before DRT-II, the DRT-III has no jurisdiction to deal with S.A.
Discussing the provisions of sub-sections (1) and (7) of section 17 and section
13(10) of SARFAESI Act, section 19(1) of RDDBFI Act and rule 6 of DRT
Rules, the Appellate Tribunal held that the place where the defendants actually
and voluntarily reside being kept aside, the cause of action would arise within the
jurisdiction of the Tribunal where the secured creditor bank is located. It also
held that the location of the mortgaged property has nothing to do with the juris-
dictional aspect; an application under section 17 of the SARFAESI Act could
only be filed before the DRT having jurisdiction over the place where the loaning
branch of the secured creditor bank was located. This decision has also cast an
obligation on the applicant to declare with details about the pendency of any OA
relating to the same debt/loan/dues and a duty on the Registrar to scrutinise the
SA from this angle so that two different benches of DRT do not hear disputes
relating to the same debt/loan or dues.
In Tea Brokers (Guwahati) Pvt. Ltd. v. UCO Bank”, the defendant-borrowers
being residents of Guwahati filed an application under section 17 of the SAR-
FAESI Act before the DRT-Guwahati. Later, the Secured Creditor-Bank initiated
proceedings under section 19 of the RDDBFI Act before PR Tal ora. ey
application filed by the borrowers under section 17(A) of the R

47. 1(2009) BC 89 (DRAT).

48. 1 (2009) BC 49 (DRAT).
49. III (2007) BC 66 (DRAT).
1118 See. 17, Sya. 8 Part li—Chap. Hli—Enforcement of Security Interest

the Appellate Tribunal citing balance of convemience as the reason allowed trans
fer of proceedings from Kolkata to Guwahati.
Can aggrieved parties file appeals at multiple places”? Since there is a possibil
ity of multiplicity of interested parties, it is quite possible that appeals may be
filed at different places. This would be both vexatious as also run counter to the
purpose of this law.
In UCO Bank v. Elementies Coke Private Limited”, the borrower was granted
loan by the Ashram Road branch of the creditor-bank, the immovable properties
which were provided as security were situated in the State of Gujarat and the no.
tice for public auction was published in newspaper in Gujarat, However, the for-
mal sanction of the loan was given by the head office of the Bank at Kolkata and
notices were served at the registered office of the borrower at Kolkata, Citing the
Apex Court's judgment in Agencia Commercial International Lid, v, Custodian
of Branches of Banco National Ultramarino”', and Oil and Natural Gas Commis:
sion y. Utpal Kumar Basu”, the DRAT-Kolkata held that it is a well settled
proposition of law that every fact which is necessary to be proved, as distin-
guished from every piece of evidence which is necessary to prove each fact,
comprises in cause of action and as such, the DRT-I Kolkata has no jurisdiction
to entertain the appeal.
Deviating from the judgments that consider the situs of the mortgaged property
as irrelevant to the jurisdictional aspect, is the case of Amish Jain & Anr, v. ICICI
Bank Ltd.** wherein the Delhi High Court drew a distinction between the pro-
ceedings under the RDDBFI Act and the SARFAESI Act as proceedings under
section 19(1) of the RDDBFI Act are merely proceedings for recovery of debt
and not for enforcement of mortgage, for which SARFAESI Act was enacted.
Therefore, the question of territorial jurisdiction for the remedy of appeal pro-
vided in section 17(1) of the SARFAESI Act has to be construed in the said light
and not in the light of the DRT Act making a from the principle en-
shrined in section 16 of the CPC. Section 17(1) of the SARFAESI
Act does not
specify the jurisdiction of the DRT; so in order to determine which DRT will
have jurisdiction, one has to see what is to be the matter for adjudication in a
proceeding under section 17(1) and what relief the DRT is empowered to grant
in the proceeding. Section 17(2) describes the scope of proceedings under section
Pee Ortar a Ten, Saat STE DEG) PAYi Roane Wi Bee
provisions Act. The measures are of taking over possession or manage-
ment of the secured asset. So, it can be argued that DRT within whose jurisdic-
tion the bank/FI is situated will have the jurisdiction. However, the Court drew
attention towards the Explanation to section 17(1) that disentitles the borrower to
make application to the DRT under the said section. Thus the cause of action for
the appeal under section 17(1) of the SARFAESI Act is the taking over ofthe pos-
session/management of the secured asset and which cause of action can be said
to have accrued only within the jurisdiction of the DRT where the secured asset
's so sttuated and the possession thereof is taken over. Vtis the said DRT only

5. TI (200 BC 557)(DRAT).
$1. ATR 19SC 82 1268.
$2. (199 4 SCC
4) 711.
53. TV (2012) BC 552 (Del) (PR).
 Stay of proceedings by the DRT Sec. 17,Syn.9 1119
which can be said to be having “jurisdiction in the matter” within the meaning of
section 17(1) of the Act.

9. Stay of proceedings by the DRT

The plain language of the section seems to suggest that a person aggrieved by
the action of the secured lender may “appeal”, or after the amendments in 2004,
“make an application” before the DRT. It would suggest that unless the measures
referred to in section 13(4) have been taken, there is nothing to appeal against,
because the appeal is only against the action. Can someone take a matter to DRT
even before the action is taken, so as to prevent injustice from being caused? In
other words, it would be a curious question to examine whether there can be an
appeal even before the action? For example, can there be a proceeding for stay?
The DRT Ranchi, in Appeal (SARFAESI) No. 3 of 2004 decided On: 27-5-
2004 in Sri Lal Bihari Singh v. Canara Bank”, granted an interim stay on the
action under section 13(4) of the Act on the ground that the objection filed by the
borrower under the Act had not been responded to by the bank. While this might
be considered a factual issue, it is important to note that the stay granted in this
case was interim in nature. There are no specific provisions in the Act for interim
stay, but the Tribunal has taken a stand that since civil remedies are ousted in the
Act, the Tribunal has inherent power to grant interim stay as well.
“In that view of the matter, when the jurisdiction of Civil Court is
ousted leaving exclusive jurisdiction to Debts Recovery Tribunal, this
Tribunal can pass interim orders to avert serious injustice to any party.
Once the aggrieved party cannot move Civil Court, they can approach
the Tribunal having jurisdiction, for interim relief in appropriate cases
where there is clear lack of jurisdiction and/or, the action is barred by
limitation, and when there is non-application of mind coupled with
abuse of power leading to grave injustice to any party.”
The Tribunal in this case also arrived at an important decision that the power to
grant in interim stay is an inherent and ancillary power that can be exercised de-
spite lack of clear provisions of the law:
“It is pertinent to refer here that sub-section (25) of section 19 of
DRT Act read with rule 18 of DRT (Procedures) Rules, 1993 confers,
wide ancillary powers on the Tribunal for proper administration of jus-
tice. Where there is no express provision in the Act for a remedy, the
Tribunal can invoke at any stage this power to meet the ends of justice
and to prevent abuse of process of law. The legislative intention is that
omission of any provisions in the Act should not make the Tribunal
powerless. Moreover under section 37 of the SRFAESI Act the afore-
said provisions of DRT Act providing inherent power to the Tribunal
has been kept intact, amongst others.
19. Hon’ble Apex Court in 1999 (4) SCC 710 and in 1999 (6) SCC
755 has observed that the powers of Tribunal under section 22

54. 1 (2005) BC 20.

1120 See. 17, Sya. 9 Part tl—Chap. l1—Enforcement of Security Interest

are wider than those of Civil Courts and the only restriction on
its powers is that principles of natural justice have to be ftol-
lowed. The observation made in Allahabad Bank y, Rad.
hakrishna Maity, Vil (1999) SLT 366: TT (1999) BC 600 :
(1999) (6) SCC 755, is that “DRT has jurisdiction to pass in»
terim orders. The Tribunal certainly has powers to pass other
types of injunction orders or stay orders apart from what is
stated in section 19(6). The width and amplitude of the powers
of DRT are to be gathered from section 22(1), The Tribunal can
exercise powers contained in CPC and can go even beyond the
code so long as it passes order in conformity with the principles
of natural justice. The provision in section 19(6) is only as ena-
bling provision is not exhaustive and cannot resist the Tribunal
to pass only those type of injunction and stay orders.”
20. Hon'ble Supreme Court has also observed in Union of India
v. Delhi High Court Bar Association that Tribunals have
now become an essential part of judicial system in this coun-
try.
21. In the recent authentic judgment dated 8.4.2004” Hon'ble Su-
preme Court has held while discussing on the power of Tribu-
nal that “the Tribunal in the exercise of ancillary powers shall
have jurisdiction to pass any stay/interim order subject to the
condition as it may deem fit and properto impose.”
22. It is thus futile to say that Tribunal lacks jurisdiction to pass
interim order before the stage of preferring appeal under section
17(1) of SARFAESI Act. sad
In Ramco Super Leathers Ltd. v. UCO Bank”, the High Court referring to the
Mardia Chemicals’ case, reiterated that in exercise of its ancillary powers, the
Tribunal shall have jurisdiction to pass any stay/interim order. However, there is
no automatic stay or prohibition on the secured creditor to take recourse to one or
more measures under sub-section (4) to section 13, till an
an interim
interi ; passed
order is
by the Tribunal.

See also Sand Plast (India) Ltd vs. Punjab National

Dethi)]: Vinay Container Services Pot Lid. & Ors. vs Ast Bok Te Ce BC 117 (DRAT-
3. o.
 Illustrative cases where stay of proceedings, etc. Sec.17,Syn.11 = 1121
In K. Sami v. Bank of India®’, the Court acknowledged the legal
position that
only when a measure under section 13(4) is taken, an appeal would lie under
sec-
tion 17. Though at the same time, it opined that it is not necessary
for an ag-
grieved person to wait till actual/symbolic possession is taken by the financi
al
institution before resorting to the remedy as provided under section 17.
The
Court remarked, “....the question is when exactly a measure under Section 13(4)
can be stated to be actually taken....The mere decision of the financial institution
to approach the Magistrate under section 14 would also constitute a measure un-
der section 13(4).” Drawing attention towards cases where persons are made bor-
rowers/surety by fraud or forgery, the Court observed that the rigour of the provi-
sions of the Act should not be taken to that extreme extent to deny even the right
of appeal under section 17.However, the order of the DRAT in Indusind Bank
Ltd. v. Deva Tools and Forging®’, seems to say the “action” pursuant to which an
appeal may lie is only the actual taking of an action under section 13(4). See also,
holding that the notice under section 13(2) is only a form of a show-cause, and no
saNse of action lies unless the action contemplated under section 13(4) has been
taken.

10. Illustrative cases where stay of proceedings was granted

An extremely interesting argument was taken in Neel Madhav Mining (P.) Ltd.
v. Authorised Officer, Union Bank of India®’. Upon service of notice under sec-
tion 13(2), it was contended that the land being the secured asset was agricultural
land, and a stay application was filed before the DRT. The DRT rejected the ap-
plication as premature, without any consideration as to whether the land is agri-
cultural or not. The borrower went to the court in writ petition, and the writ was
admitted. The court held that since, in case of agricultural land, in view of section
31, there was no application of the Act, it was necessary for the Tribunal to con-
sider this argument and allow for submission of evidence. There is no question of
post facto application in a case like this.

11. Illustrative cases where stay of proceedings was not granted

e In Kushal N Aggarwal v. Saraswat Co-operative Bank Ltd.°’, the Tri-
bunal refused to pass an order restraining bank from taking any action
against the borrower’s property on the ground that the petition was
premature, though, on facts, the case seemed a good case for injunction.
Here, the Tribunal based on appreciation of evidence noted that the
property that the bank was trying to take possession of in fact belonged
to two different persons, one of whom was not a borrower. In other
words, there was a mistake as to what was actually mortgaged to the
bank.

59. 1 (2012) BC 455 (Ker.). _—

5) BC 97 (DRAT/ ; = —
y v. Union
Bank, 1V (2005) BC 502 (Mad—DB); Rajesh Kumar
on Beda, of Osea Lid v. bibin
of India, (2005) 63 SCL 499 (Pat).
62. (2005) 62 SCL 383 (AP).
63. II (2005) BC 7 (DRAT/DRT).
 1122 See. 17, Syn. 12 Part H—Chap. 111—tnforcement afSecurity Interest

e In Prafulla Shankerrao Shirke y. The Mahanagar Co-operative Bank

Lid, the DRT refused to grant the stay holding the case premature as
even a symbolic possession had not been taken, though, on the facts of
the case, the Tribunal did concur that the case was a fit case for settle:
ment and the bank had shown readiness to settle the case. In this case,
the borrower had paid a substantial part of the principal and interest,
and the outstanding amount was largely against overdue interest, which
also had been partly settled by set-off of the fixed deposit of the bor.
rower with the bank.
¢ In Sosamma Abraham v, State Bank of Travancore’, the Kerala High
Court was requested to permit filing of appeal under section 17 and un-
til then stay the handing over of the possession of the secured asset, The
High Court declined the request stating that the right to appeal under
section 17 of the act arises only after the culmination of the securitisa-
tion proceedings and the power of the Debt Recovery Tribunal in such
appeal is only to restore possession in appropriate cases and not to stay
the handing over of possession.

12. Limitation
for filing of appeal
The law fixes a limitation of 45 days for filing the appeal. Where there has
been a failure on the part of the aggrieved party to meet the deadline, the appli-
cant may make an application for condonation of delay, giving reasons as to why
the applicant failed to makethe appeal within 45 days as fixed by law. The delay
may be condoned only if there is a good and reasonable cause by which the ap-
pellant is prevented from preferring the appeal in time. In Vinodha R. Joshi v.
State Bank of Hydera , the DRAT-Chennai held that financial difficulties
and not keeping in good health are not sufficient cause to condone the delay. In
Union Bankof India v. Madhu Goenka®’, neither any application forcondonation
of delay was moved nor the application contained grounds which may constitute
sufficient grounds for delay, the Allahabad Appellate Tribunal refused
to enter-
tain the application filed after the limitation period.
While the intention of law in fixing a limitation is that matters should
not be al-
lowed to drag on for indefinite period and that a party who has shown
latitude in
enforcing his/her rights should not beallowed todelay the admini
stration ofjus-
tice, itshould also be clear that the principle of limitation
should not be taken
very seriously as tothwart a case which is otherwise deserv
ing.
13. Applic
of section
abi 5 of thelit
Limitation
yAct
Section 5 ofthe Limitation Act prescribes that an aa
admitted aftertheprescribed period iftheappellant orthespohren women be

64. TV (2005)
BC 60 DRAT—_DR
65. IV(2008) BC334, -
es. TV(2007) BC65 (DRAT).
2009) BC 34 (DRAT).
 Applicability of section 5 of the Limitation Act: Sec. 17, Syn. 13 1123

court that he had sufficient cause for not preferring the appeal or making the ap-
plication within such period.
Whether section 5 of the Limitation Act would have applicability in respect of
time limits provided under sections 17 & 18 of the SARFAESI Act has been a
matter of contention in several cases. The SARFAESI Act is a special law and
neither section 17 nor 18 provide for any relaxation in filing application/appeal,
as the case may be.
The Hon’ble Supreme Court in Hukumdev Narain Yadav y. Lalit Narain
Misra®’, while dealing with the provisions of section 29(2) and section 5 of the
Limitation Act has concluded that the provisions of the Limitation Act cannot
come to the rescue of a person filing an appeal under any special law in case such
special law is silent about the relaxation for condonation of delay. The Apex
Court, again in the matter of Fairgrowth Investments Ltd v. Custodian”. while
analysing the provisions of section 4(2) of the Special courts (Trial of offences
relating to Transactions in Securities) Act, 1992 where the provisions of filing an
application are almost similar to that of SARFAESI Act took a view that if the
Act itself is silent for any relaxation in period of filing the application, the Court
cannot interpret such provision to relax the period of filing the application apply-
ing the provisions of CPC or provisions of the Limitation Act, 1963 to defeat the
aim and objects of such special law.
The aforesaid views of the Apex Court were echoed by the DRAT-Allahabad
in the case of Misuki Exports Pvt. Ltd. v. State Bank of India”. Discussing the
aforesaid judgments of the Apex Court, the DRAT held that the question of
granting any concession for applying the provisions of the Limitation Act under
section 18 of the SARFAESI Act for filing appeal does not arise.
In Jayan v. Hongkong and Shanghai Banking Corporation Limited (supra) the
Kerala High Court held that section 5 of the Limitation Act is not applicable to
applications under section 17(1). Dealing with the matter in details, the said court
observed that if the time limit prescribed under section 17(1) can be extended
indefinitely by the application of section 5 of the Limitation Act, section 13(6)
will become nugatory and redundant. In light of time limit of 60 days fixed under
section 17(5) for disposal of an application under section 17(1), the Court further
held that section 5 of the Limitation Act shall not apply to a section 17(1) appli-
Oil
cation. Similar views were also expressed by the Presiding officer in Akola
Industries Ltd y. State Bank of India", wherein it was held that the application
like
under the SARFAESI Act is to be treated at par with an original proceeding
suit and, therefore, section 5 of the Limitation Act has no application.
Chakraborty
It was stated in Akshat Commercial Pvt. Ltd. & Anr. v. Kalpana
invoking original
& Ors.”, that by specifying the time limit being 45 days for
imit of 60 days, the
jurisdiction under section 17 and a further tentative time-l
Act to the original
legislature did not intend to apply section 5 of the Limitation
Rp A SE TO
68. AIR 1947 SC 480.
69. IV (2004) CLT 156 (SC).
70. Ill (2008) BC 51 (DRAT).
71. 111 (2006) BC 237 (DRAT—DRT).
72. IV (2010) BC 267 (Cal.) (DB).
1124 See. 17, Sya. 13 Pant U—Chap. L—tnforcement afSecurity Inieresi

oceeding under section 17(1) by merely showing cause lor delay without any
cadelien on the Tribunal. Thus, “the time period of 45 days provided lor under
section |7 cannot be extended by taking aid of section 5 of the Limitation Act,
However, a different view has been taken by the Bombay High Court in its de-
cision in UCO Bank y. Kanji Manji Kothari & Co,”. Observing that the Debt
Recovery Tribunal must bear in mind scheme of the Securitisation Act and not
allow any person to procrastinate proceedings by making frivolous applications,
the court held that the provisions of section 5 of the Limitation Act will apply to
proceedings under section 17(1) of the Securitisation Act,
in Ponnuswamy and Another v. DRT Coimbatore and Another”, the Madras
High Court affirmed the applicability of the Limitation Act to appeal filed under
section 17 of the SARFAESI Act, for “the right conferred upon the secured oredi-
tor under Section 13 (4) of the SARFAESI Act, is a right of recovery, The right
conferred upon the debtor or the surety under Section 17 is a right to save one’s
own property. To hold that the fate of a debtor or surety will be sealedin a period
of 45 days from the date of initiation of the measur under es
section 13 (4) and
that he would be left remediless after the said period on account of non-
availability of section 5 of the Limitation Act, would defeat the night to property.
Therefore the Court has to choose an interpretation which would lean in favour
of the right to property.”
Relying on Kanji Manji Kothari & Co. (supra) and on Ponnuswamy and An-
other (supra), the Allahabad High Court in State Bank of Patiala v. Chairperson,
DRAT& Ors.”° upheld the applicability of section 5 of the Limitation Act.
The Court, in State Bank of Patiala v. The Chairperson, DRAT & Ors.”°, con-
sidering section 24 of the Limitation Act, agreed to the applicability of the Limi-
tation Act to the Tribunal which would include section 5 and section 14 of the
Limitation Act. As such, an application under section 5 would be maintainable
for the purpose of section 17(1) of theSARFAESI Act.
In Nangia Engineers & Contractors v. Bank of Maharashtra,” it was
before DRAT-Mumbai that the above views of the Bombay High Court in ji
Manyi Kothari’s case are obiter. Negati the contention
ng , the DRAT held that the
question about the applicability of section 5 of the Limitation Act to a
under section 17 was specifically raised and answered by the court after discus-
sion in Kanji Manji Kothari’s case (supra).

InSajida Begum vs. State Bank ofHyderabad”, the Court held that in view of
section 29(2) of the Limitation Act sections 4 to 24 (inclusive) of the Limitation
Act would be applicable to proceedings under sections 17 and 18 of the
FAESI Act before the DRT as well as DRAT.
-
ta

(2008) 3 Bom CR 290.

2009 (2) CTC 302: (2009 3) MLJ 1271.
IMI(2012 BC)51 (Allahabad).
Ht(2012) BC 212 (Ail) 212.
If(2009) BC 21(DRAT).
BARRED
| (2013) BC 24 AP (DB) (CN).
 Calculation of 45 days- from when? Sec. 17,Syn.14 =1125
_ In Surinder Mahajan v. Debts Recovery Appellate Tribunal & Others’’, Pun-
jab-Haryana High Court agreed with the views given in Sajida Begum case (su-
pra) as well as in UCO Bank y. Kanji Manji Kothari*! and clarified that in the
absence of any provision under the Act excluding the applicability of the Limita-
tion Act to the proceedings before the Debt Recovery Tribunal under section 17
or before the Debt Recovery Appellate Tribunal under section 18 of the Act, an
application for condonation of delay would be maintainable before the Tribunal
and the Appellate Tribunal. The High Court set aside the order of DRAT and
held the following:
“(i) The remedy provided to any person including a borrower under
section 17 of the Act is in response to the actions and measures taken
by the secured creditor through an application which is in the nature of
objections to the action taken by the secured creditor.
(ii) The provisions of sections 4 to 24 of the Limitation Act are applica-
ble to the proceedings to be initiated by any person aggrieved including
a borrower before the Debt Recovery Tribunal under Section 17 of the
Act.
(iii) The provisions of sections 4 to 24 of the Limitation Act are appli-
cable to an appeal to be preferred against an order passed by the Debt
Recovery Tribunal before the Debt Recovery Appellate Tribunal under
section 18 of the Act.
(iv) Whether sufficient cause is disclosed to seek condonation of delay,
is a question of fact to be determined by the Debt Recovery Tribunal
and/or the Debt Recovery Appellate Tribunal in the facts of each case.”
In the case of La-Kozy & Ors. v. ING Vysya Bank Ltd. & Ors.®’, the Court ex-
pressed though in Kanji Manji Kothari case (supra), the applicability of section 5
of the Limitation Act to the proceedings under section 17 was upheld, yet DRT is
not obliged to entertain the proceedings even after the same has become hope-
lessly barred by limitation and no sufficient cause for condoning delay is made
out by the Applicants. The onus is on the Applicants to make out sufficient cause
for condoning delay.

14. Calculation of 45 days- from when?

Since the action under the SARFAESI Act is the basis for filing a complaint
with the DRT, it may be crucial as to what exactly is the action being appealed
against. The action is usually not an event that happens on a particular day to
trigger an absolute period of limitation running from that date. The action may be
a series of steps. For instance, there may be a technical or symbolic parsession
taken initially. Thereafter, actual possession of the asset might have been taken.
a RQncs
There are several steps thereafter—valuation of the property, service of
a sale, actua
of intended sale, fixation of the terms and the manner of making

April, 2013.
79, CWP Nos 22567 and 17894 of 2011, decided on 5""
80. 1 (2013) BC 24 AP (DB) (CN).
81. 2008 (1) Bank CLR 773.
82. IV (2010) BC 82 (Bom.) (DB).
1126 See. 17, Sya. 14 Part ll—Chap. Ul—Enforcement afSecurity Interest

of the property
sale, crediting the sale procee ds to the account of the of the bor-
rower, etc. The borrower may make a complaint against any of these, and the
appeal should not be turned down on the technical ground of limitation running
from the first of the series of steps. Sometimes, the date on which the steps have
been taken may not even be definiive—for instance, a technical repossession
may itself be a combination of several steps. lt would be hard to read the limita-
tion running from just anyone of the several steps and defeat an application on
that ground.
In Haresh Rasiklal Shah vy. Small Industries Development Bank of India, the
DRT refused to entert ain by someone who contended, though not on
an appeal
evidence acceptable to the DRT, to be a tenant in the premises seized by the
bank, on the ground that the appeal was filed beyond the period of limitation,
According to the Tribunal, the limitation ran from the date of taking symbolic
possession, which is the date of visit of the officers of the bank at the property.
On the contrary, in the case of Kanji Manji Kothari & Co v, UCO Bank”, the
Appellate Tribunal held that the borrower had the right to file an appeal within 45
days from the date of taking actual/physical possession of the property and not
from taking symbolic possession of the secured property The author's contention,
reiterated, is that it is not possible to fix any such deadline with reference to any
one of the several steps taken by the secured lender. In any event, symbolic pos-
session is too inconspicuous an event to be relied for fixing limitation. On the
other hand, a person may not be aggrieved by actual physical possession taken by
bank, his actual grievance could be in respect of sale of property. A limitation
running from the date of public notice may be more understandable. However, as
that is not the only step leading to a prejudice to the borrower, it is difficult to fix
a date solely with reference to the date of taking possession, actual or symbolic.
In Mardia Chemicals Ltd. v. Union of India (supra), the Apex Court held that
on measure having been taken under section 13(4) and before the date of sale/
auction, it would be open to the borrower to file an appeal under section 17 of the
Act before DRT. Relying on Mardia’s case, the DRAT-Delhi in the matter of
State
Bank of India v. Kandhari and Kandhari Pvt. Ltd.*°, held that ifthe auction
notice has occasioned grievance, the period of limitation of 45 days will have to
be reckoned from the date of publication of auction notice. In Aradhana Seth v.
Presiding Officer”, DRT, Allahabad, the High Court held that limitation has to
be computed from the date when the measures have been undertaken and not
from the date when measures have been proposed to be taken.”

il (2005) BC 157 (DRAT—DRT).

1 (2008) BC 91 (DRAT).
 Sub-section (2) as it stood prior to 2004, etc. Sec. 17,Syn.15 = 1127
The right to challenge would come to an end only after the expiry of 45 days
reckonable from the date of last concluded stage of the action of the bank.

15. Sub-section (2) as it stood prior to 2004 Amendment: Deposit

money before you appeal
The provisions of sub-section (2) prior to the 2004 Amendment required the
applicant to deposit 75% of the demanded amount before making an “appeal”
under this section. We had mentioned:
The provisions of sub-section (2) are bound to come for attack before
Constitutional courts.’ This provision considerably limits the right of
appeal before the DRT by providing that no appeal by a borrower shall
be admitted by the DRT unless the borrower deposits 75% of the claim
made by the lender in the notice referred to in section 13(2).
And this provision was successfully challenged in the case of Mardia Chemi-
cals. We had adduced the following reasoning why the condition demanding
75% deposit from the borrower was not logical:
It must be noted that the pre-condition of deposit has been laid down
only in case of appeal by the borrower. Where the appeal is being made
by any other person, there is no such precondition at all. For instance, if
the appeal is being preferred by the co-lender, another secured creditor,
or a shareholder of the borrower, or employees of the borrower, who
may be aggrieved parties in the matter, therein no requirement for such
a deposit.
This clause requires deposit of 75% of the claimed amount from the
borrower, if the borrower were to protest the action taken by the se-
cured creditor. There are several other legislations which similarly re-
strict the right of appeal. For example, the nearest law is section 21 of
the RDB Act which deals with appeal against the order of the DRT to
the Appellate Tribunal. In a very similar vein as this law, section 21 of
the RDB Act provides that where an appeal is preferred by any person
from whom the amount of financial debt is due, such appeal shall not be
entertained unless such person has deposited 75% of the amount deter-
mined by the Tribunal.
There are similar provisions in section 129(1) of the Customs Act.
Over time, the validity of these provisions have been examined by
Courts.
In a case dealing with a Gujarat local law, the Supreme Court held in
The Anant Mills Co. Ltd. v. State of Gujarat, as under:
“The right of appeal is the creature of a statute. Without a
is
statutory provision creating such a right the person aggrieved
why
not entitled to file an appeal. We fail to understand as to

had tough time defending them.

ttacked in the Rajya Sabha, and Mr Arun Jaitley, MP,
ges Sabha discussions linked in comments under the Preamble.
guchisngr
See record of Rajya
90. AIR 1975 SC 1234.
1128 ©See. 17, Sym. 15 Part Li—Chap. L—baforcemeni af Security Interest

the Legislature while granting the night of appeal CARROL LOApOSe

conditions for the exercise of such right. In the absence of any
special reasons there appears to be no legal or consututonal
impediment to the imposition of such condivons, It is permissi-
ble, for example, to prescribe a condition in criminal cases that
unless a convicted person is released on bail, he must surrender
to custody before his appeal against the sentence of imprison.
ment would be entertained, Likewise, it is permissible to enact
a law thno atappeal shall Le against an order relating to an as-
sessment of tax unless the ax had been paid, Such a provision
was on the statute book in section 30 of the Indian Income-tax
Act, 1922. The proviso to that section provided that"... no ap-
peal shall lie against an order under sub-section (1)of section
46 unless the tax had been paid”, Such conditions merely regu-
late the exercise of the right of appeal so that the same is not
abused by a recalcitrant party and there is no difficulty in the
enforcement of the order appealed against in case the appeal is
ultimately dismissed. It is open to the Legislatu ree an
to impos
accompanying liability upon party upon whom legal right is
conferred or to prescribe conditions for the exercise of the right.
Any requirement for the discharge of that liability or the ful-
fillment of that condition in case the party concerned seeks to
avail of the said right is a valid piece of legislation, and we can
discern no contraven tio
of Articl nit.
e 14 in
There have been several other rulings of the Supreme Court on legis-
lative restrictions on the right of appeal.
However, a very significant difference between the right of appeal
against the order of a judicial or quasi-judicial body, and a complaint
against the conduct of a party to a contract, is that in the former case,
any assessment, demand, or order passed by a judicial or quasi-judicial
authority is subject to an adjudication process. For instance, every as-
sessing officer making an assessment of corporation tax, income tax or
excise duty sits in a quasi-judicial capacity and is bound by rules of
Sduiotion dattee ane is not
; arbitrary
| or whimsicalmet
, though quitepre
of-
ten, such demands are, and that is why there are appellate provisions.

thedemand maybeunreasonable orarbitrarily exasecrated, merel

y to
make it difficult for the aggrieved party to go in for appeal.
The saving clause isthe proviso 17(2) where the DRT may
reduce
waive theamount ofdeposit. Inpractice, however, it isunlikely thatthe
 Sub-section (2) post-Amendment, etc. Sec. 17, Syn. 16 1129

the secured creditor. If there is a genuine issue relating to the amount

demanded, it cannot be taken up in interlocutory application relating to
the amount of deposit itself, and it is quite likely that an aggrieved party
may be denied justice merely because he could not place a deposit
which is a certain percentage of an amount which itself he seeks to dis-
pute.
Notably, the decision of the DRT not to entertain an appeal or reduce
or waive the amount of deposit is itself an appealable decision and ap-
peal will lie before the Appellate Tribunal.
In the case of Mardia Chemicals, our opinion above was almost fully vindi-
cated. To quote from the ruling:
“The condition of pre-deposit in the present case is bad rendering the
remedy illusory on the grounds that (i) it is imposed while approaching
the adjudicating authority of the first instance, not in appeal, (ii) there is
no determination of the amount due as yet (iii) the secured assets or its
management with transferable interest is already taken over and under
control of the secured creditor (iv) no special reason for double security
in respect of an amount yet to be determined and settled (v) 75% of the
amount claimed by no means would be a meager amount (vi) it will
leave the borrower in a position where it would not be possible for him
to raise any funds to make deposit of 75% of the undetermined demand.
Such conditions are not alone onerous and oppressive but also unrea-
sonable and arbitrary. Therefore, in our view, sub-section (2) of section
17 of the Act is unreasonable, arbitrary and violative of Article 14 of
the Constitution.”

16. Sub-section (2) post-Amendment: DRT to consider the measures

This sub-section provides that the DRT shall consider whether the measures
adopted by the secured lender are in accordance with the law. One of the impor-
tant issues that would come up for discussion before the DRTs in most cases is
the determination of the amount claimable by the secured lender. While this sec-
tion is not exactly only adjudication of the amount payable by the borrower, but
determination of the amount is an essential part of the action under this section,
as the secured lender realises his claim by way of enforcement action and either
demands deficiency or has to return the surplus. Hence, DRTs cannot remain lim-
ited to examination as to whether the measures taken by the secured lender were
in accordance with the law.
Likewise, the sale of the asset by the secured lender would almost invariably
come for discussion. Was the price the best price, or was the sale conducted in
the best possible manner? See the ruling of the Bombay High Court in Kanji
i
Manjiil Kothari j (supra) holding it isi only the measures adopte d in taking pos-
that it
asasie of the asset that can be argued before the DRTs, and, therefore, other
au-
questions, including sale price, are not to be agitated before the DRTs. The
thor is in humble disagreement with this view, for reasons discuss ed earlier.
1130 §©See. 17, Sya. 17 Part li—Chap. Hi —Enforcement ofSecurity Interest

ln some cases even questions of title have been agitated before the DRT. In
Jammu and Kashmir Bank ». Jai Lakshmi Dravid’, the Panjab & Haryana High
Tri-
Court held that even question of title can be examined by the Debi Recovery
bunal in proceedings under section 17 of the Act as all objections which are
available to a person against the proceedings initiated by the bank are to be raised
before the Tribunal.

17. Sub-section (3): Undoing the damage

The sub-section was added by the 2004 Amendment and provides for the
DRT’s power to hold that recourse to any of the measures adopted by the secured
lender was not in accordance with the law or the rules made thereunder. As we
have mentioned above, while the law does not talk about these, but several re-
lated and critical questions are sure to come up before the DRTs—the claim of
the secured lender, sale price, manner of making sale, distribution of sale pro-
ceeds, conflicting cla ims
of other lenders, etc. Hence, it is not just that the DRT
would either hold the measures adopted as within the law, or invalid in law, but it
may have to do a substantial amount of adjudication work.
The Supreme Court in the case of Authorised Officer, Indian Overseas Bank v.
Ashok Saw Mill”, when confronted with the question whether the DRT would
have jurisdiction to consider and adjudicate with regard to post 13(4) events or
whether its scope in terms of section 17 of theSARFAESI Act would be con-
fined to the stage contemplated under section 13(4), has spelt out the legislative
intent and scope of section 17(3) as under:
“22. In order to prevent misuse of such wide powers and to prevent
prejudice being caused to a borrower on account of an error on the part
of the banks or financial institutions, certain checks and balances have
been introduced in section 17 which allow any person, including the
borrower, aggrieved by any of the measures referred to in sub-section
(4) of section 13 taken by the secured creditor, to make an application

insection 17 hasgone totheextent ofvesting the DRT with authority

91. 1 (2007) BC 227.
92. III (2009)
BC 640 (SC).
es ie gee ee Y UVESUWEF SHOUIC De regarded)as an
proceedings under section 17, since the appeal to the next
8 has to be backed by a deposit, which is based
on the
y the Tribunal.

}): if the measures are lawful

is sub-section is very strange. It Says that if what you have
ou can go ahead and do it. It has been repeatedly mentioned
parent recourse to the redressal machinery in this law is by
ipplication. Since the measures under section 13(4) would
en, there is no question of the secured creditor, cleared by
with the measures. In most cases, an application before the
*r soon after a constructive possession of the property is
ter a sale. The DRT essentially holds what has been done as
een sufficient for the law to say—the DRT may pass such
ppropriate.
ause in the sub-section is merely a surplusage, as the entire
a special enactment is to be unfettered by any other law. In
f India”, it was held that the provisions of section 13(4)
| law in case of a conflict between the two.
it we made above—that the right of the DRT includes right
ts fortified by the language of this sub-section.

n interim order restore possession to the borrower?

tory order relating to the restoration or redelivery of the
the defaulter borrower is not permissible in law. In Lak-
.) Ltd v. The Authorised Officer, Indian Bank, it was cate-
Debts Recovery Tribunal has no power to pass any interim
ing to restoration of possession before the finalisation of
er section 17 of the SARFAESI Act. Similar views were
ase of Syndicate Bank v. Sri Basalingappa,”; The Author-
1k v. The DRAT, Chennai (WP No. 46413/2006); Corpora-
| Bhandarkar”*, Lakshmi Shankar Mill (P) Ltd. & Ors. v.
Punjab and Sind Bank v. Bhim Sain”.
s from the rulingby DRAT in Indian Bank y. B.M.
1132 =See. 17, Syn. 20 Part 1l—Chap. ll—Enforcement ofSecurity Interest

ustice it may be possible for the Debt Recovery Tribunal to order restoration ot
1 meorhoe ofpod rw to the borrower. In this case, the residential house of the
borrower was taken possession of while two other Hems were also available as
secured properties, the DRT on the grounds of balance of convenience and inter-
est of justice restored possession to the borrower. The DRAT while agreeing that
the DRT could use its discretionary power in the interest of justice reversed the
decision for other reasons. In Canara Bank v, Umesh Kumar Ahuja , the bor:
rower was directed to pay more than half of the total amount due for return to
him of the property taken over by the bank pursuant to section 13(4) of the Act.

20. Can restoration of possession of the secured asset be made only in

favo of the ur
borrower?
Section 17(1) empowers any person (including borrower) to make an applica-
tion to DRT. Section 17(3) empowers DRT to restore the secured asset to the
borrower. In Fakrudheen Haji v. State Bank of India’, it was contended that
though any person can make an application under section 17(1), the restoration of
possession of the secured asset could be made only to the borrower. Negating the
contention, the Division Bench of the Kerala High Court in this case held that
nothing in section 17 prevents the Tribunal from passing appropriate orders pro-
tecting the interests of the appellant, whicther the appellant is the borrower or any
other person. The fact that specific mention is made for restoration of possession
in favour of the borrower does not mean that restoration of possession in favour
of a person other than the borrower is impossible while passing an order under
section 17(3). It cannot be said that when a right is conferred on any person ag-
grieved, to file an appeal to the DRT, the Tribunal would have no power to re-
dress his grievance. Restoration of possession to the borrower mentioned in 17(3)
would not in any way fetter the jurisdiction of the Tribunal to pass any order in-
cluding restoration of possession in favour of any person aggrieved, whether he is a
borrower or not, if the facts and circumstances of the case warrant such restoration.

21. Sub-sections (5) & (6): Time limit for disposal of application
Timeliness of disposal of a challenge is one of the important ingredie
i nts of jus-
ticeunder thissection. Whether itis theborrower aggrieved bytheaction ofthe
bank or any other person, the redressal must be speedy. The law provides for a
time frame of 60 days, and on extension for reasons to be recorded, 4 months, for
the DRT to dispose of the application.
As per sub-section (6), even a delay in disposal of an application
ion is an appeal-
able ground. This would have appropriately been called an
appeal—appeal
against the failure of the DRT to pass an order. However, by
the
twice-shy principle, even the next course ofaction before the Appel one-bitten-
hasbeen called an“application”. Itisnotclear whether late Tribunal
any fees will bepayable
onthesecond application totheAppellate Tribunal—logica
lly, there should not

1. TV (2009) BC 126 (DRAT).

2. 11 (2009)BC 352.
 Review by the DRT
Sec. 17, Syn. 23-1133
There is no time limit for disposal of the application to the Appell
ate Tribu-
nal—which may literally mean the time limits under sub-section (5)
become
meaningless.
However, very clearly as expressed by the Court in Gulshan Rai Jain
& Ors. y.
DRAT, Allahabad & Ors.’, in case the appeal filed before the DRT or
the appeal
before the DRAT are not decided within the statutory period provided under
the
Act, then it shall frustrate the very object and purpose of the Act. In the said case,
the DRT kept the matter pending by passing interim orders and the DRAT,
too
acted in a mechanical way- it disposed off the pending appeal file under Section
18 of the Act permitting the creditors to proceed with the auction and sale with
liberty to the borrower to pay all the dues to the Bank before auction takes place.
According to the Court, the proper recourse for the DRT had been to vacate the
interim order and decide the appeal before it on merit; and the DRAT should
have exercised the power granted to it under section 17(6) to direct the DRT to
decide the pending appeal within a specified date. Failure on the part of the DRT
or the DRAT to decide the issue within the statutory period shows inaction or
incompetency on the part of the Presiding Officer of the Tribunals.

22. Sub-section (7): Provisions of RDB Act to apply on disposal of

application
The purport of this sub-section is to say that except for the specific provisions
made in this law, the disposal of the applications by the DRTs shall be as per the
RDB law. While this law does not provide the same thing for disposal of applica-
tion by the Appellate Tribunal, understandably, same will apply to the Appellate
Tribunal as well.
The purport of expression “as far as may be” used in the said sub-section was
explained in the case of Syndicate Bank v. Basalingappa’. Justice S Abdul
Nazeer in paragraph 18 of the judgment observed as follows:
“18. The expression “as far as may be” employed in the said provi-
sion assumes importance. The said expression means in deciding any
question relating to procedure not specifically provided in the Act, the
Tribunal as far as may be guided by the provisions of the DRT Act and
the Rules made thereunder. This does not in any way override the spe-
cial provisions contained in the Act. In other words, if there is no spe-
cific provision in the Act, then only the provisions of the DRT Act and
the Rules made thereunder are applicable.”

23. Review by the DRT

Does the DRT (or the Appellate Authority—see following section) have the
right to review their decisions? The power of the DRTs to review their decisions
is based on general powers of the DRTs. Holding that the powers of the ma .
review their decisions were at par with those of the Civil courts, the MP Hig

3. 11 (2012) BC 5 (All.) (DB).

4. Il (2008) BC 274.
1134 See. 17, Syn. 24 Part U—Chap. Hl—Enforcement of Seourity Interest

n 22(2 Ke) of
Court in Ankit Steel Indore v. Bank of India, Indore’, held that sectio
the RDB Act equated the powers of the DRTs with those of a civil court, Hence,
the provisions of Order 47 of rule | of Civil Procedure code are applicable as
regards the power to review. Order 47 provides a power to seek review On the
grounds of discovery of new and important matter or evidence, which, after the
exercise of due diligence, was not within the knowledge of the petitioner, or
could not be produced at the time of the decree or order, or on account of mistake
or error apparent on the face of the record, or any other suffici ent reason,

24. Pecuniary limit for DRT jurisdiction |

Under the RDB Act, DRTs have jurisdiction in case of matters of Rs, 10 lacs
above. Does the same monetary limit apply to applications under this law as
well? Courts have ally answered this question in the negative-——see the rul-
ing of a Division Bench of Punjab and Haryana High Court in Kalyani Sales
Company v. UOP, Also see notes under section 31(h).
25. Ad valorem fees for filing of appeals
Rule 13 of the Security Interest (Enforcement) Rules, 2002 prescribe the Court
fees payable for applications and appeals under section 17 and 18 of the Securiti-
sation Act. This rule came into force on 2-2-2007. The fees payable is ad-
valorem, subject to a maximum of Rs. 1 lac.
Position prior to 2-2-2007:
Pursuant to the amendments made in view of Mardia Chemicals ruling, the Se-
curitisation and Reconstruction of Financial Assets and Enforcement of Security
Interests (Removal of Difficulties) Order 2004 provided that the fees for making
appeal to the DRT under section 17(1) of theSARFAESI Act will be the same as
per rule 7 of the DRT (Procedure) Rules, 1993.
sian pally t eiptas stn aph vinae
rem fees was questioned on the ground that the same contraryto the spirit of
the Supreme Court ruling. However, és cctaaton uh tinted dea WhDigit:
sion Electr
Ltd. onics
v. Indian Bank’.
In Kalyani Sales Company v. Union of India*, the Punjab and ana Hi
Court differed from te Makes High Come tating trDegiviston Miteesonas ane
pra). According to the P&H High Court, the effect of the Supreme Court ruling
in Mardia was that the action of the borrower was not an appeal, and, therefore
theadvalorem fees payable under theSecuritisation and Reconstruction ofFi-
nancial Assets and Enforcement of Security Interests (Removal of Difficulties)
Order 2004 were not applicable asthe said Order referred toan “appeal”.
Instead,
the P&H High Court held that the fee payable on the applicable was aflat fee
Rs. 250since anapplication under sec. 17 was neither an application of
of money nor a case ofa counter claim. Itwas merely aninterlocu forrecovery
tory applica-

5. 1 (2005)
BC 534.
6. 1 (2006)
BC 1 (DB).
7. TV (200BC 5)52 (Mad. (DB).
8. Order dated 8th Dec. 2005 | [1 (2006) BC 1 (DB).
 Fees payable on an appeal from, etc. See. 17,Syn.26 1135
tion. (Also followed in Bank of Baroda v. Veena Chandyoke’
) The same court, in
an earlier ruling, in Atma Jain Hosiery Emporium v. Union of
India'°, order dated
Oct 2004, had upheld the ad valorem fees, but the later ruling held
that that deci-
sion was not applicable after the provisions of the Act were amended in 2004.
Since section 17(1) (amended) provides for prescribing fees for an applica
tion
and since no rule has been framed under the NPA Act after 11-11-2004 being
the
date of amendment of Sec 17, a question whether fees can be levied under
the
Order 2004 after 11-11-2004 came for consideration before the Apex court in
Transcore’s ruling (supra). The Supreme Court stated that after the amendi
ng
Act 30 of 2004, certain amendments have been made in section 17(1) of the NPA
Act. However, the 2004 Order dated 6-4-2004 does not, in any way alter the
scheme of the amended Act. It merely fills in the deficiency and, therefore, the
2004 Order will continue to operate even after the amending Act 30 of 2004 and
till rules are prescribed in terms of section 2(s) of the NPA Act. In Arihant
Pharma, Bangalore v. The Registrar, DRT, Bangalore'', where an appeal was
filed under section 17 on 27-4-2006 and no fees was paid in view of challenge to
the 2004 Order pending before Supreme court in Transcore’s case, the High
Court held that on account of circumstances the Petitioner had not paid the Court
fees at the time of filing of appeal and did have the benefit of the Security Inter-
est Rules prescribing a lesser court fee on the date of actual payment of fees. The
Petitioner cannot be denied the advantage.
In Morion Chemicals Ltd. v. UCO Bank Ltd.'’, an application under section 17
was filed by some of the borrowers. The other borrowers filed an interim applica-
tion in the said proceeding for getting impleaded. Had they filed an application
under section 17 separately that would have not only been barred by limitation
but also would require payment of court fees. The said interim application was
rejected by DRT. On appeal, upholding the view of DRT, the appellate Tribunal
stated that the appellants wanted to kill two birds with one stone in an indirect
way by making a bizarre prayer. First they wanted to get over the embargo of
limitation. Second, they wanted to avoid the payment of requisite court fee.

26. Fees payable on an appeal from an Interlocutory application:

Section 17 of the Securitisation Act speaks of the right to make an application
against any proceedings under section 13(4) thereof but does not refer to any in-
terlocutory application. Nonetheless, a conjoint reading of section 17 with the
provisions of Recovery of Debts Due to Banks and Financial Institutions Act,
1993 and Code of Civil Procedure clearly indicate that although substantive ap-
plication is to be made under section 17(1), a party can made interlocutory appli-
cations under section 17(7) of the Securitisation Act. In this context, whether the
fee payable on an appeal from an interlocutory application in a substantive peti-
tion under section 17(1) of the Securitisation Act would be the same as raion ie
appeal from the final order passed in such substantive application ot ir y
the same as the fee payable in the first instance on an interlocutory applica

9. 1(2010) BC 93 (DRAT).
10. (2005) 60 SCL 38 (P&H).
11. 1(2010) BC 329.
12. 1 (2008) BC 46 (DRAT).
1136 ©6©See. 17, Syn. 27 Part 1l—Chap. 111—Enforcement of Security Interest

Act
moved in the substantive petition under section 17(1) of the Securitisation
Kumar
came for consideration before the Delhi High Court in the case of Naresh
Minal v. State Bank of India’, In this case the Appell ate Tribun al interpr eted rule
13 of the Security Interest Rules and had held that the tees payable for an appeal
from an interlocutory application would be the same as is payable for an appeal
from a substantive application under section 17(1), Holding that the interpreta
tion given by DRAT 1s incorrect, the High Court held that the fees payable on
appeals from interlocutory application would be the same as the fees payable for
the interlocutory applications.

27. Whether fees payable when more than one appeal filed;
From a plain reading of the Rules it appears that Court fees has to be paid
whenever an application is filed under section 17 of the Act. Since the fees are
ad-valorem, it would cause immense hardship to the borrower if he has to prefer
more than one appeal against the measures taken by the secured creditor, For in-
stance, if more than one property is provided as security and the secured creditor
issues separate possession notices in respect of the properties, the borrower
would be constrained to challenge the different possession notices in separate
proceedings, resulting in payment of Court fees more than once. In Corporation
Bank v. Avanthi Leathers Ltd.'*, the Chairperson did not allow the borrower to
amend an appeal to include therein challenge to a second possession notice is-
sued by the bank but observed that there is some anomaly in the procedure and
for that matter, the borrower cannot be driven to critical position of paying the
Court fees twice, when he wants to challenge the measures taken under section
13(4) by taking separate proceedings.

In the case of a borrower residing in the State of Jammu and

Kashmir, the application under section 17
equucaien toCome o| Shall be made to the Court of District Judge in
District Judge in certain that State having jurisdiction over the bor-
cases rower which shall pass an order on such appli-
cation.
Explanation.—For the removal of doubts, it is hereby declared
that the communication of the reasons to the borrower by the se-
cured creditor for not having accepted his representation or objec-
tion or the likely action of the secured creditor at the stage of com-
munication of reasons shall not entitle the person (including bor-
rower)
this tosection.]
make an applica
ication to the Court of District Judge under

13. TV (2009) BC 50 (Dethi) (DB).

* ae ) BC 227 (DRAT—DRT - Chennai)
Ss. Ins. y the Enforcement of Security Interest . ecov Debts Laws (Amendment) 204
(30 of 2004).s. 11 (wef 11-11-2004). as ¥ as
 Appeal to Appellate Tribunal
Sec.18 1137

COMMENTS
This section makes a special provision for the State of Jammu
and Kashmir.
The powers of the District Judge are the same as those of the
Tribunals. While
the law does not say that the provisions of section 17 shall, mutati
s mutandis, be
applicable to the application made to the District Judge, the same
should be im-
plied. In other words, the time limits and the right of making an applic
ation, in
this case, to the High Court, should also be implicit.

(1) Any person aggrieved by any order made

S. 18. Appeal to Ap- by the Debts Recovery Tribunal '[under sec-
pellate Tribunal tion 17, may prefer an appeal along with such
fee, as may be prescribed] to an Appellate Tri-
bunal within thirty days from the date of receipt of the order of
Debts Recovery Tribunal:
[Provided that different fees may be prescribed for filing an ap-
peal by the borrower or by the person other than the borrower: ];
'’(Provided further that no appeal shall be entertained unless the
borrower has deposited with the Appellate Tribunal fifty per cent.
of the amount of debt due from him, as claimed by the secured
creditors or determined by the Debts Recovery Tribunal, which-
ever is less:
Provided also that the Appellate Tribunal may, for the reasons to
be recorded in writing, reduce the amount to not less than twenty-
five per cent. of debt referred to in the second proviso.]
(2) Save as otherwise provided in this Act, the Appellate Tribu-
nal shall, as far as may be, dispose of the appeal in accordance
with the provisions of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (51 of 1993) and rules made
thereunder.
SYNOPSIS
1. Applicability of Limitation Acct.............. 1138} 5. The purpose of the deposit and the
2. Pre-deposit at appellate stage................. 1139 utilisationof the deposited amount ........ 1142
3. Constitutional validity of second 6. Pre-deposit required irrespective of has
Proviso to SectiOn 18(1)...... ceceeeeees 1140 appropriation Of debts ..........-ssscsereenes "be
4. Is pre-deposit also required in respect 7. Deposit of money only ONCE...........1-++ Aas
of an appeal from an interlocutory 8. Applicability of Limitation ACt........+.++: Hee
order made in course ,of section 17 9. Review by the Appellate Tribunal.......... :
DEOCECOINIESFotis MAN. csbiidecbecsextvese 114]

16:~Sibee aoeaeerienrot-Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
AF aca
(30 of 2004), s. 12, for “under section 17, may prefer an appeal” (w.e.f. 21-6-2002).
of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 (30 0 ’
17. Ins. by the Enforcement

Enforcement of Security Interest and Recovery of Debts Laws

the Pstorcen (Amendment) Act, ; 2004
Laws (Am
ina by
18. Ins. Be ihe
(30 of 2004), s. 12 (w.e.f. 11-11-2004).
1138 See. 18, Sya. 1 Part 1l—Chap. 1l—Bnforcement of Security Interesi

COMMENTS
The power of appeals under the RDB Act is contained in section 20 ot the
RDB Act. There is a provision that an endeavour shall be made to dispose of an
appeal within 6 months of the making thereof, This is apparently apploable to
the appeals under this law as well.
The amendments made in 2004 relate to the payment of fees, and the pre-
deposit provision commented below,

1. Applicability of Limitation Act

An appeal has to be filed within thirty days from the date of receipt of order of
Debts Recovery Tribunal. There is no specific mention for the applicability of the
provisions of the Limitation Act under the SARFAESI Act, It is pertinent to note
that under the RDDBFI Act, section 24 specifically provide for application of the
Limitation Act to an application made to a Tribunal under that Act. Thus, if an
application under the RDDBFI Act is filed with delay, the same can be condoned
by the Tribunal invoking the provisions of the Limitation Act.
However, under the SARFAESI Act, the Tribunal does not have any permis-
sion to enlarge the said period of thirty days or permit any concession in respect
thereof. Holding that the provisions of Limitation Act are not applicable to the
SARFAESI Act, the Chairperson of the DRAT-Allahabad in State Bank of India
v. Sudarshan Doors Pyt Ltd'’, held as follows:
reevbeedt Legislature consciously and purposely did not permit any al-
lowance to this Tribunal to condone the delay for an appeal under section
18, if the appeal was filed beyond thirty days prescribed under section 1%
of theSARFAESI Act. The reason for this omission is that the provisions
of SARFAESI Act have been enacted to expedite the matters of recovery
Banks’ dues, as the banks were running out of the financial resources to
further carry on the financial activity to meet the need and requirements
of its other depositors and clients ......... Therefore,need was felt for a
faster procedure empowering the secured creditors to recover their dues
and for security of financial assets to generate maximum monetary li-
quidity in the larger interest of the society”
In M/s Seth Bansidhar Kedia Rice Mills Pvt. Ltd. .v. Bank of India
4:Aur.” inwesbchdGottGeelegielunnee henconeehciathy lenendad austen ater ts

2 1 (2013) BC 667 (MP) (DB).

See also Canara Bank vy.Promila Rani (TV (2012) BC 92
21 Pets Viiava Bank v.Lucy Dsouca & Ors.(TV (DRAT-Dethiy].
(2012) BC9 (DRAT Canara Bark »
Promila ari WY (2012) BC 92 (DRAT-Dethi)} hath
of
Mehoradara ‘BEG thee ai
 Pre-deposit at appellate stage Sec. 18, Syn.2 1139

of the Act, appeals could be filed belatedly to revive dead matters, so as to pre-
vent the banks from invoking the provisions of the Act to realize the dues. That
Was not the intention of the Parliament while framing the SARFAESI Act.
However, a contradictory view was taken in Sajida Begum v. State Bank of Hy-
derabad (supra) *».

2. Pre-deposit at appellate stage

As ruled by the Supreme Court in the case of Mardia Chemicals, insisting on a
deposit at a stage other than an appeal is not legally permissible. Therefore, the
deposit provision that existed pre-2004 has been shifted to the appeal before the
Appellate Tribunal. At this stage, there is a determination of the amount payable
by the borrower by the DRT. The law provides for a deposit of 50% of the
amount demanded by the lender, or the amount determined by the DRT, which-
ever is less. It is hard to think of cases where the amount determined as payable
by the DRT may be higher than the amount demanded by the secured lender.
Further, the power to DRAT under the third proviso to section 18(1) to reduce
the amount has been held not to be absolute in nature, by the Court in /ndian
Bank v. Debts Recovery Appellate Tribunal & Ors.,”*. Moreover, it is necessary
to assign a reason for allowing such reduced deposit, as a paramount duty and an
ingredient of section 18, as was held in Bank of India & Anr. v. Registrar, DRAT,
Chennai & Ors.”. In Goldy Fin Agro Cotton Pvt. Ltd. & Ors. v. State Bank of
India *° , it was held that the Appellate Tribunal has no power to waive deposit of
amount less than 25%. Complete waiver is not permissible. In view of section 18
of the SARFAESI Act since amount of 25% is not deposited which is mandatory
deposit, no favorable including interim relief can be passed in favour of appel-
lant. It is quite important to note that the amount determined as payable by the
DRT should refer to the amount determined as payable after the measures under
section 13(4) have been taken. For instance, the secured lender demanded an
amount of Rs. 100 lacs and seized property, which, say, has been sold for a price
of Rs. 60 lacs. The borrower cannot be required to pre-deposit 50% of Rs. 100
lacs, as the enforcement of security interest, which the DRT is upholding, itself
amounts to a deemed payment to the extent of the value of the property. In Siva-
kumar Textiles v. DRAT & Ors.”’, it was held that 50% of ‘the amount due from
him, as claimed by the secured creditor’ should be with reference to the amount
claimed in the notice under section 13(2), and not the amount that could have
been claimed by the secured creditors while opposing an application for waiver.
Reason: section 13(4) does not contemplate any indication as to the quantum. of
debt to be shown in the possession notice. Proceedings under section 13(4) which
was questioned under section 17, are the proceedings which culminated into one
of the further appeal under section 18 of the Act. In that sense, amount demanded
may be
under section 13(2) alone has relevance. The borrower’s right to appeal
to mean that
defeated in the event if second proviso to Section 18 is interpreted

23. 1 (2013) BC 24 AP (DB) (CN).

24. 1(2011) BC 514 (Mad.) (DB).
25. IV (2011) BC 336 AP (DB).
26. 1 (2013) BC 28 (DRAT Allahabad).
27. Il (2012) BC 45 (Mad.) (DB).
1140 =See. 18, Syn. 3 Part L—Chap. Li —bafercement afSecurity Interest

50% of the amount to be depositedis with referenc e claimed

to the amount by
the secured creditor at the ime when the DRAT considers the apphoatio n for
waiver.

However, in Godavari Laxmi Co-Op. Bank Lid, v, Union af India & Anr.”*, the
Court interpreted the second proviso to say that the amount referred therein refers
to the present outstanding amount claimed by the secured creditor,
In Shree Vidya Paper Mills Lid. v, Stressed Assets Stabilization Fund &
Ors.””, it was held that even in the absence of determination by the Tribunal of
debt due, law requires borrower to deposit 50% of debt as claimed by secured
creditor. Use of plural expression “secured creditors” is indicative of fact that
what is required to be deposited is 50% of entire debt due to all seoured creditors
cumulatively,
It is also very important to note that the pre-deposit is to be done only in case
of an appeal by the borrower. There might be various other parties who may be
aggrieved by an order of the DRT, but may not have any obligation to pay money
to the secured lender. For instance, the grievance may be registered by a co-
chargeholder, or by a subordinated chargeholder. In fact, even aggrieved work-
ers’ unions may file an appeal. A shareholder may also be an aggrieved party,
and it is difficult to hold a shareholder liable to deposit a portion of the demanded
amount. However, as was held in Jndian Bank v. Debts Recovery Appellate Tri-
bunal & Ors.,”°, by virtue of inclusion
of aguarantor under section 18(1)
as per
section 2(1)(f) of the Act, obligation is created on the guarantor as well to deposit
ay Reso. ohCe aR, Aa, KYRA PS,SERRATE SPN Pr 18(1) of the
ct.

3. Consti
validity
tutof second
ion
proviso al
to section 18(1)

can impose conditions under which this is to be

basis ofthesame principle, the Delhi High Court inexerci sed”. Similarly, on the
Satyavol Venkat Krishna Rao
& Ors. v. Union of India & Ors.”*, held that the second proviso ishedged by fea-
sonable conditions cannot be treated to be ultra vires.

Ill (2012)
BC 180 (Bom.) (DB).
(Bom.) (DB)
I(2011)BC514 (Mad.) (DB).
1
(2006) BC455 (DB),
also National P. .
sSsIV (2010) BC 695 core CO” © Union ofInia & Ors. {1(20121
SS BC-97(Bom) (BY)
 Is pre-deposit also required in respect, etc. Sec. 18, Syn.4 1141
4. Is pre-deposit also required in respect of an appeal from an inter-
locutory order made in course of section 17 proceedings?
In Amrit Rice and Pulse Mills v. Dena Bank #4, the DRAT-Mumbai held that
the wording “any order” used in section 18(1) refer to an order made finally
by
allowing or dismissing an appeal/application filed under section 17 of the SAR-
FAESI Act and not to any interim order. According to DRAT, the provision of
deposit has to be construed reasonably to avoid causing hardship to the appellant.
When the main proceeding is pending before the DRT, the claim of the bank is
yet to be determined, the order of pre-deposit in appeal against interim orders
cannot be contemplated or warranted.
However, the Madras High Court in an unreported decision in Ind Bank Hous-
ing Limited v. The Debts Recovery Appellate Tribunal*™ held that in all cases
irrespective of the fact that an application under section 19 of RDDBFI Act is
pending determination, the aggrieved person is required to make a pre deposit
under second proviso to section 18(1) even for an appeal against an interim order
passed by DRT or against the order refusing to pass an interim order or for any
other relief, if the appeal is filed under section 18 of the SARFAESI Act.
The DRAT-Kolkata in Nicco-UCO Alliance Credit Limited v. UCO Bank*>,
also differed from the view taken by the DRAT-Mumbai and held that an appeal
under section 18 is not restricted only against final order but any order interlocu-
tory or final is appealable. The words “any order” are wide enough to include
both the interlocutory order and the final order as well. It further stated that the
conditions prescribed under second and third proviso to section 18 of the SAR-
FAESI Act are mandatory and cannot, therefore, be diluted upon any interpreta-
tion without the support of any statutory provision in this regard.
Also negating the contention that the provisions of section 18 would not be ap-
plicable to an interlocutory order as because the amount of debt due to the se-
cured creditor is not determined in law, the DRAT-Kolkata held that there is no
scope for determination of the debt in a proceeding under section 17 of the Act.
The DRAT further held that the expressions, namely “as claimed by the secured
creditor’ and “determined by the DRT” as appearing in the second proviso to
section 18(1) have been made disjunctive by the word “or” and these two dis-
junctive expressions refer to two different stages in the process of recoveringa
debt by a secured creditor. Therefore, in case of recovery of a debt initiated in
accordance with the provisions of the SARFAESI Act, the conditions as provided
under the second and third proviso to section 18 would apply on the basis of the
claim made by the secured creditor and in case of recovery of debt under the
SARFAESI Act after the amount is determined by DRT, the condition of pre de-
posit would be of the amount which is lesser amongst the claimed and the deter-
mined amount.

34. W.P. No. 20255 of 2008 decided on 21" November, 2008.

35. 1 (2010) BC 38 (DRAT).
; | dni
& Ors. v.Axis; Bank
Bank of
[TVIndia
(2011) BC 191 (Bom.) (DB)I:
36. See also Vinay Container ae se fs United [II (2012)) BC ' 3 (DRAT-
| ing Industries
BC 13 (DRAT-Delhi)].
STV eae cn Ar einorian v. Bank of India & Anr. {I (2012)
1142 See. 18, Sya. 5 Part Ll —Chap. 1U— Enforcement af Security Interest

5. The purpose of the deposit and the utilisation of the deposited

amount
The purpose of the pre-deposit, as discussed several times before courts al
various levels, is ane restrain frivolous applications being made, The pre-
deposit is surely not a mode of recovery of money, particularly 80 In Case of ap-
peals under this law. A DRT has its genesis and nemesis i “debi recovery”, but
this law authorises only recovery of so much amount as can be recovered by en-
forcement of security interest. There is nothing in this law that authorises the se-
cured lender to recover the deficit, that is, the amount left unrecovered by en-
forcement of security interest.
The DRT or the Appellate Tribunal cannot use the pre-deposit as a mode of re-
covery of the deficiency. In fact, this is where the question of simultaneous ap-
plications by the secured lender under this law and the RDB law becomes crit-
cal. A lender may have also filed simultaneous application under the RDB law
for recovery of the residual (which has been approved by certain rulings of the
ADRT).”’ The borrower is forced by law to the ADRT, where he has to put in a
deposit. But it would be wrong to use the appeal by the borrower under this law
to cause a recovery to be done under the RDB Act, merely because the appellate
machinery of the two laws happens to be the same.
However, the Kolkata High Court in the case of Akshat Commercial Private
Limited v. Smt Kalpana Chakraborty’*, held that the pre-deposit that the Act re-
quires for an appeal to be entertained is both for the purpose of ensuring that a
lending bank sees some money till the protracted process of adjudiciationis
completed and also to put the borrower and guarantor on terms.

6. Pre-deposit required irrespective of appropriation of debts

When the creditorhas
-bank
enforced security interest under section 13(4) and
has recovered more than 50% and appropriated the same towards recovery of its
dues, is the borrower obliged to make a pre-deposit in terms of section 18 of Act
only for the purpose of entertainment of appeal is not free from controversy. In
Akshat Commercial Private Limited’s case (supra), the banki a notice un-
der section 13(2) and ultimately put the secured assets for sale under section
13(4) of the said Act. The secured assets were sold to the highest bidder and

which was dismissed. On appeal before DRAT, the guarantors sought exemption
from making any pre-deposit for entertaining the appeal as because the creditor
bank has already received by auction sale pursuant to section 13(4)
more than
antore and casi madebyit.The DRAT agreed withthecontention ofthe
antors
guar
and exempted from maki -deposit. On appeal single judge
ofKolkata High Courtheldthatnopartoftheconsideration
putinbytheave
Purchaser could be treated towards the deposit that a borrow
er or guarantor is
required toput onthe table before proceeding with the appeal. The borrowers’
or
37. See notes under section
17.
38. AIR 2010 Cal 138.
 Validation of fees levied Sec. 18A 1143
guarantors’ appeal should not stand on the legs of the auction purchasers’ deposit.
The pre-deposit that the said Act requires for an appeal to be entertained is both for
the purposes of ensuring that a lending bank sees some money till the protracted
process of adjudication is completed and also to put the borrower or guarantor on
terms. It would be gross injustice if the auction purchaser is to be told that his
money would be treated as credit for the guarantor’s luxury in challenging the
bank’s action under section 13(4) and DRT’s order under section 17 of the Act.
See another ruling on the issue in Saroj Kumar Samantra v. Indian Bank”.

7. Deposit of money only once

When two borrowers independently challenged the action taken under section
13(4) of the SARFAESI Act in separate appeals under section 17 before the
DRT, it was held in the case of M. Ramakrishnan v. Dena Bank”, that the DRAT
cannot direct the subsequent appellant to deposit against 50% of the amount as
against very same claim made by the secured creditor-Bank.
In Shilpa Homes y. A.P. Mahesh Co-operative Urban Bank Ltd.*', the appel-
lant’s contention before DRAT was that if they were to challenge the measures of
the secured creditor for the second time, they will have to again spend amount for
the court fee and it would cause hardship to them. The DRAT should have al-
lowed cost while granting the application. The DRAT set aside the DRT order on
the ground that it did not award any cost while allowing the application.

8. Applicability of Limitation Act

On applicability of the Limitation Act, see comments under section 17.

9. Review by the Appellate Tribunal

On the power of review by Tribunal or Appellate Tribunal, see comments un-
der section 17.

Any fee levied and collected for preferring, before the com-
mencement of the Enforcement of Security In-
15 1A. Validation terest and Recovery of Debts Laws (Amend-
of fees levied ment) Act, 2004, an appeal to the Debts Recov-
ery Tribunal or the Appellate Tribunal under
this Act, shall be deemed always to have been levied and collected
in accordance with law as if the amendments made to sections 17
and 18 of this Act by sections 10 and 12 of the said Act were in
force at all material times].

39. IV (2009) BC 17 (DRAT).

40. II (2009) BC 633 (Mad on
; BC 57 (DRAT. ).
Recovery of Debts Laws (Amendment) Act, 2004
2 Ins.nals Pita cetbent of Security Interest and
(30 of 2004), s. 13 (w.e.f. 11-11-2004).
\i44 See. 186 Part li—Chap. Hl—bnforcement af Security Interest

COMMENTS

This section was required only to ratify the levy of lees since the provision for
levying of fees was inserted only by the 2004 Amendment. This Seclion Is Lo Tal
ify the levy of fees for all appeals and petitions filed before the effective date of
the 2004 Amendment.

Any borrower residing in the State of Jammu and Kashmir and

aggrieved by any order made by the Court of
“[S. ISB. Appeal © District Judge under section 17A may prefer an
high Court i) Se appeal, to the High Court having jurisdiction
- over such Court, within thirty days from the
date of receipt of the order of the Court of District Judge:
Provided that no appeal shall be preferred unless the borrower has de-
posited, with the Jammu and Kashmir High Court, fifty percent. of the
amount of the debt due from him as claimed by the secured creditor or
determined by the Court of District Judge, whichever is less:
Provided further that the High Court may, for the reasons to be
recorded in writing, reduce the amount to not less than twenty-five
per cent. of the debt referred to in the first proviso}.
COMMENTS
This section is intended for limited cases of Jammu and Kashmir where the
first application under section 17A goes to a District Court. The provisions of
pre-deposit have been made applicable for this provision also.
“[(1) Where an application or an appeal is expected to be made or has
been made under sub-section (1) of section 17 or sec-
S. 18C. Right to tion 17A or sub-section (1) of section 18 or sectio
18B,
n
lodge a caveat the secured creditor or any person claiming a right to
appear before the Tribunal or the Court of District
Judge or the Appellate Tribunal or the High Court, as
the case may be, on the ing of such icati
uninieoed tate Sennen Ot SEPSM, Any leten 8
(2) Where a caveat has been lodged under sub-section (1),—
(a) the secured creditor by whom the caveat has been lodge
d (hereafter in
this section referred to as the caveator) shall serve notic
e of the caveat by
registered post, acknowledgement due, on the person by whom
tionhasbeenorisexpected tohemade under sub-section (1p
oe

43. Ins. by the Enforcement

of Security Interest
gg, oct 200), Bet l-liien and Recovery of Debts Laws (Amendment) Act. 2004
. Section 18C imserted by the Enforcement of Security
ity Interest
ment) Act, 2012 (1 of2013), s. 7 (w.ef. 15-1-2013. and Recovery ofDetss Laws (Amend-
 Right to lodge a caveat
Sec.18C 1145
1 (b) any person by whom the caveat has been lodged (herea
fter in this sec-
tion referred to as the caveator) shall serve notice of the caveat
by registered
post, acknowledgement due, on the person by whom the applic
ation has
been or is expected to be made under sub-section (1).
(3) Where after a caveat has been lodged under sub-section (1), any appli-
cation or appeal is filed before the Tribunal or the court of District Judge or
the Appellate Tribunal or the High Court, as the case may be, the Tribunal
or the District Judge or the Appellate Tribunal or the High Court, as the
case may be, shall serve a notice of application or appeal filed by the appli-
cant or the appellant on the caveator.
(4) Where a notice of any caveat has been served on the applicant or the
Appellant, he shall periodically furnish the caveator with a copy of the ap-
plication or the appeal made by him and also with copies of any paper or
document which has been or may be filed by him in support of the applica-
tion or the appeal.
(5) Where a caveat has been lodged under sub-section (1), such caveat
Shall not remain in force after the expiry of the period of ninety days from
the date on which it was lodged unless the application or appeal referred to
in sub-section (1) has been made before the expiry of the said period.]

COMMENTS
1. Purport of the Section:
The Section intends to protect the interests of both the secured creditor and the
borrower, because by filing the caveat the other party will be prevented from ob-
taining ex-parte orders.
2. Who can file the Caveat?
The right to lodge a caveat has been given to the secured creditor or any other
person claiming a right to appear before the Tribunal (u/s 17) or the Court of
District Judge (u/s 17A) or the Appellate Tribunal (u/s 18) or the High Court (u/s
18B), as the case may be. Similar to the usage in section 17, the term “any per-
son” is to be taken of a wide import. However, succeeding words “claiming a
right to appear” restrict the scope of “any person”. Any other person, as such can
include the borrower (including guarantor), subsequent purchasers/mortgagees,
tenants, etc.
3. Time of filing Caveat
The caveat can be filed when an application under section 17 or 17A, or an ap-
peal under section 18 or 18A (drafting blemishes again) is expected to be made
or has been made.
4. Notice of the Caveat
The caveator (i.e. the secured creditor or any person filing the inca has to
give notice of the same to the applicant or the appellant, as the case may be.
and
ntionally, the manner of serving notice, etc. are procedural aspects
areComen y. in the Rules and not in the main Act. The manner of serving the
ionalfor
provided
1146 Sec. 19 Pant lA ‘hap ill Lanfor cement of Securuy Inieresi

limit for serv

notice is registered post, acknowledgement due, however the Gime
ing such notice of caveat has not been specified.
app
to the eal
Cavea tor ss
5. Notice of the application/
Obligation has been cast . {T/Court of ) District
upon the ; authori1ty (DRT/
to
judge/DRAT/High Court) before which the application/appeal has been filed
give notice of the application/appeal to the caveator,
6. Validity of the Caveat
The validity period of the caveat is ninety days from the date the same was
filed.
7. CPC rules on Caveats
Section 148A of the Code of Civil Procedure deals with caveats, Order XL-A
contains procedural matters.

“{S. 19 Rightof bor — If the Debts Recovery Tribunal

or the Court
aoe ice nad come, Of District Judge, on an application made un-
noon le der section 17 or section 17A or the Appellate
Tribunal or the High Court on an appeal pre-
ferred under section 18 or section 18A, holds that the possession of
secured assets by the secured creditor is not in accordance with the
provisions of this Act and rules made thereunder and directs the
secured creditors to return such secured assets to the concerned
borrowers, such borrowers shall be entitled to the payment of such
compensation and costs as may be determined by such Tribunal or
Court of Distri Judgector Appellate Tribun or al
the High Court
referred to in section 18B.] ee Yr
SYNOPSIS
1. Amendments
in 2004 and lapses............. 1] 4. Instances
where the sale
2. Compensation
inwhatkindof cases. . 1147 5. Instances where the tale wa ma 4
anproperty wastere the possession
restoredtothe of the 1147), 000i
borrower... EO BOWE oii csessssstiecs
tttetasusetnnenncasntin 114%

COMMENTS
This is an important safeguard and is a
well-founded
not be predators: if lenders act in an irresponsible naeeraprinci
nda
:
assets oftheborrowers, the borrower mak
n ben
e atien Ge
may see k compensation and costs
1, Amendments in 2004 and lapses
The amendments made in
2004 intend to take care
proceedings under section 17/
17A are applications and th the
S
o

“\areappeals, andalsointend ose onde’ see

tocover thenewly inserted sectio
ns 17 and
45. Subs.
by the of Security 3
(30of2004).
5.14(wef 11-11-2008), COVEY OfDebits Laws(Amendment)
Act,2004
 Instances where the possession of the property, etc. Sec. 19, Syn.3 1147
I8A. However, a significant lapse remains—what if the DRT
or the DRAT
hold that the takeover of business under section 13(4)(b) was wrongf
ul? The
compensation is all the more the more deserved in case of a takeover of man-
agement.

2. Compensation in what kind of cases

Since the measures under section 13(4) include sale of the asset as well, it is
natural that the sale of the asset, particularly the sale price, will also be a matter
of dispute between lenders and borrowers and will come for appeals before
DRTs. If the borrower succeeds in establishing that the sale made by the lender
was not at a fair price, there might be a scope for seeking compensation. Appar-
ently, this section is not applicable in such a case, since this section only deals
with cases where the possession was found to be unauthorised. However, inher-
ent powers of the Tribunals to adjudicate on matters also include powers to order
compensation, or at least to order costs.
Note that there is a requirement in the Enforcement Rules that the seller will try
to ensure the maximum sale price.
The author is of the view that in case of an attempted takeover of management
that is reversed by the authorities, a compensation must be forthcoming, despite
the lack of express provision in the law.

3. Instances where the possession of the property was restored to

the borrower
e@ In Arun Jagannath Gedam v. State Bank of Hyderabad ° it was held
that there was no creation of mortgage in favour of the bank and all that
the borrower had done was to write a power of attorney in favour of the
bank authorising the bank to create a legal mortgage in its own favour.
As no such mortgage was ever created, there was no security interest in
favour of the bank and hence, enforcement action could not be taken.
The issue, whether the placing of title deeds with the bank itself created
an equitable mortgage which was enough to take action under this law,
was never discussed by the DRT.
ai ) Lid.”’, the
e In Cyril Kotian v. The Bharat Co-operative Bank (Mumb
under section
DRT Mumbai struck down a possession where the notice beg
demanded earlier
13(2) had substantially increased the amount
the Tribunal also a
roughly Rs. 10 lacs to Rs. 62 lacs). In this case,
500/- per day from the
manded the bank to pay compensation of Rs.
ing possession. It is not
date of taking possession to the date of return
lic or actual.
clear whether the possession was only symbo

o
ee A e
46. 1 (2005) BC 217 (DRAT/DRT).
47. IV (2004) BC 175 (DRAT/DRT).
1148 «See. 19, Syn. 4 Part l—Chap. Ll Enforcement ofSeourity Interest

4. Inst ce
the sale
wherean strucksdown

e In Gopal Krishna Bhasin v. State Bank ofPatiala, the sale was struck
down by the DRAT on the ground that there were discrepancies in the
address of the property in the public notice, and that the price received
from the auction was low considering the value of the property in the
area.

@ In Mahavir Plantations Lid. v, ICICI Bank Lia.””, the DRAT at Chennai

held that as notice to the guarantor had not been given under section
12), the entire proceedings had been vitiated, and, therefore, the sale
was struck down.
@ Cybaba Netscripts vy. Mahesh Sahakari Bank Lid. Pune”, the Tribunal
set aside a sale where the sale was made at a price substantially less
than the reserve price, without the consent of the borrower,

5. Instances where the sale was not struck down

In Asset Reconstruction Company (India) Lid. v. Kumar Metallurgical Corpo-
ration India’, the question of adequacy of stamp duty on assignment of the Joan
by the original lender to ARCIL, the reconstruction company ing the se-
cured loan in the present case, was raised. The DRAT Chennai refused to con-
sider this contention, holding that “if the respondents have any grievance on that
count they may agitate that, if they are so advised, in the appropriate forum. They

have a right against the borrower isnot properly stam

ped quasi-judicial author
itycannot giveregard totherights ofthesecured
lender, ceitcannot take into
evidence the document by which the secured lend
er claims to have derived this
 CHAPTER IV
CENTRAL REGISTRY

SYNOPSIS
1. Waking up after 9 years... eee 1149) 3. General philosophy of registration
2. \Eauee Wee ic 1149 FOQUITCINCIES=. fee to tv. i eee 1149

COMMENTS

1. Waking up after 9 years

At the time the last edition of the book was published, this entire Chapter was
dormant—the provisions had not been given effect to.
Now, the Central Registry has been set up by the name of Central Registry of
Securitisation Asset Reconstruction and Security Interest of India (CERSAD)! in
the form of a company licensed under section 25 of the Companies Act, 1956;
and has been made functional since March 2011, i.e. almost after 9 years after the
enactment of the SARFAESI Act, 2002.
The Company is a Government Company with a shareholding of 51% by the
Central Government and select Public Sector Banks and the National Housing
Bank are also shareholders of the Company.

2. Land Titling Bill

The Department of Land Resources has mooted a proposed legislation called
the Land Titling Bill. The Bill provides for complete reform of land records, in-
cluding registration of mortgages. If the said Bill gets enacted and mortgages are
registered under that Act, the registration provisions of this Act, at least as re-
gards immovable property, will become infructuous. Hence, it seems likely that
this Chapter may not be enforced at all.

3. General philosophy of registration requirements

The underlying motive of provisions requiring registration of ee nie
8
is to serve the purpose of perfection, that is, the security interest 1s taken 7
y ape +:
declared to the world at large and, therefore, is a valid claim on propert
the basis for p
just a claim against a person. Registration has also been used as
fection.

