4 October 2016

AMENDMENTS TO SECURITIZATION LAWS

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act (Act) recently received Presidential assent and thereafter was duly notified in the official gazette. The Act seeks to empower banks to confiscate security in the case of a loan default, a development that assumes significance in view of the recent defaults made by industrialist Mr Vijay Mallya. Finance Minister Arun Jaitely emphasized the need for 'firmness coupled with fairness' in recovering bad loans. The Act majorly seeks to amend four laws:

• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

• Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

• Indian Stamps Act, 1899.

• Depositories Act, 1996.

This legal update is an attempt to highlights key amendments brought out by the Act.

AMENDMENTS TO SARFAESI ACT

The SARFAESI Act specifies 3 (three) modes of recovering outstanding debt:

• sale of property;

• arrest and detention of defendants; or

• appointment of a person to manage the property of the defendant.

Section 14 of the SARFAESI Act allows secured creditors to take possession over collateral, against which a loan had been provided, upon a default in repayment. This process can be undertaken by the secured creditor, making in request in writing to the Chief Metropolitan Magistrate or District Magistrate, to take possession of the same. The same process under the new Act will have to be completed within 30 days by the District Magistrate. At the same time the Act also provides that secured creditors will not be able to take possession over the collateral unless the transaction and the collateral security has been registered with the Central registry, established under the Act by the creditors or secured creditors.

Revamping the DRT mechanism, the Bill proposes electronic filing of recovery applications, documents and written statements. The Act initiates regularization of all the records of transactions related to secured assets and creates a Central database for the pursuance of the same.

The Act also provides that in the event any secured creditor jointly with other secured creditors or any asset reconstruction company (ARC) or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired a controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.

The Act further empowers RBI to audit and inspect ARC from time to time and in the event the RBI is satisfied that business of an ARC is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such ARC, the Reserve Bank may, for securing proper management of an ARC, remove the chairman or any director and appoint central bank officials to its Board. The Central Bank will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

AMENDMENTS TO RDDBFI ACT

Section 28 of the Act provides that the Presiding Officer of the Debt Recovery Tribunal (DRT) shall hold office for a term of 5 years and shall be eligible for reappointment. It also increases the retirement age of the Presiding Officer from 62 years to 65 years. It also increases the retirement age of Chairpersons of Appellate Tribunals from 65 years to 67 years

Also Section 14 of the Act describes the local limit of jurisdiction where an Application can be filed before the DRT:

• where the cause of action, wholly or in part, arises;

• where the secured asset is located; or

• the branch or any other office of a bank or financial institution is located.

The Act maintains that the banks and financial institutions will be required to file cases before the DRT which has jurisdiction over the defendant’s area of residence or business. The Act further allows banks to file cases in DRT which has jurisdiction over the area of bank branch where the debt is pending.

AMENDMENTS TO THE STAMP ACT

The Act now amends Section 8F of the Indian Stamp Act exempting deed of assignment signed at the time of an Asset Reconstruction Company buying a loan from a bank from the levy of Stamp duty.

AMENDMENTS TO DEPOSITORIES ACT

The Act now states that every depository, on receipt of intimation from a participant should register any issue of new shares in favour of any (a) Bank; (b) Financial Institute; or (c) ARC (collectively referred as Lenders) or any other assignee of such Lenders, by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and such Lenders.

MHCO COMMENT

The major motive of the new amendments is to empower the banks to take effective legal action against defaulters. The current amendments to securitization law and DRT law would ensure fulfillment of that the objective. It has also been assured by government that the Banks would take a compassionate view on education loan defaults. The newly enacted law hence simplifies the procedure for quick disposal of pending cases of banks and financial institutions by the DRT.

This article was released on 4 October 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.