Securitization Act

  • November 2019
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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

Executive Summary The president of India promulgated an Ordinance called ‘ The Securitisation and Reconstruction of Financial Assets’ which came into effect on 21.06.2002. The principal objective of the ordinance is to facilitate quick and efficacious recovery of the debts due to Banks and Financial Institutions from the defaulting companies which are invariably sick. The debts which have been classified as ‘non performing assets’ by the lending institutions, can now be transferred to separate companies called ‘ Securitisation Company’ or ‘Reconstruction Company’ and recovered by such companies. The lending institution is called the ‘originator’ and borrowing company is referred to as ‘obligor’ in the ordinance. This article attempts to arrange the provisions of the ordinance into a tabular format for ease of reference to the various provisions of the ordinance. 2

Definition (please refer the ordinance) REGULATIONOF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS AND FINANCIAAL INSTITUTION

3 (1)

SC/ RC (Securitization Company/ Reconstruction Company) shall commence business after obtaining a certificate of registration granted under this section and having owned fund not less than two crores and not more than 15% of total financial assets acquired or to be acquired by SC /RC. RBI shall notify different amounts of owned fund for different class of SC /RC.

(2) (3)

An existing SC/RC shall obtain RBI approval with in six months on commencement of this ordinance. Application for registration to be submitted to RBI. Before issuing registration RBI shall satisfy, by inspection of records or other wise following conditions:

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

 That no losses incurred in preceding last 3 yrs by SC/RC;  Adequate arrangement for realization of the FA acquired;  QIB investments in SC/RC redeemed on respective due dates;  Adequate professional experience in finance, securitisation and reconstruction activities of directors;  Sponsors representation in board should not exceed 50% of strength of the Board.  (Sponsors mean holding greater than equal to 10% of shares of SC/RC.)  Director or not convicted for any offence including moral turpitude;  Sponsors are not a holding co of SC/RC or have controlling interest in it.  SC/RC complied all prudential norms of RBI.

(4)

RBI, after satisfaction of all above clauses are being fulfilled then grant the certificate of registration with or without any conditions.

(5)

RBI has right to reject any application due to non compliance clause 3 Every Co. should obtain RBI approval for substantial change in management and change of registered office.

(6) 4

RBI can cancel registration under any circumstance as mentioned below:     

Ceases to carry on the business of SC /RC; Ceases to receive or hold any investment from a QIB Unable comply conditions put on registration of company; Non-fulfillment of any sub clause of clause 3. Unable to comply with direction issued by RBI; nonmaintenance of accounts as specified by RBI; unable to facilitate inspection of records; doesn't obtain prior approval of RBI under clause 3 (6).

In public interest, RBI may give time for compliance of certain clauses before cancellation of registration.

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

(2) (3) 5(1)

(2) (3) (4)

6

7

(3) (4)

Aggrieved SC/RC co may approach to RBI, on cancellation of registration. In spite of cancellation of registration certificate, SC/RC shall continue to be SC/RC co unless entire investment along with interest is redeemed. SC/RC can acquire FA (Financial Assets) of any bank and FI by issue of debenture or bond or any security in the nature of the debenture, for consideration agreed between such company and the bank or FI, incorporating therein such terms and conditions as may be agreed between them; or by entering into an agreement with such bank or FI for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them. On acquisition of FA from FI or Bank, SC/RC shall be deemed to be lender and all rights shall vest in such company in relation to FA. Unless other wise expressly provided by this ordinance all contracts, deeds, bonds, approvals, permission relating to FA to which bank or FI are party shall after acquisition shall apply to SC/RC. On the date of acquisition of FA any suit, appeal, or proceeding pending by or against the bank or FI, same shall not be abate, discontinued or be, in any way, prejudicially affected by reason of the acquisition of FA by SC/RC. Such proceeding shall continue against SC/RC. Bank and FI shall give notice to obligor and concerned registrar where FA has been registered, so that obligor discharges their obligation by making payment directly to SC/RC. Incase no notice given and any money received by bank and FI shall be money received in trust on behalf of SC/RC. Without prejudice of provisions of Co Act, SEBI, SCRA, SC/RC on receipt of FA will issue security receipts to QIB. SC/RC may raise funds from QIB by formulating schemes for acquiring FA and shall keep and maintain separate and distinct accounts in respect of each such scheme for every FA acquired out of investments made by a QIB and ensure that realization of such FA is held and applied towards redemption of investment and payment of return assured on such investment under relevant schemes. In event of non-realization of FA the resolutions passed by 75% QIBs, shall be binding on the company. Procedures for QIB meeting shall be similar to that of BOD meeting