. th ‘
(accessed on 10" September, 2013)
1. Website of CERSAI: https://www.cersai.org.in/

1149
 Part 1—Chap. 1V-—-Centnal Registry
1150 §6Seection 20
but this law, being a combo
Registration of security interests Is understandable,
tion and asset reconstruc
piece of legislation, deals with registration of securitisa itisation
as well. There of a secur
is no point in registravon
ion tansactions
on of transfer of re
transaction—there might be some sense though in registrati
for details, notes
ceivables that accompanies a securitisation transaction. See,
be low

(1) The Central Government may, by notification, set-up or cause

to be set-up from such date as itmay specify in
5 20 Central Reestry such notification, a registry to be known as the
Central Registry with its own seal for the pur-
poses of registration of transaction of securitisation and recon-
struction of financial assets and creation of security interest under
this Act.
(2) The head office of the Central Registry shall be at such place
as the Central Government may specify and for the purpose of fa-
cilitating registration of transactions referred to in sub-section (1),
there may be established at such other places as the Central Gov-
ernment may think fit, branch offices of the Central Registry.
(3) The Central Government may, by notification, define the ter-
ritorial limits within which an office of the Central Registry may
exercise its functions.
(4) The provisions of this Act pertaining to the Central Registry
shall beinedditien so and astlsdobsaation afhet oftheeeoet
sions contai in the Registrat
nedion Act, 1908 (16 of 1908), the
Companies Act, 1956 (1 of 1956), the Merchant Shipping Act, 1958
(44 of 1958), the Patents Act, 1970 (39 of 1970), the Motor Vehicles
Act, 1988 (59 of 1988) and the Designs Act, 2000 (16 of 2000) or any
other law requiring
registration of charges and shall not affect the
Priofori ty
charges or validity thereof under those Actsor laws.
SYNOPSIS
a © Registry 1150) a Vist
1.

will beregintered
a
-

& Aste NE...

osies ssa 145)
+i Fe I Cees eteatnieaienman 1152

COMMENTS
1. CERSAI and the Central Registry Rules
; As an "ce Registry und
er the Act has been established vid
ta all caer 2011, with e Notifi
jurisdiction of the same over the
aoe
y. ae sak J Vv entire coun.
me pany named Central Registry of
Reconstruction and Security Inte Securiti-
under the superintendence and dir rest of India (C ERSAT) vali
ection of the Central Registrar app ne
ointed by the
 Central Registry
Sec. 20, Syn.3 1151
Government of India. Simultaneously, vide anoth
er Notification dated 31"
March, 2011, the Government has notified the SARF
AESI (Central Registry)
Rules, 201 1°.

2. An innocuous provision
The relevance of this section, apart from being merely informational,
is frus-
trated by the law words of sub-section (4) that the registration, or
non-
registration, of the matters registrable under this section shall neither affect the
priority nor the validity of any charges. Likewise, it is unlikely that the validity of
any securitisation transaction, or any transfer of asset for reconstruction, could be
affected by the non-registration. This section was apparently modeled after Arti-
cle 9 of the UCC of the United States wherein registration of security interests
leads to perfection. Section 9.302 requires a financing agreement to be filed for
perfection, and perfected security interests generally take precedence over unper-
fected interests. The same is the position under the Companies Act. Section 77 of
the Companies Act, 2013 places a blanket requirement for registering all charges.
If a charge is not registered, it shall not be taken into account, which in the opin-
ion of author is not different from voiding the same. That is, the charge loses its
validity if it is not registered’. There is a basic presumption in cases where regis-
tration is made mandatory by law: an outsider is entitled to ignore what is not
registered.
In fact, registration requirements, if not coupled with an impact on the priority
of the charge, would be meaningless, even for informational purposes. As a mat-
ter of fact, all registration requirements are meant for public information, but the
lack of such public information affects the priority of the charge. It would not be
difficult to understand why registration and priority must go together. Let us say,
I create a charge in favour of A and do not register it. Yet another lender B looks
at the registry records and finds the asset is clean, and lends against it. Unless B’s
charge, which is the first registered charge, is prior, B can simply be misled by
the information about the registry records. |
Similarly, registration of transactions of securitisation is normally accompanied
by a true sale treatment. For instance, in Italy, securitisation transactions are per-
fected by notification in the Italian Official Gazette. If the transaction is so noti-
fied, it is guaranteed a true sale treatment. This law says nothing as far as true
sale treatment of securitisation transactions is concerned. In any case, the regis-
tration, or failure thereof, has no impact.

3. What all will be registered

of secu-
The section provides for the Central Registry to register transactions ty intere st
ritisati on, transactions of asset reconstruc tion, and “creation of securi
of asset reconstruction —
under this Act. There is no such thing as “transaction

25041 1.pdf (accessed on 10th September, 2013).

2. http://rbidocs.rbi.org.in/rdocs/Content/PDFs/CERR ds | to Section 125 of the Companies Act, 1956
ponds
3. Section 77 of the Companies Act, 2013 corres id ty as per the pro-
and an unregistere d charge loses its validi
egistered
i notified as yet, and therefore
SS eon 77 ofthe Companies Act, 2013 has not been
updated as on 13th September, 2013).
has not come into effect. (Information
 1152 See. 21 Part l—Chap. 1V-—Central Registry

so. these words might be taken to mean, “wansfer of financial assets for the pur
pose of asset reconstruction”.
The words “creation of security interests under this Act” are confusing: this
law deals only with enforcement of security interests and not their creation. Secu:
rity interests are created by mutual agreement, and not under this law. Further,
the Registry will also register particulars of assignment of receivables under the
Factoring Regulation Act, 2011 (see later),

4. Sub-section (4)
Sub-section (4) clarifies that the registration requirements under the several
statutes mentioned therein, as also those not so mentioned, shall remain unat-
fected by this law. In other words, the registration under this law shall be addi-
tional, and not alternative.
CERSAI, in its letter dated 11" April, 2011 addressed to the institutions cov-
ered under the SARFAESI Act, clarified that any registration with the Central
Registry under the SARFAESI Act is in addition to the existing registration re-
quirements under various laws. In view of section 20(4), the validity of the
charge or mortgage and the priority to such charge or mortgage is not to be de-
cided in accordance with the provisions of the SARFAESI Act. Such validity and
priority has to be decided in accordance with the law under which the charge or
mortgage is created and registered if required.
The last words of sub-section (4) take away the sting of this law. Non-
registration under this law can only have a penal consequence, but does not in
any way affe the priority
ct of the charge. As mentioned earlier, this may rather
lead tomisleading information than be of any use to the inquisitive, since what is
not registered may be presumed not to exist.

(1) The Central Government may, by notification,

appoint a per-
S. 21. Central Regis- conforthe registration oftransac-
purpose of
relating to securitisation, reconstruction
re of financial assets and security interest created
Registrar over properties, to be known as the Central

inS 1S an administrati
COMMENTS
> :
createtheregistration machinery ’ om. designed to allow the Central Registrar to
 Filling of transactions of securiti
sation, etc.
Sec.23 1153

(1) For the purposes of this Act, a record called

the Central Reg-
4 Regist wie: ister shall be kept at the head office of the Cen-
satis ae onal Big tral Registry for entering
the particulars of the
tion and security inter- Wansactions relating to—
est, transactions 4% 3
(a) securitisati i
on of financial assets;
(b) reconstruction of financial assets; and
(c) creation of security interest.
(2) Notwithstanding anything contained in sub-section
(1), it shall
be lawful for the Central Registrar to keep the records wholl
y or
partly in computer floppies, diskettes or in any other electronic
form subject to such safeguards as may be prescribed.
(3) Where such register is maintained wholly or partly on com-
puter, floppies, diskettes, or any other electronic form, under sub-
section (2), any reference in this Act to entry in the Central Regis-
ter shall be construed as a reference to any entry as maintained in
computer or in any other electronic form.
(4) The register shall be kept under the control and management
of the Central Registrar.

COMMENTS
This is also an administrative provision. The only notable feature is that the
Registrar shall maintain a Central Register of securitisation, asset reconstruction
and creation of security interests. The very concept of a central registry implies
searches relating to any company, irrespective of the place of incorporation, can
be made anywhere.
The law allows the Central Register to be maintained in electronic form. Obvi-
ously, given the nature of the register, that is the only convenient form of main-
taining the register.
The particulars of every transaction of securitisation, asset recon-
struction or creation of security interest shall
S. 23. Filing of trans- pe filed, with the Central Registrar in the man-
aan as ge aap ner and on payment of such fee as may be DEE.
reconstruction and crea- A P e °
tion of security interest. Scribed, within thirty days after the apis*
such transaction or creation of security, by the
securitisation company or reconstruction company or the secured
creditor, as the case may be:
|
ided that the Central Regis' trar may allow the
t ling of
filing of the
n thirty
see of such transaction or creation of security withi
of thirty days on
days next following the expiry of the said period
 1154 See. 23 Part li—Chap. IV-—Central Registry

payment of such additional fee not exceeding ten times the amount
of such fee:

SYNOPSIS
1. Piling
of particulars 000000... 1184] 6. Table comparing registration of
2. Securitisation transactions................ 1155 charges under the Companies
Act and
3. Asset Reconstruction transactions... 1156 gE ee 1157
? Creation of security interests............ 1156 7. Dolayed Ging ..ciimvim.
oem dd,..od. 1158
es geag of certain a lars

2011 — Nee iB

COMMENTS

1. Filing
of particulars
This section, coupled with sections 24 and 25, impose an obligation for regis-
tration of transactions of securitisation, asset reconstruction and creation, modifi-
cation and satisfaction of security interests. As mentioned earlier, though the fil-
ing of the particulars of security interests is mandatory, the only impact of non-
filing is the penal consequences under section 27; there is no impact on the valid-
ity ofpriority ofthe security interest. This considerably reduces the reliability
the information filed with the Registrar, because nothing stops an of
unrepistered
security interest holder from claiming priority over a registered
interest
CERin SAI
itsletter,dated 11" April, 2011 made itclear that theobjectholder. ofthe
registration system is to compile data relating to secured
besearched byany person onpayment oftheprescribe transactio ns which can
force security under section 13 of the SARFAESI
d fees. Theright toen-
Act, is not linkedto such regis-
tration. Hence, such enforcement

SPS Ce a eae
can bedone even ifthere is no registration.
Moreover, initially when CERSAI ; —*

sanctioned and coven: wesisting mortgages tosecure loans and advances

tobedoneby way of issuing « notificate sotheCERSAI, butthesameneeds

ha sbeenmadeintheCentral Regist
ry Rules’ #0istodefine“ra
nean ee
4. Insbythe
. BnforcementndofSecurity Interest
=
of
2013),58 (wel 155-2013)
—

st and Recovery of Debt Laws (Amendment) Act, 2012 (1

NO. GSR 310(E) [F.NO.1/1/2013-Recovery},
dated 15-5-2013
 Securitisation transactions
Sec. 23, Syn.2 1155
clude “the transactions which subsisted before the date of
setting up of the Cen-
tral Registry under sub-section (1) of section 20 of the Act”. Furthe
r, it was re-
quired that the particulars of the subsisting transactions should be filed
by the
secured creditors on or before the 30" June without any fee, and after
the afore-
said date, with fee as prescribed under the Central Registry Rules.
As per this section, particulars of the following transactions are to be filed: se-
curitisation transactions, asset reconstruction transactions, and creation of secu-
rity interests. Each of these is discussed below.

2. Securitisation transactions

Securitisation is actually the process that converts assets into securities and is
not a transaction as such. The transaction is the transfer of assets by the origina-
tor for the purpose of securitisation. In several cases, the transfer of assets is not
coincidental with the issuance of securities by the issuer: the transfer might either
precede or succeed the issuance of securities. For instance, the SPV might be ac-
cumulating assets for the purpose of a prospective securitisation. Alternatively,
the SPV might be doing, what in industry jargon is called, a pre-funding transac-
tion or not fully ramped up transaction, where the assets are to be created over a
period of time. Hence, it will be difficult to decipher as to what exactly is the
“transaction of securitisation”. For instance, in case of a revolving assets transac-
tion, the issuance of securities happens at a point of time, and the transfer of as-
sets by the originator is a continuing process, which continues over a period of
time, say, 3 years. There might be a transfer every month. Each such transfer is a
transaction of transfer, and all of them together make it a transaction of securiti-
sation.
As such, it is difficult to reckon the date on which the transaction of securitisa-
tion takes place. Appropriately, since the objective is apparently to keep track of
the transfers of financial assets, the date of entering into the assignment agree-
ment, whether relating to existing assets, revolving assets or future assets, should
be recognised as the date of the transaction. In case of revolving asset deals, the
future transfer takes place in pursuance of the same agreement: therefore, there
should be no need to file any particulars over time.
Will this law require filing for transactions of securitisation, which are not cov-
ered by this Act? Since the word securitisation is defined as acquisition of finan-
cial assets by a securitisation company, it is only the transactions falling pats
the ambit of this law that require such registration. This is yet another drawbac
if an
that would limit the relevance of the information on the Central Registry:
originator has transferred any financial asset other than to a securitisation com-
pany, there is no trace thereof on the Central Registry. -
he transaction of securitisation involves a sale of f1nanci
al assets, and it
particulars of every sale of
is invonenieule that the Central Registry could store of financial assets
institutions. Saleouti
ial institut. ng TIERCE:
financial assets made by a bank/financial
eben tionoi Seagal
yaaasation
of securiti
pean
transact abe
ions, other ensuring true sale treat-
than forponer
registra use.
ot be of much
ment to registered transactions, cann
 Part —Chap, 1V-—Central Registry
1156 See. 23, Sya. 3

ons
3. Asset Reconstruction transacti
n:
ansacuon”. The process of asset reqo
Asset reconstruction is much less a “ur be
l assel, may take months, oF may
struction, that is, realisation of the financia with this law is to read it as
complying
years. Hence, the only practical way of t reconstruction” and require
ncial assets for the purpose of asse
“transfer of fina

4. Creof asecu io
trity n
inte rests
irement: one, that it ambit is
There are two points to be noted about this requ
under the Companies Act,
much different from the registration requirements
onthe secured creditor, and
1956 and two, that the obligation toregister here is
not on the borrower.
tered if the charge,
Under the Companies Act, 1956 charges needed to be regis
company, inrespec-
being one of the charges listed in section 125, is created by a
interest” is
tiveof who the creditor is. Under this law, the definition of “security
same
much wider than registrable charges under the Companies Act, 1956, At the
time, the registration is to be done only where the creditor happens to be a “se-
cured lender ” d in this law, that is, a bankor financial institution, How-
as define
rat
ever, section 77 oftheCompanies Act mandates registof ion
all charg es’.
There is no obligation cast upon the borrower to file particulars of the security
interest. The borrower neither stands to gain, nor lose, by non-filing of the par-
ticulars bythe secured lender. At the same time, the secured lender as well has no
particular advant registration. Therefore,
to gain byage it is only the penal conse-
quences under the law that will drive secured lenders to register the security in-

been ;
such as hypothecation of goods or hypothecation of plant and machinery or other
types of mortgage of immovable property etc. no Forms have been prescribed by
the Rules. Hence, as of now, banks and financial institutions are required to file
i os oo et aaa helieiete

RegiAct,
5. an tionof certaincertai particulars under the Factoring Regula-
stra30th
Besides the registrations of transactions under SARF AESI
also actasthenodal registry forregistration of wet Meee tt ay
pe Regulation Act, 2011. The Central Government. |
April, 2011 has made sections 19, 20

_—_— a

Act,ies
eee

6. not
Though theCompan 2013 has
notified. (Information updated as on Yee Segeemce, OES ae le Cee Cig
Securitisation transactions
Sec. 23, Syn.5 1157
file, the particulars of every transaction of assignment
of receivables in his favour
with the Central Registry within a period of thirty
days from the date of such as-
signment or from the date of establishment of such regist
ry. Section 20 of the
said Act enables the inspection of the registered particular
s, and section 21 pro-
vides for penal consequences for non-filing of particulars.

6. Table comparing registration of charges under the Companies

Act and under this Act
Registration of se- Registration of Registrartion of
curity interests un- charges under the charges under the
der this law Companies Act, Companies Act,
1956 2013
Registrable Any security inter- Only charges listed All charges require
charges est, which is all in- in section 125 (4) are mandatory _registra-
clusive and includes to be registered. tion under section
all legal and equita- Pledge of movable 77. This, in turn, will
ble rights in property property is not in- include pledges too.
created for the pur- cluded. Conditional
pose of — security. sales may be _in-
Pledge is not in- cluded if they create
cluded, by virtue of a mortgage.
section 31. Condi-
tional sales are also
excluded by section
eis
Security inter- Only a “secured Any creditor Any creditor
est holder creditor’, primarily
including banks and
financial institutions

Registration The secured creditor | Primarily by the bor- Primarily by the bor-
required to be rower, but the law | TOWeT, but a law
done by permits the lender to | Permits the lender to
register register
Charge shall not be
Effect of non- None, except the The charge is void
against the creditor “taken into account”
registration penal consequences
or the liquidator by the liquidator or
any other creditor
(which, in effect, is
the same as making
the charge void)
 See. 23, Sya. © Part ll—Chap. 1V--Central Registry
1158

7. Delayed filing
of securitisation, asset recon:
The time for filing particulars of a wansaction days, with a power granted to
struction or enforcement of security interests is 30
30 days on payment of an ad-
the Central Registrar to extend the ume by another
similar to Section 77 of the
ditional fee. The provision is analogous to somewhat
been empowered to allow an
Companies Act, 2013 wherein the Registrar has
panies Act, 2013 allows
extension of 300 days. Moreover, Section 87 of the Com
tion of the charge even
the Central Government to extend the time for registra
e is no such power
beyond the time allowed under Section 77’. However, ther
, or the extended
under this law, This will imply that beyond the period of 30 days
ng, and will lead
period of 60 days, a delayed filing will be equivalent to non-fili
to the penal consequences specified in section 27,
it is to be noted that the power granted to the Central Government under the
second proviso is with respect to transactions subsisting on or before the estab-
lishment of the Central Registry, and the power is not extended to transactions
that are entered post the establishment of the Central Registry. Therefore, the
power so conferred upon the Central Government cannot be said to be analogous
to that under the Companies Act, 2013.

Whenever the terms or conditions, or the extent or operation of

Bigs any security interest registered under
Sue lene aa Chapter are or is modified, be the
it shall be
wt dectee Act company or the recon-
©Of the securitisation

This provision is:

is a logical extension of the proviision
sion requiring particulars
creationof securityinteresttobefiled.Notablythisprovision s applicable only
creation Security interests, and not transactions ofsecuritisation orasset re-

The meaning of “modificatio

for thisn” shobe
law s uld
the same
tion 7X10) ofthe Companie
vies s Act, 2013° (corresponding :osadn 133ofGb
ompanies Act, 1956. Under that section, modification has
been construed to
the cecneed aon inthe terms ofthesecurity interests.
If, with the consent of
secured creditor, the benefit of any security interest istransferre
d, that isa
 Securitisation company or reconstruction
company, etc. Sec. 25 1159
case of modification. Therefore, if secured finan
cial assets are securitised or
transferred to a reconstruction company, such trans
fer will be a case of modifica-
tion, and in the case of such a modification, it shall
be the duty of the securitisa-
tion company or asset reconstruction company to send
the particulars of modifi-
cation to the Central Registrar.
The meaning of the last line of the section is that the time limit
for registration
- modification is also 30 days, with permitted extension of 30 days
on additional
ees.
(1) The securitisation company or reconstruction company or the
fn acimereme secured creditor as the case may be, shall give
L Sikh
d . eee
securitisation
ajnf;oarviet| s» - eeeionsia Registr
1
ar of the pay-
tion company or secured Ment or satisfaction in full, of any security in-
creditor to report satis- terest relating to the securitisation company or
ertion of security inter-
the reconstruction company or the secured
creditor and requiring registration under this
Chapter, within thirty days from the date of
such payment or satisfaction.
*1(1A) On receipt of intimation under sub-section (1), the Central
Registrar shall order that a memorandum of satisfaction shall be
entered in the Central Register.]
(2) ‘If the concerned borrower gives an intimation to the Cen-
tral Registrar for not recording the payment or satisfaction re-
ferred to in sub-section (1), the Central Registrar shall on receipt of
such intimation], cause a notice to be sent to the securitisation
company or reconstruction company or the secured creditor calling
upon it to show cause within a time not exceeding fourteen days
specified in such notice, as to why payment or satisfaction should
not be recorded as intimated to the Central Registrar.
(3) If no cause is shown, the Central Registrar shall order that a
memorandum of satisfaction shall be entered in the Central Regis-
ter.
(4) If cause is shown, the Central Registrar shall record a note to
that effect in the Central Register, and shall inform the borrower
that he has done so.

oD ee eee se a a
Recovery of Debts Laws (Amendment) Act, 2004
9. Ins. by the Enforcement of Security Interest and
(30 of 2004), s. 15 (w.e.f. 11-1 1-2004). ion” by the En
intimation” Enforcement
on receipt of such intimat
10. Subs. for the words “The Central Regis ar shall, aeit) Act, 2004 (30 of 2004), s. 15 w.e.f.
sins L aws (Apa
of Security Interest and Recovery of Debts
11-11-2004.
 Part i—Chap. 1V-——-Central Registry
1160 See. 25, Sya.!

COMMENTS

1. Drafting blemishes
section 138 of the Companies
This section has been drafted almost at par with
the draftsman of this law was
Act. 1956''. As they say, copying is also an art, l in sub-secuon (2),
reveals sel
obviously not very facultative in that art, which
ars of creahon, modification
(3) and (4). Under the Companies Act, 1956 partioul
the company. Since satis
and satisfaction of charges are required to be filed by
interests of the lender,
faction of a charge is sometees that directly affects the
ower claims that a
the Companies Act [section 138(2)] provides that if the borr sfaction until after
re is fully satisfied, the Registrar shall not enter such sati
ld not be re-
notifying the lender to show cause as to why the satisfaction shou
corded.
Under this law, the obligation to file particulars of creation, modification and
registration of charges is on the secured creditor himself. It is he, who under sub-
section (1) files particulars of satisfaction of the security interest. In the very next
breath, sub-section (2), in tune with the Companies Act, 1956 requires the Cen-
tral Registrar to notify the secured creditor himself, to show cause as to why the
satisfaction should not be recorded!
As under the Companies Act, 1956 the security interest must be paid in full,
before a satisfaction is recorded. What is satisfaction in full—satisfaction of
charge over an asset, or satisfaction of the entire interest of a secured lender?
Since the idea of registration of security interests is to ascertain the interests ap-
plicable to a particular asset, it should properly imply the satisfaction of interest
relating to an asset.

(1) The particulars of securitisation or reconstruction or

entered in the Central Register of

security interest transac- any person on payment of such fee as may

—_ be prescribed.
_ (2) The Central Register referred to in sub-section (1) maintained
in electronic form,shallalsobeopenduring thebusiness hoursfor
inspection of any person through electron media
ic payment
ofsucks feeosmany beprescribed. ho

COMMENTS
The only notable difference between sub-sections (1) and (2) isthat sub-section
(2) referstotheelectronic register. Fromthisx appenrs danGooCounsel
migttp Raman
men.
ing tw requerement
: | ma! ‘regi
register, and anelectronic register.

ee
™ Analogous provisions have been inserted i .
Section isyettocome intoeffect. (Information
frp iy ek wg ™
 Drafting blemishes
| Sec.26 1161
Electronic register should understandably
be accessible through the net, and
therefore, the question of “open during
business hours” in sub-section (2) should
not arise.

'27(1) The Central Government, on being satisfied—

(a) that the omission to file with the Registra
r the particulars of
any transaction of securitisation, asset reconstruction
or security
S. 26A. Rectification terest or modification or satisfaction of such
by Central Government transaction or; the omission or mis-statement
em op ae of any particular with respect to any such
satdsbietloa: eset transaction or modification or with respect to
any satisfaction or other entry made in pursu-
ance of section 23 or section 24 or section 25 of
the principal Act was accidental or due to inadvertence or some
other sufficient cause or it is not of a nature to prejudice the posi-
tion of creditors; or
(b) that on other grounds, it is just and equitable to grant relief,
may, on the application of a secured creditor or securitisation
company or reconstruction company or any other person inter-
ested on such terms and conditions as it may seem to the Central
Government just and expedient, direct that the time for filing of
the particulars of the transaction for registration or modification
or Satisfaction shall be extended or, as the case may require, the
omission or mis-statement shall be rectified.
(2) Where the Central Government extends the time for the regis-
tration of transaction of security interest or securitisation or asset
reconstruction or modification or satisfaction thereof, the order
shall not prejudice any rights acquired in respect of the property
concerned or financial asset before the transaction is actually regis-
tered.]

COMMENTS
Where Section 23 allows extension of time by the Central Registrar for filing
particulars of the transaction, Section 26A allows extension of time by the Cen-
tral Government for filing particulars of the transaction or for rectifying any ae
statement made earlier. It is pertinent to note that for extension under section za,
there is no need to show any cause for the delay caused; however, section eh
ot ‘4
requires a cause to be shown whether that is accidental, inadvertent, or any
(not only
sufficient cause or that it does not prejudice the position of creditors

;
Interest and Recovery of Debt Laws (Amend
12. Section 26A inserted by the Enforcement of Security
ment) Act, 2012 (1 of 2013), s. 9 (w.e.f. 15-1-2013).
 ry
Part l—Chap. 1V--CGentral Regist
1162 See. 26
). Eve n whe re the re exi st oth er grounds, the extension can be
‘secured’ creditors
itable todoso.
granted provided it isfairand equ ac-
any rights.before the transaction is
As regards, “order shall notprejudice be and infpuctuous, as, in
rather vague and
wally regi ster ed”, the prov sio
isio n
n app ear s to
register does notaffect proper ty rightsor
waycase theregistration offailure to
interest,
rights ofthe person holding security
 CHAPTER V

OFFENCES AND PENALTIES

If a default is made—
S. 27. Penalties (a) in filing under section 23, the particu-
lars of every transaction of any securitisation or
asset reconstruction or security interest created by a secu-
ritisation company or reconstruction company or secured
creditors; or
(b) in sending under section 24, the particulars of the modifica-
tion referred to in that section; or
(c) in giving intimation under section 25,
every company and every officer of the company or the secured
creditor and every officer of the secured creditor who is in default
shall be punishable with fine which may extend to five thousand
rupees for every day during which the default continues.

COMMENTS
This section is dedicated to offences relating to registration of security
interests.
Once again, the confusion between the borrower and the lender is visible in this
section. The filing requirement is an obligation cast upon the securitisation com-
pany, reconstruction company and secured creditor. The words “every company
and every officer of the company” may be taken to relate to the borrower, which
is not the case. The proper words are “every securitisation company/reconstruc-
tion company and every officer of such company .
e
Though the offences committed by securitisation/reconstruction com
ery under this law fot
might easily come to notice, there is no surveillance machin
filing by secured creditors.
is concerned, the chi
As far as the meaning of the word “officer in default”
be deemed fy be impereet °
tion in section 5 of the Companies Act, 1956 may p
s Act, 2013* widens
this law. However, section 2(60) of the Companie
is aware of such aps i omg yy
of the term by inclusion of any director, who
ngs of the Board or participa
virtue of the receipt by him of any proceedi
same.
such proceedings without objecting to the

1163
 Part ll—Chap. V—Offences and Penalties
1164 Sec. 28
y fails to
8 uritisation company er reconstruction compan
— comply with any direction issued by the Re-
ion 12A}
S. 26, Penalties for serve Bank ‘[under section 12, oz ecctcomp
nca-complance © such com and every officer e any
rection of Reserve Bank ee ae default, shall be punishable with fine
which may extend to five oe papas one in the
case of a continuing offence, with an additional fine may @X-
lt
tend to ten thousand rupees for every day during which the defau
continues,

COMMENTS
This is the prosecution section relating to directions of the Reserve Bank.
If any person contravenes, or attempts to contravene or abets the
contravention of the provisions of this Act or of
S. 29. Offences any rules made thereunder, he shall be punish-
able with imprisonment for a term which may
extend to one year, or with fine, or with both.
S. 28. Penalties for non-compliance of direction of Reserve Bank

COMMENTS
This section prescribes general penalty for all mandatory provisions of this law.
The offences under this law shall be dealt with in accordance with the usual
rules relating to offences under statutes. Since the prosecution under this section

23, section 24 or section

orsection 29orany : 25 or under section 28

1. Subs. for the words “ander cect

Debts Laws (Amen section 12° by the Enforcememt of Security Interest Recovery
2 (1969)2 SCC627(197) 1Ra 8.16 (wef. 11-11-2004), c 7
3. Sab.
(1of 13) , Enforce
by the ment Atety
s.1 rwet Te
Imeres t and Recovery of Debt Laws (Amendment) Act, 2012
Congnizance of offence
Sec. 30 1165
complaint in writing made by an officer of
the Central Registry or
an officer of the Reserve Bank, generally or
specially authorised in
writing in this behalf by the Central Registrar
or, as the case may
be, the Reserve Bank.
(2) No court inferior to that of a Metropolitan Magi
strate or a
Judicial Magistrate of the first class shall try any offen
ce punish-
able under this Act.]

COMMENTS
Originally, while the law provided for the judicial forum to try offence
s under
this Act, it made no provision as to the manner of taking cognizance, that
is, who
shall file a complaint for cognizance of offences.
The Amendment Act of 2012 makes it mandatory that the complaint shall be
made in writing by an officer of the Central Registry or an officer of the Reserve
Bank, generally or specially authorised in writing in this behalf by the Central
Registrar or, as the case may be, the Reserve Bank, or else the offences shall not
be taken cognizance of by the Court.
 j The. bis st
» Las

etatd-y bh: Ves *

ari 6 ah. if! '

» oa ihe if i ind tale sessile at

i’ ne itn, dae som pager —ten
| ae Le
gl
a pe an whieh the
si ¢ gee >
catia ih ut oat) seit teabhowne owl eltallie 4
ate Ate somaningee, «niet Woeee ge cai oneins a
- Sikurngeeol taedegeets
6 0h WET OO ee ae wn tea] CHE0 ar , Fattde
at? h
ra Oe es
taes
we wad & a >> (ue OGRE y aie wa es
owns) aft q@ Vado’ «diet paw ahh - be a
aa (ene omer at? ing JastlLoomge

64e | @ “a
 CHAPTER VI
MISCELLANEOUS
specie etd Th
eas isi
provisions of thisi Act shall not apply
this Act not to apply in
ceyain cae (a) a lien on any goods, money or security
given by or under the Indian Contract Act, 1872
(9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any
other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of
the Indian Contract Act, 1872 (9 of 1872);
(c) creation of any security in any aircraft as defined in clause
(1) of section 2 of the Air-craft Act, 1934 (24 of 1934);
(d) creation of security interest in any vessel as defined in clause
(55) of section 3 of the Merchant Shipping Act, 1958 (44 of
1958);
(e) any conditional sale, hire-purchase or lease or any other con-
tract in which no security interest has been created;
(f) any rights of unpaid seller under section 47 of the Sale of
Goods Act, 1930 (3 of 1930);
(g) ‘[any properties not liable to attachment (excluding the
properties specifically charged with the debt recoverable
under this Act)] or sale under the first proviso to sub-section
(1) of section 60 of the Code of Civil Procedure, 1908 (5 of
1908); |
(h) any security interest for securing repayment of any financial
asset not exceeding one lakh rupees;
(i) any security interest created in agricultural land;
(j) any case in which the amount due is less than twenty per
cent. of the principal amount and interest thereon.

ecuri ty Int erest

of Securi
liable to attachment” 7 by the Enforcement
1. Subs. the words “any properties not 2004 (30 of 2004) , s. 17 (w.e.f . 11-11 -2004).
nt) Act,
and Recovery of Debts Laws (Amendme

1167
 See. 31, Syn. ! Part U—Chap. V1-—-Miscellaneous
1168
SYNOPSIS
8 Clause (g) Properties not hable to
Scope AchuMan prov isons 1168]
1108 atlachment under CPC — sonnannnvannenens or 1170
; yw tydy Seer = (hy) Seourity interest for
1108 9. Clause
3. Clause (dD) Pledgeof movables assets upto Ro. | AOD vsnessensseeas A738
financial
4. Clause (ck Creaton of scourty
aircrafts $169) 10, Monetary limitof this law vs, DRI
§. Clause (dy Vessels ame 29 pecuniary JUFsdioHon ........ sovenvensnnsneans woh 3
11. Clause (i): security mierest
6 Clause (ey Conditional sale, hire
purchase. lease, of unsecured contracts 1169 Muara VAN ........:sersceessereeeserennnnrnnenen 1173
12. =o due being less than —_
Amount
7, Clause(fi Rights ofan anpaid seller... 1170)

COMMENTS

1. Scope of the exclusion provisions

) this section is apparently intended to apply only as an exception to
provisions relating to enforcement of security interests, the section is worded as
an exception to the whole of the Act. This is the result of a mistake, which has a
history— mergerthe
of two unrelated Bills.
There is no doubt that this section was not intended to apply in case of securiti-
sation and reconstruction transactions. There is no reason, for example, why un-
secured loans covered by clause (e) above should not be covered by this law.
Historically, there were disjoint bills drafted at the instance of the RBI: one relat-
ing to Enforcement of Security Interests and another relating to securitisation.
During the process of final presentation to the Cabinet, these two got merged into
one, and therefore, section 31, originally intended to apply in context of en-
forcement of security interests, now applies to the whole of the law.
In any case, applying the principles of purposive construction, section 31
should only be taken as an exception to provisions relating to security interests.

Liens
2. Clause (a): Statutory

3. Clause (b): Pledge ofmovables

xcluding pledges was that the rights in case

section provides that ell-
i case
that im ofnon-payme ofthe176
byntsection
prot ecte dof dcty weet The
secoed
 Clause (e): Conditional sale, hire purc
hase, lease, etc. See. 31, Syn. 6 1169
either sue the debtor for money and hold
the goods as a collateral, or he may sell
the goods after giving the pawnor a reas
onable notice before sale. There is no
need to seek judicial intervention in case of
a pledge as the goods are already in
possession of the pawnee. As the essentia
l spirit of this law is to avoid judicial
intervention and allow for faster enforcement of security
interests, there is no
need to extend the provisions of this law to pledges.

4. Clause (c): Creation of security in aircrafts

This and the next section avoid the application of this law
to specific carriers:
aircrafts and shipping vessels. The purpose might possibly
have been to take care
of the specific requirements of air traffic and the need to ensure
that no conflicts
arise between this law and the aircraft regulation.
It may sound surprising that even kites and balloons are aircrafts. The defini-
tion of “aircraft” in section 2(1) of the Aircraft Act 1934 is as under:
“‘aircraft’
means any machine which can derive support in the atmosphere from reactions of
the air other than reactions of the air against the earth’s surface, and includes bal-
loons whether fixed or free, airships, kites, gliders and flying machines”. This
may be particularly relevant in case of fixed balloons used for advertising.
The intent of this law should be to exclude the applicability of the provisions of
this law on aircraft. If a single security agreement creates security interest on air-
craft and other assets, the application of this law to other assets should not be
affected by this clause.

5. Clause (d): Vessels

Section 3(55) of the Merchant Shipping Act, 1958 defines “vessel” as under:
‘vessel’ includes any ship, boat, sailing vessel, or other description of vessel
used in navigation”. The word “navigation” is not defined in the law and is a key
word in the definition of a “vessel”—this word should be understood in its ordi-
nary sense.
“Ship” is defined as under:
“3(45) ‘ship’ does not include a sailing vessel”. Therefore, the definition of
“ship” also needs to be construed in ordinary sense.
Sailing vessel is thus defined: am
“(39) ‘sailing vessel’ means any description of vessel provided with ae
sail area for navigation under sails alone, whether or not fitted with mec ae a
means of propulsion, and includes a rowing boat or canoe but does not inclu
pleasure craft.” | |
The words “pleasure craft” and “boat” have also not been defined in the law.

6. Clause (e): Conditional sale, hire purchase, lease, or unsecured

contracts
an
+e ion.
of considerable confus
The last few words of thisi clause have been a source
no security interest
These words read “or any other contract in which
 Part Chap. Vi-—Miscellaneaus
1170 ~=3>-See. 31, Syn. 7
y to amplify the preceding
-reated”. Actually, these words have been used onl
contracts are excluded
ee + he mag condhional sale, hire purchase and lease
ificatory, and the words noted above
from this law. The exclusion is only clar
amplify the scope of the exclusion,
the scope of this law
exclusion under this clause is merely to clarify that
lease, which are, though, f1-
Ph extend to contracts like hire purchase and
of “security interest” similar
nancial transactions, bur do not result into creation
interest and not security
to a loan. These transactions are based on ownership
those of a security
interest. The rights of an owner are obviously different from
interest holder and are not dealt with by this law. Hence, the noted words “or any
relate to trans:
other contract in which no security interest has been created” only
ity interest 1s not
actions like hire purchase, lease, etc, where creation of secur
inherent.
clarified
In Manokamna Steel Pvt. Ltd. y. Punjab National Bank’, the Court confin
that the words “in which no security interest has been created” are not ed
to the words “any other contract” but also qualify the words “conditional sale,
hire-purchase or lease”. Therefore, a lease will not come under the purview of the
Act, but, if a security interest has been created on lease by deposit of title deeds,
etc. then the Act becomes applicable on such lease. See also Indian Bank v. Nip-
pon Enterprises South & Ors.’ Will the provisions of this law y in cases
where a lease or hire purchase contract is also backed by creation of a collateral
security interest? The provisions of this law do not extend to any security inter-
est, but only to security interest relating to a “financial assistance” as defined in
this law. The view has been upheld in /ndian Bank v. Nippon Enterprises South
& Ors.”. Also, see notes under section 2 for meaning of “financial assistance”.
The exclusion under this section for conditional sales is most unfortunate: the
lawmakers have failed to appreciate that a conditional sale is a way of creating
security interest. In fact, statutorily, conditional sales have been treated as a form
of a mortgage. If ownership interest is acquired or retained in any goods with the
condition that the title will be released if the debt is cleared, it is a conditional
sale, and is a form of mortgage.

7. Clause (f): Rights of an unpaid seller

An unpaid seller has an equitable lien over goods as per section47
ofGovls Acs,Therewns noseedtocecsne ton candies, Daeeee Maier Ge
banks orfinancial institutions sell goods, nor can an unpaid sale betreated as a
“financial assistance or the buyer a “borrower”. This clause is a pure surplusage.

8. Clause (g): Properties notliable toattachment under CPC

This clause has de n been inserted to ensure that the provis
ions of this law do not
disturb the
Procedure actually deale at tne, Country. Section 60oftheCode otCivil
with property liable to attachment and sale in execution
2 Tt(2012) BC 206 Uttarakhand
3. 1 (2012) BC 370 Mad . (DB).
4. 1(2BC0370
1Mad
2.)
(DR),
Clause (g): Properties not liable to attachment,
etc. Sec. 31, Syn. 8 1171
of a decree. The proviso to section 60(1) specifies assets
that cannot be attached.
The reference in this law is only to the proviso to secti
on 60(1), and not the main
section 60(1) itself. However, the essential principles of
section 60(1) should ap-
ply to this law as well. Section 60(1) permits attachment
of all saleable property,
all movable or immovable property belonging to the judgment
debtor, or over
which he has disposing power for his own benefit, whether held
in his name or in
the name of any other person in trust for him. In other words,
beneficial interest
in property is liable to attachment, but legal interest in property where
the holder
merely holds it in trust for a beneficiary is not so liable.
Proviso to section 60(1) provides for exclusion of the following from attach-
ment. These shall be applicable to the present Act as well:
(a) the necessary wearing-apparel, cooking vessels, beds and bedding of
the judgment-debtor, his wife and children, and such personal orna-
ments as, in accordance with religious usage, cannot be parted with by
any woman;
(b) tools of artisans, and, where the judgment-debtor is an agriculturist, his
implements of husbandry and such cattle and seed-grain as may, in the
opinion of the Court, be necessary to enable him to earn his livelihood
as such, and such portion of agricultural produce or of any class of agri-
cultural produce as may have been declared to be free from liability un-
der the provisions of the next following section;
(c — houses and other building (with materials and the sites thereof and the
land immediately appurtenant thereto and necessary for their enjoy-
ment) belonging to an agriculturist or a labor or domestic servant and
occupied by him;
(d) books of account;
(e) amere right to sue for damages;
(f) any right of personal service;
(g) stipends and gratuities allowed to pensioners
—
of the Government or of a
local authority or of any other employer or payable out of any service
family pension funds notified in the Official Gazette by the Central
Government or the State Government in this behalf, and political pen-
sions;
(h) the wages of labourers and domestic servants, whether payable in
money or in kind;
(i salary to the extent of the first four hundred rupees and two-thirds of the
—

reminder in execution of any other than a decree for maintenance:

as 1s li-
Provided that, where any part of such portion of the salary
er continuously or
able to attachment has been under attachment, wheth
s, such ponen
intermittently for a total period of twenty-four month
of a further ps4, “
shall be exempt from attachment until the expiry Ai ip
twelve months and, where such attachment has been made in
hment has continued for
of one and same decree, shall after the attac
 See. 31, Syn. 8 Part i—Chap. Vi--Miscellaneous
biv2
finnaly exempt from atlachment
total period of twenty-four months, be , |
in execution of that decree:
(ia) one-third of the salary in execution
of any decree for maimtenance,
Air Foroe Act, 1950, or
y) the pay and allowances of persons to whom the
applies,
the yoos Act, 1950, or the Navy Act, 1957,
ved from any fund to
(k) all compulsory deposits and other sums in orderi
whthe ic h
Prov ident Funds Act, 1925, for the time being applies in so
liable toattach-
far asthey are declared by the said Act, asnot to be
ment,
any fund to which the
(ka) all deposits and other sums in orderived from
Public Pro vid ent
Fund Act, 1968, for the time being applies, in so far as
they are declared bythe said Act as nottobe liable toattachment;
of the judg-
(kb) all moneys payable under a policy of insurance on the life
ment-debtor;
ions
(ke) the interest of a lessee of a residential building to which the provis
of law for the time being in force relating to control of rents and ac-
commodation apply.
(1) any allowance forming part of the emoluments of any servant of the
Governme nt
or of any servan t company
of a railway or local authority
which the appropriate Government may by notification in the Official
Gazette declare to be exempt from attachment, and any subsistence
grant of allowance made to any such servant while under suspension,
(m) an expectancy of succession by survivorship or other merely contingent
or possib right or le
interest;
(n) a right to future maintenance;
(0) any allowance declared by any Indian law, to be exempt from liablity
to attachment or sale in execution of a decree;
(p) where judgment-debtor is a person liable for the payment of land-
revenu e, any movabl e proper ty which, under any lawfor thetime being
n-<_~perrenetnothame tithengan. 7meet apf. ner pecan
 Clause (i): security interest in agricultural
land Sec. 31, Syn. 11 1173
of the draftsman of this particular piece
of law—a point that we have made all
Over this book.
In the case of Yukta Mookhey : Yukta Mookkey
v. Bank of India ’, the issue of
exemption under section 31(g) was raised, contendi
ng that a leave and license
agreement was also a leasehold interest protected under
the rent control laws, but
was dismissed on factual grounds. In Joseph George v.
Joint Registrar’, the High
Court rejected the contention holding that the exemption does
not apply to prop-
erties specifically charged to the bank.

9. Clause (h): Security interest for financial assets upto Rs. 1 lac
The word “financial asset” has been wrongly used here: the proper word
is “fi-
nancial assistance”. Notably, “financial asset” includes financial assista
nce.
While the latter word means a loan or credit facility, the former word include
s
even the receivables out of the loan. From the word “repayment of any financial
asset’, it may be concluded that the reference is to the loan, and not the loan in-
stalments.
In other words, if the amount lent, or credit facility granted, involved a “re-
payment” (the word repayment only relates to principal) of upto Rs. 1 lac, the
powers under this law cannot be used. There is no bar, however, for recourse to
measures under common law.

10. Monetary limit of this law vs. DRT pecuniary jurisdiction

A question has been raised whether the provision of this law, by implication
empowering the secured lender to enforce security interest where the sum out-
standing is more than Rs. | lac clashes with the pecuniary jurisdiction of DRTs
which have right to admit complaints only where the sum outstanding is Rs. 10
lacs or above. In other words, does it imply that where the claim outstanding is
more than Rs. | lac but less than Rs 10 lac, while the secured lender will have the
right to enforce security interest, the DRT will not have the right to admit the
application filed by the borrower?
This contention was dismissed, rightly so in the opinion of this author, by the
Punjab & Haryana High Court in Kalyani Sales Company v. Union of India’. The
court held the jurisdiction under the SARFAESI Act to be independent of that
under the DRT law. The Kerala High Court came with similar conclusion in Jo-
seph George v. Joint Registrar’.

11. Clause (i): security interest in agricultural land

ined
The word “agricultural land” x has not been defined in thisthi Act; , nor isis 1it defined<
in
in any of the statutes referred to in section 2(2)eIm SP. Watel v. State of ait
the Supreme Court was inclined to go by the normal meaning of the word as fol-

. Order dated 20" ee at

. (2006) 65 SCL 239 (Ker).
1 (DB).
; Getanae 8th December, 2005 : I (2006) BC
. (2006) 65 SCL 239 (Ker).
AIR 1973 SC 1293.
CHIAN
 Part H—Chap. Vi-—-Miscellaneous
1174 See. 31, Sya. 1!
ivating thesoil includ:
io * ‘ylture” means the science and the artofcult the
the rearing of live-stock, farming (in
-* pe ae in of the crops, and Vol, 1, p. 37), So, ordinar:
Edn,
widest sense)”. (Shorter Oxford Dictionary, 3rd for cultivation or larmang. ,
ily “agricultural area” would means an area used
y Kumar Saharoy' that actual UL)
Years ago, the Supreme court ruled in Benounde
theland is important to rstand whether the land 4s agri
ingorploughing of
The Court held that this
A writ was filed claiming land to be agricultural land, al and is not a fit
on
issue may as well be examined by the appropriate DRT
v. Indian Bank’.
case for writ petition. See Model Financial Corporation
d stay on @ piece
togrant
The Kerala High Court in Sosamma Abraham'’, refuse onu
based on some coc
landral t and some
trees
of land. claimed to be agricultu
a certifi-
banana trees growing on it, and held the agricultural officer who gave
cate was merely obliging the borrower.
In Gajula Exim P Lid v. Authorised officer, Andhra Bank’, the High Court
held merely payment of land revenue is not sufficient to establish agricultural
foo
land. In the said case, the court also held that business of seais d -
not agricul
ture.
In Muhammed Basheer v. Kannur District Co-operative Bank Lid," the Ker-
ala High Court held that rubber plantation is not included in the term “agricul-
tural land”.
In Kalpesh P.C. Surana v. Indian Bank '®, it was held that when the secured as-
set is a urban land and situated in an industrial area which is surrounded by build-
ings and there are no agricultural operations being carried out nearby. In such
circumstances whether the nature and character of the land is agricultural, has to
be proved by evidence. It is imperative to give reasonable limit to scope of “agri-
cultural land” found mentioned in section 31(i) of SARFAESI Act. Further
it was
held that, whether provisions of Act are applicable, whether there is any proce-
a NESS ee eee eee eee

Another important question in this context is the point of time at which

the
status of the land (whether agricultural or non-agricultural) is to be determined.
In Sahara Industrie s v. State Bank of India'’, the \and in question was
and Anr.
declared a non-agricultural land on the date when the loan was given by the bank;
however, the same land was declared again as agricultural land, after initiation of
the proceedings for the recovery and issuance of notice under the section 13(2) of
the SARFAESI
SARFAESI ActAct.
canbe The Court held ne a ,
initiased. ee oe

ty aoe) BC774
m BC189Ker.(DB) also Karshaka Sanghatana Aykyavedi v. State Bank ofTranvancore, 4 (2011)
so Karshaka Sanghatana
16. TH(2011)BC189Mad DB) ®$B of Travancore TM(2011) BC110Ker.(DB).
17. TV(2012) BC 44(Uttarakhand),
 Clause (i): security interest in agricultural land
Sec. 31, Syn. 12 1175
12. Clause (j): Amount due being less than 20%
This clause is very unhappily worded, and it is impos
sible to derive any mean-
ing out of this clause. The clause says, “less than 20%
of the principal amount
and interest thereon” without clarifying whether the refer
ence is to principal at
the time of inception of the credit facility. The principal lent
is an amount ascer-
tainable at any point of time—it is obviously different at the incep
tion from that
after certain amortisation. All the more confusing is the refer
ence to “interest
thereon”. If the words “20% of principal” refer to the principal at the
inception,
then, there is no interest at all at the inception of the loan. On the other
hand, if
these words refer to unpaid interest, the same is an accreting amount and is
like a
moving target.
The only possible way to interpret these words is “20% of the principal lent”
and unpaid interest. In other words, the 20% does not apply to interest. If the un-
paid amount is less than 20% of the principal lent, and any unpaid interest, the
provisions of this law are not applicable.
Most of the loan documents contain appropriation rules under which any pay-
ment made by the borrower is first taken to payment of interest and thereafter
principal. This is also the common law in Venkatadri Appa Row v. Parthasarathi
Appa Row'*, the Judicial Committee of the Privy Council had held that upon tak-
ing an account of principal and interest due, the ordinary rule with regard to
payments by the debtor unappropriated either to principal or interest is that they
are first to be applied to the discharge of the interest. The Supreme Court in
Meghraj v. Bayabai'’, reiterated the position of law and held that the normal rule
was that in the case of a debt due with interest, any payment made by the debtor
was in the first instance to be applied towards satisfaction of interest and thereaf-
ter to the principal.
Therefore, it will not be usual that the interest would be unpaid while the prin-
cipal would have been reduced to 20%. However, such a scenario is quite likely
in case of loans payable in instalments.
In a landmark ruling in Central Bank of India v. Ravindra’, the Supreme Court
held that interest debited to the account of the borrower partakes the character of
principal: “...when interest is debited to the account of the borrower on periodi-
cal rests, it is debited because of its having fallen due on that day. Nothing pre-
vents the borrower from paying the amount of interest on the date it falls due. If
the amount of interest is paid there will be no occasion for capitalising the
amount of interest and converting it into principal. If the interest is not paid on
the date due, from that date the creditor is deprived of such use of the money
which it would have made if the debtor had paid the amount of interest on the
date due. The creditor needs to be compensated for deprivation. As held in Paz-
to pi i.
haniappa Mudaliar v. Narayana Ayyar’ , the fact-situation 1s analogous
to i 0
if the creditor has advanced money to the borrower equivalent
expression “the princt-
interest debited. We are, therefore, of the opinion that the

18. (1920-21) 48 IA 150: AIR 1922 PC 233.

19. (1969) 2 SCC 274 : (1970) 1 SCR Ck N
20. 107 Com Cases 416 (SC).
21. AIR 1943 Mad 157.
 Pan U—Chap., Vi-—Miscellaneaus
L176 Sec. SLA

of interest, changed on periodical

pal sum adjudged” ma) include “the amount
actually advaneed, so as to become
rests, and capitalised with the principal sum
an amalgam of principal”.
This. however, does not include penal interest.
Known as restructuring
if the banker-customer agree to what Is commercially
principal and interest as @ re
and legally taken as novalion, Wealing the unpaid
ct, and, therefore,
capitalised principal, this would amount to a new loan conwa
ed loan amount,
the percentage of 20% should be applied on this restructur
Lid.”’, the
in Prafulla Shankerrao Shirke v. The Mahanagar Co-operative Bank
part of
borrower had ¢laimed to have paid the whole of the principal, and a large
an
the interest also, but continuously accruing interest had raised the number to
astronomical sum, A case was raised before the Tribunal that the outstanding
sum was less than 20% of initial principal. While the Tribunal did concur that the
case was a fit case for settlement and the bank had shown readiness to setile the
case, but it refused to grant a stay against the proceedings holding the case to be
premature. No detailed reasoning as to what is the meaning of 20% of principal
and interest, and how exactly have the respective parties to the case done calcula-
tion of interest were recorded by the tribunal.
11) The Central Government may, by notification in the public
interest, direct that any of the provisions of this
§. 31A. Power toex- Act—
empt a class or classes
of banks or financial (a) Shall not apply to such class or classes of
aemeemnene banks or financial institutions; or
_(b) shall apply to the class or classesofbanksor financial institu-
tions with such exceptions, modifications and adaptations,
as may be specified in the notification.
(2) A copy of every notification proposed to be issued under sub-

ti
22. TV
2B Ie (2005
ee) BC BC)60
GO(DRATIORT)._
\ forcement of Security Interest
of 2013), s.11 (wef 15-14-2013) st andRecovery ofDebt Laws (Amendmen
Act, 2012
t) (1
 Offences by companies
Sec. 33 1177

COMMENTS
While section 31 of the Act makes the Act inapp
licable to certain cases. the
newly inserted section 31A empowers the Central Gove
rnment, by way of a noti-
fication, to exempt certain class(es) of banks/FIs from
any of the provisions of
the Act or to make the Act applicable to certain banks/Fls
with certain excep-
tions, modifications or adaptations.

No suit, prosecution or other legal proceedings shall lie agains

t
. any secured creditor or any of his officers or
sg aca eo ia of manager exercising any of the rights of the se-
good °
faith cured creditor or borrower for anythi°ng done
or omitted to be done in good faith under this
Act.
COMMENTS
The good faith clause is normally inserted in laws for the protection of public
servants or officials appointed under the law for action taken by them under the
law. However, it is strange to see that this law provides a similar protection to a
party under a contract.
This section cannot undermine the provisions of section 19, which makes a se-
cured creditor making unauthorised use of powers under this law liable for com-
pensation.

(1) Where an offence under this Act has been committed by a

company, every person who at the time the of-
S. 33. Offences by fence was committed was in charge of, and was
il cibitt responsible to, the company, for the conduct of
the business of the company, as well as the
company, shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render
any such person liable to any punishment provided in this Act, if he
proves that the offence was committed without his knowledge or
that he had exercised all due diligence to prevent the commission of
such offence.
2) Notwithstanding anything contained in sub-section (1), where
cli it
“aPie under thiswet iis been committed by a company
tgp or
is proved that the offence has been committed with the
the part o ea
connivance of, or is attributable to any neglect on
the it ae Dh Se
director, manager, secretary or other officer of
shall also be de
director, manager, secretary or other officer
 Part —Chap. Vi--Miscellaneous
1178 Sec.

liable to be proceeded
to be guilty ofthe offence and shall be
against and punished accordingly.
-—
Explanation.—kor the purposes of this section,
includes a firm
(a) “company” means any body corporate and
or other association of individuals; and
r in the firm.
(b) “director”, in relation to a firm, means a partne
COMMENTS
V dealing with
This section should appropriately have been placed in Chapter
offences and penalties.
such
Provisions like these are found in most statutes, and the only impact of
provisions is to extend the prosecution of the company to the persons responsible
for running the company.
Sub-section (1) contains an important gateway for such person, but this is only
a defence to the vicarious liability for the liability of the company, Where the
section itself provides for prosecution of the company and every officer of the
company, the defence under this section is inapplicable.

No civil court shall have jurisdiction to entertain any suit or pro-

S.. 34. 34. CivilCivil court

con not meses
ecovery tTrine pag
or an Appellate Tribunal ts
—— empowered by or under this Act to determine
and no injunction shall be granted by any court
or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act or under
the Recovery of Debts due to Banks and Financial tions
1993 (51 of 1993). vores -~
SYNOPSIS
1. Ouster of civil jurisdiction... 1178; 5. R other concerned persons
1A. Is ouster
aof civil —
jurisdiction
onlySsafter P Tipe
oeehiieneias
of pow sansssonsonse savbosaarsnsssesace 1185
4 | gfocar ner — woniNinabtitabascbsscosiehe 1181 COMNOEG 0.5 ssiss2s.nsssttsherea.
.eontetadssa 1185
tecagne anecandtnan - 7. Availability
of writ jurisdiction............... 1185
. aunties? tenanmemenen 2| &. me tg: Minted A gee ae
Pp erage verona egg enor omen 1183| 9. Iustrative cases where writ petition
Cases upholding 7
ES eed the jurisdiction
mregprroc tg DP 1187

COMMENTS

1. Ouster of civil jurisdiction

TThis oct — - it Statificsal
civilcourtsandreplacesthesamebythejuri
sdiction ofDRTsandAprellane Te
 Ouster of civil jurisdiction
Sec. 34, Syn. 1 1179
bunal under the RDB law. Validity of a simil
ar provision in context of the RDB
Act has already been tested before the Supreme
Court in Union of India v. Delhi
High Court Bar Association™*. In this case, the
Supreme Court has held that the
objective of ouster of jurisdiction of civil courts is to
replace the same by Tribu-
nals; however, the objective is not to leave aggrieved perso
ns without any rem-
edy at all. The important dictum in law is ubi Jus tbi remedium
.
It is, therefore, important to understand that the ouster of civil
jurisdiction un-
der this section is only to the extent the same has expressly been
replaced by ju-
risdiction of DRTs and the Appellate Tribunal. If there is anything
for which a
remedy before the DRTs does not exist under this law, civil jurisdiction
shall be
available. In Mardia Chemicals, the Supreme Court held thus: “The bar of
Civil
Court thus applies to all such matters which may be taken cognizance of by the
Debts Recovery Tribunal, apart from those matters in which measures have al-
ready been taken under Sub-section (4) of section 13”. In other words, the exclu-
sion of civil jurisdiction is not total—it is only for the matters that may be dis-
posed of by the DRT. For instance, if there is a dispute as to whether a tenancy
has or has not been lawfully granted, or it does or does not exist, or the rights of a
leave and license holder, or a partition suit, the civil courts will continue to have
jurisdiction.
Years ago, the Supreme Court in Sri Vedagiri Lakshmi Narasimha Swami
Temple v. Induru Pattabhirami Reddi’’, held in unmistakable terms, that in every
situation where the legislature has excluded jurisdiction of the civil court, the
exclusion has to be applied only to the extent the legislature intends and not a bit
beyond it. As observed by the Supreme Court: “Any other construction would
lead to an incongruity, namely, there will be a vacuum in many areas not covered
by the Act and the general remedies would be displaced without replacing them
by new remedies.”
In Dhulabhai v. State of MP’®, the Supreme Court laid down elaborate princi-
ples based on which the exclusion of civil jurisdiction on matters covered by spe-
cial courts will be determined:
1. “Where the statute gives a finality to the orders of the Special Tribu-
nals, the Civil Court’s jurisdiction must be held to be excluded if there
is adequate remedy to do what the Civil Court would normally do in a
suit. Such provision, however, does not exclude those cases where the
provisions of the particular Act have not been complied with or the
statutory Tribunal has not acted in conformity with the fundamental
principles of judicial procedure.
2. Where there is an express bar of the jurisdiction of the Court, an examt-
nation of the scheme of the particular Act of find (sic) the adequacy of
the sufficiency of the remedies provided may be relevant but is not de-
cisive to sustain the jurisdiction of the Civil Court. Where there 1s no
express exclus ion, the exa mination of the remedies sand the scheme of
necessary and the
the particular Act to find out the intendment become

24. 110 Com Cases 141 (SC).

25. AIR 1967 SC 781.
26. AIR 1969 SC 78.
 Part l—Chap. Vi-—Miscellaneous
1180 «©.See. Ms, Syn 1
ssary to
the inquiry may be decisive. In the latter Case HtIs Nece
lity and provides for the
soeif ~ statute mihr 4special right or a liabi down that all
her lays
determination of the right or liability and furt
be determined by the
questions about the said nights and liability shall
normally associated
Tribunals so constituted, and whether remedies
statute or not,
with actions in Civil Courts are prescribed by the said
4. Challenge to the isions of the particular Act as ultra vires cannot be
the High
brought before Tribunals constituted under that Act, Even
from the deci-
Court goes into that question on a revision or reference
sion of the Tribunals.
4. When a provision is already declared unconstitutional or the constitu-
tionality of any provision is to be challenged, a suit is open. A writ of
certiorari may include a direction for refund if the claim is clear!
within the time prescribed by the Limitation Act but it is not a compul-
sory remedy to replace a suit.
5. Where the particular Act contains no machinery for refund of tax col-
lected in excess of constitutional limits, a suit lies.
6. Questions of the correctness of the assessment apart from its constitu-
tionality for the decision of the authorities and a civil suit does not lie if
the orders of the authorities are declared to be final or there is an ex-
press prohibit ion
in the particular Act. In either case the scheme of the
particular Act must be examined beca use
it is a relevant inquiry,
7. An exclusion of the jurisdiction of the Civil Courts is not readily to be
inferred unless the conditions above set down apply”.
Note the very significant ruling of the Supreme Court inthe case of Nahar In-
dustrial Enterprises’’. Also, it ispertinent to note that in G.V. Films Lad. v, In-
dian Bank”, the Madras High Court after discu ng Supreme
Court rulings in
the case of Rajasthan SRTC v. Bal Mukund , Indian Bank v. ABS Marine
bay ney pre , aswell as Mardia Chemicals’ case concluded that it can stil]
el there is some scope for moving the civil court notwithstanding
provisions of the SARFAESI Act. 1%
While the general principle of ouster of civil jurisdiction is to ensure that the
scheme oflawindelivery ofjustice byspecialised bodies ismaintained, while at
same time not leaving the citizens without any remedy, there have been sev-
eral attempts on the of borrow : ;
clvd courtsinproceciags aguas Gisian aggrieved persons in running up to
e The provisions of section 34 would prohibit the court below from pass-
ing any order which would amount to restrain or injunct the bank from
taking any action forrealisation ofits outstanding dues from the bor-
rower, in pursuance of the powers conferred to the
rtisation Act.(Tara DeviKelankaw. State Bank Secu-
oftadia")
27. (200 4 CTC
9)74.
28. 1 (2010)BC 222.
29. (200 9)98 =
2 SLT (2009) 1 CLT 307 (SC).
3. (200 6)72
5 SCC
34. TV (2009) BC 266 (Tharkhand)
 Ouster of civil jurisdiction
Sec. 34, Syn. 1 1181
e In Jndian Bank y. Krishnamoorthy”,
where a suit was filed for seeking
decree for permanent prohibitory injuncti
on restraining petitioner bank
from trespassing into plain schedule prop
erty, the Kerala High Court
held the suit as not maintainable and barred
under section 34 of the Act.
On non-maintainability of suit in view section
34 of the Act and DRT
being the only forum to entertain matters under
the SARFAESI Act
also see the judgments in the case of Bank of India
v. Manickam @ Sel-
lakumarasamy’>.
e Considering an appeal against an order of injunction
against banks in-
juncting them from selling away the property in order
to discharge the
debts due to them, the Andhra Pradesh High Court in
the case of
Branch Manager, State Bank of India y. Chinigepalli latha
ngi** held
that the civil court has no jurisdiction to entertain not only a
suit but
also a “proceeding” in respect of any matter which the DRT/DRAT
is
empowered to deal with. It further stated that notwithstanding the na-
ture of the suit and reliefs sought for in the suit, if the proceedings are
initiated by the secured creditor under the Act invoking the provisions
of section 13(4) thereof, the same shall not be subjected to an order of
injunction by a civil court.
e Relying on Mardia Chemical’s case, the courts in this case took the
view that the jurisdiction of the civil court is barred in respect of any
action taken or to be taken in pursuance of any powers under the Secu-
ritisation Act. See Yuth Development Co-Op Bank Ltd y. Balasaheb
Dinkarrao Salokhe”.
Further, to be noted that there is an express bar for passing of any order of in-
junction and the Civil Court or other authority has no jurisdiction to entertain any
suit in respect of any matter, as was held in Central Bank of India & Anr. v. Ram
Chandra Sahoo & Ors.*°. The Court, in the instant case, relied on the interpreta-
tion of the words “other authority” in Rajasthan State Electricity Board, Jaipur v.
Mohan Lal & Ors.*” to conclude that in view of section 34 of the SARFAESI
Act, the Consumer Forums do not have any jurisdiction to entertain the applica-
tion, pass interim order and decide the same finally”®.
1A. Is ouster of civil jurisdiction only after measures are taken under
section 13(4)? .
In B. Shanmugam v. Union Bank of India,” it was contended before the Madras
High Court that before any action or measure is taken under sub-section (4) of
section 13, there would be no bar to approach a civil court. Negating the conten-
tion the High Court held that a full reading of section 34 shows that jurisdiction

32. IV (2007) BC 207.

33. IV (2007) BC 149 (Mad).
34. ILI (2007) BC 35.
35. I1 (2009) BC 646.
36. 11 (2012) BC 311 Orissa (DB).
BC 472 Ker.].
38. Se bisAN Wetted Bank v. Consumer Disputes Redressal Forum, | (2012)
39. IV (2008) BC 104.
 Part Chap. V/i—Miscellaneous
1182 Sec. 44, Sya. 1A
or DRAT is empow-
F civ l ¢ barred in respect of matters which a DRT pursuance of
poh wna in resp ect of any action taken “or to be taken in

shall have no jurisdiction Lo

action may be taken even later on, the civil court
applies to all such
entertain any proceeding thereof, The bar of civil court thus
from those matters
matters which may be taken cognizance of by the DRT, apart
fact, this issue
in which measures have already been taken under section 13(4). In as High
had also been discussed in Mardia Chemicals and the ruling of the Madr
Court is consistent with that of the Apex Court.

2. Civil jurisdiction in case of counter-claims against the secured

lender
In a case arising under the RDB Act, in Indian Bank v. ABS Marine Products
Court recently
Pyt. Ltd.” the Suprem the
e considered whe rCivil
ouster of
the
underontheRDB Act excluded the right of a borrower to file a counter-
jurisdicti
nst
claim agaithe thet
bank in a civil court, It is notable tha RDB Act originally
did not contain a right of the borrower to make a counter-claim or a claim for set-
off agaithe nstbank. While the constitutionality of the Act was challenged before
the Supreme Court in Delhi High Court Bar Association v. Union of India*', one
of the grounds of challenge was the non-availability of the right of the borrower
to make a counter-claim against the bank. Consequently, the right of the bor-
rower seeking a set-off was inserted in section 19. In ABS Marine Products (su-
pra), the borrower sought tofile a suit against the bank for non-release of a sanc-
tioned loan, and the bank contended that such suit be considered only before the
DRT, where the bank’s own case was pending, as the suit of the borrower was
nothing but a counter claim and accordingly, the ouster of civil jurisdiction will
be applicable. This contention was dismissed by the Supreme Court. The Court
ape poses ep lig Nrnpeedbpeapnelie ae ue type ny
a against , there was no question of denial ivil jurisdiction
such a claim. - maton ™
This ruling isclearly applicable as regards proceedings under this Act as well
ane Genial ofcivil jurisdiction islimited onlyforsuch remedies asareavailable
efore the DRTs. Where a remedy is not available for DRTs, the jurisdiction of

jurisdiction under theRDBActis limit

Indust prise
Enterto
rialed only that
claime oftie
thes", bar,Ieoncivilcog
banka
e
/* >e
49. AR 2006
i. AIR De1899:
1995SC op (2006 SK 72.
42. (200 9)74.
4CTC
 Ouster of civil jurisdiction
Sec. 34, Syn. 3 1183
adoption of the measures by the bank under secti
on 14. For instance, if the bor-
rower disputes the right of the bank to claim
the money due, or the right of the
lender to apply section 13 at all, the DRT may not
be a proper forum to agitate
such issues.

3. Civil jurisdiction in extraordinary circumstances

In Mardia Chemicals ruling, the Supreme Court also carved
out a small niche
for civil jurisdiction to a “very limited extent”. While the ruling of
the Court is
explicitly clear—to save the preserve of the judiciary to interfere to stop
an injus-
tice being done in a palpably clear case—circumstances of real-life cases
may not
be clear. An aggrieved borrower may add expenses to his injury to knock
the
doors of the judiciary thinking that his case falls under the “very limited extent”
circumstances pointed out by the Supreme Court, but may be shot down by sec-
tion 34. On the other hand, a borrower may stall the action of the secured lender
making out the case to be one approved by the Supreme Court. In other words,
the gateways of civil jurisdiction pointed by the apex court do not add to the clar-
ity needed for a legislation that directly affects people’s property and hence needs
to be very very clear.
Here are the gateways of civil jurisdiction:
e Action of the secured lender is alleged to be fraudulent,
e The claim of the secured lender is apparently absurd or fraudulent
which does not require any probe,
e Cases, in case of English mortgages, where civil courts may interfere to
disallow a right expressly granted by law and contract. The Supreme
Court cited two rulings.
In State Bank of India y. Jigishaben B. Sanghavi & Ors“, the Court held that
an exception to section 34 can be made only “to a very limited extent” where the
action of the secured creditor is alleged to be fraudulent or where his claim would
not require any probe by virtue of being totally absurd and untenable. Since the
existence of “systematic fraud” was merely alleged and could not be established,
the bank’s action of acquiring possession over the property was held valid”.
In Jaibharat Synthetics Ltd. & Ors. v. State Bank of India & Ors.*°, the view
was reiterated using a different set of words, “...power under the extraordinary
writ jurisdiction under Article 226 of the Constitution of India can be eaten
sparingly and in exceptionally deserving cases, wherein the petitioner has made
out a case that the secured creditor has failed to abide and follow any express
legal provision, rule or regulation which is binding upon him, for which the peti-
tioner is otherwise remediless.” (emphasis ours)

135; A Batch Saheb v. Nariman K.

43. V. Narasimhachariar v. Egmore Benefit Society, AIR 1955 Mad
Urban Co-operative
44 apace Sao ao ty, om also Sushma Suri & Anr. v. Mahamedha

aira Bank & Ors. Il (2012) BC All. 294;} Shree Bharat Co-op. Bank
ad gh is d ui
Bank v. Cana
) BC 361 Guj. (DB).
= i Bh Ee yy ken Lalchand Kothari & Ors. 1V (2011
46. 1(2011) BC 214 Bom. (DB).
 See. M,Sya.4 Part Ll—Chap. Vi--Miscellaneous
1184
civil courts
4. Cases upholding the jurisdiction of
labo ra
ruling te
of| the Madras; High
High C t in Arasa Kumar v. ! Nallam-7
Cour
had brought about was for par:
on cone held that if the suit that the borrower brothers, the determina-
two
tition of the mortgage property among the father and
bank to
psclic the civil court is not ousted in such case, The right of the
growth hee property will wait until such determination. In this case,
the Court discussed various authoron iti point of ousterofcivil jurisdiction,
thees
.
and held as under:
“ it is manifestly clear that the power under section 34 of the Securiti-
sation and Reconstruction of Financial Assets and Enforcement of Se-
curity Interests Act is not absolute and the same is subject to certain re-
strictions. ...If the claim made by the parties is outside the jurisdiction
of the Debts Recovery Tribunal or the appellate Tribunal or any action
taken or to be taken under this Act and also under the Recovery of Debt
Due to Banks and Financial Institutions Act, 1993, and the dispute
raised by the parties cannot be adjudicated by any of the Tribunal or au-
thority, created under the Act or any other Act, the right of the parties to
approach the Civil Court for appropriate relief cannot be deprived and
taken away.”
In Ashok Wamanrao Babhulkar v. Akola Janata Commercial Cooperative Bank
Ltd’, it was held that whether the mortgagor had the right to mortgage the prop-
erty or not, or hereditary disputes over the property fell in the civil realm and the
DRT had no right nor competence to decide such matters. The DRT however
clarified that the Legislature has not demolished rights of the parties available
under general civil law for protection, statutory or otherwise. Civil court's jurisi-
diction to entertain any suit or proceeding is ousted only in respect of those mat-
ters which fall within the exclusive jurisdiction of the SARFAESI Act.
an Ape aon ies Bank or G. Keerthana”’, it was held that the Tribunal
or ate Tribunal is not the comp etto
forum adjudt
en icate a suit for par-
ftom, a IS a suitwhich canbeadjedicaed Only Bya civilcourt The (irmieaien
High Court, however, clarified that the right of the mortgagee bank under the
raperty ontparesinNowayaffected asbecause whoever getsa shateinsecured
~~ a partion, it wi ject to the mortgage in favour of the bank.
Similarly, m Krishna v Kedarnait?” theDivision Boneh ofGeeKaruaha tigh
Court held that while the bank can enforce its security interest for realisation of
prove theyareanecorar eee, aimpartition inthesuitschedule properties ifthey
bobeenclonively dealwihbyGior tee en ae

47. Mi(2005)
BC 127.
S| (2006) BC349DRT/DRAT
- 11(2008)
BC 214:2008/2) K;
58. TH2006)BCO—DB) 38°
 Availability of writ jurisdiction
Sec. 34, Syn. 7 1185
5. Right of other concerned persons to app
roach Courts
In reply to the debate in the Lok Sabha on 21st
November, 2002, the Finance
Minister said the following: “I wish to assure the
hon. Members that employees
will not be affected with this change and no employee
s, either in the management
or a worker, will be affected on this account. The rules
have already been notified
under the Ordinance and the Reserve Bank of India is
already in the process of
issuing guidelines. I wish to make it clear that if between
the lender and the bor-
rower if there is any third party involved, then that third
party can always ap-
proach a court of law.”
This statement by the Finance Minister reinforces the view that
the ouster of
civil jurisdiction under this law cannot be taken as complete. If section
17 of this
law is not treated as conferring power to seek injunction against an action
under
section 13, then civil jurisdiction shall be available.
The Madras High Court in the case of State Bank of India v. Gop
@Gopalan
al ’!
held that a tenant of the premises is entitled to seek injunction even against the
landlord of the property that he should not be evicted except under due process of
law and a suit by him is not barred by section 34 of this Act.

6. Right of appeal against reconstruction companies

As regards the rights of a reconstruction company exercised under section 9,
there is no right of appeal granted to DRTs. In any case, DRTs do not have juris-
diction over reconstruction companies. So, any of the measures taken by the re-
construction companies are appealable before civil courts.

7. Availability of writ jurisdiction

While writ jurisdiction is not legally ousted, it may not be available in particu-
lar instances on account of alternative remedies. Rule of exclusion of writ juris-
diction by availability of an alternative remedy is a rule of discretion and not one
of compulsion. It may be relevant to note that in Whirlpool Corporation’s case
the Supreme Court allowed exercise of writ jurisdiction at least in the following
three situations despite the existence of alternative remedy — (a) where the writ
petition seeks enforcement of any of the fundamental rights; (b) where there is
failure of principles of natural justice; or (c) where the orders or proceedings are
wholly without jurisdiction or the vires of an Act is challenged. The apex court
reiterated the exercise of writ jurisdiction in at least the above said three i
gencies in the case of Harbanslal Shahnia v. Indian Oil Corporation Limited ~.
In M/s. S J S Business Enterprises (P.) Ltd. v. State of Bihar’, the Supreme out
held that mere availability of alternative forum for appropriate reliefs ee a
impinge upon the jurisdiction of the writ court to deal with et cole oe
ever a party has already availed of the alternative remedy while invoking the J

51. Ll (2009) BC 147.

52. AIR 1999 SC 22; (1998) 8 SCC I.
53. (2003)1 SLT 153; (2003) 2 SCC 107.
54. AIR 2004 SC 2421.
 Sec. 44, Sya. 7 Part Li—Chap. Vi-—Miscellaneous
1186
appropriate for the court lo entertain
risdiction uader Article 226, « would not be
the writ Petition

on A Ors. , Stated that

Court in United Bank of India v. Satyawatl Tand
t in the presence of
Areweit petition should notbeentertained bytheHigh CourSeetion 17(1), If the
under
alternative remedies available in the statute itself, as

,
The scope of the exercise of power under Article 226 of the Constitution
d by the decisi on
against the action of bank under the Securitisation Act is covere
of Gujarat High Court in case of Apex Electricals Limited v. ICICI Bank Lim-
ited’. In this decision, after considering various contentions including on the as-
pect of maintainability of the petition, this Court inter alia concluded as under:
“65.6. All financial institutions covered by the Act exercising statutory rights
and the measures as provided under the present Act are amenable to jurisdiction
of this Court under Article 226 of the Constitution of India, but as the present Act
itself provides for efficacious alternative remedy, by way of self imposed restric-
tions, this Court would not entertain a petition challenging the action of the se-
cured creditors of contemplating to undertake the measures as per the section
13(4) of the Act unless the action is perverse on the face of it or it creates absurd
result or situation which cannot be remedied by the forum provided under sec-
tions 17, 18 read with the powers under section 19 of the Act or there is inherent
lack of right/power with the secured creditor.”
In Debasree Das v. State of West Bengal & Ors”, the Court was of the view
that where a bank or financial institute which has not acquired any legal interest
over the property in question and has harassed an Indian citizen by disposing
him
re ged prereset PtBerge Dap
tiy ye ao wh ARFAES] Act
2002, citizen
is not required to go to alternate remedy provided under
section 17 of the Act. y
Lamenting at the numerous writ petitions challenging action of the secured
creditor, the Division bench of the AP High Court in the case of Ashok Sharda v.
Small Industries Development Bank of India® observed that even after rejection
of challenges tothe vires ofthe 2002 Act, hundreds of adventurous petitions are
instituted every year invarious High Courts by the defaulters and their
whet wadaon natsomehow they willbeabletopersuade thecourt tograntinterim
thereby delay finalisation of proceedings initiated by the bank, etc.

SS. (1964)
6 SCR 654.
7 Ben) BC207 (SC).
Jf. also R. Shiva Subramanivan
Central BanikofInifia & Amr Re, State Bank of India & Ors., TV (2011) BC 452 Mad. (DB).
Se, (2003)
2GLR 1785; 8 eaters Sho & Or 12) BC3MOa OB)
rn MH (2011) BC 330 Cal. (DB)
2007 (5) ALD 866; 2007 (5)ALT 404,
~
 Availability of writ jurisdiction
Sec. 34, Syn. 8 1187
8. Illustrative cases where writ petition admitted
In Manoj D. Kapasi v. Union of India®', the Divis
ion Bench of the Bombay
High Court set aside a sale made by the bank as a secured
lender and passed or-
ders under its writ jurisdiction, holding that, while the prope
r remedy was as pro-
vided in the statute, the rule of exhaustion of internal remedy
in the law is only a
rule of self-limitation.
In ndumati Pattanayak v. Chief Manager and Authorised Officer
, Bank of In-
dia’, the Orissa High Court admitted a writ petition and quashed a
notice under
section 13(2) for an equitable mortgage which was barred by limitation.
In Indian Overseas Bank v. G.S. Rajashekaran® the Division Bench of the
Madras High Court while dismissing the writ petition filed by the bank opposing
the preference of application (appeal) of borrower under section 17 of the SAR-
FAESI Act after the writ petition filed by the said borrower has been rejected by
a single judge, so as to render him remediless, held that the High Court under
Article 226 of the Constitution of India could have entertained the writ petition to
determine the case on merits as the provisions of the SARFAESI Act cannot take
away the power of the High Court under Article 226 of the Constitution of India.
In Aradhana Seth v. Presiding Officer, DRT, Allahabad™, the Allahabad High
Court observing that alternative remedy is not absolute bar, allowed the writ peti-
tion in the case where the first remedy provided under section 17(1) had been
taken away in totally arbitrarily manner on the grounds of limitation.
In Chemstar Chemicals and Intermediates v. Commercial Tax Officer®, the
High Court observed that availability of an alternate remedy is not an absolute
bar for entertaining a writ petition. The relief sought in the instant case was not
against the measure of auction taken under Section 13(4) but against the auction
procedure. Hence, even though section 17 provides for an alternate remedy, the
writ was admitted owing to the facts and circumstances of this case.
In Amba Devi Paper Mills Ltd. v. State Bank of India & Anr**., the Court ob-
served that in respect of non-acceptance of representation or objection of the bor-
rower under section 13(3A), the borrower could not prefer an application to
DRAT under section 17 or to the Court of the District Judge under section 17A.
In such circumstances, the writ petition could not be rejected at the threshold on
the ground that the appellant has an efficacious remedy.
In M/S. K.R.S. Latex (India) Pvt. Ltd v. The Federal Bank Limited’, the Kerala
High Court clarified that when a patent illegality arising out of evident non-
compliance of the mandatory procedure is brought out, the exercise of writ juris-
diction is warranted and justified, even if there is availability of alternate rem-
edy.
68

61. III (2005) BC 592 (DB).

62. IV (2005) BC 357 (DB).
63. 1 (2009) BC 421 (DB).
64. AIR 2009 ALD 41.
65. II (2011) BC 164.
66. III (2012) BC fA een 1) BCI
) BC 159 Mad (DB).
a ae iRajiv Subramanian & Anr. v. Pandiyas & Ors., (2012
 Part li—Chap. Vi--Miscellaneous
1188 «©.See. 4, Sy. 8
(2 Chands Union of india & Orvs.”, the Court opined
steps Uiken
popte is we lo be evicted either bythe
= :oe — l asto whether DRT can
under secon 14/4) orsection 14,it is highly doubtfu the DR'T is not expeoted to
vrinto thequestion ofbona fides ofthetenant, since
and is expected toproceed on
Ftlow the elaborate procedure of a civil court a writ pe-
theCourt toentertain
summary basis. Insuch cases, there is nobar for
tition.
a”, the Orissa High Court allowed
Subhas Chandra Panda v. State of Orisswher
tha suintainability ofwritpetition in a case e the proceeding under section
on,
13 of the Act against the petitioner was without jurisdicui
inSyndicate Bank v.Basali a writng ap
petition admitted”'
was pa ,sale
and the
was cancelled in view of the non-speaking response of the bank to the representa-
tion under section 13(3A)”.
In Shyam Kishore Prasad v. Bank ofBaroda™ , the writ petition was allowed
and itwas held that as the petitioners were relieved of their guarantee, the bank
could not proceed against them leaving other mortgaged property for satisfying
the claim.
In Housing Development Finance Corpn. Lid v. State of Maharashtra &
Ors.” , the Court, due to delay on the part of the authorities having jurisdiction
over section 14 (both in the disposal of applications as well as in the execution of
orders which have been passed under section 14), remark that “thised
Court is
constrained to exercise its writ jurisdiction under Article 226 of the Constitution,
in order to ensure that the provisions of the law enacted by Parliament are not
nugatory.” Similarly, in R. Shiva Subramaniyam v. State Bank of India
& Ors. *, the Court allowed the writ petition as because the order passed by the
CJM under section 14 of the Act was totally non-speaking order, and was passed
with non application of mind without even considering territorial jurisdiction.
In M/S. United Steel Allied Industries Private Limited v. M/S. Indian Bank”,
the Andhra Pradesh High Court, when faced with the question about maintain-
ability of the application by the auction purchaser about the validity of the sale,
explained the following and allowed the writ petition:
“But, however, it has been fairly well settled that when the proceedings
before the lower authorities are not properly conducted, the Writ juris-
diction of the High Court is not denied. The substance of the writ is

TV (2012)BC 105 Mad. (DB).

