India: Recent Changes To The Debt Recovery Regime In India

Last Updated: 25 August 2016
Article by Trilegal .

The recent amendments to the SARFAESI Act demonstrate the Indian government's commitment to put in place an efficacious system for dealing with bad debts and making debt recovery easier and effective.

INTRODUCTION

With increasing levels of non-performing or stressed assets in the Indian financial services sector, reforming the debt recovery and bankruptcy framework has been a key focus area for the Indian government. Following the recent enactment of the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code), the Indian parliament has now passed the Enforcement of Security Interests and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 to improve the efficacy of Indian debt recovery laws.

The amendment act introduces a number of changes to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). These changes will however come into effect as and when the government issues appropriate notifications in the Official Gazette to implement the relevant provisions of the amendment.

KEY CHANGES INTRODUCED

A. Changes to the ARC Framework

(i) Ownership and Control of ARCs: Till now, ownership and control of an asset reconstruction company (ARC) had to be diversified and no sponsor could hold a controlling interest (more than 49%) in an ARC or appoint a majority of its board of directors. These restrictions have been removed and sponsors are now allowed to hold up to 100% equity in an ARC as well as exercise majority control over its board. Correspondingly, the Reserve Bank of India (RBI) has also been given greater powers of oversight over an ARC's operations including, the right to appoint RBI officers as observers to the board of directors of an ARC and if required, change/ replace its directors.

(ii) Eligible Purchasers of Security Receipts: Until now, only 'qualified institution buyers' (i.e. banks, financial institutions, insurance companies, state finance corporations, mutual funds and foreign portfolio investors) were permitted to purchase security receipts issued by ARCs. With the amendment, the scope of eligible investors has been widened to include non-institutional investors as identified by RBI from time to time.

With non-performing assets (NPAs) and stressed assets of Indian banks exceeding INR 8 trillion (approx. USD 125 billion), these changes to the ARC framework could help remove distressed assets from the balance sheets of Indian banks by developing a robust secondary market for distressed debt in India. Removal of the sponsor ownership restrictions could incentivize more players to set up ARCs and allow existing ARCs to raise necessary capital to expand their portfolios. Further, the widening of the investor base for security receipts may possibly generate more interest in these instruments and allow banks to off-load their NPAs on an arms' length basis, as opposed to self-funding securitization transactions to restructure their exposure.

B. Wider group of SARFAESI Eligible Lenders

Until recently, the benefits under the SARFAESI Act and the DRT Act were available to a limited group of lenders – i.e. scheduled commercial banks, International Finance Corporation, Asian Development Bank and identified Housing Finance Companies. The government has made two significant additions to this group:

  1. NBFCs: On 5 August, 2016, the Ministry of Finance has specifically notified and named those non-banking financial companies (NBFCs) with an asset size of more than Rs. 500 crores, as SARFAESI eligible lenders.
  2. Listed Debt Securities: The benefits of the SARFAESI Act and the DRT Act have been extended to the listed bond market in India. Debenture trustees appointed in respect of debt securities listed in accordance with applicable SEBI regulations have been specifically included as 'secured creditors' under the SARFAESI Act, and corresponding changes have been made to various provisions of both the SARFAESI Act and the DRT Act. These changes potentially allow lenders that do not independently have rights under the SARFAESI Act or the DRT Act (such as domestic funds, mutual funds, insurance companies, foreign portfolio investors and other investors in the corporate debt market) to benefit from such rights when acting through a debenture trustee in respect of listed bonds.

C.Central Registry for Security Interests

Once the amendments are notified, all secured creditors (including creditors who do not have enforcement privileges under the SARFAESI Act) will be required to register their security interests with the Central Registry of Securitization Asset Reconstruction and Security Interests of India (Central Registry). This will facilitate implementation of the Bankruptcy Code and will increase overall transparency in respect of security interests over a debtor's assets.

D.Increasing efficacy of SARFAESI and DRT Proceedings

While the SARFAESI Act and DRT Act are intended to expedite recovery of secured debt, there have been various procedural issues which have limited the efficacy of these legislations. Accordingly, various modifications have been made to both the legislations to deal with this problem. For instance:

  1. timelines for various steps in the adjudication process before the debt recovery tribunals such as filing of written statements, passing of orders, appeals, etc. have been reduced; and
  2. the cost on a borrower to delay recovery timelines through protracted appeals and proceedings has been increased. Borrowers will now be required to deposit at least 25% of the outstanding amounts with the debt recovery appellate tribunal (DRAT) under the DRT Act to prefer an appeal. Previously, (a) this floor of 25% on the deposit obligation applied only to appeals made under the SARFAESI Act, and (b) borrowers could request the DRAT for a waiver of the entire deposit obligation under the DRT Act.

CONCLUSION

The amendments are perhaps the most significant set of changes to the SARFAESI Act since its enactment in 2002. The Bankruptcy Code and the amendments to the SARFAESI Act together reflect a clear legislative intent to shift the needle in a distressed situation towards the creditors by plugging various loopholes available to borrowers.

We believe that the inclusion of listed bonds within the SARFAESI Act could significantly deepen the listed debt market in India by generating interest from a wider variety of investors – including retail investors, insurance companies, domestic funds and foreign portfolio investors. If sufficient liquidity is generated in the market, traditional lenders could also explore subscribing to listed debt in light of the simpler process and cheaper transaction costs associated with a transfer of these instruments.

While the amendments are a welcome move, they fall short of creating a level playing field for all participants in the Indian debt market. The entire external commercial borrowing (ECB) framework, which is comparatively more regulated than the listed bond framework, continues to remain outside the scope of the SARFAESI Act. In an environment where foreign companies, individuals and retail investors holding listed bonds would ultimately benefit from the self-help remedies under SARFAESI Act, it is unclear why regulated foreign banks, bilateral or multilateral financial institutions and other eligible ECB lenders should have to resort to traditional court-proceedings to recover their dues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions