LEGAL FRAMWORK OF SECURITISATION IN INDIA BY - NEETI GOYAL
LEGAL FRAMWORK OF SECURITISATION IN INDIA
AUTHORED BY -
NEETI GOYAL[1]
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002)
The said act has played a
vital role in regulating the financial sector in India. The need of this act
was felt when large amount of the bank loans were converting into NPA's and
there was no appropriate regulation for the banks to recover their loan. The
problem has been faced in earlier decades of "directed control"
policies of the Indian government. Such policies and the financial support for
the preferred sector was given with the aim to develop the country.[2]
After the Asian crisis
the need for the proper legislation was felt. Recommendations given by the
Narasimham Committee in 1991, in effect of which the Parliament had enacted
Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The Act
created a separate tribunal for the Debt Recovery which were known as the debt
recovery Tribunals they were appointed with the responsibility of taking the
cognizance of the disputes due to non-payment of debts and for encouraging speedy
recovery proceeding by banks. However this system was not proved satisfactory
as the convulsion of those real estates and translation into liquid assets
seemed impossible because of the legal complexities as well as the sloth of our
judicial system. It meant that bad debt of the banks and financial institutions
ran into huge bulk of rupees which would not be recovered easily due to delays
in the conventional legal system. It took years for the banks to liquefy the
security assets and appreciate the sum of deficiency. This resulted in blockade
of huge amounts causing unhealthy economic imbalances in the functioning of
banks and financial institutions.
Be that as it may, the
execution of DRTS was exceedingly unacceptable on account of different
hindrances. One of the hurdles was the Sick Industrial Companies (Special
Provisions) Act 1985 (SICA). The banks discovered it to a great degree hard to
sue for recovery of cash against a modern substance enlisted as "wiped
out" under SICA. Aside from that, assent was additionally required from
the Board for Industrial and Financial Reconstruction (BIFR), made under
article 4 of SICA, for the procedure of recovery. These remnants of the
"license raj" period of communist India at that time was in hurry to
change its economy but by the defaulting companies. Luckily, the Government
understood that some important steps has to be taken to assist the recuperation
of NPAs, in furtherance of this a bill was presented to abrogate SICA, the Sick
Industrial Companies (Special Provisions) Repeal Bill was presented in the Lok
Sabha on August 30, 2001. What's more, another bill the Companies (Amendment)
Bill of 2001 was likewise acquainted in the Lok Sabha with achieves changes
important to assist the recuperation of awful advances. In spite of the fact
that the bills were displayed in the midst of much ballyhoo, just the Companies
(Amendment) Act was gone in 2001; the other grieved in the parliamentary
framework until 2003 when the Sick Industrial Companies (Special Provisions)
Repeal Act at long last got to be law. In the midst of this, execution of
Public Sector Banks kept on being antagonistically influenced, incompletely as
a consequence of the fragile political financial structure of India, mostly in
light of rivalry from foreign banks, and somewhat in because of structural
inadequacies. This developed a feeling of earnestness in the Indian
bureaucratic and political circles. All the excited movement and open civil
argument over NPAs brought about a somewhat exceptional step, the declaration
of "The Securitisation, Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002" (SARFAESI), by the Government of India.
Suddenly, there was an enhancement of creditors' rights, which empowered
"banks and financial institutions to take possession of the securities and
sell them without going through the protracted judicial process."
Securitisation and its present situation in India
Securitisation is one of
the latest financial innovations in Indian markets.. In December 2002, a legal
frame work was provided for securitization through the "securitization and
reconstruction of financial assets and enforcement of security interest
Act", 2002 which became effective from June 21, 2002. The development in
the Indian securitisation market has been to a great extent fuelled by the
repackaging of retail assets and private home mortgages of banks and FIs. This
business sector has been in presence since the mid 1990s, however has developed
fundamentally just post-2000 with a built up limited band of financial
specialist group and standard guarantors. As per Industry assesses, the
organized issuance volumes have become extensively in the most recent couple of
years; however still little contrasted with universal volumes. Asset backed
securitisation (ABS) is the biggest item class driven by the developing retail
credit arrangement of banks and different FIs, investors nature with the hidden
resources and the short development time of these advances. The mortgaged
backed securities (MBS) market has been fairly moderate in taking off
notwithstanding a developing lodging fund market because of the long
development periods, absence of optional business sector liquidity and the
danger emerging from prepayment/repeating of the fundamental advance.