I (2009) BC 443 (DB).
Sean ee (Kar).
also Anil
(2009) Kumar a
BC 311 LCC] Bank & Anr. Wi (2011)BC 172Chhattisgarh.
(201BC 1) 452 Mad. (OB)
P. No. 19297 of2012 and 33655 of 2011, decided on
29.04.2013.
 Illustrative cases where writ petition dism
issed Sec. 34, Syn. 9 1189
the Debt Recovery Tribunal, but, howe
ver in this case the other applica-
tions challenging the action of the Official
Liquidator and the exclusive
Jurisdiction of the Company Court under sect
ion 53] and 531(A) of the
Companies Act are being considered and the benefit of
such proceed-
ings cannot be denied to the auction purchase
r and consequently I hold
that in the particular circumstances of this case, the
application filed by
the auction purchaser can be held to be maintainable.”

9. Illustrative cases where writ petition dismissed

In Kanaiyalal Lalchand Sachdev vy. State of Maharashtra & Ors.”°,
the Su-
preme Court referred to its observations made in City and Industrial
Develop-
ment Corporation v. Dosu Aardeshir Bhiwandiwala & Ors’’:
“Court while exercising its jurisdiction under Article 226 is duty-bound to
con-
sider whether:
(a) adjudication of writ petition involves any complex and disputed ques-
tions of facts and whether they can be satisfactorily resolved;
(b) the petition reveals all material facts;
(c) the petitioner has any alternative or effective remedy for the resolution
of the dispute;
(d) person invoking the jurisdiction is guilty of unexplained delay and la-
ches;
(e) ex facie barred by any laws of limitation;
(f) grant of relief is against public policy or barred by any valid law; and
host of other factors.”’,
Since the facts of instant case did not abide by these guidelines, the writ peti-
tion in the case was dismissed.
In Smt. Krishna Kumar Talwar v. Debts Recovery Tribunal™, the writ peti-
tioner, a 75 year old lady, contended that she had been cheated by the borrowers
in collusion with the bank. The writ was dismissed on account of alternative
remedies.
In Narender Jain v. Union Bank of India”, the court dismissed the writ petition
on the ground that the petitioner, who claimed to be the buyer of a property sub-
ject to an equitable mortgage, was not unaware of the interest of the bank holding
the mortgage.
In Digvision Electronics Ltd. v. Indian Bank®, the Division Bench of the Ma-
dras High Court rejected several writ petitions
iti on the ground o f alternative rem-
edy. (See also Sumantri'Devi v. Canara Bank*', Pooran Lal Arya v. State of Ut

76. (2011) 2 SCC 782; I (2011) BC 698; (2011) II SLT 188.

77. (2009) 1 SCC 168.
78. If (2005) BC 187.
79. III (2005) BC 82.
80. IV (2005) BC 502 (DB).
81. 11 (2009) BC 511.
1190 See, 34, Sym. 9 Part Chap. Vi-—Miscellaneous
; Shankar v.
Projects India Lad v, State of Maharastra’,
anchal’, ATV
Debt Recovery Tribwnal, Yarmala Leela
Union Bank ofIndia’, K. Balakrishna vy. Bank of In-
Krishna Prasad v. Central Bank of India Jai Electronic v, Central

& Ors. ¥. Tarsem Chand & Ors.'®, Rupesh Mines & Mine rals v. State
Manu af Baroda A Ons,”
Bunk ro & Anr.'', Birendra Singh Negi A Ors, v. Bank
Saraspathy Sundarraj v. State Bank ofIndia ", BSK Madh avi v, Kotak Mahindra
Bank Lid. & Ors.'*, RajeKuma nd Sharma v. Allahabad
r ra Bank & Anr, , Kail-
sah Pati Asthana v. State Bank of India & Ors. ® Madhu Shukla v, Bank of

a writ pet-
In O.P. Khannav. Union of India’, the Delhi High Court rejected
tion where the itioner took the ground that the petitioner had been cheated by
bank,
the earlier owner who had created an equitable mortgage in favour of the
to have bought the -
The Court held that the fact that the petitioner claims
erty, which was subject-matter of an equitable mortgage, canno t preju dice
right of the bank as the mortgagee.
In Ravindra Agrawal v. Bank of India’®, the MP High Court held that a writ
court cannot examine the factual issues concerning the notice under section
|3(2), the claim and the counter claims of the borrower.’
tyLid. & Anr. v. State Bank of India & Ors.”’, the Court
Gold Pvt.
In Clari
viewed whether forcible possession was taken by the secured creditor is essen-
tially a question of fact to be determined on the basis of the material on record.
Having regard to the parameters of jurisdiction under Article 226 of the Constitu-
tion, it would only be appropriate and proper if that question is left to be decided
by the DRAT which has a fact finding jurisdiction.
In Atma Tube Products
Limited v. Debt Recovery Appellate Tribunal”,
the
Punjab Haryana High Court dismissed the writ holding that under Article 226, it

Ill(2007)
BC 285 (DB).

2 % (DB)
(DB).

Ml (2012) BC 416 (DB-Bom.). - State Bank of India & Ors., 12012) BC 416 (DB-Bom.,).
SS
BPSSSRIRDETE
cernanewy-
 Illustrative cases where writ petition dismisse
d Sec. 34, Syn. 9 1191
Shall not undertake the exercise to determine wheth
er the debt is barred by Limi-
tation Act or the recovery of the debt has been claim
ed within the period of limi-
tavion.
In UC O Bank v. Dipak Debbarma™, the Gauhati High
Court opined that the
writ petition at the instance of borrower, who has remedies availa
ble under the
Act should not be entertained by this Court in exercise of power
s under Article
226 of the Constitution of India particularly when the writ petitioner has
not pur-
sued their remedies with reasonable diligence.
In Bidulata Maharana y. Bank of India’, where the writ petitioner seeking
to
quash the notice issued under section 13(2) of the SARFAESI Act had also filed
a suit on the same subject matter, the Orissa High Court refused to entertain the
writ on the ground that a person cannot be permitted to approach two forums in
respect of the same subject matter simultaneously.
In Barak Valley Tea Co. v. Union of India*®, when a writ was filed against no-
tice under section 13(2), the Gauhati High Court held that the statutory remedy
cannot be bypassed invoking the writ jurisdiction and in any case the time has not
ripened for initiating any proceeding (followed in Sushil Kumar Agarwalla &
Anr v. State of Assam’, Nihar Ranjan Bhattacharjee y. Union of India**, Noor-
bari Tea Co (P.) Ltd. v. UCO Bank’’). Non-maintainability of petition under Ar-
ticle 226 of the Constitution challenging notice under section 13(2) of the SAR-
FAESI Act due to availability of efficacious alternative remedy under section 17,
was also upheld in Loyal Chemicals Pvt. Ltd. v. Bank of India’’, relying on the
observations made in Kanaiyalal Lalchand Sachdev and Others v. State of Ma-
harashtra and Others”! (supra). See also Kaushar Ara v. ICICI Bank & Anr.”,
R.K. Timber & Anr. v. ICICI Bank Ltd. & Anr.””.
In Kapu China Veerabhadra Rao y. Authorised Officer; Punjab National
Bank”, a writ application filed by a person seeking restraint against physical pos-
session of secured property on grounds of tenancy right was dismissed by AP
High Court for lack of acceptable material relating to alleged tenancy rights as
well as availability of alternate remedy. See also Pushpangadan v. Federal Bank
Ltd.’ where the Court held that the DRT has the jurisdiction to entertain applica-
tion by a person claiming to be a tenant under the borrower or any person under
whom the borrower claims title, and to enquire whether the applicant had any
right, title or interest or possession anterior to the creation of the security interest
and to what extent such interest could be protected. Therefore, reliefs sought un-

24. IV (2007) BC 169.

25. II (2009) BC 182 (DB).
26. III (2007) BC 548.
27. I1 (2007) BC 695.
28. II (2008) BC 14.
95 : AIR 2007 SC 135 (Gauhati).
v. Jigishaben B. Sanghavi & Ors., TV (2011)
30. fwe PBC GG) 226;See also State Bank of India
401 Bom. (DB).
SLT 188.
F} & On I) 2 SCC 90:1 (2011) BC 698; (2011) Il
32. IV (2012) BC 709 All. (DB).
33. IV (2012) BC 622 MP.
34. III (2008) BC 474.
35. II (2012) BC 115 Ker. (FB).
 See. 35, Sya. | Part Li—Chap. Vi--Miscellaneous
1192
of adequate, alternative,
the writ peution were declined owing to availabilityr seouon 17.
DRT unde
Tisviennsemats to make an application to
are serious disputed questions of fact or contentious issues 1 rela:
fore,
oaome w the property, judicial review IS certainly barred, There
f 1s 0 spute, writ
when the title with regard to the secured asset itsel
State Bank of Hy rabad
would not lie, as was held in Durgam Anitha & Anr. v.
the stage of demand
& Ors.”. in the said case, the Court also remarked that at
notice under section 13(2 ),
or posse ssion notice under section 13(4), or at the
amount under
stage of subsequent orders passed by the bank for recovery of the of
the SARFAESI Act’’, no writ petition would lie, the prope r remedy is by way
aggrieved, by filing second
filing appeal under section 17, and thereafter, if so
appeal under section 18 of theAct”.
Whether the account of the borrower had become a non-performing asset or
not, isa question of fact which cannot be adjudicated in a Writ forum and the
appropriate remedy to ventilate such grievance is tofile an under section
17. [See Manokamna Steel Pvt. Lid. v. Punjab National , Munshi Ram
Gupta v. State Bank of India“ and Sahara Industries & Anr. v. State Bank of In-
dia |
A private company carrying on banking business does not perform any public
& Anr.
duty, so itis not amenable to writ jurisdiction, as was held in R.K. Timber
v. ICICI Bank Lid. & Anr.” relying on the pronouncements
made in Binny Lid. vy.
V. Sadasivan”’, U.P State Co-operative Land Development Bank Lid. v. Chandra
Bhan Dubey™.
ald ahaa hvedigedscee brett Sow Fehon so Nw

oeake alteProvisions other law for the time being in force or any in-
w.
SYNOPSIS
I. Non-obstante clause 2200000.0..00....cccccsececovees 11 3. SARFAESI Act and Arbitration and
2. Supremacy of legislation — Supreme Conciliation Act - which law
Court settles
the issue? 00202000. 1194 COREG, oiaiiisiee itasiss
itesndts
ities, 1197

a8 Lid. v. Bank ofBaroda & Ors. 1V(2011) BC 35 All. (DB)), where

the
JonTea” 17: anappeal maybefiled bytheborrower after theaction hasbeen
. v. Bank of Baro & da
Ors. Wi (2012
v.Ht(201
Kotak2) Mahi
BCndr,
206 Uae Lad.& Ors
, . 1 (2013) BCAP 24(DB)Ye
j.494); Madhavi
(CN). =i So
Hi(2012) BC 331.
TV (201BC 2)44
TV (201 BC 2)
622 MP
2005 VI SLT)602.
# (1999) T SLT 27; I (1999) CLT 134 (SC)
ESSSSs
 Non-obstante clause Sec. 35, Syn. 1 1193

COMMENTS

1. Non-obstante clause
The meaning and impact of a non-obstante clause have been discussed by the
Supreme Court in many cases. A non-obstante clause confers a power to the law
to the effect that if any thing comes in the way of enforcing the provisions of this
law, such that the provisions of the law cannot be given effect to, then what
comes in the way must be sacrificed. It is only inconsistent provisions that will
be sacrificed, and not something that can be complied with without militating
against the law in question. .
There are lots of modern laws that contain non-obstante clauses, which have
come before courts on several occasions. There are several laws containing con-
flicting non-obstante clauses. In such cases, the general rules are as under:
e A special law will override a general law. As far as enforcement of se-
curity interests is concerned, this law is a special law.
e Where there is more than one special law, and each has an over-riding
clause, a later law will prevail over the one that is older in time.
Several Supreme Court rulings in this regard make an interesting reading.”° In
2005, the Supreme Court reviewed an alleged conflict between section 529/529A
of the Companies Act and section 29 of the SFC Act, and in the process, also
passed rulings relating to the powers of DRTs in case of companies in liquida-
tion.
In Gaurangbhai Bipinbhai Pandya v. Bank of Baroda*’, while deciding the
question whether the bank would be entitled to enforce its right of lien under the
Contract Act, read with the agreement of deed of guarantee in view of section 37
of the Securitisation Act, the Gujarat High Court discussed the ambit and over-
riding effect of section 35 in a lucid manner:
“22. If section 35 of the Securitisation Act-is read with section 37 of
the Securitisation Act, there cannot be any second view than that of the
Securitisation Act, has the overriding effect over any other law for the
time being enforced, if anything is inconsistent with the Securitisation
Act. Therefore, if any rights are available other than under the Securiti-
sation Act, then they are saved. If the rights arise under the Securitisa-
tion Act itself, the Securitisation Act is to be given precedence, and
such rights would prevail over the other rights. When it is a matter for
enforcement of the rights under the Securitisation Act, it would equally
be a matter for discharging of the obligation under the Securitisation
under the
Act, and the reason being that rights of the secured creditors

Maharashtra Tubes Ltd. v. Sta te Industrial and Invest

ment Corporation of a bat Ld
45. Sit
144; Sarwan Singh v. Kasturi Lal, A
(1993) 78 Com Cases 803 : (1993) 2 SCC Com Cases 64 : (2000) 4 SCC _
Bank v, Canara Bank, (2000) 101
( 1977) 2 SCR 421; Allahabad
ial Co. Lid., (1956) 26 Com Cases 280 : Al
and Shri Ram Narain v. Simla Banking and Industr
¢ SCR 603.
Sth October, 2005 : (2005) 8
46 csp a Corpn. v. The Official Liquidator, order dated
SCC 190.
47. {11 (2009) BC 362.
 Sec. 35, Sym. 2 Part li—Chap. Vi--Miscellaneous
1194
lute but by way of inbuilt
Securitization Act, are not the rights in abso gation as conceived und
obli
mechanism under the Act, it also creates an
rvations and dis-
expressly provided under the Act. in view of the obse , as the secured
nt bank
cussions, the right is conferred upon responde

to the person con-

of section 13(7) to return the residue of the amount
er1s covered for
cerned whose property is sold. Therefore, if the matt
tion Act, the
creation of the right and of obligation under the Securitisa
would prevail over any other rights created under any other law
for the time being in force.”
this Act,
In the above case, reconciling the provisions of sections 35 and 37 of
for maint aining
the High Court rejected the contention of the Respondent Bank
tion cre-
right of lien under the Contract Act, as against the provisions for obliga
ated under the Securitisation Act.
In Pushpangadan y. Federal Bank Lid.”", reading section 35 together with sec-
tion 37. the Court remarked, “When there is no inconsistency, the overriding ef-
fect under section 35 has no application. The overriding effect provided under
section 35 is only to the extent indicated therein... The Securitisation Act is not
intended to destroy the statutory rights vested in persons ...Secu ritisat ion Act
does not contemplate extinguishment of the vested rights of third parties, The
Securitisation Act is not a piece of legislation which destroys the substantive
laws relating to property and the procedural laws in respect of suits and other
proceedings concerning thereto, however, when such laws, whether substantive
or procedural, are inconsistent with the provisions of the Securitisation Act, the
former should give way to the latter, that is all what is intended by section 35 of
the Securitisation Act.”
2. Supremacy of legislation — Supreme Court settles the issue:
State legislations, particularly sales tax legislations contain provisions
witch feechargeis Seatedontiepeabody tw deubitMOBISetywhenta
dena Urdedie, 40ofGo tains ke ee ee
tea n section Securitisation will have primacy over the State

In The Thane Janata Sahakari Bank Ltd. v. The Commissioner

of Sales Tax”
credit facilities were granted toa company by creating equitable mortgage ofits
factory, land and building in favour of the cooperative bank. The company failed
to pay the amount and proceedings under section 13(2) of the Securitisation Act
were imitiated. The possession of movable and immovable were dso

Nippon Enterprises South. oe

andl Nate fam:Csaned Askam Gusediets Copa
 Supremacy of legislation — Supreme Court, etc. Sec. 35, Syn. 2 1195
of the company and, therefore, it could not have taken possession of the
mort-
gaged assets and sold the same. A recovery notice was issued on the bank
by the
Assistant Commissioner for recovery of its dues. A writ petition was filed by the
bank for quashing of the said notice on the ground that there is a conflict between
section 38C of the Bombay Sales Tax Act and section 35 of the Securitization
Act, the latter being a Central legislation, the first charge created by the State Act
cannot have priority over debts of the bank. The Division Bench of the Bombay
High Court observed that if any Central Act provides for first charge, the charge
created under section 38C of the Bombay Sales tax Act is overridden. Conversely
if the Central Act does not provide for the first charge in respect of the liability
under the said Act, the first charge created under section 38C of the Bombay
Sales Tax Act shall hold the field. In the absence of any provision in the Securiti-
sation Act providing for first charge in favour of banks, the High Court con-
cluded that section 35 of the Securitisation Act cannot be held to override section
38C of the Bombay Sales Tax Act.
Though in relation to DRT Act, similar issue was also before the Kerala High
Court in the case of Central Bank of India v. State of Kerala’', wherein the Single
Judge negatived the bank’s challenge by observing that proceedings under the
Kerala Act had been initiated before the issue of certificate by the Debt Recovery
Tribunal and that even if the Tribunal has got exclusive jurisdiction to recover
the amount due to banks, the Tehsildar was not obliged to approach it for recov-
ery of the State dues.
Both the above matters along with other similar matters came in appeal before
the Supreme Court. In a very elaborate judgment per Justice G.S. Singhvi in Cen-
tral Bank of India v State of Kerala®’, the Apex Court on various issues before it
held as follows:
(a) Even though the Central and State legislations have not been enacted
with reference to a particular entry in List III in the Seventh Schedule ,
whether Article 254 will get attracted?
Referring to several of its judgments on the issue, the Apex Court in
Para 14 and 15 of the order held as follows:
“14, The ratio of the above noted judgments is that Article 254
gets attracted only when both Central and State legislations
have been enacted on any of the matters enumerated in List III
in Seventh Schedule and there is conflict between two legisla-
tions.....
15. Undisputably, the DRT Act and Securitisation Act have
Sey-
been enacted by Parliament under Entry 45 in List I in the
Acts have been en-
enth Schedule whereas Bombay and Kerala
54 in List
acted by the concerned State legislatures under Entry
ently, two sets of leg-
II in the Seventh Schedule. To put it differ ent
entries In differ
islations have been enacted with reference to
Article 254 cannot be
lists in the Seventh Schedule. Therefore
a

51. (2009)4SCC 94.

52. 1(2009) BC 705 (SC).
1196 Sec. 35, Syn. 2 Part Li—Chap. V1I-—Miscellaneous

oked se for striking down State Legislations on the

Legisla-
wround thatthesame arein conflict with theCentral
, ot

and Securitisation Act on

(b) Is there any conflict between the DRT Act
one hand and state legislations on the other,
hora of judicial
After an elaborate discussion and referring to a plet
follows:
precedents onthesubject, the Apex Court observed as
“39, If the provision the DRT Act and Securitisation Act are inter
of s
h these lep-
preted keeping in view the background and context in whic
islations were enacted and the sought to be achieved by their
enactm en
it beco mest,
clear that two legislations, are intended to
s,
create a new dispensation for expenditious recovery of dues of bank

grievance made by any aggrieved person qua the procedure adopted by

the banks, financial institutions and other secured creditors, but the pro-
visions contained therein cannot be read as creating first charge in fa-
vour of banks, etc............. In the absence of any specific provision to
that effect, it is not possible to read any conflict or inconsistency or
overlapping between the provisions of the DRT Act and Securitisation
Act on the one hand and section 38C of the Bombay Act and section
26B of the Kerala Act.”
(c) Whether by virtue of non obstante clauses contained in section 34(1) of
DRT Act and section 35 of Securitisation Act, the provisions override
the State legislations?
Observing that the non-obstante clauses cannot be invoked for declaring

qua or affect the proceedings initiated by the secured creditors, the

Apex Court held as follows:
“48. On the basis of above discussion , we hold that the DRT Act and
Securitisation Act do not create first charge in favour of banks, finan-

tained in section 38C of the Bombay Act and section 26B of the Kerala
Act are not inconsistent with the provisions of the DRT Act and Secu-
ritisation Act so as to attract non-obstante clauses contained in section
34(1) of DRT Act or section 35 of the Securitisation Act.”
(d) Whether prior charges created in favour of banks would ail over the
subsequent mortgages created in favour of the State? on
the judgment in Dattatreya Shanker More v. Anand -
taman Datar,” andseveral othercasesrelating topriority ofwatcor
y
legislations ceacnntt.charges, theApex Courtreiterated thatthestate
a cag SER EEE TeSHEN Ge HVE
—————
oo” “ew was reiterated in Pushpangadan v. Federal Bank
11d, 1 (2012) BC 115 Ker
$4. (197 4)
2 SCC 700
 SARFAES] Act and Arbitration and Conciliation Act
Sec. 35, Syn. 2 1197
Besides the above clarif
ications provided by the Apex Court, Courts have also
upheld the supremacy of the legislation over other preva
iling laws, in case the
latter is incon
sistent with the former. In Ram Murty Pyara Lal & Ors.
v. Central
Bank of India & Ors. ”, it was stated that the provisions
of the SARFAESI Act
will prevail in case of any inconsistency of such provision
with any provision of
the Transfer of Property Act and the Code of Civil Procedure.
In Punjab National Bank v. Consumer Disputes Redressal Forum™
, the Court
opined that SARFAESI Act, being a later and special enactment as compared
to
the Consumer Protection Act, will prevail over the latter. The SARFAESI Act
provides for specific remedy to aggrieved persons for challenging proceedings
under the Act. Therefore, if it is to be held that CDRF has also jurisdiction to en-
tertain challenge against proceedings under the SARFAESI Act, that would be hit
by section 34 insofar as that would be inconsistent with the provisions of the
SARFAESI Act.
However, in Kotak Mahindra Bank Ltd v. Balaram Cements Ltd.° ” it was held
that one of the objects of enactment of SARFAESI Act is recovery of debt and
which may be sought to be achieved but it cannot be construed in such a manner
that it negates or nullify statutory provisions of other laws like Transfer of Prop-
erty Act. As per provisions of Transfer of Property Act and Registration Act,
when rights of immovable properties are conveyed, document is required to be
registered and such provisions must be complied with even when rights of im-
movable property are conveyed as a consequence of enforcement of security in-
terest under the SARFAESI Act.

3. SARFAESI Act and Arbitration and Conciliation Act — which law

overrides?
The DRAT-Mumbai in State Bank of India v. Heera Laxmi Contractor Pvt.
Ltd.**, was confronted with the question whether the provisions of the Arbitration
and Conciliation Act would be applicable to proceedings initiated under the pro-
visions of the SARFAESI Act. Explaining the overriding effect of section 35 of
the SARFAESI Act, the Appellate Tribunal held that the provisions of section 35
of SARFAESI Act will have overriding effect over section 8 of the Arbitration
and Conciliation Act which was enacted earlier in point of time. The provisions
of the SARFAESI Act having been enacted later in point of time, surely the leg-
islature can be deemed to have been aware of the earlier enactment and if the leg-
islature had intended that the mandatory provisions of section 8 of the arbitration
law were to prevail over the provisions of the SARFAESI Act, it would have
been so provided in the SARFAESI Act.
Further, section 9 of the Arbitration and Conciliation Act enables the parties to
approach the Court for certain interim measures to protect and secure the amount
v. Mir
in dispute in arbitration. In Sundaram BNP Paribus Home Finance Ltd.

Ul (2011)
<6. Col? 8 i Se tesHDFC Bank Ltd. v. Consumer Dispute Redressal Forum,
BC 346 Ker.]. '
57. Ul (2011) BC 263 Guj.
58. 1 (2007) BC 224.
 Part i—Chap. Vi-—Miscellaneous
119% Sec. 46
invoking secuon Y of the Ar
2? the Court held that the bank ts not jusufied in proceeded against the mort
already
ote and Conciliation Act, when it has
so, the Court relied on the prince.
gaged property offered as security. In deciding
s Lid, v, Orissa Manganese and
ple laid by the Supreme Court in Adhunik Steel
g of section 9 is to be
Minerals Pve. Lid”, wherein it was held that thetn
Specific Rehet Act and is
based on the principles governing the provisions of the
e Code,
not totally independent of the provisions of Civil Procedur
being in force” in
it further stated that the words “any other law for the time
of the ratio of the
section ¥7 of the Act would not make any difference in view
P. Lid. v. N.K. Modi,
Supreme Court decision in the case of Fair Air Engineers
al Credit So-
and in the case of Secretary, Thirumurugan Cooperative Agricultur of
ciety v. M. Lalitha”. The provisions of the SARFAESI Act are a step ahead w~
the provisions of the Arbitration Act inasmuch as the banks have been empo
of
ered to act or proceed even faster and more speedily in respect of recovery
their dues by enforcement of the security, The Arbitration and Conciliation Act 1s
mainly intended to apply to the civil cases filed in civil courts, where it takes
years for the recovery of claims of the private parties.
No secured creditor shall be entitled to take all or any of the
measures under sub-section (4) of section 13,
S. 36. Limitation unless his claim in respect of the financial asset
is made within the period of limitation pre-
scribed under the Limitation Act, 1963 (36 of 1963).

COMMENTS
This law is not an escape for limitation. Therefore, wherever any claim is
barred by limitation, a claim under this law shall not be applicable. Notably, un-
der this law, it is only the claim that is affected by the limitation, and not the ac-
tion under section 13.
In Indumati Pattanayak v. Chief Manager and Authorised Officer, Bank of In-
dia,’ the Orissa High Court quashed a notice under section 13() earalioniantine
mortgage which was barred by limitation.
In Sreedharan vy. Indian Bank™ the Court was concerned with the starting point
of time for computation of the period of limitation. The Court said that under sec-
tion 36 of SARFAESI Act: claim in respect of ‘financial asset’ should be made
Sree debe tot oflimitation prescribed. Definition of“financial assets’ in-
>t or receivab Hence,
les.
decree is also a ‘ y claim
to ‘financial assets’ is made on the we saiscell's ne

3. TV (2005)
BC 357 (DR).
64. Til(2011)
BC 407 (Ker),
 Application of other laws not barred
Sec. 37 1199
concluded that the period of limitation for
realisation of a decree starts from the
date of declaring the loan as an NPA.
The provisions of this Act or the rules made ther
eunder shall be
what in addition to, and not in derogation of,
“ Baia, Application of Companies Act, 1956 (1 of the
1956), the Securities
Contracts (Regulation) Act, 1956 (42 of 1956),
the Securities and Exchange Board of India
Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks
and Fi-
nancial Institutions Act, 1993 (51 of 1993) or any other law for
the
time being in force.

SYNOPSIS
1. Whether section 35 has the effect of 2. Protection under section 22 of SICA
overriding section 37 of the Act........... 1200 BG SAKE ALS ACE oes ceccccsateecis-u 1200
3. Proceedings under the SIDBI Act.......... 1203

COMMENTS
While the overriding effect of this law is retained by section 35, the meaning of
this section is that non-conflicting provisions or powers under the laws men-
tioned above shall be complied with, or shall be applicable, in addition to this
law.
The last words “‘any other law for the time being in force” also leads to the
same implication, that non-conflicting laws are not eroded by this law in any
manner. See also discussion under section 35 on the words “any other law for the
time being in force”.
Do the provisions of this section empower the secured lender to enforce reme-
dies under multiple laws at the same time? This question has been raging before
several courts and appellate forums without any clear answer at this time. See
rulings and discussion under section 13. In a case where one secured creditor
proceeded under the SARFAESI Act and another secured creditor took recourse
to the RDDB Act, it was held that section 37 of the Act states that the provisions
of SARFAESI are in addition to and not in derogation of RDDB Act and, there-
fore the overriding effect of section 35 will not be applicable in the instant case.
If a secured creditor is aggrieved by an order passed he has to invoke the provi-
sions of appeal under the relevant law. |
There are a plethora of cases where the courts have reiterated that the provi-
sions of this Act or the rules made thereunder shall be in addition to, and not in
derogation of the provisions of the other Acts as indicated therein. #" ar
Valley Tea Co. v. Union of India” and Kasturi Devi Jain v. Union Bank of India
& Ors.*’.

65. UCO Bank y. Bank of Baroda, \V (2009) BC 41.

66. III (2007) BC 548.
67. 1 (2012) BC 189 MP.
 ~«=-See. 37, Syn. 1 Part 1l—Chap. VI--Miscellaneous
1200

1. Whether section 35 has the effect of overriding section 37 of the

Act.
ides for right of redemp-
Section 60 of the Transfer of Property Act, 1882 prov e sec-
tion of mortgage before a sale is completed by way of registered deed. Sinc
, the right of rede mp:
tion 37 is in addition toand not in derogation of other laws
cted under section 37 of
tion conferred under the Transfer of Property Act is prote FAESI Act is
the SARFAESI Act. If a sale of the secured asset under the SAR
on 13(8), will
already effected satisfying the conditions contemplated under secti
r laws,
such sale by virtue of section 35 of the SARFAESI Act prevail over othe
including the right of redemption conferred under section 60, which is protected
under section 37 of the SARFAESI Act. In K. Chidambara Manickam \
Shakeena™, the High Court held that because a non-obstante clause provided un-
der section 35 of the SARFAESI Act makes it clear that even though there are
inconsistencies to such other rights conferred under any other law for the time
being in force that are protected under section 37 of the SARFAESI Act, the ac-
tion initiated under the provisions of the SARFAESI Act shall have the overrid-
ing effect as per section 35 of the SARFAESI Act because it is a special Act
which aims to accelerate the growth of our country empowering the lenders to
realise their dues from the defaulted borrowers.

2. Protection under section 22 of SICA and SARFAESI Act

Section 22 of the SICA provides protection to a company when an inquiry is
pending or any scheme is under preparation or consideration or a sanctioned
scheme is under implementation, against any initiation or continuation of any
winding up proceedings or execution of such proceedings or distressor any pro-
ceeding of like nature against the properties of the industrial company. There is
no blanket ban on such proceedings, but such proceedings cannot be either initi-
ated or proceeded against such industrial company except with the consent of
BIFR or appellate authority, as the case may be.
The question for consideration, therefore, is whether such protection to a sick
company would be available when a borrower has taken measures to recover
their secured debt under the Securitisation Act. The provisions of section 22 of
the SICA have been considered by the Apex Court in several judgments. A brief
summary of some such decisions is given hereinunder:
(a) Real Value Appliances Ltd. v. Canara Bank”.
fi APex Court in thiscase held thatthelegislativeive intention
is to see
. 28 against the assets are taken before decisions
givenbytheRIFRandtheactionagainstthecompany's assetsmus
ay yed as stated insection 22 till final decision are taken by the

(6) NGEF Ltd. v. Chandra Developers (P.) Ltd”.

Se
ad Mad 108.
(1998) BC 357:
23223(2005) BC 406. (199 8) 3. CLT 1
(2005) 7 SIT Ae
 Protection u/s, 22 of SICA and SARFAE
SI Act Sec. 37, Syn. 2 1201
In this case, it was held that SICA has
a non-obstante clause and is a
special statute and a complete code by
itself. Under section 22, BIFR is
empowered to Issue any direction in the
interest of the Sick Industrial
Company or its creditors or shareholder and
direct the Sick Industrial
Company not to dispose of its assets except with
its assent.
(c) Jay Engineering Works Ltd. v. Industry Facil
itation Council".
In this case the Apex Court reiterated that SICA is
a complete code by
itself and the provision of section 22 has been referred
to as grant of
“statutory injunction”. Explaining the rationale of secti
on 22 of the
SICA, it was held thus:
“....Section 22 of the 1985 Act provides for a safeguard
against im-
pediment that is likely to be caused in implementation of the Schem
e.
Section 22 was also held to be of wide import as regards suspension
of
legal proceedings from the moment, the inquiry is started till after the
implementation of the scheme or disposal of the Scheme under section
25 of the 1985 Act.”
(d) Morgan Securities and Credit Private Limited v. Modi Rubber Ltd”.
In this case, it is stated that the legislative intent behind the promulga-
tion of the SICA is to afford maximum protection of employment, op-
timise the use of financial resources, salvaging the assets of production,
realising the amounts due to the banks and to replace the existing time
consuming and inadequate machinery by efficient machinery for expe-
ditious detection and with a view to securing the timely detection of
sick and potentially sick companies owning industrial undertakings, the
speedy determination by a Board of experts of the preventive, ameliora-
tive, remedial and the expeditious enforcement to the measure so de-
termined and for matters connection therewith or incidental thereto.
In light of the provisions of the SICA and the judicial pronouncements referred
to hereinabove, it appears that a Sick Company is entitled to protection under
section 22 of the Act notwithstanding the SARFAESI Act.
However, in terms of third proviso inserted in section 15(1) of the SICA by the
operation of section 41 of the SARFAESI Act, the proceedings pending before
BIFR abate and the protection provided by section 22 of the SICA is lost. In No-
ble Aqua Private Limited v. State Bank of India’, it was held that the proviso to
section 15 of the SICA as amended by section 41 of the SARFAESI Act will
come into force where a reference is pending before BIFR and not when the pro-
ceedings under the SICA is not at the stage of reference. Where the proceedings
before BIFR have gone far ahead of reference and culminated in an order Nei
BIFR declaring the company a Sick Industrial Company, the Division Benc yor
Orissa High Court held that reference cannot abate since the matter is under
SICA and is not pending in reference before the BIFR.

71. (2006) 8 SLT 320; AIR 2006 SC 3252.

0; AIR 2007 SC 683. .
2008 Ori 103; 106 (2008) CLT 126; 2008 I OLR 702.
23 (Open Beast (DB); AIR
1202 ©See. 37, Syn. 2 Part 1l—Chap. Vi—Miscellaneous

High in Ne-
Court
uhstanding the status of proceeding s before BIRR, the
further ; that a perusal
Py sa Private Limited v. State Bank of India (supra)
ation of any other
of section 37 makes it clear that the same will not be in derog to
been given
law for the time being inforce. Therefore, the protection which has 1985 has not
Sick Industrial Company under a special statute, namel y SICA of
a
been taken away by section 37 of the Seouritisauion Act,
Indus.
However, the Kerala High Court in Integrated Rubian Exports Lid. v.
trial Finance Corporation , took a contrary view. The High Court stated that
section 35 of the SARFAESI Act (a later enactment), ¢ ly lays down
that the provisions of the Act shall have effect notwi anything incon:
sistent therewith contained in any other law for the time being in force or any
instrument having effect, by virtue of that law. Section 35 overrides section 22 of
the SICA, which is a previous enactment, having come into being in 1985, There-
fore, notwithstanding the abatement provided by the third proviso to section
15(of 1)the SICA, introduced by virtue of section 41 read with Schedule to the
SARFAESI Acct, the effect of section 22 of the SICA no more survives section 35
of the SARFAESI Act.
Similarly, in Shamken Spinners Ltd vs. State of U.P & Ors.” , it was held
where a reference is pending before BIFR, it would abate if secured creditors
representing not less than three-fourth in value of amount outstanding against
financial assistance disbursed to borrower, have taken any measures to recover
their secured debt.
In Nouwveaw Exports Pvt. Ltd. v. AAIFR & Co. & Ors”, the third proviso to
section 15(1) of SICA was held to be an exception to the bar under section 22 of
SICA. Therefore, on a conjoint reading of Section 22 with the third provisoto
Section 15(1) of SICA, as also taking into account section 35 of SARFAESI, the
position which emerges, according to the Court is:
“If the secured creditor(s), whose strength is “less than” three-fourth in
value of the amount outstanding against financial assistance disbursed
to the borrower, intends to invoke the regime under the Act of 2002,
would be obliged to take consent of the Board under section 22 of the
Act of 1985. Whereas, if the secured creditor(s) representing “not less
than” three-fourth in value of the amount outstanding against financial
assistance disbursed to the borrower, by virtue of third proviso to sec-
tion IS(1) of the Act of 1985, are entitled to proceed against the bor-
theActof2008 ee, 2 oftheborrower byinvoking provisions of
Osan tate etaking consent of the Board as per section 22
In Eupharma Laboratories Ltd. vy.State Bank of India™,
before DRT that itwas also contended

74. 11(200BC9) 271.

7S. Hi (201 BC 1)
452 An.
> Sl) BC547 Bom. (DB)
“2. 1 (2006)Sal
BCem25Text
(DRiles
ATIDRT, MOM: ARC Pur.Lad.& Anr, J (2012) BC110 Mad. (DB).
 Proceedings under the SIDBI Act
Sec. 37, Syn. 3 1203
BIFR. The DRT repudiated the said contention and held that
such a view would
set to naught the scheme of SARFAESI Acct.
However, the Gujarat High Court in Computer Skill Ltd. v. Chairman and
M_D.
& Ors. ’, took a different approach to the issue. It was observed that
SICA has a
broader social perspective and interpretation cannot be made in a manner
that
would frustrate the very purpose and object of the Act: the proviso to section
15(1) of SICA permits measure to be adopted under section 13(4) of the SAR-
FAESI Act, but the same cannot be interpreted in a manner that it controls the
main section of a statute like section 15 of SICA. Whether SARFAESI overrides
SICA, will have to be considered depending on the facts of the case as to whether
a unit has the potentiality of revival or not. If the unit has no potentiality of re-
vival or the cost of revival is much more and it is not feasible and profitable in
the general public interest to invest or lock such capital, then resort to section
13(4) is made permissible for expediting the recovery.
Also in this context, it is to be noted that section 13(9) has undergone a change
by virtue of the Amendment Act of 2012: the minimum consent limit has been
reduced from 75% to 60%. However, there is no corresponding amendment in
SICA. So, in order that the proceedings before BIFR abate, the stipulation of
75% of creditors is to be met, though the same has been reduced under the SAR-
FAESI Act. [See our comments under Section 13(9)]

3. Proceedings under the SIDBI Act

The Small Industries Development Bank of India Act, 1989 was enacted to es-
tablish a Financial Institution for promotion and development in the small scale
sector. Section 38 of the SIDBI Act provides for quick recovery of the loans from
the defaulting small industries. Now, SARFAESI Act is a subsequent enactment
to the SIDBI Act. The question arises is: in case of default in repayment of loans
availed from SIDBI, is SIDBI precluded from proceeding under section 38 of the
SIDBI Act and is required to necessarily proceed under the SARFAESI Act?
The question fell in adjudication before the Delhi High Court in Maxim
Lightech Pvt. Ltd. v. Small Industries Development Bank of India _ . The Court,
in view of “or any other law for the time being in force” used in section 37 of the
SARFAESI Act, opined that the provisions of SARFAESI Act are in addition to
and in derogation of the SIDBI Act. It was further remarked, ‘once it is held that
small scale industries form a class by themselves and for which special legisla-
vires of
tion can be and has been made and in the absence of any challenge to the
cease to
section 38 of the SIDBI Act, I am unable to hold that the same would
procedure for en-
apply because under the subsequent legislation a less onerous
2
forcement of security interest has been laid down.
guice-
However, at the sa ‘ime the Court raised concern as to absenceof any
h remedy to
lines to guide the authHeteactucials concerned of SIDBI as to whic
judgment rendered in
invoke against which defaul ting debtor. Relying on the
of Greater Bombay” , the
Maganlal Chaganlal (P) Ltd. y, Municipal Corporation
Pt Ln .eee
79. IV (2011) BC 307 (Guj.).
80. III (2011) BC 655 Del.
81. (1974) 2 SCC 402.
120 Sec. 38 Part U—-Chap. Vi--Miscellaneous

r section 38 of the SIDBI Act as

Court held that the procedure presoribed unde
Act, both cover the whole held of
well as under section 13 of the SARFAESI
out any guidelines as to the class ol
enforcement of securily unterests and with
to. This is violative of Article 14
cases in which either procedure is to be resorted
the SARFAESI Act that leaves
of the Constitution, Moreover, there is nothing in
as to Which remedy is to be
the discretion in the authorities/officials to decide
es prescribing the mode
invoked against which debtor, Therefore, unless guidelin
other debtors may be
of election are made/framed, SIDBI's action against its
come liable to challenge under Article 14,
Elec-
(1) The Central Government may, by notification and in the
tronic Gazette as defined in clause(s) of section
5. 38. Power of Cen- 2 of the Information Technology Act, 2000 (21
tralGovernment ™K° of 2900), make rules for carrying out the provi-
) sions of this Act.
(2) In particular, and without prejudice to the generality of the
foregoing power, such rules may provide for all or any of the fol-
lowing matters, namely:—
(a) the form and manner in which an application may be filed
under sub-section (10) of section 13;
(b) the manner in which the rights of a secured creditor may be
exercised by one or more of his officers under sub-section
(12) of section 13;
"[(ba) the fee for making an application to the Debts Recovery Tri-
bunal under sub-section (1) of section 17;
(bb) the form of making an application to the Appellate Tribunal
under sub-section (6) of section 17;
(be) the fee for preferring an appeal to the Appellate Tribunal
under sub-section (1) of section 18};
(c) the safeguards subject to which the records may be kept un-
der sub-section (2) of section 22; .
(d) the manner in which the particulars of every transaction of
securitis
joel enation toda
shall be filed under section
j 23 and fee for filing

(e) the fee

. for inspecting
pecting the particulars
; of transactions kept

(f) the fee for inspecting the Central R

: egister maintained in
electronic form under sub-section (2) ofsection 26:

(30of2004), 5.18(wef of
82. Ins. by the Enforcement
11-11Security
2004)Imerest ns ROCONEHY OfDebts Laws (Amendment) Act, 2004
 The Amendments of certain enactments
Sec. 41 1205
(g) any other matter which is required to be,
or may be, pre-
scribed, in respect of which provision is to be,
or may be,
made by rules.
(3) Every rule made under this Act shall be laid, as soon
as may
be after it is made, before each House of Parliament, while
it is in
session, for a total period of thirty days which may be comprise
d in
one session or in two or more successive sessions, and if, before the
expiry of the session immediately following the session or the suc-
cessive sessions aforesaid, both Houses agree in making any modi-
fication in the rule or both Houses agree that the rule should not be
made, the rule shall thereafter have effect only in such modified
form or be of no effect, as the case may be, so, however, that any
such modification or annulment shall be without prejudice to the
validity of anything previously done under that rule.
The provisions of sub-sections (2), (3) and (4) of section 20 and
. Ly sections 21, 22, 23, 24, 25, 26 and 27 shall apply
S. 39. Certain provisions after the Central Registry is set up or cause to
of this Act to apply after ° a
Central Registry is set up D€ Set up under sub-section (1) of section 20.
hiscacendilll lin (1) If any difficulty arises in giving effect to
mone diificcn, ‘© '® the provisions of this Act, the Central Govern-
ment may, by order published in the Official
Gazette, make such provisions not inconsistent
with the provisions of this Act as may appear to be necessary for
removing the difficulty:
Provided that no order shall be made under this section after the
expiry of a period of two years from the commencement of this Act.
(2) Every order made under this section shall be laid, as soon as
may be after it is made, before each House of Parliament.
The enactments specified in the Schedule shall be amended in the
manner specified therein.
S. 41. Amendme-nts
of certain enactments COMMENTS

The amendments effected by this law are the definition of “public financial in-
stitutions” in the Companies Act, “securities” under the Securities bss aoe
ssl
Regulation Act, and the possibility of making a reference under the ip
trial Companies Act regarding an entity whose financial assets have been s
ritised or transferred to a reconstruction company.
anies Act are the most
Of these, the amendments in the Sick Industrial Comp
whom reference un-
confusing, as it 1s not even clear as to which is the entity for
maker might have tried to refer
der that Act shall not be made. Possibly, the law- is unlikely that this
to the obligor company, but the way the clause is worded, it
 Part U—Chap. Vi-—Miscellaneous
1206 Sec. 42

gor nouficalion Is nol mandatory un-

intent could be carmed out. In any case, obli
ty cannot in any way be affected by
der this law, and the nghts of the obligor enti
ection under the Sick Industries
transfer of the financial assets. Seeking of prot
ot be curtailed by the unilateral
Companies Act is a night, and such right cann
transfer of financial assets.
ncial Assets and
(1) The Securitisation and Reconstruction of Fina
| Enforcement of Security Lnoterest Ordinance,
3 of
alSav 2002 (Or
a 42. Repeand d. 2002) is hereby repealed.
| (2) Notwithstand such repeal, anything
done or any action taken under the said inance shall be deemed
aeRareWetadomeorCin SRNR CE aetoed eeara
ct.
 THE SCHEDULE
[See section 41]

a
1956 nThe
e Companies Act, 1956. In section 4A, in sub-section (1), after
clause (vi), insert the following:
“(vii) the securitisation
company or
reconstruction company which
has obtained a certificate of reg-
istration under sub-section (4) of
section 3 of the Securitisation
and Reconstruction of Financial
Assets and Enforcement of Secu-
rity Interest Act, 2002”

The Securities Contracts In section 2, in clause (h), after sub-

(Regulation) Act, 1956. section (ib), insert the following:—
“(ic) “security receipt” as defined in
clause (zg) of section 2 of the Se-
curitisation and Reconstruction of
Financial Assets and Enfor-cement
of Security Interest Act, 2002”

The Sick Industrial Compa- In section 15 in sub-section (1), after the

nies (Special Provisions) Proviso, insert the following:
Act, 1985. “Provided further that no reference shall
be made to the Board for Industrial and
Financial Reconstruction after the com-
-men-cement of the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act,
2002, where financial assets have been
acquired by any securitisation company or
reconstruction company under sub-section
(1) of section 5 of that Act.

“Provided also that on or after the com-

mencement of the Securitisation and Re-
construction of Financial Assets and En-
forcement of Security Interest Act, 2002,
where a reference is pen-ding before the
Board for Industrial and Financial Recon-

1207
 Part U—Chap. Vi-—Miscellaneous
1208 Seh., Sya. |

ee
“Mruotion, such reference shall abate if the
secured creditors, representing nol less
than three fourth in vaof lu e
the amount
outstanding against financial assistanee
disbursed to the borrower of such secured
creditors, have ken any measure to re
cover thei secured debt under Sub-seetion
(4) of section 13 of that Act”

SYNOPSIS
of reference to the BIFR: is is AULOMALIE ........0000000 1209
2. Abatement
1. Abatement
there a broader philosophy? ............5 1208

COMMENTS

1. Abatement of reference to the BIFR: is there a_ broader

philosophy?
The provision inserted in the Sick Industrial Companies Act (SICA), providing
for automatic abatement of reference to the BIFR if the secured creditors have
taken a repossession measure under this law, runs completely counter to the spirit
of the Sick Industrial Companies law, and to a large extent, defeats the very in-
tent of the SICA. The SICA is aimed at restructuring companies at the brink of
bankruptcy. It is a known fact that SICA was int toend ed
provide for remedy
similar to Chapter 11 of the Bankruptcy Code in the USA. Under Chapter 11 of
Bankruptcy Code, a bankrupt company seeks protection under the code, propos-
ing a scheme of restructuring of the company rather than allowing the company’s
assets being confiscated by the lender, and thereby making the position of the
company completely beyond resolution. Therefore, 11 puts an automatic
stay on enforcement of security interests by the secured ;
Notably reference to SICA may be made by the secured lenders, but has to be
made, in specific circumstances, mandatorily by the company itself. There is no
doubt that the secured lenders will be interested to seek possession of the bor-
Cherehee ean owuuch isprecisely why theprotection ofSICA isrequired. Ifthe
reference, say made by the company, were to abate if the secured lenders were to
take repossession action, then SICA itself becomes meaningless.
If the idea of the lawmakers was to allow secured lenders to have free
then
the
Schemeof
lawthat
prevailed priorto
SICAwasgoodenough. Secured
din tet ae either enforcing security intere
or proving
ststheir
,
 Abatement is automatic
Sch., Syn. 2 1209
The provision for abatement provided by this
law makes SICA completely ir-
relevant, because it gives ultimate authority of
deciding whether the unit should
revive or not to the secured lenders and not the BIFR.
The proviso to section 15 of SICA as amended by
section 41 of the SAR-
FAESI Act will come into force where a reference is pendi
ng before the BIFR
and not when the proceedings under the SICA is not at the
stage of reference.
Where the proceedings before the BIFR have gone far ahead
of reference and
culminated in an order by the BIFR declaring the company a Sick
Industrial
Company, the division Bench of the Orissa High Court held that reference
cannot
abate since the matter is under SICA and is not pending in reference
before the
BIFR.' See also notes under section 37.
See also notes under section 13(3) under the heading Provisos to section 15(1)
of Sick Industrial Companies Act.

2. Abatement is automatic
In Asset Reconstruction Company (India) Ltd. v. Kumar Metallurgical Corpo-
ration India,’ the Chennai DRAT held that the abatement is automatic once the
enforcement action has been taken by the secured lenders, and there is no need to
take any declaration from any authority. See also Nouveaw Exports Pvt. Ltd. v.
AAIFR & Co. & Ors*(supra).
The view taken was reiterated in M/s. Salem Textiles Limited v. The Authorized
Officer, M/s.Phoenix ARC Private Ltd & Ors.*. The Court held:
“(i) Once an action is initiated in terms of section 13(4) of the Securitisation
Act, 2002, by the secured creditors representing three-fourths in value
of the total amount outstanding, the proceedings before BIFR would
automatically abate, in view of the third proviso inserted by Act 54 of
2002 under section 15(1) of SICA, 1985. This is the position irrespec-
tive of whether the reference is at the stage of budding under section 15
or at the stage of blossoming under sections 16 and 17 or at the stage of
fruition under sections 18 and 19 or at the stage of rotting (deserving
only winding up) under section 20. (11) The secured creditors are not
obliged to seek permission of BIFR under section 22 (1) of SICA, for
taking action under section 13(4) and for bringing to an end the pro-
ceedings before BIFR, provided they represent three-fourthsin value of
the total amount outstanding and they take a concerted decision to initi-
ate action under section 13(4) of Securitisation Act, 2002. (iii) The view
expressed in 7riveni Alloys Ltd’., does not require reconsideration.
In the opinion of the author, while a declaration of the BIFR may not be strictly
necessary, protocol demands that the leave of the BIFR should be ta ken. In case
security
of wanting tpof companies, the secured lender has the right to enforce

534 (DB).
Noble Aqua Private Limited v. State Bank of India, | (2009) BC
. III (2005) BC 44 (DRAT/DRT).
. If (2011) BC 547 Bom. (DB).
. (2013) 178 Comp Cas 533.
= (2006) 132 Comp Cas 190.
.
WWD
 Sek, Sym. 2 Part 1l—Chap. Vi-—Miscellaneous
1210

interest without ai) specific sanction of thecourt, buta leave ofthewinding up

,
cour t isalways taken as a matter of protocol

seealso notes under section

As regards abatement ofreference tothe BIFR,
(1 Sick Industrial Companies
of )
133) under the heading provisos to section 15
Act.
 APPENDIX 1

MODEL CLAUSES IN CONSTITUTIONAL

DOCUMENTS OF SPVs

SYNOPSIS
1. Memorandum of Association............... 1211| 2. Articles of Association .........ccccccccccccseese. 1211

1. Memorandum of Association
Under Companies Act, the purpose of formation of a company is given by the
Objects clause of the Memorandum of Association. The objects clause, in turn, is
broken into three:
(a) Main objects, to be pursued immediately upon incorporation
(b) Objects incidental or ancillary to the attainment of the main objects
(c) Other objects.
Under the present legislation, securitisation companies are allowed to engage in
certain businesses other than securitisation, contained in section 10. However, if
the securitisation company has to qualify as an SPV itself under global securitisa-
tion criteria, it must not engage itself in any business other than that of securitisa-
tion.
In view of whether a securitisation company itself is the SPV, or is the entity
backing up SPVs, the objects clause of the SPV may be drawn up.
Under the “main objects” clause, the activity of securitisation should be put up.
The “other objects” clause can contain the matters specified in section 10, as re-
served clauses. It is notable that more objects can be added by passing a special
resolution.
Incidental and ancillary objects can include things like opening of bank ac-
counts, reinvestment of cashflows, writing of one or more derivatives relating to
the assets, engaging of outsourcing agents, creating of security interests, opening
up of one or more trusts and acting as trustees therefor, etc.

2. Articles of Association
eae on
The articles of association, in law, is an agreement between
Therefore, the artic * ara .
the company, and amongst the members inter se. any
except to the extent there 1S
ing on the company as also on the members,
provision contradicting the law.

WAL
 App. 1, Sya. 2 Part ll—Chap. Vi-—Miscelianeous
1212
oness and independence orner
in view of this, most of the bankruptcy-remot
of association of the company,
required for SPVs can be inserted in the articles
r:
Some of the significant conditions are as unde
gal resolutions. [here are several thin
speci company
that ags
1. Passof in
r things, i can
can do by passing a special resolution, Among othe business
e the
change or expand its business, alter the articles, etc. Sinc
provisions in
of an SPV is intended to be restricted for all times, and the
tors (the in-
the articles are to remain operative for the sake of the inves
vestors may not be equity investors), it is necessary to prescribe a par-
article
ticular modality for certain special resolutions. Hence, in the
dealing with passing of special resolutions, a special procedure or spe-
cial voting can be provided for special resolutions, There is no bar un-
der section 170 of the Companies Act in case of private companies
from putting additional restrictions in its articles.
2. Restrictions on liabilities/security creation: This may be supported by
a negative restraint in the Incidental and Ancillary Objects clause of the
Memorandum. A clause may be inserted in the Articles providing that
the Company shall not incur any indebtedness, secured or unsecured,
direct or indirect, absolute or contingent (including guaranteeing any
obligation or assuming liability for the debts of any other Person and
Company wil hold itself out as being liable for the debts of any
not l
other Person), other than the securities issued under one or more
Scheme. No indebtedness other than the securities issued under one or
more Scheme may be secured (subordinate or pari passu) by the assets
of the Company or any portion thereof. Except as contemplat byed
the
Scheme, Company sha notllpledge, grant any security interest in, hy-
pothecate or otherwise encumber its assets for the benefit of any other

3. Restriction on transactions with affiliates: This restriction is to avoid

any potentially unfavourable transactions with “affiliates” Affiliates

nay such party

4. Scheme-related ring-fencing: The books . Tecords and
accounts
See ean hall at alltimes bemaintained ina manner itti pnd
in of |
=voped any particular Scheme operated or by
Articles ofAssociation
App. 1, Syn. 2 1213
. 4 Hold out to be independent: Company shall not hold
itself out to the
public or to any of its individual creditors as being a unifie
d entity with
assets and liabilities in common with any other Person. Comp
any shall
maintain and utilise separate stationary, invoices and books and
paper,
separate bank account, etc. Company shall maintain its own banki
ng
account Or accounts with commercial banking institutions separate from
other Persons.
Restrictions on restructuring, amalgamations, etc: This is a very
important clause, and should be structured suitably to ensure that the
consent of the “investors” that is, those who put in funding but are not
the legal equity holders of the Company have a say in all organisational
restructuring matters. This clause may put a restriction as under: Save
with the majority consent of the “debt holders’/“subordinated debt
holders”, Company shall not, as to itself, (i) commence any case, pro-
ceeding or other action under any existing or future law of any jurisdic-
tion, relating to bankruptcy, insolvency, reorganisation, compromise or
arrangement, or any order seeking reorganisation, arrangement, adjust-
ment, winding-up, liquidation, dissolution, composition or other relief
with respect to Company, or (ii) seek appointment of a receiver, trustee,
custodian or other similar official for Company or for ali or any sub-
stantial part of its assets, or make a general assignment for the benefit
of Company’s creditors. Company shall not take any action in further-
ance of, or indicating its consents to, approval of or acquiescence in,
any of the acts set forth above. Company shall never be unable to, or
admit in writing its inability to, pay its debts.
Directors’ independence: All and every Director of Company shall
independently, in best interest of Company and its investors/equity
holders, and shall not act as per the directions of any other person.
 APPENDIX 2

FAS 140 REQUIREMENTS FOR QUALIFYING

SPECIAL PURPOSE VEHICLES’

SYNOPSIS
SPC ....ccccurcesnegnennesnennenes 1214
1. Qualifying §. Limits on Sales or Other Dispositions
2. Need to be Demonstrably CA AGO isssiessivees.cesscerdneeberstersnrresrersoen 1217
from the Transferot ........0.cenennre 1215 6. Quallfyint, SPEs and Consolidated
nancial StateMEeNMs ........0.cc ere 218
3. Limits on Permitted Activities ..........0+ 121
4. Limits on What a Qualifying SPE may
nietihpiecincaininreaincenilataenciaabtteeh ince 1216

1. Qualifying
SPC
35. A qualifying SPE? is a trust or other legal vehicle that meets all of the fol-
lowing conditions:
(a) It is demonstrably distinct from the transferor (paragraph 36).
(b) Its permitted activities (1) are significantly limited, (2) were entirely
specified in the legal documents that established the SPE or created the
beneficial interests in the transferred assets that itholds, and (3) may be
significantly changed only with the approval of the holders of at least a
majorityof the beneficial interests held by entities other than any trans-
feror, its affiliates, and its agents (paragraphs 37 and 38).
(c) It may hold only:
(1) Financial assets transferred to it that are passive in nature
(paragraph 39).
(2) Passive derivative financial instruments that pertain to bene-
ficial interests (other than another derivative financial instru-
ment) issued or sold to parties other than the transferor, its af-
filiates, or its agents (paragraphs 39 and 40).
(3) Fina assets
ncia (for example,
l
xample, guaror ante
rights to collateral
es )
that would reimburse it if others were to fail to adequately ser-
vice financial assets transferred to it or to timely pay obliga-
tions due to it and that it entered into when it was established,
ee
1. Re-write of FAS 140 after the subprime meltdown has done
Srrs.We have residthe conditions a hey
indicatethe
featre of
|
pase specalune on

Seeuniin _— aien repre nded toanyentity thatdoes notcurrently satisfy allof

 FAS 140 Requirements for Qualifying Spec
ial, etc. App. 2, Syn. 2 1215
when assets were transferred to it,
or when beneficial interests
Soa than derivative financial instruments)
were issued by the
PE.
(4) Servicing rights related to financial assets that
it holds.
(5) Temporarily, non-financial assets obtained
in connection with
the collection of financial assets that it holds (paragraph
41).
(6) Cash collected from assets that it holds and inves
tments pur-
chased with that cash pending distribution to holders of benef
i-
cial interests that are appropriate for that purpose (that
is,
money-market or other relatively risk-free instruments without
options and with maturities no later than the expected distribu-
tion date).
(d) If it can sell or otherwise dispose of non-cash financial assets, it can
do
so only in automatic response to one of the following conditions:
(1) Occurrence of an event or circumstance that (a) is specified in
the legal documents that established the SPE or created the
beneficial interests in the transferred assets that it holds; (b) is
outside the control of the transferor, its affiliates, or its agents;
and (c) causes, or is expected at the date of transfer to cause,
the fair value of those financial assets to decline by a specified
degree below the fair value of those assets when the SPE ob-
tained them (paragraphs 42 and 43).
(2) Exercise by a BIH (other than the transferor, its affiliates, or its
agents) of a right to put that holder’s beneficial interest back to
the SPE (paragraph 44).
(3) Exercise by the transferor of a call or ROAP specified in the
legal documents that established the SPE, transferred assets to
the SPE, or created the beneficial interests in the transferred as-
sets that it holds (paragraphs 51—54 and 85-88).
(4) Termination of the SPE or maturity of the beneficial interests in
those financial assets on a fixed or determinable date that is
specified at inception (paragraph 45).

2. Need to be Demonstrably Distinct from the Transferor

36. A qualifying SPE is demonstrably distinct from the transferor only if it
cannot *.iMdaterall dissolved by any transferor, its affiliates, or its gt a
either (a) at least 10 per cent of the fair value of its beneficial interests 1s ss y
an
parties other than any transferor, its affiliates, or its agents or (b) the transfer
guaranteed mortgage securitization.’ An ability to unilaterally lace pr
2te
can take many forms, including but not limited to holding thgest +
call a
interests to demand that the trustee dissolve the SPE, the right to
is thatthé mortgage-bé
paragraph 46, is -backed securit ies
nite:
3. An effect of that provision, in conjunct ion with the SPE meets all condit ions for being a
tization inwhich
retained in a guaranteed mortgage securitiz
nts of the transfer or as securiti es that are sub-
qualifying SPE are classified in the financi al stateme
sequently measured under Statem ent 115.
 App. 2, Sya. 3 Part 1l—Chap. Vi-—Miscellaneous
1216
call or a prepayment privilege on the
sets transferred to the SPE, and a nght to
beneficial interests held by other parties.

4. Limits on Permitted Activities

those activities allowed by para
37. The powers of the SPE must be limited to
s of entities are not so limited.
graph 35 for it to be a qualifying SPE. Many kind
ion plan, or investment com:
For example, any bank, insurance Company, pens ifying SPE.
to be a qual
pany has powers that cannot be sufficiently limited for it
its agents may have the
48. The BIHs other than any transferor, its affiliates, or
rs of a previously
ability to change the powers of a qualifying SPE. If the powe s the
fying, unles
qualifying SPE are changed so that the SPE is no longer quali
conditions in
conditions in paragraph 9(b) are then met by the SPE itself and the
%a) and %(c) continue to be met, that change would bring the trans-
raph
ferred assets held in the SPE back under the control of the transferor (parag
55).

4. Limits on What a Qualifying SPE may Hold

39. A financial asset or derivative financial instrument is passive only if hold-
ing the asset or instrument does not involve its holder in making decisions other
than the decisions inherent in servicing (paragraph 61). An equity instrument is
not passive if the qualifying SPE can exercise the voting rights and is permitted
to chohow ose to vote. Investments are not passive if through them, either in
themselv eson with other investments or rights, the SPE or any
or in combinati
related entity, such as the transferor, its affiliates, or its agents, is able to exercise
control or significant influence (as defined in generally accepted accounting prin-
ciples for consolidation policy and for the equity method, respectively) over the
investee. A derivative financial instrument is not passive if, for example, it in-
cludes an option allowing the SPE to choose to call or put other financial instru-
ments; but other derivative financial instruments can be passive, for example,
name caps meh yates contracts. Derivative financial instru-
result in . like other liabilities
of a qualifying are a kind
of beneficial interest in the qualifying SPE’s assets. on
40. A derivative financial instrument pertains to beneficial interests (other
another derivative financial instrument) issued only if it: 9
 Limits on What a Qualifying SPE may
Hold App. 2, Syn. 5 1217
(b) Has a notional amount that does not
initially exceed the amount of those
beneficial interests and is not expected to
exceed them subsequently;
(c) Has characteristics that relate to, and partl
y or fully but not excessively
counteract, some risk associated with those benef
icial interests or the
related transferred assets.
41.A qualifying SPE may hold non-financial assets
other than servicing rights
only temporarily and only if those non-financial assets result
from collecting the
transferred financial assets. For example, a qualifying
SPE could be permitted to
tempo rarily hold foreclosed non-financial collateral. In contra
st, an entity cannot
be a qualifying SPE if, for example, it receives from a transferor
significant se-
cured financial assets likely to default with the expectation that it
will foreclose
on and profitably manage the securing non-financial assets. A quali
fying SPE
also may hold the residual value of a sales-type or a direct financing lease
only to
the extent that it is guaranteed at the inception of the lease either by the lesse
e or
by a third party financially capable of discharging the obligations that may arise
from the guarantee (paragraph 89).

5. Limits on Sales or Other Dispositions of Assets

42. Examples of requirements to sell, exchange, put, or distribute (hereinafter
referred to collectively as dispose of) non-cash financial assets that are permitted
activities of a qualifying SPE—because they respond automatically to the occur-
rence of an event or circumstance that (a) is specified in the legal documents that
established the SPE or created the beneficial interests in the transferred assets
that it holds; (b) is outside the control of the transferor, its affiliates, or its agents;
and (c) causes, or is expected to cause, the fair value of those assets to decline by
a specified degree below the fair value of those assets when the qualifying SPE
obtained them—include requirements to dispose of transferred assets in response
to:
(a) A failure to properly service transferred assets that could result in the
loss of a substantial third-party credit guarantee;
(b) A default by the obligor;
(c) A downgrade by a major rating agency of the transferred assets Or of
the underlying obligor to a rating below a specified minimum rating;
(d) The involuntary insolvency of the transferor;
(e) A decline in the fair value of the transferred assets to a specified value
less than their fair value at the time they were transferred to the SPE.
43. The following are examples of powers or requirements to dispose of non-
cash financial assets that'are not permitted activities of a qualifying SPE, because
they do not respond automatically to the occurrence of a specified event or oa
cumstance outside the control of the transferor, its affiliates, or its vile ‘a
causes, or is expected to cause, the fair value of those transferred ass ge es fees
by a specified degree below the fair value of those assets when the )
them:
1218 App. 2, 5ya. 6 Part H—Chap. Vi--Miscellaneous

ferred
ap A er that allows an SPE to choose to either dispose of trans
e, a decline in
ie adoonor hold them in response to a default, a downgrad
fair value, or a servicing failure,
a speci
b) A requirement to dispose of marketable equity seourities Upon
fied decline from their “highest fair value” if that power could resul t in
disposing of the asset in exchange for an amount that is more than the
fair value of those assets at the time they were transferr to theed
SPE;
(c) A requirement to dispose of transferred assets in response to the viola
tion of a nonsubstantive contractual provision (that is, @ provision for
which there is not a sufficiently large disincentive to ensure perform.
ance).
44. A qualifying SPE may dispose of transferred assets automatically to the ex-
tent necessary to comply with the exercise by a BIH (other than the transferor, its
affiliates, or its agents) of its right to put beneficial interests back to the SPE in
exchange for:
(a) A full or partial distribution of those assets;
(b) Cash (which may require that the SPE dispose of those assets or issue
beneficial interests to generate cash to fund settlementof the put);
(c) New beneficial interests in those assets.
45. th epee Kentyas, Rane Bred opined oa hw eA dS
other than the transferor, its affiliate, or its agent on termination of the or
maturity of the beneficial interests,but only automaticallyon fixed or determin-
able dates that are specified at inception. For example, if an SPE is required to
dispose of long-term mortgage loans and terminate itself at the earlier of (a) the
specified maturity of beneficial interests in those mortgage loans or (b) the date
of prepayment of a specified amount of the transferred loans, the ter-
mination date is a fixed or determinable date that was i at inception.In
contrast, ifthat SPE has the power to dispose of transferred assets on two speci-
fied dates and the SPE can decide which transferred assets to sell on each date,
the termination date is not a fixed or determinable date that was specified atin-

6. Qualifying SPEs and Consolidated Financial Statements

46. A qualifying
qansierGrortes SPEaffiiunesshall not be consolidated in the financial
; statements of a
 APPENDIX 3

STANDARD AND POOR’S LEGAL CRITERIA FOR

SPECIAL PURPOSE ENTITIES

[1
MeaP
SinornY eS HATie)
AORMNOPSISTI
SLI) oi ano
DODamenOD |
Re
SYNOPSIS
1. Special-Purpose Entities] ..................... 1219| 7. Security Interests Over Assets................ 1222
2. Restriction on Objects and Powers ...... | 727401) aM.SS ©] 2G Ce777 ee ee eR 1223
3. Debt Emnitations (i0.)..26... ui 2d 1220] 9. Entity-Specific Requirements, SPE
4. The Independent Director..................... 1221 COmMorations 5. 252%, nde evs. eR aak 1224
5. No Merger or Reorganization .............. PEE As SEE General PAmtMess <x. 5.0sscs05 sscesasesnnsece 1225
6. Separateness Covenants .................00+5 | 950s) paldeals ) f 2,|bl
FO llr elem a ee aa 1225
7. OSRE JTrosts yi) sete. eth Ge he ss 1225

1. Special-Purpose Entities1
General.—As discussed previously, Standard & Poor’s legal criteria for struc-
tured finance transactions are designed to ensure that the entity owning the assets
required to make payments on the rated securities is either bankruptcy remote
(that is, is unlikely to be subject to voluntary or involuntary insolvency proceed-
ings) or the transaction is properly accounted for as a dependent rating (see Sec-
tion One, Securitizations By Code Transferors, General, and section on Select
Issues Criteria, Dependent Ratings Criteria). In this regard, Standard & Poor’s
will evaluate the incentives of this type of entity, known as a special-purpose en-
tity (or an SPE), or its equity holders, to resort to voluntary insolvency proceed-
ings and the incentives of creditors of the SPE to resort to involuntary insolvency
proceedings. The bankruptcy remote analysis also examines whether third-party
creditors of the SPE’s parent would have an incentive to reach the assets of the
SPE to satisfy the parent’s obligations.
eee
Characteristics of Bankruptcy Remoteness.—Standard & Poor’s has
‘
piled the following “SPE criteria,” which an entity should satisfy to be sone by
a 1s regar we
bankruptcy remote SPE. An entity that satisfies these criteri
Standard & Poor’s as being suffici ently protected against both voluntary and in-
re ; Debt limitations;
risks: Restrictions on objects and powers;
the equivalent in the case of other
a,
ea
Indep endenery
t director (for corporate SPEs, or
covena nts, an
teness,
izati on, etc.; Separateness
‘ ,
: merger or reorganizati ae
: s. Each of these characteristics is 0
import ant to the
i ity A interests aaover asset
Secur
Regardless of the specific organiza
aalconces of bankruptcy remoteness. ialy, aie
elements should, generally, be naa
tional structure of the SPE, these Unjec’
orga niza tion al and/ or tran sact ion documents (see Restrictions on
relevant

1219
 App. 3, Sya. 2 Part li—Chap. Vi-—Miscellaneous
1220
d below, is followed by a full de-
and Powers). Their rationale, briefly explaine
scripuion of the SPE critena.

2. Restriction on Objects and Powers

objects and powers be
The fundamental SPE characteristic is that the entity's y lO effect the trans:
ssar
restricted as closely as possible to the bare activities nece
SPE’ s risk of insolvency
action. The purpose of this restriction is to reduce the
assets and the issu-
due to claims created by activities unrelated to the seouriised
ance of the rated securities.
remote:
To the extent Standard & Poor’s analysis relies upon the bankruptcy
the transa ction
ness of an entity, it will generally require that the SPE embed in
of in
documents or in its organic document of establishment (articles/certificate
for lim-
corporation for corporations, deed of partnership/partnership agreement
cl
of organi
ited partnerships, arti esfor
sation s or deed of trust/trust agree-
ment for trusts) objects and power clauses that constrain the SPE to those activi-
ties needed to ensure the sufficiency of cash flow to pay the rated securities.
The organic documents are the preferred locus for this constraint (as well as the
other SPE restrictions discussed below) for two reasons. First, these documents
are publicly available and provide some measure of public notice of the restric-
tion, rather than merely notice to the parties to a particular transaction. Second,
an organic restriction is less likely to become lost in the organisational files and
more likely to remind the management of the SPE to act in accordance with its
charter. Where possible, this limited objects clause, as well as the other SPE cri-
teria, should also be covenants in the appropriate transaction documents. In brief,
the SPE should not engage in unrelated business activities unless the parties to a
transaction are willing to allow the rating to reflect the effect of these activities
on the entity’s resources, cash flows, and the ability to pay the entity’s obliga-
tions in a full and timely manner.

3. Debt Limitations

cases where such indebtedness would not affect the rating on its existing indebt-
SidesDhiba baslates oranda ce eee
anincentiveto file for the of the SPE in order to
cess to the SPE’s cash flows and anes. Thane: additional indebtednessPaiste
either expressly subordinated to, or rated the same as, existing indebtedness
principle, affect the rati isting indebted Additional

demnify, etc. In the U.S. and

SPE Criteria,” Canadian Legal Criteria Structured

nance Transactions.) Outside theU.S.and
Canada, thetransection maybegow
 Debt Limitations
App. 3, Syn. 5 £231
erned by different legal regimes which may affect the abilit
y of any SPE to issue
segregated debt. (See section titled Legal Criteria Appli
cable to International
Transactions, Segregation Criteria.) Standard & Poor’s also
generally requires
non petition language in any agreement between the SPE and
its creditors
whereby the creditors agree not to file the SPE into bankruptcy and not
to join in
any bankruptcy filing. In some cases, a specific inter creditor agreement
may also
be appropriate.

4. The Independent Director

An SPE acts through its board of directors, general partner, management com-
mittee, Or managing member. In the case of a corporation, for example, business
is conducted at the direction and under the supervision of the board, although
day-to-day management of the corporation is generally delegated by the board to
the corporation’s officers. The directors are elected by the shareholders, the cor-
poration’s owners. Among the major decisions taken by the board of directors is
the decision to file the corporation into bankruptcy, and it is this concern that
prompts Standard & Poor’s to request the “independent director” in respect of
corporate SPEs or the equivalent in the case of other forms of SPEs. In many
structured transactions, the SPE is sought to be established by a non-SPE operat-
ing entity parent. This parent may, at times, be either unrated or have an issuer
credit rating below the issue credit rating of its subsidiary debt. Moreover, the
directors of the parent may well serve as the directors for the subsidiary. Inter-
locking directorates present a potential conflict of interest. If the parent becomes
insolvent even though the subsidiary is nevertheless meeting its debts as they
become due and is otherwise in a satisfactory financial state, there may be an in-
centive for the parent to cause the subsidiary to “voluntarily” file itself into bank-
ruptcy, thus paving the way for a consolidation of its assets with those of the par-
ent. However, if the subsidiary has at least one director who is independent from
the parent and this director’s vote is required in any board action seeking bank-
ruptcy protection for the subsidiary or the amendment of its organic documents,
the subsidiary may be less likely to voluntarily file an insolvency petition. Ac-
cordingly, Standard & Poor’s generally requires the organic documents of an en-
tity seeking to be considered an SPE to recite that, in voting on bankruptcy mat-
ters, an independent director take into account the interests of the holders of the
rated securities. In cases where an SPE is a limited partnership or an LLC, Stan-
dard & Poor’s generally requires that at least one general partner, member, or
manager, as the case may be, also be constituted as an SPE. In certain transac-
tions that are not true securitisations where the subsidiary is a so-called limited
purpose operating entity” that holds operating assets rather than liquidating re-
par-
ceivables, somewhat different criteria may apply, especially if the parent or
ents are rated more highly than the rating being sought on the transaction.

5. No Merger or Reorganization
rated securities ih out-
This requirement attempts to ensure that, while the a hc
not esi
standing, the bankruptcy-remote status of the SPE will
any reorganization, dissolution,
merger or consolidation with a non-SPE or by res that the SPE
rally also requi
liquidation, or asset sale. Standard & Poor’s gene
:222 «=App. 3, Sym. © Part Li—Chap. Vi--Miscellaneous

out pro written Hoge LO Sti

aot amend ily orgamsauonal documents with olid ated enti ty be
& Poor's. Should the issuer credit rating of the merged or cons
s obligations may be ad-
lower than the rated obligations, the rating on the SPE’
versely affected.

6. Separateness Covenants
holds itself Out to
Separateness covenants are designed to ensure that the SPE
entity does not act as
the world as an independent entity, on the theory that if the
of piercing the cor-
if it had an independent existence, a court may use principles
and its assets
porate veil, alter ego, oF substantive consolidation to bring the SPE eaching
into the parent's bankruptcy proceeding. The involvement of an overrin
parent isa threat to the independent existence of the SPE. “Pierc the corpog rate
veil” is the remedy exercised by a court when a controlling entity , such as the
parent of an SPE, so disregards the separate identiof tythe SPE that their enter-
prises are seen as effectively commingled. The remedy can be sought, by credi-
tors with claims against an insolvent parent who believe funds can be operly
traced into the subsidiary. The “alter ego” theory is used whthe en subsidi isa
mere shell and all its activities are in fact conducted by the parent, Substantive
consolidation is an equitable doctrine under the Bankruptcy Code that combines
elements of both piercing the corporate veil and alter ego analyses. Successful
motions for consolidation are based on this overly familiar relationship between
parent and the subsidiary, or partner and partnership. An important element of
Standard & Poor's bankruptcy remote analysis is the exisof te nc
legal e rt
comfo
that the SPE entity would not be substantively consolidated with its parent. In
this regard , should observe certain separateness covenants, set forth in
the entity
the following section (see SPE Criteria). In addition, Standard & Poor's gener-
ally requests legal opinions to the effect that the SPE would not be consolidated
with its parent. (For a discussion of Standard & Poor's criteria regarding non-
consolidation and non-consolidation opinions, see sections on Securitizations by
Code Transferors, Multiple-Tier Transactions, Non-consolidation, and Securiti-
zations by SPE Transferors and Non-Code Transferors, Non-Code Transferors,
Non-FDICegy Insured Banks, Non-consolidation, and Insurance Companies, ] Non :

7. Security Interests Over Assets

Sections One and Two discuss in detail the requirement that the isung SPE
grant
hhsererArticio,
mitpriat
connectionappro genWeral lsreques cli e
Standard& Poorsons
a security interest over its assets tothe holders of the rated securities. In
le 9Representatiand
é, arranties in the relevant
security agreement

te r
tiveofthepartes,thelikelihood ofaninvoluntary filing ma)wasta
 SPE Criteria
App. 3, Syn. 8 1223
8. SPE Criteria
General SPE Criteria.—Based on the principles discussed
above, Standard &
Poor’s has developed criteria to help it conclude that an entity
is an SPE:
1. Restrictions on Objects and Powers.—The entity should not engage
in any
business or activity other than those necessary for, or incidental
to, its role in the
transaction.
2. Debt limitations.—Except in the case of certain multi-use vehicles (see
Ap-
pendix III, Multiple-Use SPE Criteria for U.S. Transactions and Section Nine,
Legal Criteria Applicable to International Transactions), the entity should not
incur any debt (other than indebtedness that secures the rated securities) unless—
(a) the additional debt is rated by Standard & Poor’s the same as the issue
credit rating requested for the rated securities in a given transaction (at
the time of issuance and at all times thereafter), or
(b) the additional debt is fully subordinated to the rated securities and, in
either case,
(x) 1s non-recourse to the entity or any of its assets other than cash
flow in excess of amounts necessary to pay holders of the rated
securities, and
(y) does not constitute a claim against the entity to the extent that
funds are insufficient to pay such additional debt.
Additional debt includes any monetary obligation or other obligation that may
involve the payment of money, such as covenants by the SPE to remove liens,
indemnify, etc.
Any agreement between the SPE and its creditors should include non-petition
language whereby the creditors agree not to file the SPE into bankruptcy and not
to join in any bankruptcy filing.
3. Independent Director.—Independent Director. means a duly appointed
member of the board of directors of the relevant entity who should not have been,
at the time of such appointment or at any time in the preceding five years, (a) a
direct or indirect legal or beneficial owner in such entity or any of its affiliates
(excluding de minimus ownership interests), (b) a creditor, supplier, employee,
officer, director, family member, manager, or contractor of such entity or its af-
filiates, or (c) a person who controls (whether directly, indirectly, or otherwise)
such entity or its affiliates or any creditor, supplier, employee, officer, director,
manager, or contractor of such entity or its affiliates. (See specific entity require-
ments below.)
4. No Merger or Reorganization, etc.—The entity should not engage in any
i
dissolution, liquidation, consolidation, merger, or asset sale (other than oar
la i
vided in the relevant transaction documents), or amendment of its i
without prior written
documents so long as the rated securities are outstanding,
notice to Standard & Poor’s. )
agree to abide by the follow-
5. Separateness Covenants.—The entity should
ing separateness covenants:
 App. 3, Syn. 9 Part li—Chap. Vi-—-Miscellaneous
1224
r person or entity,
To maintain books and records separate from any othe
other person or en-
¢ To maintain its accounts separate from those of any
tity;
y;
Not to commingle assets with those of any other entl
To conduct its own business in its own name,
To maintain separate financial statements,
To pay its own liabilities out of its own funds;
other
To observe all corporate, partnership, or LUC formalities and
formalities required by the organic documents,
To maintain an arm’s-length relationship with its affiliates;
To pay the salaries of its own employees and maintain a sufficient
number of employees in light of its contemplated business operations;
Not to guarantee or become obligated for the debts of any other entity
or hold out its credit as being available to satisfy the obligations of oth-
ers,
Not to acquire obligations or securities of its partners, members, or
shareholders;
To allocate fairly and reasonably any overhead for shared office space;
To use separate stationery, invoice s,
and checks;
. Not to pledge its assets for the benefit of any other entity or make any
loans or advances
to any entity;
To hold itself out as a separate entity;
ee ee en ee eee

To maintain adequate capital in light of its contemplated business op-

6. Security Interests Over Assets.—A\l of the entity’s assets should be pledged

to secure the entity's debt (none of the entity’s assets should remain unencum-

9. Entity-Specific Requirements, SPE Corporations

Inaddition tothe general SPE criteria set forth above eorpotstion
should conform tothefollowing additional criteria: foe
The corporation should have at least one independent director.
The unanimous consent of the directors including that of the indep
end-
ent director(s), should be required to: (i) file, consent tothe of,or
jom in any filing of, a bankruptcy or insolvency petition or :
 SPE Trusts App. 3,Syn.12 1225
e The independent director should be required to
consider the interests of
the corporation’s creditors when making decisions.
Standard & Poor’s generally requests non-consolidati
on opinion(s), as dis-
cussed above (see Section One, Securitizations by Code
Transferors, Multiple-
Tier Transactions, Non-consolidation i
SPE Limited Partnerships.—In addition to the general SPE criteria
set forth
above, an SPE limited partnership should conform to the following
additional
criteria:
e At least one general partner of a limited partnership should be an SPE.
Usually, such SPE general partner will be an LLC or a corporation.
e The consent of the SPE general partner should be required to: (i) file,
consent to the filing of, or join in any filing of, a bankruptcy or insol-
vency petition, or otherwise institute insolvency proceedings; (ii) dis-
solve, liquidate, consolidate, merge, or sell all or substantially all of the
assets of the partnership; (iii) engage in any other business activity; and
(iv) amend the limited partnership agreement.
e If there is more than one general partner, the limited partnership agree-
ment should provide that the partnership will continue (and not dis-
solve) as long as another solvent general partner exists.
e The SPE general partner should be required to consider the interests of
the partnership’s creditors when making decisions.
Standard & Poor’s generally requests non-consolidation opinion(s), as dis-
cussed above (see Section One, Securitizations by Code Transferors, Multiple-
Tier Transactions, Non-consolidation).