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

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10 11 12

of SC/RC. Security receipt issued by SC/RC is exempted from registration under Registration Act 1908, on issue and on subsequent transfer. SC/RC can take one or more measures for assets reconstruction issued by RBI:  Proper management of the business of borrower by change in management, take over;  The sale lease of part of the business;  Rescheduling of payment of debts;  Enforcement of security interest in accordance with the provisions of this ordinance;  Settlement of dues payable by the borrower;  Taking possession of secured assets. SC /RC can act as agent to bank and FI; manager; receiver if appointed by court. Provided no pecuniary liability to sc/rc. Any dispute among parties shall be resolved by conciliation or arbitration, as per Arbitration and Conciliation Act, 1996. RBI empowered to make any policies such as bad debt provisioning; capital adequacy etc and issue direction from time to time as required in the interest of the public. Further, it may issue procedure for acquisition of FA and aggregate value of FA to be acquired. ENFORCEMENT OF SECURITY INTEREST

13(1)

(2)

(3)

Notwithstanding anything contained in section 69 and section 69A of the Transfer of Property Act 1882, any security interest crested in favor of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditors in accordance with the provisions of this ordinance. Where borrower who is under liability to a secured creditors under a security agreement makes any default in repayment of secured debt or any installment thereof, his account shall be classified as NPA by the secured creditors and a notice can be issued to repay entire secured debt with in 60 days, failing which secured creditor shall be entitled to exercise all or any of the rights under section (4). The above notice shall give complete detail of amount payable by

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

(4)

the borrower. In case borrower unable to discharge his liability with stipulated period shall take any of the measures mentioned below:  Take possession of secured assets of the borrower including right to transfer, sale, assignment;  Take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment, sale;  Appoint any person to manage the secured assets the possession of which has been taken over by the secured creditors;  Require at any time by notice in writing, to any person having possession of the secured assets on behalf of borrower, to repay amount due towards secured creditors; Any payment made to secured creditor by any person shall lead to valid discharge of liability of the borrower.

(6) (7)

(8) (9)

According to recent Supreme Court judgment in favour of Mardia Chemicals, apex court directed that secured creditors can proceed under clause 13(2) & (4) but cannot part with the assets by way of sale , assignment, lease. (ET 9/10/02 Pg 3). Apex court did not provide any stay on the Ordinance. However, company can go for one time settlement with the secured creditor, which can allow parting with assets. Any transfer of assets in any of the above mode shall lead to valid transfer of assets in favour of transferee with all rights in or in relation to the secured assets. The borrower shall repay any cost incurred by secured creditors. Money received on disposal of assets first applied towards the cost, charges and expenses, secondly towards debt and balance if any paid to the person entitled thereto in accordance with his rights and interest. If dues of secured creditor are repaid before the date fixed for sale of secured assets then such sale of assets shall be withheld not steps towards transfer of same shall be further initiated. In case of joint secured creditors no such steps mentioned in sub section (4) shall apply unless creditors representing not less then 75% in value of the amount outstanding as on the record date do it. However, incase company is under liquidation than provision of

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

(10)

(11) (12) (13) 14(1) 15(1)

section 529A of Co Act shall apply. Here on sale of assets after payment of workmen dues balance amount shall be paid to secured creditors with an undertaking in case short /excess of workmen dues, shall be adjusted by him. On sale of secured assets if dues of secured creditors are not satisfied then an application can be filed to the Debt Recovery Tribunal having jurisdiction or a competent court for recovery of balance amount. Secured creditors can proceed against guarantors or sell the assets pledge under this ordinance. One or more of his officers can exercise the rights of secured creditors. No borrower can transfer the secured assets after getting a notice with prior consent of the secured creditors. Chief Metropolitan Magistrate or District magistrate to assist secured creditor in taking possession of assets. Manner and effect of take over of management On business take over by the secured creditors (SC) a notice in news paper is publish to this affect and SC appoints as many persons they think fit to run the business.