SCHEME OF THE ACT
It consists of 41
sections which are divide in 6 Chapters, 1 Schedule. Chapter 1 talks about the
applicability of the act and contains all the definitions of the said Act.
Chapter 2 consists of 10 sections which gives details for regulation of
securitisation and reconstruction of financial assets of banks and financial
institutions, setting up of securitisation and reconstruction companies and matters
related thereto. Chapter 3 consists of 9 sections gives details for the
procedure of the enforcement of security interest and incidental matters.
Chapter 4 consists of 7 sections giving the procedure for the establishment of
a Central Registry, registration of securitisation, reconstruction and security
interest transactions and matters related thereto. Chapter 5 contains 4
sections. providing for offences, penalties and punishments. Chapter 6 contains
10 sections providing for routine legal issues.
"The main purpose of the
SARFAESI Act is to enable and empower the secured creditors to take possession
of their securities and to deal with them without the intervention of the court
and also alternatively to authorise any securitisation or reconstruction
company to acquire financial assets of any bank or financial institution."[3]
The salient
features of the act are:-
·
Securitisation
of financial assets
The term 'securitisation is defined
under definition clause which says "acquisition of financial assets by any
securitisation company or reconstruction company from any originator, whether
by raising of funds by such securitisation company reconstruction company from
qualified institutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise."[4]
Under this act banking
companies and the financial institution can only securitize their financial
assets due to the non performing loans or assets with the securitisation
company and through asset reconstruction. The funds required for the
acquisition of the assets can be raised from the QIB's[5]
(qualified institution buyers) or by issuing the security receipts representing
undivided interest in such asset or otherwise.
Debt or receivables and
includes-
·
a
claim to any debt or receivables or part thereof, whether secured or unsecured;
or any debt or receivables secured by, mortgage of, or charge on, immovable
property: or a mortgage, charge, hypothecation or pledge of movable property; or
any right or interest in the security, whether full or part underlying such
debt or receivables; or any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such interest is existing,
future, accruing, conditional or contingent; or any financial assistance;
The act has emerged to be
the significant change for the lenders to secure their future cash flow from
the secured assets and to their blocked funds for the purpose of lending
further.
Incorporation & Registration of Special Purpose Companies
"Securitisation
company" and "asset reconstruction company" are the two main
vehicle ( special purpose vehicle) for securitising and reconstructing the
financial assets. Securitization company" means any company formed and
registered under the Companies Act, 1956 (1 of 1956) for the purpose of
securitisation;(in common parlance called Special Purpose Vehicle (SPV);
Reconstruction company means a company formed and
registered under the Companies Act, 1956 for the purpose of asset
reconstruction.
Asset reconstruction means acquisition by any
securitisation company or reconstruction company of any right or interest of
any bank or financial institution in any financial assistance for the purpose
of realisation of such financial assistance. These are the company registered
under the companies act 2013.the main
objective of the company is to securitize the assets and asset reconstruction.
The act requires the
mandatory registration of the companies with the minimum requirement of the
funds owned by these companies. Minimum 2 crores or fifteen percent of the
total financial assets should be possessed by the companies. RBI has power to
alter the fund requirement time to time. It is mandatory for the existing SCO
and RCO to get registered under the securitisation act. These companies except
their core business may perform other functions:-
To act as an recovery
agent on behalf of banking companies and financial institution.
To act as a manager to
manage the affairs relating to the secured assets the possession of which has
been taken by the secured creditor.
To act as a receiver on
order given by any court or tribunal.
RBI has given wide power
in relation to the registration of these companies. it can cancel the
registration of these companies, in following situation:-
If the company-
1) ceases to receive or hold any
investment from qualified institutional buyer
or
2) ceases to carry asset reconstruction
business or
3) fails to comply with the conditions
of registration
4) it Fails to fulfil the conditions of
Section 3(3)[7]
5) it fails to comply with directions
given by the RBI.
6) It fails to maintain accounts etc
FUNDING OF SECURITISATION
For the acquisition of
the financial assets the SCO/RCO needs some funds at which they can buy the
assets through a bank or financial institutions. These companies access to the
qualified institutional buyers by issuing a security receipt. These securities
are the "securities" within the meaning of section 2(h) (ic) of the
securities contract (regulation) Act, 1956.