10. SPE General Partners

An SPE general partner should meet all criteria set forth for SPE corporations,
LLCs or limited partnerships, as the case may be.

11. SPE LLCs

An LLC is an entity that has tax transparency along with limited liability for its
members. LLCs can have a single member or a multi-member ownership struc-
ture, (See Appendix IV, Legal Criteria for LLCs, for the criteria for SPE LLCs.)

12. SPE Trusts

In general, Standard & Poor’s evaluates case-by-case whether a trust in a rated
transaction is bankruptcy, remote.
Based on an analysis of Sections 101 and 109 of the Bankruptcy ee
trust that is determined to be a “business trust” under the Bankruptcy ns gs
eligible to be a “debtor” under the Bankruptcy Code and thus ie el :
tr ah eae
bankruptcy protection. Thus, if the trust holding assets in a rated
its nd penta de)
not a business trust under the Bankruptcy Code, it is, by st §
filed. Of aaa
remote, as it cannot be voluntarily or involuntarily
in a cour
has a separate legal identity and can sue and be sued
1226 «=—sApp. 3, Sym. 12 Part Chap. Vi-—Miscellaneaus

defined in the Bankruptoy

The term business ust, however, Is Aol actually
Code.
to be a business trust for.
Rather, whether a partioular wust will be determined analysis
dard & Poor's
Bankruptcy Code purposes depends upon the facts. Stanof the trust and whether
will examine the purposes, organisation, and activities or under
icable state law
the trust would be viewed as a business trust under appl
the IRC.
“statutor "(eR
Trusts are generally classified under state law as being either
contract), In either
a Delaware business trust) or “common law” (e., existing by
n, may be
case, the parti¢ular trust entity, depending on the facts of the transactio
r under the
determined to be a “business trust” and thus eligible to be a debto
t bea
Bankruptcy Code. if an issuer wants to rely on the fact that a trust canno
debtor, Stan&da rd
Poor' s may requ anes ton of counsel to this effect, In the
opini
case of certain state common law trusts, Standard & Poor's generally requires
that the trust agreement provide that the bankruptcy of one or more of the benefi-
ciaries of the trust will not result in the dissolution of the trust.
In the case of statutory trusts, Standard & Poor's may also ask for comforthat t
the trust has been properly constituted as a trust under applicable state law and
will not be subject to early termination. In this regard, Standard & Poor's may
request a “trust opinion” to the effect that, under the law of the relevant state, the
trust is irrevocable and that, under such state’s law, no creditor of a beneficiary
would have the right to terminate the trust and reach the assets and that no re-
ceiver, liquidat or bankruptcor,
y trustee would have any rights to the trust's as-
Sout avast tekdtttics oe taal coninaie of the trust. (For Standard &
oor’s criteria in connection with legal opinions, see Appendix II, Select Specific
Opinion Criteria/Language). 7
 PART III
SUBORDINATE LAW (RULES, DIRECTIONS,
ETC.) WITH COMMENTS

CONTENTS

[1] SECURITY INTEREST ENFORCEMENT RULES, 2002 ....0..cccccecceees 1229

[2] SARFAESI ACT (REMOVAL OF DIFFICULTIES) ORDER 2004... 1278
[3] ee EMG DOING ANDY GUIDELINES .......:........0.....0cescoesanecsenee 1280
[4] GUIDELINES FOR BANKS FOR DISPOSAL OF NON-PERFORMING
3 ae ee ee ee ee Fe 1281
[5] eee MERON) INGYEIFIGA TIONS 29.58 oho aiisdsincdiccsccanuiesdasevastieeeseeatewecs 1282
[6] APPLICATION FORM FOR SETTING UP ARGG............cccccceeceeeeeeee 1285
[7] FORM OF APPLICATION FOR CERTIFICATE OF REGISTRATION
TO COMMENCE/CARRY ON THE BUSINESS OF A SECURITI-
SATION COMPANY OR RECONSTRUCTION COMPANY..........c2+2+- 1286

1227
 iat.ME
a «¢ tiene «of the
Th Tait —" ) ;

FRONT TAA PA TING P.. Sela ware .

\ 2M MOOR (J tet
risstes ‘n ext exceed aes
art & Poor's x
v3 | ae 1 ia. oho Wal os mar ae wee

We! , or Pree VERT waaay T

ey viedCOMA
wr 8 oN re aie
“mt « == *@ r,

ie
om
o

. oaimnendeal
7 é “aay’

mains teatel,
ca bee sar _ i 7

+ a . a
RY
)
TrTs7 Gb
es 4
_— creme 2 aT A GEDtame v
rie se? seo GT MD
er2MiF08
oe! AA MOT RENTERID
 [1]
SECURITY INTEREST (ENF ORCEMENT) RUL
ES, 2002
Ministry : Ministry of Finance and Company Affairs,
Department/Board: Economic Affairs
Notification No: SO 1020(E)
Date: 20-9-2002

SYNOPSIS
R.1. Short title and commencement. ........ 1229 App. VI—Form............cceecececsceeseeseee 1267
W211 GRefinwions:. fash cz3) ve e557 1230 App. VII—Application Under
RSae! |Demand Notice...«...055...............4.. 1232 Sub-Section (1) Of
[R.3-A.Reply to representation of Section 17 Of The
power: 43 2edtherns: Derres. 1234 Securitisation And
R.4. Procedure after issue of notice.......... 1235 Reconstruction Of
R.5. Valuation of movable secured Financial Assets And
SRA... POET IRN 2. AM). 1239 Enforcement Of
R.6. Sale of movable secured assets......... 1239 Security Interest Act,
R.7. Issue of certificate of sale.................. 1243 14,1 REI ie 1270
R.8. Sale of immovable secured assets..... 1244 App. VIII—Application — Under
R.9. Time of sale, Issue of sale Sub-Section (6) Of
certificate and delivery of Section 17. Of The
possession sete. 12543: Ve,. Lb cuss isees 1251 Securitisation And
R.10. Appointment of Manager.................. 1257 Reconstruction Of
R. 11. Procedure for Recovery of shortfall Financial Assets And
aheecused debits oi be bi 51358 1258 Enforcement Of
R.12. Application to the Tribu- Security Interest Act,
nal/Appellate Tribunal.— ................. 988 ZU GAIA thy 0s 0s:sanpesseese 1273
R. 13. Fees for applications and appeals App. [X—Appeal Under Section
under sections 17 and 18 of the 18 O The
BB th Den srsinntysets dygeei AMT. 988 Securitisation And
App. I—Panchnama....................... 1260 Reconstruction Of
App. II—Inventory ...................00. 1261 Financial Assets And
App. I1I—Certificate Of Sale........ 1262 Enforcement Of
App. 1V—Possession Notice......... 1263 Security Interest Act,
App. V—Sale Certificate............... 1265 DOU MEILE: bE s0000000 1275

Security Interest (Enforcement) Rules, 2002

S.O. 1020(E). dated 20th September, 2002—In exercise of the powers conferred
by Sub-section (1) and clause (b) of Sub-section (2) of Section 38 read with Sub-
Sections (4), (10) and (12) of Section 13 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest [Act, 2002 (54 of 2002)],
the Central Government hereby makes the following rules, namely:—
R. 1. Short title and commencement:

These rules may be called the Security Interest (Enforcement) Rules, 2002,
the Of-
(2) They shall come into force from the date of their publication in
ficial Gazette (20-9-2002).
2002) by SO 103(B), dated 2-2-2007 (w.e.f. 2-2-
1. Subs. for “(Second) Ordinance, 2002 (Ord. 3 of
2007).

1229
 Directions, etc. ), ete,
i200 =~=R2 Part 11l—Suberdinate Law (Rules,

COMMENTS
rcement of security interests has
The power to preseribe rules relating to enfo
ific reference in section 14( 10) to
been granted in section 38(2)(b). There is a spec for exercise of powers of
prescribing the format of appeal, and in section 13(12)
the secured creditor through his authorised officers.
of measures to be
The rules are relevant in context of section 13 only, In case
takeover of
adopted by asset reconstruction companies under section 9 or for
relevant.
management under section 15, these Rules are not

R. 2. Definitions
In these rules, unless the context otherwise requires,—
er of
(a) “quthorised officer” means an officer not less than a chief manag
a public sector bank or equivalent, asspecified by the Board of Direc-
tors or Board of Trustees of the secured creditor or any other person
or authority exercising powers of superintendence, direction and con-
trol of the business or affairs of the secured creditor, as the case may
be, toexercise the rights ofa secured creditor under the ’|Act);
(b) “demand notice” means the notice in writing issued by a secured
creditor or authorised officer, as the case may be, to any borrower
n 13 of the *|Act};
(2) of section
pursuant to sub-sectio
‘l(c) “Act” means the Securitisation and Reconstruction of Financial
—s Enforcement of Security Interest Act, 2002 (54 of
ys
‘[(d) “approved valuer” means a person registered as a valuer under
Sec. 34-AB of Wealth-tax Act, 1957 and approved by the Board of
Directors or Board or Trustees of the secured creditor, as the case
may be];
ae i used and not defined in these Rules but
defined in t Act] shall have the meanings respectively assigned
to them
in the “|Act].
Rule
2 (a)

(a) “authorised officer” means an officer not less than a chief man-
ager of a public sector bank or equivalent, as specified by the
Board of Directors or Board of Trustees of the secured creditor or
any other person or authority exercising powers of
1O3E), dated 2-2-2007
FSO TONE dy LOSE), dated 2-2-2007 (wef. 2-2-2007
(week 2-2-2007),
(c) Ordinance” means theSecuritisation and
Recenemunsin a ery
Ordinance, 2002 (Ord.3 of 2002)".
26-10-2007 (wef. 26-10-2007).
 Security Interest (Enforcement) Rule
s, 2002 R.2(b) 1231
superintendence, direction and control
of the business or affairs of
the secured creditor, as the case may be,
to exercise the rights of a
secured creditor under the [Act ]

COMMENTS
The word “authorised officer” only refers to an office
r of the secured creditor.
Action under section 13 may be taken either by the
secured creditor, or by his
authorised officer. Since secured creditors under this law are
juristic entities, the
only way for them to discharge any function is through authorised
officers.
In Jupiter Jewel Tech. & Ors. v. Indian Overseas Bank®, it was
stated that
“Authorised Officer may mean different officers depending upon the context
and
obviously depending upon the delegation by the persons or authority in
charge of
the institution.”
In case of appointment of any external agency for exercise of the rights, the
general agency rules will be applicable and any action shall be taken only in the
name of the authorised officer.

Notice struck down as not signed by “authorised officer”

In Skyhigh Bright Bars P. Ltd v. Co-operative Bank of Ahmedabad Ltd.’, the
notice under section 13(2) was served by a deputy manager of the bank. The no-
tice was struck down on the ground that the signatory to the notice was not at
least a chief manager. While a subsequent ratification was done by the bank, the
Tribunal did not recognise the same holding that retrospective authorisation is
not contemplated under the law. The rejection seems to be extremely technical —
all that the Bank has to do is to restart the process again. If the bank is putting its
weight on the litigation, there is no reason why the bank cannot rectify the minor
mistake in the notice. The ground was not proper for rejection of the notice as the
borrower could not have been put to any fundamental prejudice by the error;
nevertheless, the case is a pointer to the need to meticulously observe the re-
quirements of the law as regards the notice. A similar rejection of the notice was
done in K Inbarajan v. Tamilnad Mercantile Bank Limited’, as the notice was
signed by a person who could not be proved to be of the bank of a chief manager
of a nationalised bank. The ruling also held that a subsequent regularisation of
the notice could not rectify the omission.

Rule 2(b)
(b) demand notice:means the notice in writing issued by a secured credi-
tor or authorised officer, as the case may be, to any borrower pursu-
ant to sub-section (2) of section 13 of the [Act];

6. III (2010) BC 385 Mad. (DB)

7. II (2005) BC 13 (DRAT/DRT).
8. IL (2005) BC 92 (DRAT/DRT).
 Directions, ete. ), efe.
i732 RS Part 11i—Suberdinate Law (Rules,

COMMENTS
13(2), see the comments under seo
As to contents of the notice under section
tion 13(2) and 1.4(3).
Court in Jupiter Jewel Tech, &
As to the term “authorized officer” used, the
officer under rule 2(b) would
Ors. v. Indian Overseas Bank’. held that authorised
de a secured creditor in a more
mean an officer authorised under rule 2(a) or inclu of Trus:
tors or Board
generic sense, which may also include the Board of Direc
tees of such creditor.
Rule 2(c), (d) and (e)
Financial As-
(ec) [“Aet” means the Securitisation and Reconstruction of
sets and Enforcement of Security Interest Act, 2002 (54 af 2002); ]
Sec.
(d) [“approved valuer” means a person registered as a valuer under
34-AB of Wealth-tax Act, 1957 and approved by the Board of Direc-
tors or Board or Trustees of the secured creditor, as the case may be; |
(e) Words and expressions used and not defined in these Rules but defined
in the [Act] shall have the meanings respectively assigned to them in
the [Act]

R. 3. Demand Notice
(1) The service of demand notice as referred to in sub-section (2) of section
13 of the "[Act] shall be made by delivering or transmitting at the place
where the borrower or his agent, empowered to accept the notice or docu-
ments on behalf of the borrower, actually and voluntarily resides or carries
on business or personally works for gain, by registered post with acknowl-
edgement due, addressed to the borrower or his agent empowered to accept
the service or by Speed Post or by courier or by any other means of trans-
mission of documents like fax message or electronic mail service:
Provided that where authorised officer has reason to believe that the bor-
rower or his agent is avoiding the service of the notice or that for any other
reason, the service cannot be made as aforesaid, the service shall be effected
by affixing a copy of the demand notice on the outer door or some other con-
sprcuous part of the house or building in which the borrower or his agent
ordinarily resides or carries on business or personally works for gain and
also by publishing the contents of the demand notice in two leading newspa-
pers, one m vernacular language, having sufficient circulation in
that

P a 10) BC 385 Mad. (DB).

» Subs. for “Ordinance” by SO 103(E), dated 2-2-
2007 (wet 2-2-2007).
 Security Interest (Enforcement) Rules, 2002
R.3(1) 1233
(2) Where the borrower is a body corporate, the demand notice
served on the registered office or any of the shall be
branches of such body corporate
as specified under sub-rule (1).
(3) Any other notice in writing to be served on
the borrower or his agent
by authorised officer, shall be served in the same mann
er as provided in this
rule.
(4) Where there are more than one borrower, the dema
nd notice shall be
served on each borrower.

Rule 3(1)
(1) The service of demand notice as referred to in sub-section (2) of section
13
of the [Act] shall be made by delivering or transmitting at the place where
the
borrower or his agent, empowered to accept the notice or documents on behalf
of
the borrower, actually and voluntarily resides or carries on business or person-
ally works for gain, by registered post with acknowledgement due, addressed to
the borrower or his agent empowered to accept the service or by Speed Post or
by courier or by any other means of transmission of documents like fax message
or electronic mail service:
Provided that where authorised officer has reason to believe that the borrower
or his agent is avoiding the service of the notice or that for any other reason, the
service cannot be made as aforesaid, the service shall be effected by affixing a
copy of the demand notice on the outer door or some other conspicuous part of
the house or building in which the borrower or his agent ordinarily resides or
carries on business or personally works for gain and also by publishing the con-
tents of the demand notice in two leading newspapers, one in vernacular lan-
guage, having sufficient circulation in that locality

COMMENTS
The last few words of this rule leave the mode of delivering the notice com-
pletely open-ended. However, it is to be noted that as the provisions under this
law are for enforcement of security interests, and the security interests are created
under the security agreement, the provisions of this law cannot travel too far from
the security agreement. If the agreement between the parties provides for a par-
ticular mode of serving notices, the same should be complied with.
P l
In Bharatbhai Kamalshi Mehta y. The Kapol Cooperative Bank Ltd.'', the DRT
Mumbai has taken a view that the above rule does not allow for personal Lae
of the notice. This seems to be a mistaken view as the modes of service permitte
by the rule are several and the rule has substantial scope for flexibility.

11. 1 (2006) BC 127 (DRT/DRAT).

 ns, etc.), etc.
1234 BR. X22) Part 11i—Suberdinate Law (Rules, Directio

Bank Veena Chandyvoke”, when registered notices sent to the

the endorsement “Un-
ane b Lahey ae address were returned with
lly served on the bor-
claimed”. the DRAT held that the notices were not actua
rower.
in Narender Singh v. Punjab & Sind Bank'’, when the notice had alread y died
at all to be served
nearly three years before the issuance of notice, it was held not
aper would
on her and nor could the publication of any such notice in any Newsp
be of any legal value.
Rule 42)
(2) Where the borrower is a body corporate, the demand notice shall be served
on the registered office or any of the branches of such body corporate as spect-
fied under sub-rule (1).

COMMENTS
The purport of this rule should be taken as empowering the secured lender to
serve a notice at either the registered office, or the relevant branch of the body
corporate where the concerned assets are situated. Obviously, if the assets are
situated at the Calcutta branch, serving a notice at the Delhi branch will not be a
good service.
In view of the nature of action involved under this section, it will be a good
practice to serve a notice both at the registered office of the borrower, as also at
the branch where the action under section 13 is to be physically taken.
Rule (3) and (4)
(3) Any other notice in writing to be served on the borrower or his agent by
authorised officer, shall be served in the same manner as provided in this rule.
(4) Where there are more than one borrower, the demand notice shall be
served on each borrower.

“TR. 3-A. Reply torepresentation

of borrower.—

amine whether the same is acceptable or tenable. adage

12. 1 (2010) BC 93 (RAT).

13. TV (2009) BC 84 (DRAT),
14. Ins. by SO 103(E), dated 2-2-2007 (wef. 2-2-9007).
 Security Interest (Enforcement) Rules, 2002
R.4 1235
deemed necessary, within seven days from the
date of receipt of the repre-
sentation or objection.
(c) If on examining the representation made or
objection raised, the au-
thorized officer comes to the conclusion that such repre
sentation or objec-
tion is not acceptable or tenable, he shall communicate
within one week of
receipt of such representation or objection, the reasons for
non-acceptance
of the representation or objection. to the borrower. ]

COMMENTS
See notes under section 13(3A).

R. 4. Procedure after issue of notice

If the amount mentioned in the demand notice is not paid within the time
specified therein, the authorised officer shall proceed to realise the amount
by adopting anyone or more of the measures specified in sub-section (4) of
section 13 of the ‘[Act] for taking possession of movable property,
namely:—
(1) Where the possession of the secured assets to be taken by the se-
cured creditor are movable property in possession of the bor-
rower, the authorised officer shall take possession of such movable
property in the presence of two witnesses after a Panchnama
drawn and signed by the witnesses as nearly as possible in Appen-
dix I to of these rules.
(2) After taking possession under sub-rule (1) above, the authorised
officer shall make or cause to be made an inventory of the prop-
erty as nearly as possible in the form given in Appendix n to these
rules and deliver or cause to be delivered, a copy of such inventory
to the borrower or to any person entitled to receive on behalf of
borrower.

(3) The authorised officer shall keep the property taken possession
under sub-rule (1) either in his own custody or in the custody of
any person authorised or appointed by him, who shall take as
much care of the property in his custody as an owner of ordinary
prudence would, under the similar circumstances, take of such
property:
Provided that if such property is subject to speedy or natural
custody is likely
decay, or the expense of keeping such property in
sell it at once.
to exceed its value” the authorised officer may

Wie
eee 2
15. Subs. for “Ordinance” by SO 103(E), dated 2-2-2007 (w.e.f, 2-2-2007).
 Subordimat Law (Rules, Directions, etc.), etc.
2% RH) Part li

f preservation and pro:

he authorised officer shall take steps for
ifnecessary, tilltheyane
them,
= aananet eccured assets andinsure
sold or otherwise disposed of,
—
(5) in case any secured asset is:
le instrument; or
(a) a debt not secured by negotiab
(b) a share in a body corporate;
ession of the bor-
(c) other movable property not in the poss
ody of
rower except the property deposited in or in the cust
shall
any court or any like authority, the authorised officer
obtain possession or recover the debt by service of notice as
under:—
(i) in the case of a debt, prohibiting the borrower from
recovering the debt or any interest thereon and the
debtor from making paym thereofen t ing
and direct
the debt or
to make such paym to theen t
author ised
officer;or
(ii) in the case of the shares in a body corporate, directing
the borrower to transfer the same to the secured credi-
tor and also the body corporate from not transferring
such shares in favour of any person other than the se-
cured creditor. A copy of the notice so sent may be en-
dorsed to the concerned body corporate’s Registrar to
the issue or share transfer agents, if any;
(iii) in the case of other movable property (except as
aforesaid), calling upon the borrowers and the person
in possession to hand over the same to the authorised
officer and the authorised officer shall take custody
of such movable property in the same manner as
provided in sub-rules (1) to (3) above;
(iv) movable secured assets other than those Ain

Rule 4(1)
(1) Where the possession of the
aremovable property inpo secured assets tobetaken bythe secured creditor
Panchnama drawn and signed heoperty in the presence of two witnesses after a
Ito of these rules. datas witnesses as nearly as possible in Appendix
 Security Interest (Enforcement) Rules, 2002 Rr. 4(2) & (3) =—-:1237

COMMENTS
See also notes under 13.

The analogous rule is rules 43 and 43A, Order 21 of the CPC. The notable dif-
ference is that this law does not make any separate rule for agricultural produce.

As to what property cannot be attached under this rule, see notes under section
31, and generally section 60 of the CPC.
Note that the mere taking of possession by the secured creditor does not
amount to a transfer of title. Therefore, taking of such possession is not a “sale”,
even for the purposes of sales-tax. See, generally, as to the impact of an attach-
ment, section 64 of the CPC.
A point left untouched by the Rules is - within what time frame after serving
the notice under section 13 should the secured creditor take the measures pro-
vided for in section 13(4)? In other words, does he have all the time in the world,
and avoid being blamed for latitude? There is no upper time limit laid down in
the law. Most likely, while service of the notice under section 13(2) will be used
by lenders as tool to force the borrower to come on the negotiating table, lenders
will not take actual possession of assets until they spot an opportunity of selling
the assets. Therefore, they might rather be inclined to appoint managers to man-
age the assets rather than take possession thereof.
In view of this, it should have been proper for the rules to have laid down an
upper time limit.

Rule 4(2) & (3)

officer
(2) After taking possession under sub-rule (1) above, the authorised
nearly as possibl e
shall make or cause to be made an inventory of the property as
or cause to be deliv-
in the form given in Appendix-II to these rules and deliver
person entitled to re-
ered, a copy of such inventory to the borrower or to any
ceive on behalf of borrower. |
taken possession under sub-
(3) The authorised officer shall keep the property
custody of any person Japan or
rule (1) either in his own custody or in the
of the property in his custo . o
appointed by him, who shall take as much care
the similar circumstances, take ©
an owner of ordinary prudence would, under
such property:
fe
ect to speedy or natural decay, *, NE
Provided that if such property is subj the au
custody is likely to exceed its value,
pense of keeping such property in
ised officer may sell it at once.
Vwese-s- a =| _ = edok Dy, Ee le ee ee

cured creditor merely amounts to assuming custody of the gor

above rule will be to impose on the secured creditor obligatio:
bailee under the Contract Act.
Rule 4(4)
(4) The authorised officer shall take steps for preservatio
secured assets and insure them, if necessary, till they are so.
posed of.
'

COMMENTS
Analogous rules are contained in section 76 of the Transf
See also notes under section 13 in Part II.
Rule 4(5)

(5) In case any secured asset is—

(a) adebt not secured by negotiable instrument; or
(b) a share in a body corporate;
(c) other movable property not-in-the-possession of t
the property deposited in or in the custody of any «
thority, the authorised officer shall obtain posses
debt by service of notice as under:—
(i) in the case of a debt, prohibiting the borroy
the debt or any interest thereon and the «
payment thereof and directing the debtor to
to the authorised officer, or
(ii) in the case of the shares in a body corporat
rower to transfer the same to the secured c
body corporate from not transferring such
any person other than the secured creditor.
so sent may be endorsed to the concerne
Registrar to the issue or share transfer ager
Security Interest (Enforcement) Rules, 2002 R.6 1239

possession of the documents evidencing title to such secured

assets.

COMMENTS
Analogous rule in CPC is rule 46 of Order 21.

R. 5. Valuation of movable secured assets

After taking possession under sub-rule (1) of rule 4 and in any case before
sale, the authorised officer shall obtain the estimated value of the movable
secured assets and thereafter, if considered necessary, fix in consultation
with the secured creditor, the reserve price of the assets to be sold in realisa-
tion of the dues of the secured creditor.

COMMENTS
Though this rule talks of getting the asset valued, but does not exactly specify
how. Possibly, the definition of “‘valuer” in rule 2(d) will be relevant here.
The words “fix, in consultation with the secured creditor” seem to be mis-
placed, as fixation of the reserve price is to be done by the secured creditor him-
self. The authorised officer is nothing but the officer of the creditor. It is likely
that the intent was to keep the borrower in confidence.
In order to avoid litigation on the sale price, it is advisable to keep the borrower
into the loop, though there is no obligation under the Rules to allow the borrower
to intervene in the process of sale.

R. 6. Sale of movable secured assets

d assets taken pos-
(1) The authorised officer may sell the movabie secure
lots by adopting any of
session under sub-rule (1) of rule 4 in one or more
for the assets, to be so
the following methods to secure maximum sale price
sold—
in the secured assets or
(a) obtaining quotations from parties dealing
or
otherwise interested in buying such assets;
(b) inviting tenders from the public; or
(c) holding public auction; or
(d) by private treaty.
thirty
The aut hor ise d offi cer shal l ser ve to the borrower a notice of
(2)
d assets, under sub-rule (1):
days for sale of the movable secure
the sal e of suc h se cur ed ass ets is being, effected by either
Provided that if ding public auction, the sec
ured
fro m the pub lic or by hol
inviting tenders two leading newspapers,
one In the
cau se a pub lic not ice in
creditor shall
 Ons, s @bC,),),
Di ection ek
te.
Part Ub Subordinate Law (Rules,, Dir
i240 «6B GI)

gua ge, hav ing suf fic ien t cir cul ation inthatlocality bysetting
vernacular Lan
e,
out the terms of sale, which may includ
the secured creditor;
(a) details about the borrower and
ets tobesold with identification
(b) description of movable secured ass
marks or numbers, if any, on them;
payments
(ec) reserve price, ifany, and the time and manner of
(d) time and place ofpublic auction orthetime after which sale by
any other mode shall be
d secured
(e) depositing earnest money as may be stipulate by the
creditor;
if) other thing which the authorised officer considers it material
fora purchaser toknow inorder tojudge thenature and value of
movable secured assets.
(3) Sale by any methods other than public auction or public tender, shall
be on such terms as may be settled between the parties in writing.

Rule 6(1)
(1) The authorised officer may sell the movable secured assets taken posses-
sion under sub-rule (1) of rule 4 in one or more lots by adopting any of the fol-
lowing methods to secure maximum sale price for the assets, to be so sold—
(a) obtaining quotations from parties dealing in the secured assets or oth-
erwise interested in buying such assets; or
(b) inviting tenders from the public;or
(c) hold publicin
auctiog
n; or
(d) by private treaty.

COMMENTS

of.Infact,thesecured creditor willhav

etosellsuchassets
 Security Interest (Enforcement) Rules, 2002
R. 6(2) 1241
Rule 6(2)
(2) The authorised officer shall serve to the borrower a notice
of thirty days for
sale of the movable secured assets, under sub-rule (Dy:

Provided that if the sale of such secured assets is being, effected by either
invit-
ing tenders from the public or by holding public auction, the secured credito
r
shall cause a public notice in two leading newspapers, one in the vernacular
language, having sufficient circulation in that locality by setting out the terms of
sale, which may include,—
(a) details about the borrower and the secured creditor:
(b)~ description of movable secured assets to be sold with identification
marks or numbers, if any, on them;
(c) reserve price, if any, and the time and manner of payment;
(d) time and place of public auction or the time after which sale by any
other mode shall be completed;
(e) depositing earnest money as may be stipulated by the secured the
creditor;
(f) any other thing which the authorised officer considers it material for a
purchaser to know in order to judge the nature and value of movable
secured assets.

COMMENTS
The rules have laid down a 30-days notice before sale. Though it is not explicit
in the rules, it is quite reasonable to assume that the notice is given after fixing
the sale price, buyer, and the terms of the sale. This is a sort of cooling off period
for the borrower to either try and get a better deal for the sale, or, if he has any
grudge against the sale, to take necessary action by way of appeal, etc.
Rule 6(2) has been held to be mandatory in nature. In Sameer Chand v. Central
Bank of India'®, the DRAT-Allahabad held that as per the object and spirit of the
pur-
rules, 30 days time should be granted to the borrower before the auction
t time
chaser is to crop up. It is clear that the object of rule 6(2) is to give sufficien
The bank officer cannot
for the borrower for paying off the loan within 30 days.
cut down or curtail the said period of time granted by the rules.
days is not Ra
When a notice is issued for a second time, the time of thirty
g the provisions of nana
tory.' In Dayanath Pandey v. State of CP. & takin
Court held that oi 8s
of the U.P. General Clauses Act, 1904, the High
the date of issuance of notice.
thirty or sixty days was to be counted excluding

aaa ee
16. 1 (2010) BC 3 (DRAT).
17. 1(2010) BC 19 (DRAT).
18. II (2008) BC 634 (DB).
 .
(Rules, Directions, ete), ete
12342) «(RL OS) Part ill—Subordinate Law

en
Contof thet sice
not
s of sub -ru le (2) abo ve are ana log ous to UOC Article 9, section
The provision
613. The said section states:
ten ts of a nou fic aii on of dis pos iti on are sufficient if the notification:
The con
d party,
(A) describes the debtor and the secure
ject of the intended disposition,
(B) describes the collateral that is the sub
on,
(C) states the methodof intended dispositi
ounting of the unpaid indebt-
(D) states that the debtor is entitled toan acc
an accounting; and
edness and states the charge, if any, for
time after which
(E) states the time and place of a public disposition or the
any other disposition is to be made.
above.
Point (D) above is significant and is missing in sub-rule (2)

ds
partie
Notice to other intereste
While the Rules explicitly require notice only to the borrower, it is important
that other parties, who are interested in the sale or the credit for the sale proceeds,
are also notified. This would, at least, include the following:
(a) the guarantor,
(b) any pari passu security interest holder, whether or not the same have
joined in taking action of repossession,and
(c) any subordinated
security interest holder.

Rule 6(3)
(3) Sale by any methods other than public auction or public tender, shall be on
such terms as may be settled between the parties in writing.

= vate oa a

er
In the mattof sale by financial

Princiof pl esng
maki gone several time
sales byGi Shteeae'Co inal
s into the card.
the matte r."° rpor at io ns ngs
See one of the ruli in
19. Karnataka Stone .
(2005) BC443SC)” VESIMERY andDevelopment Conporation Lad.».Covalen Yada L4d..11
 Security Interest (Enforcement) Rules, 2002
Ri7 +1243
R. 7. Issue of certificate of sale

() Where movable secured assets is sold, sale price of each lot shall be
paid as per the terms of the public notice or on the terms as may be settled
between the parties, as the case may be and in the event of default of pay-
ment, the movable secured assets shall be liable to be ordered for sale again.
(2) On payment of sale price, the authorised officer shall issue a certificate
of sale in the prescribed form as given in Appendix III to these rules specify-
ing the movable secured assets sold, price paid and the name of the pur-
chaser and thereafter the sale shall become absolute. The certificate of sale
so issued shall be prima facie evidence of title of the purchaser.
(3) Where the movable secured assets are those referred in sub-clauses (iii)
to (v) of clause (1) of sub-section (1) of section 2 of the’ [Act], the provisions
contained in these rules and rule 7 dealing with the sale of movable secured
assets shall, mutatis mutandis, apply to such assets.

COMMENTS
Sub-rule (2) provides that the sale shall become absolute upon realisation of the
payment by the secured lender. The possible meaning of this rule is that, as pro-
vided in sub-rule (1), the sale remains conditional until the payment. However,
since the sale becomes absolute only upon payment of the entire price, the effec-
tive date of the sale is the issuance of the certificate.
The rules provide no guidance as to appropriation of the sale proceeds and giv-
ing of credit to the borrower.

Title of the buyer: do limitations and equities of the seller survive?

The question as to whether the sale by the bank is a case of creation of interest
in the buyer, or a mere transfer of interest, will remain a very significant question
for quite some time. The general position of law on the sale by the lender in ex-
(rus-
ercise of security interest seems to be that secured lender is not an agent or
obviously
tee of the borrower. However, the action of the secured lender does not
In other words, the secured
contain any independent title in the secured lender.
limitations and equi-
lender acquires or transfers the property subject to all such
instance, if the right or
ties that affected the rights of the borrower himself. For
whether existing at
the borrower over the property was subjected to any equities, ,
created thereafter
the time when the security interest was created or lawfully
under this Act, and, therefore,
such equities will survive the repossession action
will get relegated to the buyer.
Bench of the Punjab and Hary-
In almost like a passing comment, the Divisionjab Nation , e
a l Bank’'na
‘ona a case deal-|
h Cou rt in San t Nir ank ari Man dal v. Pun
na Hig
d that the buyer of a property “cannot get
af mn a sale under the RDB Act, hel
eekly ees
30. Subs for “Ordinance” by SO 103(B), dated 2-2-2007 (w,e.f, 2-2-2007).
21. 1 (2005) BC 587.
 Directions, etc.), ete.
1244 KS Pert 111—Suberdinate Law (Rules,

question than what are the rights of the

any better right or ttle to the property 1
acoordance with the law”.
owner-mortgagor or the Bank, that too 10
ofthe buyer
Dues of the previous owner and the position
the position of the buyer
In practice, there might be curious questions as to
e a buyer acquires 4 unit or
with regards to the dues of the previous owner, Wher
are unpaid dues of
property from a secured creditor, it is quite likely that there
the previous owner.
unpaid
For instance, in one of the cases of sale by order of the DRT, there were
resume the
electricity dues of the seller. The electricity company refused to
power connection unless the dues of the previous owner were paid, The Rajast-
han High Court ordered that the dues of the erstwhile seller cannot be claimed
from the auction buyer. There was a reliance on a Supreme Court ruling in Isha
Marbles y. Bihar State Electricity Board” relating to the rights of an auction
buyer.
Needless to say, similar rule will apply to any other dues of the seller.

R. 8. Sale of immovable
secured assets

(1) Where the secured asset is an unmovable property, the authorised offi-
cer shall take or cause to be taken possession, by delivering a possession no-
tice prepared as nearly as possible in Appendix IV to these rules, to the bor-
rower and by affixing the possession notice on the outer door or at such con-
spicuous place of the property.
(2) “[The possession notice asreferred toin sub-rule (1) shall also be pub-
Oftaking anus Possible butinanycase notlater than 7 daysfrom thedate
taking possession, in two leading newspapers] , one in vernacular lan-
guage having sufficient circulation in that locality, by the authorised officer.
(3) In the event of possession of immovable
is actually
proper ty taken
theauthorised officer suchproperty shallhekeptin
hisowncustody
custody any person authorised or appointed by him, who i or
shall take as

(4) The author officis

er shall
ed take
of secured assets and insur steps for preserva proteon
and ti ction
dispased of. a. them, ifnecessary, till they are sold or otherwise

22. 1 (1995) BC $70

 Security Interest (Enforcement) Rules, 2002
R.8 1245
the reserve price of the property and may sell the whole
or any part of such
immovable secured asset by any of the following methods:—
(a) by obtaining quotations from the persons dealing with similar
se-
cured assets or otherwise interested in buying the such assets; or
(b) by inviting tenders from the public;
(c) by holding public auction; or
(d) by private treaty.
(6) The authorised officer shall serve to the borrower a notice of thirty
days for sale of the immovable secured assets, under sub-rule (5):

Provided that if the sale of such secured asset is being effected by either in-
viting tenders from the public or by holding public auction, the secured
creditor shall cause a public notice in two leading newspapers one in ver-
nacular language having sufficient circulation in the locality by setting out
the terms of sale, which shall include,—
(a) the description of the immovable property to be sold, including
the details of the encumbrances known to the secured creditor;
(b) the secured debt for recovery of which the property is to be sold;
(c) reserve price, below which the property may not be sold;
(d) time and place of public auction or the time after which sale by
any other mode shall be completed;
(e) depositing earnest money as may be stipulated by the secured
creditor;
(f) any other thing which the authorised officer considers it material
for a purchaser to know in order to judge the nature and value of
the property.
(7) Every notice of sale shall be affixed on a conspicuous: part of the im-
the
movable property and may, if the authorised officer deems it fit, put on
web-site of the secured creditor on the Internet.
tender, shall be
(8) Sale by any method other than public auction or public
g.
on such terms as may be settled between the parties in writin

i COMMENTS
rties is Jee = te re-
Substantively, this rule relating to immovable prope
the CPC is rule 54 of Order 21.
lating to movable properties. Analogous rule in
 Directions, etc, ), etc.
i246 «CRB Part il—Suberdinate Law (Rules,
“
Sco pe of rul e 5:
of India”, explained the scope
The Supreme Court in Transcore v. Union Bank
of rule 8 in followin g
words.
issuance of
"96. :;.. Thus. rule & deals with the stage anterior to the
the issu-
Sale Certificate and delivery of possession under rule 9, Till
a Court Recei ver
ance of Sale Certificate, the authorized officer is like
lic
under Order 40, Rule 1, CPC. The Court receiver can take symbo
possession and in appropriate cases where the Court recei ver finds that
a third party interest islikely tobe created overnight, he can take actual
possession even prior tothe decree. The authorized officer under rule 6
has greater powers than even a Court Receiver as security interest inthe
property is already created in favour of the banks/Fis. That interest
needs to be protected. Therefore, rule 8 provides that till issuance of the
sale certificate under rule 9, the authorized officer shall take such steps
as he deems fit to preserve the secured asset. It is well settled that third
party interest are created overnight in very many cases, Those third
party take up the defence of beia ng bona fide purchaser for value with-
.
out notice It is these types of dispu tes which are sought to be avoided
by rule 8 read with rule 9 of the 2002 Rules. In the circumstances, the
drawing of dichotomy between symbolic and actual possession does not
find place in the scheme of the NPA Act read with the 2002 Rules.”
Mandatory
nature of the Rules
The procedural rules on sale of assets are mandatory and departure therefrom
will render the repossession and/or sale liable to be set aside. In Manoj D. Kapasi
v. Union of India’*, the Division Bench of the Bombay High Court set aside a
repossession action taken by the bank where the public notice was published on
the 30th October, 2004 and the last date for tenders was fixed as Sth November.
2004. The tender document required the bidder to pay 25% forthwith, but the
fhecae age ay notpaid until 19th January, 2005. Inthiscase,
om anemade bythebank setaside, butsince theborrower notonly was
has a right ofredemp-
See more thesale, theborrower was allowed toredeem theprop
erty by
bythebank forRs. 15 crores, Whee the iva tan Goaralioas Urvinae,
 Security Interest (Enforcement) Rules, 2002
R.8 1247
In Garments India Exports v. Dhanlakshmi Bank Ltd, the possession
notice
was not published as required under rule 8(2), the DRAT-Chennai held
that the
word “shall” has been used in rule 8(2) and there is no room to say that the op-
tion Is on the secured creditor to take or not to take the publication in two leading
newspapers. Non-compliance of the same is not only a breach, but also violation
of the rules provided under the Security Interest (Enforcement) Rules, 20027’.
In C.S. Hotel P. Ltd. v. Ahmedabad People Co-op Bank Ltd.*°, where valuation
report was not obtained from approved valuer, the sale notice was published only
in local newspaper, no references of the encumbrances of the secured assets was
mentioned and the reserve price was not quoted, the sale notice though issued for
the third time, was held to be invalid, illegal and void.
The mandatory nature of such notice has also been upheld in Haji Abdul Ghani
v. Central Bank of India and Ors.”', relying upon the decision taken in M/s K.R.S.
Latex India Pvt. Ltd. v. The Federal Bank Ltd’.

Constitutional validity of Rule 8(5) and Rule 8(6)

In Kanha International & Ors. vs. Union of India & Ors.**, the constitutional
validity of sub-rule (5) and (6) was challenged on the ground that there is no right
expressly provided to the borrower to get copy of valuation report or there is no
express provision for consultation of the borrower by authorised officer while
fixing the reserve price. The Gujarat High Court dismissed the petition stating
that rule 8(5) and 8(6) of the SARFAESI Act are not unconstitutional as these
protect the interest of the borrower. With respect to rule 8(5) mere absence of an
express right by itself is not sufficient ground to make the rule unconstitutional.
As regards rule 8(6) it again gives the borrower to put forward his valuation
which perhaps may be in some conflict with the valuation which is fixed as
per rule 8(5) and hence the borrower has clear 30 days to get his grievance re-
dressed.
In Sea Poly Plasf'India Pvt. Ltd. & Ors. vs. Union Of India & Ors.™, the Con-
stitutional Validity of rule 8(5) was challenged but the Court observed that such
contemplate
challenge is not sustainable as because, although rule 8(5) does not
Officer is
that borrower should be consulted and it is sufficient if the Authorised
price, but, suffi-
empowered in consultation with secured creditor to fix reserve
notice 1s issued race
cient safeguards have been provided to borrower to whom
receipt of notice undet
rule 8(6) and the borrower can object to valuation upon
rule 8( 6).

e
ees ee Py eee ts
Pe
RAT). ) BC 36 (DRAT-Delhi).
Ltd. v. Om Prakash & Ors IV (2011 |
i: Remwicle Teas 5 hin
Ahmedabad). |
Vv. Kotak Mahindra Bank | (2013)
aa 47 api
SP ppi ise e also KR Krishnegowda & Anr.
rf OM
BC 455 Kar. (DB).
78.
32. I (2011) BC 1; AIR 2011 Kerala
33. Il (2011) BC 316 (DB- Guj)
34. 1(2013) BC 33B Bom. (DB) (CN)
1248 RS Part l1L—Subordinate Law (Rules, Directions, etc. ), ete.

Valuation of the secured asset for sale

Anr.”, the DRAT held
In Phoenix ARC Pvt, Lid. v. Ishan Systems Pvt. Lad. &3(1)(v
that the definition of “Fair Value” as given in Guideline ) of the Securilisa:
tion Companies and Reconstruction Companies (Reserve Bank) Guidelines and
ion
Directions, 2003 cannot prima facie be accepted as a guiding factor for valuat
of immovable secured asset for the purposes of sale under rule 8. The definition
of fair value under the said Guidelines have been used in the same Guidelines for
the limited purpose of determining the realizable value of investments of the
SC/ARC. The said Guidelines do not lay down any guideline for valuation of the
secured asset acquired by the reconstruction company for the purpos e
of sale,

Notice
to the borrower
Rule 8(6) requires the authorised officer to serve a notice to the borrower for
sale of immovable secured asset under sub-rule (5). However, the proviso to the
sub-rule states that if the sale is being effected by either inviting tenders from the
public or by holding public auction, the secured creditor shall cause a public no-
tice to be published by setting out the terms of sale.
The question is: does the proviso operate as a dispensation for serving notice to
the borrower in case sale is effected by inviting tenders or public auction? If the
case of Phoenix ARC Pvt. Ltd. v. Ishan Systems Pvt. Ltd. & Anr.”°
isto be relied
upon, the answer is ‘Yes’. The DRAT viewed that the purpose of the publication
of the public notice is that the residents of the locality at large, including the bor-
rower, may know about the sale of the property and they may participate in the
sale and the property may fetch a better price. Therefore, there is no requirement
of service of notice for sale upon the borrower when the property is to be sold by
inviting tenders from the public or by public auction. Notice to the borrower is
required in cases sale is effected by other methods under sub-rule (5).
Publication of the notice
The authorities have taken the rule regarding publication of notice with strict-
ness. In K. Inbarajan v. Tamilnadu Mercantile Bank Limited’’, the public notice
published in vernacular newspaper, but in English, was held not to be a proper
notice and hence, the possession taken in pursuance thereof was set aside.
Similarly, such non-compliance was observed in Ram Murti Pyare Lal v. Cen-
tral Bank of India & Ors.””, wherein too the sale was set aside.

35. 11 (2012) BC 98 (DRAT-Dethi)

36. II (2012) BC 98 (DRAT-Dethi)
37. Til (2005) BC 92 (DRAT/DRT).
38. 11 (2012) BC 72 (DRAT-Dethi)
39. 11 (2006) BC 137 (DRAT/DRT).
Security Interest (Enforcement) Rules, 2002
R.8 1249
Sansthan Maryadit v. Nanded District Central Coope
rative Bank Ltd.*’, the no-
tice was published in only one newspaper and, . theref
ore , the Presididiing officer
held the action taken pursuant to section 13(4) as not sustainable.
‘
jeter also Pragati Builders & Promoters & Ors. y. Ram Murthy Pyara
Lal &
age
Details of encumbrances
Rule 8(6)(f) mandates the secured creditors, especially an Authorised Officer,
to make known in the terms of sale notice anything that may be material to the
purchaser’s decision regarding the nature and value of the property. This also
includes any form of encumbrance on the property.
It was held in Jai Logistics v. Syndicate Bank", that in case of an auction, if so
indicated, the intending purchaser is liable to verify any encumbrances or statu-
tory liabilities attached to the property and cannot later seek for either the refund
of the earnest money or clearance of the encumbrance by the bank in question.
However, in the absence of such indication in the sale notice, the Bank would not
be justified in compelling a purchaser to further the sale by deposition of balance
sale consideration alongwith the encumbrance.
In E.Muthuraj v. The Authorised Officer®, the Madras High Court dismissed
the writ petition referring to the pronouncement made in Jai Logistics v. The
Authorised Officer“, remarked that the obligation on the part of the Authorised
Officer to disclose the encumbrances, is limited only to “those encumbrances
known to the secured creditor’, there is no scope for expanding the same to all
kinds of encumbrances created by the borrower or guarantor behind the back of
the secured creditor. “The ratio laid down in Jai Logistics (supra), cannot be un-
derstood to mean that the secured creditor as an obligation to obtain an encum-
brance certificate upto the period one day preceding the date of publication of the
proviso
auction sale notice. Reading such an obligation into clause (a) under the
of all ille-
to rule 8(6) would actually tantamount to some kind of a tacit approval
mortgagor after the creation
gal alienations made or encumbrances created by the
be extended to such an
of the security interest.... The purport of rule 8(6) cannot
due diligence
extent that it obliterates the liability of the purchaser to undertake
and to scrutinise the title to the property.”
& Ors.””, the Bank auc-
In Tarun Krishna Ag garwal vy. Central Bank of India
encumbrances, if any
tion sold the property on “as is where is” basis including
Court in respect of ie di
when litigation was already pending in the High auction aed ae =
back the
in question. The Bank was directed to return
have brought all facts by a no * ea
simple interest because Bank should
of the fact that they hi is on
appellant and should have made them aware Court that Bank wante
to the
symbolic possession of the property. It appeared
ee
ES a

DRT).
SS

_ [1 (2006) BC 205 (DRAT/ )

(DB -De lhi
rr I (2012) BC 835
Mad. (DB)
42. I (2010) BC 594
43. 1 (2013) BC 713.
44. (2010 (4) CTC 627).. Delhi).
45. ti(2011) BC 1 (DRAT
 i230 RB Part Lli—Suberdinate Law (Rules, Directions, ete.), etc.

mislead public at large. However, the Court rejected the appellant's claim tor
compensation and higher interest on the ground that, since the newspaper adver-
lisement stated “as is where is” basis the appellant should have visited the spot to
of theion
out that who is in possess
find so the appel-
in not doing
property and
lant was a bit negligent.
Amount to be mentioned
in notice:
In Todkar Associates v. Shree Veerashaiva Co-operative Bank Lid.”, after is-
sue of notice under Section 13(2) some amount was deposited by the borrower.
When possession notice in terms of rule 8(1) was issued the original amount due
as mentioned in notice under section 13(2) was stated and no deduction was
given for the money paid subsequently. It was contended that amount mentioned
in the possession notice was incorrect and, therefore, the notice is non-est, Con-
sidering the format of notice contained in Appendix IV to the Security Interest
Rules, 2002, the Presiding office held that the possession notice makes a refer-
ence to the demand made under section 13(2) and, therefore, it is the amount in-
corporated in the notice under section 13(2) which is requiredto be mentioned in
the possession notice.
Sale by Private Treaty
The law permits sale by private treaty but the only condition is that it shall be
on such terms as settled between all the parties in writing. Therefore, the pres-
ence of debtor and his willingness in writing is essential, as was held in J. Rajiv
Subramanian
& Anr. v. Pandiyas& Ors.“’ The consent of the borrower is sine
qua non of a valid agreement. See Sarika Jain vs. Urmi
Pawarla
& Anr.”.
Publication of photographs of the borrower/guarantor
Several banks are following the practice of publication Samelesaun taof the
borrower/guarantor, along with the post-repossession public notice. is is a
highly deplorable practice, as ittakes a civil wrong to the height of a crime.
The
author has strongly opposed this practice inanarticle”.
The Calcutta High Court inUjjal Kumar Das & Anr. v. State Bank
ofIndia &
Ors. - Inview of relevant rules, held that publication of photograph
of a bor-
 Security Interest (Enforcement)
Rules, 2002
R.9 1251
Way round. /t has no power to act
in a particular manner unless it is auth
by law...... There is absolute lack of orized
legislative sanction in relation to publicat
of photographs of defaulting borrower(s)/ ion
guarantor(s). The SARFAES] Act and
the rules framed thereunder not having
conferred any power on the secured credi-
tors to publish their photographs, they cann
ot resort to such action on the ground
that publication of photograph is not prohibit
ed. For the secured creditors, the test
1S not as to whether publication is prohibited
by the statute but whether such pub-
lication is permitted by it.”

R. 9. Time of sale, Issue of sale certificate and deliv

ery of Possession, etc.
(1) No sale of immovable property under these
rules shall take place be-
fore the expiry of thirty days from the date on whic
h the public notice of sale
is published in newspapers as referred to in the provi
so to sub-rule (6) or
notice of sale has been served to the borrower.
(2) The sale shall be confirmed in favour of the purchaser who
has offered
the highest sale price in his bid or tender or quotation or offer to the author
-
ised officer and shall be subject to confirmation by the secured creditor:
Provided that no sale under this rule shall be confirmed, if the amount of-
fered by sale price is less than the reserve price, specified under sub-rule (5)
of rule 9:
Provided further that if the authorised officer fails to obtain a price higher
than the reserve price, he may, with the consent of the borrower and the se-
cured creditor effect the sale at such price.
(3) On every sale of immovable property, the purchaser shall immediately
pay a deposit of twenty-five per cent of the amount of the sale price, to the
authorised officer conducting the sale and in default of such deposit, the
property shall forthwith be sold again.
(4) The balance amount of purchase price payable shall be paid by the
purchaser to the authorised officer on or before the fifteenth day of confir-
mation of sale of the immovable property or such extended period as may be
agreed upon in writing between the parties.
(5) In default of payment within the period mentioned in sub-rule (4), the
deposit shall be forfeited and the property shall be resold and the defaulting
purchaser shall forfeit all claim to the property or to any part of the sum for
which it may be subsequently sold.

Ge obi ors’ ‘ ,
rse to extra-legal means’-rules ieh
Calcutta Hig
51. See also:
ip
“Publishing
ivush
defaulters mee G: Lepeurs Kothari. & Company, at _https://india-
Sinha former Sip
(accessed on
cee
in , Oy Reise: - detaltors = photo_a_recourse_to_extra_legal_means.pdf
16th Sept embe r, 2013).
 Part Ui—Suberdinate Lan (Rules, Dinectians, etc,), etc,
1252 RY
. of
r and if the tenms
. .
(6) Ow confirmation of sale by the secured eredite
r exercising the
payment have been complied with, the authorised office
ble property in
power ofsale shall issue # certificate ofsale ofthe immova
V tothese rules,
favour of the, purchaser in the form given in Appendix
brances,
(7) Where the immovable property sold is subject to any encum
to deposit
the authorised officer may, if he thinks fit, allow the purchaser
inter.
with him the money required to discharge the encumbrances and any
sufficient
est due thereon together with such additional amount that may be
may be
to meet the contingencies or further cost, expenses and interest as
determine d
by him:
1 Provided that if after meeting the cost of removing encumbrances and
contingencies there is any surplus available out of the money deposited by
the purchaser such surplus shall be paid to the purcwithin ser
hafifteen days
from the date if finalisa the sale}
oftion
(8) On such t of money for discharge of the encumbrances, the
authorised [shall] issue or cause the purchaser to issue notices to the
persons interested in or entitled to the money deposited with him and take
steps to make the payment accordingly.
(9) The authorised officer shall deliver the property to the purchaser free
from encumbranc known to thees secured cred itor
on deposit of money as
specified in sub-rule (7) above.
of sale issued under sub-rule (6) shall specifically men-
(10) The certificate
tion that whether the purchaser has purchased the immovable secured asset
free from any encumbrances known to the secured creditor or not.

COMMENTS
Mandatory nature of the Rules
See comments under rule 8.
In C.S. Hotel Pvt. Ltd. v Ahmedabad People Co-op. Bank Ltd.™, though huge
sum was deposited by the third party, it had neither deposited 25% of the sale
price on the date of sale nor deposited remaining sale price within 15 days from
the date of confirmation of sale. The DRAT held that the requirement of rule 9
was not complied with and refused to allow impleadment of the third party in an
appeal under section 17 filed by the borrower.
In a case where there was no agreement between the parties to extend the pe-
riod of deposit under sub-rule (4), but there had been correspondence only aaa
such correspondence cannot be termed to be an agreement in writing to extend

52. Ins. by SO 1837(E), dated 26-10-2007 (w.e.f 26-10-2007).|

54. (2007) IBC 236 (DRATDRT) (E), dated 26-10-2007(w.e.f. 26-10-2007)
 Security Interest (Enforcement
) Rules, 2002
R'9) 1253
the period; the DRAT upheld the DRT’s judgment
:
State Bank : of India vy. Shripad Madhao Kapil & Ors.
to set aside
side th the auction. [See

Can “authorized officer” delegate:

In Pradeep D. Kothari vy UTI Bank,”°
the authorised officer had authorised
enforcement agent to do and carry out an
the works in taking possession of the
property. The DRAT held that the language
employed in rule 8 that the Author-
ised officer shall take or
cause to be taken possession, would
authorised officer himself shall take Possessi mean that the
on or he is entitled to delegate his
power to anyone to take possession of the prop
erty.
Confirmation of sale in Rule 9 (2)
In the writ petition filed by Advs. Sri.Jawahar Jose”
2012, Kerela High Court while addressing
decided on 19" April,
the contention that confirmation is
‘automatic’, as discernible from the terminology
under rules 8(6), 9(2) and 9(7)
of the Security Interest (Enforcement) Rules, more so,
when the attachment, by
itself, is not an encumbrance, gave the following clarification:
“15. Once the valuation of property fixing the reserve price
is done
under rule 8(5) and the same is notified, including by paper publica
tion,
pointing out the ‘reserve price’ below which the property will not
be
sold as provided under rule 8(6), it does not give any vested right to the
participating bidder who quotes just ‘one rupee above' the upset price, to
have the sale confirmation in his name. The role of the Secured Creditor
is not that of a 'scare crow' or a silent spectator. The practice and proce-
dure prescribed is not to make it an empty formality, in the matter of
granting confirmation. It is always open for the Secured Creditor who is
in fact, 'duty bound’, to see that maximum sale price is procured in re-
spect of the secured assets, not only for that the liability of the Secured
Creditor is satisfied, but also to ensure that the balance generated
reaches the hands of the owner of the property, to enable him to meet
the other liabilities, if any, or to remain with him as the left over 'asset.'
Merely for the reason that the price quoted by the bidder is just ade-
quate to satisfy the liability of the Secured Creditor, it is not enough to
discharge the obligation/duty cast upon the Secured Creditor while giVv-
ing confirmation of the sale. There has to be proper application of mind
with regard to the nature, lie and location of the property, the potential
value, proximity to road and commercial/such other establishments, the
chance to obtain better price, necessity to have more advertisements to
attract more bidders etc. Admittedly, in the instant case, there was only
one tender, the one submitted by the petitioners; which by itself takes
no competition and the chance to have the best offer. This being the po-
sition, this Court declares that the Secured Creditor is not bound to
grant confirmation automatically, without examining all these facts and

55. III (2012) BC 27 (DRAT-Allahabad)

56. IV (2007) BC 53.
57. WP(C).No. 14041 Of 2012 (E).
 ctions, etc,),ete.
1254 B® Part lli—Suberdinate Law (Rules, Dire

itor to reject the offer

figures and it is always open for the Secured Cred
’
and to go for a better one, with wider publicity,
v. indian Overseas Bank ™*, the
in India Finlease Securities Lid, Chennai
e when sale is confirmed by
Court held that the confirmation of wansfer takes plac
by ‘authorised officer” who
‘secured creditor’ as required under rule 9(6) and not
ect to the acceptance of the
conducts auction proceedings and accepts the bid subj
secured creditor.
in Hemalatha Ranganathan y. Indian Bank ™, it was onheldas that the authorised
nominee of a suc-
officer of the bank has no authority to recognise a pers
the highest bidder and
cessful bidder and sale has to be confirmed in the name of
ul bidder and
not nominee. Privity of contract would only be between successt
trati on of sale cer-
question of further sale of property would only arise after regis
tificate by Bank in the name ofsuccessful bidder,

“Sold again” in Rule 9(3) - meaning of

In Ullash Chandra Sahoo v. Bank of India”, the Orissa High Court held that-
the phrase “sold again” cannot mean that on failure ofthe highest bidder deposit
ing 25% of the sale price, the property should be sold to the second highest
bidder rather as it is a mandatein sub-rule (2) quoted above tha thetsale shall be
confirmed in favourof the purchaser who offered the highest sale price in his bid
or tender of quotation or offer. Hence, if a harmonious interpretation of sub-rule
(2) and sub-rule (3) of rule 9 of the SARFAESI Rules is made, the inevitable
conclusion would be that if the highest bidder fails to deposit 25% of the sale
price immediately, the entire process of sale by public auction as prescribed in
the proviso to sub rule (6) of rule 8 shall have to be followed forthwith.

“immediately”
in Rule 9(3) — meaning of
In Eupharma Laboratories Ltd. v. State Bank of India®', where the paymentof
25% of sale price was made within 10 days of confirmation of sale, the DRT up-
held the view that though word “immediately” connotes urgency, it cannot be
equated to mean “forthwith”. The DRT further stated having regard to the
scheme of the Act, the words “shall” and “immediately” cannot be construed as
rigidly as tovitiate the sale in the event of authorised officer giving 10 days pe-
riod for making payment of 25% of the sale price which can well be construed to
be immediate payment.

Sale of property at less than the reserve price

Rule 9(2) mandates taking of sanction of the borrower for a sale below the re-

This does not provide the authorised officer the election of not obtaining the con-

$8. 1 (2013) BC 18 AP (DB) (CN).

$9. 1 (2013) BC 42Mad. DB).
60. Il (2007) BC 659.
61. 1 (2006) BC 25(DRAT/DRT).
 Security Interest (Enforcement
) Rules, 2002
R9 ©°1255
sent of the borrower. The electi
on is only limited to whether to
or not. In Cybaba Netscripts vy. Mah sell the property
esh Sahakari Bank Ltd. Pune’,
set aside a sale where the sale was the Tribunal
made at price substantially less than
serve price, without the consent the re-
of the borrower.
In Palpap Ichinichi Software Internat
ional Ltd. y. Indian Bank®’, where
market value and the reserve price was the
reduced, and the property was purchase
d

that of Order 21 rule 72 of the Code of

Civil Procedure in the SARFAESI Act
disentitling the decree holder from particip
ating in the auction without the ex-
press permission of the Court; however
when there are no bidders, the bank
should not have knocked down the property
for a paltry sum.
Similarly, in Dr. D. Y. Chandrachud and Anoo
p V. Mohta, JJ Goldie Sud y.
Punjab National Bank & Ors™, the Court opin
ed that in an “Auction Sale” a re-
serve price is calculated below which the property
involved is not to be sold. A
bid received from the petitioner below the reser
ve price is liable not to be
considered.
However, a contrary view was taken by the Madhya Prade
sh High Court in the
case of Godawari Shridhar vy. Union Bank of India”. The High
Court stated that
in rule 9(2) the word “may” has been used and the word “may”
cannot be inter-
preted as a mandatory dictate to the bank not to sell the property below
the re-
serve price. Discussing Supreme Court rulings on rules of interpretati
on, the
High Court concluded the word “may” cannot be construed as mandatory be-
cause the Act has been enacted to facilitate recovery of loan by financial institu-
tions and it may be possible in certain circumstances that financial institution is
not in a position to fetch or receive the reserved price. In such cases, it has discre-
tion to sell the property below the reserve price of the property.
On a question whether the auction can be confirmed when the sale price is
same as the reserve price without the consent of the borrower, the High Court in
K. Raamaselvam vy. Indian Overseas Bank®, held that a combined reading of all
the provisions contained in rule 9(2) makes it clear that if the price offered is
higher than the reserve price, it shall be confirmed by the authorised officer, but
such confirmation is subject to the further confirmation by the secured creditor.
If, however, price offered is not higher than the reserve price, which means it
may be on par with the reserve price or less than the reserve price, the auction
can be confirmed only with the consent of the borrower and the secured creditor
and not otherwise.

The fixation of the reserve price by the authorised officer by reducing it from
its earlier reserve price, does not require any consent from the borrower. The

62. IV (2005) BC 241 (DRAT/ DRT).

63. III (2012) BC 324 Mad. (DB).
64. If] (2011) BC 333 Bom (DB).
65. III (2009) BC 98.
66. 1 (2010) BC 489 (DB).
 Directions, etc, ), etc.
1256 R® Part lii— Subordinate Law (Rules,
ease
uction of reserve price in appropriate
Rules do aot pul an restriction on red ,
aan Systems Pvi. Lad. and Ant,
Ba ee inPhoenix ARC PvtLad.¥. Ish

secured asset
Right ofthe highest bidder toclaim the
0 aucti notice Was a composite one for land and buildings
themselves asma.
ee a echunery. thoughallthebidders withdrew
only received for land and
chines and equipments were concerned. The bids were on sale in favour of the
aucti
buildings. Meanwhile, pending confirmation of the
totheborrower torelease the
highest bidder, thebank gave finalopportunity
into & private agreement wi
assets. In pursuance ofthis, the borrower entered
offthedues tothebank.
another party tosellalltheassets ata better price topay
the highest bidder and
The bank rejected the confirmation ofsale infavour of
returned the money ited bato ckthem, The Court held that no legal right
r toclaim the se-
can be said to have been accrued in favour of the highest bidde
and their bid
cured asset only on the ground that they are the highest bidder
Lad, v.
should have been accepted by the bank. [See Sushen Medicamentos Pvt,
Ashok Enterprise & Ors.)
Forf tu
the deposi
ofei tedre amount
As per sub-rule (5), if the auction purchaser fails to make the balance payment
within the stipulated time, then the deposit given by the purchaser under sub-rule
(3) shall be forfeited. Howe ve
there r,
is no mention of the manner of appropria-
tion of the said amount.
Bankn v. Tetrahedron Ltd’, Madras High Court, while addressing the
In India
Bank’s contention that the forfeited amount would go to the income account of
the Bank, gave the following clarification and accordingly dismissed the Civil
Revision Petition:
“The Legislature very cautiously made a provision in the Security
Interest (Enforcement) Rules, that the amount shall be forfeited. There
is no specific mention that this amount would go to the Bank. In case
the borrower has to bear the expenses of sale, necessarily, any profit de-
rived out of such sale should also go to the account of the borrower.
The borrower is not demanding that the amount should be paid to him
by cash. The request is to credit the balance amount in the loan account.
The contention that the forfeited amount would be appropriated by the
Bank is nothing but unjust enrichment. It is true that the borrower has
taken a loan. The Bank wanted to realise the loan amount with interest.
The sale notification was made with respect to the ownedby
the borrower. Therefore, any amount fetched by the on accountof
such sale, (with reference to the property of the borrower) should be
credited in the account of the borrower. The Bank has no justifiable
claim to appropriate the forfeited amount by crediting it in the income
67. IV (2012) BC 9 (DRAT-Delhi).
68. Ill (2012) BC 364 Guj. (DB)
69. 11(2013) BC 218; 2013(1) CTC 353.
 Security Interest (Enforcement) Rules, 2002
R.10 = 1257
account. Therefore, we are of the view that the Bank
was not justified in
its contention relating to the appropriation of the forfei
ted amount. We
also clarify that, in case, the amount is forfeited under the
Debts Recov-
ery Tribunal (Procedure) Rules,1993 read with Income
Tax Act, 1961,
the forfeited amount should go to the Government only.”

‘Free from encumbrances”

Sub-rule (9) requires the authorised officer to deliver the property to
the pur-
chaser “free from encumbrances”. Are all types of encumbrances covered
here?
In Business India Builders & Developers Ltd. v. Union Bank of India”, the
Court held “lease” to be an encumbrance for the purpose of sub-rule (9). How-
ever, a contrary view was taken in Pushpangadan y. Federal Bank dad,
wherein the Court while deciding on the rights of the secured creditor to evict the
tenant, opined that the encumbrances referred to in sub-rule (9) are those encum-
brances referred to in sub-rule (7). Sub-rule (7) contemplates only those encum-
brances which are capable of being discharged by depositing money. To quote
the Court:
“The scheme of rules 8 and 9 of the Security Interest (Enforcement)
Rules does not indicate that a sale under the Securitisation Act would
be free from all encumbrances. The sale would be free from only
those encumbrances known to the secured creditor and which were
discharged as provided in the Rules. It cannot be said that when a sale
takes place under the provisions of the Securitisation Act, all encum-
brances would automatically come to an end.” (emphasis ours)

R. 10. Appointment of Manager

(1) The Board of Directors or Board of Trustees, as the case may be, may
appoint in consultation with the borrower any person (hereinafter referred
to as the Manager) to manage the secured assets the possession of which has
been taken over by the secured creditor.

”1 Provided that the Manager so appointed shall not be a person who is or

has been adjudicated insolvent, or has suspended payment or has com-
pounded with his creditors, or who is, or has been convicted by a competent
court of an offence involving moral turpitude.]
(2) The Manager appointed by the Board of Directors or Board of oko)
an ,
tees, as the case may be, shall be deemed to be an agent of the borrower
n 0
the borrower shall be solely responsible for the commission or omissio
are due to im-
acts of the Manager unless such commission or omission
officer.
proper intervention of the secured creditor or the authorised

70. 2007 (2) ee ronal

r 2012) B er.
.e.f. 26-10-2007).
LS The by £0 1837(E), dated 26-10-2007(w
 ), etc.
Part 1it—Suberdinate Law (Rules, Directions, eic.
1258 RA
r any
Man age r shal l hav e pow er by Holice in writing to recove
(3) The from the
ey fro m apy per son who has acquired any of the secured assets
mon
become due to the borrower.
borrower, which is due to may
son who has made payment under
(4) The Manager shall give such per
has made payments to the borrower,
sub-rule (3) a valid discharge as if he
received by him in accordance
(5) The Manager shall apply all the monies
ion (7) of section 13 of the “|Act),
with the provisions contained in sub-sect
of secured debt
R. 11. Procedure for Recovery of shortfall
nt byany secured creditor pur-
(1) Anapplication forrecovery ofbalance amou
cuant tosub-se(10) ctofio nion 13 of the “[Act] shall be presented to the
sect
ndix VItothese rules by
Debts Recovery Tribunal inthe form annexed as Appe
orised legal practitioner, to
the authorised officer or his agent or by a duly auth
casefalls orshall besent
the Registrar ofthe Bench within whose jurisdiction his
very Tribunal.
byregistered post addressed tothe Registrar ofDebts Reco
) Rules,
(2) The provisions of the Debts Recovery Tribunal (Procedure
Institutions
1993 made under Recovery of Debts Due to Banks and Financial
n filed
Act, 1993 (51 of 1993), shall mutatis mutandis apply to any applicatio
by under sub-rule (1).
(3) An application under sub-rule (1) shall be accompanied with fee as
provided in rule 7 of the Debts Recovery Tribunal (Procedure) Rules, 1993.

*S[R. 12. Application to the Tribunal/Appellate Tribunal—(1) Any appli-

cation to the Debts Recovery Tribunal under sub-section (1) of Sec. 17 shall
be, as nearly as possible, in the form given inAppeVII to the said rules.
ndix
(2) Any applica Appellate Tribunal under sub-sect
tion
to the of Sec.
(6)ion
17 of the Act shall be, as nearly as possible, in the form given In Appendix
VIII to the said rules. Any appeal to the Appellate Tribunal under Sec. 18 of
Act shall be, as nearly as possibl
the ent in the form given in Appendix IX to
i e, in
Gn

P
*[R. 13. Fees for applications and appeals under sections 17 and 18 of the
Act.—(1) Every application under sub-section (1) of section17 or an appeal
to the Appellate Tribunal under sub-section (1) ofsection 18 shall be accom-
panied by a fee provided in the sub-rule (2) and such fee may be remitted
through a crossed demand draft drawn on a bank or Indian Postal Order in

. Subs. for ,“Ordinance” j by SO 103(E

3(E), dated 2-2-2007 (w.ef.
2-2-
74. Subs.for “Ordinance” by SO 103(E), dated 2-2-2007 (wef. ee
7S. Ins. by SO1837(E dated 26-10-20
).07 (wef. 26-10-2007)
Ins. by SO 103€, dated 2-2-2007 (w-e.f. 2-2-2007) _ |
Security Interest (Enforcement) Rules, 2002
: R.13 1259
favour of the Registrar of the Tribunal or the
Court as the case may be,
payable at the place where the Tribunal or the Court
is situated.
(2) The amount of fees payable shall be as follows:

Amount offee payable

Application to ma Debt Recovery Tribunal un-
der sub-section (1) of Section 17 against any of
the measures referred to in Sub-section (4) of
Section 13
Where the applicant is a borrower and the Rs. 500 for every Rs.
amount of debt due is less than Rs. 10 Lakh or part thereof

Where the applicant is a borrower and the Rs. 5000 + Rs. 250 for
amount of debt due is Rs. 10 lakh and every Rs. 1 lakh or part
thereof in excess of Rs. 10
lakhs subject to a maximum
of Rs. 1,00,000
Where the applicant is an aggrieved party Rs. 125 for every Rupees
other than the borrower and where the one lakh or part thereof
amount of debt due is less than Rs. 10

Where the applicant is an aggrieved party Rs. 1250 + Rs. 125 for
other than the borrower and where the every Rs. 1 lakh or part
amount of debt due is Rs. 10 lakh and thereof in excess of Rs. 10
lakh subject to a maximum
of Rs. 50,000

Appeal to the Appellate Authority against any |Same fees as provided at

order passed by the Debts Recovery Tribunal | clauses (a) to (e) of Serial
under section 17 number | of this Rule]
 APPENDIX |
|Rule-4(1))

PANCHNAMA
WHEREAS;
We
Name of Panch Address Age Occupation
Sr. No.
and
Father’ s/Husband's Name

The above mentioned Panchs on being called by Shri ..........0::0:::eereeeere eee

, the authorised officer Of..............-:ceceeeeeeeeeees (name of the Institution), un-
der the Securitisation and Reconstruction of Financial Assets and Enforcem ent of
Security Interest *{Act], 2002 (54 of 2002 and)in exercise of the powers under
Section 13(4) of the said *{[Act] today entered the premises of Shri/M/s
edidaskebdes sbiboatesdbomays ove At .cissssssdbessseseeseeseseseee ONG Gomanded the pay-
ment of the dues mentioned in the demand notice dated ....................5 in re-
spect of Loan Account bearing No. and on its non-payment, taken over posses-
sion of movable properties as detailed in the inventory attached to this Panch-
nama betwthe een hours .......................00.0000 DE NGS, 055.5%. 52555..45, M
in our presence.
We also hereby state that during take over of possession ee

(to be filled in case of occurrence of any incidence)

Therefore, we declare that the facts of the Panchnama mentioned herein are
true and correct to the best of our observations and knowledge.
1. Signature Date Time
Name
Address
2. = do -
Drawn before me

Ss
* Subs. by SO 103(E), dt. 2-2-2007 for “Ordinance” (wef. 2-2-20
07).

1260
 APPENDIX I
[Rule-4(2)|
INVENTORY
Inventory of movables taken possession in Loan Account bearing No.
ES Ris rspeddsdeeennene Inventory of movable properties taken possession of at
the premises of Shri/W/s .......5...22200-ccccccceeeccee BIOe PRO ecacsdancectPe/Gala
ee ae a a Street, Nos d-basnisveicis yd -o-of
ET under Section 13(4) of the Securitisation and Recon-
struction of Financial Assets and Enforcement of Security Interest *[Act], 2002
and the Security Interest (Enforcement) Rules, 2002 made thereunder, on this
MEMS 255.8 S9S Foes Jonbae rs Snsecbotape SAE Oo ce Side LO t Oe, tL gee eA oe
Ee ene ope A > SS Sito ae ees , authorised officer
0 ONS I IEA A IED RIOD S (name of the Institution) under the said [Act]. be-
NS TR 2 oe Tee eee ;

SL. No. Description of article Estimated Place where kept for safe custody
value (Name of the person if necessary)

Panchas:

Name and Address of Panch

SEO OAOHLEDAAAFOALEF eee

COS SSPE EPEEOP

Signature of Borrower/Representative
Signature of Authorised Officer

for “Ordinance” (w-e.f. 2-2-2007).

Subs. by SO 103(E). dated 2-2-2007

1261
 APPENDIX II]
[Rule-7(2)|
CERTIFICATE OF SALE
(For Movable Property)
Whereas
The undersigned being the authorised officer Of ThE .........06. ces
(name of the institution) under the Securitisation and Reconstruction of Finan-
cial Assets and Enforcement of Security Interest *|Act|, 2002 (54 of 2002) and in
exercise of the powers conferred under Sub-section (12) of Section 13 read with
rule 8 of the Security Interest (Enforcement) Rule, 2002 has in consideration of
Ce eee eT een ) sold
CE, EGE -.IMD.....c cn8e000cececeediboscespoosnsce (name of the secured credi-
tor/institution in favour Of ............c:cceeeeeeeeeee wees (purchaser), the following
movable property secured in favour Of the 2.0.0.0... ....0.cceeeeeeeeeen en (name of the
Pe I a (the names of the borrowers) to-
wards the financial facility ....:06:5...5:c000000s500.00005 ( ) offered by
mpese and chanutbenes sonenatoene creditor). The undersigned acknowledge the
t[receiptof the sale price of Rs. ............ CREBOES. ceerenege sentonns ) only],of the
a eR A Oe OR EY onSo eee ee
Ww.

Description of the movable property.

Sd/-

Authorised Officer
Date:
Place:

103(E), dt. 2-2-2007 for ‘Ordinance’ (wef. 2-2-2007).

 APPENDIX IV
[Rule-8(1)]

POSSESSION NOTICE
(For Immovable Property)
Whereas
The undersigned being the authorised officer of the .................:eeeeeeeeeeees
(name of the Institution) under the Securitisation and Reconstruction of Finan-
cial Assets and Enforcement of Security Interest *[Act], 2002 (54 of 2002) and in
exercise of powers conferred under Section 13(12) read with rule 9 of the Secu-
rity Interest (Enforcement) Rules, 2002 issued a demand notice dated
Apuechaser),.the unmava calling upon the borrower Shri ................... /M/s
A. Pf |. eee to repay the amount mentioned in the notice being Rs.
(ihe. names. of .the .borme (in words ................+0++-.+-) With in 60 days from-
the date of receipt of the said notice.
The borrower having failed to repay the amount, notice is hereby given to the
borrower and the public in general that the undersigned has taken possession of
the property described herein below in exercise of powers conferred on him/ her
under Section 13(4) of the said *[Act] read with rule 9 of the said rules on this
Paar e neal te ORES Ea GAOT Si cca rctsccciccnctve.vestees sos00s
OL UNO YORE

The borrower in particular and the public in general is hereby cautioned not to
deal with the property and any dealings with the property will be subject to the
amount
charge Of the ..........:.scececcecsceeeeeers (name of the Institution) for an
tre creccarsstccsteretare and interest thereon.
St il ek elie ar tn SETI TATRA REESE

Description of the Immovable Property

E
Oe EEE l
....... eeesseeeees
All that part and parcel of the property consisting of Flat No.
or Town
PDT GION ono nce reece corrsesesvccvers In Survey No. ..........0e00ee: /City
...ccocvccsavecsseevsers encens esss
Survey NO. ........ceeceeceeseceresseneees [etude ata NO. nestre and
ssree
ssreereensersee eee
Within the registration Sub-district...........-.sesse
29Y..
Di6triehie NOTI ets
N ++ Lipnamieh

Bounded;
On the North by
aes
for “Ordinance” (w.e.f. 2-2-2007).
* Subs. by SO 103(E), dated. 2-2-2007

1263
 i ay ee SS .he
{ae ee
wm svar = mA ae a
_. acieup Cher othtags
pares
nih obey) ete) 4) agli Iineoms of cog ws bala?
ae i rw q 4
¢
fot bocrgueiane wae :
ai a aah. wares P
wee hi war ai
ph - pepe hae tall

tebe es sthy a ree 7 | ahr, 0 ime ' i pry mtn

14
v4 eit ’
j : “<) alte gn deel OR a ’ _
a im a

“ant ' “thas | pape ani oct

et eriaint Dae aaneaerer
 APPENDIX V
[Rule-9(6)]
SALE CERTIFICATE
(For Immovable Property)
Whereas
The undersigned being the authorised officer of the ....................c
ceceeeeens
(name of the Institution) under the Securtisation and Reconstruction of Financial
Assets and Enforcement of Security Interest *[Act], 2002 (54 of 2002) and in
exercise of the powers conferred under Section 13 read with rule 12 of the Secu-
rity Interest (Enforcement) Rules, 2002 sold on behalf of the ......................5.
(name of the secured creditor/institution) in favour Of ................cccceceeee eee
(purchaser), the immovable property shown in the schedule below secured in fa-
WEE EN sonst oe edit yao rageasiens (name of the secured creditor) by .........
(the names of the borrowers) towards the financial facility .......................
seves (secured creditor). The under-
(desetaption) offered Diy) ..ccijscn 085. 00s. Weave
signed acknowledge the receipt of Reis: ae cebedl cont Mer setiea alee. aye (Ru-
pecan ‘THE. DEBTS BECOVER. only)] the sale price in full and handed over the
delivery and possession of the scheduled property. The sale of the scheduled
property was made free from all encumbrances known to the secured creditor
listed below on deposit of the money demanded by the undersigned.

