- SECURITISATION ACT
(The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)
With the problem of NPAs, created due to systemic banking crisis, focused measures to help banking system to realize its NPA has resulted in creation of Asset Reconstruction Companies (ARCs).
It is also perceived that the cumbersome and time consuming legal process create many a hurdle than solution to address the problem of NPA s in the banking system. It was suggested by many a committees on banking reforms that there should be a mechanism to recover the dues of the banks through efficacious and speedier realisation of the assets/securities.
In 1991 and again in 1998, the Narasimham Comittees 1 & 2 suggested legal frame work in this direction. The committee on weak Public Sector Banks (1999) also suggested to draw a lesson from Asian neighbours to set up ARCs. The Andhyarujina Committee had suggested legal infrastructure in the realization and management of securities.
Securitisation
To address the increasing needs of financial institutions to have more cheaper funds available for lending operations and to reduce the size of the balances sheets, Securitisation was widely accepted as a tool carry out the above activity.
Securitisation is a process which converts a financial relation in to a transaction that is into a capital market instrument. In other words it is the process of converting existing or future cash inflows in to a tradable security. That is the expected cash inflow from financial assets such as mortgages, trade receivables, book debts, charges, hypothecations, assignments and intellectual property against which borrowings were raised, are made in to tradable securities. Since the lender is assured of regular cash flows, there is an enhanced element of credit worthiness and therefore can offer the loan at a lower price.
The process
The originator, is the entity which securitise its assets, which is responsible for originating the claims which are to be ultimately securitised. Thus originator transfers receivables to the issuing entity.
The Special Purpose Vehicle, will hold the receivables assigned to it for the purpose of issuing and holding the securities on behalf of the investors. The SPV will create securities which are marketable, may be of smaller size receipts in which the investors can invest.
As per the present scheme of the Act, only the Qualified Institutional Buyers (QIBs) can invest in such securities.
Credit Enhancement is the process by which enhancing the quality of the asset, which is supplied by the originator in order to make it acceptable to investor.
Securitisable Recievables
Wherever there is a future stream of revenues that can be realized and which can be reasonably estimated there lies an opportunity to raise money by way securitisation. To illustrate
· Receivables of real estates/housing finance companies
· Receivables of non mortgage based finance companies -auto loans, equipment lease rentals
· Car rentals
· Receivables of credit cards
· Hotel rentals
· Real estate rentals
· Receivables of utility agencies- telephone, electricity
· Taxes
· Loan portfolio of Banks
· Royalty or license fee from Intellectual Property
· Insurance premium
The statute
The Act was passed in June 2002, mainly with a view to address the problems faced by the Banks/FIs in the NPA front giving rights to them to enforce/restructure securities without intervention of the courts, cutting litigation time/expenses.
The Act provides two ways to restructure/realise the assets:
Enforcement of Security Interest
Asset Reconstruction
Enforcement of Security Interest
The Act provides that in an NPA account, classified in the books of the Banks/FIs
A demand notice can be served to the borrower and to the persons who has created security to repay the dues within 60 days from the date of the notice, by the secured creditor- like Bank, FI, ARC, SC & Housing Finance Companies (section 2[c])
If the borrower/creator of security interest, fails to clear the dues in the statutory period of 60 days, the secured creditor through its authorised officer.
- Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured assets
- Takeover management of secured assets of the borrower with the above rights
- Appoint any person to manage the secured assets, of which the possession has been taken over
Issue notice and require any persons who acquired right of the borrower on the secured assets and/or having dues to the borrower to pay the secured creditor money sufficient to clear the dues of the borrower. (Garnishee Notice)
Securities Enforceable under the Act
Book debts
Receivables
Charges
Mortgage
Hypothecation
Assignment
Intellectual Property Rights
Securities Not Enforceable under the Act
Lien on goods money or security
Pledge
Charge on Aircraft/Ship
Conditional Sale
Hire purchase or lease
Rights of unpaid seller
Assets exempted under the proviso of section 60 of CPC
Agricultural land
Accounts which are not eligible
The accounts which are not classified as NPAs
The Accounts in which liability of the borrower is less than 1 lac
The Accounts where amount due is less than 20% of the amount lent
The accounts with expired documents
are barred from taking action under the provisions of the Act.
Asset Reconstruction
An Asset Reconstruction Company/Securitisation Company (ARC/SC) formed under the provisions of the Act can take any one or following measures, in tune with the guidelines issued by the RBI in this regard.
Taking over/ effect change in management of the business
The sale or lease of part/whole business
Rescheduling of payment of debt
Enforcement of security rights as above
Settlement of dues with the borrower
Taking of possession of the secured assets as above
Formation of ARCs/SCs
· Shall apply to RBI to get a license.
· After getting license the ARC/SC may acquire financial assets from the Bank/FIs(Originators) by way of issuing debentures, bond or any form of security for consideration agreed upon with terms and conditions.
The ARC/SC can enter an agreement with the originator for transfer of such financial assets to the ARC/SC.
If the originator is a lender, all the rights of the lender shall vest in SC/ARC, after such acquisition.
The ARC/SC after acquisition of the financial assts may offer security receipts to the buyers (at present only to the QIBs).
Challenges for Banks/FIs
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Grievances of Defaulters
Lender Favoured
Assets Sold in a closed room
No reference to lender’s liability
No judicial remedy
Defense
An extension of SFC’s Act which is in operation from 1969
In-built remedies available against arbitrariness
§ Appeals to DRTs
§ Penalty for non adherence to provisions of the Act including imprisonment
©Sabu G Chelapaden 2003
Sabu/sec-arc