(2)

On publication of above notice in newspaper all office bearer having power of superintendence, direction and control stands vacate/released from their respective powers. Any contract of director, manager about holding of office stands deemed to be terminated. The administrators appointed by SC to take over the entire operations including control over all property, actionable claims, receivables and etc.

(3)

In case management of a company under Companies Act, 1956 has been taken over by the SC then notwithstanding anything contained in the said Act or in MOA: • •

Shareholders can appoint no directors. No resolutions can be passed with out the constant of the SC;

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.



(4) 16(1)

17(1)

(2) (3) 18(1)

(2) 19

20(1)

21 22

No proceedings for winding up shall lie in any court without the consent of the SC. SC shall restore the management of the business of the borrower on realization of their debt inn full. No officers, directors of borrower company shall be entitled to loss of compensation on premature termination. The released officers, directors etc are entitled to recover from the business of the borrowers their dues except compensation. Right to Appeal Any person (including borrower) aggrieved by the measures undertaken as mentioned in 13(4) can make an appeal with in 45 days to the Debt Recovery Tribunal (DRT). Appeal of borrower shall stand provided 75% of the amount claimed in the notice as referred in 13(2) is deposited. However, DRT can waive or reduce the amount to be deposited. DRT shall dispose the appeal as per the Recovery of Debt Due to Banks and Financial Institutions Act, 1933 and rules. Appeal to Appellate Tribunal (AT) Any person aggrieved by the order of DRT can file an appeal to AT with 30 days from the date of order. AT shall dispose the appeal as per the Recovery of Debt Due to Banks and Financial Institutions Act, 1933 and rules. If according to DRT or AT, the possession of assets by SC is wrong then all such assets shall relapsed back to the borrower along with the compensation as fixed by the tribunal. Central Registry The central government (CG) by notification shall set up central registry for registration of transaction of Securitization and reconstruction of financial assets and creation of security interest under this Ordinance. Location, power, territorial coverage all shall be ascertained by CG. This act shall be in addition to different act for registration. CG shall appoint central registrar. Under this ordinance, a Register shall be maintained, which will provide all information about assets registered including Securitization of financial assets, reconstruction of financial assets, creation of security interest.

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

The register can be maintained in electronic form. The particulars for registration is to be filed with 30 days along with prescribed fees with CR. All modification in security interest is required to be filed with CR by SC or borrower with in 30 days of payment and satisfaction. Securitization company or reconstruction company or SC to report satisfaction of security interest. The particulars of Securitization etc can be inspected from the office of CR on payment of fees. OFFENCES AND PENALTIES In case of any default made in filing of information as required under section 23 to 25, every officer shall be punishable with a fine of Rs.5000 per day. Non-compliance of RBI direction u/s 12 shall levy penalty of Rs. 5 lacs and Rs10000 per day if offence continues. Contravention of provision of this ordinance shall lead to one-year imprisonment or fine or both. Magistrate ranked not below first class shall hear all such offence. MISCELLANEOUS Non-applicability of this ordinance in certain cases. Protection of action taken in good faith by SC. Offence committed under this ordinance shall be punishable as per this section. Civil court not to have any jurisdiction over matters required to be referred to DRT and AT. This ordinance overrides any thing contained in any other law relating to same provision. SC has to ensure the claim should be made with the period of limitation prescribed under the limitation Act, 1963. Application other law not barred i.e. SEBI, Co Act, etc. Power of CG to make rules. Certain provisions shall apply after setting up of registry section 21to 27. CG empowered to remove difficulties under this ordinance. Amendments as specified in schedule shall be made in SEBI, SICA, and Companies Acts. No reference shall be made to BIFR after Securitization Company has acquired the FA under section 5 (1) of the Ordinance 2002.

Sharad Jain , ACA Eveready Industries India Ltd.

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The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002.

Abatement of reference made to BIFR where the process of Securitization has begun before passing of any order by BIFR and secured creditors not less than 75 % of outstanding amount of FA have taken any measure for recovery as mentioned in section 13(4) of the Ordinance 2002.

Sharad Jain , ACA Eveready Industries India Ltd.

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