DESCRIPTION OF THE MOVABLE PROPERTY

EEE AE

All that part and parcel of the property consisting of Flat No. ............-.. /Plot
NOR iaaicas ks aetna oi cea en anus

In Sugvey, Now cs foe service: /City or Town Survey No. .......-.++.+++ /Khasara
i! RO, a ee

Within the registration sub-district eens esseen

...........seceeeeeeeene eence ses
nene
BEE NIUAEIEL pices is viegiatansapiperegicsss
Bounded;
On the North by
On the South by
On the East by
ee
ee ee a ee
* Subs. by SO 103(B) , dated 2-2-20 07 for “Ordinance” (w.e.f. 2-2-2007).
07).
+ Ins. by SO 103(E), dated 2-2-2007 (w.e.f. 2-2-20

1265
 APPENDIX VI
FORM
[See rule 11(1)]
APPLICATION UNDER SUB-SECTION (10) OF SECTION 13 OF
THE SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST *[ACT], 2002
For use in Office.
A ieee nabergrnnes
ceceeeeeeeeeee
Date of receipt by post................
Registration No..........2...0cseecesesereeees
Signature
Registrar

IN THE DEBTS RECOVERY TRIBUNAL

[Name of the place]
BETWEEN A.B. APPLICANT AND C.D. DEFENDANT
Delete whichever is not applicable.
DETAILS OF APPLICATION:
1. Particulars of the applicant
(i) Name of the applicant:
(ii) Address of Registered Office:
(iii) Address for service of all notices:
2. Particulars of the (defendant) |

(i) Name of the (defendant):

(ii) Office address of the (defendant):
(iii) Address for service of all notices:
3. Jurisdiction of the Tribunal
of the recovery of deb t due falls
The applicant declares that the subject-matter
within the jurisdiction of the Tribunal.
i a
for “Ordinance” (w.e.f. 2-2-2007).
* Subs. by SO 103(E), dated 2-2-2007

1267
1268 App. Vi Part 1li— Subordinate Law (Rules, Directions, etc.), etc.

4. Limitation
The applicant further declares that the application is within the limitation pre:
scribed im section 24 of the Recovery of Debts Due to Banks and Financial Inst-
tutions (Act), 19953.
5. Facts of the case
The facts of the case are given below: -|Give-here a concise statement of facts
in a chronological order, each paragraph containing as nearly as possible a sepa-
rate issue, fact or otherwise},
6. Details of recoveries made by sale of securities
[Give here security wise details of sale/s conducted and realizations, appropria-
tions of sale proceeds towards, costs interest and principal amount and the bal-
ance amount to be recovered. |
7. Relies sought
In view of me facts mentioned in para 5 above, the applicant prays for the the
following relief(s): -[Specify below the relief(s) sought explaining the ground for
relief(s) and the legal provisions (if any relief upon).|
8. Interim order, if prayed for
Pending final decision on the application, the applicant seeks issue of the fol-
lowing interim order--[Give here the nature of the interim order prayed for with
reasons. |
9. Matter not pending with any other court, etc
The applicant further declares that the matter regarding which this application
has been made is not pending before any court of law or any other authority or
any other Bench of the Tribunal.
10. Particulars of Bank Draft/Postal Order in respect of the application fee
(1) Name of the Bank on which drawn:
(2) Demand Draft No: or
(3) Number
of Indian Postal Order(s):
(4) Name
of the issuing Post Office:
(5) dateof issue of Postal Order(s):
(6) Post Office at which payable:
11. Details
of Index
An index in duplicate containing the details of the documents to be relied upon
is enclosed.[Such documents should include copies of sale certificates or any
other documents relating to sale of secured assets and sale proceeds realised].
Form App. VI 1269

12. List of enclosures

Verification
|BR Re PPPHCANL LUPel COCIMLES (Name in full and block
letters) son? CangnterPwite* oF “Siti Nh LIC I, ese cece eens being the
wucvacceawccd eee tte (destematinpe yon (1201 886... .....3..... (ame of the
company) holding a valid power of attorney from .................ceeseeeeeeeees
(name of the company) do hereby verify that the contents of paras I to 11 are true
to my personal knowledge and belief and that I have not suppressed any material
facts.
Signature of the applicant
Place :
Date :
To
The Regiatralt:<3-cnsoht~nin
view ore
 *(APPENDIX VII
|See rule 12(1)}

APPLICATION UNDER SUB-SECTION (1) OF SECTION 17

OF THE SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT, 2002
For use in Tribunal’s Office
Dit tl BR isecceceveccccerosecsensvevsnsvnsnssonsnvenss
Date of receipt by POSt............ccccceeeeeenees
Or
a

Signature
Registrar
In the Debts Recovery Tribunal
(Name of the Place)
Between
A.B. Applicant(s)
And
C.D. , Defendant(s)
*Delete whichever is not applicable
Details of the Application:
1. Particulars of the applicant
(i) Name of the applicant :
(11) Address of Registered Office :
(iii) Address for service of all notices :
2. Particulars of the defendant
(i) Name of the defendant :
(ii) Office address of the defendant :
(iii) Address for service of all notices -
3. Jurisdiction of the Tribunal.—The appli-
cant declares that the subject-matter
of this
* Ins. by S.O. 103(E), dated 2-2-2007 (w.e.f. 2-2-2007).

1270
 Application under sub-Section (1) of Section 17, etc. App. VII 1271

application falls within the jurisdiction of

the Tribunal.
. Limitation.—The applicant further declares
that this application is filed within the limi-
tation prescribed in sub-section (1) of sec-
tion 17 of the Securitisation and Reconstruc-
tion of the Financial Assets and Enforce-
ment of Security Interest Act, 2002.
. Facts of the case.—The facts of the case are
given below:— ;
[Give here a concise statement of facts in
a chronological order, each paragraph con-
taining as nearly as possible a separate issue,
fact or otherwise as to how the applicant is
aggrieved. |
. Relief(s) sought.—In view of the facts men-
tioned in paragraph 5 above, the applicant
prays for the following relief(s):—
[Specify below the relief(s) sought ex-
plaining the ground for relief(s) and the le-
gal provisions (if any) relied upon.]
. Interim order, if prayed for.—Pending
final decision on the application, the appli-
cant seeks issue of the following interim or-
der:—
[Give here the nature of the interim order
prayed for with reasons. ]
. Matter not pending with any other Court,
etc.—The applicant further declares that the
matter regarding which this application has
been made is not pending before any Court
of law or any other authority or any other
Bench of the Tribunal.
. Particulars of Bank Draft/Postal Order in
respect of the application fee in terms of
‘[rule 13] of these rules:—
(1) Name of the Bank on which drawn :
(2) Demand Draft No. :
or
(1) Number of Indian Postal Order(s) :
(2) Name of the issuing Post Office :
SE ee
“rules 13”.
* Subs. by SO 1444(EB), dated 21-8-2007, for
1272 App. VIL Parrdll Subordinate Law (Rules, Directions, ete), 0%.
(3) Date of issue of Postal Order(s) ;
(4) Post Office at which payable :
10. Details of Index.—An index in duphoate
containing the details of the documents to be
relied upon is enclosed.
11. List of enclosures.—
VERIFICATION
Lita 14 4 bch (Name in full and block letters), son/daughter/wile
Of Shati.c sihe..d Steinoctatenteseothibentnntet . the applic andan t/fo
on behalf rap-
of the
plicant hereby solemnly verif that the contents ofparas 1 to 10 are true to my
belie? andthatI havenotsuppressed anymaterial facts.
Poe Pee eee

Signature of the Applicant

POPP eee Pee ee Pee eee eee eee

Tee PPP Pee ee eee eee eee eee

 APPENDIX VIII
[See rule 12(2)]
APPLICATION UNDER SUB-SECTION (6) OF SECTION 17
OF THE SECURITISATION AND RECONSTRUCTION
OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT, 2002
For use in Appellate Tribunal’s Office
PICO TUNE on isciteaconpeetn armen ticee-
eee: OF FOC aee OY THOSEvncnacns
Or
Registration No. .............2SsHGGs./u52.38

Signature
Registrar
IN THE DEBTS RECOVERY APPELLATE TRIBUNAL
(NAME OF THE PLACE)
Between
A.B. Applicant(s)
And
C.D. Defendant(s)
*Delete whichever is not applicable
Details of Application:
1. Particulars of the applicant
(i) Name of the applicant :
(ii) Address of Registered Office :
(iii) Address for service of all notices :
2. Particulars of the defendant
(i) Name of the defendant :
(ii) Office address of the defendant :
(iii) Address for service of all notices :
3. Jurisdiction of the Appellate Tribunal.—
The applicant declares that the subject-
matter of this application falls within the ju-
risdiction of the Appellate Tribunal.

1273
1274 App. VILE —Suberdinate Law (Rules, Directions, etc.), etc.
Part Ill

4. Facts of the case.—The facts of the case are

given below:—
The applicant submits that the appli-
canV/defendant had filed an application un-
der sub-se(1) cti on n 17 of the Secu-
of sectio
ritisation and Reconstruction of Financial
Assets and Enforcement of Security Interest
Act, 2002, before the Hon'ble Debt Recov-

Tre TPCT OCC Ce eee eee,

5. “ee a sought.—In view of the facts men-

tioned in “[para 4] above, the applicant prays
for the following relief(s):—
Direct the Hon’ble Debt Recovery Tribu-
nal (Place) to dispose off the said applica-
BL) eee at the earliest
and/or pass any other suitable order in the
interest of justice and equity.
6. Matter not pending with any other Court,
etc.—The applicant further declares that the
matter regarding which this application has
been made is not pending before any Court
of law or any other authority or any other
Bench of the Tribunal.
7. Details of Index.—An index in duplicate
containing the details of the documents to be
relied upon is enclosed.
8. List of enclosures.—
Verification
D, entenenunnmnmuneenenceguiiilaied (Name in full and block letters), son/daughter/
ok ., the applicant hereby solemnly verify
that the contents ofparas 1 to7 are true tomy personal knowledge and belief and
that I have not suppressed any material facts.
FETE EEE EEE ERE EEE EEEEEE EERE EEEEBEEEEREEEEEE

OP Ree eee eee

* Subs. by S.0. 1444(E), dated 21-8-2007, for “para 5”.

 APPENDIX IX
[See rule 12(2)|

APPEAL UNDER SECTION 18 OF THE SECURITISATION

AND RECONSTRUCTION OF FINANCIAL ASSETS
AND ENFORCEMENT OF SECURITY
INTEREST ACT, 2002
For use of Tribunal’s Office
Bates OF Cin soos shinee
nt 2
Date of receipt Dy post....£-..ec<s-stioeep
Registration NOjeicscs..Lsct) ..csceesstealewonn aaa

Signature
Registrar

IN THE DEBTS RECOVERY APPELLATE TRIBUNAL

(NAME OF PLACE)
Between

Pare Ce oe OM A i a il Appellant(s)/Judgment-Creditor(s)

caldhgt TR Roca 61a AMO Odd. 8 CeeeLEA SeO'S,0 Oi AG DIS Oe. OTa CME GIen eee oneee cere er wee ....Respondent(s)/Creditor(s)
ee,

Details of Appeal:
I. Particulars of the appellant(s)
(i) Name of the appellant :
(ii) Address of the Registered Office of the appellant :
(iii) Address for service of all notices :
Il. Particulars of the respondent(s)
(i) Name(s) of respondent :
(ii) Office address of the respondent :
(iii) Address for service of all notices :

1275
1276 App. IX Part 1li—Subordinate Law (Rules, Directions, ete), ete.

LiL. Jurisdiction of the Appellate Tribunal.—The appellant declares that

the subject-matter of the appeal falls within the jurisdiction of the Ap
pellate Tribunal.
IV. Limitation.—The appellant declares that the appeal is within the limi-
tation prescribed in sub-section (1) of section 18 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security In-
terest Act, 2002.
. Facts
of the case.
[Give here a concise statement of facts and grounds of appeal against
the specific order of DRT passed under *sub-section (3)/sub-section (4)
of *{section 17] of the Securitisation and Reconstruction of Financial
hese and Enforcement of Security Interest Act, 2002.)
Vi. Relief(s) sought.—In view of the facts mentioned in paragraph V
above, the appellant prays for the following relief(s):—
[Specify below the relief(s) sought explaining the grounds of relief(s)
and the legal provisions (if any) relied upon.|
Vil. Interim order, if prayed for.—Pending final decision on the appeal
the appellant seeks issue of the following interim order:—
[Give here the nature of the interim order prayed for with reasons. |
Vill. Matter not pending with any other Court, etc.—The appellant fur-
ther declares that the matter regarding which this appeal has been made
is not pending before any Court of law or any other authority or any
other Tribunal(s).
. Particulars of Bank Draft/Postal Order in respect of the deposit of
debts due in terms of sub-section (1) of section 18 of the Act:—
(1) Name of the Bank on which drawn :
(2) Demand Draft number :
or
(1) Number of Postal Order(s):
(2) Name of issuing Post Office :
(3) Date of issue of Postal Order(s):
(4) Post Office at which payable:
Particulars of ‘[Bank Draft/Postal Order] in respect of the fee paid
in terms of rule 13 of these rules: —
(1) Name of the Bank on which drawn :
(2) DemDraft and number :
or
(1) Number of Postal Order(s) :
(2) Name of issuing
Post Office :
(3) Date of issue of Postal Order(s) :

* Subs. by SO 1444(E), dated 21-8-2007, for “section 18”.

* Subs. by SO 1444(E), dated 21-8-2007, for “Bank Draft. Postal Order”.
Appeal under section 18 of the Securitisation, etc. App. IX 1277

(4) Post Office at which payable :

XI. Details of Index.—An index in duplicate containing the details of the
documents to be relied upon is enclosed.
XII. List of enclosures.—
Verification
|1 REL Ceci). Binion cre oe eae (Name in full and block letters), son/
CES RE TCR) | | | ne ee ne a , the appellant do hereby
verify that the contents of paragraphs *[I to XII] are true to my personal knowI-
edge and belief and that I have not suppressed any material fact(s).
POPP OHRS EHO EE EEE ETE SEH EEE EEE EEE EEEES

Signature of the Appellant

Place:
Date:

To
Registrar
+[Debts Recovery Appellate Tribunal]
PORE ERRREEEHETHHE EET H EE EHH EH EET EES TEESE

* Delete whichever is not applicable.

ee
XI”. \
* Subs. by SO 1444(B), dated 21-8-2007, for “I to al”.
“Debts Recove ry Tribun
+ Subs. “chSO 1444(B), dated 21-8-2007, for
 [2]
SARFAESI ACT (REMOVAL
OF DIFFICULTIES) ORDER, 2004
S.0. 466(E), Dt. 6-4-2004.—Whereas the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)
(hereinafter referred to as the said Act came into force on the 18th day of De-
cember, 2002;
And Where as any person (including borrower), aggrieved by any of the meas:
ures referred to in sub-section (4) of the said Act taken by the secured creditor or
his authorised officer under Chapter III of the said Act, may prefer an appeal un-
der sub-section (1) of section 17 of the said Act to the Debts Recovery Tribunal
established under sub-section (1) of section 3 of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 having jurisdiction in the matter;
And whereas the provisions contained in sub-section (3) of section 17 of the
said Act provides that the Debts Recovery Tribunal shall, as far as may be, dis-
pose of an appeal arising with the said Act in accordance with the provisions of
the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of
1993) and rules made thereunder;
And whereas section 19 of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, read with rule 7 of the Debts Recovery Tribunal (proce-
dure) Rules, 1993 made under that Act, specifies the fee for the purpose of filing
an application to the Debts Recovery Tribunal under the Act;
And whereas any person (including borrower), aggrieved by any order made by
the Debts Recovery Tribunal under sub-section (3) of section 17 of the said Act
may prefer an appeal under sub-section (1) of section 18 of the said Act to the
Debts Recovery Appellate Tribunal referred to under sub-secti (1) of section
on 8%
of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
(hereinafter referred to as the Appellate Tribunal) having jurisdiction in the mat-
ter;
And whereas the provisions contained in sub-section (2) of section 18 of the
said Act provides that the Appellate Tribunal shall, as far as may be, dispose of
Sore, ef Eicher Dar in taal call Cnn en oepevenene ofBSEe
covery | of Debts | to Bar Financial Institutions Act, !1993 and rules

_ And whereas section 20 of the Recovery of Debts Due to Banks and Financial
institutions Act, 1993, read with rule 8 of the Debts Recovery’ Appellate Tribu-

1278
SARFAESI Act (Removal of Difficulties) Order, 2004 Order 4 1279

nal (Procedure) Rules, 1994 made under that Act, specifies the fee for the pur-
pose of filing of an appeal to the Appellate Tribunal;
And whereas in the absence of express provisions to levy fees, difficulties have
arisen in the matter of levying of fees for filing of appeals under section 17 and
18 of the said Act to the Debts Recovery Tribunal and the Appellate Tribunal
Fig under the Recovery of Debts Due to Banks and Financial Institutions
ct, 1995:
Now, therefore, in exercise of the powers conferred by sub-section (1) of sec-
tion 40 of the said Act, the Central Government hereby makes the following Or-
der to make the provisions for levying of the fee for filing of appeals under sec-
tions 17 and 18 of the said Act, being not inconsistent with the provisions of the
Act, to remove the difficulty, namely:
1. Short title and commencement—

(i) This Order may be called the Securitisation and Reconstruction of Fi-
nancial Assets and Enforcement of Security Interest (Removal of Diffi-
culties) Order, 2004.
(ii) It shall come into force at once.
2. Definition Debts Recovery Tribunal (Procedure) Rules, 1993 means the
Debts Recovery Tribunal (Procedure) Rules, 1993 means under section 9 read
with clause (e) of sub-section (2) of section 36; the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993.

3. Fee for filing of an appeal to Debts Recovery Tribunal.—The fee for fil-
ing of an appeal to the Debts Recovery Tribunal under sub-section (1) of section
17 of the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 shall be mutatis mutandis as provided for filing of
an application to the Debts Recovery Tribunal under rules of Debts Recovery
Tribunal (Procedure) Rules, 1993.

4. Fee for filing of an appeal to Debts Recovery Appellate Tribunal_—The

fee for filing of an appeal to the Debts Recovery Appellate Tribunal under sub-
section (1) of section 18 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 shall be mutatis mutandis
as provided for filing of an appeal to the Debts Recovery Appellate Tribunal un-
der rule 8 of the Debts Recovery Appellate Tribunal (Procedure) Rules, 1994.
[F. No. 4/1/2004-BO-I]
AMITABH VERMA, Jt. Secy.
 [3]
ARC DIRECTIONS AND GUIDELINES
For text of the guidelines see Appendix 1 and 2 to Chapter 9 of Part | also see
Appendices 3 and 4 to the same chapter for guidance notes and notification re-
spectively,

1280
 [4]
GUIDELINES FOR BANKS FOR DISPOSAL OF
NON-PERFORMING OR FINANCIAL ASSETS
Refer to Annexure 6 of Chapter 6 of Part I for Guidelines on purchase/sale of
Non Performing Assets (RBI Notification dated 13th July 2005.
Refer to Appendix II to Chapter 8 of Part I for Guidelines to banks/FIs on sale
of Financial Assets to Securitisation Company (SC)/Reconstruction Company
(RC) (created under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002) and related issues.

1281
 [5]
SARFAESI NOTIFICATIONS

1. Banks notified under section 2(1)(c)(v) [Notification No. SO

105(E), dated 28-1-2003 issued by Ministry of Finance and Com-
pany Affairs (Department of Economic Affairs) (Banking divi-
sion)]
Co-operative Banks covered under the definition of Banks
In exercise of the powers conferred under item (v) of clause (c) of sub-section
(1) of section 2 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (54 of 2002), the Central Government
hereby specifies “Co-operative Bank” as defined in clause (cci) of section 5 of
Banking Regulation Act, 1949 (10 of 1949) as “bank” for the purpose of Secu-
ritisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (54 of 2002).
Note: Section 5 (cci) of Banking Regulation Act, 1949 defines co-operative
bank as:
“Co-operative Bank” means a state co-operative bank, a central co-operative
bank and a primary co-operative bank”

2. Financial Institutions notified under section 2(1)(m)(iv) [Notifica-

ion No. S.O 1282(E), dated 10-11-2003 Housing Finance Compa-

In exercise of the powers conferred under sub-clause (iv) of clause (m) of sub-
section (1) of section 2 of the Securitisation and Reconstruction of Financial As-
sets and Enforcement of Security Interest Act, 2002 (54 of 2002), the Central
Government hereby specifies the following housing finance companies registered
under sub-section (5) of section 29A of National Housing Bank Act, 1987 and
with Tie I capital
r of Rs. 10 crore (rupees ten crore) or above as per their audited
balance sheet for the year ended 31“ March, 2003 to be treated as “financial
insti-
tutionfro
” the purpose of the said sub-clause:-
SI. No. Name of the Housing Company
1. HDFC Limited, Mumbai

1282
SARFESI Notifications Notfn. 1283

2. LIC Housing Finance Limited, Mumbai

3. ICICI Home Finance Limited, Mumbai
4. Can Fin Homes Limited, Bangalore
5. Birla Home Finance Limited, New Delhi
6. Dewan Housing Finance Corp. Limited, Mumbai
7. GIC Housing Finance Limited, Mumbai
8. PNB Housing Finance Limited, New Delhi
9. '[Sundaram BNP Paribas Home Finance Limited, Chennai]
10. BOB Housing Finance Limited, Jaipur
11. GRUH Finance Limited, Ahmedabad
12. TATA Home Finance Limited, New Delhi
13. Cent Bank Home Finance Limited, Bhopal
14. Orissa Rural Housing & Development Corp. Ltd., Bhubaneshwar
15. Vysya Bank Housing Finance Limited, Bangalore
16. Maharishi Housing Development Fin. Corpn. Ltd., New Delhi
17. Corpbank Homes Limited, Bangalore
18. Weizmann Homes Limited, Mumbai
19. Vibank Housing Finance Limited, Bangalore
20. National Trust Housing Fin. Ltd., Chennai
21. Manipal Housing Fin. Syndicate Ltd., Manipal
22. REPCO Home Finance Limited, Chennai
23. SICOM Housing Dev. Fin. Ltd., Mumbai

3. Asian Development Bank notified as financial institution under

section 2(1)(m)(iv) [Notification No. SO 1275(E), dated 30-10-
2003]
(m) of sub-
In exercise of the powers conferred by sub-clause (iv) of clause
on of Financial As-
section (1) of section 2 of the Securitisation and Reconstructi
(54 of 2002), the Central
sets and Enforcement of Security Interest Act, 2002
the “financial in-
Government hereby specify the “Asian Development Bank” as
stitution” for the purposes of the said Act.
pted from
4. Securitisation and Reconstruction Companies exem
fication No.
provisions of Reserve Bank of India Act, 1934 [Noti
nt Of Non-
DNBS. 3/CGM (OPA) 2003, issued by Departme
banking Supervision, Reserve Bank of India]
fied that it is necessary so to do, in
The Reserve Bank of India, on being satis of In-
exercise of its powers conf erred under section 45NC of the Reserve Bank
Le ee ee
), dated 24-3-
ed, Chennai,’ by Notification No. SO 546(E
1. Subs. for ‘Sundaram Home Finance Limit ce.
ces, Ministry of Finan
2008 issued by Department of Financial Servi
12384 Notfn. Part lll—Subordinate Law (Rules, Directions, ete,),ete.

sections 45-14, 45-18

dia, 1934 (2 of 1934) hereby declares that the provisions of not apply to a
and 45-IC of the Reserve Bank of Lndia Act, 1934 (2 of 1934) shall
non-banking financial company which is a securitisalion y or reconstruc:
secti on 3 of the
tion company registered with the Reserve Bank of India
t of Seou-
Securitisation and Reconstruction of Financial Assets and Enforcemen
rity Interest Act, 2002.
 [6]
APPLICATION FORM FOR SETTING
UP ARCS

See Annexure 7

1285
 (7)
FORM OF APPLICATION FOR CERTIFICATE
OF REGISTRATION TO COMMENCE/
CARRY ON THE BUSINESS OF A
SECURITISATION COMPANY
OR RECONSTRUCTION
COMPANY
[Notification No.DNBS.1/CGM(CSM)-2003 dated March 7, 2003]

Reserve Bank of India, Department of Non-Banking Supervision,

Central Office, Centre No 1, World Trade Centre, Mumbai 400 005
The Reserve Bank of India, in exercise of the powers conferred under sub-
section (2) of section 3 of the Securitisation and Reconstruction of Financial As-
sets and Enforcement of Security Interest Act, 2002, hereby, specifies that the
form given in the Annexure hereto shall be the form of application to be submit-
ted by the securitisation companies or reconstruction companies seeking registra-
tion from the Reserve Bank of India under section 3 of the Securitisation and Re-
construction of Financial Assets and Enforcement of Security Interest Act, 2002.
2. The securitisation companies or reconstruction companies seeking registra-
tion from the Reserve Bank of India shall submit their application duly filed in
with all the relevant annexures/supporting documents to the Chief General Man-
ager-in-Charge, Department of Non-Banking Supervision, Central Office, Re-
serve Bank of India, Centre 1, World Trade Centre, Cuffe Parade, Colaba, Mum-
bai 400 005.
Encl: Annexure

FORM OF APPLICATION FOR CERTIFICATE OF REGISTRATION

TO COMMENCE/CARRY ON THE BUSINESS OF A SECURITISATION
COMPANY OR RECONSTRUCTION COMPANY
(Vide Section 3 of The Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002)
By Registered Post AD/Hand Delivery
Name of the company (in block letters)
Address of registered office

1286
Form of application for certificate of registration, etc. Notfn. 1287

To
The Chief General Manager-in-Charge -
Department of Non-Banking Supervision, Second Floor
Reserve Bank of India
Central Office
Centre No 1, World Trade Centre
Mumbai 400 005
Dear Sir,
Application for a Certificate of Registration to commence/carry on* the
business of a Securitisation Company or Reconstruction Company
We make this application in terms of sub-section (2) of section 3 of The Secu-
ritisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 for issue of a Certificate of Registration. The required docu-
ments/information as per the instructions are furnished.
2. We are desirous of commencing/carrying on* the business of a Securitisa-
tion Company or Reconstruction Company. Hence, we hereby request you to
kindly issue the necessary Certificate of Registration under sub-section (1) of
section 3 of the Securitisation and Reconstruction of Financial Assets and En-
forcement of Security Interest Act, 2002 to enable our company to com-
mence/carry on* the business of Securitisation Company or Reconstruction Com-
pany.
We solemnly declare that to the best of our knowledge and belief, the informa-
tion furnished in this application and the annexures hereto and statements en-
closed are correct, complete and true. We are aware that if any of the information
furnished herein is found to be incorrect/incomplete/untrue, the application for
grant of Certification of Registration is liable to be rejected and the Certificate of
Registration, if granted, is liable to be cancelled.
Yours faithfully,
(Signature of Authorised Official)
Name:
Date: Designation:
Place: Company Seal:
| Sheets
*Strike out whichever is not applicable.

ANNEXURE I
IDENTIFICATION PARTICULARS OF THE COMPANY
Part I

1. Name of the Company

:
Ds List of Directors
Yes/No
3. | Whether the company had changed its name:
earlier?
 etc.
12383 Notfn. Part Lli—Suberdinate Law (Rules, Direouons, eto.),

(Please see item (10) of instructions |

> Whether the company had changed is spon-
sors? Lf so, details of earlier sponsors.
Date of incorporation
Date of commencement of business
State in which the company is registered POU UU UT T TTT ee ee eee eee

Sen
PY Full Address of the Company
(i) Registered Office ..........6:.:cseee hee ee
e ne i
iedeat
Wael ~, io dachendnst ee ee ee ee EB By
(ii) en ene ee ee eee Phone No
Pn ere ee eee ek eS Seer
Beat OP (b) Private
10. Whether the company was transacting Yes/No
(a) the business of securitisation/asset recon-
ion
as on June
struct 21, 2002
If yes, since when (date of commence-
ment of such business)
(b) any other business including the business
of an NBFI. If yes, since when (date of
commence ment
of such business)
LL. Name/s of Statutory Auditor/s, if appointed Pee ee

address/es ROE TEER HH

Phone No./Fax SEETHER EEE TEE HEHE EEEEE®

12. Name/s of all bankers

Address/es
Phone No./Fax
13. Whether the company or its related party(s) : Yes/No
has/have committed any default in repayment
of any loan, advance or any other credit facil-
ity availed from any bank/any other financial
institution including NBFCs.
If yes, furnish full details, such as name and
branch of lending institution, type of facility,
period and quantum of default, etc.
15. : Yes/No
have committed any default in repayment of
redeemable debentures/preference shares/de-
posits
16. If yes, furnish full details of such defaults
Form of application for certificate of registration, etc. Notfn. 1289

17. Whether any group company is NBFC : Yes/No

18. If yes, whether it has applied for registration to : Yes/No
RBI for grant of a certificate of registration
19. If yes, whether registered/rejected : Yes/No
20. If registered Registration No.
Date of issue of CoR

Part II
Shareholding pattern of sponsor/s (Please see item 9 of instructions)
Name of spon- No. of % to total Whether
sor & shares paid up eq- holding
Address
uity share controlling
capital of the interest

(Signature of the Authorised Official )

Name
Date : Designation
Place : Company Seal

* Strike out whichever is not applicable

 etc.), etc.
1290 Notfn. Part 1li—Subordinate Law (Rules, Directions,

Partl
ANNEAURE Li
STATEMENT OF OWNED FUND AS ON jccoceseeneees
(Please seen item No.1 1of the instructions)
(Rs. in lakhs)
Amount Rs.

(i) Paid-up Equity Capital

(ii) Paid up preference capital to the extent compulsorily
conve

(a) General Reserves

(b) Share Premium Reserve
(c) Capital Reserves (representing retained surplus
on sale of assets held in separate account)
(d) Debentures Redemption Reserve
(e) Capital Redemption Reserve
(f) Credit Balance in P&L Account
(g) Oth reserves (to be specified)
freeer
(iv) Total of (i) to (iii)

(viii) Under/Short provisioning in value of Investments

[other than those covered under item (xi)] ,
(ix) Under/Short provisioning against NPAs/bad &
ae debts [other than those covered under Item
Xi

qualified by the auditors in their report on the

cial statements

(xiv) Owned fund (iv - xiii)

Form of application for certificate of registration, etc. Notfn. 1291

(Signature of Authorised Official)

Name
Date : Designation
Place : Company Seal
* Strike out whichever is not applicable

AUDITOR’S CERTIFICATE
We have examined the books of account and other records maintained
BY cxsaatoassenceees Limited in respect of its owned fund as on ................... and report
that to the best of our knowledge and according to the information and explana-
tions given to us and as shown by the records examined by us, the figures shown
in the statement of owned fund are correct.
Chartered Accountants/Statutory Auditors*
Date:
Place:
*Certificate to be signed by statutory auditors, if appointed.

ANNEXURE III
INFORMATION ABOUT THE CHAIRMAN, MANAGING DIRECTOR,
DIRECTORS AND THE CHIEF EXECUTIVE OFFICER
OF THE COMPANY
1. Name
24 Designation/Status : Chairman/Managing
Director/Director/Chief
Executive Officer*
3 Nationality
- Age
mt Business Address
6. Residential Address
7 Income Tax PAN No.
8 Educational/professional qualifications
9 Line of business or vocation
10. Name/s of other companies in which the
person has held the post of Chairman/
Managing Director/Director/Chief Execu-
tive Officer
(i) Whether associated as Sponsor, Man- Yes/No
11.
aging Director, Chairman or Director with
 etc. ), ete.
Notfn. Part [1i—Suberdinate Law (Rules, Directions,

any NBFC including a Residuary Non-

Banking Company.
(ii) If yes, the name/s of the company/ ies
(Separate sheet may be attached if neces-
sary)
Yes/No
(i) Whether prosecuted/oonvicted for an
offence involving moral turpitude or for
any economic offence either in the indi-
vidual capacity or as a partner/director ot
any firm/company
(ii) If particulars thereof
4G) Whelner. barred.by.SEBI. in:the.ast Yes/No
from becoming Director in any company
(ii) If yes, particulars thereof
14. (i) Whether disqualified in the past to be
director of a company under the Compa-
nies Act, 1956
(ii) If yes, particulars thereof
Experience in the field of finance, securiti-
sation and asset reconstruction (details)
(a separate sheet may be attached, if nec-
essary)
16. Equity shareholding in the applicant com-
pany
(i) No. of shares
(ii) Face Value
(iii) Percentage of total paid-up equity
share capital of the company
17. Whether nominee of or associated with
any of sponsor/s
All Bank details: A/c Nos., all Bankers’
names & addresses
19. Whether committed any default in repay- Yes/No
ment of any loan, advance or any other
credit facility availed from any bank/any

NBFCs
If yes, furnish full details, such as name
and branch of lending institution, type of
facility, period and quantum of default,
etc.
Form of application for certificate of registration, etc. Notfn. 1293

| solemnly declare that to the best of my knowledge and belief the information
furnished in the statement above is correct, complete and truly stated.

Signature of the person furnishing

information
Name
Date : Designation
Place
I solemnly declare that to the best of my knowledge and belief the information
furnished in the statement above is correct, complete and truly stated.
(Signature of Authorised Official of
the Company)
Name
Date : Designation
Place Company Seal
* Strike out whichever is not applicable.

ANNEXURE IV
INFORMATION ABOUT THE SPONSOR/’S OF THE COMPANY
Name
Business Address
Residential Address
Income Tax PAN No.
Line of business or vocation [
Bank A/c. No., Banker’s name & address
=NDAAR
WH Whether committed any default in repayment Yes/No
of any loan, advance or any other credit facil-
ity availed from any bank/any other financial
institution including NBFCs.
If yes, furnish full details, such as name and
branch of lending institution, type of facility,
period and quantum of default, etc. —
Whether the company/subsidiary/other com- Yes/No
panies in the same group has/have committed
any default in repayment of redeemable deben-
tures/preference shares/deposits
10. Whether object clause in its Memorandum and Yes/No
Articles of Association permits investment in
Securitisation Company or Reconstruction
Company
 eto), etc.
1294 Notfn. Part It—Subordinate Law (Rules, Directions,

il. Exte nt
of inve stment in Reconstruction Com-
pany or Securitisation Company
(i) No. of shares
(ii) Face Value
(iii) Percentage of total paid-up equity share
Capital of the company
12. Whether sponsor is holding company/or hold-
ing controlling interest in the proposed com-
pany
! the information
| solemnly declare that to the best of my knowledge and beliestated ,
furnished in the statement above is correct, complete and truly
Signature of Authorised
official
Name
Date ; Designation
Place : Company Seal

ANNEXURE V
INFORMATION ABOUT RELATED PARTIES
1 Name of related Party ;
2 Full Address
x Line of business
4 Status: (a) Individual Firm (b) Public limited
company/Private limited Co.
5. Relationship with applicant company
6. Details of Exposure

| _ Amou Inlakh)
(Rs.nt
Investment in capital shares, bonds/deben- )
tures

I solemnly declare that tothe best of my knowledge and belief the

furnished in the statement above is correct, complete and truly stated.
Form of application for certificate of registration, etc. Notfn. 1295

Signature of authorised official

Name
Designation
Company Seal

DOCUMENTS REQUIRED TO BE ANNEXED TO THE

APPLICATION FORM
Identification particulars of the company (Annexure J).
Statement of Owned Fund (Annexure II).
Information about the management (Annexure III).
Information about the sponsor/s (Annexure IV).
Information about related parities as defined in the Accounting Stan-
dards and Guidance Notes of ICAI. (Annexure V)
Certified copy of up-to-date Memorandum and Articles of Association
of the Company (evidencing therein that the company has been formed
for the purpose of undertaking securitisation/asset reconstruction busi-
ness only).
A Certified copy each of Certificate of Incorporation and Certificate of
Commencement of Business (in case of public Ltd. companies).
A certified copy each of the Board of Directors Resolutions (i) specifi-
cally approving the submission of the application to Reserve Bank of
India and its contents and names of authorised officials, (ii) stating that
the company has not accepted any deposit (as defined in Section 45-
I(bb) of the Reserve Bank of India Act, 1934)/deposit accepted will be
repaid in terms of the contract and the company has not defaulted in re-
payment of deposits/interest thereon so far, (iii) stating whether or not
the directors of the company have adequate professional experience in
matters related to finance, securitisation and reconstruction, (iv) stating
that none of the directors are disqualified to be appointed as directors as
per the provisions of the Companies Act, 1956 and (v) stating that the
company, if carrying on any other business other than the business of
securitisation/asset reconstruction as defined in the Act on or before the
date of application, will cease to carry on any such business by June 20,
2003 if the company is granted registration by RBI ( carrying out the
business of securitisation, which does not fall under the definition of
Securitisation as in Section 2(1)za of the Act, will fall under ‘other ac-
tivity’ ).
-
_ A certified copy of Board of Directors Resolution and Auditor’s Certifi
cate (in original) to the effect that;
 etc.), etc.
1296 Notfn. Part 111—Suberdinate Law (Rules, Directions,

the three preceding

(i) the company has not incurred losses in any of
financial years; (for existing companies only)
only )/will not
(ii) the company has not engaged (for existing companies
reconstruc:
engage in any business other than securitisation and asset
tion;
tisation
(iii) any of the sponsors is not a holding company of the securi
hold
company or reconstruchon company, OF does not otherwise
any controlling interest in such securitisation company or recon:
struction company,
(iv) the Board of Directors of the company does not consist of more
than half of its total number of directors who are either nominees
of any sponsor or associated in any manner with the sponsor or
any of its subsidiaries;
10. The Board of Directors should, by means of a report, state that the com-
pany has made adequate arrangements for realisation of the financial as-
sets acquired for the purpose of securitisation/asset reconstruction and
that it shall be able to service its obligations on respective due dates to
the qualified institutional buyers or other persons.
II. A copy each of the Profit and Loss account and audited Balance Sheet
for the last 3 years or for such shorter period as are available (for com-
panies already in existence).
12. Business plan ofcompany for the next three years giving details of its
(a) thrust of business; |
(b) amount of Financial Assets proposed to be acquired;
(f) market segment;
(g) projection of investme and nts
income;
(h) statement of Financial Assets and Liabilities; and
(i) organisational Structure
is not ver
* Delete whiche applicable.
INSTRUCTIONS
(Application form should be filled up strictly in accordance
with these instructions)
GENERAL
1. Application should be made in this form . Wherever is insuf-
ficient, information may be furnished wpe sheet/ ba
2. Application along with enclosures duly completed should be submitted
Sechien Samurcidion Tesres thei ciiaaiin Ccueee
Banking Supervision, Reserve Bank of India, Central Office, Centre
2nd floor, World Trade Centre, Mumbai 400 005.
3. A photocopy of the application together with enclosures/Annexures
submitted may be kept with the company for its record. a
Form of application for certificate of registration, etc. Notfn. 1297

4. Application should be signed by any of the following officials author-

ised by the Board of Directors in this behalf (viz., Chairman/Managing
Director/Director/Chief Executive Officer/Company Secretary, herein-
after known as the Authorised Official).
. Application should bear the company seal.
. An acknowledgement for having submitted the application may be ob-
tained from the RBI.
. Statement of Owned Fund to be submitted as on date of the latest au-
dited balance sheet.
ANNEXURE I

(oe). ‘Sponsor’ as defined in terms of Section 2(1)(zh) of the Securitisation

and Reconstruction of Financial Assets and Enforcement of Security In-
terest Act, 2002.
. “control” includes the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person, di-
rectly or indirectly, including by virtue of his shareholding or manage-
ment rights or shareholders’ agreements or voting agreements or in any
other manner.
10. In case the company has changed its name earlier, a list of all the earlier
names of the company and date/s of change together with the names of
Chief Executive Officer and Chairman at the time of change of name
should be furnished.

ANNEXURE II

FE. The particulars/information to be furnished in Annexure-II of the appli-

cation should be based on figures as disclosed in the latest audited bal-
ance sheet. However, in the case of a company incorporated on or after
21-6-2002, such particulars/information should be based on the balance
sheet as on a date falling within not more than thirty days preceding the
date of application.
BZ. ‘Free reserve’ includes reserves shown in the balance sheet and created
through an allocation out of profits but not being (a) a reserve created
for repayment of any future liability or for depreciation on assets or for
bad debts, or (b) a reserve created by revaluation of assets of the com-
pany.
13; “Related Party” means related parties as per the accounting standards
and guidance notes of issued by the Institute of Chartered Accountants
of India.
and
14. Under/Short provisioning in value of investments, against NPAs
auditors/
over-recognition of income will be as identified by statutory
internal auditors/RBI inspecting officer.
by a Chartered
15; The contents of Annexure II should be certified
Accountant.
 Law (Rule
Part Il—Suberdina ete.),etc.
tes, Directions,
Notfn.

by
tors and the chief executive officer of the company must be certified
each individual, chairman, managing director, directors and the chief
executive offi ce
of the rny and coun
compa te
signe rthe Authorised
d by
Official of the applicant company,
- Separate form should besubmitted inthis format ofeach ofsuch func:
uionaries.
ANNEXURETV

18. Separate form should be submitted in respect of each of the sponsors,

ANNEXUREV
19. Separate form shouldbe submitted in respect of each of the related par-
ty.
20. The particulars/information should be based on figures as on date oflast
audited balance sheet as given in Annexure II,
 PART IV
REFERENCE LAW: STATUTES INTEGRALLY
REFERRED IN THE MAIN LAW

APPENDICES
ARRANGEMENT OF APPENDICES

App. 1 RELEVANT EXTRACTS FROM THE TRANSFER OF PROPERTY

ROT Gees a A cose
ecans saan sdestentsaboataneteseevetse 1301

App. 2 THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL

INSTITUTIONS ACT, 1993 ...cccccececccccoenccnnsserssssecercerscoroconscceenes
1312

DEBT RECOVERY TRIBUNAL (PROCEDURE) RULES, 1993 ... 1332

APP. 3
App. 4 DEBTS RECOVERY APPELLATE TRIBUNAL (PROCEDURE)
1346
RULES, 1994 .....c..ccececccccsscccccscescreecessnscccccsnsssescsensseserereracccssees
APP. 5 THE DEBTS RECOVERY ‘TRIBUNAL (PROCEDURE)
1355
AMENDMENT RULES, 2003.......--:sscccccccccececceceeceessscecsesceseeeons
NCIAL
APP. 6 THE DEBTS RECOVERY APPELLATE TRIBUNAL (FINA
assseecene 1363
AND ADMINISTRATIVE POWER) RULES, BOT aati
RECOVERY TRIBUNAL (FINANCIAL AND
APP. 7 DEBTS
e 1364
ADMINISTRATIVE POWER) RULES, Ls SSSer
N LAWS... 1365
APP. 8 SPECIAL RECOVERY POWERS UNDER SOME INDIA

ANNEXURE 8.1: PROVISIONS IN THE STATE FINANCIAL

1365
CORPORATIONS ACT, L951 ......ceeccccceeeeesseeees
eeseedereesoee 1373
ANNEXURE 8.2: PROVISIONS IN THE TECLAGCT. .insoves
Now REPEALED BY THE INDUSTRIAL
FINANCE CORPORATION (TRANSFER OF
UNDERTAKINGS AND REPEAL) ACT, 1993
ACT, 1984........... 1379
ANNEXURE 8.3: PROVISIONS IN THE IRBI
Now REPEALED BY THE
OF
RECONSTRUCTION BANK (TRANSFER
UNDERTAKINGS AND REPEAL) ACT, 1997

1299
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 APPENDIX 1

RELEVANT EXTRACTS FROM

THE TRANSFER OF PROPERTY ACT, 1882
* * * * * *

8. Operation of transfer.—Unless a different intention is expressed or neces-

sarily implied, a transfer of property passes forthwith to the transferee all the in-
terest which the transferor is then capable of passing in the property, and in the
legal incidents thereof.
Such incidents include, where the property is land, the easements annexed
thereto, the rents and profits thereof accruing after the transfer, and all things at-
tached to the earth;
and, where the property is machinery attached to the earth, the moveable parts
thereof;
and, where the property is a house, the easements annexed thereto, the rent
thereof accruing after the transfer, and the locks, keys, bars, doors, windows, and
all other things provided for permanent use therewith;
and, where the property is a debt or other actionable claim, the securities there-
for (except where they are also for other debts or claims not transferred to the
transferee), but not arrears of interest accrued before the transfer;
and, where the property is money or other property yielding income, the inter-
est or income thereof accruing after the transfer takes effect.
* * * * * *

67. Right to foreclosure or sale.—In the absence of a contract to the contrary,

the mortgagee has, at any time after the mortgage-money has become due to him,
and before a decree has been made for the redemption of the mortgaged property,
a
or the mortgage-money has been paid or deposited as hereinafter provided,
right to obtain from the Court a decree that the mortgagor shall be absolutely de-
sold.
barred of his right to redeem the property, or a decree that the property be
ed of his
A suit to obtain a decree that a mortgagor shall be absolutely debarr
sure.
right to redeem the mortgaged property is called a suit for foreclo
Nothing in this section shall be deemed—
e by conditional sale
(a) to authorize any mortgagee other than a mortgage
the terms of which he
or a mortgagee under an anomalous mortgage by

1301
 1882
1302 Appt Relevant Extracts fram The Transfer of Praperty Act,
an usulruc:
is entitled to foreclose, to institute a suit for foreclosure, or
sale as such to
luary mortgagee as such or a mortgagee by conditional
institute a suit for sale; or
as his trustee
(b) to authorize a mortgagor who holds the mortgagee’s rights
property, to
or legal representative, and who may sue for a sale of the
institute a suit for foreclosure; or
work in the
(c) to authorize the mortgagee of a railway, canal or other
maintenance of which the public are interested, 10 insGtute a suit for
foreclosure or sale; or
ey to
(d) to authorize a person interested in part only of the mortgage-mon
institute a suit relating only to a corresponding part of the mortgaged
propefty, unless the mortgagees have, with the consent of the mortga-
gor, severed their interests under the mortgage.
67A. Mortgagee when bound to bring one suit on several mortgages.—-A
mortgagee who holds two or more mortgages executed by the same mortgagori
respect of each of which he has a right to obtain the same kind of decree under
section 67, and who sues to obtain such decree on any one of the mortgages,
shall, in the absence of a contract to the contrary, be bound to sue on all the
mortgages in respect of which the mortgage-money has become due,
68. Right to sue for mortgage money.—(1) The mortgagee has a right to sue
for the mortgage-money in the following cases and no others, namely: -
(a) where the mortgagor binds himself to repay the same,
(b) where, by any cause other than the wrongful act or defau lt
of the mort-
gagor or mortgagee, the mortgaged property is wholly or partially de-
stroyed or the security is rendered insufficient within the meaning of
section 66, and the mortgagee has given the mortgagor a reasonable op-
portunity ofproviding further security enough to render the whole secu-
rity sufficient, and the mortgagor has failed to do so;
(c) where the mortgagee is deprived of the whole or part ofhis security by
or in consequence of the wrongful act or default of the mortgagor:
(d) where, the mortgagee being entitled to possession of the mortgaged
property, the mortgagor fails to deliver the same to him, or to secure the
possession thereof to him without disturbance by the mortgagor or any
person claiming under a title superior to that of the mortgagor:
Provided that, in the case referred to in clause (a), a transferee from the mort-
gagor or from his legal representative shall not be liable to be sued for the mort-
gage-money.

(2) Where a suit is brought under clause (a) or clause (b) of sub-section (1), the
Court may, at its discretion, stay the suit and all proceedings therein, notwith-
standing any contract to the contrary, until the mortgagee has exhausted all his
available remedies against the mortgaged property or what remains of it, unless
the mortgagee abandons his security and, if necessary, re-transfers the mortgaged
 Relevant Extracts from The Transfer of Property Act, 1882 App.1 = 1303

69. Power of sale when valid.—(1) A mortgagee, or any person acting on his
behalf, shall, subject to the provisions of this section, have power to sell or con-
cur in selling the mortgaged property, or any part thereof, in default of payment
of the mortgage-money, without the intervention of the Court, in the following
cases and in no others, namely:—
(a) where the mortgage is an English mortgage, and neither the mortgagor
nor the mortgagee is a Hindu, Muhammadan or Buddhist or a member
of any other race, sect, tribe or class from time to time specified in this
behalf by the State Government, in the Official Gazette;
(b) where a power of sale without the intervention of the Court is expressly
conferred on the mortgagee by the mortgage-deed and the mortgagee is
the Government;
(c) where a power of sale without the intervention of the Court is expressly
conferred on the mortgagee by the mortgage-deed and the mortgaged
property or any cart thereof was, on the date of the execution of the
mortgage-deed situate within the towns of Calcutta, Madras, Bombay,
or in any other town or area which the State Government may, by noti-
fication in the Official Gazette, specify in this behalf.
(2) No such power shall be exercised unless and until—
(a) notice in writing requiring payment of the principal money has been
served on the mortgagor, or on one of several mortgagors, and default
has been made in payment of the principal money, or of part thereof, for
three months after such service; or
(b) some interest under the mortgage amounting at least to five hundred
rupees is in arrear and unpaid for three months after becoming due.
(3) When a sale has been made in professed exercise of such a power, the title
of the purchaser shall not be impeachable on the ground that no case had arisen
to authorize the sale, or that due notice was not given, or that the power was oth-
erwise improperly or irregularly exercised; but any person damnified by an unau-
thorized or improper or irregular exercise of the power shall have his remedy in
damages against the person exercising the power.
(4) The money which is received by the mortgagee, arising from the sale, after
discharge of prior encumbrances, if any, to which the sale is not made subject, or
after payment into Court under section 57 of a sum to meet any prior encum-
in trust
brance, shall, in the absence of a contract to the contrary, be held by him
properly
to be applied by him, first, in payment of all costs, charges and expenses
secondly, in
incurred by him as incident to the sale or any attempted sale; and,
any, due under
discharge of the mortgage-money and costs and other money, if
paid to the per-
the mortgage; and the residue of the money so received shall be
for the pro-
son entitled to the mortgaged property, or authorised to give receipts
ceeds of the sale thereof.
powers conferred before
(5) Nothing in this section or in section 69A applies to
the first day of July, 1882.
1304 App.t Relevant Extracts from The Transfer of Property Act, 1882
Loexercise
69A. Appointment of receiver.— 1) A mortgagee having the right
of sub-s ection
a power of sale under secon 69 shall, subject to the provisions
(2), be entitl ed
to appoin t, by writing signedby him or on tis behall, a receiver of
the income of the mortgaged prop er
or any thereof,
partty
g and
(2) Any person who has been named in the mortgage-deed and is willin
able to act as receiver may be appointed by the mortgagee.
If no person has been so named, or if all persons named are unable or unwilling
to act, or are dead, the mortgagee may appoint any person to whose appointment
the mortgagor agrees; failing such agreement, the mortgagee shall be entitled to
apply to the Court for the appointment of a receiver, and any person appointed by
the Court shall be deemed to have been duly appoin mortgagee.
by the ted
A receiver thay at any time be removed by writing signed by or on behalf of
the mortgagee and the mortgagor, or by the Court on application made by either
party and on due cause shown.
A vacancy in the office of receiver may be filled in accordance with the provi-
sions of this sub-section.
(3) A receiver appointed under the powers conferred by this section shall be
deemed to be the agent of the mortgagor; and the mortgagor shall be solely re-
sponsible for the receiver's acts or defaults, unless the mortgage-deed otherwise
provides or unless such acts or defaults are due to the improper intervention of
the mortgagee.
(4) The receiver shall have power to demand and recover all the income of
which he is appointed receiver,by suit, execution or otherwise, in the name either
of the mortgagor or of the mortgagee to the full extent of the interest which the
mortgagor could dispose of, and to give valid receipts accordingly for the same,
and to exercise any powers which may have been delegated to him by the mort-
gagee in accordance with the provisions of this section.
(5) A person paying money to the receiver shall not be concerned to inquire if
the appointment of the receiver was valid or not.
(6) The receiver shall be entitled to retain out of any money received by him,
for his remuneration, and in satisfaction of all costs, charges and expenses in-
curred by him as receiver, a commission at such rate not exceeding five per cent
on the gross amount of all money received as is specified in his appointment,
and, if no rate is so specified, then at the rate of five per cent on that gross
amount, or at such other rate as the Court thinks fit to allow, on application made
by him for that purpose.
(7) The receiver shall, if so directed in writing by the mortgagee, insure
to the
extent, if any, to which the mortgagee might have insured, and keep insured
against loss or damage by fire, out of the money received by him, the mortgaged
property or any part thereof being of an insurable nature.
(8) Subject to the provisions of this Act as to the application of insurance
money, the receiver shall apply all money received by him as follows, namely. —
 Relevant Extracts from The Transfer of Property Act, 1882 App.1 1305

(i) in discharge of all rents, taxes, land revenue, rates and outgoings what-
ever affecting the mortgaged property;
(ii) in keeping down all annual sums or other payments, and the interest on
all principal sums, having priority to the mortgage in right whereof he
is receiver;
(iii) in payment of his commission, and of the premiums on fire, life or
other insurances, if any, properly payable under the mortgage-deed or
under this Act, and the cost of executing necessary or proper repairs di-
rected in writing by the mortgagee;
(iv) in payment of the interest falling due under the mortgage;
(v —— in or towards discharge of the principal money, if so directed in writing
by the mortgagee;
and shall pay the residue, if any, of the money received by him to the person
who, but for the possession of the receiver, would have been entitled to receive
the income of which he is appointed receiver, or who is otherwise entitled to the
mortgaged property.
(9) The provisions of sub-section (1) apply only if and as far as a contrary in-
tention is not expressed in the mortgage-deed; and the provisions of sub-sections
(3) to (8) inclusive may be varied or extended by the mortgage-deed, and, as so
varied or extended, shall, as far as may be, operate in like manner and with all the
like incidents, effects and consequences, as if such variations or extensions were
contained in the said sub-sections.
(10) Application may be made, without the institution of a suit, to the Court for
its opinion, advice or direction on any present question respecting the manage-
ment or administration of the mortgaged property, other than questions of diffi-
culty or importance not proper in the opinion of the Court for summary disposal.
A copy of such application shall be served upon, and the hearing thereof may be
attended by, such of the persons interested in the application as the Court may
think fit.
The costs of every application under this sub-section shall be in the discretion
of the Court.
(11) In this section, “the Court” means the Court which would have jurisdiction
in a suit to enforce the mortgage.
70. Accession to mortgaged property.—If, after the date of a mortgage, any
accession is made to the mortgaged property, the mortgagee, in the absence ofa
contract to the contrary, shall, for the purposes of the security, be entitled to such
accession.
Illustrations

(a) A mortgages to B a certain field bordering on a river. The field is in-

creased by allusion. For the purposes of his security, B is entitled to the
increase.
 Act, 188?
1306 «=App.t Relevant Extracts from The Transfer ofProperty

» plot ofbuilding land to B and afterward s a

ereots
morigages 4
= — on yy se mn= -*his security, B is entitled to the
house as well as the plot.
gaged property is a lease
71. Renewal of mortgaged lease.—When the mort
the mortgagee, in the absence
and the mortgagor obtains a renewal of the lease,
the security, be entutled to
of a contract to the contrary, shall, for the purposes of
the new lease.
—A mortgagee may spend such money
72. Rights of mortgagee in possession.
as is necessary—
destruction, fortes
(b) for the preservation of the mortgaged property from
ture or sale;
(c) for supporting the mortgagor's UUle to the property,
and
(d) for making his own title thereto good against the mortgagor,
renewal
(ec) when the mortgaged property is a renewable lease-hold, for the
of the lease;
the prin-
and may, in the absence of a contract tothe contrary, add such money to
such
cipal money, at the rate of interest payable on the principal, and, where no
rate is fixed, at the rate of nine per cent per annum,
Provided that the expenditure of money by the mortgagee under clause (b) or
clause (c) shall not be deemed to be necessary unless the mortgagor has been
called upon and has failed to take proper and timely steps to preserve the prop-
erty or to support the title.
Where the property is by its nature insurable, the mortgagee may also, in the
absence of a contract to the contrary, insure and keep insured against loss or
damage by fire the whole or any part of such property; and the premiums paid for
any such insurance shall be added to the principal money with interest at the
same rate as is payable on the principal money or, where no such rate is fixed, at
the rate of nine per cent. per annum. But the amount of such insurance shall not
exceed the amount specified in this behalf in the mortgage-deed or (if no such
amount is therein specified) two-thirds of the amount that would be required in
case of total destruction to reinstate the property insured.
Nothing in this section shall be deemed to authorize the mortgagee to insure
when an insurance of the property is kept up by or on behalf of the mortgagor to
the amount in which the mortgagee is hereby authorized to insure.
73. Right to proceeds of revenue sale or compensation on acquisition.— |)
Where the mortgaged property or any part thereof or any interest therein is sold
owing to failure to pay arrears of revenue or other charges of a public nature or
rent due in respect of such property, and such failure did not arise from any de-
fault of the mortgagee, the mortgagee shall be entitled to claim payment of the
a eeea Vee eS ee TPE ee ee ere errs | epeuesatawes UE iitim
1e mortgagee shall be entitled to claim payment of the mort-
le or in part, out of the amount due to the mortgagor as com-

all prevail against all other claims except those of prior en-
ly be enforced notwithstanding that the principal money on
become due.
equent mortgagee to pay off prior mortgagee.—Rep. by
ty (Amendment) Act, 1929 (20 of 1929), sec. 39
esne mortgagee against prior and subsequent mort-
> Transfer of Property (Amendment) Act, 1929 (20 of 1929),

nortgagee in possession.—When, during the continuance of

rtgagee takes possession of the mortgaged property,—
inage the property as a person of ordinary prudence would
it were his own;
his best endeavours to collect the rents and profits thereof:
the absence of a contract to the contrary, out of the income
erty, pay the Government revenue, all other charges of a
e I[and all rent] accruing due in respect thereof during such
and any arrears of rent in default of payment of which the
ly be summarily sold;
the absence of a contract to the contrary, make such neces-
of the property as he can pay for out of the rents and profits
r deducting from such rents and profits the payments men-
luse (Cc) and the interest on the principal money;
commit any act which is destructive or permanently injuri-
operty;
s insured the whole or any part of the property against loss
y fire, he must, in case of such loss or damage, apply any
h he actually receives under the policy or so much thereof
ecessary, in reinstating the property, or, if the mortgagor so
duction or discharge of the mortgage-money:
1308 Appl Relevant Extracts from The Transfer of Property Act, 1882

menof tthe property and the collec and prof

rents n
oftio andit other
the s
be deb-
expenses mentioned in Clauses (Cc) and (d), and unterest thereon,
ited against him in reduction of the amount (if any) from time to time
due to him on account of interest and, so far as such receipts exceed any
interest due, in reduction or discharge of the morigage-money; the sur
plus, if any, shall be paid to the mortgagor,
(i) when the mortgagor tenders, or deposits in manner herematter pro:
vided, the amount for the time being due on the mortgage, the mortgage
must, notwithstanding the provisions in the other clauses of this section,
account for his receipts from the mortgaged property from the date of
the tender or from the earliest time when he could take such amount out
of Court, as the case may be and shall not be entitled to deduct any
amount therefrom on account of any expenses incurred after such date
or time in connection with the mortgaged property,
Loss occasioned by his default.—If the mortgagee fail to perform any of the
duties imposed upon him by this section, he may, when accounts are taken in
pursuance of a decree made under this chapter, be debited with the loss, if any,
occasioned by such failure.
77. Receipts in lieu of interest—Nothing in section 76, clauses (b), (d), (g)
and (h), applies to cases where there is a contract between the mortgagee and the
mortgagor that the receipts from the mortgaged property shall, so long as the
mortgagee is in possession of the property, be taken in lieu of interest on the
principal money, or in lieu of such interest and defined portions of the principal.
Priority
78. Postponement of prior mortgagee.— Where, through the fraud, misrepre-
sentation or gross neglect of a prior mortgagee, another person has been induced
to advance money on the security of the mortgaged property, the prior mortgagee
shall be postponed
to the subsequent mortgagee.
79. Mortgage to secure uncertain amount when maximum is expressed.—
If a mortgage made to secure future advances, the performance of an engagement
or the balance of a running account, expresses the maximum to be secured
thereby, a subsequent mortgage of the same property shall, if made with notice of
the prior mortgage, be postponed to the prior mortgage in respect of all advances
or debits not exceeding the maximum, though made or allowed with notice of the
subsequent mortgage.
Illustration
A mortgages Sultanpur to his bankers, B & Co., to secure the balance of his ac-
count with them to the extent of Rs. 10,000. A then mortgages Sultanpur to C, to
secure Rs. 10,000, C having notice of the mortgage to B & Co., and C gives notice
to B & Co. of the second mortgage. At the date of the second mortgage, the bal-
ance due toB & Co. does notexceed Rs. 5,000. B & Co. subsequently advance to
A sums making the balance of the account against him exceed the sum of Rs.
10,000. B & Co. are entitled, to the extent of Rs. 10,000
to priority over
, C.
 Relevant Extracts from The Transfer of Property Act, 1882 App.1 = 1309

80. Tacking abolished.—Rep. by the Transfer of Property (Amendment) Act,

1929 (20 of 1929), sec. 41.
Marshalling and Contribution
81. Marshalling securities.—If the owner of two or more properties mort-
gages them to one person and them mortgages one or more of the properties to
another person, the subsequent mortgagee is, in the absence of a contract to the
contrary, entitled to have the prior mortgage-debt satisfied out of the property or
properties not mortgaged to him, so far as the same will extend, but not so as to
prejudice the rights of the prior mortgagee or of any other person who has for
consideration acquired an interest in any of the properties.
82. Contribution to mortgage-debt.—Where property subject to a mortgage
belongs to two or more persons having distinct and separate rights of ownership
therein, the different shares in or parts of such property owned by such persons
are, in the absence of a contract to the contrary, liable to contribute rateably to
the debt secured by the mortgage, and, for the purpose of determining the rate at
which each such share or part shall contribute, the value thereof shall be deemed
to be its value at the date of the mortgage after deduction of the amount of any
other mortgage or charge to which it may have been subject on that date.
Where, of two properties belonging to the same owner, one is mortgaged to
secure one debt and then both are mortgaged to secure another debt, and the for-
mer debt is paid out of the former property, each property is, in the absence of a
contract to the contrary, liable to contribute rateably to the latter debt after de-
ducting the amount of the former debt from the value of the property out of
which it has been paid.
Nothing in this section applies to a property liable under section 81 to the claim
of the subsequent mortgagee.
Of Transfers of Actionable Claims
130. Transfer of actionable claim.—(1) The transfer of an actionable claim
whether with or without consideration shall be effected only by the execution of
an instrument in writing signed by the transferor or his duly authorized agent,
shall be complete and effectual upon the execution of such instrument, and there-
upon all the rights and remedies of the transferor, whether by way of damages or
otherwise, shall vest in the transferee, whether such notice of the transfer as is
hereinafter provided be given or not:
Provided that every dealing with the debt or other actionable claim by the
debtor or other person from or against whom the transferor would, but for such
instrument of transfer as aforesaid, have been entitled to recover or enforce such
debt or other actionable claim, shall (save where the debtor or other person Is a
party to the transfer or has received express notice thereof as hereinafter pro-
vided) be valid as against such transfer.
(2) The transferee of an actionable claim may, upon the execution of such in-
same 1n his
strument of transfer as aforesaid, sue or institute proceedings for the
 erty Act, 1882
1310 Appt Relevant Extracts from The Transfer of Prop

such suit or proceedings

own name without obtaining the tansferor’s consent to
and without making him a party thereto.
er of a marine or fire
Exception —Nothing in this section applies to the transf
the Insurance Act,
licy of insurance [or affects the provisions of section 38 of
1938 (4 of 1938)).
/llustrations
demands the debt
(i) A owes money to B, who transfers the debt to C. B then
prescribed in section
from A. who, not having received notice of the transfer, as
131, pays B. The payment is valid, and C cannot sue A for the debt,
s
(ii) A effects a policy on his own life with an Insurance Company and assign
dies, the
it to a Bank fot securing the payment of an existing or future debt, If A
t the
Bank is entitled to receive the amount of the policy and to sue on it withou
(1) of sectio n
concurrence of A’s executor, subject to the proviso in sub-section
130 and to the provisions of section 132.
130A. Transfer of policy of marine insurance.—Rep. by the Marine Insur-
ance Act, 1963 (11 of 1963), sec. 92 (w.e.f. 1-8-1963)
131. Notice to be in writing, signed.—Every notice of transfer of an action-
able claim shall be in writing, signed by the transferor or his agent duly author-
ized in this behalf, or, in case the transferor refuses to sign, by the transferee or
his agent, and shall state the name and address of the transferee.
132. Liability of transferee of actionable claim.—The transferee of an ac-
tionable claim shall take it subject to all the liabilities and equities to which the
transferor was subject in respect thereof at the date of the transfer.
Illustrations
(i) A transfers to C a debt due to him by B, a being then indebted to B. C sues
B for the debt due by B to A. In such suit B is entitled to set off the debt due by
A to him; although C was unaware of it at the date of such transfer.
(ii) A executed a bond in favour of B under circumstances entitling the former
to have it delivered up and cancelled. B assigns the bond to C for value and with-
out notice of such circumstances. C cannot enforce the bond against A.
133. Warranty of solvency of debtor —Where the transferor of a debt war-
rants the solvency of the debtor, the warranty, in the absence of a contract to the
contrary, applies only to his solvency at the time of the transfer, and is limited,
where the transfer is made for consideration, to the amount or value of such con-
sideration.
134. Mortgaged debt.— Where a debt is transferred for the purpose of secur-
ing an existing or future debt, the debt so transferred, if received by the transferor
or recovered by the transferee, is applicable, first, in payment of the costs of such
recovery; secondly, in or towards satisfaction of the amount for the time being
secured by the transfer, and the residue, if any, belongs to the transferor or other
person entitled to receive the same.
Relevant Extracts from The Transfer of Property Act, 1882 App.1 1311

135. Assignment of rights under policy of insurance against fire-—Every

assignee, by endorsement or other writing, of a policy of insurance against fire, in
whom the property in the subject insured shall be absolutely vested at the date of
the assignment, shall have transferred and vested in him all rights of suit as if the
contract contained in the policy had been made with himself.
135A. Assignment of rights under policy of marine insurance.—Rep. by the
Marine Insurance Act, 1963 (11 of 1963), sec. 92, (w.e.f. 1-8-1963).
136. Incapacity of officers connected with Courts of Justice.—No Judge,
legal practitioner or officer connected with any Court of Justice shall buy or traf-
fic in, or stipulate for, or agree to receive any share of, or interest in, any action-
able claim, and no Court of Justice shall enforce, at his instance, or at the in-
stance of any person claiming by or through him, any actionable claim so dealt
with by him as aforesaid.
137. Saving of negotiable instruments, etc.—Nothing in the foregoing sec-
tions of this Chapter applies to stocks, shares or debentures, or to instruments
which are for the time being, by law or custom, negotiable, or to any mercantile
document of title to goods.
Explanation.—The expression “mercantile document of title to goods” includes
a bill of lading, dock-warrant, warehouse-keeper’s certificate, railway receipt,
warrant or order for the delivery of goods, and any other document used in the
ordinary course of business as proof of the possession or control of goods, or au-
thorizing or purporting to authorize, either by endorsement or by delivery, the
possessor of the document to transfer or receive goods thereby represented.
 APPENDIX 2

THE RECOVERY OF DEBTS DUE TO BANKS

AND FINANCIAL INSTITUTIONS
ACT, 1993

(ACT NO, 51 OF 1993)

{27th August 1993).
-
An Act to provide for the establishment of Tribunals for expeditious adjudica
tion and recovery of debts due to banks and financial institutions and for matters
connected therewith or incidental thereto.
Be it enacted by Parliament in the Forty-Fourth Year of the Republic of India
as follows:
CHAPTER I
PRELIMINARY
S. 1. Short title, extent, commencement and application —(1) This Act may
be called the Recovery of Debts Due to Banks and Financial Institutions Act,
1993.
(2) It extends to the whole of India except the State of Jammu and Kashmir.
(3) It shall be deemed to come into force on the 24th day of June, 1993.
(4) The provisions of this Act shall not apply where the amount of debt due to
any bank or financial institution or to a consortium of banks or financial institu-
tions is less than ten lakh rupees or such other amount, being not less than one
lakh rupees, as the Central Government may, by notification, specify.
S. 2.Definitions.—In this Act, unless
the context otherwise requires,—
(a) “Appellate Tribunal” means an Appellate Tribunal established under
Sub-Section (1) of Section 8;
(b) “application” means an application made to a Tribunal under Section 19;
(c) “appointed day”, in relation to a Tribunal or an Appellate Tribunal,
means the date on which such Tribunal is established under Sub-
oe eT ee
tion 8;
(d) “bank” means—

1312
AY MGUMN UI LUid,

ubsidiary bank; or
.egional Rural Bank;
1ulti-State co-operative bank;]
ompany” shall have the meaning assigned to it in Clause (c)
) of the Banking Regulation Act. 1949 (10 of 1949):
on” means a Chairperson of an Appellate Tribunal appointed
on 9”,
ding new bank” shall have the meaning assigned to it in Clause
ion 5 of the Banking Regulation Act, 1949 (10 of 1949);
ns any liability (inclusive of interest) which is claimed as due
‘rson by a bank or a financial instit or byut
a consor
io tium
n of
1ancial institutions during the course of any business activity
by the bank or the financial institution or the consortium un-
for the time being in force, in cash or otherwise, whether se-
secured, or assigned, or whether payable under a decree or or-
civil court or any arbitration award or otherwise or under a
id subsisting on, and legally recoverable on, the date of the

stitution” means—
iblic financial institution within the meaning of Section 4A
he Companies Act, 1956(1 of 1956):
securitisation company or reconstruction company which
obtained a certificate of registration under sub-section (4)
ection 3 of the Securitisation and Reconstruction of Finan-
Assets and Enforcement of Security Interest Act, 2002 (54
2002);””.]
| other institution as the Central Government may, having
rd to its business activity and the area of its operation in In-
yy notification, specify;
” means a notification published in the Official Gazette;
means prescribed by rules made under this Act:
1314 App.2 Recovery of Debts Due to Banks & Fin. Institutions Act, 1993

(k) “Recovery Officer” means a Recovery Officer appointed by the Central

Government for each Tribunal under sub-Seotion (1) of Section 7;
(1) “Regional Rural Bank” means a Regional Rural Bank established under
Section 3 of the Regional Rural Banks Act, 1976 (21 of 1976),
(m) “State Bank of India” means the State Bank of India constituted under
Section 3 of the State Bank of India Act, 1955 (23 of 1955);
(n) “subsidiary bank” shall have the meaning assigned to it in Clause (k) of
Section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38
of 1959),
(o) “Tribunal” means the Tribunal established under sub-Section (1) of
Seation 3.
CHAPTER I
ESTABLISHMENT OF TRIBUNAL AND
APPELLATE TRIBUNAL
S. 3. Establishment of Tribunal.—(1) The Centra! Government shall, by noti-
fication, establish one or more Tribunals, to be known as the Debts Recovery
Tribunal, to exercise the jurisdiction, powers and authority conferred on such
Tribunal by or under this Act.
(2) The Central Government shall also specify, in the notification referred to in
sub-Section (1), the areas within which the Tribunal may exercise jurisdiction for
entertaining and deciding the applications filed before it.

S. 4. Composition of Tribunal —(1) A Tribunal shal] consist of one person

only (hereinafter referred to as the Presiding Officer) to be appointed by notifica-
tion, by the Central Government.
(2) Notwithstanding anything contained in sub-Section (1), the Central Gov-
ernment may authorise the Presiding Officer of one Tribunal to discharge also the
functions of the Presiding Officer of another Tribunal.

S. 5. Qualifications for appointment as presiding Officer —A person shall

not be qualified for appointment as the Presiding Officer of a Tribunal unless he
is, or has been, or is qualified to be, a District Judge.
S. 6. Term of Office —The Presiding Officer of a Tribunal shall hold office
for a term of five years from the date on which he enters upon his office or until
he attain
the agesof “[sixty two years], whichever is earlier.
S._7. Staff of Tribunal.—(1) The Central Government shall provide the Tribu-
nal [with one or more Recovery Officers] and such other officers and employees
as that Governme
may think
nt fit.

6. Subs. by for “sixty years” wef. 9-8-1995.

7. Subs. by Amendment for “with a Recovery Officer” (w.r.ef. 17-1-2000).
 Recovery of Debts Due to Banks & Fin. Institutions Act, 1993 App.2 1315

(2) The [Recovery Officers] and other officers and employees of a Tribunal
— discharge their functions under the general superintendence of the Presiding
icer.
(3) The salaries and allowances and other conditions of service of the *TRecov-
ery Officers] and other officers and employees of a Tribunal shall be such as may
be prescribed.
S. 8. Establishment of Appellate Tribunal—(1) The Central Government
shall, by notification, establish one or more Appellate Tribunals, to be known as
the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers and
authority conferred on such Tribunal by or under this Act.
(2) The Central Government shall also specify in the notification referred to in
sub-Section (1) the Tribunals in relation to which the Appellate Tribunal may
exercise jurisdiction.
173) Notwithstanding anything contained in sub-Sections (1) and (2), the Cen-
tral Government may authorise the Chairperson of an Appellate Tribunal to dis-
charge also the functions of the Chairperson of other Appellate Tribunal.]
S. 9. Composition of Appellate Tribunal.—An Appellate Tribunal shall con-
sist of one person only (hereinafter referred to as ''[the Chairperson of the Appel-
late Tribunal]) to be appointed, by notification, by the Central Government.
S. 10. Qualifications for appointment as '[Chairperson of the Appellate
Tribunal].—A person shall not be qualified for appointment as '*[the Chairper-
son of an Appellate Tribunal] unless he—
(a) is, or has been, or is qualified to be, a Judge of a High Court; or
(b) has been a member of the Indian Legal Service and has held a post in
Grade I of that Service for at least three years; or
(c) has held office as the Presiding Officer of a Tribunal for at least three
years.
S. 11. Term of Office —"*[The Chairperson of an Appellate Tribunal] shall
hold officer for a term of five years from the date on which he enters upon his
officer or until he attains the age of '[Sixty five years], whichever is earlier.
S. 12. Staff of the Appellate Tribunal.—The provisions of Section 7 (except
those relating to Recovery Officer) shall, so for as may be, apply to an Appellate

8. Subs. by Amendment Act, 2000, s. 4, “The Recovery Officer” (w.r.e.f. 17-1-2000).

9, Subs. by Amendment Act, 2000, s. 4, “The Recovery Officer” (w.r.e.f. 17-1-2000).
10. Ins. by Amendment Act, 2000, s. 5 (w.r.e.f. 17-1-2000)..
11. Subs. by Amendment Act, 2000, s. 2, for “the Presiding Officer of the Appellate (w.r.e.f. 17-1-
2000) Tribunal”. -
12. Subs. by Amendment Act, 2000, s. 2, for “the Presiding Officer of the Appellate (w.r.e.f. 17-1-
2000) Tribunal”.
13. Subs. by Amendment Act, 2000, s. 2, for “ the Presiding Officer of the Appellate (w.r.e.f. 17-1-
2000) Tribunal”.
14. Subs. by Amendment Act, 2000, s. 2, for “ the Presiding Officer of the Appellate (w.r.e.f. 17-1-
2000) Tribunal”. *
9-8-1995).
15. cng Amendment Act, 1995, s. 3, for “sixty-two years” (w.r.e.f.
1316 App. 2 Recovery of Debts Due to Banks & Pin, lnstinations Aoi, 1993
Y in that Section
Tribunal as they apply to a Tribunal and accordingly references
nal” and peler-
to “Tribunal” shall be construed as references to “Appellate Tribu
d,
ences to “Recovery Officer” shall be deemed to have been omitte
e of
S. 13. Salary and allowances and other terms and conditions of servic
other terms
Presiding Officers.—The salary and allowances payable to and the
and conditions of service (including pension, gratuity and other relire ment bene-
fits) of, '“{the Presiding Officer of a Tribunal or the Chairperson of an Appellate
Tribunal} shall be such as may be prescribed:
Provided that neither the salary and allowances nor the other terms and condi.
tions of service of '’'{the Presiding Officer of a Tribunal or the Chairperson of an
Appellate Tribunal shall be varied to his] disadvantage after appointment.
S. 14. Filling up of vacancies.—I{, for any reason other than temporary ab-
sence, any vacancy occurs in the office of '|the Presiding Officer of a Tribunal
or the Chairperson of an Appellate Tribunal], then the Central Government shall
appoint another person in accordance with the provisions of this Act to fill the
vacancy and the proceedings may be continued before the Tribunal or the Appel-
late Tribunal from the stage at which the vacancy is filled,
S. 15. Resignation and removal.—(1) '"|The Presiding Officer of a Tribunal
or the Chairperson of an Appellate Tribunal] may, by notice in writing under his
hand addressed to the Central Government, resign his office:
Provided that *{the Presiding Officer of a Tribunal or the Chairperson of an
Appellate Tribunal] shall, unless he is permitted by the Central Government to
relinquish his office sooner, continue to hold office until the expiry of three
months from the date of receipt of such notice or until a person duly appointed as
his successor enters upon his office or until the expiry of his term of office,
whichever is the earliest.
of a Tribunal or the Chairperson of an Appellate
(2) [The Presiding Officer
Tribunal] shall not be removed from his office except by an order made by the
Central Govern ment
on the ground of proved misbeha viour
or incapacity after
inquiry—
(a) in the case of Presiding Officer of a Tribunal, made by a Judge of a
High Court;
(b) in the case of “[the Chairperson of an Appellate Tribunal], made by a
Judge of the Supreme
Court,

Subs. by Amendment Act, 2000, s. 2,for “the Presiding Officerof°aTribunal or an Appellate Tri-
|
bunal™ (w.r.e.f. 17-1-2000).
: Amendment Act, 2000, s.6, for “the said Presiding Officers shall be varied to their”

Subs. oie
byAmendment
xe Act,| 2000, s. 2,for “thePresiding
s. 2, Presi Officer of a Tribunal
or an Appellate Tri-
19. Subs. by Amendment Act, 2000, s. 2,for“the Presiding Officer ofa Tribunal oran Appellate Tri-
” (w.1.ef. 17-1-2000)
20. Subs. by Amendment Act, 2000, s. 7, for “the said Presiding Officers
. byby Amendment Act, 2000, s. 2, for “the Presiding Officer ofa Wvioundlot ; e Ti
ahAppella
bunal” (w.r.e.f. 17-1-2000).
22. Subs. byAmendment Act, 2000, s. 2,for“the Presiding Officers ofanAppetite Tribunal” (wire.
 Recovery of Debts Due to Banks & Fin. Institutions Act, 1993 App.2 1317

(c) in which “[the Presiding Officer of a Tribunal or the Chairperson of an

Appellate Tribunal) has been informed of the charges against him and
given a reasonable opportunity of being heard in respect of those
charges:
“(Provided that the Central Government, during the pendency of the
inquiry against the Presiding Officer or 2 Chairperson, as the case may
be may after consulting the Chairperson of the Selection Committee
constituted for selection of Presiding Officer or Chairperson, pass an
order suspending the Presiding Officer or the Chairperson, if it is satis-
fied that he should cease to discharge his functions as a Presiding Offi-
cer or Chairperson, as the case may be.]
(3) The Central Government may, by rules, regulate the procedure for the in-
vestigation of misbehavior or incapacity of ~[the Presiding Officer of a Tribunal
or the Chairperson of an Appellate Tribunal].
S. 16. Orders constituting Tribunal or an Appellate Tribunal to be final
and not to invalidate its proceedings—No order of the Central Government
appointing any person as the Presiding Officer of a Tribunal or the Chairper-
son of an Appellate Tribunal] shal) be called in question in any manner, and no
act or proceeding before a Tribunal or an Appellate Tribunal shall be called in
question in any manner on the ground merely of any defect in the Constitution of
a Tribunal or an Appellate Tribunal.

CHAPTER III
JURISDICTION, POWERS AND AUTHORITY
OF TRIBUNALS

S. 17. Jurisdiction, powers and authority of Tribunals—<1) A Tribunal

shall exercise, on and from the appointed day, the jurisdiction, powers and au-
thority to entertain and decide applications from the banks and financial institu-
tions for recovery of debts due to such banks and financial institutions.
(2) An Appellate Tribunal shal] exercise, on and from the appointed day, the
jurisdiction, powers and authority to entertain appeals against any order made, or
deeme to have beendmade, by a Tribunal under this Act.
71S. 17A. Power of Chairperson of Appellate Tribunal.—(1) The Chairper-
son of an Appellate Tribunal shall exercise general power of superintendence and
control over the Tribunals under his jurisdiction including the power of apprais-
ing the work and recording the annual confidential reports of Presiding Officers.

by Amendment Act, 2000, s. 7, for “the Presiding Officer concerned” (w.r.ef. 17-1-2000).
Act 1 of 2013, s. 13 (w-e-f. 15-1-2013).
by Amendment Act, 2000, s. 7, for “the aforesaid Presiding Officer” (w.r.e.f. 17-1-2000).
by Amendment Act, 2000, s. 2, for “the Presiding Officers of an Tribunal or an Appellate
Tribunal” (w.r-e£ 17-1-2000).
7. Ins. by Act | of 2000, s. 8 w-e.f. 17-1-2000.
 1993
i318 App.2 Recovery of Debts Due to Banks & Fin, Institutions Act,
over the Tr-
(2) The Chairpersoa of an Appellate Tribunal having jurisdiouion
Own motion after
bunals may, on the application of any of the parties or on his
one Tribunal for
notice to parties and after hearing them, ansfer any case from
disposal to any other Tribunal}.
S. 18. Bar of Jurisdict —On andionfrom.the appointed day, no Court or other
s or author
authority shall have, or be entitled to exercise, any jurisdiction, power
under
ity (Except the Supreme Court, and a High Court exercising jurisdiction in
the matter s specif ied
Articles 226 and 227 of the Constitution) in relation to
Section 17:
**Provided that any proceedings in relation to the recovery of debts due to any
multi-State ¢ rative bank pending before the date of commencement of the
Enforcement bf Security Interest and Recovery of Debts Laws (Amendment)
Act. 2012 under the Multi-State Co-operative Societies Act, 2002 (39 of 2002)
shall be continued and nothing contained in this section shall, after such com-
mencement, apply to such proceedings. |
CHAPTER IV
PROCEDURE OF TRIBUNALS
TS. 19. Application to the Tribunal.—(1) Where a bank or financial institu-
n
to the
tion has to recover any debt from any person, it may make an applicatio
Tribunal within the local limits of whose jurisdiction,—

28. Ins. by Act I of 2013, s. 14 (w.e-f. 15-1-2013),

29. Subs. by Amendment Act 1 of 2000, s. 9, forSection 19 w.ref. 17-1-2000, prior to its substitution
it stoodas under:-
**[19. Application to the Tribunal —(1) Where a bank or a financial institution has to recover any
debt from any person, it may make an application tothe Tribunal within the local limits of whose
(a) the defendant, oreach ofthe defendants where there are more than one, at thetime ofmuak-
ing the application, actually and voluntarily resides, orcarries on business, orpersonally
works
for gain; or
(b) any of the defendants, where there are more than one, at the time of making the
and voluntarily resides, orcarries on business, or personally works for gain; or

ing
WS tec fenendl aby, etn
Tribunal may. giving the applicant and defendant
thethe an opportunity ofbeing heard.
ends of justice
meet
pass such orders on the application as it thinks fit to
(5) The Tribunal shall send a copy of every order passed by itto the applicant and the defendant
(6) The Tribunal may make an interim order (whether injunction againstt
defendant
todebar him
him from cuntewing, bond
alienating orwala dealing
as with, fo ing
ordisposof, any
—
proand
per belonging to him witho
assets ty prior
theut permissi tribunal

the Tribto unal ,

the Recovery
_(8) The application
made to
 Recovery of Debts Due to Banks & Fin. Institutions
Act, 1993 App.2 1319
(a) the defendant, or each of the defendants where there
are more than one,
at the time of making the application, actually and voluntarily
resides or
carries on business or personally works for gain; or
(b) any of the defendants, where there are more than
one, at the time of
making the application, actually and voluntarily resides
or carries on
business or personally works for gain; or
(c) the cause of action, wholly or in part, arises.
Provided that the bank or financial institution may, with
the permission of
the Debts Recovery Tribunal, on an application made by it, withdr
aw the applica-
tion, whether made before or after the Enforcement of Security Interes
t and Re-
covery of Debts Laws (Amendment) Act, 2004 for the purpose of taking
action
under the Securitisation and Reconstruction of Financial Assets and
Enforcement
of Security Interest Act, 2002 (54 of 2002), if no such action had been
taken ear-
lier under that Act:
Provided further that any application made under the first proviso for seeking
permission from the Debts Recovery Tribunal to withdraw the application made
under sub-section (1) shall be dealt with by it as expeditiously as possible and
disposed of within thirty days from the date of such application:
Provided also that in case the Debts Recovery Tribunal refuses to grant permis-
sion for withdrawal of the application filed under this sub-section, it shall pass such
orders after recording the reasons therefor.]
; 'TUA) Every bank being, multi-State co-operative bank referred to in sub-
clause (vi) of clause (d) of section 2, may, at its option, opt to initiate proceedings
under the Multi-State Co-operative Societies Act, 2002 (39 of 2002) to recover
debts, whether due before or after the date of commencement of the Enforcement
of the Security Interest and Recovery of Debts Laws (Amendment) Act, 2012
from any person instead of making an application under this Chapter.
(JB) In case, a bank being, multi-State co-operative bank referred to in sub-
clause (vi) of clause (d) of section 2 has filed an application under this Chapter
and subsequently opts to withdraw the application for the purpose of initiating
proceeding under the Multi-State Co-operative Societies Act, 2002 (39 of 2002)
to recover debts, it may do so with the permission of the Tribunal and every such
application seeking permission from the Tribunal to withdraw the application
made under sub-section (/A) shall be dealt with by it as expeditiously as possible
and disposed of within thirty days from the date of such application:
Provided that in case the Tribunal refuses to grant permission for withdrawal of
the application filed under this sub-section, it shall pass such orders after re-
cording the reasons therefor.]
(2) Where a bank or a financial institution, which has to recover its debt from
any person, has filed an application to the Tribunal under sub-section (1) and

30. Ins. by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, (30 of
2004), s. 20 (w.e.f. 11-11-2004).
31. Ins. by Act 1 of 2013, s. 15(a) (w.e.f. 15-1-2013).
 1993
i320 App.2 Recovery ofDebis Due to Banks & Fin, Instinations Aoi,
also has a claim to
against the same person another bank of financial insulation hoant
Maly Jou the
recover its debi, thea the later bank or financial tastulion
e the final order
bank or financial institution at any stage of the proceedings, befor
is passed, by making an application to that Tribunal.
shall be in such
(3) Every application under sub-Section (1) or sub-Seection (2)
by such fee as
form and accompanied by such documents or other evidence and
may be prescribed:
Provid the fee may be prescribed having regard to the amount of debt to
that ed
be recovered:
Provided further that nothing contained in this sub-Section relating to fee shall
apply to cases transferred to the Tribunal under sub-Section (1) of Section 31,
"1(3,) If any application filed before the Tribunal for recovery of any debt is
settled prior to the commencement of the hearing before that Tribunal or at any
stage of the proceedings before the final order is passed, the applicant may be
granted refund of the fees paid by him at such rates as may prescribed. |
(4) On receipt of the application under sub-Section (1) or sub-Section (2), the
Tribunal shall issue summons requiring the defendan t within thirty
to show cause
days of the service of summons as to why the relief prayed for should not be
granted.
331(5) The defendant shall, within a period of thirty days from the date of ser-
vice of summons, present a written statement of this defence:
Provided that where the defendant fails to file the written statement within the
said period of thirty days, the Presiding Officer may, in exceptional cases and in
special circumstances to recorded in writing, allow not more than two extensions
to the defendant to file the written statement. |
“1(5A) After hearing of the application has commenced, it shall be continued
from day-to-day until the hearing is concluded:
Provide d
that the Tribunal may grant adjournments if sufficient cause is shown,
but no such adjournment shall be granted more than three times to a party and
where there are three or more parties, the total number of such adjournments
shall not exceedsix:

imposing such costs as may be considered necessary. ]

(6) Where the defendant claims to set-off against the applicant’s demand any
ascertained sum of money legally recoverable by him from such applicant, the
defendant may, at the first hearing of the application, but not afterwards unless
permitted by the Tribunal, present a written statement containing the particulars

a z 4 2: 2 z S ?
 Recovery of Debts Due to Banks & Fin. Institutions Act,
1993 App.2 = 1321
(7) The written statement shall have the same effect as
a plaint in a cross-suit
So as to enable the Tribunal to pass a final order in respec
t both of the original
claim and of the set-off.
(8) A defendant in an application may, in addition to his right
of pleading a set-
off under sub-Section (6), set up, by way of counter-claim agains
t the claim of
the applicant, any right or claim in respect of a cause of action
accruing to the
defendant against the applicant either before or after the filing of
the application
but before the defendant has delivered his defence or before the
time limited for
delivering his defence has expired, whether such counter-claim is in the
nature of
a claim for damages or not.
(9) A counter-claim under sub-Section (8) shall have the same effect as a
cross-suit
so as to enable the Tribunal to pass a final order on the same application, both
on the
original claim and on the counter-claim.
(10) The applicant shall be at liberty to file a written statement in answer to the
counter-claim of the defendant within such period as may be fixed by the Tribunal.
(11) Where a defendant sets up a counter-claim and the applicant contends that
the claim thereby raised ought not to be disposed of by way of counter-claim but
in an independent action, the applicant may, at any time before issues are settled
in relation to the counter-claim, apply to the Tribunal for an order that such
counter-claim may be excluded, and the Tribunal may, on the hearing of such
application, make such order as it thinks fit.
(12) The Tribunal may make an interim order (whether by way of injunction or
stay or attachment) against the defendant to debar him from transferring, alienat-
ing or otherwise dealing with, or disposing of, any property and assets belonging
to him without the prior permission of the Tribunal.
(13) (A) Where, at any stage of the proceedings, the Tribunal is satisfied, by af-
fidavit or otherwise, that the defendant, with intent to obstruct or delay or frus-
trate the execution of any order for the recovery of debt that may be passed
against him—
(i) is about to dispose of the whole or any part of his property; or
(ii) is about to remove the whole or any part of his property from the local
limits of the jurisdiction of the Tribunal; or
(iii) is likely to cause any damage or mischief to the property or affect its
value by misuse or creating third party interest,
the Tribunal may direct the defendant, within a time to be fixed by it, either to
furnish security, in such sum as may be specified in the order, to produce and
place at the disposal of the Tribunal, when required, the said property or the
value of the same, or such portion thereof as may be sufficient to satisfy the cer-
tificate for the recovery of debt, or to appear and show cause why he should not
furnish security.
(B) Where the defendant fails to show cause why he should not furnish secu-
rity, or fails to furnish the security required, within the time fixed by the Tribu-
1322 App.2 Recovery of Debts Due to Banks & Fin, Institutions Aci, 1993
or such portion ofthe
nal, the Tribunal may order the attachment of the whole
his tavour or oth
properties claimed by the applicant as the properties secured in
any certificate for
erwise owned by the defendant as appears sufficient to satisfy
the recovery of debt.
specify the
(14) The applicant shall, unless the Tribunal otherwise directs,
property required tobe attached and the estimated value thereot,
of the
(15) The Tribunal may also in the order direct the conditional attachment
whole or any portion of the property specified under sub-section (14),
(16) Lf an order of attachment is made without complying with the provisions
of sub-Section (13), such attachment shall be void,
(17) In the case of disobedience of an order made by the Tribunal under sub-
Sections (12), (13) and (18) or breach ofany of the terms on which the order was
made, the Tribunal may order the properties of the person guilty of such disobe-
dience or breach to be attached and may also order such person to be detained in
the civil prison for aterm not exceeding three months, unless in the meantime the
Tribunal directs his release.
(18) Where it appears to the tribunal to be just and convenient, the Tribunal
may, by order—
(a) appoint a receiver of any property, whether before or after grant of cer-
tificate for recovery of debt;
(b) remove any person from the possession or custody
of the property;
(c) commit the same to the possession, custody or management of the re-
ceiver;
(d) confer upon the receiver all such powers, as to bringing and defending
suits in the courts or filing and defending application before the Tribu-
nal and for the realization, management, protection, preservation and
improvement of the property, the collection of the rents and profits
thereof, the application and disposal of such rents and profits, and the
execution of documents as the owner himself has, or such of those
powers as the Tribunal think fit; and
(e) appoint a Commissioner for preparation of an inventory of the proper-
ties of the defendant or for the sale thereof.
(19) Where a certificate of recovery is issued against a company registered un-
der the Companies Act, 1956 (lof 1956) the Tribunal may order the sale pro-
ceeds of such company to be distributed among its secured creditors, in accor-
dance with the provisions of Section 529 A of the Companies Act, 1956 and to
pay the surplus, if any to the company.
(20) The Tribunal may, after giving the applicant and the defendant an oppor-
tunity of being heard, pass such interim or final order, i the orderfor
ee eee ardae eee noe the amount is
found upto realisation or actual payment, on the application
thinks fit to meet the ends of justice. a
 Recovery of Debts Due to Banks & Fin. Insti
tutions Act, 1993 App.2 = 1323
*{(20A) Where it is proved to the satisfaction of
the Tribunal that the claim of
the applicant has been adjusted wholly or in part
by any lawful agreement or
compromise in writing and signed by the parties
or where the defendant has re-
paid or agreed to repay the claim of the applicant,
the Tribunal shall pass orders
recording such agreement, compromise or satisfacti
on of the claim.]
(21) The Tribunal shall send a copy of every order passe
d by it to the applicant
and the defendant.
(22) The Presiding Officer shall issue a certificate under
his signature on the
basis of the order of the Tribunal to the Recovery Offic
er for recovery of the
amount of debt specified in the certificate.
(23) Where the Tribunal, which has issued a certificate
of recovery, is satisfied
that the property is situated within the local limits of the
jurisdiction of two or
more Tribunals, it may sent the copies of the certificate of
recovery of execution
to such other Tribunal where the property is situated:
Provided that in a case where the Tribunal to which the certificate
of recovery
is sent for execution finds that it has no jurisdiction to comply with
the certificate
of recovery, it shall return the same to the Tribunal, which has issued it.
(24) The application made to the Tribunal under sub-Section (1) or sub-Sec
tion
(2) shall be dealt with by it as expeditiously as possible and endeavour shall
be
made by it to dispose of the application finally within one hundred and eighty
days from the date or receipt of the application.
(25) The Tribunal may make such orders and give such directions, as may be
necessary or expedient to give effect to its orders or to prevent abuse of its proc-
ess or to secure the ends of justice. ]
S. 20. Appeal to the Appellate Tribunal.—(1) Save as provided in sub-
Section (2), any person aggrieved by an order made, or deemed to have been
made, by a Tribunal under this act, may prefer an appeal to an appellate Tribunal
having jurisdiction in the matter.
(2) No appeal shall lie to the Appellate Tribunal from an order made by a Tri-
bunal with the consent of the parties.
(3) Every appeal under sub-section (1) shall be filed within a period of forty-
five days from the date on which a copy of the order made, or deemed to have
been made, by the Tribunal is received by him and it shall be in such form and be
accompanied by such fee as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal after the expiry of
the said period of forty-five days if it is satisfied that there was sufficient cause
for not filing it within that period.
(4) On receipt of an appeal under sub-Section (1), the appellate Tribunal may,
after giving the parties to the appeal, an opportunity of being heard, pass such

35. Ins. by Act | of 2013, s. 15(e) (w.e.f. 15-1-2013).

 ns Act, 1993
1324 App.2 Recovery of Debts Due to Banks & Fin. Institutio

g or setting aside the order

orders thereon as it thinks fit, confirming, modifyin
appealed against.
order made by it to the
(5) The Appellate Tribunal shall send a copy of every
parties to the appeal and to the concerned Tribunal.
sub-Section (1) shall
(6) The appeal filed before the Appellate Tribunal under
vor shall be made by
be dealt with by it as expeditiously as possible and endea
date of receipt of the
to dispose of the appeal finally within six months from the
appeal.
an appeal is
8. 21. Deposit of amount ofdebt due, onfiling appeal.—Where
bank or a finan-
preferred by any person from whom the amount of debt is due to
appeal
cial institution or a consortium of banks or financial institutions, such
n has depos -
shall not be entertained by the Appellate Tribunal unless such perso
of debt so
ited with the Appellate Tribunal seventy-five percent of the amount
due from him as determined by the Tribunal under Section 19:
writ-
Provided that the Appellate Tribunal may, for reasons to be recorded in
ing, waive or reduce the amount to be deposited under this Section.
S. 22. Procedure and powers of the Tribunal and the Appellate Tribu-
nal.—(1) The Tribunal and the Appellate Tribunal shall not be bound by the pro-
cedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be
guided by the principles of natural justice and, subject to the other provisions of
this Act and of any rules, the Tribunal and Appellate Tribunal shall have powers
to regulate their own procedure including the places at which they shall have
their sittings.
(2) The Tribunal and the Appellate Tribunal shall have, for the purpose of dis-
charging their functions under this Act, the same powers as are vested in a Civil
Court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in
respect of the following matters, namely:—
(a) summoning and enforcing the attendance of any person and examining
him in oath;

(b) requiring the discovery and production of documents;

(c) Receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing
its decisions;

(f) dismissing an application for default or deciding it ex parte;

(g) setting aside any order of dismissal of any application for default
order passed by it ex parte; = -_"

(h) Any other matter, which may be prescribed.

 Recovery of Debts Due to Banks & Fin, Insti
tutions Act, 1993 App.2 = 1325
(3) Any proceeding before the Tribunal
or the Appellate Tribunal shall be
deemed to be a judicial proceeding within the
meaning of Sections 193 and 228,
and for the purposes of Section 196, of
the Indian Penal Code (45 of 1860) and
the Tribunal or the Appellate Tribunal shall be
deemed to be a Civil Court for all
the purposes of Section 195 and Chapter XXVI
of the Code of Criminal Proce-
dure, 1973 (2 of 1974),
S. 23. Right to legal representation and Presenti
ng Officers.—(1) A bank or
a financial institution making an application to a
Tribunal or an appeal to an Ap-
pellate Tribunal may authorise one or more legal pract
itioners or any of its offi-
cers to act as Presenting Officers and every person
so authorised by it may pre-
sent it case before the Tribunal or the Appellate Tribu
nal.
(2) The defendant may either appear in person or autho
rise one or more legal
practitioners or any of his or its officers to present
his or its case before the Tri-
bunal or the Appellate Tribunal.
S. 24. Limitation.—The provisions of the Limitation
Act, 1963 (36 of 1963)
shall, as far as may be, apply to an application made to a Tribun
al.
CHAPTER V
RECOVERY OF DEBT DETERMINED BY TRIBUNAL
S. 25. Modes of recovery of debts.—The Recovery Officer shall,
on receipt of
the copy of the certificate under sub-section (7) of Section 19, procee
d to recover
the amount of debt specified in the certificate by one or more of the
following
modes, namely:—
(a) attachment and sale of the movable or immovable property of the
de-
fendant;
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable
properties of the defendant.
S. 26. Validity of certificate and amendment thereof.—(1) It shall not be
open to the defendant to dispute before the Recovery officer the correctness of
the amount specified in the certificate, and no objection to the certificate on any
other ground shall also be entertained by the Recovery Officer.
(2) Notwithstanding the issue of a certificate to a Recovery Officer, the Presiding
Officer shall have power to withdraw the certificate or correct any clerical or arith-
metical mistake in the certificate by sending intimation to the Recovery Officer.
(3) The Presiding Officer shall intimate to the Recovery officer any order with-
drawing or canceling a certificate or any correction made by him under sub-
section (2).
S. 27. Stay of proceedings under certificate and amendment or withdrawal
thereof.—(1) Notwithstanding that a certificate has been issued to the Recovery
Officer for the recovery of any amount, the Presiding Officer may grant time for
 1993
1326 «=App.2 Recovery of Debts Due 10 Banks & bin. instinaions Act,
officer shall stay the
the payment of the amount, and thereupon the Recovery
ed.
proceedings until the expiry of the time so grant
, the Presiding
(2) Where a certificate for the recovery of amount has been issued
or time granted
Officer shall keep the Recovery Officer informed of any amount paid Officer,
ery
for payment, subsequent to the issue of such certificate to the Recov
of debt has
(3) Where the order giving rise to a demand of amount for recovery
d,
been modified in appeal, and, as a Consequence thereof the demand is reducethe
amount of
the Presiding Officer shall stay the recovery of such part of the
the appeal
certificate as pertains to the said reduction for the period for which
remains pending.
(4) Where a certificate for the recovery of debt has been received by the Re-
ds ts re-
covery Officér and subsequently the amount of the outstanding deman
duced “for enhanced] as a result of an appeal, the Presiding Officer shall, when
the order which was the subject matter of such appeal has become final and con-
clusive, amend the certificate or withdraw it, as the case may be,
S. 28. Other modes of recovery.—(1) Where a certificate has been issued to
the Recovery Officer under sub-section (7) of section 19, the Recovery Officer
may, without prejudice to the modes of recovery specified in Section 25, recover
the amount of debtby any one or more of the modes provided under this Section.
(2) If any amount is due from any person to the defendant, the Recovery Offi-
cer may require such person to deduct from the said amount, the amount of debt
due from the defendant under this Act and such person shall comply with any
such requisition and shall pay the sum so deducted to the credit of the Recovery
Officer:
Provided that nothing in this sub-section shall apply to any part of the amount
exempt from attachment in execution of a decree of a Civil Court under section
60 of the Code of Civil Procedure, 1908 (5 of 1908).
(3) (i) The Recovery Officer may, at any time or from time to time, by notice
in writing, require any person from whom money is due or may become
due to the defendant or to any person who holds or may subsequently
hold money for or on account of the defendant, to pay to the Recovery
Officer either forthwith upon the money becoming due or being held or
within the time specified in the notice (not being before the money be-
comes due or is held) so much of the money as is sufficient to pay the
amount of debt due from the defendant or the whole of the money when
it is equal to or less than that amount.
(ii) A notice under this sub-section may be issued to any person who holds
or may subsequently hold any money for or on account of the defendant
jointly with any other person and for the purposes of this sub-section,
the shares of the joint holders in such amount shall be presumed, until
the contrary is proved, to be equal.

36. Ins. by Amendment Act, 2000, s. 10 w.e.f. 17-1-2000.

Recovery of Debts Due to Banks & Fin. Insti
tutions Act, 1993 App.2 = 1327
(ili) A copy of the notice shall be forwarded to the
defendant at his last ad-
dress known to the Recovery Officer and in the case of a joint account to
all the joint holders at their last addresses known to the Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a
notice is issued under this sub-section, shall be
bound to comply with
such notice, and, in particular, where any such notice
is issued to a post
office, bank, financial institution, or an insurer, it shall
not be necessary
for any pass book, deposit receipt, policy or any other
document to be
produced for the purpose of any entry, endorsement or
the like to be
made before the payment is made notwithstanding any rule,
practice or
requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice
under
this sub-section has been issued arising after the date of the notice
shall
be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent object
s
to it by a statement on oath that the sum demanded or the part thereo
f is
not due to the defendant or that he does not hold any money for or on
account of the defendant, then, nothing contained in this sub-section,
shall be deemed to require such person to pay any such sum or part
thereof, as the case may be, but if it is discovered that such statement
was false in any material particular, such person shall be personally li-
able to the Recovery Officer to the extent of his own liability to the de-
fendant on the date of the notice , or to the extent of the defendant’s li-
ability of any sum due under this Act, whichever is less.
(vil) The Recovery Officer may, at any time or from time to time, amend or
revoke any notice under this sub-section or extend the time for making
any payment in pursuance of such notice.
(viil) The Recovery Officer shall grant a receipt for any amount paid in com-
pliance with a notice issued under this sub-section, and the person so
paying shall be fully discharged from his liability to the defendant to
the extent of the amount so paid.
(ix) Any person discharging any liability to the defending after the receipt
of a notice under this sub-section shall be personally liable to the Re-
covery Officer to the extent of his own liability to the defendant so dis-
charged or to the extent of the defendant’s liability for any debt due un-
der this Act, whichever is less.
(x) If the person to whom a notice under this-section is sent fails to make
payment in pursuance thereof to the Recovery Officer, he shall be
deemed to be a defendant in default in respect of the amount specified
in the notice and further proceedings may be taken against him for the
realisation of the amount as if it were a debt due from him in the man-
ner provided in Sections 25, 26 and 27 and the notice shall have the
same effect as an attachment of a debt by the Recovery Officer in exer-
cise of his powers under Section 25.
 1993
1328 App.2 Recovery of Debts Due to Banks & Fin. Institutions Act,

in whose custody there is

(4) The Recovery Officer may apply to the Court
entire amount of
money belonging to the defendant for payment to him of the
an amount sufficient to
such money, or if it is more than the amount of debt due,
discharge the amount of debt so due.
“I4A) The Recovery Officer may, by order, at any stage of the execution of the
ny, any of its
certificate of recovery, require any person, and in case of a compa
declare on
officers against whom or which the certificate of recovery is issued, to
affidavit the particulars of his or its assets,|
the defen.
(5) The Recovery Officer may recover any amount of debt due from
r laid down in the
dant by distraint and sale of his movable property in the manne
Third Schedulg to the Income-tax Act, 1961 (43 of 1961),
S. 29. Application of certain provisions of Income-tax Act.—The provisions
of the Second and Third Schedules to the Income-Tax Act, 1961 and the Income-
far
tax (Certificate Proceedings) Rules, 1962, as in force from time to time shall, as
as possible, apply with necessary modifications as if the said provisions and the
rules referred to the amount of debt due under this Act instead of to the income-tax:
Provided that any reference under the said provisions and the rules to the “as-
sessee” shall be construed as a reference to the defendant under this Act.
‘TS. 30. Appeal against the order of Recovery Officer.—(1) Notwithstand-
ing anything contained in section 29, any person aggrieved by an order of the
Recovery Officer inade under this Act may, within thirty days from the date on
which a copy of the order is issued to him, prefer an appeal to the Tribunal.
(2) On receipt of an appeal under sub-section (1), the Tribunal may, after giv-
ing an opportunity to the appellant to be beard, and after making such inquiry as
it deems fit, confirm, modify or set aside the order made by the Recovery Officer
in exercise of his power under Sections 25 to 28 (both inclusive)).
CHAPTER VI
MISCELLANEOUS
S. 31. Transfer of pending case—(1) Every suit or other proceeding pending
before any court immediately before the date of establishment of a Tribunal un-
der this Act, being a suit or proceeding the cause of action whereon it is based is
such that it would have been, if it had arisen after such establishment, with the ju-
risdiction of such Tribunal, shall stand transferred on that date to such Tribunal:
Provided that nothing in this sub-section shall apply to appeal pending
aforesaid before any Court: ped r*

mencement of the Enforcement of Security Interest and Recovery of Debts Laws

(Amendment) Act, 2012 under the Multi-State Co-operative Societies Act, 2002,
37. Ins. by Act 1 of 2000, s. 11 w.e.f. 17-1-2000.
38. Subs by Act 1 of 2000, s. 12 w.e.f. 17-1-2000.
39. Ins. by Act I of 2013, s. 16 (wef. 15-1-2013).
 Recovery of Debts Due to Banks & Fin. Institutions Act, 1993 App.2 1329
(39 of 2002) shall be continue
and nothing
d contained in this sectishall
on apply
to such proceedings.|
(2) Where any suit or other proceeding stands transferred from any Court
to a
Tribun alon (1),—
under sub-secti
(a) the Court shall, as soon as may be after such transfer, forwa the
rd re-
cords of such suit or other procee to thedin
Tribunal:gand
(b) the Tribunal may on receipt
, of such records, proc toeed
deal with such
suit or other proceeding, so far as may be, in the same manner as in the
case of an application made under section 19 from the which was
reached before such transfer or from any earlier stage “[***] as the
Tribunal may deem fit.
“[S. 31A. Power of Tribunal to issue certificate of recovery in case of de-
cree or order.—{} ) Where a decree or order was passed by any court before the
commencement of the Recovery of Debts Due to Banks and Financial Institu-
tions (Amendment) Act, 2000 and has not yet been executed, then, the decree-
holder may apply to the Tribunal to pass an order for recovery of the amount.
(2) On receipt of any application under sub-sect (1), theion
Tribunal may issue
a cestificate of recovery to a Recovery officer.
(3) On receipt ofa certificate under sub-section (2), the Recovery Officer shall
proceed to recover the amount as if it was a certificate in respect of a debt recov-
era under
blethis Act_}
“($.32. Chairperson, Presiding Officer and staff of Appellate Tribunal and
Tribunal to be public servants—The Chairperson of an Appellate Tribunal, the
Presiding Officer of a Tribunal, the Recovery Officer and other officers and em-
ployees of an Appellate Tribunal and a Tribunal shal) be deemed to be public ser-
vants within the meaning of Section 21 of the Indian Penal Code. (45 of 1860)}.
S. 33. Protection of action taken in good faith—No suit prosecution or other
legal proceedings shall lie again
the st
Central Governme
or againstnt
“*[the Pre-
siding Officer of a Tribunal or the Chairperson ef an Appellate Tribunal] or
agai thenst
Recovery Officer for anything which is in good faith done or intended
to be done in pursuance of this Act or any rule or order made there under.
S. 34. Act to have over-riding effect—{1) Save as provided in sub-section
(2), the provision of this Act shall have effect notwithstanding anything inconsis-
tent therewith contained in any other law for the time being in force or in any
instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made there under shall be in addition to,
and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948),
the State Financial Corporation Act, 1951
s (63 of 1951) the Unit Trust of India Act,
1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of
40. The words “or de novo” omitted by Act 1 (2000, Sec. 13 of w.c.f. 17-1-2000).
41. pd al ne Le Bigg mail
42. Subs. byAmendment Act. . s. 15, wref. 17-1- 4 :
43. Fee tyMeet AL OO ae “tasPacey OFSEEs of Tribal cxamAppefiens Ti-
bunal” wref. 17-1-2000.
1330 App.2 Recovery of Debts Due to Banks & Fin. Institutions Act, 1993

1984) “Jand the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986) and the Small Industries Development Bank of India Act, 1989 (39 of (1989)).
S. 35. Power to remove difficulties. —(1)If any difficulty arises in giving ef
fect to the provisions of this Act, the Central Government may, by order pub
lished in the Official Gazette make such provisions, not inconsistent with the
provisions of this Act, as appear to it to be necessary Or expedient for removing
the difficulty:
Provided that no such order shall be made after the expiry of the period of three
years form the date of commencement of this Act
Every order made under this Section shall, as soon as may be after it is made,
be laid before each House of Parliament,
The Central
S. 36. Power to make rules.—( may by Notifica:
1) Government
tion make rules to carry out the provisions of this Act,
(2). Without prejudice to the generality of the foregoing power, such rules may,
provide for all or any of the following matters, namely:
(a) the salaries and allowances and other terms and conditions of service of
“5 the Chairpersons, the Presiding Officers], Recovery Officers and
other Officers and employees of the Tribunal and the Appellate Tribu-
nal under Sections7, 12 and 13.
(b) the procedure for the investigation of misbehavior or incapacity of
“(the Chairpersons of Appellate Tribunals and the Presiding Officers of
the Tribunal] under sub-section (3) of Section 15;
(c) the form in which an application may be made under section 19 the docu-
ments and other evidence by which such application shall be accompanied
and the fees payable in respect of the filing of such application;
“"I(cc) the rate of fee to be refunded to the applicant under sub-section (3A) of
section 19 of the Act.]
(d) the form in which an appeal may be filed before the Appellate Tribunal
under Section 20 and the fees payable in respect of such appeal;
(e) any other matter which is required to be, or may be, prescribed.
*“[(3) Every notification issued under Sub-section (4) of Section 1, Section3
and Section. 8 and every rule made by the Central Government under this Act,
shall be laid, as soon as may be after it is made, before each House of Parliament,
while it is in session, for a total period of thirty days which may be comprised in
one session or in two or more successive sessions, and if, before the expiry of the
session immediately following the session or the successive session aforesaid,
both Houses agree in making any modification in the Notification or rule or both

44. Subs. by Amendment Act | of2000 (Sec. 16 for “and the Sick Industrial Companies (Special Provi-
sions) Act), 1985 (1 of 1986)” (w.r.e.f. 17-1-2000).
45. — eee 17-1-
46. Subs. forthe words “ ThePresiding Officer
ofthe Tritumals and Appellate Tribunal”
47. Ins. by Act 1 of 2013, s. 17 (w.ef. 15-1-2013). " 7
48. Subs. by Amendment Act, | of 2000, Sec. 7 for sub-section (3) (wre. 17-1-2000).
Recovery of Debts Due to Banks & Fin. Institutions Act, 1993 App.2 1331

the Houses agree that the notification or rule should not be issued or made, the
Notification or rule shall thereafter have effect only in such modified form or be
of no effect, as the case may be; so, however, that any such modification or an-
nulment shall be without prejudice to the validity of anything previously done
under that Notification or rule].
S. 37. Repeal and saving.—(1) The Recovery of Debts Due to Banks and Fi-
nancial Institutions Ordinance 1993 is hereby repealed.
(2) Notwithstanding such repeal, anything done or any action taken under the
said Ordinance shall be deemed to have been done or taken under the corre-
sponding provisions of this Act.
 APPENDIX 3

DEBT RECOVERY TRIBUNAL

(PROCEDURE) RULES, 1993
36 of
In exercise of the powers conferred by sub-sections ( 1) and (2) of Section
the Recovery of Debts Due to Banks and Financial Institutions Ordinance, 1993
rules,
(25 of 1993), the Central Government hereby makes the following
namely:—
1. Short title and commencement.—(1) These rules may be called the Debt
Recovery Tribunal (Procedure) Rules, 1993.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions.—In these rules, unless the context otherwise requires:
(a) “agent” means a person duly authorised by a party to present application
or to give reply on its behalf before the Tribunal,
'[(b) “applicant” means a person making an application under section 19 or
under section 31-A and also includes an “applicant” who files an appeal
under section 30(1) of the Act;
(c) “application” means an application filed under section 19 or under sec-
tion 31-A and includes an “appeal” filed under section 30(1) of the
Act);
(d) “legal practitioner” shall have the same meaning as is assigned to it in
the Advocates Act, 1961, (25 of 1961);
(e) “Act” means the Recovery of Debts due to Banks and Financial Institu-
tions “[Act, 1993 (51 of 1993) (hereinafter referred to as the Act)};
(f) “Presiding Officer” means the Presiding Officer of a Tribunal;
*I(g) “Registrar” means the Registrar ofthe Tribunal and includes the Assistant
ce NE a ee ee ae

published
1. Subs., by GSR 44(E), dated 21-01-2003 (w ef. 21-01-2003). Prior toitssubstitution itstood asunder:
(b) “applicant” means a person making anapplication tothe Tribunal under section 19,
(c) “application” means an application made to the Tribunal under section 19;".
2. Subs.
for “Ordinance 1993 (25 of 1993)” by GSR No. 352 (EB), Dt. 31-3-1994.
3. Sub.
by GSR 44(E), dated 21-01-2003 (w.e.f. 21-01-2003). Prior to its substitution it stood as wn-
der:
(g) “Registrar” means the Registrar of the Tribunal:”.

1332
 Debt Recovery Tribunal (Procedure) Rules,
1993 App.3 = 1333
(h) “Registry” means the Registry of the Tribunal.
3. Language of the Tribunal.—(1) The proceeding
s of the Tribunal shall be
conducted in English or Hindi.
(2) No reference, application, representations, documents
or other matter con-
tained in any language other than English or Hindi
shall be accepted by the Tri-
ee unless the same is accompanied by the true translation
thereof in English or
indi.
4. Procedure for filing applications.—(1) “[The applic
ation under section 19
or section 31-A, or under section 30(1) of the Act may be
presented as nearly as
possible in Form I, Form II and Form III respectively] annex
ed to these rules by
the applicant in person or by his agent or by a duly authorised
legal practitioner
to the Registrar of the Bench within whose jurisdiction his
case falls or shall be
sent by registered post addressed to the Registrar.
(2) An application sent by post under sub-rule (1) shall be deeme
d to have been
presented to the Registrar the day on which it was received in
the office of the
Registrar.
(3) The application under sub-rule (1) shall be presented in [two sets]
in a pa-
per-book along with an empty file size envelope bearing full address of the
°[de-
fendant] and where the number of ’[defendants] is more than one, then sufficie
nt
number of extra paper-books together with empty file size envelopes bearing full
address of each of the *[defendants] shall be furnished by the applicant.
5. Presentation and scrutiny of applications.—*[(1) The Registrar or, as the
case may be, the officer authorised by him, shall endorse on every application the
date on which it is presented or deemed to have been presented under rule 4 and
shall sign endorsement. ]
(2) If on scrutiny, the application is found to be in order, it shall be duly regis-
tered and given a serial number.
(3) If the application, on scrutiny, is found to-be defective and the defect no-
ticed is formal in nature, the Registrar may allow the party to rectify the same in
his presence and if the said defect is no formal in nature, the Registrar, may allow
the applicant such time to rectify the defect as he may deem fit.
(4) If the concerned applicant fails to rectify the defect within the time allowed
in sub-rule (3), the Registrar may by order and for reasons to be recorded in writ-
ing, decline to register the application.

Subs. for the words “An application shall be presented in Form” by GSR 44(B), dt. 21-01-2003
(w.e.f. 21-01-2003).
Subs. for the words “four sets” by GSR No. 328(E), dt. 19-6-1997, w.e.f. 19-6-1997.
Subs. for “respondent” by GSR 328(B), dt. 19-6-1977, w.e.f. 19-6-1997.
Subs. for the words “respondent” by GSR No. 328(E), dt. 19-6-1997, w.e.f. 19-6-1997.
SAAN
w Subs. by GSR 44(E), dated 21-01-2003 (w.e.f. 21-01-2003). Prior to its substitution it stood as un-
der:
“(1) The Registrar or, as the case may be, the Officer authorised by him under Rule 4, shall en-
dorse on every application the date on which it is presented or deemed to have been presented under
that rule and shall sign endorsement.”
1334 App.3 Debi Recovery Tribunal (Procedure) Rules, 1993
sub-rule (4) shall be
(5) An appeal against the order of the Regiswar under
Presiding Officer con-
made within 15 days of the making of such onder to the
cerned in chamber whose decision thereon shall be final,
an order made
15-4. Review.—(!) Any party considering itself aggrieved by the
ent on face ofthe
by theTribunal onaccount ofsome mistake orerror appar
may apply for a
record desires to obtain a review of the order made against him,
review of the order to the Tribunal which had made the order.
of sixty
(2) No application for review shall be made after the expiry of a period
ained un-
days from the date of the order and no such application shall be entert
less it is accompanied by an affidavit verifying the application.
(3) Where it appears tothe Tribunal that there is no sufficient ground for a re-
view, it shall reject the application but, where the Tribunal is ofopinion that the
application for review shobe uldgranted, it shall grant the same:
Provid ed
that no such applic be granted without previous notice to the
shall ant
@
opposite party to enable him to appear and to beheard in support ofthe order,
review of which is applied for.]
6, Place of filing application —The application shall be filed by the appli-
cant with the Registrar within whose jurisdiction,—

9. Rule 5-A Ins. by GSR No. 328(B), dt 19-6-1997, wef. 19-6-1997.

Prior to200
dated 21-01-2003 (w.e. 21-01-
10. Subs. by GSR 44(E), 3).
its substitution it stood as

“6. Place offiling applications.—The application shall be filed by the applicant with the Regis-
trar within whose jurisdiction the applicant isfunctioning asa bank orfinancial institution, asthe

mitted through a crossed Indian Postal Order drawn in favour of the Registrar and payable in Central
Post Office of the station [located at any place within local limits ofthe jurisdiction of a Tribunal].
(2) The amount of fee payable shall be as follows:—
[TABLE
Si. No. e of

1. Application
for recovery of debts due,—
(a) Where amount of debt due is Rs. 10lakhs Rs. 12,000
(b) Where amount of debt due is above Rs. 10 lakhs Rs. 12,000 Plus
Rs. 1,000 for every one lakh rupee
of debt due or part thereof in excess
of Rs. 10 lakhs, stibjectto a maxi-
mum of Rs. 1.50,000.
2. Application forreview 50 per cent of the fee paid
3. Application for interlocutory order Rs. 10
OU
Vv. eres ots hee Ss
lL. Sg Se ee Eeey ae by ES PR Aer arene wae HS
2. 08 qdmealpagebeiammmnapa catia diaeptiatt: sec, 194-1997, wef
3. Table subs.
by GSR No. 328(E), dt. 19-6-1997, wef. 19-6-1997,
 Debt Recovery Tribunal (Procedure ) Rules, 1993 App.3 = 1335
(a) the applicant is functioning as a Bank or Finan
cial Institution, as the
case may be, for the time being; or
(b) the defendant, or each of the defendants where
there are more than one,
at the time of making application, actually or voluntaril
y resides, or car-
ries on business, or personally works for gain; or
(c) any of the defendants where there are more than one, at the time of
making the application, or personally works for gain;
or
(d) the cause of action, wholly or in part, arises.
7. Application fee.—(1) Every application under section
19(1), or section
19(2), or section 19(8), or section 30(1) of the Act, or interl
ocutory application or
application for review of decision of the Tribunal shall be accom
panied by a fee
provided in the sub-rule (2) and such fee may be remitted throug
h a crossed Bank
Demand Draft drawn on a bank or Indian Postal Order in favour
of the Registrar
of the Tribunal and payable at the place where the Tribunal is situated.
(2) The amount of fee payable shall be as follows:—

SI. Nature of application Amount of fee payable

No.
ie Application for recovery of debts due under
section 19(1) or section 19(2) of the Act,—
(a) Where amount of debt due is Rs. 10 Rs. 12,000
lakhs
(b) Where the amount of debt due is above Rs. 12,000 plus Rs.
Rs. 10 lakhs 1,000 for every one
lakh rupees of debt due
or part thereof in excess
of Rs. 10 lakhs, subject
to a maximum of Rs.
TO 000
oe Application to counter-claim under section
19(8) of the Act,—
(a) Where the amount of claim made is_ Rs. 12,000
upto Rs. 10 lakhs
(b) Where the amount of claim made is Rs. 12,000 plus Rs.
above Rs. 10 lakhs 1,000 for every one
lakh rupees or_ part
thereof in excess of Rs.
10 lakhs, subject to a
maximum of Rs.
1,50,000
3. Application for review including review ap-
plication in respect of the counter-claim—
1336 «6App. 3 Debi Recovery Tribunal (Procedure) Rules, 1993

SL Nature of application Amount of fee payable

Fe diel
em
(a) Agai an inter
ns order
im t Rs. 125
(b) Against a final order excluding review 50% of fee payable al
for correction of clerical or arithmetcial rates as applicable on
the applications under
mustakes
section 19(1) or 1908)
of the Act, subject to a
maximum of Rs, 15,000
4. Application for interlocutory order Rs, 250
-§ Appeals against orders of the Recovery Offi-
cer. If the amount appealed agianst is,—
(i) Less than Rs. 10 lakhs Rs, 12,000
(ii) Rs. 10 lakhs or more but less than Rs. Rs. 20,000
30 lakhs
(iii) Rs. 30 lakhs or more Rs. 30,000
6. Vakalatnama Rs. 5.]

8. Contents of Applicatio n Every application filed under Rule 4 shall

—(1)
set forth concisely under distinct heads, the grounds for such application and
such grounds shall be numbered consecutively and shall be typed in double space
on one side of the paper.
(2) It shall not be necessary to present separate application to seek interim or-
der of direction if in the original application the same is prayed for.
9. ''[Documents to accompany the application under section 19 or section
31-A of the Act—(1) '’[An application under section 19 or section 31-A] shall
mpan
be accoby containing:—
a paper book ied
'5I(j) a statement showing details of the debt due from a defendant and cir-
cumstances under which such debt has become due; and shall also dis-
close details of the case and decision in that case which is sought to be
reviewed; |
(ii) all documents relied upon by the applicant and those mentioned in the
application;
(iti) details of the crossed demand draft or crossed Indian Postal Order rep-
resenting the application fee;
(iv) index of documents.
— :
accompany the application” by GSR 44(E), dt. 21-01-2003
11. Subs. for the words “Documentsto the
(w.e.f. 21-01-2003).
12. Subs. for the words “Every application” by GSR 44(E), dt. 21-01-2003 (w.ef. 21-01-2003
13. an: by GSR 44(E), dated 21-01-2003 (w.ef. 21-01-2003). Priorto its substitution it ant as un-

“(i) statement
lm showing details ofthe
adanten a3debt due from a '|defendam]
and the circumstances under

1. Subs. for the word “respondent”

by GSr No. 328(E),
dt. 19-6-1997,
 Debt Recovery Tribunal (Procedure) Rules,
1993 App.3 = 1337
(2) The documents referred to in sub-rule (1)
shall be neatly typed in double
space on one side of the paper, duly attested
by a Senior Officer of the bank, or
financial institution, as the case may be, and numb
ered accordingly.
(3) Where the parties to the suit or proceedings
are being represented by an
agent, documents authorising him to act as such
agent shall also be appended to
the application:
Provided that where an application is filed by legal
practitioner, it shall be ac-
companied by a duly executed Vakalatnama.
‘710. RK OK]

11. Endorsing copy of application to the 'STdefenda

nt].—A copy of the ap-
plication and paper-book shall be served on each of the
5 [defendants] as soon as
they are filed, by Registered Post.
_12. Filing of reply and other documents by the "[def
endant].—(1) The
[defendant] may file '*[two complete sets] containing the
reply to the applica-
tion along with documents in a paper-book form with the regist
ry within one
month of the service of the notice of the filing of the application
on him.
(2) The '[defendant] shall also endorse one copy of the reply
along with
documents as mentioned in sub-rule (1) to the [applicant].
(3) The Tribunal may, in its discretion on application by the '[defendant]
, al-
low the filing of reply referred to in sub-rule (1), after the expiry of
the period
referred to therein.
'*[(4) If the defendant fails to file the reply under sub-rule (1) or on the
date
fixed for hearing of the application, the Tribunal may proceed forthwith to
pass
an order on the application as it thinks fit.
(S) Where a defendant makes an admission of the full or part of the amount
of
debt due to a bank or financial institution, the Tribunal shall order such defendant
to pay the amount, to the extent of the admission, by the applicant within a period
of one month from the date of such order failing which the Tribunal may issue a
certificate in accordance with Section 19 of the Act to the extent of amount of
debt due admitted by the defendant.
'°(6) The Tribunal may at any time for sufficient reason order that any particu-
lar fact or facts shall be proved by affidavit,or that the affidavit of any witness
shall be read at the hearing, on such conditions as the Tribunal thinks reasonable:

14. Omitted by GSR 44(E), dated 21-01-2003 (w.e.f. 21-01-2003). Prior to its omission it stood as un-
der:
“10. Plural remedies.—An applicant shall not seek relief or reliefs based on more than a single
cause of action in one single application unless the reliefs prayed for are consequential to one an-
other.”
15. Subs. for the word “respondent” by GSR No. 328(B), dt. 19-6-1997, w.e.f. 19-6-1997.
16. Subs. for the word “four complete sets”by GSR No. 328(E), dt. 19-6-1997, w.e.f. 19-6-1997.
17. Subs. for the word “application” by GSR No. 328(B), dt. 19-6-1997, w.e.f. 19-6-1997.
Ins. by GSR No. 328(E), dt. 19-6-1997, w.e.f. 19-6-1997. iarronts
Subs. by GSR 44(E), dated 21-01-2003 (w.e.f. 21-01-2003). Prior to its substitution it stood as un-
der:
1338 App. 3 Debt Recovery Tribunal (Procedure) Rules, 1993

respective parties where i

Provided that after filing of the affidavits by the
the defendant desires the
appears to the Tribunal that either the applicant or
that such witness can be
production of a witness for cross-examination and
shall for sufficient reasons to
produced and it is necessary to do so, the Tribunal
amination, and in the
be recorded, order the witness to be present for cross-ex
n, then, the affidavit
event of the witness not appearing for cross-examinatio
evidence other than that
shal! not be taken into evidence and further that no oral
given in this proviso will be permitted. |
applicant,
(7) Uf the defendant denies his liability to pay the claim made by the
is acquainted with
the Tribunal may act upon the affidavit of the applicant who
sworn the affidavit
the facts of the case or who has on verification of the record
in respect of the contents of application and the documents as evidence.
Act,
(8) The provisions contained in Section 4 of the Bankers’ Books Evidence
's book
{891 (18 of 1891) shall apply to a certified copy of an entry in a Banker
n 19 by
furnished along with the application filed under sub-section (1) of Sectio
the applicant.}
13. Date and place of hearing to be notified.—(1) The Tribunal shall notity
as
the parties the date and place of hearing of the application in such a manner
the Presiding Officer may by general or special order direct.
14. Order to be signed and dated.—(1) Every order of the Tribunal shall .be
ice
in writing andshall besigned and dated by the Presiding Offof r
the Tribunal
(2) The order shall be pronounced in open Court.
15. Publication of orders.—Any orders ofthe Tribunal asaredeemed fitfor
publication inanyauthoritative report orthepress may be released for such pub-
lication on such terms and conditions as the Tribunal may lay down.
*°[15A. Publication of names of the defaulters—The Tribunal may cause to
notify the names of the defaulters in the newspaper or otherwise after the final
ae ee NY has been passed by the Tribunal as it deem fit and
proper.

_16. Communication of orders to parties——Every order passed on an applica-

tion shall be communicated to the applicant and to the *"[defendant] either in per-
son or by registe red
post free of cost.
17. Fee for inspection of records and obtaining copies thereof.—(1) A fee
of rupees twenty for every hour or part thereof of inspection subject to a mini-

Continued)
“(6) The Tribunal may at any time for sufficient reason order that particular fact
beprovedby
eftava or
theten of
erywinncesmaybe
sendofGeheating, ofsathconde
"Provided that where itappears totheTribunal that either applicant ordefendant desire
ne ination. andthat rr Shallootbe
made authorising the evidence of such witness to be given by affidavit.”
20. Ins. by GSR 44(E), dated 21-1-2003 (w.e.f. 21-1-2003).
21. Subs. for the word “respondent” by GSR No. 328(E), dt. 19-6-1997, wef. 19-64-1997.
 Debt Recovery Tribunal (Procedure) Rules, 1993 App.3 = 1339
mum of rupees one hundred shall be charged for inspec
ting the record of leach
pending application] by a party thereto.
(2) A fee of rupees five for a folio or part thereof not involving typing
of and a
fee of rupees ten for a folio or part thereof involving typing of statem
ent and fig-
ures shall be charged.
18. Orders and directions in certain cases.—The Tribunal may make
such
orders to give such directions as may be necessary or expedient to give effect
to
its orders or to prevent abuse of its process or to secure the ends of justice.
19. Working hours of the Tribunal.—Except on saturdays, Sundays and
other public holidays, the officers of the Tribunal shall, subject to any order
made
by the presiding officer, remain open daily from 10 a.m. to 6.00 p.m. but no
work, unless, of an urgent nature, shall be admitted after 4.30 P.m. on any work-
ing day.
20. Sitting hours of the Tribunal.—The sitting hours of the Tribunal (includ-
ing a vactation bench), shall ordinarily be from 10.30 to 1.00 p.m. and 2.00 p.m.
to 5.00 p.m. subject to any order made by Presiding Officer.
21. Holiday.—Where the last day for doing any act falls on a day on which the
office of the Tribunal is closed and by reason thereof the act cannot be done on
that day, it may be done on the next day on which that office opens.
22. Powers and functions of the Registrar.—(1) The Registrar shall have the
custody of the records of the Tribunal and shall exercise such other functions as
are assigned to him under these rules or by the Presiding Officer a separate order
in writing.
(2) The Official seal shall be kept in the custody of the Registrar.
(3) Subject to any general or special direction by the Presiding Officer, the seal
of the Tribunal shall not be affixed to any order, summons or other process save
under the authority in writing from the Registrar.
(4) The seal of the Tribunal shall not be affixed to any certified copy issued by
the Tribunal save under the authority in writing of the Registrar.
23. Additional powers and duties of Registrar.—In addition to the powers
conferred elsewhere in these rules, the Registrar shall have the following powers
and duties subject to any general or special order of the Presiding Officer,
namely:—
(i) to receive all applications and other documents including transferred
applications;
(ii) to decide all questions arising out of the scrutiny of the applications
before they are registered;
(iii) to require any application presented to the Tribunal to be amended in
accordance with the rules;

22. Subs. for the word “Pending Application” by GSR No. 328(E), dt. 19-6-1997, w.e.f. 19-6-1997.
1340 App.3 Debi Recovery Tribunal (Procedure) Rules, 1993

daof tehearing
(iv) subject to the directions ofthe Presiding Offhoer, to fix
and issue notices there at,
of the applicationsor other proceedings
(v) direct any formal amendment of records,
s,
(vi) to order grant of copies ofdocumentsto parties toproceeding
(vii) to grant leave to inspect other records of Tribunal;
es or other proc.
(viii) dispose of all matters relating to the service of notic the
esses, applications for the issue of fresh notices or for extending
time for or ordering a particular method of service on a defendant)
including a substituted service by publication of the notice by way of
advertisements in the newspapers,
(ix) to requisition records from the custody of any Court or other authority.
“123-4. Functions of Assistant Registrar.—The Assistant Registrar of the
Tribunal shall assist the Registrar in the work relating to the Registry and Ad-
ministration of the Tribunal and perform such other functions assigned/delegated
to him by the Presiding Officer. |
24. Seal and emblem.—The official seal and emblem of the Tribunal shall be
such as the Central Government may specify.

FROM I
(See Rule 4)
Application under Section 19 of the Recovery of Debts due to
Banks and Financial Institutions
*[Act], 1993
For use in Tribunal’s Office
ee eee
Date of receipt by post........
Or
Registration No. ...........
Signature
Registrar
IN THE DEBT RECOVERY TRIBUNAL
(Name of the place)
Between
A G86 B. ....ccovecrveeresevewens Applicant
And

PCE.
SS tress Orsay Gooapa eerat 20
23. Subs.
for the word G.S.R. No. 328(E), dt.19-6-1997 19-6-1997
 Delt Recovery Tribunal (Procedure) Rules, 1993 App.3 134]

(1) Name of the applicant:

(2) Address of registered Office:
(3) Address
for service of all notices.
2.Particulars
of the "(defendant }:—
(1) Name of the *[defendant]
(2) Office address of the {defendant}
(3) Address for service of all notices:
3. Jurisdiction of the Tribunal —The applicant declares that the subject-
matter of the recovery of dein duc falls within the jurisdiction of the Tribunal.
4. Limitation. —The applicant further declares that the application is within the
limitation prescribed in Section 24 of the Recovery of Debts Due to Banks and
Financial Institutions {Act}, 1993.
5. Facts of the case.—The facts of the case are given below:
(Giver here a concise statement of facts in 2 Gonological order, each para-
graph containing as nearly as possible 2 separaic issuc, fact or otherwise ).
6. Relief (s) sought —In view of the facts mentioned in para 5 above, the ap-
plicamt prays for the following relief(s)-—
(Specify below the relief(s) sougi@ explaining the ground for relief(s) and the
legal provisions (if any) relied upon).
7. Interim order, if prayed for —Pending final decision on the application.

(Give here the nature of the interim order prayed for with reasons).
8. Matter not pending with any other Court, 4ce.—The applicant further de-
that the matter regarding which the application has been made is not pend-
before any Court of law or any other authority or any other Bench of the Tri-

9. Particulars of Bank Draft/Postal Order in respect of the application

(1) Name of the Bank on which drawn:

(2) Demand Draft No.i
or

. Subs. for the word “respondent” by GSR. No. 320(E).& 1941997.

Subs. for the word “respondent” by GS. BR. No. 32HE) & 1941997
. Subs. by GSR 352(E). dated 31-3-1994 (wef 31-3- 1996), for “Ondamance”.
1342 App.3 Debi Recovery Tribunal (Procedure) Rules, 1993

(1) Number of Indian Postal Order (s):

(2) Name ofthe issuing Post Office:
(3) Date of issue of Postal Order(s):
(4) Post Office at which payable:
aining the details of the
10. Details of Index.—An index in duplicate cont
documents to be relied upon is enclosed,
11. List ofenclosures:
Verification
being
I ne Berporern< son/daughter/wife Of SIM .....:c cece rereee ees
of),.........
OD ccicccccccangeaseoons (Name in full and block letters) (designation
holding a valid power of attorney fPOM .......0. 0.:ccereeee reeeeeeess (name of the
compan hereby verify that the contentsof Paras | to 11 are true to my per-
do y)
sonal knowledge and belief and that | have not suppressed any material facts.
Signature of the applicant
Place:
Date:
To,
The Registrar

“FROM i
(See Rule 4)
ati
under
Applic on
Section ry
of Debts
31-A of the Recove due to
1993
Act, ns
Banks and Financial Institutio
For use in Tribunal’s Office
Date
of fNG 6. cs cveosds
twee
Date of receipt by post........
or
Registration No. ...........
Signature
Registrar
IN THE DEBT RECOVERY TRIBUNAL
(Name of the place)
Between
yowservosvevetivewiedten Applicant(s)/Judgment-Creditor(s)
and
Lesesseeesseeeesseesee Defendant(s)/Iudgement-Debtor(s)

30. Ins. by GSR 44(E), dated 21-1-2003.

 Debt Recovery Tribunal (Procedure) Rules, 1993 App.3 1343
1, Particulars of the applicant(s):—
(i) Name of the applicant:
(ii) Address of registered Office:
(iii) Address for service of all notices.
IL. Particulars of the defendant(s):—
(i) Name of the defendant:
(ii) Office address of the defendant:
(111) Address for service of all notices:
Ill. Jurisdiction of the Tribunal.—The applicant declares that the subject-
matter of the application falls within the jurisdiction of the Tribunal.
[V. Limitation.—The applicant further declares that the application is within
the limitation prescribed in section 24 of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993.
V. Facts of the case.—The facts of the case are given below:
(Giver here a concise statement of facts in a chronological order, each para-
graph containing as nearly as possible a separate issue, fact or otherwise).
VL. Relief prayed for.—(1) Issue of Recovery Certificate for the recovery of a
meh O62e! cuclouires.. EG oh eco ci es only) inclusive of a sum of Rs.
oe only) as per the decree in O.S. No. ............ dated
fetes... passed by ................ With interest at the rate of ..................%
_ eer till the date of realization with costs.
(II) Any other relief:
VIL. Matter not pending with any other Court, etc.—The applicant further
declares that the matter regarding which this appeal has been made is not pending
before any Court of law or any other authority or any other Tribunal(s).
VILL. List of enclosures:—
(a) Copy of the decree passed by the Court on the basis of which the pre-
sent application is filed.
(b) List of hypothecated movables indicating the place in which they are
kept.
(c) List of mortgaged immovables.
(d) Calculations sheet showing the amount for which the Recovery Certifi-
cate is sought to be issued.
Verification
SOS aes cc piceaaees (name in full block letters) son / daughter / wife of
EE eee NY cask sbeeecesvecteses- . (OSIDANON) of
(name of Bank/Financial Institution), do hereby verify that the
1344 App.3 Debt Recovery Tribunal (Procedure) Rules, 1993

and behet and that |

contents of paras | to VIII are true to my personal knowledge
have not suppressed any material fact(s).
Place:
Date:
Signature of the applicant
To,
The Registrar

FROM Itt
(See Rule 4)
Application under Section 30(1) of the Recovery of Debts due to
Banks and Financial Institutions Act, 1993
For use in Tribunal’s Office
Date of filing ........--....+0+.
Date of receipt by post........
Or
Registration No. ...........
Signature
Registrar
IN THE DEBT RECOVERY TRIBUNAL
(Name of the place)
Between
ne Adiineranars Appellant(s)/Judgment-Creditor(s)
and
paltieen.ty veameneven Respondent(s )/Judgement-Debtor(s)
Details of appeal:
I. Particulars of the applicant(s):—
(i) Name of the appellant:
(ii) Address of Registered Office of the appellant:
(iii) Address for service of all notices.
II. Particulars of the respondent(s):—
(1) Name of the respondent:
(ii) Office address of the respondent:
(iii) Address for service of all notices:
 Debt Recovery Tribunal (Procedure)
Rules, 1993 App.3 = 1345
Ill. Jurisdiction of the Tribunal.—The
appellant declares that the subject-
matter of the appeal falls within the jurisdic
tion of the Tribunal.
IV. Limitation.—The appellant further decl
ares that the appeal is within the
limitation prescribed in section 30(1) of the Reco
very of Debts Due to Banks and
Financial Institutions Act, 1993.
V. Facts of the case.—(Give here a concise state
ment of facts and grounds of
appeal against the specific order of Recovery Offic
er, in a chronological order).
VI. Relief(s) sought.—In view of the facts ment
ioned in paragraph V above,
the appellant prays for the following relief(s):—
[Specify below the relief(s) sought explaining the
grounds of relief(s) and the
legal provisions (if any) relief upon. ]
VII. Interim order, if prayed for.—Pending final
decision on the appeal the
appellant seeks issue of the following intereim order:—
(Give here the nature of the interim order prayed for with
reasons).
VIII. Matter not pending with any other Court, etc.—
The applicant further
declares that the matter regarding which this appeal has been
made is not pending
before any Court of law or any other authority or any other
Tribunal(s).
IX. Details of index.—An index in duplicate containing the
details of the
documents to be relied upon is enclosed.
X. List of enclosures.—

Verification
I, deeded tv aweetarn sVeractseverledcttietmame iY fall Block letters)
son/daughter/wife Of........eeeecsececeseees holding a valid power of attorney
framA6 0902, 20-425 5 (name of the company), do hereby verify that the contents
of Paras I to IX are true to my personal knowledge and belief and that I have
not
Suppressed any material fact(s).
Place:
Date: .
Signature of the applicant
To
The Registrar,
Debts Recovery Tribunal
 APPENDIX 4

DEBTS RECOVERY APPELLATE TRIBUNAL

(PROCEDURE) RULES, 1994

In exercise of the powers conferred by sub-sections (1) and (2) afsection 36 of

the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (SJ of
1993), the Central Government hereby makes the following rules, namely:
1. Short title and commencement.—(1) These rules may be called the Debts
Recovery Appellate Tribunal (Procedure) Rules, 1994.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions.—In these rules, unless the context otherwise requires,—
(a) “Act” means the Recovery of Debts Due to Banks and Financial Institu-
tions Act, 1993 (51 of 1993);
(b) “agent” means a person duly authorised by a party to present appeal or
to give reply on its behalf before the Appellate Tribunal;
(c) “appeal” means an appeal made to the Appellate Tribunal under section
20 or section 30 of the Act;
(d) “appellant” means a person or a bank or financial institution making an
appeal to the Appellate Tribunal under section 20 or section 30 of the
Act;
(e) “Appellate Tribunal” means and Appellate Tribunal established by the
Central Government under section 8 of the Act;
(f) “legal practitioner” shall have the same meaning as assigned to it in the
Advocates Act, 1961 (25 of 1961);
(g) — Officer” means the Presiding Officer of an Appellate Tribu-

(h) “Registrar” means the Registrar of an Appellate Tribunal and includes

an officer of such Appellate Tribunal who is authorised by the Presid-
ing Officer to function as Registrar:
(i) “Registry” means the Registry of Appellate Tribunal.
_3. Sittings of Appellate Tribunal—An Appe Tribunal
llat shall hold eits sit-
ting either at headquarters or at such other place falling within its jurisdiction as
it may consider convenient.
i. Vie Sea LD: dened 16-11-1994, pubtiched imthe Gazene oftndia, Ext, 7.i,S. 300), dened 16-

1346
IEE, AVPUeCaAUIOH, LOPICsecimtauiOl, GOCUIMCTIL OF OUICT TMAtlers
age other than English or Hindi, shall be accepted by the
ess the same is accompanied by a true copy of translation
indi.
ing appeals.—(1) A memorandum of appeal shall be pre-
exed to these rules by the appellant either in person to the
late Tribunal within whose jurisdiction his case falls or
ed post addressed to such Registrar.
int is a bank or financial Institution a memorandum of ap-

re legal practitioners authorised by such bank or financial

officers of such bank or financial institution to act as Pre-

TS;
ithorised may present the appeal before the Appellate Tri-

ant is other than a bank or a financial institution, he may

on or by his agent or by a duly authorised legal practitio-

post under sub-rule (1) shall be deemed to have been pre-

yn the day on which it is received in the office of the Reg-

sub-rule (1) shall be presented in four sets in a paper book

- size envelope bearing full address of the respondent and
-spondents are more than one, then sufficient number of
her with empty file size —— bearing full address of
> furnished by appellant.
scrutiny of memorandum of appeal.—(1) The Registrar
appeal the date on which it is presented under rule 5 or
esented under that rule and shall sign endorsement.
- appeal is found to be in order, it shall be duly registered
or.
 Rules, 1994
i348 App.4 Debts Recovery Appellate Tribunal (Procedure)

under sub-rule (4) shall be

(5) An appeal against the onder of the Regiswar
the Presiding Officer con-
made within fifteen days of making of such order to
be final.
cerned in his chamber, whose decision thereon shall
llate Tribunal, on
'16A. (1) Any party aggrieved by an order passed by the Appe
of the record, desires to
account of some mistake or error apparent on the face
Appellate Tribunal
obtain a review of such order, may apply for a review to the
which passed the order,
of a period of sixty
(2) No application for review shall be made after the expiry
entertained un,
days from the date of the order and no such application shall be
less it is accompanied by an affidavit the application,
(3) Where it appe ar
to the sate Tribunal that sufficient ground for a re-
Appell
ied with the
view does not exist, it shall reject the application, and if it is satisf
application
grounds raised in the application for such review, it shall allow the
for review of the order:
us
Provided that no such application for review shall be allowed without previo
notice and an opportunity of being heard is given to the opposite party.
7. Place of filling memorandum of appeal.—The memorandum of appeal
shall be filed by the appellant with the Registrarofthe Appellate Tribunal having
jurisdic in the manner.
tion
8. Fee.—(1) Every memorandum of appeal under section 20 of the Act shall be
accompanied with a fee provided in sub-rule (2) and such fee may be remitted
either in the form of crossed demand draft drawn on a nationalised bank in favour
of the Registrar and payable at the station where the Registrar’s office is situated
or remitted through a crossed Indian Postal Order drawn in favour of the Regis-
trar and payable in central Post Office of the Station where the Appellate Tribu-
nal is located.
(2) The amount of fee payable in respect of appeal under section 20 shall be as
follows:—
Amount of debt due Amoun t
of fees payable
1. Less than Rs. 10 lakhs Rs. 12, 000
2. Rs. 10 lakhs or more but less than Rs. 30 Rs. 20, 000
lakhs
3. Rs. 30 lakhs or more Rs. 30, 000
9. Deposit of amount of debt due.— Where an appeal is preferred by a person
dound wisvctien it Ge tak le ene an eens 0 On
Appellate Tribunal unless such person has deposited with the Appellate Tribunal
seventy-five
per cent of the amount of debt so due from him as determined by the
Tribunal
under section 19 of the Act, provided that the Appellate Tribunal may

1. Ins. byG.S.R. 119(E), dated 20-2-2013, (wef. 22-2-2013).

 Debts Recovery Appellate Tribunal (Procedure ) Rules,
1994 App.4 = 1349
for, reasons to be Recorded in writing, waive or reduce
the amount to be depos-
ited under section 21 of the Act.
10. Contents of memorandum of appeal.—(1) Every memor
andum of appeal
filed under rule 5 shall set forth concisely under distinct heads,
the grounds of such
appeal without any argument or narrative, and such grounds
shall be numbered
consecutively and shall be typed in double line space on one side of
the paper.
(2) It shall not be necessary to present separate memorandum of appeal
to seek
interim order or direction if in the memorandum of appeal, the same
is prayed
for.
11. Documents to accompany memorandum of appeal.—(1) Every memo-
randum of appeal shall be in triplicate and shall be accompanied with two
copies
(at least one of which shall be a certified copy) of the order of the Presiding Offi-
cer of Debts Recovery Tribunal or order made by the Recovery Officer under
section 30 of the Act, as the case may be, against which the appeal is filed.
(2) Where the parties to the appeal are being represented by an agent, docu-
ments authorising him to act as such agent shall also be appended to the appeal:
Provided that where an appeal is filed by a legal Practitioner, it shall be ac-
companied by a duly executed Vakalatnama.
(3) Where a bank or financial institution is being represented by any of its offi-
cers to act as Presenting Officer before the Appellate Tribunal, the documents
authorising him to act as Presenting Officer shall be appended to the memoran-
dum of appeal.
12. Plural remedies.—A memorandum of appeal shall not seek relief or reliefs
based on more than a single cause of action in one single memorandum of appeal
unless the reliefs prayed for are consequential to one another.
13. Endorsing copy of appeal to the respondents.— A copy of the memo-
randum of appeal and paper book shall be served on each of the respondents, as
soon as they are filed, by the Registrar by registered post.
14, Filling of reply to the appeal and other documents by the respon-
dents.—(1) The respondent may file four complete sets containing the reply to
the appeal alongwith documents in a paper book from with the registry within
one month of the service of the notice on him of the filling of the memorandum
of appeal.
(2) The respondent shall also endorse one copy of the reply to the appeal along
with documents as mentioned in sub-rule (1) to the appellant.
(3) The Appellate Tribunal may, in its discretion on application by the respon-
dent, allow the filling of reply referred to in sub rule (1), after the expiry of the
period referred to therein.
15. Who may be joined as respondents.—(1) In an appeal a person other than
a bank or financial institution the bank or financial institution who has to recover
any debt from any person under section 19 of the Act before the Tribunal against
 dure) Rules, 1994
1350 App.4 Debts Recovery Appellate Tribunal (Proce
shall bemade the respondent 40theap:
those order theappeal hasbeen preferred
peal.
l institution the other party shall be
(2) In an appeal by the bank or a financia
made the respondent to the appeal.
ed.—The Appellate Tribunal shail
16. Date and place of hearing to be notifi
of the appeal in such a manner as
notify the parties the date and place of hearing
ial order direct,
the Presiding Officer may by general or spec
and for the representatives
17. Dress regulations for the Presiding Officer
iding Officer shall be white pant
of the parties. —(1) Summer dress for the Pres
black coat, In winter, striped or
with black ae:Poa a black tie or a buttoned-up of female Pre-
rs 'may be worn in place of white trousers. In the case .
over white saree
siding Officers, however the dress shall be black coat
a relative orregular em
(2) The dress forthe agent oftheparties (other than
e the Appellate Tribunal
ployee of the appellant or respondent) appearing befor
shall be the following, namely:—
p coat over a pant or
(a) In the case of a male, a suit with a tie or buttoned-u
chunidar pay-
national dress that is along buttoned-up coat on dhoti or
jama. The colour of the coat shall, preferably, be black.
other sober coloured
(b) In the case of female, black coat over white or any
saree.
lawyers
(c) Where, however, the agent belongs to a profession like that of
ap-
or a chartered accountant and they have been prescribed a dress for
ate Tri-
pearing in their professional capacity before any court, Appell
bunal, Tribunal or other such authority, they may, at their option, ap-
pear in that dress, in lieu of the dress mentioned above.
(3) All other persons appearing before the Appellate Tribunal shall be properly

18. Order to be signed and dated.—(1) Every order of the Appellate Tribunal
shall be in writing and shall be signed and dated by the Presiding Officer of the
Appellate Tribunal.
(2) The order shall be pronounced in open court.
19. Publication of orders.—The orders of the Appellate Tribunal as are
deemed fit for publication in any authoritative report or the press may be released
for such publication on such terms and conditions as the Appellate Tribunal may
lay down.
20. Communication of orders.—Every order passed on an shall be
communicated to the appellant and to the respondent and to the ribunal con-
cerned either in person or by registered post free of cost.
21. Fee for inspection of records and obtaining copies thereof —(1) A fee
of rupees twenty four every hour or part thereof of inspection subject to a mini-
 Debts Recovery Appellate Tribunal (Procedure) Rules, 1994 App.4 135!

mur of rupees one hundred shall be charged for inspec the records of apend-
ting
ing appeal by a party thereto.
(2)A fee of rupees five for a folio or part thereof not involving typin and agfee
of rupees ten fora folio or part thereof involving typing of statement and figures
be charged.
shall
22. Orders and directions in certain cases —The Appellate Tribunal may
make such orders or give such directions as may be necessary or expedient to
give effects to its orders or to prevent abuse of its process or to secure the ends of
justice
23. Working hours of the Appellate Tribunal—(1) Except on Saturdays.
Sundays and other public holidays the offices of the Appellate Tribunal shall,
subject to any other order made by the Presiding Officer, remain open daily from
10 a.m. to 6 p.m. but no work, unless of an urgent nature, shall be admitted after
4.W p.m. on any working day.
(2) The sitting hours of the Appellate Tribunal shall ordinarilybe from 10.30
am. to 1.00 pm. and 2.00 pm. to 5.00 p.m. subject to any order made by the
Presiding Officer.
2A. Holiday. —Where the last day for doing any act falls on 2 day on which the
office of the Appellate Tribunal is closed and by reason thereof the act cannot be
done on that day, it may be done on the next day on which that office opens.
25. Powers and functions of the Registrar —(1) The Registrar shall have the
custody of the records of the Appellate Tribunal and shall exercise such other
functions as are assigned to him under these rules or by the Presiding Officer by
a separateorder in writing.
(2) The official seal shall be kept in the custody of the Registrar.
(3) Subject to any general or special direction by the Presiding Officer. the seal
of the Appellate Tribunal shall not be affixed to any order, summons or other
process have under the authority in writing from the Registrar.
(4) The seal of the Appellate Tribunal shall not be affixed to any certified copy
issued by the Tribunal save under the authority in writi ng
of the Registrar.
26. Additional powers and duties of Registrar.—In addition to the powers
conferred elsewhere in these rules, the Registrar shall have the following powers
and duties subject to any general or special orders of the Presiding Officer.
namely:-—
(1) to receive all appeals and other documents;
(2) w decide all questions arising out of the scrutiny of the appeals before

(3) to require any appeal presented to the Appellate Tribunal to be amended

in accordan with thece
rules:
(4) subject to the directions of the Presiding Officer to fix date of hearing
of the appeals or other proceedings and issue notices thereof.
 1994
1352 App.4 Debis Recovery Appellate Tribunal (Procedure) Rules,

(5) direct any formal amendment of records;

edings,
(6) to order grant of copies of documents to parties to proce
(7) to grant leave to inspect the records of Appellate Tribunal;
proc-
(8) dispose of all matters relating to the service of notices or otherthe ime
esses, application for the issue of fresh notice or for extending
of the no-
for or ordering a particular method of service by publication
tice by way of advertisements in the newspapers,
ty,
(9) to requisition records from the custody of any court or other authori
Tribu-
27. Seal and emblem.—The official seal and emblem of the Appellate
nal shall be such as the Central Government may specify.
FORM
Memorandum of appeal under section 20, section 30 of the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
(51 of 1993)
For use in Appellate Tribunal’s Office
Date of filing .............:::ceceeeeseeeeseeeeneens
Date of receipt by post .........-..0ccceeeereeeees
Registration number ......... 6.6.0eeeeceeerere ees
Signature
Legistrar

In the Debts Recovery Appellate Tribunal, between:

A. _ B.- Appellant
C. D. and others - Respondent (s)
Deta ils
of the appeal:
1. Particul ars :
of the appellant
(i) Name of the appellant
(ii) Address of registered office of the appellant
(iii) Address for service of all notices
2. Particulars of the respondent or respondents:
(i) Name of the responde ntts
or responden
(ii) Office address of the respondent or respondents
or service ses
(iti) Addres of all notices
3. Jurisdiction of the Appellate Tribunal.—The appellant declares that the
matter of the appeal falls within the jurisdiction of the Appellate Tribunal.

limitation as prescribed in sub-section (3) of section 20 of the of Debts

Due to Banks and Financial Institutions Act, 1993 (51 of 1993).
 Debts Recovery Appellate Tribunal (Procedure ) Rules,
1994 App.4 = 1353
5. Facts of the case and the orders passed by the Tribu
nal or the Recovery
Officer.—The facts of the case are given below:
(give here a concise statement of facts and grounds of
appeal against the spe-
cific order of Tribunal or Recovery Officer, as the case may
be, in a chronologi-
cal order, each paragraph containing as neatly as possible
as separate issue, fact
or otherwise).
6. Relief(s) sought.—In view of the facts mentioned in paragraph
5 above, the
appellant prays for the following relief(s) (Specify below the relief(
s) sought ex-
plaining the grounds for relief(s) and the legal provisions (if any) relied
upon).
7. Interim order, if prayed for.—Pending final decision on the appeal the
ap-
pellant seeks issue of the following interim order:
(give here the nature of the interim order prayed for with reasons)
8. Matter not pending with any other court, etc.—The appellant further de-
clares that the matter regarding which this appeal has been made is not pending
before any court of law or any other authority or any other Tribunal.
9. Particulars of bank draft/postal order in respect of the deposits of debts due in
terms of section 12 of the Act applicable or under any other provisions of the Act:
(1) Name of the bank on which drawn
(2) Demand draft number
or
(1) Number of Indian Postal Order(s)
(2) Name of the issuing post office
(3) Date of issue of postal order(s)
(4) Post office at which payable
10. Particulars of bank draft/postal order in respect of the
fee paid in terms of rule 8 of these rules.
(1) Name of the bank on which drawn
(2) Demand draft number
or
(1) Number of Indian Postal Order(s)
(2) Name of the issuing post office
(3) Date of issue of postal order(s)
(4) Post office at which payable
11.Details of index.—An index in duplicate containing
the details of the documents to be relied upon is enclosed.
12. List of enclosures.
 ocedure) Rules, 1994
Debis Recovery Appellate Tribunal (Pr

(Name in full and block letters) ee

Sp ROBT TAMA OP being the .........50.eeeeeee

a aniensheceieam holding a valid power of attorney

(Name of the company)
ents
Te ee ccagbhottgheuees eanane do hereby verify that the cont

that 1 have
11 are true tomy personal knowledge and belief and
any material facts.
at
Signof theur et
applican

eeeeseseeseeeereseeeeee

eeeeeee seers eeerrsese

 APPENDIX 5
THE DEBTS RECOVERY TRIBUNAL
(PROCEDURE) AMENDMENT
RULES, 2003
G.S.R 44(E).—In exercise of the powers conferred by sub-sections (1) and (2)
of section 36 of the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (51 of 1993), the Central Government hereby makes the following
rules further to amend the Debts Recovery Tribunal (Procedure) Rules, 1993,
namely: -
1. Short title and Commencement
(a) These rules may be called the Debts Recovery Tribunal (Procedure)
Amendment Rules, 2003.
(b) They shall come into force on the date of their publication in the Offi-
cial Gazette.
2. In the Debts Recovery Tribunal (Procedure) Rules, 1993, (hereinafter
referred to as the said rules),—
(i) In the said rules for rules 2(b), 2(c) and 2(g), the following rules shall
be substituted, namely:—
2(b) “Applicant” means a person making an application under sec-
tion 19 or under section 31 A and also includes an “applicant” who files
an appeal under section 30(1) of the Act,
2(c) “application” means an application filed under section 19 or un-
der section 31 A and includes an “appeal” filed under section 30(1) of
the Act,
2(g) “Registrar” means the Registrar of the Tribunal and includes the
Assistant Registrar to whom the powers and duties of the Registrar may
be delegated”’.
(ii) In the said rules, in rule 4, in sub-rule (1) for the words “An application
shall be presented in Form’, the words and figures - “The application
under section’ 19 or section 31 A, or under section 30(1) of the Act may
be presented as nearly as possible in- Form-I, Form II and Form III re-
spectively’, shall be substituted;
(iii) In the said rules, in rule 5, for sub-rule (1), the following sub-rule shall
be substituted, namely: -

1355
1356 App.5 DRT(Procedure) Amendment Rules, 2003
er authorized by
“(1) The Registrar, or, as the case may be, the offic
h iis presented
him. shall endorse on every application the date on whic
endorse
or deemed to have been presented under rule 4 and shall sign
ment”;
shall be subst-
(iv) In the said rules, for rules 6 and 7, the following rules
tuted, namely:—
by the
“6. Place of filing application: —The application shall be filed
applicant with the Registrar within whose jurisdiction:
(a) the applicant is functioning as a bank or financial institution, as
the case may be, for the time being, or
(b) the defendant, or each of the defendants where there are more
than one, at the time of making application, actually or volun-
tarily resides, or carries on business, or personally works for
gain, or
(c) any of the defendants where there are more than one, at the
time of making the application, actually and voluntarily resides,
or carries on business, or personally works for gain, or
(d) the cause of action, wholly or in part, arises”.
7. Application Fee:—(1) Every Application under section 19(1), or
section 19(2), or section 19(8), or section 30(1) of the Act or interlocu-
tory application or application for review of decision of the Tribunal
shall be accompanied by a fee provided in the sub-rule (2) and such fee
may be remitted through a crossed Bank Demand Draft drawn on a
k
or Indian
ban ur
Postal Orderin favoof of therar
the Regist Tribunal
and payable at the place where the Tribunal is situated.
(2) The amount of fee payable shall be as follows:

Nature of Application , | Amount of Fee payable

Application of recovering of debts due
under section 19(1)
or section 19(2)
of the
Act— Rs. 12,000/-
(a) Where amount of debt due is Rs. 10
lakhs 12,000/-
plus 1000/- for
every one lakh rupeesof
(b) Where amount of debt due is above
debt due or part thereof
Rs.10 lakhs
in excess of Rs. 10/-
lakhs, subject to a
maximum of Rs.
1 ,50,000/-
Application
to counter claim under sec-
tion 19(8)
of the Act-
(a) Where the amount of claim made is
pto Rs.10 lakhs.
DRT (Procedure) Amendment Rules, 2003 App.5 1357

Nature of Application Amount of Fee payable

(b) Where the amount of claim made is
above Rs.10 lakhs. Rs.12000/- plus
Rs.1000/- for every one
lakh rupees or part
thereof in excess of
Rs.10/- lakhs, subject to
4 maximum of
Rs.1,50,000/-
Application for review including review Rs.125/-
application in respect of the counter claim
(a) against an interim order -50% of fee payable at
rates as applicable on
(b) against a final order excluding review | the applications under
for correction of clerical or arithmetical section 19(1) or 19(8) of
the Act, subject to a
maximum of Rs.
15,000/-
Application for interlocutory order Rs. 250/-
Appeals against order of the Recovery
Officer
If the amount appealed against is
(i) less than Rs. 10 lakhs
(ii) Rs. 10 lakhs or more but Jess than

(v) In the said rules, in rule 9, —(A) For the “heading”, the following shall
be substituted, namely: - “Documents to accompany the application un-
der section 19 or Section 31 A of the Act”;
(B) in the opening portion for the words, Every application,” the
words and figures - “An application under section 19 or section 31 A”
shall be substituted;
(C) in sub-rule (1) for clause (i), the following shall be substituted,
namely:—
(1) “a statement showing details of the debt due from a defendant
and circumstances under which such debt has become due: and shall
also disclose details of the case and decision. In that case which is
sought to be reviewed”;
(vi) In the said rules, rule 10 shall be omitted;
 2003
App.5 DRI (Procedure) Amendment Rules,
1358
rule 12, the following shall be sub-
(vii) In the said rules, for sub-rule (©) of
stituted, namely:
nt reason order that any
(6) The Tribunal may at any time for sufficie
affidavit, or that the affidavit
particular fact or facts shall be proved by
ing, on such conditions as the
of any witness shall be read at the hear
Tribunal thinks reasonable:
ts by the respective partes
Provided that after filing of the affidavi
the application or the defen-
where it appears to the Tribunal that either
cross examination and that
dant desires the production of a witness for
y to do so, the Tribunal
such witness can be produced and it is necessar
r the witness to be pre-
shall for sufficient reasons to be recorded, orde
witness not appearing
sent for cross examination, and in the event of the n into, @Vi-
be take
for cross examination, then, the affidavit shall not
that given in this pro-
dence and further that no oral evidence other than
viso will be permitted”;
shall be inserted,
(viii) In the said rules, after rule 15, the following rule
namely:
The Tribunal may
“15A. Publication of names of the Defaulters: -
paper or other-
cause to notify the names of the defaulters in the news
passed by the
wise after the final order/recovery certificate has been
Tribunal as it deem fit and proper”;
be inserted,
(ix) In the said rules, after rule 23, the following rule shall
namely: -
trar of
“3A. Functions of Assistant Registrar - The Assistant Regis
the Regis-
the Tribunal shall assist the Registrar in the work relating to
functions
try and Administration of the Tribunal and perform such other
assigned/ delegated to him by the Presiding Officer”.
4)”, the
(x) In the Form to the said rules, for the heading “FORM (see rule
Plane shall be substituted, namely: - “FORM 1 SEE RULES 4)”;

At the end of Form I, the following forms II and III shall be inserted;

FORM-II
Application under section 31-A of The Recovery of Debts Due to Banks and
Financial Institutions Act, 1993
For use Tribunal’s office
Date of filling
Date of receipt by post ”
Or
Registration No.
 DRT (Procedure) Amendment Rules, 2003 App.5 = 1359

Signature
Registrar
IN THE DEBTS RECOVERY TRIBUNAL
wpe eeestsetsheets oss cases OAM 6/Judgemenia fen eis

(name of place)
Between
Bec. 5 59 OLE EET, Application(s)/Judgement- Creditor(s)
and
kes. nell Abecctats < pease perc Defendant(s)/Judgement-Debtor(s)
I. Particulars of the Applicant(s)
i) Name of the applicant:
ii) Address of the Registered office:
iii) Address for service of all notices:
If. Particulars of the defendant(s)
i) Name of the defendant:
ii) Office address of the defendant:
iii) Address for service of all notices:
Ill. Jurisdiction of the Tribunal:
The applicant declares that the subject matter of the application falls within the
jurisdiction of the Tribunal.
IV. Limitation:
The applicant further declares that the application is within the limitation pre-
scribed in section 24 of the Recovery of Debts Due to Banks and Financial Insti-
tutions Act, 1993.
V. Facts of the case:
(give here a concise statement of facts in a chronological order, each paragraph
containing as nearly as possible a separate issue, facts or otherwise)
VI. Relief prayed for:
(I) Issue of Recovery Certificate for the recovery of sum of Rs...............
(Rupeesidin: (ane. dave the. nuisaas only) inclusive-arsum,Of RS.....0.. 006.0008 as
per the,decree. in O.Sz° NO. 605) o2sinsee I jsscene dnaK Passed by ......with
Saag.
interest at the rate of % from till the date of realization
with costs.
(II) Any other relief: -
VII. Matter not pending with any other court, etc:-
1360 App.5 DRT(Procedure) Amendment Rules, 2003

ding which this appeal has

The applicant further declares that the matter regar
other authority or any
been made is not pending before any court of law or any
other Tribunal (s).
VILL. List of enclosures:
basis of which the pre-
(a) Copy of the decree passed by the Court on the
sent application is filed.
in which they are
(b) List of hypothecated movables indicating the place
kept.
(c) List of mortgaged immovables,
Recovery Certifi-
(d) Calculations Sheet showing the amount for which the
cate is sought to be issued.
Verification
D nsuece enna+dn saninen (name in full block letters) son/ daughter/ wile of
inane as
N) of
ccccesesccscapammammasooses being the ........ccserseecereseeeeerenreerereh GOSIBMALIO

Signature of the applicant

Place:
Date:
To
Registrar
Debts Recovery Tribunal

FORM-III
(See rule-4)
Appeal under section 30(1) of the Recovery of Debts Due to Banks and Fi-
nancial Institu tions
Act, 1993 (51 of 1993)
For use of Tribunal’s
office Oe ee eee eee ee eee ee eee ee eee

SOOT
 DRT (Procedure) Amendment Rules, 2003
App.5 1361
IN THE DEBTS RECOVERY TRIBUNAL
(name of place)
Between
saGrsey etekaeesessosa Gaus Lees Appellant(s)/Judgement-Creditor(s)
and
SHOES eG AG Rolo Ue ac Respondent(s)/ Judgement-Debtor(s)
Details of appeal:
I. Particulars of the Appellant(s)
(i) Name of the appellant:
(ii) Address of the Registered office of the appellant:
(iii) Address for service of all notices:
Il. Particulars of the respondent(s):
(i) Name(s) of respondent:
(ii) Office address of the respondent:
(iii) Address for service of all notices:
Ill. Jurisdiction of the Tribunal:
The appellant declares that the subject-matter of the appeal falls within the ju-
risdiction of the Tribunal.
IV. Limitations:
The appellant declared that the appeal is within the limitations as prescribed in
section 30(1) of the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (51 of 1993).
V. Facts of the cases:
(give here a concise statement of facts and grounds of appeal against the spe-
cific order of Recovery Officer, in chronological order)
VI. Relief(s) sought:
In view of the facts mentioned in paragraph V above, the appellant prays for
the following relief(s) (Specific below the relief(s) sought explaining the grounds
of relief(s) and the legal provisions (if any) relief upon).
VU. Interim order, if prayed for-
Pending final decision on the appeal the appeallant seeks issue of the following
Interim order: (Give here the nature of the interim order prayed for with reason)
VIII. Matter not pending with other court, etc:-
The applicant further declares that the matter regarding which this appeal has
been made is not pending before any court of law or any other authority or any
other Tribunal(s).
(362 App.5 DRT (Procedure) Amendment Rules, 2003

containing thedetails ofthe doou-

EX. Details ofindex- Anindex induplicate
ments to be relied upon is enclosed,
X. List of enclosures:
Verification

y
ofparaI toDX aretrue
(Name ofthe company) dohereby verify that thecontents
suppressed any material
to my personal knowledge and belief and that I have not
fact(s).
; Signature of the applicant

Registrar
Debts Recovery Tribunal
 APPENDIX 6

THE DEBTS RECOVERY APPELLATE

TRIBUNAL (FINANCIAL AND
ADMINISTRATIVE POWER)
RULES, 1997

G.S.R. 337(E).—In exercise of the powers conferred by Section 36 of the Re-

covery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993),
the Central Government hereby makes the following rules, namely:—
1. Short title and commencement.—(1) These rules may be called the Debts
Recovery Appellate Tribunal (Financial and Administrative Power) “Rules, 1997.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions.—In these rules, unless the context otherwise requires,—
(a) “Act” means the Recovery of Debts Due to Banks and Financial Institu-
tions Act, 1993 (51 of 1993);
(b) “Appellate Tribunal” means the Debts Recovery Appellate Tribunal
established under sub-section (1) of Section 9 of the Act;
(c) “Presiding Officer” means a person appointed as Presiding Officer of
an Appellate Tribunal under Section 9 of the Act;
(d) All other words and expressions used and not defined in these rules but
defined in the Act shall have the meanings respectively assigned to
them in the Act.
Presid-
3. Powers of the Presiding Officer of the Appellate Tribunal.—The
of Department
ing Officer shall have the same powers as are conferred on a Head
of the Financial
in respect of the General Financial Rules, 1963, the Delegation
Rules, the Cen-
Powers Rules, 1978, the Fundamental Rules, the Supplementary
s (Joining Time)
tral Civil Services (Leave) Rules, 1972, the Central Civil Service
the Central Civil Services
Rules, 1979, the Civil Services (Pension) Rules, 1972,
fication, Control and
(Conduct) Rules, 1964, the Central Civil Services (Classi
(Central Services) Rules,
Appeal) Rules, 1965 arid the General Provident Fund
1960 as amended from time to time:
ding Officer under these rules
Provided that the exercise of powers by the Presi
issued from time to time by the
shall be subject to such instructions as may be
Central Government.

1363
 APPENDIX 7

DEBTS RECOVERY TRIBUNAL (FINANCIAL

AND ADMINISTRATIVE POWER)
RULES, 1997
the Re-
G.S.R. 338(E) - In exercise of the powers conferred by Section 36 of
(51 of 1993),
covery of Debts Due to Banks and F inancial Institutions Act, 1993
the Central Government hereby makes the following rules, namely.
1. Short title and commencement.—(1) These rules may be callethe d Debts
Recovery Tribunal (Financial and Administrative Power) Rules, 1997,
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions.—In these rules, unless the context otherwise requires—
a. “Act” means the Recovery of Debts Due to Banks and Financial Institu-
tions Act, 1993 (51 of 1993);
b. “Tribunal” means the Debts Recovery Tribunal established under sub-
section (1) of Section 3 of the Act;
c. “Presiding Officer” means a person appointed as Presiding Officer Tri-
bunal under Section 4 of the Act.
d. All other words and expressions used and not defined in these rules but
defined in the Act shall have the meanings respectively assigned to
them in the Act.
hemes, tame qatumn obaancatemnd ann eae
shall have the same powers as are conferred on a Head of Department in respect
of the General Financial Rules, 1963, the Delegation of the Financial Powers
Rules, 1978, the Fundamental Rules, the Supplementary Rules, the Central Civil
Services (Leave) Rules, 1972, the Central Civil Services (Joining Time) Rules,
1979, the Civil Services (Pension) Rules, 1972, the Central Civil Services (Con-
duct) Rules, 1964, the Central Civil Services (Classification,
Control and Appeal)
Rules, 1965 and the General Provident Fund (Central Services) Rules, 1960 as
amended from time to time:
Provided that the exercise of powers by the Presiding Officer under these rules
shall be subject to such instructions as may be issued from time to time by the
Central Government.

1364
 APPENDIX 8
SPECIAL RECOVERY POWERS UNDER
SOME INDIAN LAWS

ANNEXURE 8.1
PROVISIONS IN THE STATE FINANCIAL
CORPORATIONS ACT, 1951
* * * * * *

29. Rights of Financial Corporation in case of default.—(1) Where any in-

dustrial concern, which is under a liability to the Financial Corporation under an
agreement, makes any default in repayment of any loan or advance or any in-
stalment thereof or in meeting its obligations in relation to any guarantee given
by the Corporation or otherwise fails to comply with the terms of its agreement
with the Financial Corporation, the Financial Corporation shall have the right to
take over the management or possession or both of the industrial concerns, as
well as the right to transfer by way of lease or sale and realise the property
pledged, mortgaged, hypothecated or assigned to the Financial Corporation.
(2) Any transfer of property made by the Financial Corporation, in exercise of its
powers under sub-section (1), shall vest in the transferee all rights in or to the prop-
erty transferred as if the transfer had been made by the owner of the property.
(3) The Financial Corporation shall have the same rights and powers with re-
spect to goods manufactured or produced wholly or partly from goods forming
part of the security held by it as it had with respect to the original goods.
(4) Where any action has been taken against an industrial concern under the
provisions of sub-section (1), all costs, charges and expenses which in the opin-
ion of the Financial Corporation have been properly incurred by it as incidental
thereto shall be recoverable from the industrial concern and the money which is
received by it shall, in the absence of any contract to the contrary, be held by it in
trust to be applied firstly, in payment of such costs, charges and expenses and,
secondly, in discharge of the debt due to the Financial Corporation, and the resi-
due of the money so received shall be paid to the person entitled thereto.
(5) Where the Financial Corporation has taken any action against an industrial
concern under the provisions of sub-section (1), the Financial Corporation shall

1365
 an Laws
1366 App.5 Special Recovery Powers wader some indi

ern, for the purposes of suits by or

be deemed to be the owner of such conc
in the name of the concern,
against the concern, and shall sue and sued
agreed period. Notwithstanding
Ww. Power to call for repayment before
the Financial Corporation may, by
anything in any agreement to the contrary,
ern to Which it has granted any loan
notice in writing, require any industrial conc the Financial Corpora:
its liabilities to
or advance to discharge forthwith in full
uon, —
ng information in any
(a) If it appears to the Board that false or misleadi in its application
material particular was given by the industrial concern
for the loan or advance, or
the terms of its con-
(b) Lf the industrial concern has failed to comply with loan or ad-
tract with the Financial Corporation in the matter of the
vance; or
concern is un-
(c) If there is a reasonable apprehension that the industrial
n may be com-
able to pay its debts or that proceedings for liquidatio
menced in respect thereof; or
assigned to the
(d) If the property pledged, mortgaged, hypothecated or
insured
Financial Corporation as security for the loan or advance is not
ofthe F-
and kept insured by the industrial concern tothe satisfaction
inthe
nancial Corporation or depreciates invalue to such an extent that,
Board
opinion of the Board, further security tothe satisfaction of the
should be given and such security is not given; or
(e) If, without the permission of the Board, any machin ery
plant ,
or other
equipment, whether forming part of the security or otherw ise, is re-
moved from the premises of the industrial concern without being re-
placed; or
(f) If for any reason it is necessary to protect the interests of the Financial
Corporation.
31. Special provisions for enforcement of claims by Financial Corpora-
tion.—(1) Where an industrial concern, in breach of any agreement, makes any
default inrepayment ofany loan oradvance oranyinstalment thereof orin meet-
ingitsobligations in relation to any guarantee given by the Corporation oroth-
erwise fails to comply with theterms ofitsagreement with the Financial Corpo-
ration orwhere the Financial Corporation requires anindustrial concern to make
Rnesisiine sepia oa artes Gene caer eee
concern fai e repayment without prejudice to the provisions
cftxToe AUG
See aneaiehaivalcfatotea OF A ED
of 1882), anyofficer ofthe Financial Corporation, generally orspecially author-
ized bythe Board inthis behalf, may apply tothe District Judge within the limits
of whose jurisdiction the industrial concern carries onthe whole ora substantial
part of its business for one or more of the following reliefs, namely:—
 Special Recovery Powers under some Indian Laws App.8 = 1367
(a) For an order for the sale of the property pledged, mortgaged, hypothe
-
cated or assigned to the Financial Corporation as security for the loan or
advance; or
(aa) for enforcing the liability of any surety; or
(b) For transferring the management of the industrial concern to the Finan-
cial Corporation; or
(c) For an ad interim injunction restraining the industrial concern from
transferring or removing its machinery or plant or equipment from the
premises of the industrial concern without the permission of the Board,
where such removal is apprehended.
(2) An application under sub-section (1) shall state the nature and extent of the
liability of the industrial concern to the Financial Corporation, the ground on
which it is made and such other particulars as may be prescribed.
32. Procedure of District Judge in respect of applications under section
31.—(1) When the application is for the reliefs mentioned in clauses (a) and (c)
of sub-section (1) of section 31, the District Judge shall pass an ad interim order
attaching the security, or so much of the property of the industrial concern as
would on being sold realise in his estimate an amount equivalent in value of the
outstanding liability of the industrial concern to the Financial Corporation, to-
gether with the costs of the proceedings taken under section 31, with or without
an ad interim injunction restraining the industrial concern from transferring or
removing its machinery, plant or equipment.
(1A) When the application is for the relief mentioned in clause (aa) of sub-
section (1) of section 31, the District Judge shall issue a notice calling upon the
surety to show cause on a date to be specified in the notice why his liability
should not be enforced.
(2) When the application is for the relief mentioned in clause (b) of sub-section
(1) of section 31, the District Judge shall grant an ad interim injunction restrain-
ing the industrial concern from transferring or removing its machinery, plant or
equipment and issue a notice calling upon the industrial concern to show cause,
on a date to be specified in the notice, why the management of the industrial con-
cern should not be transferred to the Financial Corporation.
(3) Before passing any order under sub-section (1) or sub-section (2), or issuing
a notice under sub-section (1A) the District Judge may, if he thinks fit, examine
the officer making the application.
(4) At the same time as he passes an order under sub-section (1), the District
Judge shall issue to the industrial concern or to the owner of the security attached
a notice accompanied by copies of the order, the application and the evidence, if
any, recorded by him calling upon it or him to show cause on a date to be speci-
fied in the notice why the ad interim order of attachment should not be made ab-
solute or the injunction confirmed.
1368 App.5 Special Recovery Powers wader some Indian Laws
specified inthe notice under
(4A) Ifnocause isshown ono before thedate
hwith order the enforcement of the
sub-section (1A), the District Judge shall fort
liability of the surety
specified inthe nouce under sub-
(5) If no cause is shown on or before the date
hwith make the ad interim order
sections (2) and (4), the District Judge shall fort oF transfer the management
absolute and direct the sale of the attached property or confirm the injunction,
ion
of the industrial concern to the Financial Corporat
eed to investigate the claw
(6) Lf cause is shown, the District Judge shall proc
isions contained in the
of the Financial Corporation in accordance with the provsuch provisions may be
as
Code of Civil Procedure, 1908 (5 of 1908), in so far
applied thereto.
the District Judge
(7) After making an investigation under sub-section (6),
-

may—
of the attached
(a) Confirm the order of attachment and direct the sale
property,
of the property
(b) Vary the order ofattachment so as torelease a portion
the attached
from attachment and direct the sale of the remainder of
property;
(c) Rele as
the proper tyefrom attachment,
(d) Confirm or dissolve the injunction;
the claim
(da) direct the enforcement of the liability of the surety or reject
made in this behalf;or
ial
(ce) Transfer the management of the industrial concern to the Financ
Corporation or reject the claim made in this behalf:
Provided that when making an order under clause (c), ormaking an order rejecting
the claim to enforce the liability ofthe surety under clause (da) or making and order
rejecting theclaim totransfer themanagement oftheindustrial concer totheFinan-
cial Corporation under clause (e) theDistrict Judge may make such further orders as
he thinks necessary to protect the interests of the Financial Corporation and may ap-
portion the costs ofthe proceedings insuch manner ashe thinks fit:
Provided further that unless the Financial Corporation intimates to the District
Judge that it will not appeal against any order releasing any property from at-
tachment, or rejecting the claim to enforce the liability of the surety or rejecting
the claim to transfer the industrial concern to the Financial Corporation such or-
der shall not begiven effect to,until theexpiry oftheperiod fixed under sub-
section (9) within which an appeal may be preferred or, if an appeal is preferred.
unless the High Court otherwise directs until the appeal is disposed of.
_(8) Anorder ofattachment orsale ofproperty under this section shall becar-
ried into effect as far as practicable in the manner provided in the Code of Civil
Procedure, 1908 (5 of 1908), for the attachment or sale of property in execution
of a decree as if the Financial Corporation were the decree-holder.
 Special Recovery Powers under some Indian Laws App.8 1369
(8A) An order under this section transferring the management of an industr
ial
concern to the Financial Corporation shall be carried into effect, as far
as may be
practicable, in the manner provided in the Code of Civil Procedure,
1908, (5 of
1908) for the possession of immovable property or the delivery of movable
prop-
erty in execution of a decree, as if the Financial Corporation were the decree-
holder.
(9) Any party aggrieved by an order under sub-section (4A), sub-section (5) or
sub-section (7) may, within thirty days from the date of the order, appeal to the
High Court, and upon such appeal the High Court may, after hearing the parties,
pass such orders thereon as it thinks proper.
(10) Where proceedings for liquidation in respect of an industrial concern have
commenced before an application is made under sub-section (1) of section 31,
nothing in this section shall be construed as giving to the Financial Corporation
any preference over the other creditors of the industrial concern not conferred on
it by any other law.
(11) The functions of a district judge under this section shall be exercisable—
(a) In a presidency town, where there is a city civil court having jurisdic-
tion, by a judge of that court and in the absence of such court, by the
High Court; and
(b) Elsewhere, also by an additional district judge or by any judge of the
principal court of civil jurisdiction.
(12) For the removal of doubts it is hereby declared that any court competent to
grant an ad interim injunction under this section shall also have the power to ap-
point a Receiver and to exercise all the other powers incidental thereto.
32A. Power of Financial Corporation to appoint directors or administra-
tors of an industrial concern when management is taken over.—(1) When the
management of an industrial concern is taken over by the Financial Corporation,
the Financial Corporation may, by order notified in the Official Gazette, appoint
as many persons as it thinks fit,—
(a) In any case in which the industrial concern is a company as defined in
the Companies Act, 1956 (1 of 1956), to be directors of that industrial
concern; or |
(b) In any other case, to be administrators of that industrial concern.
(2) The power to appoint directors or administrators under this section includes
the power to appoint any individual, firm or company to be the managing agent
or manager of the industrial concern on such terms and conditions as the Finan-
cial Corporation may think fit.
(3) Nothing in the Companies Act, 1956 (1 of 1956), or in any other law for the
time being in force or in any instrument relating to the industrial concern shall, in
so far as it makes in relation to a director, any provision for the holding of any
share qualification, age limit, restriction on the number of directorships, retire-
1370 ~App.3 Special Recovery Powers under some indian Laws
to any director appounted by the
ment by rotation or removal from office, apply
Financial Corporation under this secuon.
n the issue of a notified
328. Effect of notified order under section 32A.—O
order under section 32A,—
is a company as defined un
(a) In any case in which the industrial concern ing office as di-
the Companies Act, 1956 (1 of 1956), all persons hold
persons hold-
rectors of the industrial concern and in any other case, all
n and cob-
ing any office having the powers of superintendence, directio the nob-
issue of
trol of the industrial concern, immediately before the
as such;
fied order, shall be deemed to have vacated their offices
rn and any
(b) Any contract of management between the industrial conce
ng office as
managing agent or any director or manager thereof holdi
be deemed
such immediately before the issue of the notified order shall
to have terminated,
defined in
(c) In the case of an industrial concern which is a company as
the Companies Act, 1956 (1 of 1956), the managing agent, if any, ap-
pointed under section 32A shall be deemed to have been duly appointed
of asso-
in pursuance of the said Act and the memorandum and articles
and
ciation of the industrial concern and the provisions of the said Act
provi sions con-
the memorandum and articles shall, subject to the other
tained in this Act, apply accordingly, but no such managing agent shall
be removed from office except with the previous consent of the Finan-
cial Corporation;
(d) The directors or the administrators appointed under section 32A shall
take such steps as may be necessary to take into their custody or under
their control all the property, effects and action claimsablto whichethe
industrial concern is, or appears to be, entitled, and all the property and
effects of the industrial concern shall be deemed to be in the custody of
the directors or administrators, as the case may be, as from the date of
the notified order;
(e) The directors appointed under section 32A shall, for all purposes, be the
directors of the industrial concern duly constituted under the Compa-
nies Act, 1956(1 of 1956), and such directors, or as the case may be,
the administrators appointed under section 32A, shall alone be entitled
to exercise all the powers of the directors or as the case may be, of the
persons exercising powers ofsuperintendence, direction and control, of
the industrial concern, whether such powers are derived from the said
Act or from the memorandum or articles of association of the industrial
concern or from any other source whatsoever.
32C. Powers and duties of directors and administrators—(1) Subject tothe
control ofthe Financial Corporation, the directors, orasthe case may be, the ad-
ministrators appointed under section 32A, shall take such steps as may be neces-
sary for the purpose of efficiently managing the business of the industrial
and shall exercise such powers and have such duties as may be prescribed.
Special Recovery Powers under some Indian Laws App.8 = 1371

(2) Without prejudice to the generality of the powers vested in them under sub-
section (1), the directors, or as the case may be, the administrators appointed un-
der section 32A, may, with the previous approval of the Financial Corporation,
make an application to a Court for the purpose of cancelling or varying any con-
tract or agreement entered into at any time before the issue of the notified order
under section 32A, between the industrial concern and any other person and the
Court may, if satisfied after due inquiry that such contract or agreement had been
entered into in bad faith and is detrimental to the interests of the industrial con-
cern, make an order cancelling or varying (either unconditionally or subject to
such conditions as it may think fit to impose) that contract or agreement and the
contract or agreement shall have effect accordingly.
32D. No right to compensation for termination of contract of managing
agent, managing director, etc. —(1) Notwithstanding anything to the contrary
contained in any contract or in any law for the time being in force, no managing
agent, managing director or any other director or a manager or any person in
charge of management of an industrial concern shall be entitled to any compensa-
tion for the loss of office or for the premature termination under this Act of any
contract of management entered into by him with such concern.
(2) Nothing contained in sub-section (1) shall affect the right of any such man-
aging agent or managing director, or any other director or manager or any such
person in charge of management to recover from the industrial concern, moneys
recoverable otherwise than by way of such compensation.
32E. Application of Act 1 of 1956.—(1) Where the management of an indus-
trial concern, being a company as defined in the Companies Act, 1956, is taken
over by the Financial Corporation, then, notwithstanding anything contained in
the said Act or in the memorandum or articles of association of such concern,—
(a) It shall not be lawful for the shareholders of such concern or any other
person to nominate or appoint any person to be a director of the con-
cem;
(b) No resolution passed at any meeting ofthe shareholders of such con-
cern shall be given effect to unless approved by the Financial Corpora-
tion;
(c) No proceeding for the winding up of such concern or for the appoint-
ment of receiver in respect thereof shall lie in any Court, except with
the consent of the Financial Corporation.
(2) Subject to the provisions contained in sub-section (1) and to the other pro-
visions contained in this Act and subject to such other exceptions, restrictions
and limitations, if any, as the Central Government in consultation with the State
Government may, by notification in the Official Gazette, specify in this behalf,
the Companies Act, 1956 (1 of 1956), shall continue to apply to such concern in
the same manner as it applied thereto before the issue of the notified order under
section 32A.
1372 App.5 Special Recovery Powers under some Indian Laws
rial con-
32F. Restriction on filing ofsuits for dissolution ete., ofan indust
taken over.—(!) Whore
cern not being a company when its management is
ny as defined in the
the management ofan industrial concern not being a compa
Corporation, no
Companies Act, 1956(1 of 1956), is taken over by the Financial as iH relatesto
so far
suit or proceedings for dissolution or for partition shall, in
tribun al or other authority
that industrial concern, lie in any Court or before any
except with the consen the Financial Corporation,
oft
er in
(2) No proceeding for the appointment of any official assignee or receiv
over
relation to any industrial concern the management of which has been taken
consen t of the
by the Financial Corporation shall lie in any Court except with
Financial Corporation.
32G. Recovery of amounts due to the Financial Corporation as an arrear
of land revenue.—Where any amount is due to the Financial Corporation inre-
spect of any accommodation granted by it to any industrial concern, the Financial
Corporation or any person authorised by it in writing in this behalf, may, without
prejudice to any other mode of recovery, make an application to the State Gov-
ernment for the recovery of the amount due to it,and if the State Governmentor
such authority, as that Government may specify in this behalf, is satisfied, after
following such procedure as may be prescribed, that any amount is 80 due, it may
iss ueate for that amount to the Collector, and the Collector shall pro-
a certific
ceed to recover that amount in the same manner as an arrear of land revenue.
 ANNEXURE 8.2
PROVISIONS IN THE IFC ACT*
* * * * * *

28. Right of Corporation in case of default—(1) Where any industrial con-

cern which is under a liability to the Corporation under an agreement makes any
default in repayment of any loan or advance or any instalment thereof, or in
meeting its obligations in relation to any guarantee given by the Corporation, or
otherwise fails to comply with the terms of its agreement with the Corporation,
the Corporation shall have the right to take over the management, or possession,
or both, of the concern, as well as the right to transfer by way of lease or sale and
realise the property pledged, mortgaged, hypothecated or assigned to the Corpo-
ration.
(2) Any transfer of property made by the Corporation in exercise of its powers
under sub-section (1) shall vest in the transferee all rights in or to the property
transferred as if the transfer had been made by the owner of the property.
(3) The Corporation shall have the same rights and powers with respect to
goods manufactured or produced wholly or partly from goods forming part of
security held by it, as it had with respect to the original goods.
(3A) Where any action has been taken against an industrial concern under the
provisions of sub-section (1), all costs, charges and expenses which, in the opin-
ion of the Corporation, have been properly incurred by it as incidental thereto
shall be recoverable from the industrial concern, and the money which is re-
ceived by it shall, in the absence of any contract to the contrary, be held by it in
trust to be applied, firstly, in payment of such costs, charges and expenses and,
secondly, in discharge of the debt due to the Corporation, and the residue of the
money so received shall be paid to the person entitled thereto.
(4) Where the Corporation takes over the management or possession of a con-
cern under the provisions of sub-section (1), it shall be deemed to be the owner of
such concern for purposes of suits by or against such concern and shall sue and
be sued in the name of the concern.
30. Special provisions for enforcement of claims by the Corporation.—(1)
Where an industrial concern, in breach of any agreement, makes any default in
repayment of any loan or advance or any instalment thereof or in meeting its ob-
ligations in relation to the guarantee given by the Corporation or otherwise fails

* Now Repealed by the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,
1993 (Act 23 of 1993).

i373
1374 Apps Special Recovery Powers under some Indian Laws

Comeuren or where the

to comply with the terms of its agreement with the
ate repayment of any
Corporation requires an industrial concern to make WM
rn fails to make such
loan or advance under section 29 and the industrial conce
section 28 of this Act and
repayment, then, without prejudice to the provisions of
1882), any officer of the
of section 69 of the Transfer of Property Act, 1882 (4 of
d in this behalf may
Corporation generally or especially authorized by the Boar
s, namely:-
apply to the Court for one or more of the following relief
hypothe:
(a) for an order for the sale of the property pledged, mortgaged,
cated or assigned to the Corporation as security for the loan or advance,
or
rn to the Corpo-
(b) for transferring the management of the industrial conce
ration, or
-
(c) for an ad interim injunction where there is apprehension of the machin
ial
ery or the equipment being removed from the premises of the industr
concern without the permission of the Board,
(2) An application under sub-section (1) shall sta nature and extent of the
thete
it is
liability of the industrial concern to the Corporation, the ground on which
made and such other particulars as may be prescribed.
(3) When the application is for the reliefs mentioned in sub-clauses (a) and (c)
on
the Court
(1) cti
of sub-se the security
shall pass an ad interim order attaching
or so much of the property of the industrial concern as would on being sold real-
ise in its estimation an amount equivalent in value to the outstanding liability of
the industrial concern to the Corporation together with the costs of the proceed-
ings taken under this section with or without an ad interim injunction restraining
the industrial concern from transferring or removing its machinery or equipment.
(4) Where the application is for the relief mentioned in sub-clause (b) of sub-
section (1) the Court shall grant an ad interim injunction restraining the industrial
concern from transferring or removing its machinery or equipment and issue a
notice calling upon the industrial concern to show cause on a date to be specified
in the notice why the management of the industrial concern should not be trans-
ferred to the Corporation.
(5) Before passing any order under sub-section (3) or sub-section (4), the Court
may, if it thinks fit, examine the officer making the application.
(6) At the same time asitpasses anorder sub-section (3), the Court shall issue
to the industrial concern a notice accompanied by copies of the order, the appli-
cation and the evidence, if any, recorded by it calling upon the industrial concern
to show cause on a date to be specified in the notice why the ad interim order of
attachment should not be made absolute or the injunction confirmed °

(7) If no cause is shown on or before the date specified in the notice under sub-
sections (4) and (6), the Court shall forthwith make the ad interim order absolute
and direct the sale of the attached property or transfer the management of the in-
dustrial concern to the Corporation or confirm the injunction.
 Special Recovery Powers under some Indian Laws App.8 = 1375

(8) If cause is shown the Court shall proceed to investigate the claim of the
Corporation and the provision of the Code of Civil Procedure, 1908 (5 of 1908),
shall as far as practicable apply to such proceedings.
(9) On an investigation made under sub-section (8) the Court shall pass an or-
der—
(a) confirming the order of attachment and directing the sale of the attached
property, or
(b) varying the order of attachment so as to release a portion of the property
from attachment and directing the sale of the remainder of the attached
property, or
(c) releasing the property from attachment, if it is satisfied that it is not
necessary in the interest of the Corporation, or
(d) confirming or dissolving the injunction, or
(e) transferring the management of the industrial concern to the Corpora-
tion of rejecting the claim made in this behalf: Provided that when mak-
ing any order under clause (c), the Court may make such further orders
as it thinks necessary to protect the interests of the Corporation, and
may apportion the costs of the proceedings in such manner as it thinks
fit: Provided further that unless the Corporation intimates to the Court
that it will not appeal against any order releasing any property from at-
tachment, such order shall not be given effect to until the expiry of the
period fixed under sub-section (11) within which an appeal may be pre-
ferred, or if an appeal is preferred, unless the Court empowered to hear
appeals from the decisions of the said Court otherwise directs, until the
appeal is disposed of.
(10) An order of attachment or sale of property under this section shall be car-
ried into effect as far as may be practicable in the manner provided in the Code of
Civil Procedure, 1908 (5 of 1908), for the attachment of sale of property in exe-
cution of a decree, as if the Corporation were the decree-holder.
(10A) An order under this section transferring the management of an industrial
concern to the Corporation shall be carried into effect, as far as may be practica-
ble, in the manner provided in the Code of Civil Procedure, 1908 (5 of 1908), for
the possession of immovable property or the delivery of movable property in
execution of a decree, as if the Corporation were the decree-holder. ]
(11) Any party aggrieved by an order under sub-section (7) or sub-section (9)
may, within thirty days from the date of the order, appeal to the Court empow-
ered to hear appeals from the decisions of the Court which passed the order and
the appellate Court may after hearing the parties pass such orders as it thinks
proper.
(12) Nothing in this section shall be construed, where proceedings for liquida-
tion in respect of the industrial concern have commenced before an application 1s
made under sub-section (1) as giving to the Corporation any preference over the
other creditors of the industrial concern not conferred on it by any other law.
1376 =App.5 Special Recovery Powers under some Indian Laws
Court competent
(14) For the removal of doubts, it is hereby declared that any
have the power to
to grant an ad interim injunction under this section shall also
o.
appoint a receiver and to exercise all other powers incidental theret
proceedings )
(15) All proceedings (whether by way of suits or appeals or other
t Judge of
under this Act pending before a District Judge or an Additional Distric
Corporation
a High Court at the commencement of the Industrial Finance
nt, be pro
(Amendment) Act, 1972 (74 of 1972), shall, on such commenceme
the said
ceeded with and disposed of as if this section had not been amended by
Act.
with
(16) Every suit or other proceedings which are disposed of in accordance
the provisions contained in sub-section (15) or in respect of which time for ap-
peal has not expired at the commencement of the Industrial Finance Corporation
(Amendment) Act, 1972 (74 of 1972), may, on such commencement, be appealed
against as if this section had not been amended by the said Act.
30A. Power of Corporation to appoint Directors of an industrial concern
when management is taken over.—(1) When the management of an industrial
concern is taken over the Corporation, the Corporation may, by order notified in
the Official Gazette, appoint as many persons as it thinks fit to be the “Directors,
or, as the case may be, the Administrator of that industrial concern” and nothing
in the Companies Act, 1956 (1 of 1956), or in any such law or instrument relating
to the industrial concern in so far as it makes, in relation to a director any provi-
sion for the holding of any share qualification, age limit, restrictions on the num-
ber or directorships, retirement by rotation or removal from office shall apply to
any Director appointed by the Corporation under this section.
(2) The power to appoint Directors under this section includes the power to ap-
point any individual to be the Manager of the industrial concern on such terms
and conditions as the Corporation may think fit.
30B. Effect of notified order appointing Directors. On the issue of a noti-
fied order under section 30A
(a) all persons holding, immediately before the issue of the notified order,
office as Directors of the industrial concern or any other offices enti-
tling them to exercise powers of superintendence, direction and control
of the industrial concern, shall be deemed to have vacated their offices
as such;
(b) any contract of management between the industrial concern and any
Director thereof holding office as such immediately before the issue of
the notified order shall be deemed to have terminated;
(c) See bane enaaieael trcouaeeus afta aut ata
ve i in pursuance of the provisions of the Companies
Act, 1956 (1 of 1956), and the memorandum and articles of association
of the industrial concern or, as the case may be, of any law for the time
being in force relating to co-operative societies and the memorandum or
other instrument of the industrial concern, and the provisions of the said
 Special Recovery Powers under some Indian Laws
App.8 1377
Act or law, and of the memorandum and articles of association or, as
the case may be, memorandum or other instrument shall, subject to
the
other provisions contained in this Act, apply accordingly; but no such
Manager shall be removed from office except with the previous consent
of the Corporation;
(d) the Directors or, as the case may be, Administrator appointed under
section 30A shall take such steps as may be necessary to take into their
custody or under their control all the property, effects and actionable
claims to which the industrial concern is, or appears to be, entitled, and
all the property and effects of the industrial concern shall be deemed to
be in the custody of the Directors or, as the case may be, Administrator
as from the date of the notified order;
(e) the Directors appointed under section 30A shall, for all purposes, be the
Directors of the industrial concern duly constituted under the Compa-
nies Act, 1956 (1 of 1956) or under any law for the time being in force
relating to co-operative societies, and such Directors or, as the case may
be, the Administrator appointed under section 30A, shall alone be enti-
tled to exercise all the powers of the Directors (by whatever name
called) of the industrial concern, whether such powers are derived from
the said Act or law or the memorandum or articles of association or, as
the case may be, the memorandum or other instrument of the industrial
concern;
30C. Powers and duties of Directors.—(1) Subject to the control of the Cor-
poration, the Directors or Administrator appointed under section 30A shall take
such steps as may be necessary for the purpose of efficiently managing the busi-
ness of the industrial concern and shall exercise such powers and have such du-
ties as may be prescribed.
(2) Without prejudice to the generality of the powers vested in them under sub-
section (1), the Directors or Administrator appointed under section 30A may, with
the previous approval of the Corporation, make an application to a Court for the
purpose of cancelling or varying any contract of agreement entered into, at any
time before the issue of the notified order under section 30A, between the industrial
concern and any other person and the Court may, if satisfied after due inquiry that
such contract or agreement had been entered into in bad faith and is detrimental to
the interests of the industrial concern, make an order cancelling or varying (either
unconditionally or subject to such conditions as it may think fit to impose) that
contract or agreement and the contract or agreement shall have effect accordingly.
30D. No right to compensation for termination contract of managing
agents.—(1) Notwithstanding anything contained in any law for the time being
in force, no Managing Director or any other Director or Manager or holder of any
office having the powers of superintendence, direction and control of an indus-
trial concern shall be entitled to any compensation for the loss of office or for the
premature termination under this Act of any contract of management entered into
by him with such concern.
i378 App.5 Special Recovery Powers under some Indian Laws

right of any such Man:

(2) Nothing contained insub-section (1) shall affect the
ofoffice reterred to in
aging Director or any other Director or Manager or holder
rn Moneys recoverable oth-
that sub-section to recover from the industrial conce
erwise thanby way of such compensation,
management of an indus
WE. Application of Act I of 1956.—(1) Where the (1 of
s Act, 1956
trial concern, being a company as defined in the Companie
anything con-
1956), is taken over by the Corporation, then, notwithstanding of such
association
tained in the said Act or in the memorandum or articles of
concermn,—
any other
(a) it shall not be lawful for the shareholders of such concern or
person to nominate or appoint any person to be a Director of the con-
cer;
(b) no resolu tio
passed atnany meeting of the shareholders of such concern
shall be given effect to unless approved by the Corporation;
(c) no proceedi forngthe winding up of such concern or for the appoint-
ment of a receiver in respect thereof shall lie in any Court, except with
the consent of the Corporation.
(2) Subject to the provisions contained in sub-section (1) and to the other pro-
visions contained in this Act and subject to such other exceptions, restrictions
and limitations, if any, as the Central Government may, by notification in the
Official Gazette, specify in this behalf, the Companies Act, 1956 (1 of 1956),
shall continue to apply to such concern in the same manner as it applied thereto
bef issue of the notorder
theore ifi section 30A.
undered
 ANNEXURE 8.3
PROVISIONS IN THE IRBI ACT, 1984*
39. Rights of Reconstruction Bank in case of default.—(1) Where an as-
sisted industrial concern, which is under a liability to the Reconstruction Bank
under any agreement with the Bank, makes any default in the payment of any
dues, or in meeting its obligation in relation to any other assistance given by the
Reconstruction Bank or otherwise fails to comply with the terms of the agree-
ment with that Bank, the Reconstruction Bank shall have the right to take over
the management, or possession, or both, of the industrial concern, as well as the
right to transfer by way of lease or sale of the property assigned, charged, hy-
pothecated, mortgaged or pledged to the Reconstruction Bank for the purpose of
realising its dues or for the revival of the industrial concern.
(2) Any transfer of property made by the Reconstruction Bank in exercise of
the powers conferred on it by sub-section (1) shall vest in the transferee the rights
in, or in relation to, the property transferred as if the transfer had been made by
the owner of such property.
(3) The Reconstruction Bank shall have the same rights and powers with re-
spect to goods manufactured or produced wholly or partly from goods forming
part of the security held by it, as it had with respect to the original goods.
(4) Where any action has been taken against an industrial concern under the
provisions of sub-section (1), all costs, charges and expenses which, in the opin-
ion of the Reconstruction Bank, have been properly incurred by it as incidental
thereto, shall be recoverable from the industrial concern and the money which is
received by the Reconstruction Bank shall, in the absence of any contract to the
contrary, be held by it in trust, to be applied, firstly, in payment of such costs,
charges and expenses and, secondly, in discharge of the dues of the Reconstruc-
tion Bank and the residue of the money so received shall be paid to the person
entitled thereto in accordance with his rights and interests.
(5) Where the Reconstruction Bank takes over the management or possession
of any industrial concern under sub-section (1), such industrial concern may sue,
and be sued, in its name.
40. Enforcement of claims by the Reconstruction Bank.—(1) (a) Where an
assisted industrial concern makes any default in the payment of any dues to, or in
meeting its obligation in relation to any other assistance given by the Reconstruc-

* Now Repealed by the Reconstruction Bank (Transfer of Undertaking and Repeal) Act, 1997 (Act 7
of 1997).

1379
1380 App. Spectal Recovery Powers under some Indian Laws
agreement with that
tion Bank or otherwise fails to comply with the terms of
Bank, of
section 38 requiring
(b) Where the Reconstruction Bank makes an order under tance
yment of any assis
the assisted industrial concern to make immediate repa
t,
granted to it and the industrial concern fails to make such repaymen
ion son 39 ofthis Act and ofsectio
secti 69nof
then, without prejudice to the provisof tion
the Recon
of r struc
the Transfer of Property Act, 1882 (4 of 1882), any office
may apply to the
Bank generally or specially authorised by the Board in this behalf,
ly :—
concerned High Court for one or more of the following reliefs, name
d, hy-
(i) for an order for the sale or lease of the property assigned, charge
pothecated, mortgaged or pledged to the Reconstruction Bank as secu-
rity forthe assistance granted toit, orfor the sale orlease ofany ether
ria
property, of the industconcer n,lor
(ii) for transferringthe managemeof nt to the Recon-
the industrial concern
struction Bank or to its nominee, or
(iii) for an ad interim injunction restraining the industrial concern from
transferring or removing its machinery, plant or equipment from the
premises of the industrial concern without the previous permission of
the Board, where such transfer or removal is apprehended, or
(iv) for an order for the appointment of a receiver where there is apprehen-
sion of the machinery, equipment or any other property of substantial
value which has been assigned, charged, hypothecated, | or
pledged to the Reconstruction Bank, being removed from the premises
of the industrial concern or of being transferred without the previous
is
of the
perm si
Reconstr on
uction Bank.
(2) An application under sub-section (1) shall state the nature and extent of the
liability of the industrial concern to the Reconstruction Bank, the ground on
which it is made and such other particulars as may be necessary for obtaining the
relief prayed for.
(3) Where an application is for any relief mentioned in sub- clause (i) of sub-
section (1), the High Court may, —
(a) by an order, authorise the Reconstruction Bank to grant lease of such
property to such person and on such terms and conditions as may be
specif ied
in the said order; or
(b) pass an order calling upon the person whose property has been as-
signed. charged, hypothecated, mortgaged or pledged to the Recon-
struction Bank to show cause, on a date to be specified in the notice, as
to why an order for the sale of such property or so much of such prop-

under this section, shall not be made; or

 Special Recovery Powers under some Indian Laws
App.8 1381
(c) pass an ad interim order attaching any property of the industrial
concern
which has not been assigned, charged, hypothecated, mortgaged
or
pledged to the Reconstruction Bank, or so much of such propert
y, as
would, on being sold, realise, in its estimation, an amount equivalent
in
value to the outstanding dues of the industrial concern to the Recon-
struction Bank, together with costs of the proceedings taken under this
section, and pass an order calling upon the industrial concern to show
Cause on a date to be specified in the notice as to why such order of ad
interim attachment shall not be made absolute.
(4) Where an application is for the relief mentioned in sub-clause (11) of sub-
section (1), the High Court shall issue a notice calling upon the industrial concern
to show cause, on a date to be specified in the notice, as to why the management
of the industrial concern shall not be transferred to the Reconstruction Bank or to
its nominee.
(5) Where an application is for the relief mentioned in sub-clause (iii) of sub-
section (1), the High Court shall grant an ad interim injunction restraining the
industrial concern from transferring or removing its machinery or other equip-
ment and issue a notice calling upon the industrial concern to show cause, on a
date to be specified in the notice, as to why such ad interim injunction shall not
be made absolute.
(6) Where an application is for the relief mentioned in sub-clause (iv) of sub-
section (1), the High Court shall pass an ad interim order appointing a receiver in
respect of the property assigned, charged, hypothecated, mortgaged or pledged
and shall issue a notice calling upon the industrial concern to show cause, on a
date to be specified in the notice, as to why the ad interim order appointing the
receiver shall not be made absolute.
(7) If no cause is shown, on or before the date specified in the notice issued by
the High Court, the Court shall forthwith—
(a) make an order for the sale of the property which has been assigned,
charged, hypothecated, mortgaged or pledged to the Reconstruction
Bank or so much of such property, as would, on being sold, realise, in
its estimation, an amount equivalent in value to the outstanding dues of
the industrial concern to the Reconstruction Bank, together with costs
of the proceedings taken under this section;
(b) direct the sale of the attached property or the transfer of the manage-
ment of the industrial concern to the Reconstruction Bank or to its
nominee;
and shall apply the proceeds of such sale for the discharge of the dues
to the Reconstruction Bank and the residue of such proceeds, if any,
shall be made over to the person entitled thereto in accordance with his
rights and interests;
(c) make the ad interim injunction made under sub-section (5), and the ad
interim order of appointment of the receiver made under sub-section
(6), as the case may be, absolute.
1382 App.5 Special Recovery Powers under some indian Laws

(3) Lf cause is shown, the High Court shall proceed to investigate the claim of
the Reconstruction Bank and the provisions of the Code of Civil Procedure, 1908
(5 of 1908), shall, as far as practicable, apply to such proceedings.
(9) On an investigation made under sub-section (8), the High Court may pass
an order, —
(a) for the sale of the property which has been assigned, charged, hypothe-
cated, mortgaged or pledged to the Reconstruction Bank or so much of
such property, as would, on being sold, realise, in its estimation, an
amount equivalent in value to the outstanding dues of the assisted in-
dustrial concern to the Reconstruction Bank, toget her
with costs of the
proceedings taken under this section, or
(b confi
~"
rming
the order of attachment and directing the sale of the attached
property, or the transfer of the management of the assisted industrial
concern to the Reconstruction Bank or to its nominee, or
(c varying the order of attachment so as to release a portion of the property
~

from attachment and directing the sale of the remainder of the attached
property,
and shall apply the proceeds of such sale for the discharge of the dues
to the Reconstruction Bank and the residue of such proceeds, if any,
shall be made over to the person entitled thereto, in accordance with his
rights and interests;
(d) releasing the property from attachment, if it is satisfied, that it is not
necessary in the interests of the Reconstruction Bank; or
(e) confirming or vacating the injunction or the order for the appointment
of the receiver:
Provided that when making any order under clause (d), the High
Court may make such further orders as it thinks necessary to protect the
interest of the Reconstruction Bank, and may apportion the costs of the
proceedings
in such manner as it thinks fit:
Provided further that unless the Reconstruction Bank intimates to the
High Court that it will not prefer an appeal against any order releasing
any property from any attachment, such order shall not be given effect
to until the expiry of the period fixed under sub-section (12) within
which an appeal may be preferred, or if an appeal is preferred, unless
the court empowered to hear appeals from the decisions of the said
High Court otherwise directs, until the appeal is disposed of.
_(10) An order of attachment or sale of property under this section shall be car-
ried into effect as far as practicable in the manner provided in the Code of Civil
Procedure, 1908 (5 of 1908) for the attachment or sale of property in the execu-
tion of a decree as if the Reconstruction Bank were the decree-holder.
(11) An order under this section transferring the management of any industrial
concern totheReconstruction Bankorto
itsnominee shallbecarried intoeffect,
as far as may be practicable, in the manner provided in the Code of Civil Proce-
dure, 1908 (5 of 1908) for the possession of immovable property or the delivery
 Special Recovery Powers under some Indian Laws App.8 = 1383
of movable property in the execution of a decree, as if the Reconstruction Bank
or its nominee were the decree-holder.
(12) Any party aggrieved by an order under sub-section (3), sub- section (7) or
sub-section (9) may, within thirty days from the date of the order, prefer an ap-
peal to the court empowered to hear appeals from the decisions of the High Court
which passed the order and the appellate court may, after hearing the parties, pass
such orders as it thinks proper.
(13) Nothing in this section shall be construed, where proceedings for liquidation
in respect of an industrial concern have commenced before an application is made
under sub-section (1), as giving to the Reconstruction Bank any preference over the
other creditors of the industrial concern not conferred on it by any other law.
41. Power of Reconstruction Bank relating to property offered as primary
or collateral security.—(1) Where a person has offered any property as security,
whether primary or collateral, for any assistance given by the Reconstruction
Bank to any industrial concern, or to such person, and a default has been commit-
ted by the industrial concern or by such person in the payment of any dues of the
Reconstruction Bank or in meeting any obligation in relation to the assistance
given by the Reconstruction Bank to the industrial concern aforesaid, the Recon-
struction Bank shall have the right to take over the management, or possession,
or both, of the property so offered as security, and shall have the right to transfer
by lease or sale the property aforesaid for the purpose of realising its dues.
(2) Any transfer of property made by the Reconstruction Bank, in exercise of
the powers conferred on it by sub-section (1), shall vest in the transferee, the
rights in or in relation to the property transferred as if the transfer had been made
by the owner of such property.
(3) Where any action has been taken under the provisions of sub-section (1),
costs, charges and expenses which, in the opinion of the Reconstruction Bank,
have been properly incurred by it as incidental thereto, shall be recoverable out of
the money received by the Reconstruction Bank by the sale or lease of the prop-
erty referred to in sub-section (1) and shall, in the absence of any contract to the
contrary, be held by it in trust, to be applied, firstly, in payment of such costs,
charges and expenses and, secondly, in the discharge of the dues of the Recon-
struction Bank and the residue of the money so received shall be paid to the per-
son entitled thereto in accordance with his rights and interests.
(4) The Reconstruction Bank may, instead of exercising the powers conferred
on it by sub-section (1), apply for the sale or lease of the property referred to in
sub-section (1) or for any other relief, to the High Court within the local limits of
whose jurisdiction the property aforesaid is situated, and, thereupon, the provi-
sions of section 40 shall, without prejudice to the provisions of section 69 of the
Transfer of Property Act, 1882 (4 of 1882), apply thereto as if the property afore-
said were the property referred to in section 40, and powers shall be exercisable
by the High Court accordingly.
42. Power of Reconstruction Bank to appoint directors or administrators
of an industrial concern when management thereof is taken over.—(1) When
 1334 App.s8 Special Recovery Powers wader some Indian Laws

ihe management of an industnal concern is taken Over by the Reconstrucuon

Bank, that Bank may, by order, notified in the Official Gazette, appoint as many
persons as it thinks fit, —
(a) in amy case in which the industrial concern is a Company, as defined in
the Companies Act, 1956 (5 of 1986) to be the directors of that indus-
trial concern; or
(b) in any other case, to be the administrator of that industrial concern,
(2) The power to appoint directors or administrators under this section includes
the power to appoint any individual, firm or body corporate to be the manager of
the industrial concern on such terms and conditions as the Reconstruction Bank
may think fit. )
(3) For the removal of doubts, it is hereby declared that the power to appoint
directors, administrators or managers includes the power to remove or replace the
person so appointed,
(4) Nothing in the Companies Act, 1956(1 of 1956)or in any other law for the
time being in force or in any instrument relating to the industrial concern shall, in
so far as it makes, in relation to a director, any provision for the holding of any
share qualification, age limit, restriction on the number of directorships, retire-
mentby rotation or removal from office, apply to any director appointed by the
Reconstruction Bank under this section.
43. Effect of notified order under section 42.—On the issue of a notified or-
der under section 42—
(a) if the industrial concern is a company as defined in the Companies Act,
1956(1 of 1956), all persons holding offi as directors
ce of the industrial
concern, and in any other case, all persons holding any office having
the powers of superintendence, direction and control of the industrial
concern, immediately before the issue of the notified order, shall be
deemed to have vacated their offices as such:
(b) any contract of management between the industrial concern and any
director or manager thereof holding office as such immediately before
the issue of the notified order shall be deemed to have terminated:

control, the property, effects and actionable claims to which the indus-

sisAck,1956 (of1996)aadochSee er ee
nies Act, 1956 (1 of 1956) and such directors, or,
the administrators, appointed under section 42, shall alone be
exercise all the powers ofthe directors, or, asthe case may be, ofthe
 Special Recovery Powers under some Indian Laws App.8 = 1385
persons exercising powers of superintendence, direction and control of
the industrial concern, whether such powers are derived from the said
Act or from the memorandum or articles of association of the industrial
concern or from any other source whatsoever.
44. Powers and duties of directors and administrators.—(1) Subject to the
control of the Reconstruction Bank, the directors, or, as the case may be,
the ad-
ministrators appointed under section 42, shall take such steps as may be neces-
sary for the purpose of efficiently managing the business of the industrial concern
and shall exercise such powers and have such duties as may be prescribed.
(2) Without prejudice to the generality of the powers vested in them under sub-
section (1), the directors, or, as the case may be, the administrators appointed
under section 42, may, with the previous approval of the Reconstruction Bank,
make an application to a court for the purpose of cancelling or varying any con-
tract or agreement entered into, at any time before the issue of the notified order
under section 42, between the industrial concern and any other person, and the
court may, if satisfied after due inquiry that such contract or agreement had been
entered into in bad faith and is detrimental to the interests of the industrial con-
cern, make an order cancelling or varying (either unconditionally or subject to
such conditions as it may think fit to impose) that contract or agreement and the
contract or agreement shall have effect accordingly.
45. No right to compensation for termination of contract of managing di-
rector, etc.—(1) Notwithstanding anything to the contrary contained in any con-
tract or in any law for the time being in force, no managing or whole-time direc-
tor or any other director or a manager or any person in charge of management of
an industrial concern shall be entitled to any compensation for the loss of office
or for the premature termination, under this Act, of any contract of management
entered into by him with such concern.
(2) Nothing contained in sub-section (1) shall affect the right of any such man-
aging or whole-time director, or any other director or manager or any such person
in charge of management to recover from the industrial concern, moneys recov-
erable otherwise than by way of such compensation.
46. Application of Act 1 of 1956.—(1) Where the management of an industrial
concern, being a company as defined in the Companies Act, 1956, is taken over
by the Reconstruction Bank, then, notwithstanding anything contained in the said
Aci or in the memorandum or articles of association of such concern, —
(a) it shall not be lawful for the shareholders of such concern or any other
person to nominate or appoint any person to be a director of the concern;
(b) no resolution passed at any meeting of the shareholders of such concern
shall be given effect to unless approved by the Reconstruction Bank;
(c) no proceeding for the winding up of such concern or for the appoint-
ment of a receiver in respect thereof shall lie in any court, except with
the consent of the Reconstruction Bank.
1386 App.8 Special Recovery Powers under some Indian Laws

(2) Subject to the provisions contained in sub-section (1) and to the other pro-
visions contained in tus Act and subject to such other exceptions, restrictions
and limitations, if any, as the Cenwal Government may, by notificavon im the
Official Gazette, specify in this behalf, the Companies Act, 1956, shall continue
lo apply lo such concern in the same manner as it applied thereto before the issue
of the notified order under section 42.
47. Restriction on filing of suits for dissolution, etc., of an industrial con-
cern not being a company when its management is taken over.—Where the
management of an industrial concern not being a company as defined in the
Companies Act, 1956 (1 of 1956), is taken over by the Reconstruction Bank, no
suit or proceedings for dissolution or for partition shall, in so far as it relates to
that industrial concern, lie in any court or before any tribunal or other authority
except with the consent of the Reconstruction Bank,
48. Official assignee or receiver not to be appointed without the consent of
the Reconstruction Bank.—No proceeding for the appointment of any official
assignee or receiver in relation to any industrial concern the management of
which has been taken over by the Reconstruction Bank shall lie in any court ex-
cept with the consent of the Reconstruction Bank.
49. Power of Central Government to grant relief in the case of certain as-
sisted industrial concerns.—(1) The Central Government may, if it is satisfied
on an application made to it by the Reconstruction Bank that it is necessary so to
do for the purpose of reconstructing, reviving or rehabilitating any assisted indus-
trial concern, declare by notification in the Official Gazette, that the operation of
all or any of the contracts, assurance of property, agreements, settlements,
awards, standing orders or other instruments in force (to which such assisted in-
dustrial concern is a party, or which may be applicable to such assisted industrial
concern) immediately before the issue of such notified order, shall remain sus-
pended or any rights, privileges, obligations and liabilities accruing or arising
thereunder before the said date, shall remain suspended or shall be enforceable
with such adaptations and in such manner as may be specified in the notified order.
(2) The notified order made under sub-section (1) shall remain in force, in the
first instance, for a period of two years, but the duration of such order may be
extended from time to time by a further notified order by a period not exceeding
two years at a time:
Provided that no such order shall in any case remain in force fot more than
eight years in the aggregate from the date of issue of the first notified order.
(3) Any notified order made under sub-section (1) shall have effect, notwith-
standing anything to the contrary contained in any other law, agreement or in-
strument or any decree or order of a court, tribunal, officer or other authority ot
of any submission, settlement or standing order.
(4) Any remedy fortheenforcement ofanyright, privilege, obligation orliabil-
ity referred to in sub-section (1) and suspended or modified by notified order
made under that sub-section shall, in accordance with the terms of that notified
 Special Recovery Powers under some Indian Laws App.8 1387

order, remain suspended or modified, and all proceedings relating thereto pend-
ing before any court, tribunal, officer or other authority shall accordingly remain
stayed or be continued subject to such adaptations, so, however, that on the noti-
fied orders ceasing to have effect—
(a) any right, privilege, obligation or liability so remaining suspended or
modified shall become revived and enforceable as if the notified order
had never been made;
(b) any proceeding so remaining stayed shall be proceeded with, subject to
the provisions of any law which may then be in force, from the stage
which had been reached when the proceeding became stayed.
(5) In computing the period of limitation for the enforcement of any right,
privilege, obligation or liability referred to in sub-section (1), the period during
which it or the remedy for the enforcement thereof, remained suspended shall be
excluded.
(6) During the period of operation of the notified order made under sub-section
(1), the Central Government may, if satisfied that it is necessary so to do in the
public interest,—
(a) for the reconstruction, revival or rehabilitation of an assisted industrial
concer; or
(b) for the proper management of the assisted industrial concern; or
(c) for scaling down the liabilities of the assisted industrial concern, where
the financial condition and other circumstances of the assisted industrial
concern are such that such scaling down in necessary,
authorise the Reconstruction Bank to prepare as scheme—
(i) for the reconstruction, revival or rehabilitation of the assisted
industrial concern; or
(ii) for scaling down the liabilities of the assisted industrial con-
cer; or
(iii) for the amalgamation of the assisted industrial concern with any
other industrial concern (referred to in this section as the “trans-
feree industrial concern’’).
(7) The scheme referred to in sub-section (6) may contain provisions for all or
any of the following matters, namely:—
(a) the constitution, name and registered office, the capital, assets, powers,
rights, interests, authorities and privileges, the liabilities, duties and ob-
ligations of the assisted industrial concern on its reconstruction, or, as
the case may be, of the transferee industrial concern;
(b) in the case of amalgamation of the assisted industrial concern, the trans-
fer to the transferee industrial concern of the business, propertics, assets
and liabilities of the assisted industrial concern on such term con-
and s
ditions as may be specified in the scheme;
1388 App.8 Special Recovery Powers under some Indian Laws

(c) amy change im the Board of Directors, or the appointment of a new

Board of Directors, of the assisted industrial Concern On its reconstruc.
tion, or, as the case may be, of the transferee industnal concern and the
authority by whom, the manner in which, and the other terms and con,
ditions on which, such change or appointment shall be made and in the
case of appointment of a new Board of Directors or of any director,the
period for which such appointment shall be made;
(d) the alteration of the memorandum and articles of association of the as-
sisted industrial concern on its reconstruction, or, as the Case may be, of
the transferee industrial concern for the purpose of altering the capital
thereof or for such other purposes as may be necessary to give effectto
the reconstruction or amalgamation;
(e subject to the provisions of the scheme, the continuation by, or against,
~~

the assisted industrial concern on its reconstruction or, as the Case may
be, the transferee industrial concern of any actions or proceedings pend-
ing against the assisted industrial concern immediately before the date
of the notified order made under sub-section (1);
(f) the reduction of the interest or rights which the members and other
creditors have, in, or against, the assisted industrial concern before its
reconstruction or amalgamation to such extent as the Reconstruction
Bank considers necessary in the interest of the reconstruction, revival or
rehabilitation of the assisted industrial concern or for the maintenance
of the business of the assisted industrial concern;
(g) the payment in cash or otherwise to the members and other creditors in
full satisfaction of their claitns—
(i) in respect of their interests or rights, in, or against, the assisted
industrial concern before the reconstruction or amalgamation;
or
(ii) where their interests or rights aforesaid, in, or against, the as-
sisted industrial concern has or have been reduced under clause
(f), in respect of such interests or rights as so reduced;
(h) the vesting of controlling interest, in the reconstructed industrial con-
cern, in the Central Government or its nominee either by the appoint-
ment of additional director or by the allotment of additional shares;
(i) the allotment to the members of the assisted industrial concern, for aty
share or shares held by them therein before its reconstruction or amal-
gamation [whether their interest on such shares has been reduced under
clause (f) or not], of shares in the assisted industrial concern on its re-
construction, or, asthe case may be, in the transferee industrial concern
and where any member claims payment in cash and not allotment of
shares, or where it is not possible to allot shares to any member, the
payment in cash to those members in full satisfaction of their claims.—
(i) in respect of their interest in shares in the assisted industrial
concern before itsreconstr or amalgamat
uctiion: on or
 Special Recovery Powers under some Indian
Laws App.8 1389
(ii) where such interest has been reduced under
clause (f), in re-
spect of their interest in shares as so reduced;
Gj) the continuance of the services of such of the
employees of the assisted
industrial concern as may be specified in the schem
e, in the assisted in-
dustrial concern itself on its reconstruction, or in
the transferee indus-
trial concern on such terms and conditions as may
be specified in the
scheme;
(k) notwithstanding anything contained in clause G),
where any employees
of the assisted industrial concern whose services are
proposed in the
draft scheme referred to in sub-section (2), have, by notic
e in writing
given to the Reconstruction Bank at any time before the
expiry of one
month next following the date on which the draft scheme
is sent to the
assisted industrial concern, intimated their intention of
not becoming
employees of the assisted industrial concern on its reconstruc
tion or in
the transferee industrial concern, the payment, to such emplo
yees, and
to other employees whose services have not been continued in
the as-
sisted industrial concern on its reconstruction or in the transferee
indus-
trial concern, of compensation, if any, to which they are entitled under
the Industrial Disputes Act, 1947 (14 of 1947), and such pension,
gratu-
ity, provident fund and other retirement benefits ordinarily admis
sible
to them under the rules or authorisations of the assisted industrial
con-
cern as in force immediately before the date of its reconstruction or
amalgamation;
(1) any other terms and conditions for the reconstruction or amalgamation
of the assisted industrial concern;
(m) such incidental, consequential and supplemental matters as are neces-
sary to secure that the reconstruction or amalgamation shall be fully and
effectively carried out.
(8) (a) A copy of the scheme prepared by the Reconstruction Bank shall be
sent, in draft, to the assisted industrial concern and also to the transferee indus-
trial concern and any other industrial concern concerned in the amalgamation for
suggestions and objections, if any, within such period as the Reconstruction Bank
may specify for this purpose;
(b) The Reconstruction Bank may make such modifications, if any, in the draft
scheme as it may consider necessary in the light of the suggestions and objec-
tions received from the assisted industrial concern and as also from the transferee
industrial concern, and any other industrial concern concerned in the amalgama-
tion and from any members or other creditors of such industrial concerns and the
transferee industrial concern:
Provided that where the transferee industrial concern is a company, the scheme
aforesaid shall be laid before such company in the general meeting for the ap-
proval of the scheme by its members and no such scheme shall be proceeded with
unless it has been approved, with or without modification, by a special resolution
passed by the members of such company.
1390 App.38 Special Recovery Powers under some Indian Laws

(9) The scheme shall thereafter be placed before the Central Government for its
sanction and the Central Government may sanotion the scheme withoul any
modifications or with such modifications as it may consider neoessary, and the
scheme as sanctioned by the Central Government shall come into force on such
date as the Central Government may specify in this behalf:
Provided that different dates may be specified for different provisions of the
scheme.
(10) For the purpose of assisting it to exercise the powers conferred on it by
sub-section (9), the Central Government may constitute an advisory committee
consisting of such officers of the Central Government, Reserve Bank, State Bank,
public financial institutions and nationalised banks, having knowledge of, or ex-
perience in, or more of the following matters, namely;—
(a) industry and industrial sickness;
(b) finance and banking;
(c) industrial relations;
(d) law;
as it may think fit.
(11) The sanction accord Central Government under sub-section (9)
by theed
shall be conclusive evidence that all the requirements of this scheme relating to
the reconstruction, or, as the case may be, amalgamation, have been complied
with and a copy of the sanctioned scheme certified in writing by an officer of the
Central Government to be a true copy thereof, shall, in all legal proceedings
(whether in appeal or otherwise) be admitted as evidence to the same extent as
the original scheme.
(12) On and from such date of the coming into operation of the scheme or any
provision thereof, the scheme or such provision shall be binding on the assisted
industrial concern, or as the case may be, on the transferee industrial concern,
and any other industrial concern concerned in the amalgamation and also on all
the members and other creditors and employees of each of those assisted indus-
trial concerns and of the transferee industrial concern, and on any other person
having any right or liability in relation to any of the assisted industrial concerns
or the transferee industrial concern including the trustees or other persons manag-
ing, or connected in any other manner with, any provident fund or other fund main-
tained by any of those industrial concerns or the transferee industrial concern.
(13) On and from such date as may be specified by the Central Government in
this behalf, the properties, and the assets of the assisted industrial concern shall,
by virtue of, and to the extent provided in the scheme, stand transferred to, and
vest in, and the liabilities of the assisted industrial concern shall, by virtue of, and
to the extent provided in, the scheme stand transferred to, and become the liabili-

(14) If any difficulty arises in giving effect to the provisions of the scheme,
Central Government tny,bycules, d0anying, Sitoneniee Une ety.
 Special Recovery Powers under some Indian Laws
App.8 1391
visions, which appears to it to be necessary or expedient for
the purpose of re-
moving the difficulty.
(15) Copies of the scheme or of any order made under sub-section (14)
shall be
laid before each House of Parliament, as soon as may be, after the scheme
has
been sanctioned by the Central Government, or, as the case may be, the
order has
been made.
(16) Where the scheme is a scheme for amalgamation of the assisted
industrial
concern, any business acquired by the transferee industrial concern under the
scheme or under any provisions thereof shall, after the coming into operation of
the scheme or such provision, be carried on by the transferee industrial concern,
in accordance with the law governing the transferee industrial concern, subject to
such modifications in that law or such exemptions of the transferee industrial
concer from the operation of any provisions thereof as the Central Government,
on the recommendation of the Reconstruction Bank, may, by notification in the
Official Gazette, make for the purposes of giving full effect to the scheme:
Provided that no such modification or exemption shall be made so as to have
effect for a period of more than seven years from the date of the acquisition of
such business.
(17) Nothing in this sub-section shall be deemed to prevent the amalgamation
with an assisted industrial concern by a single scheme of several industrial con-
cerns in respect of each of which an order has been made under sub-section (1) of
this section.
50. Power of High Court to authorise Reconstruction Bank to prepare
scheme for reconstruction, etc., of industrial concern.—(1) Where any com-
pany, being an industrial concern, is being wound up by the High Court, and the
High Court is of opinion that a scheme should be made for the reconstruction,
revival or rehabilitation of such industrial concern, it may, by order, authorise the
Reconstruction Bank to prepare, and submit to it, a scheme for such reconstruc-
tion, revival or rehabilitation of the industrial concern.
(2) The Reconstruction Bank may, in pursuance of the order made by the court
under, sub-section (1), prepare a scheme for the reconstruction, revival or reha-
bilitation of the industrial concern referred to in sub-section (1), and the scheme
so made may contain all or any of the maters specified in sub-section (7) of sec-
tion 49: Provided that no such scheme shall provide for the amalgamation or
merger of the company in liquidation or any undertaking owned by it with any
other company, or any other undertaking owned by such other company, except
on the authority of a special resolution passed by the members of that other com-
pany.
(3) The High Court may, if it is satisfied, after considering the scheme prepared
under sub-section (2), that the scheme ensures the reconstruction, revival or re-
habilitation of the industrial concern which is a company being wound up by the
court; and such reconstruction, revival or rehabilitation would ensure an increase
in the production of goods needed by the community, approve the scheme with or
1392 «~App.8 Special Recovery Powers under some Indian Laws

without any modification and the scheme so approved shall have effect, notwith-
standing anything to the contrary contained in any other provisions of this Act or
any other law, or any agreement, award or other instrument for the time being in
force.
51. Chief Metropolitan Magistrate and District Magistrate to assist Re-
construction Bank in taking charge of property.—(1) Where any property,
effects or actionable claims have been sold or leased in pursuance of any power
conferred by section 39, section 40 or section 41 or where the management of an
industrial concern is taken over by the Reconstruction Bank or its nominee or an
undertaking or an industrial concern is amalgamated under section 49, the Re-
construction Bank or the administrator or any director, or any other person
authorised by the Reconstruction Bank may, for the purpose of taking into cus-
tody or control any such property, effects or actionable claims, may, request in
writing the Chief Metropolitan Magistrate or the District Magistrate within
whose jurisdiction any property or books or account or other documents relating
to such property or effects or actionable claims may be situated, or found, to take
possession thereof, and the Chief Metropolitan Magistrate or the District Mapis-
trate, as the case may be, shall, on such request being made to him,—
(a) take possession of such property, effects or actionable claims and books
of account and other documents relating thereto, and
(b) forward them to the Reconstruction Bank, administrator, director or
other person, as the case may be.
(2) For the purpose of securing compliance with the provisions of sub-section
(1), the Chief Metropolitan Magistrate or the District Magistrate may take or
cause to be taken such steps and use, or cause to be used, such force as may, in
his opinion, be necessary.
(3) No act of the Chief Metropolitan Magistrate or the District Magistrate done
oer Es secon. steal)BeGame Ae APRS AAILE Ee
authority.
 SUBJECT INDEX
A

1988 Capital Accord, of the Bank for International Settlements, p. 216

e SEE ALSO “Basle IT”

Abatement, of proceedings under BIFR, ¢ SEE “Sick companies”

ABS, ¢ SEE “Asset-backed security”

Acceleration, Notice of, e SEE ALSO “Recall notice’’, p. 985

Accounting for asset reconstruction companies, consolidation of trusts, p. 652

in respect of assets acquired as trustee, p. 627

Accounting for securitisation, as per RBI guidelines, pp. 106, 264

Guidance note of ICAI, text of, p. 108
in India, p. 106

Accounting for security, acquired by banks, p. 650

Accounting for SPV, in Indian guidance note, p. 96

under international accounting standards, p. 653

Accounting for trusts set up by ARCs, consolidation with primary beneficiary,

p. 653
Generally, p. 648

Accounting profits, and securitisation, in India, p. 96

and securitisation, p. 70
e SEE ALSO “Gain on sale”

Accretion bonds, p. 60

Accrual bonds, p. 60 '

Action under 13(4), e SEE UNDER “Security interests”

Actionable claims, and Financial asset compared, p. 824

and receivables, p. 824

1393
1394 SUBJECT INDEX

Actionable claims (Conéd.)

meaning of, pp. 98, 825
security receipt as, p. 871
takeover of possession under this law, p. 1008
transfer of, in India, pp. 98, 901

Ad valorem fees, for application to DRTs, #SBE UNDER “Application”

Adjudication of liability, as not provided by this law, p. 1001
whether DRTs to do in application by borrower, pp. 1128, 1129

Administrative receiver, and winding up, p. 733

in UK law, p. 1027
meaning of, p. 729

Advance, meaning of, p. 817

After-acquired property, security interests on, under article 9 of UCC, p. 716

Agency costs, and securitisation, p. 18

Agricultural land, security interest

on, not covered under this law, p. 1173

Aircraft, meaning of, p. 1169

security interests in, p. 1169

Alternative remedies, for enforcement of security interests, «She “Choice of

remedies”

AMC, ¢ SEE “Asset management companies”

Amount
due, and debt, p. 806
where less than 20%, p. 1175

Anomalous mortgage, meaning, p. 721

against asset reconstruction company’s action, p. 942
against notice u/s. 13 (2), p. 988
against secured creditors’ action, pp. 1106, 1108
applicability of Section 5 of Limitation Act in preferring,p. 1123
deposit of money, pp. 1124, 1135
eligibility to file, p. 1114
limitation, p. 1123
meaning of, p. 767
SEE ALSO “Application”
to Appellate Tribunal, p. 1137
under RDB law, p. 754
under SARFAESI law, deposit of money, p. 767
versus application, p. 1106
 SUBJECT INDEX 1395

Appellate Tribunal, definition of, p. 784

ad valorem fees for, p. 1134
and appeal, pp. 1106, 1132
anticipatory or prior to the measures u/s. 13(4), p. 1108
by other lenders, p. 1113
by third parties, p. 1114
deposit of money, p. 1124
disposal of, time limit for, p. 1132
eligibility to file, p. 1114
fees for application, ad valorem, p. 1134
limitation, p. 1123
review of order, p. 1134
time limit for disposal of, p. 1132
e SEE ALSO “Appeal’’
e SEE ALSO “Stay of proceedings”
Arbitrage securitisations, under RBI guidelines, p. 226
Arbitraging opportunities, and securitisation, p. 226
Arbitrage transactions, of securitisation, p. 854

Arbitration and Conciliation Act, and SARFAESI Act, p. 1197

Arbitration, agreement for, p. 949

and conciliation, p. 949
for resolution of disputes under this law, p. 949
of disputes between the bank and the borrower, p. 949

ARC, Asset reconstruction companies, pp. 517-532

Arms length basis, of credit enhancement, p. 249

Article 122a, CRD, EU, history of, p. 211

generally, p. 212
risk retention, p. 212 213
CRD IV Package, EU, p. 214

Article 9, UCC, USA, generally, pp. 714

history of, p. 714

Articles of association, of SPVs, sample clauses in, p. 1212

Asset backed securities, listing of, in India, p. 103

meaning of, pp. 7, 882, 888
e SEE “GenerallySecuritisation”

Asset based financing, and entity-based financing, p. 33

and securitisation, p. 34, 67
1396 SUBJECT INDEA

Asset management companies, AMC, pp. 445-4380

nies, Pp. 448
Asset management companies, and asset reconstruction Compa
approach, to resolving NPLs, pp. 453
centralised, advantages and disadvantages of, p. 452
centralised, pp. 452, 621
China, in, p. 477
Germany, in, p. 479
india, in, pp. 453, 621
Indonesia, in, p. 476
Japan, in, p. 458
Korea, in, p. 460
Malaysil, in, p. 462
Mexico, in, p. 456
multiple, versus single, p. 452
ownership of, p. 453
Philippines, in, p. 471
private versus government-owned, p. 452
success of, factors, p. 480
Thailand, in, p. 473
USA, in, p. 453

Asset management, and asset reconstruction, p. 785

accounting for, p. 627
acquisition of performing assets by, p. 785
acquistion of assets, mode of, p. 631
and asset management companies, pp. 448, 946
and collective investment devices, p. 922
and trusts, pp. 634, 641
application for registration, appeal against rejection, p. 895
application for registration, format, p. 1288
application for registration, rejection, p. 891
approaches to realisation of assets, p. 785
as secured creditor, p. 863
asset management function, p. 946
assets held as trustees, p. 627
business of, pp. 855, 945, 946
cancellation of certificate of registration, p. 894
cancellation of registration, appeal against, p. 895
capital requirement for, pp. 620, 637, 881
directions
of the RBI, ¢ SEE ALSO “Securitisation
and asset reconstruction
company directions”
directions of the RBI, pp. 627, 950
eligibility norms, p. 620
enforcement of security interests by trusts of, ¢ SEE ALSO “Enforcement of
security interests” p. 981
 SUBJECT INDEX 1397

Asset management (Contd. )

foreign investments in, p. 637
formation of, p. 620
funding of, p. 627
guidance note of the RBI, p. 675
guidelines of the RBI, ¢ SEE “Securitisation and asset reconstruction com-
pany directions”
history of, p. 619
in India, compared with other countries, p. 617
in India, review of activity, p. 622
independent directors in, p. 888
investment in security receipts, p. 640
investment in the capital of, p. 627
law of, p. 621
motivations for, p. 629
net worth requirement, pp. 641, 882
non performing assets, recognition, p. 641
notifications,
overview of performance, in India, pp. 622, 624
performance of, p. 621
performing assets, acquisition of, p. 785
powers of, p. 934
profitability of, p. 887
purchase and sale of assets by, p. 786
receivership function, p. 947
recovery agency function, p. 946
registration of, p. 620
sale of assets by, p. 786
securities to be issued by, nature of, p. 868
security receipts issued by, investment in, PP. 638-639
special powers of, p. 621
takeover guidelines of the RBI, p. 943
taxation of, p. 649
trusts formed by, pp. 641, 937
e SEE ALSO “Asset management companies”
e SEE ALSO UNDER “Asset Reconstruction”