A Scheme of acquisition
has to be formulated for every acquisition detailing therein the description of
financial assets under acquisition, the quantum of investment, rate of return
assured etc. Further separate and distinct accounts have to be maintained in
respect of each scheme of acquisition. Realizations made from the financial
assets have to be held and applied towards the redemption of investments and
payment of assured returns.
In case of
non-realization of financial assets, the QIB holding not less than 75% of the
total value of the security receipts issued, are entitled to call a meeting of
all QIB and pass resolution and every such resolution is binding on the SCO/RCO
ACQUISITION BY THE SCO AND RCO THE RIGHTS AND INTERESTS IN
THE ASSETS
The company may acquire
rights and interest in financial asset of the banks
and financial institution
by two ways given in the act[8]:-
·
Either,
by issuing the debenture or bond or any other security in nature of debenture,
on being consideration agreed between the banker financial institution and the
SCO or RCO, on their terms and conditions."
·
By
entering into the agreement by the RCO or SCO with the bank or financial
institution for transfer the financial assets on such term and condition as
agreed upon.
After the company
acquires the financial assets they comes into the shoes of the banks or the
financial institutions and get all the rights and powers associated with the
realisation of the financial assets from the obligors. It also gives the right
to file any case appeal, any other proceedings against the borrower.
When the securitization
company takes over the assets of the banks than they may with the consent of
the origin who held the assets initially files an application to the debt
recovery tribunal or any court where the case has been instituted or appeal has
been instituted to change the name in place of the originator.
Assets Reconstruction
The companies may take
the following steps for asset reconstruction:-
·
To
take over the management of the business of the obligor or the borrower.
·
By
selling off or by giving it on lease the part or whole of the business of the
borrower.
·
By
rescheduling of payment of debts payable by the borrower.
·
By
enforcing the security interest.
·
By
settling down the dues [payable by the obligor.
·
By
taking in possession of the secured assets.
·
By
converting any portion of debt into share of a borrower company.[9]
NON PERFORMING ASSETS:-
In common parlance bank
gives loan to the borrowers. In case of failure to repay the loan by the
borrower the bank gives him notice to pay the loan on time with certain amount
of interest. In case of failure the banks declares such loans as Non
-Performing Assets or Bad loans. Non-performing asset means an asset or account
of a borrower, which has been classified by a bank or financial institution 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,
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[10] relating
to assets classifications issued by the Reserve Bank".[11]
Conclusion.
The Act is in itself is complete
guide for the enforcement of security interest for individuals, However after
enactment of Insolvency and Bankruptcy Code 2016, the scope of recovery and
enforcement of security interest has enlarged.
So the importance of this Act becomes
crucial in the sphere of Banking Law.
[1]Assistant Professor- Senior Scale, UPES, School of
Law, Knowledge acres, Kandoli, Dehradun- 248007, Uttrakhand, India.
[2] India's financial system in its latter half of the
last century was dependent on the financial institutions which provides credit
to the small ventures. SIDBI was created in 1989 to
facilitate"
finar.cial assistance leading to the promotion, financing, and development of
small- scale projects and microenterprises."
[3] ICSI, Corporate Restructuring, Valuation And
Insolvency, available at:
www.icsi.edu/docs/webmodules/Publications/Full%20Book%20of%20PP-CRVI-2014.pdf
(Last
Modified on: 02/04/2016).
The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, S.2(1)(z)
[4] The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, S.2(1)(z)
[5] Any financial institution, banks, insurance company,
State Financial Corporation,
Trustee,
State Industrial Development Corporation, or any AMC on behalf of any mutual
fund, provident fund, gratuity fund or pension fund, FIIs registered with SEBI
or any other body corporate specified by SEBI”.
[6] The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, S.2(1)(I)
15
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, S.2(1)(za),
16
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, S.2(1)(v),
17
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, S.2(1)(b),
[7] The Reserve Bank may, for the purpose of considering
the application for registration of a securitisation company or reconstruction
company to commence or carry on the business of securitisation or asset
reconstruction, as the case may be, require to be satisfied, by an inspection
of records or books of such securitisation company or reconstruction company,
or otherwise, that the certain conditions are fulfilled.
[8] ºThe Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, S.5.
[9] The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, S.9.
[10] Reserve Bank Of India,
"Master Circular - Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances", July 1, 2015,
available at:
https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908 (Last
Modified on March7, 2016)
[11] Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002, S.2(1)(0)