India: Optimism Of Banks & FIS : The New Debt Recovery Act

Last Updated: 13 January 2017
Article by Bornali Roy

Most Read Contributor in India, December 2018

PREFACE

To make debt recovery more effective, the Minister of Finance, Mr. Arun Jaitley, has moved the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 20161 in Lok Sabha, on May 11, 2016. It was sought to amend four laws: (i) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), (ii) Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI), (iii) Indian Stamp Act, 1899 and (iv) Depositories Act, 1996. It also confers more powers to the Reserve Bank of India (RBI) to regulate asset reconstruction companies (ARCs).

After having approved Insolvency and Bankruptcy Code, 2016, earlier this year, the government had been putting stress on the bringing up an infrastructure to deal with escalating bad debt at banks. The government moved the amendments in the Lok Sabha, just before the House concluded the budget session. The Bill was passed in the Lok Sabha on August 01, 2016 and in the Rajya Sabha on August 09, 2016. Finally, the Bill received the assent of the President on August 12, 2016. The Minister of Finance had issued a notification (S.O. 2831 (E)) dated September 01, 20162, through which the Act came into force on September 01, 2016.

AMENDMENTS TO THE SARFAESI ACT, 2002 (HEREINAFTER "PRINCIPAL ACT")

The SARFAESI Act permits a secured creditor to take possession over collaterals, against which a loan had been provided, upon default in repayment in the loan. This process is to be undertaken with the assistance of the District Magistrate, and does not involve the intervention of courts or tribunals. The Act provides a time limit for concluding this procedure. The new Act (Section 12 amending Section 14 of the principal Act) has provided that this process will have to be completed within 30 days by the District Magistrate.3 The Joint Committee had further modified it to allow for the time limit to be extended to 60 days, if District Magistrate is unable to pass an order within 30 days, due to some circumstances.4

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act further empowers the District Magistrate to assist banks in taking over the management of a company, in case the company defaults in the repayment of loans. This will be done in case the banks convert their outstanding debt into equity shares, and resultantly hold a stake of 51% or more in the company (Section 13 amending Section 15 of the Principal Act).5

While, under the SARFAESI Act, a central registry is created to maintain records of transactions related to secured assets, the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act required creating a central database to integrate records of property registered under various registration systems with this central registry. This has included integration of registrations made under Companies Act, 2013, Registration Act, 1908, Motor Vehicles Act, 1988, Merchant Shipping Act, 1958, Patents Act, 1970, Designs Act, 2000 or other such records under any other law for the time being in force (Section 16 inserting new Section 20A in the Principal Act).6 The new Act further provides that secured creditors would be unable to take possession over the collateral unless it is registered with the central registry (Section 18 inserting new Chapter IVA thereby inserting Section 26D in the Principal Act).7 Further, these creditors, after registration of security interest, will have priority over others in repayment of dues (Section 18 inserting new Chapter IVA thereby inserting Section 26E in the Principal Act).8 The move will provide a better picture of assets to the existing and potential creditors.

The SARFAESI Act authorizes the Reserve Bank of India (RBI) to scrutinize the statements and inspect any information of Asset Reconstruction Companies related to their business. The new Act further gives power to the RBI to conduct audit and inspection of these companies. The RBI has further been bestowed with executive powers as it may penalize a company if the company fails to comply with any directions issued by it (Section 21 inserting new Section 30A in the Principal Act).9

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act provides that stamp duty will not be charged on transactions undertaken for transfer of financial assets in favor of asset reconstruction companies (Section 6 amending Section 5 in the Principal Act).10 Financial assets include loans and collaterals  AMENDMENTS TO THE RDDBFI ACT, 1993 (HEREINAFTER "PRINCIPAL ACT")

The RDDBFI Act established the Debt Recovery Tribunals and Debt Recovery Appellate Tribunals. The new Act increased the retirement age of Presiding Officers of Debt Recovery Tribunals from 62 years to 65 years (Section 28 amending Section 6 of Principal Act).11 Further, it increased the retirement age of Chairpersons of Appellate Tribunals from 65 years to 67 years (Section 30 amending Section 11 of Principal Act).12 It has also made Presiding Officers and Chairpersons eligible for reappointment to their positions.

The RDDBFI Act provides that banks and financial institutions will be required to file cases in tribunals having jurisdiction over the defendant's area of residence or business. The new Act has enlarged the territorial jurisdiction. It allows banks to file cases in tribunals having jurisdiction over the area of bank branch where the debt is pending. (Section 32 amending Section 19 of Principal Act)13

The new Act further provides that certain procedures like presentation of claims by parties and summons issued by tribunals under the RDDBFI Act will be undertaken in electronic form (Section 33 inserting new Section 19A in the Principal Act).14

The new Act also provides details of procedures that the tribunals will follow in case of debt recovery proceedings (Section 37 inserting new Section 22A in the Principal Act).15 This includes the requirement of applicants to specify the assets of the borrower, which have been collateralized. It further prescribes time limits for the completion of some of these procedures.