Asset reconstruction company, as public financial institution, pp. 629, 849

meaning of, p. 619

Asset reconstruction, business of, under the law, p. 879

definition of, pp. 619, 785
history of the phrase, p. 785
meaning realisation, p. 879
outside the SARFAESI Act, p. 631
e SEE ALSO “Asset reconstruction companies”
1398 SUBJBCT INDEX

Asset sales, and securitisation, pp. !4

and securitisation, pp. 40
eSEE ALSO “Direct Portfolio transfer”
p, 6
Asset securitisation, and generic meaning of securitisation,
generally, Sth “Securitisation”
Asset-backed bonds, p. |2

Asset-backed commercial paper, meaning, pp. 13, 43

Asset-backed lending, global relevance of, p. 696
Asset-backed notes, p. | 2

Asset-backed securities, as “securities” in India, p. 99

Asset-backed security, meaning of, p. 7

vs. future flows, p. 11
vs. mortgage-backed security, p. 12
e SEE ALSO “Securitisation”

Assignment of receivables, in portfolio sales, p. 47

Asset-based financing, securitisation, as a mode of, p. 34

Assignment of receivables, meaning of, pp. 12, 866
UNCITRAL draft relating to, p. 702

Assignment,and novation, p. 906

for security interest, p. 866
meaning of, p. 866
of actionable claims, restrictions on, p.603, 901
of benefits not obligations, p. 906
of conditional receivables, p. 831
of contracts, as distinct from receivables, p. 906
of future debt, e SEE ALSO UNDER “Future flows”, p. 830
of obligations, p. 907
of part of a receivable, p. 825
of receivables, as distinct from contract, p.906
of rights, not to include liabilities,
oral, under this law, p. 903
partial,
p. 825

Attachment,and takeover of possession under this law, pp. 1008, 1012

certain properties not liable to, under civil law, p. 1170
of receivables,
under this law, p.1030
under Civil law, compared with possession under this law, p.1012
 SUBJECT INDEX 1399

Authorised officer, and receiver appointed by courts, ¢ SEE “Receiver”

meaning of, pp. 1082, 1230
notice not signed by, struck down, p. 1231

B
Bailment, and pledge, pp. 724, 797
meaning of, p. 798

Balance sheet transactions, of securitisation, p. 853

Bank for International Settlements, ¢ SEE “Basle IT’

Bank, and Banking companies, p. 787

definition of, p. 787

Banker’s books, as evidence, e SEE “‘Evidence”’

meaning of, p. 992

Banking business, debt in course of, p. 806

Banking Companies, and banks, p. 787

Banking company, definition of, p. 787

meaning of, p. 746

Banking crises, and non performing loans, p. 425

Banking system, ¢ SEE ALSO “Banks”

Banking, ¢ SEE ALSO “Banks”

Bankruptcy remote entity, meaning of, pp. 222, 856

e SEE ALSO “Special purpose vehicle”

Bankruptcy remote transfer, ¢eSEE ALSO “True sale’’, p. 13

Bankruptcy remoteness, and minimal capital, p. 240

concept of, pp. 13, 222, 856, 1219
rating agency criteria for bankruptcy-remote SPVs, p. 1219
e SEE ALSO “Special purpose vehicle”’

Bankruptcy, and true sale, p. 230

Banks, failure of, and securitisation, p. 25

off balance sheet assets of, p. 24
opacity of, due to securitisation, p. 25
securitisation by, p. 39 Az}
transparency of banking reduced by securitisation, p. 25
1400 SUB.ECT INDEA

Pp. 232
Basle LI, condition of wansfer of msks and rewards,
credit conversion factor under, p. 258
generally, p. 216
impact of, on securitisation, Pp. 101
implementation in India, p. 101
by originator,
risk weights for below-investment grade securities held
p. 254
risk weights for securities held by originator, pp. 235, 239
ator, under RI]
Below-investment grade securities, acquisition by the origin
guidelines, p. 239
risk weights in case of, under Basle II, p. 254
'
Beneficial interest certificates, and debt, p. 925
and security receipt, p. 925
in pass-through structures, p. 48
meaning of, p. 12
nature of, p. 925

Beneficial interest, and legal interest, pp. 96, 868

in case of pass through certificates, p. 868
meaning of, p. 871
retention of, by the seller, under RBI guidelines, p. 232
security receipt as, pp. 868, 871
transferability of, p. 870

Beneficial ownership, of assets by investors, p. 237

Beneficial Property, and legal property, p. 97

BIFR, ¢ SEE “Sick companies”
Bills discounting, as credit facility, p. $19
Board for Industrial and Financial Revival, ¢ SEE “Sick companies”
Bond structure, ¢ SEE “Pay through structure”
Bond, and debentures, p. 901
meaning of, p. 902

Bonds or debentures, subscribed, meaning of, p. 818

Book debts, charges on, ¢ SEE “Floating charge”

Borrower, compensation in case of wrongful measures, p. 1137
counter claims of, p. 1182
defences of, in case of SARFAESI action, p. 978
 SUBJECT INDEX 1401
Borrower (Contd.)
definition of, p. 794
derivative transactions, in the context of, pp. 801, 802
discharge, p. 1038
liability of, ¢ SEE “Adjudication”
meaning of, p. 794
related to financial assistance, p. 794
relief against apprehended action, e SEE ALSO “Stay of proceedings”
relief against apprehended action, p. 999
representation by, ¢ SEE “Borrower's representation”
right of, to compensation, p. 1137

Borrower's representation, against notice u/s. 13(2), p.993

contents of, p. 997
mandatory power, p. 993
not a quasi-judicial proceeding, p. 996
response of the bank to, pp. 997, 998
time limit for, p. 997

C
Call option, and prepayment risk, under RBI guidelines, p. 239
and true sale, p. 234
clean up, SEE “Clean up call option’’

Callable bonds, and asset backed securities, p. 239

Capital adequacy requirements, and securitisation, p. 68

first loss support and, eSEE under‘First loss”
for asset reconstruction companies, pp. 620
for liquidity facility, p. 258
for securitisation companies, p. 950
for SPVs, under RBI guidelines, pp. 240, 857
second loss support and, ¢ SEE UNDER “‘Second loss”
e SEE ALSO “Basle IP’,
e SEE ALSO “Capital Relief”’
Capital markets, and securitisation, p. 9

Capital norms, eSEE “‘Capital adequacy requirements”

Capital relief, as motive of securitisation business, p. 950
as motive of securitisation business in India, pp. 77, 83, 95
SEE “Capital adequacy requirements”

Capital requirements, ¢ SEE “Capital adequacy requirements”

Cash securitisation, meaning, pp. 17
e SEE ALSO “Synthetic securitisation”
1402 SUBJECT INDEX

392
Cash flows, subsequent sale of, pp. 269-271, 389,
CRD IV Package, EU, Article 122a, repl aces , pp. 214, 215
373
Credit enhancement, classification of, pp. 372-

Cash structure, ¢ She “Cash securitisation”

CDOs, ¢ See “Collateralised Debt Obligations”

CDR, « See “Corporate debt restructuring”

Caveat, right to lodge, p. 1144

notice of, p. 1145
time of filing, p. 1145
validity of, p. 1146

Central Registry, definition of, p. 803

and Central Registry rules, p. 1150
st
Central Registry of Securitisation, Asset Securitisation and security Intere
of India, p. 1149-1150
for registration of particulars under the Factoring Regulation Act, p. 1156
legal provisions for, p. 1150
¢ SEE “Land Titling Bill”

Certificate proceedings, under the RDB Act, p. 753

Certification of sale, ¢ SEE “Sale certificate”

Chapter 11 (US Bankruptcy code), ¢ SEE “Reorganisation”

Charge, and hypothecation, p. 839
and mortgage, pp. 718, 719, 840
and simple mortgage, p. 723
ingredients of, p. 840
meaning of, pp. 723, 839
financial asse
sfer
modification of, upon tranof t,915
pp. 907,
on future property, p. 841
rights in case of, p. 723

Chattel mortgage, meaning of, p. 724

e SEE ALSO “Movable property”
Cherry picking, of assets in securitisation,
p. 8
of receivables,pp. 31

Chief Metropolitan Magistrate, assignment offunction by. p. 1094

delegation of powers of, p. 1093
notice to borrower by, p. 1097
challenge to decision, whether possible, p. 1096
 SUBJECT INDEX 1403

Chief Metropolitan Magistrate (Contd.)

nature of function of, p. 1093
to take possession of secured assets u/s. 14, pp. 1091
e SEE ALSO “Takeover of possession”

Choice of remedies, doctrine of election, pp. 972

doctrine of election, pp. 977
DRT proceedings and those under this law, p. 973
duty of good faith in, p. 1002
in debt recovery, pp. 536, 970, 971
parallel proceedings under this law and other laws, p. 971
SARFAESI v. civil suit,

Choice of remedies, SARFAESI v. RDB law, pp. 971

SARFAESI v. winding up, pp. 971, 978
simultaneous exercise of common law remedies, pp. 1038
workout, ¢ SEE “Workout approach”

Civil courts, jurisdiction of, barred in certain cases, p. 1178

jurisdiction of, under SARFAESI Act, p. 767

Civil jurisdiction, counter claims of the borrower, p. 1182

in case of action by ARCs u/s. 9, p. 943
ouster of, basic principles, p. 1179
principles of ouster of, p. 1179
third parties, rights of, p. 1185
versus special courts, pp. 1180, 1181
where available, p. 1183

Civil suit, and SARFAESI law, ¢ SEE “Choice of remedies”

Clean up call option, retention of, and true sale, pp. 235, 248, 902

CLOs, ¢ SEE “‘Collateralised Loan Obligations”

CMBS, SEE “Commercial mortgage backed securities”

CMOs, « SEE “Collateralised Mortgage Obligations”

Collateral structure, of securitisation transactions, p. 45
versus pass-through structure, p. 45
SEE ALSO “‘Pay through structure”

Collateral, as central in laws of secured lending, p. 696

future property as, p. 701
global security as, p. 701
non-possessory, p. 702
tangible and intangible, p. 701
1404 SUBJBCT INDEX

Collateral (Conéd. )
types of, as per World Bank paper, p. 700
e SEE ALSO “Security interests”

Collateralised Debt Obligations, generally, p. 57

Collateralised lending, Set “Secured lending”

Collateralised Loan Obligations, generally, p. 57

in India, pp. 77, 86

Collateralised mortgage obligations, generally, pp. 57

'
Co-mingling risk, and floating charge, p. 728
in case of staggered payment structures, p, 87
meaning of, pp. 262, 918
provisions under RBI guidelines, p. 262

Co-mingling, of amounts received as servicer, p. 917

Trust law provisions relating to, p. 918
e SEE “Commingling”

Commercial Mortgage backed securities, in India, pp. 82, 84

Commercial paper, as instance of securitisation, p. 6

asset backed, p. 43
meaning of, p. 43

Commercially reasonable conduct, ¢ SEE UNDER “Unreasonable conduct”

pp. 5
Commoditisation of assets, and securitisation,
Companion bonds, inCMOs, p. 59

Compensation, of the borrower, in case of wrongful measures, ¢ SBE UNDER

“Borrower”
prepayment protecting class, p. 58
e SEE ALSO “Support Class”’, p. 59

Compromise, as a workout method, 352

as a workout method, p. 734
under Companies Act, p. 734
and arbitration, pp. 948, 949
e SEE ALSO “One time settlement”

Conditional receivables, as financial asset, p. 831

Conditional
sale, creating a mortgage, pp. 720
a mortgage. pp. 965
creating
 SUBJECT INDEX 1405
Conditional sale (Contd. )
foreclosure in, p. 965
not covered under this law, pp. 1169, 1170

Conduit structures, and RBI guidelines, p. 219

sponsors in, pp. 226
activity, pp. 14, 886
in relation to SPV, p. 882

Confirmation of sale, and takeover of possession, p. 1013

¢ SEE ALSO “Sale certificate”

Conflict of laws, special versus general, ¢ SEE UNDER“‘Special laws”

Consolidation (accounting), accounting standards, p. 652

of trusts set by ARCs, p. 650
subsidiary, meaning of, p. 653

Consolidation (legal), and bankruptcy remoteness, p. 856

of SPV with originator, pp. 226, 227, 888
e SEE ALSO “Special Purpose vehicles”

Consortium lending, and enforcement of security interests, p. 1058

Contingent receivables, as financial asset, p. 831

Control, meaning of, p. 831

meaning of, for consolidation accounting standard, p. 889
surrender of, as true sale condition, p. 232

Controlling interest, defined, p. 831

Conveyance, and oral transfers, p. 903

Conveyance, need for, in transfer of actionable claims in India, pp. 98, 903

Cooperative banks, applicability of Act to, p. 788

as banks under DRT law, p. 746
as banks under SARFAESI law, pp. 788, 1284
eligibility for, in India, p. 528
in case of SMEs, p. 528
in different countries, p. 518
in India, pp. 341, 734
institutional framework for, p. 521
legal basis for, p. 528
London Approach, p. 518
outside CDR system, p. 518
performance of, in India, p. 526
1406 SUBJBCT INDEX

Cooperative banks (Contd. )

small enterprises and, p. 529
special cases of restructuring, P- 518
text of Scheme for small companies, p, 604
text of Scheme, pp. 581, 595
voluntary arrangements and, p. §21
ns for, p. 523
Corporate debt restructuring,common conditio
14
Correlation, impact of, on a securitised pool, Pp.

Corresponding new bank, definition of, p. 803

Cost of funding, and securitisation, pp. 21, 62

Cover Assets, legal preference by isolation, p. 8

e SEE “Covered Bonds”, p. 9n

Covered Bonds, alternative to securitisation, p. 9n
cover assets, p. 9n
legal preference by isolation, p. 8
securitisation and ring fencing, p. 42
¢ SEE ALSO “Pfandbriefs”’ p. 42

Creation of security interests, laws relating to, p. 688

procedures for, p. 700

Credit card companies, securitisation by, p. 39

Credit cards, securitisation of, SEE UNDER “Revolving assets securitisation”

Credit conversion factor, under Basle II, p. 239

Credit decisions, abdication of, in securitisation context,

Credit derivatives, and risk management, p. 16

and securitisation, p. 17
meaning, p. 17

Credit enhancement, and equity in corporate finance, p. 223

and leveragp. e,36
and liquidity facilities, p. 255
and quali ty p. 36
of assets,
and rating,p.224
as a cost of securitisation,p. 21
by originator, p. 17
concep of,t p.223
 SUBJECT INDEX 1407
Credit enhancement (Contd.)
concept of, under RBI guidelines, pp. 224, 248
extent of, p. 83, 88, 92
form of, in India, p. 88
mezzanine piece, p. 87
minimum level, p. 378
owned funds and, p. 882
release of, p. 251
reset guidelines on, pp. 286, 369, 375
resetting of, pp. 286, 369, 375
size of, in India, p. 88
size of, under RBI guidelines, p. 251
third party, p. 96

Credit events, in credit derivatives, p. 17

e SEE ALSO “Credit derivatives”

Credit facilities, covered under this law, pp. 817, 819

meaning of, p. 817

Credit Information Bureau, specialised credit information company, p. 506

Credit Information companies, FDI policy for, p. 510

in India, statute relating to, p. 508
legal provisions, text of, p. 555.
private, p. 509

Credit information, disclosure of, legal provisions in RBI Acct, text, p. 539
under RBI Guidelines, pp. 296, 300, 313-315, 345, 346, 354-356

Credit risk, and credit enhancement, p. 236

e SEE ALSO “Credit derivatives”

Creditor, secured, ¢ SEE “Secured creditor’

Cross-border insolvency, UNCITRAL Model, law on, p. 713

Cross-sector risk transfers, and cecuritionsictn, p. 30

Crown dues, versus secured creditor's rights, p. 1071

Danaharta, Malaysian AMC, p. 462

restructuring principles, p. 495
statutory provisions, p. 487
1408 SuBIBCT INDEX

in case of debentures held by non.

Debenture holder, applicability of this law,
banking entities,

Debenture trust deed, meaning of, p. 902

etee,
Debtrus ur
as secur
nt etor, pp. 861, 862
ed credi

Debenture, and bond, p. 90!

and floating charge, p. 727

issuance of, upon acquisition of assets of securitisa-

Debenture,
tion/reconstruction companies, p. 903
may be taken as conveyance under the law, pp. 903
meaning of, p. 901
security receipts under this law, p. 870

Debentures, and securitisation, p. 6

meaning of, p. 819
subscribed, meaning of, p. 819

Debt recovery law, administrative machinery, p. 745

genesis of, p. 511
history of, pp. 511, 743
in India, p. 743

Debt recovery law, remedies under the, p. 976

Debt recovery tribunals, advantages of, p. 732

appeals under RDB law, p. 754
banker's viewpoint, p. 537
certificate proceedings under, p. 753
counterclaim, under the RDB law, p. 752
definition, p. 808
determination of debt under, p. 754
disadvantages of, p. 732
effectiveness of, p. 512
jurisdiction of, p. 745
pecuniary jurisdiction of, p. 749
performance of, p. 513
power of, restoring possession by interim order, p. 1131
powers of, under the RDB law, p. 753
recoveries under, p. 513
scope and powers of, p. 1109
secured creditor and rights under RDB law, p. 557
social viewpoint, p. 536
territorial jurisdiction of, p. 750
winding up, and, compared, pp. 538
 SUBJECT INDEX 1409

Debt recovery tribunals (Contd.)

versus SARFAESI] law, pp. 538, 769
versusCivil courts, p. 744

Debt recovery, bankers’ viewpoint, p. 537

choice of remedies, ¢ SEE ALSO “Choice of remedies”
choice of remedies, p. 536
options, criteria for choosing, pp. 537
social viewpoint, p. 536

Debt securities, issued by special purpose vehicles in securitisation, p. 868

e SEE ALSO “Pay through certificates”

Debt, and actionable claim, pp. 825

and actionable claim, pp. 825
and beneficial interest certificates, p. 925
and receivable compared, p. 825
derivatives claims of banks, whether, p. 808
in course of banking business, p. 806 |
into shares, conversion of, p. 806
meaning of, pp. 747, 800

Debtor creditor agreement, as basis of corporate debt restructuring, p. 528

Debtor notification, ¢ SEE “Obligor notification”

Debtor, principal, ¢ SEE “Principal debtor”

e SEE ALSO “Obligor”

Declaratory provisions, effect of, on existing contracts, p. 772

Decree of sale, ¢ SEE “‘Sale of assets”

Deduction of tax at source, ¢ SEE “Withholding tax’’

Default, amount in, p. 816

and directions of the RBI, p. 808ff
definition of, p. 808
elements of, p. 810
NPA definition and, pp. 810
e SEE ALSO “Non performing loans”

Defaulters, disincentives for, p. 510

income tax disincentives to, p. 510
willful, ¢ SEE “Willful defaulters”

Defaulting borrowers, Credit Information Bureau, e SEE UNDER “Credit Infor-

mation Bureau”
1410 SUBIJBCT INDEX

Defaulting borrowers, disclosure of list of, statutery provisions, p. 502

list of, circulation as moral pressure, p. 248

Deferred credit facility, as credit facility, p. 819

Deferred sale consideration, as a device for recapturing excess spread

Definition, comprehensive, p. 817

inclusive, p. 817

Delivery of property, as essential in pledge, p, 724

Demand notice, u/s. | 3(2), ¢ See “Notice” |sec, 13(2)],

et (accounting),« Sen “Off balance sheet treatment”
Derivative transactions, recovery in connection with, under the Act, p. 800

Derivatives, Credit, say Credit Derivatives,

Diamond Report, on registration of security interests in UK, p. 717

Direct assignment, in India, pp. 92

in India, pp. 96
vs. securitisation, p. 92

Direct assignment,e SEE ALSO “Direct Portfolio transfer”

Direct credit substitutes, meaning of, p. 819

Direct portfolio transfer, and RBI guidelines, p. 219

and securitisation, compared, p. 47
e SEE ALSO “Asset sales”
Discharge, of borrower, upon payments under this law, p. 1045

Discounting of bills, and credit facilities, p. 819

Discrete trust, versus master trust, pp. 46, 880

companies not in liquidation, p. 1063

under civil law, p. 1063
© SEE ALSO “Priorities”
@ SEE ALSO “Workers’ dues”

aan etee on securitisation transactions, introduced, the Finance Act

 SUBJECT INDEX 1411

District magistrate, and Chief Judicial magistrate, pp. 1093

and Chief Judicial magistrate, pp. 1093, 1096
to take possession of assets u/s. 14, p. 1086
e SEE ALSO “Takeover of possession”
e SEE ALSO “Chief Magistrate”

Diversification, and leverage, p. 36

as a feature of asset-backed securities, pp. 14, 36
generally, p. 36

Diversion of funds, meaning of, p. 504

Doctrine of election, of alternative remedies, eSEE “Choice of remedies”

Dodd-Frank Act, US, credit risk retention, regulation of, p. 215

history of, p. 215

Dollar for dollar capital, in case of first loss support, p. 253

DRT, ¢ SEE UNDER “Debts Recovery Tribunal”

Early Amortisation Triggers, and liquidity risk, p. 222

in revolving assets securitisation, p. 57

Economic equity, versus legal equity, p. 872

Economic recession, and securitisation, p. 20

Ejusdem generis, doctrine of, pp. 819, 1084

Employees, rights of, in case of action by secured creditors, p. 1185

Enforcement of security interests, and workout, choosing between, p. 730

appointment of manager, p. 1030
as distinct from enforcement of claims of the secured lender, p. 960
attachment of receivables u/s. 13(4)(d), p. 1031
autonomy in, p. 702
by trusts of asset reconstruction companies, p. 981
duty of good faith, p. 1002
effect of action u/s. 13(4), p. 1037
elements of, p. 983
fair and equitable action in, p. 966, 1007
floating charges, in case of, eSEE ALSO “Floating charges”
generally, pp. 692, 959.
good faith, duty of, p. 1002
Homogeneous assets, meaning of, p. 269
i412 SUBJECT INDEA

Enforcement of security interests (Conéd.)

Homogeneous pool of obligors, p. 270
in case of companies in liquidation, p. 1006
in case of muluple secured creditors, ¢SBE UNDER “Multiple security inter-
ests”
laws relating to, p. O88
Legislative guide, pp. 711-712
limitations on, p. 960
manager, appointment of, p. 1030
modern laws on, p. 714
nature of powers of CMM/DM, Section 14, pp. 1088
nature of proceedings, p. 971
notice u/s, 13(2), ¢ SBE “Notice” (sec. 13 (2)],
overview of, in India, p. 730
pooling of, p. 270
possession of assets, ¢ SEE “Takeover of possession”
priorities and, p. L058
recommendations on, as per UNCITRAL, p. 710
rules on, p. 1229
sale of assets by secured creditor, p. 1031
sale of assets by secured creditor, ¢ SEE ALSO UNDER “Sale of assets”
scope of assets, p. 969
selection of asset to, p. 967
stay of proceedings, ¢ SEE “Stay of proceedings”
takeover of possession of assets, ¢ SEE “Takeover of possession”
under special laws, p. 732
under this law, p. 959.
India, options, comparative view, p. 730
self help, under article 9 of UCC, p. 715
self help, under this law, p. 961
e SEE ALSO “Secured Transactions”

Entrustment,
and hypothecation, p. 726

Equitable assignment,
of future flows, p. 831

Equitable mortgage, meaning of, p. 721

transfer of receivables
backed by, p. 932

Equity of redemption, and foreclosure, p.722

meaning of, p. 722
underthis law, p. 1052
 SUBJECT INDEX 1413

Equity share, and securitisation, compared, p. 6

as obligation to distribute, p. 6n

Equity, and credit enhancement, p. 224

and first loss support in securitisation transactions, p. 872
legal and economic, p. 872
legal, thin size of, in case of SPVs, p. 242
meaning of, for consolidation accounting standards, p. 653
meaning, under accounting standards, p. 872
meaning, under law, p. 872

Evidence, bankers’ books as, p. 992

of sum demanded by the secured creditor, p. 992

Excess spread, and credit enhancement, 205

and transfer of pool at par value,
meaning of, pp. 23, 32
e SEE ALSO “Residual profit”

Exclusive jurisdiction, principles of, pp. 1180

principles of, pp. 745
e SEE ALSO “Civil jurisdiction”

Execution proceedings, and enforcement of security interests, p. 971

Executory clauses, in assets, securitisation and, p. 37

Executory contracts, and securitisation, p. 37

Existing assets, in securitisation, p. 42

Expected loss, in securitisation, p. 254

meaning of, p. 253
multiples of, p. 254
e SEE ALSO “Credit enhancement’

Exposure, in case of securitisation, eSEE “Securitisation exposure”

Factoring, and asset reconstruction, p. 880

and credit facility, p. 820
and securitisation, p. 41

Filing of security interests, and perfection, p. 715

e SEE ALSO “Perfection of security interests”

Financial asset, and Financial assistance compared, pp. 820

1414 SUBIJBCT INDEX

Financial asset (Contd.)

and Financial assistance compared, pp. 833
definition of, pp. 821, 822
transfer of, with all equities etc, p. 908
under Accounting standards, p. 825
under UNCITRAL model law, p. 823

Financial assistance, and Financial asset compared, p. 833

and secured debt, p. 864
definition of, pp. 817, 833
derivative transactions, whether, p. 802
:
Financial companies, securitisation by, p. 38

Financial institution, definition of, p. 837

housing finance companies as, p. 838
Public financial institutions as, p. 837
to include financial companies, upon notification, p. 838
under the RDB law, p. 838

Financial lease, as credit facility, p. 820

Financial leverage, structured finance increasing, p. 21

First loss facility, and economic equity, p. 872

as per RBI guidelines, p. 224

First loss risk, and second loss risk, as per RBI guidelines, pp. 225
and second loss risk, as per RBI guidelines, pp. 252
capital requirements in case of, pp. 254
meaning of, pp. 15, 224, 225
originator’s retained, capital consequences under RBI guidelines, p.
relation with retained risks, p. 231
retained by third parties, capital consequences, p. 254
retention of first loss risk by originator, p. 16
@SEE ALSO “Second loss risk”

Fixed charge, and floating charge, p. 858

priority of, over floating charges, p. 728

Fixtures, removal of, in taking over of possession, p. 1020

Floaters,
p. 60

in case of, p. 1007

Floating charge, action u/s. 13(4)
and after-acquired property under article 9 of UCC, p. 716
and debenture, p. 727
and fixed charge, p. 858
 SUBJECT INDEX 1415
Floating charge (Contd.)
and hypothecation, p. 725
and mortgage, p. 719
and preferential creditors, p. 729
and receivership, p. 728
and secured asset under this law, p. 858
application of this law to, p. 860
ascertainment of the asset, p. 858
crystallisation of, pp. 729, 860, 1008
enforcement of security interests in case of, p. 1007
features of, p. 859
future property, p. 841
generally, pp. 727, 842, 859
history of, p. 727
in global context, p. 701
in secured loan structure of securitisation, pp. 45
manager, in case of, p. 729
meaning of, pp. 842, 859, 1007
origin of, p. 727
preferential claims and, pp. 859
receiver, in case of, pp. 728, 860
recent case law on, p. 735
subordination to fixed charges, p. 729
subordination to preferential claims, pp. 859, 860
takeover of management of business in case of, p. 1028
undertaking, charge on, p. 727
e SEE ALSO “Administrative receivership”
e SEE ALSO “Collateral, Global security”

Foreclosure, and equity of redemption, p. 722

and right of sale, p. 721
as right of mortgagee, e SEE ALSO UNDER “‘Mortgagee”’
as right of mortgagee, p. 722
meaning of, pp. 965, 1008

Formal workouts, and informal workouts, p. 734

revival of sick companies, p. 514
e SEE ALSO “‘Workout approach”

Fractional interests, in receivables, as financial asset, p. 826

Funding cost, ¢ SEE “Cost offunding”

Future flow securitisation, and asset-backed, compared, pp. 11
and asset-backed, compared, pp. 42, 63
as different from existing asset, pp. 11, 42
cross border future flows, p. 62
1416 SUBJECT LNDEA

Future flow securitisation (Conéd. )

motivations in, p. 62
structure of, p. 58

Future flows, as debi, p. 830

assignment of, under the law, Pp. 830
equitable assignment of, p. 831

Future flows, meaning of, p. |!

Future property, assignability of, pp. 727

assignability of, pp. 830
charge on, p. 841
e SEE ALSO “Floating charge”

Future receivables, ¢ SEE “Future flows”

G

Gain on sale, amortisation of, computation of, in India, p. 106

in securitisation, motive in India, p. 82
under RBI guidelines, p. 264
e SEE ALSO “Accounting profit”

General law, to recede to special laws, p. 1192

Global security interests, laws relating to, p. 701

Good faith, action taken in, protected, pp. 1176

=. of, implicit in enforcement of security interests, pp. 1002,

e SEE ALSO “Unreasonable conduct”

Guarantee, meaning of, p. 797

Guaranteed Investment contract,in pay through structure,

Guarantor,
and principal debtor, p. 797
and security provider, p. 797
as Borrower, p. 795
as primary borrower under the law, p. 983
enforcement of security interest, p.1079
liability of, pp. 795
proceeding against, independent of action u/s. 13(4), p. 1080
rights of, p. 1080
takeover of assets of, p. 1030
¢ SEE ALSO “Surety”
 SUBJECT INDEX 1417

H
Hard bullet classes, p. 929

Hire purchase, as credit facility, p. 820

not covered under this law, p. 1170

Holding company, meaning of, p. 889

Housing finance companies, as financial institutions, upon notification, pp. 838,

1284

Hypothecation, and charge, p. 839

and entrustment, p. 726
and floating charges, pp. 725
and mortgage, pp. 725, 797
and pledge, pp. 725, 840
as non possessory security interest, pp. 718, 725, 843
definition of, pp. 725, 839
nature of, pp. 726
possession of goods in, pp. 725, 842
reputed ownership and, p. 725
rights of hypothecatee, p. 725
e SEE ALSO “Non-possessory security interest”

Immovable properties, affixation of notice of possession, eSEE ALSO “‘Notice of

possession”
affixation of notice of possession, p. 1016
attachment, under civil law, p. 1014
security interests in, in India, e SEE ALSO UNDER “‘Mortgages”’
security interests in, in India, p. 719
takeover of possession of, p. 1010

Impairment, and RBI provisions about non-performing assets, p. 652

Implicit support, by the originator, p. 250

e SEE ALSO “Reputational risk”

Income recognition, in case of pass through securities, under RBI guidelines,

pp. 263
in case of pass through securities, under RBI guidelines, pp. 263

Non-performing asset, in case of pass through securities, under RBI guidelines,

pp. 263
14158 SUBJECT INDEX

styuchon compa:
independent directors, on boards of securilsauion and recon
nies, p. 535

indian Securitisation, ¢ Sek “Securitisation Marketin India”

informal workouts, and formal workouts, p. 734

compromise, ¢ SEE “Compromise”
in India, p. 518
risk management, 2005 World Bank principles on insolvency and creditor
rights principles, p. 705
e SEE ALSO “Corporate debt restructuring”
SEE ALSO “Workout approach”

Injunction, ¢ SEE “Stay of proceedings”

Insolvency laws, and corporate winding up, pp. 733

World Bank principles on, p. 706

Inter-creditor agreement, as basis for corporate debt restructuring, p. 528

Inter-creditor arrangement, structured funding as, p. 8

Interest only strip, accounting for, p. 289

in pass throughs, p. 53
meaning of, p. 289

Interest rate risk, and securitisation, p. 70

Interest, and principal, allocation of, p. 1175

where becomes principal, pp. 1175, 1177

Inverse floaters, p. 60

by the originator, under RBI guidelines,

Investment grade securities, purchase
p. 239

Investors, beneficial ownership of, p. 237

consent of, required under RBI guidelines, p. 237
investing in securitisation, p. 41
meetings of, asset of 75%, pp. 926, 929
meetings of, in case of bonds, p. 927
meetings of, in case of pass-through certificates, p. 927
meetings of, under this law, p. 927
rights of, under this law, p. 927
voting by, under this law, pp. 929, 930

IOs, ¢ SEE “Interest

Only Strip”
 SUBJECT INDEX 1419

Isolation of assets, and securitisation, pp. 10

and true sale, p. 230

Issuer, features of, for securitisation, p. 38

in securitisation, p. 13

J
Joint security interest, e SEE “Multiple security interests”

Jurisdiction, exclusive, in case of loans acquired by ARCs, p. 912

of civil courts, e SEE UNDER “‘Civil jurisdiction”
of DRT in applications under sec. 17, p. 1116-1119
pecuniary, in case of DRTs, pp. 750, 1134
e SEE UNDER “Exclusive jurisdiction”

Jus ad rem,in case of charges, p. 723

in case of mortgages, p. 723

Lease, not covered under this law, p. 1170

Legal equity, e SEE UNDER “Equity”

Legal maturity, in asset-backed securities, p. 929

Legal opinion, as a true sale condition, p. 237

Leverage, and diversification, p. 36

and securitisation, pp. 22, 950
excessive, created by securitisation, pp. 24
limits on, set by capital adequacy norms, p. 950.
e SEE ALSO “Credit enhancement”
e SEE ALSO “Financial leverage”

Liability of the borrower, determination of, ¢ SEE “Adjudication of liability”

Lien, created by statute, not covered under this law, p. 1168

Lifting or piercing of corporate veil, doctrine of, p. 856

Limitation, applicability of, under RDB law, p. 755

debts barred by, not recoverable under this law, p. 1198

Limited liability partnership, as special purpose vehicle, p. 240

Liquidation, ¢ SEE UNDER“ Winding up”’

1420 SUBJECT INDEX

mies in Winding
Liquidator, association of, with sale of assets in case of Compa
up, p. 1066

Liquidity facility, and credit enhancement, Pp. 255

capital consequences of, p. 258
forms of, p. 225
from third parties, under RBI guidelines, p, 257
meaning of, p. 225
under RBI Guidelines, pp. 225, 256
draw downs under, recovery of, p. 259

Liquidity risks, and early amortisation triggers, p. 222

Liquidity support, as a form of exposure, p. 222

e SEE ALSO “Liquidity facility”

Listing, Securitized Debt Instruments, p. 104

e SEE ALSO “Asset Backed Securities”

Loan participations, whether loan granted, p. 817

Loan, meaning of, p. 817

Lok Adalats, in recovery of non performing loans, p. 513

Loss support, by originator, under RBI guidelines, p. 244

© SEE “Second loss”
e SEE “First loss”

Management, change in, for asset reconstruction, pp. 937

change in, for asset reconstruction, pp. 938
takeover, of borrower's business, for asset reconstruction, p. 937
e SEE ALSO UNDER “Takeover ofmanagement”
Manager,
and receiver, pp. 1031
and receiver, pp. 728
appointment of, u/s. 13(4)(c), p. 1029

Marketable security, meaning of, p. 871

Master trust structure,pp. 46, 850
Maximum risk retention, under RBI Guidelines, p. 287
MBS, ¢ SEE “Mortgage-backed
security”

Memorandum of association, of SPVs, sample clauses in, p. 1212

 SUBJECT INDEX 1421

Mezzanine pieces, market for, p. 87

Minimum Holding Period, applicability of, p. 305

commencement of, p. 305
inapplicability of, p. 306
objective of, 305
under RBI Guidelines, p. 75

Minimum Risk Rentention, by originators, under RBI Guidelines, PJD

Brazil, in, p. 216
Canada, in, p. 216
categories of, p. 281
cooperative banks, p. 791
Dodd Frank Act, US, pp. 215, 289
EU Regulations on, Art. 122a Capital Requirements Directive, p. 211
Germany, in, p. 216
Japan, in, p. 216
maintenance of, p. 285
US Credit Risk Retention Act on, p. 215

Mobile equipment, ¢ SEE “Movable property”

Modification, of security interests, p. 1158

Monetary policy, and securitisation, p. 31

Moral hazard, generally, p. 24

non performing loans and, p. 425

Moral turpitude, meaning of, p. 889

Mortgage debt, as financial asset, p. 828

transfer of, p. 828

Mortgage financiers, securitisation by, p. 38

Mortgage, and charge, pp. 719

and charge, pp. 719
and floating charges, p. 719
and hypothecation, pp. 59, 114, 725
and transfer of property, pp. 719
anomalous, pp. 721, 866
by conditional sale, pp. 720, 866, 965
by deposit of title deeds, p. 721
definition of, p. 866
enforcement, under this law, p. 962
English, pp. 721, 866
enterprise, p. 701
1422 SUBIBCT INDEX

Mortgage (Coad.)
equitable, p. 721!
foreclosure of, ¢Skt “Fereclesure”
indivisibility of, pp. 1059
ingredients of, p. 719
meaning of, pp. 719, 797, 866
personal remedies, p. 964
redemption of, pp. 722, 964, 965
sale, suit for, p. 965
simple, p. 866
types of, p. 720
usufructuary, pp. 721, 866

Mortgage-backed bonds, p. 54

Mortgage-backed security, investments in, under SEBI Regulations, p. 12%

vs. asset-backed security, pp. 12, 43

Mortgage-backed, and asset-based securities, p. 43

Mortgagee, foreclosure by, ¢ SEE ALSO “Foreclosure”

foreclosure by, pp. 722, 965
joint, pp. 1059
personal remedies of, p. 964
right of foreclosure, only in certain cases, p. 722
right of sale of mortgaged property, pp. 721, 965
rightsof, ¢ SEE “Secured lender”
rights of.pp. 722, 965
rights of, under TP Act, p. 965
sale of property, p. 965
whether trustee for the borrower, pp. 1033

Mortgagor, right to create tenancy, p. 1016

Movable property, mortgage of, pp. 724, 798

possession, takeover of, p. 1009
security interests
in, law in India,p.723
security interests
in, UNIDROIT model, p. 723
¢ SEE ALSO “Pledge, Hypothecation”
Multiple security interests, action by consent of 75%, modalities, p. 1060
effect of agreement among creditors,p. 1062
in case of mortgages,p. 1059
provisions
of this law regarding, p. 1057
Multi-state co-operative banks, as banks under SARFAES] Act, p. 791
 SUBJECT INDEX 1423

Multi-state Cooperative banks, cooperative banks, p. 788

Mutual funds, and securitisation/reconstruction companies, p. 922

investments by, in securitisation in India, p. 104

N
Natural justice, principles of, applicable under RDB law, p. 755
principles of, in enforcement of security interests, p. 1034

Natural justice, e SEE ALSO “Unreasonable conduct”

Net owned fund, and owned fund under the law, p. 882

Net worth, meaning of, p. 882

Non-discretionery trusts, in case set up by ARCs, p. 650

Non-obstante clause, in sec pp. 13, 962

meaning of, p. 899
scope of, generally, pp. 963, 1193
scope of, in sec 13, p. 963
sweep of, p. 900
under RDB law, p. 757

Non-performing asset, as necessary for invoking action under this law, p. 983
classification, in case of banks, as per RBI norms, p. 811
classification, in case of financial companies, as per RBI norms, p. 812
definition of, in case of housing finance companies, p. 814
definition of, p. 843
directions of the RBI, relevant for Default,
impairment provisions, RBI regulations, p. 652
in case of asset reconstruction companies, p. 641
in case of pass through securities, under RBI guidelines, pp. 263
transfer by banks, RBI guidelines on, p. 641
transfer of, p. 273
e SEE ALSO “‘Non performing loans”
e SEE ALSO “‘Prudential norms”

Non-performing loans, and financial crisis, p. 425

and moral hazard, p. 425
and securitisation, p. 769
and state banking, pp. 426
data, p. 427
disclosure of, p. 654
discrete view, purchase of, p. 533
disposal of, by banks in India, p. 530
1424 SUBIBCT INDEX

Non-performing loans (Conéd.)

global problem of, p. 426
hard approach, p. 469
investment in, p. 481
Japan, p. 440
junk assets, p. 621
moral pressure, p, 502
portfolio view, purchase of, p. 533
pricing of, by DanahartaMalaysia, p. 466
problem of, global data, p, 427
problem, in Asia, p. 438
problem, in India, 279, 327ff., p. 764
purchase of, portfolio or discrete view, p. 533
rapid sale approach, p. 452
requisites for sale, for buying bank, p. 532
requisites for sale, for slling bank, p. 531
resolution of, choice of remedy, p. 536
sale of, by banks in India, p. 531
sale of, by banks in India, RBI guidelines, p. 621, , 670
soft approach, p. 469
sold, disclosure of, p. 654
stock and flow problem, p. 445
e SEE ALSO “Willful defaulters”
acqiusition of, use of trusts, p. 641
China, p. 440
India, measures taken, p. 501

Non-possessory
security interest, as per World Bank paper, p. 701
e SEE ALSO “Hypothecation”

Notice [Sec. 13 (2)], contents of, p. 991

defects in, p. 989
demand notice, meaning of, p. 1231
freeze on assets after receiving, p. 1079

maintainability
of writ petitions against, p. 990
mode of service, p. 993
need for, as mandatory requirement,
p. 985
procedure, p. 985
scope of, p. 984
service of, pp. 985, 1233
technical defects in, p. 989
Notice of acceleration, ¢ SEE ALSO “Acceleration”,
p. 985
 SUBJECT INDEX 1425

Notice of possession, in case of immovable properties, affixation of, p.

1015
post possession notice, p. 1005
pre-possession notice before taking measures, p. 1004

Novation, and assignment, p. 906

NPAs, ¢ SEE “‘Non performing loans”

O
Obligor notification, and retention of servicing with originator, p. 916
by transferee, p. 914
effect of absence of, pp. 914, 916
effect of, pp. 238, 916
generally, p. 913
need for, p. 711
under common law, p. 913
under English law, p. 914
under Indian law, p. 914
under this law, p. 913

Obligor, consent of, for transfer of the asset, p. 238

definition of, p. 779
notification of, upon transfer of financial asset, eSEE UNDER“Obligor noti-
fication”
Off-balance sheet assets, and securitisation, p. 24
tables of, p. 24

Off-balance sheet funding, and securitisation, pp. 24, 68

Off-balance sheet treatment, and true sale, p. 229

general principles, p. 651
in case of assets sold by banks to ARCs, p. 651

Offences, by companies, p. 1177

cognizance of, p. 1164
under this law, p. 1164

On-balance sheet standard assets, meaning of, p. 333

One time settlement, scheme in India, p. 530

Operating revenues securitization, p. 43

Oral transfer, under this law, p. 903

Ordinary share, and securitisation, compared, p. 5

1420 SUBIBCT INDEX

overview and volumes,

Originate toDistribute Model, market activity, market
p. 79

loanat
Origin ing of, p. 818
, meaned

Originator, and arbitrage transactions, p. 853

and below investment grade securities, p. 239
and investment grade securities, Pp. 239
and special purpose vehicle, transactions between, Pp. 242
and sponsor, pp. 226, 871
and transferor, p. 226
as re-packager, p. 11
as servider, p. 32
buy back of assets by, p, 234
call option held by, p. 235
definition of, p. 844
first loss, eSEE UNDER“First Loss”
market making by, under RBI guidelines, p. 239
meaning of, pp. 11, 844
meaning of, under RBI guidelines, p. 226
moral obligation of, in respect of securitisation, p. 235
name of, reflection in the name of the SPV, p. 242
purchase of subordinated securities by, under RBI guidelines, p. 239
recourse to, SEE ALSO “Recourse”
reputational risk, p. 235
retention of beneficial interest, p. 232
retention of residual profits, p. 232
second loss, ¢SEE UNDER“Second loss”
settler, originator as, under RBI guidelines, p. 243
trustees, business with, p. 244

Originator,e SEE ALSO “Sponsor”

recouse to, under RBI guidelines, p. 234

Orphan entity, not having any parent, and consolidation, pp. 856
not having any parent, and consolidation,pp. 926
special purpose vehicle as,sp. 888
e SEE ALSO “Consolidation”
tion,
credit enhancement,
asralisa
Over-coliate p. 21

Owned fund, and credit enhancement,p. 882

and net owned fund, p. 882
meaning of, p. 882
 SUBJECT INDEX 1427

Parallel proceedings,eSEE UNDER“Choice of remedies”

d creditors,
Pari passu,allocation of secured assets between workmen and secure
p. 1069
claims of workmen with secured creditors in winding up, Pp. 736
rule as distribution of sale proceeds of secured assets, p. 1048
ts”
security interests, enforcement of, eSEE “Multiple security interes

Partial assignment, common law rules as to, p. 827

Participation certificate, and pass through structure, p. 48

Pass through rate, meaning of, p. 925

Pass-through certificates, and debt securities, p. 263

as form of security in India, p. 84
Securities Act (India), p. 84
Pass-through certificates, as securities under the
beneficial interest in case of, p. 868
distribution tax, effect of, p. 125
interest in case of, pp. 263
interest in case of, pp. 868
legal nature ol, p. 9)
meaning of, pp. 12, 48, 853
nature of, pp. 50, 755
senior and junior, p. 52
taxation of, p. 51
eSEE ALSO “Pass-through structure”
of, p. 550
Pass-through structure, accounting in case
advantages of, p. 50
and pay-through, compared, pp. 36, 56
and stripping of interest, p. 52
difficulties of, p. 51
explained, pp. 36, 48
in mortgage market, p. 48
modified, p. 51
steps in, p. 49
rnational accounting standards, p. 550
Pass-through treatment, under inte

Pawn,eSEE “Pledge”

Pawnee, right of, p. 724

Pawnor, default of, p. 724

1428 SUBIJBCT INDEX

p. 755
Pay through securities, as debt securities,
e SEE ALSO “Pay through structure”
p. 45
Pay through structure, and collateral structure,
explained, p. 36

Pay-through certificates, meaning of, p. 12

56
Pay-through structure, and pass through, compared, pp. 36,
explained, p. 54
steps in, p. 54

Pay-through, securitisation, p. 54
e SEE ALSO “Collateral structure”

Penalties, under this law

p. 716
Perfection of security interests, as basis for priorities under arucle 9,
laws relating to, p. 688
meaning of, p. 688
registration procedures, efficiency of, p. 703
under UK law, p. 716
e SEE ALSO “Registration provisions”

Performing assets, acquisition of, by ARCs, p. 785

Personal Property security laws, and SARFAESI Act, p. 97

Personal remedy, of the secured lender, p. 964

Pfandbriefs, ¢SEE ALSO “Covered Bonds”, p. 42

Physical possession,eSEE “Takeover of possession”

Planned amortisation class, p. 59
protection against prepayment risk, p. 54
e SEE ALSO “Support Class, Companion Bonds”, p. 59

Pledge of movables, not covered under this law, p. 1168

Pledge, and bailment, p. 724
and hypothecation, pp. 725, 840
delivery essential in, p. 724
enforcement of security interest, p. 724
excluded from this law, p. 1168
explained, p. 1168
generally, p. 724
meaning, pp. 724, 798, 1168
 SUBJECT INDEX 1429

Pledge (Contd.)
perfection in case of, p. 716
rights of the pawnee in, p. 724
sale of assets, p. 1078

Pledged assets, rights against, p. 724

Portfolio sales,eSEE “Asset sales”

POs,eSEE “Principal Only”

Possession, discretion of actual or symbolic, p. 1010

either actual or constructive, p. 1010
takeover of, eSEE “Takeover of possession”
e SEE ALSO “Symbolic possession”

Possessory security interest, and non-possessory security interest, p. 701

SEE ALSO “Pledge”
Preamble, relevance of, in interpretation of a law, p. 761

Pre-deposit, on appeals to appeallate authority, eSEE UNDER “Appeals”

Preference share, whether credit facility, p. 821

Preferential creditors, and floating charges, pp. 729, 857, 858

crown dues as, eSEE “Crown dues”

Prepayment risk, and call option, under RBI guidelines, p. 239

and life insurance companies, p. 96
and pass through structure, p. 53

Principal debtor, and guarantor, p. 797

Principal Only, strips, in pass throughs, p. 53

Principal, and interest, appropriation, p. 1175

Principles of natural justice,eSEE “Natural justice”

Priorities, between first and subsequent charges, p. 1055

between fixed and floating charges, p. 1055
in money on sale of asset by secured creditor, pp. 1047, 1049
in winding up, pp. 736
under common law, p. 1059
under insolvency law, p. 1060
under UCC law, p. 1051
whether to be ignored in enforcement of security interests, p. 1055
e SEE ALSO “Distribution of sale proceeds”
 eSEE ALSO UNDER ‘ele proceate”
English law, p. 716
Priority of security interests, based on contract, under
based on perfection, under Article 9, p. 716
in Diamond Report, p. 717
eSEE ALSO “Priorities”

Priority rules, as per UNCITRAL legislative guide, p. 703

as per World Bank paper, p, 703

Priority Sector Lending, in India, pp. 93

Indian securitisation market, relates to, p. 94
norms on, in India, p. 78
qualifying portfolios, p. 78
RBI's Master Circular, 94
Report of the Nair Committee on, p. 94
sectors, categorised as+E 1233, p. 94

rties not liable to attachment, under Civil law, eSEE UN-

DER“Attachment”’

Property, definition of, p. 845

general meaning of, p. 845

Proportional payment structure, in securitisation, p. 251

Protection buyer,eSEE ALSO “Credit derivatives”’, p. \7
Protection seller,eSEE ALSO “Credit derivatives”, p. 17
es,
under
Provisioning, in case ofpass through securiti RBI guidelines, p. 263
Prudential norms, for SPVs, as per RBI guidelines, p. 240
in case of financial institutions, p. 811
e SEE “Income recognition”
@SEE “Provisioning”
PTCs,eSEE “Pass through certificates”
Public charity, holding residual interest in securitisation, p. 926
Public financial institutions, asset reconstruction companies as, p. 629
criteria for being declared as, p. 834
meaning of, p. 837
under the Companies Act, p. 837
 SUBJECT INDEX 1431

Public offer, meaning of, p. 921

Purposive construction, principle of, p. 761

Put option, under RBI Guidelines, p. 239

Q
Qualified Institutional Buyer, Alternative Investment Funds notified as, p. 895
as investors in security receipts, pp. 895, 920, 921
definition of, p. 847
inclusive of ARCs, p. 848
Non-Banking Financial Companies notified as, p. 896
under SEBI guidelines, p. 686
e SEE ALSO “Investors”

Qualifying special purpose entity, under US accounting standards, pp. 243, 651,
856, 1215

Ramp up period, for acquisition of assets for securitisation, p. 921

Rapid sale approach, to resolution of NPLs, p. 452

Rating arbitrage, and securitisation, p. 66

Rating, ability to target a rating in securitisation, p. 67

as condition, under RBI guidelines, p. 244
better ratings with securitisation, p. 71
credit enhancements and, p. 224
need for, in securitisation, p. 16
of issuer, irrelevance in securitisation, p. 67
of originator, p. 16
of senior security as a function of credit enhancement by junior security,
p. 16
resilience of, in asset-backed securities, p. 71
eSEE ALSO “Credit rating” .

RBI Guidelines on securitisation, and conduit structures, p. 219

bilateral assignments, restrictions on, p. 94
computation of gain on sale, p. 106 ©
credit enhancements under, p. 223
generally, p. 209
impact of, p. 100
non-compliance, impact of, p. 217
of 2006, pp. 143-171
of 2012, pp. 78-80
1432 SUBIBCT INDEX

KBI Guidelines oa securitisation (Conéd.)

rewospective application of, p. 219
Revised guidelines on securitisation, pp. 78, 82, 86, 87, 93, 94, 100, 102
scope of applicability, p. 220

RBI Guidelines,eSt& “RBI Guidelines on securitisation”

Real estate finance companies, securitisation by, p. 38

Real Estate Lnvestment Trusts, in India, p, 54

Real estate, security interests on, excluded under Article 9, p, 715

Realty,eSEE “Real estate”

Reasonable conduct,eSEE UNDER“ Unreasonable conduct”

Recall notice, relevance of, p. 985

Receipt, in context of security receipt, p. 869

meaning of, p. 869
transferable, p. 868

Receivable, and actionable claims, p. 825

meaning of, pp. 825, 825

Receivables, features of, for securitisation, p. 14

Receiver, administrative, ¢SEE ALSO “Administrative receiver”

administrative, p. 729
and manager, pp. 1029
and manager, pp. 728
appointment of, under Indian law, pp. 728, 1030
meaning of, p. 729

Receivership, and floating charges, pp. 728, 860

as permitted business of reconstruction companies, p. 947
development of concept of, p. 728
purpose of, p. 1030
eSEE ALSO “Administrative receiver”

Recession, and securitisation, p. 20

Reconstruction
company, definition of, p. 849
¢ SEE “Asset reconstruction company”
Reconstruction,meaning of, pp. 880, 936
¢ SEE ALSO “Asset reconstruction”
 SUBJECT INDEX 1433

Recourse, and put option on securities of SPV, p. 239

and representations and warranties, p. 245
and true sale, p. 234
in securitisation transactions, p. 35
transfer of receivables in securitisation, p. 32

Recovery officer, under RDB law, p. 745

Redemption, and foreclosure, p. 965

equity of, under this law, p. 1052
in case of pledge, p. 724
right of, as inherent in mortgages, p. 722
eSEE ALSO “Foreclosure”

Registration of security interests,eSEE “Perfection of security interests”

Registration provisions, scope of, p. 1151

under this law, and under Companies Act, 895, D. Li
under this law, effect of, p. 1151

Registration under Registration law, of transfer of financial assets, pp. 931,

932
of transfer of security receipts, p. 931

Regulation AB, of the SEC, USA, p. 215

Regulatory capital,e SEE “Capital adequacy requirements”

eSEE “Basle IT’

REITs,eSEE “‘Real Estate Investment Trusts”

Remedies, choice of,eSEE “‘Choice of remedies”

REMIC structure, p. 46

Removal of accounts provisions, and effective control, p. 248

Reorganization, and Chapter 11 of US Bankruptcy code, p. 734

as alternative to winding up, pp. 515, 734
eSEE ALSO “Workout approach”

Re-packager, and originator, p. 11

Representation, by borrower, eSEE “Borrower’s representation”

reply to, by secured creditor, p. 996

Representations and warranties, failure of, action in case, p. 246

in a sale of assets, pp. 245, 902
not to amount to recourse, p. 245
1434 SUBIBCT INDEX

Reputation risk, and unplicil support, Pp. 250

of originator, and repayment of secures, Pp. 235

Keputed ownership, and hypothecaton, p- 725

Re-securitisation, bar on, under RBI Guidelines, p. 323

on secu-
Bank of India, Guidelines of the RBI, eSur “RBI Guidelines
note ve
Reser pe

Reserve price, for sale of assets by the secured lender, p. 1238

Reset of credit enhancement, RBI Guidelines on, pp. 368, 369

securitisation transactions, in, pp. 371-381, 387

Residual interests, as a form of exposure, p. 221

as basis for consolidation, pp. 650, 653, 926
as basis for determination of control in case of SPVs, p. 242
as first loss support, p. 231
in securitisation, and first loss risk, p. 26

Residual profit, and excess spread, p. 32

recapturing of, ways for, pp. 232, 886
retention of, by the originator under RBI guidelines, p. 232
eSEE ALSO “Excess spread”

Resolution companies, and asset management companies, p. 452

Resolution of NPLs, approaches to, p. 452

by asset management companies, p. 453

Resolution Trust Corporation, in USA, pp. 451, 452

Resolution, of debts and asset reconstruction, p. 785

Restructuring, approach, in case of NPLs, p. 452
asset classification, p. 521
of loan documents, to require investor consent under RBI guidelines, p.238
of loans by DanahartaMalaysia, p. 496 ‘
provisioning norms, p. 525
eSEE ALSO “Reorganisation”
Retained interest, as first loss support, p. 231

p. 224
Retained profit, as credit enhancement,
pp. 26, ,231
Retained Risk, insecuritisation
#SEE ALSO “Risks and rewards”
 SUBJECT INDEX 1435

Retrospective effect, of this law, p. 773

Review, of orders of DRTs, whether possible, p. 1134

Revised Guidelines on securitisation, banks, for, p. 216

history, pp. 210-211
NBFCs, for, p. 216
RBI Guidelines on securitisation, p. 216, 217

Revocable transfers, and taxation of trusts set up by ARCs, p. 650

Revolving asset securitisation, generally, pp. 36, 222

Revolving credit facilities, generally, p. 274

Revolving credit facilities, Revolving asset securitisation, p. 274

Rewards, and risks, eSEE “Risks and rewards’’

Right of representation,eSEE “Borrower’s representation”

Ring fencing, and securitisation, p. 41

meaning of, p. 41
of various schemes, pp. 883, 923
under protected cell companies, p. 923

Risk management, securitisation and, p. 16

Risk securitization, meaning of, p. 43

Risk transfer, cross-sector, due to securitisation, p. 30

Risk, diversification of, by securitisation, p. 19

first loss, p. 15
retained, in securitisation, p. 26
second loss, p. 15

Risks and rewards, retention of, in case of assets transferred by banks to ARCs,
p. 651
transfer of, as condition for true sale, p. 231

Risks, and rewards, eSEE “Risks and rewards”

in securitisation, p. 22

Risks, inherent in securitised assets, redistribution of, p. 15

Sale certificate, confirmation of a sale, pp. 1010, 1011

1436 SUBJBCT INDEX

Sale certificate (Contd.)

effect of, p. 1242
format of, pp. 1265, 1266
issue of, pp. 1044, 1243
under civil law, p. 1043

Sale consideration (securitisation), cash payment of, p, 235

deferred, eSer “Deferred sale consideration”

Sale of assets, by secured creditor, expenses on, p. 1045

by secured creditor, manner of making, p. 1039
by sec creditor, nature of, p. 1039
by secured creditor, outside winding up, p. 1064
by secured creditor, p. 1031
by secured creditor, procedure of, p, 1031
by secured creditor, time for making, p. 1031
by secured creditor, who can be buyer, p. 1043
certification of, pp. 1042, 1243
conditions of sale, p. 1045
duty of the secured creditor to get best price, p. 1033
expenses on, p. 1045
immovable property, p. 1244
mode of, p. 1242
notice to be given for sale, p. 1241
pledge, in case of, p. 1078
possession and, p. 1039
price for the secured asset, pp. 1033, 1239
private sale, pp. 1040, 1242
reserve price, pp. 986, 1245, 1247, 1251
title of buyer, p. 1243
warranties of sale, p. 1045
where struck down, p. 1148
where upheld, p. 1148
winding up and, association of the liquidator, p. 1066
e SEE ALSO “Sale proceeds”
Sale of business, by reconstruction company, u/s. 9, p. 938
rights of other charge holders and, p. 939

Sale of receivables,eSEE ALSO “True sale”

Sale proceeds, distribution of, ¢SEE “Distribution of sale proceeds”

priorit under ies
this law, pp. 1047, 1049
¢SEE ALSO
priori ties,
“Priorities”
residual surplus, position as regards, pp. 1051
work SEE “Workmen’ss
due. men' dues”
 SUBJECT INDEX 1437
Sale, as appropriate remedy in mortgage, p. 722
decree of, as appropriate remedy, p. 722
right of, in mortgage, eSEE ALSO UNDER“‘Mortgagee”’
right of, in mortgage, p. 722
true, eSEE “True sale”

Saleproceeds, under this law, p. 1045

SARFAESI Act action, versus other remedies, p. 732

SARFAESI Act, and Arbitration and Conciliation Act, p. 1198

and common law on security interests, p. 966
and RDB law, pp. 769, 1048, 1113
and securitisation transactions, p. 97
applicability to co-operative banks, p. 788
as additional to other laws, p. 1199
as stand-alone solution to enforcement of security interests, p. 963
Constitutional validity of, p. 763
derivative transactions and, p. 800
dominant theme of, p. 761
enabling law, as, p. 772
judicial history of, p. 763
nature of proceedings, pp. 970, 971
need for, p. 764
object of, p. 769
overriding impact of, p. 900
protection under Sec 22 of SICA and, p. 1200
regulatory law, as, p. 772
remedies under, p. 976
retroactive application of, p. 773
scope of, pp. 771, 1168

Satisfaction, of security interests, p. 1158

Savings, impact of securitisation on, p. 18

Scheme, definition of, p. 850

for issue of security receipts, under the law, p. 923
ring fencing for different schemes, pp. 850, 883, 923
trust set up by ARCs as, p. 924

SEBI, SEE “Securities and Exchange Board of India”

Second charge, SEE “Priorities”

Second loss risk, and first loss risk, pp. 225, 252
meaning, pp. 15, 225
1438 SUBIBCT INDEX

pn
Second loss risk (Contd. ) guide lines, p. 255
r RBI
retained by onginator, capital consequences unde
retained by third parties, capital Consequences, P. 256

Secured asset, defined, p. 858

in case of a floating charge, p. 858

Secured creditor, and proprietor of assets, p, 961

and workmen's dues, in winding up, allocation, p. 736
as agent, p. 1042
as trustee, pp. 1042, 1046
asset struction companies as, p. 863
claim for money by, p. 964
counterclaims against, p. 1182
debenture holder as, p. 862
debenture trustee as, p. 862
defined, p. 861
duties of, p. 1032
duty of good faith, p. 1002
duty of proper care of asset, PENDING
exercise of powers after symbolic possession, p. 1092
meaning of, p. 861
participation of, in bid, p. 1039
proper care of secured asset, p. 1032
reasonable conduct of, eSEE “Unreasonable conduct”,
refusal of confirmed sale, p. 1043
remedies, choice of, eSEE “Choice ofremedies”
right to stay outside winding up, pp. 735, 1064
ee for the balance amount after enforcement of security interest,
p. |
rights of, to enfore security, eSEE “Security interests”,
rights under RDB law, p. 753
sale of assets by, ¢SEE ALSO “Sale of assets”
sale of assets by, can he buy asset himself?,
takeover of management by, ¢SEE “Takeover ofmanagement”
trust set up by ARCs as, pp. 648, 863
trustee, for the residual surplus on sale of assets, p. 1046
whether trustee for borrower, p. 1033
winding up, rights of, pp. 735, 1064
workmen’s due and, p. 736
p. 863
company as, on
Secured creditor, securitisati
debt, red
Secu defined, p. 864

Secured lender, claim for money by, p. 964

remedies, choice of, «SEE “Choice of remedies”
 SUBJECT INDEX 1439

Secured lender (Contd.)

rights of, eSEE “Security Interests”
three rights under common law, pp. 964, 1037
e SEE ALSO “‘Secured creditor’

Secured lending, and asset backed lending, p. 692

move for a modern law on, p. 696
e SEE ALSO “‘Secured lender’

Secured loan structure, and RBI Guidelines, p. 221

of securitisation transactions, p. 45
versus true sale structure, p. 45
Secured transactions, evolution of, p. 714
guide on, as per UNCITRAL, p. 708
law on, and costs of lending, p. 696
move for a modern law on, p. 696
principles of, as per ADB, p. 699
principles of, as per EBRD, p. 697
principles of, as per World Bank, p. 700
regime, fundamental policies of, as per UNCITRAL, p. 709
e SEE ALSO “Collateral”
Securities (Securities Conctracts Regulation Act), meaning of, p. 921
amendment of the definition to include asset backed securities, p. 99
report of Parliamentary committee on the Amendment Bill to amend the
definition, p. 143
security receipts as, pp. 871, 921
text of the Amendment bill, p. 139
Securities and Exchange Board of India, definition under the law, p. 794
Securitisation (under SARFAESI Act), cases where the law inapplicable,
p. 633

Securitisation agreement, definition of, p. 857

Securitisation and Asset Reconstruction Company Directions, applicability,

in case of assets held as trustee, p. 641
directions of the RBI, pp. 627, 950
directions of the RBI, text of, p. 655
Guidance note of the RBI, text of, p. 675
guidelines of the RBI, p. 641
power to require information, p. 951
Securitisation and Asset Reconstruction Company Directions,e SEE ALSO
“Asset Reconstruction companies”

Securitisation business, meaning of, pp. 878, 880

need for RBI registration, pp. 878, 880
1440 SUBJECT INDEX

es, p. 923
Securitisation company, and collective investment devio
and special purpose vehicle(s), Pp. 882
and SPVs, pp. 879, 882
application for registration of, rejection, p. 891
application for registration, appeal against rejection, p, 894
as public financial institution, p. 854
as secured creditor, p. 864
business of, permitted under the law, pp, 945, 946
cancellation of certificate of registration, p, 892
cancellation of registration, appeal against, p. 893
conditions for grant of registration, p, 886
constitution as private limited companies, p. 856
eligibility conditions, p. 886
funding of, p. 920
income of, p. 886
meaning of, pp. 879, 880
net worth requirements for, pp. 882
powers of, p. 934
private limited companies, p. 856
profits of, p. 886
prohibition on, p. 880
registration requirements for, pp. 884, 890
registration, cancellation, p. 894
securities to be issued by, nature of, pp. 871, 920
special purpose vehicles and, pp. 856, 879
trusts, whether covered, p. 882
e SEE ALSO “Asset Reconstruction companies”
Securitisation exposure, norms for, under RBI guidelines, p. 263
of the SPV, under RBI guidelines, p. 241
under RBI Guidelines, meaning of, p. 221

Securitisation
market, in India, p. 77

Securitisation,
accounting for, advantages for investors, p. 71
advantages
for originator, p. 66
 SUBJECT INDEX 144]

Securitisation, accounting for (Contd.)

and capital markets, p. 9
and credit derivatives, p. 17
and factoring, p. 41
and financing, p. 6
and isolation of assets, pp. 230, 853
and monetary policy, p. 31
and non performing assets, p. 769
and risk management, p. 16
and sale of assets, p. 220
and structured finance, p. 13
as device of commoditisation of assets, p. 5
as funding device, p. 878
as inter-creditor arrangement, p. 8
assets, features of, p. 35
business of, under the law, eSEE ALSO “‘Securitisaiton business”
business of, under the law, p. 878
cash vs synthetic, p. 17
definition of, under the law, p. 851
definitions of, p. 10
economic benefits of, p. 17
features of, p. 33
financial transactions, and,
Guidelines of the RBI, eSEE “RBI Guidelines on securitisation”
in India, p. 113
investors in, p. 41
issuer, features of, pp. 38, 880
legal preference as the key to, p. 8
limitations of, p. 74
market in India, p. 77
meaning of, pp. 221, 853
modus operandi of, p. 31
non-performing assets and, p. 769
of future flows, eSEE “Future flows securitisatsion”’
of risk, eSEE “Synthetic securitisation”
outside the SARFAESI law, p. 880
parties to, p. 878
process of, illustrated, p. 33
RBI Guidelines, eSEE RBI Guidelines on securitisation”
receivables, features of, p. 13
risks in, p. 22
synthetic, SEE UNDER“Synthetic securitisation”
taxation of, p. 106
threats in, p. 74
transactions, outside the SARFAESI law, p. 880
India, market in, p. 69
1442 SUBJBCT INDEX

Securitisation, meaning of, pp. 220, 221

role of, in the sub-prime onisis, p. 5, 11
sub-prime crisis, and, pp. 5, 11, 19, 20, 28, 30, 42, 71, 73

Securitisation, taxation of, Distribution tax on securitisation transactions, p. 78

vs. Direct Assignment, p. 92

agreement, definition of, p. 781

essential elements of, as per UNCITRAL, p, 710

Security interest provider, and guarantor, p, 797

Security and receivable, transfer of one without the other, p. 828

coll . types of, p. 702
common law, and this law, pp. 962, 966
creation of, eSEE ALSO “Creation of security interests”
creation of, pp. 696, 1156
defined, p. 864
enforcement of, eSEE ALSO “Enforcement of security interests”
enforcement of, generally, in India, p. 730
enforcement of, generally, pp. 692, 959
enforcement of, under this law, p. 959
global, p. 702
in immovable properties, in India, p. 719
in movable property, «SEE ALSO UNDER“Movable property”
in movable property, p. 723
in USA, p. 714
joint, ¢SEE “Multiple security interests”
laws relating to, contents, p. 696
meaning of, p. 960
multiple, ¢SEE “Multiple security interests”
notice under sec. 13(2), SEE “Demand notice”
perfection of, p. 696
Priority rules, «SEE “Priority of security interests”
provision of, eSEE B
registered, p. 716
registration, under this law, eSEE “Registration”
registration, under UK law, p. 717
specific property, p. 723
takeover of possession of assets, ©SEE ALSO UNDER “Takeover
sion of assets” posses-
y. of
takeover of possession of assets, p. 1009
UNCITRAL, Hague Conference and UNIDROIT Texts
71
UNIDROIT model for, in mobile equipment, p. 708 od :
unregistered, p. 716
* SEE ALSO “Enforcement of security intersets”
 SUBJECT INDEX 1443

Security interests (Contd.)

e SEE ALSO “Priority of security interests”
e SEE ALSO “Secured Lender”
e SEE ALSO “Secured transactions”
Canada, laws in, p. 716
India, law in, p. 718
New Zealand, laws in, p. 716
UK, reform of law in, p. 717
UK, reform of law in, recommendations of the Law Commission, p. 627.
USA, laws in, eSEE ALSO “Article 9, UCC”
USA, laws in, p. 714

Security receipt, accounting for, p. 650

and beneficial interest, pp. 868, 925

and funding of asset reconstruction companies, p. 627
and pass-through certificates, p. 869
as actionable claims, p. 871
as debentures, p. 869
as marketable securities, p. 871
as receipt, p. 870
as security under the Securities Contracts Act, pp. 869, 921
defined, p. 869
foreign investment in, p. 627
in case issued by a trust, p. 925
investment in, by asset reconstruction companies, p. 640
investment in, p. 627
issue of, pp. 638, 920
legal provisions under this law on, p. 920
meaning of, pp. 627, 853, 869, 920, 921
nature of, p. 651
public offers of, p. 921
to be issued to QIBs only, p. 920
transfer of, p. 639
transferability of, p. 870
e SEE ALSO “Asset Reconstruction companies”

Security, and marketable security, pp. 12 £

under the Securities Contracts Act, eSEE “Securities (under Securities
Contracts Act)”’

Seizure, and takeover of possession, p. 1013

of secured asset, eSEE “Takeover of possession
r . 99

Self-help enforcement of security interests, under Article 9 of UCC, USA,

Dp Tis
under this law, p. 961
4 SUBJECT INDEX

Seller’s share, in master trust structure, p. 46

Service Provider, under RBI Guidelines, p, 227

Servicer, advances by, p. 238

and service provider, p. 227
meaning of, p. 32

Servicing fee, as a method of recapturing excess spread, p. 232

Servicing standard, under Regulation AB, p. 227

Servicing, by originator, under RBI guidelines, p, 238

in securitisation transactions, p. 887
provisions under RBI guidelines, p. 261
retention of, and obligor notification, p. 916

Set off, right of, and true sale, p. 238

Settlement, as a resolution strategy, p. 733

by asset reconstruction company, p. 940
under the Companies Act, p. 733
e SEE ALSO “One time settlement”
eSEE ALSO “Workout approach”

Shares, possession, takeover of, p. 1009

Ship, meaning of, p. 1169

Sick companies, references to abate, p. 1208

Sick industrial companies’ revival, effectiveness of law relating to, p. 516

Indian law vs. US law, p. 734
measures for, in India, p. 517
performance of the BIFR, pp. 517, 734
protection under sec 22 of SICA and SARFAESI Act,p. 1200
text of sec. 22 of SICA, p. 579

Simple mortgage, generally, p. 720

rights ofmortgagee
in case of, p. 720

Soft bullet classes,

p.929
Special courts, versus civil courts, eSEE “Civil jurisdiction”
Special law, to override general laws, p. 1193
* SEE ALSO “Non-obstante
clause”
Special purpose company,*SEE ALSO “Special purpose vehicle”, p.12
 SUBJECT INDEX 1445

Special purpose entity,eSEE “Special purpose vehicle”

Special purpose vehicle, and securitisation companies under this law, pp. 857,

and trusts, p. 97
arms’ length transactions, p. 236
articles of association of, p. 1211
bankruptcy remote, p. 15
bankruptcy remoteness, p. 223
business of, p. 945
capital of, p. 857
conduit, p. 882
consolidation of, eSEE ALSO “Consolidation”
consolidation of, p. 228
constitution of, p. 856
constitutional documents of, p. 1211
control of, p. 243
criteria for, p. 1219
discrete, eSEE ALSO “Discrete trusts”
discrete, p. 881
equity holding in, p. 242
features of, for securitisation, pp. 40, 856, 946
general purpose entities and, p. 228
in pass-through structures, p. 50
in pay through structure, p. 54
in structured finance, p. 240
independence of, p. 242
independent directors, p. 242
legal criteria for, p. 857
limitations of, p. 855
limited liability partnership as, p. 240
management of, p. 242
meaning of, pp. 12, 15, 228, 240, 855
memorandum and articles of association of, pp. 857, 1211
name of, not to resemble with that of originator, p. 241
need for, p. 15
net worth requirements for, p. 857
non-discretionary nature of, p. 243
organisational forms of, p. 881
originator and, transaction between, p. 241
orphan structure of, p. 242
partnership firms ds, p. 240
qualifying, under US accounting standards, pp. 243, 651, 1215
rating agency criteria for bankruptcy-remote, pp. 856, 1219
right to resell assets, p. 233
S&P criteria for, pp. 856, 1219
1440 SUBJECT INDEX

Special purpose vehicle (Coutd.)

sample clauses in constitutional documents, Pp. 850
securities of, p. 855
structure, in India, p. 54
taxation of, p. 405
taxing options, pp. 405-407
uses of, p. 240
e SEE ALSO “Bankruptcy remote entity”
bankrutcy remote, pp. 856
bankrutcy remoteness, pp. 222

Special statute, this law as, p. 899

Special tribunals, versus civil courts, «Seb “Civil jurisdiction”

Specific property, security interests in, «SEE ALSO “Security interests”
security interests in, p. 723

Sponsor, and originator, p. 871

defined, p. 871
in case of arbitrage transactions, p. 226
not to control securitisation or reconstruction company, p. 889
SPV,eSEE “Special purpose vehicle”

Stamp duty, impact of, where inadequate, p. 867

in case of ARCs, p. 619
in case of debentures, p. 903
in some Indian states, pp. 108, 110
on securitisation in India, pp. 98, 99, 105
State finance corporations, special recovery powers, pp. 512, 935
Statutes, broad types of, p. 772

Stay of proceedings, as inherent and incidental power, p. 1119

illustrative cases where granted, p. 1121
illustrative cases where not granted, p. 1121
instances where may be prayed, pp. 999, 1119
power
of the DRTs
to grant, p. 1131

Stress testing, under RBI Guidelines, p. 299-300

Structured
finance, alchemy of, p. 20
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 SUBIBCT INDEX 1449

Tenancy, impact of takeover of possession on, p. 1015

right of a mortgagor to create, p. 1016

Tenanted properties, takeover of possession of, p. 1014

Term paper,eS&e ALSO “Commercial paper”, pp. 13

eSEE ALSO “Commercial paper”, pp, 40

Third parties, damage to property of, in case of taking over of possession,

p. 1020
rights of, in case of possession of property by secured lender, pp, 1013
rights of, in case of possession of property by secured lender, pp. 1017
rights of, in case of possession of property by secured lender, pp, 1185

Title deeds, mortgage by deposit of, «See “Equitable mortgage”

Titular mortgage,eS&r “Equitable mortgage”

Tranching, first loss credit enhancement, and, p. 390

meaning of, p. 372

Transfer in anticipation ofbankruptcy, courts’ right to reject, p. 231

Transfer of financial assets, notification of, to registering authority, p. 915
Transfer of financial assets, registration of, p. 915

Transf
of receivabl
eres, and assignment, p. 12
Transfer, meaning of, p. 1081

Transferor, versus originator, p. 225

True sale opinion,eSEE “Legal opinion”

True sale structure, versus secured loan structure, p. 45

True sale, and bankruptcy, p. 231

and isolat of assets
ion , p.230
and retention of economic interest, p. 233
and transfer of risks and rewards, pp. 231, 232
concepof,tp. 12
ination of p.,230
Incase of assets sold by banks to ARCs, p.
651
in India,
p. 97
meaning of, under RBI guidelines, p.
229
Trust, accounting for, incase of ARCs, p. 648
and scheme
of a securiti company, 9904
1452 SUBJECT INDEX

Winding up (Contd.)
and insolvency laws, pp. 733
and reorganisation, p. 733
and secured creditor, pp. 736, 1064
as equitable remedy against insolvent companies, pp. 513, 733
compulsory, p. 735
efficiency of, p. 513
insolvency rules in case of, p. 735
principles of, p. 735
priorities in case of, p. 736
right of a secured creditor to stay outside, pp. 735, 1064
sale of assets by secured creditor, outside winding up, pp. 1064, 1065
secured creditor in case of, p.

Withholding tax, on loans given, p. 907

Withholding taxes, and securitisation, p. 38

Workers, rights of, in case of action by secured creditor, p. 1185

Workmen’s dues, and dues of the Crown, p. 1069

and sale by an asset reconstruction company, Pp. 939
and secured creditor, in winding up, p. 736
priority in case of winding up, p. Ips
u/s. 529A, p. 1068
under this law, p. 1068
pari passu allocation with secured creditors, p. 1069

Workout approach, and enforcement of security interests, p. 734

and winding up, p. 733
objective of, p. 734
to NPLs, p. 452

Workout approach,e SEE “Formal workouts”

e SEE “Informal workouts”
e SEE “Sick industrial companies’ revival”

Writ jurisdiction, availability of, p. 1185

cases where admitted, p. 1187
cases where dismissed, p. 1189

Z bonds, p. 65
pp. 57, 58
Z class, in collateralised mortgage obligations,
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 1450 SUBJECT INDEX

Trust (Contd.)
as not a legal efitity, pp. 97, 634, 924
as Special purpose vehicle, pp. 97, 241
constructive, p.917 She ea Sh
discrete, p. 46 SOY ES | ie
master, p. 46 "
mechanism for holding of assets in form of, p. 925
nature of, pp. 642, 924
secured creditor under SARFAESI law, p. 642
security receipts in case of ARCs, p. 639
set up by asset reconstruction companies, p. 648
settler, pp. 241, 243
structure, used in India for SPVs, p. 84
taxation of, where set up by ARCs, p. 649

Trustees, and manager, p. 924

as legal owner of the assets, p. 924
as secured creditor, p. 864
asset reconstruction company acting as, p. 629
assets of ARCs held as, pp. 627, 639
business of, with the SPV, p. 244
debenture, eSEE “Debenture trustee”’
discretion of, p. 243
powers, duties, etc, pp. 243
secured creditor as, SEE UNDER“Secured creditor”
243
Trustees,investors right to change, as per RBI guidelines, p.
U

Underlying assets, meaning of,p. 239

Undertaking, charges on residual, p. 727

e SEE ALSO “Floating charge”’

Underwriting, by the originator, p. 259

meaning of, under RBI guidelines, p. 228
policy in respect of, p. 259

Unfunded facilities, meaning of, p. 819

le equipment, p. 708
- UNIDROIT model, for security interests in mobi
e SEE ALSO “Movable property”
this law, p. 1170
Unpaid seller, right of, not covered under
 1448 SUBJECT INDEX

lakeover of management (Coantd.)

return Of management to the borrower, p. 1103
u/s. 15, p. 1098
u/s., 15, appeal against, p. 1103
where possible, p. 1101

Takeover of possession of assets, actual or constructive, p. 1009

and confirmation of sale, p. 1010
and leave and license, p. 1018
and seizure, p. 1013
and tenancy rights, p. 1016
by CMM/DM u/s, 14, p. 1082
Chief Metropolitan Magistrate/District Magistrate to cause, p.
1082
compensation in case of wrongful action, p, 1137
duties of secured creditor, p, 1032
effect of, p. 1016
expenses in relation to the asset, p. 1036
explained, p. 1009
fixtures, removal of, p. 1020
in case of various assets, p. 1009
manner of, p. 1009
physical, p. 1010
proper care, pp. 1032, 1236, 1237
purpose of, p. 1010
restoration of possession, p. 1147
symbolic, p. 1010
tenanted properties, p. 1014
time limit for, p. 1236
under this law, compared with attachment under
Civil law, p. 1012
under US law, p. 1020
¢ SEE ALSO UNNDER“ Security Interests”
¢ SEE ALSO “Attachment”
Target amortisation class, p. 59

Tax deduction at source,eSEE “Withholding tax”

Taxation ofasset reconstruction companies, in

India, p. 649
Taxation of securitisation,inIndia, p. 106
Taxation of SPVs, p. 405
Taxation of SPVs, options of, pp.
UK, in, p. 406
union budget proposals on,
USin, A, p. 406
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