SIGNIFICANCE AND CONCLUSION

Alongside the new bankruptcy law which was passed earlier in the beginning of this year, amendments that are concretized by the way of this Act will help to create an infrastructure which would effectively deal with non-performing assets in the banking system. The Act will help the financial institutions and banks to effectively recover their bad loans. The Act aims to encourage more Asset Reconstruction Companies to set up their business and would also help to revamp Debt Recovery tribunals. As the current laws are asymmetrical and favourable to the defaulters, the Act will help to strengthen the banking system more legally. The Act has empowered RBI with more powers.

Footnotes

1 Bill No. 144 of 2016 as per <http://www.thehindu.com/ multimedia/archive/02976/1 Bill No. 144 of 2016 as per SARFAESI_2976440a.pdf >, as visited on 12/11/2016.

2 The Central Government appointed the 1st day of September, 2016 as the date on which the following provisions of the said Act would come into force, namely Section 2 and 3 (both inclusive), Section 4 (except clause xiii), Section 5 and 6 (both inclusive), Section 8 to 16 (both inclusive), Section 22 to 31 (both inclusive) and Section 33 to 44 (both inclusive).

3 Section 12 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the principal Act, in section 14, in sub-section (1),— (i) in the second proviso, after the words "secured assets", the words "within a period of thirty days from the date of application" shall be inserted; (ii) after the second proviso, the following proviso shall be inserted, namely:— "Provided further that if no order is passed by the Chief Metropolitan Magistrate or District Magistrate within the said period of thirty days for reasons beyond his control, he may, after recording reasons in writing for the same, pass the order within such further period but not exceeding in aggregate sixty days."

4 Vatsal Khullar, 'PRS Legislative Research', prsindia.org/uploads/media/Enforcement%20of%20 Security/Joint%20Committee%20Report%20Comparison. pdf>, as visited on 12/11/2016.

5 Section 13 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the principal Act, in section 15, in sub-section (4), the following proviso shall be inserted, namely:— "Provided that if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.""

6 Section 16 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the principal Act, after section 20, the following sections shall be inserted, namely:— "20A. (1) The Central Government may, for the purpose of providing a Central database, in consultation with State Governments or other authorities operating registration system for recording rights over any property or creation, modification or satisfaction of any security interest on such property, integrate the registration records of such registration systems with the records of Central Registry established under section 20, in such manner as may be prescribed. Explanation.—For the purpose of this sub-section, the registration records includes records of registration under the Companies Act, 2013, the Registration Act, 1908, the Merchant Shipping Act, 1958, the Motor Vehicles Act, 1988, the Patents Act, 1970, the Designs Act, 2000 or other such records under any other law for the time being in force. (2) The Central Government shall after integration of records of various registration systems referred to in sub-section (1) with the Central Registry, by notification, declare the date of integration of registration systems and the date from which such integrated records shall be available; and with effect from such date, security interests over properties which are registered under any registration system referred to in subsection (1) shall be deemed to be registered with the Central Registry for the purposes of this Act.""

7 Section 18 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – Insertion of new Chapter IV A – "...Section 26D - Right of enforcement of securities - Notwithstanding anything contained in any other law for the time being in force, from the date of commencement of the provisions of this Chapter, no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry."

8 Section 18 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – Insertion of new Chapter IV A – "...Section 26E – Priority to secured creditors - Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority."

9 Section 21 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – Insertion of new sections 30A (Power of adjudication authority to impose penalty), 30B, 30C and 30D.

10 Section 6 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 - In the principal Act, in section 5,— "(i) after subsection (1), the following sub-section shall be inserted, namely:— "(1A) Any document executed by any bank or financial institution under sub-section (1) in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitization shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899: Provided that the provisions of this sub-section shall not apply where the acquisition of the financial assets by the asset reconstruction company is for the purposes other than asset reconstruction or securitization." As per Joint Committee Report, this benefit will not be provided if asset is acquired for any purpose other than reconstruction or securitization.

11 Section 28 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the principal Act, for section 6, the following section shall be substituted, namely:— "6. 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 and shall be eligible for reappointment: Provided that no person shall hold office as the Presiding Officer of a Tribunal after he has attained the age of sixty-five years.""

12 Section 30 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the Principal Act, for section 11, the following section shall be substituted, namely:— "11. The Chairperson of an Appellate Tribunal shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment: Provided that no person shall hold office as the Chairperson of a Appellate Tribunal after he has attained the age of seventy years.""

13 Section 32 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – ""In the principal Act, in section 19,— (i) in subsection (1), clause (a) shall be renumbered as clause (aa) and before clause (aa) so renumbered, the following clause shall be inserted, namely:— "(a) the branch or any other office of the bank or financial institution is maintaining an account in which debt claimed is outstanding, for the time being; or";

14 Section 33 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – " After Section 19 of the Principal Act, the following sections shall be inserted, namely:— Section 19A - Filing of recovery applications, documents and written statements in electronic form –

... (b) any summons, notice or communication or intimation as may be required to be served or delivered under this Act, may be served or delivered by transmission of pleadings and documents by electronic form and authenticated in such manner as may be prescribed."

15 Section 37 of Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 – "In the principal Act, after section 22, the following section shall be inserted, namely:— "22A. The Central government may, for the purpose of this Act, by rules, lay down uniform procedure consistent with the provisions of this Act for conducting the proceedings before the Tribunals and Appellate Tribunals.""

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