Nidhi Parmar

NIddhi ParmarThe Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016[1] (hereinafter referred to as “Amendment Bill, 2016”), as introduced in the LokSabha provides for amendment in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[2] (“SARFAESI Act”), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”), the Indian Stamp Act, 1899 and the Depositories Act, 1996. Chapter II of the Amendment Bill, 2016 proposes the amendments to be carried out in the SARFAESI Act. The Amendment Bill, 2016 was introduced before the LokSabha with an aim to improve ease of doing business and facilitate investment leading to higher economic growth and development.

As such, the Statement of Objects and Reasons of the Code reads as follows (extracted):

“The amendments in the SARFAESI Act, 2002 are proposed to suit changing credit landscape and augment ease of doing business which, inter alia, include (i) registration of creation, modification and satisfaction of security interest by all secured creditors and provision for integration of registration systems under different laws relating to property rights with the Central Registry so as to create Central database of security interest on property rights; (ii) conferment of powers upon the Reserve Bank of India to regulate asset reconstruction companies in a changing business environment; (iii) exemption from stamp duty on assignment of loans by banks and financial institutions in favour of asset reconstruction companies; (iv) enabling non-institutional investors to invest in security receipts; (v) debenture trustees as secured creditors; (vi) specific timeline for taking possession of secured assets; and (vii) priority to secured creditors in repayment of debts.”

In this write-up we have analysed the amendments proposed which are specific to the SARFAESI Act, 2002 and their impact:

Clause No.Text of SARFAESI ActProposed changes in the Amendment Bill, 2016Our Analysis
Clause 2 – Long Title

[Insertion]

An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights, and for matters connected therewith or incidental thereto.Generally, long title intends to provide a summary description of the purpose or scope of an Act. To keep an eye on frauds, the central registry was established which is popularly known as Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI). Initially, CERSAI’s mandate was to maintain a central registry of equitable mortgages which comprised of details pertaining to property, financial institution that has extended loans and the borrowers. However, the scope has been expanded to cover various transactions as specified under Rule 4 (2A) to (2D) to be registered with CERSAI[3].
Clause 4 (section 2(1)(ba)) – Insertion of new clause “asset reconstruction company”No such provision.“asset reconstruction company” means a company incorporated under the Companies Act, 2013 and registered with Reserve Bank under section 3 of this Act for the purpose of carrying on the business of asset reconstruction and securitisation;Clause 3 of the Amendment Bill, 2016 seeks to change the nomenclature of “securitisation company”, “reconstruction company”, “securitisation or reconstruction company”, “securitisation company or the reconstruction company” or “securitisation company or a reconstruction company” to be changed as “asset reconstruction company” and the words “securitisation companies or reconstruction companies”, to be changes as “asset reconstruction companies”.
Clause 4 (section 2(1)(f)) – Definition of “borrower”

[Insertion]

“borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;“borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of an asset reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance or who has raised funds through issue of debt securities;The term has been elaborated to include funds raised by the borrower by way of issuance of debt securities. The term “debt security” has been defined by insertion of new clause i.e. clause 2 (1) (ia).
Clause 4 (section 2(1)(ha)) – Definition of “debt”

[Substitution]

“debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;“debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and includes— (i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or conditional sale or under any other contract; (ii) any right, title or interest on any intangible asset or licence or assignment of any intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable any borrower to acquire the intangible asset or obtain licence of such asset;The term “debt” has been defined under section 2 (g) of the RDDBFI Act to mean “any liability (inclusive of interest) which is claimed as due from any person by a bank of a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application”. In order to cover every corner, the term has been elaborated to include unpaid portion of the purchase price of tangible asset given on hire, financial lease, and conditional sale or under any contract and intangible asset which secures the obligation to pay any unpaid portion or credit extended to enable any borrower to acquire such asset.
Clause 4 (section 2(1)(ia)) – insertion of definition “debt securities”No such provision“debt securities” means debt securities listed in accordance with the regulations made by the Board under the Securities and Exchange Board of India Act, 1992;The term “debt securities” is a new insertion. It has not been defined under the Securities and Exchange Board of India Act, 1992; however, regulation 2 (1) (e) of Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 defines the term debt security. Therefore, in order to understand the meaning of the term debt securities one will have to refer to SEBI ILDS Regulations.
Clause 4 (section 2(1)(j)) – Definition of “default”

[Substitution]

“default” means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor;“default” means— (i) non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; or (ii) non-payment of any debt by the borrower with respect to debt securities after notice of ninety days, demanding payment of dues served upon such borrower, by the debenture trustee or by any other authority in whose favour security interest is created for the benefit of holders of such debt securities;This change is in line with the raising of finance through of issue of debt securities within the ambit of “debt”. However, non-payment against debt securities will be termed as default only when the subscribers to the debt securities have served notice upon the issuer demanding payment of dues and 90 days have lapsed from the date of serving such notice. Additionally, this notice shall be served by the debenture trustee or such authority that is holding security interest for the benefit of holder of debt security.
Clause 4 (section 2(1)(k)) – Definition of “financial assistance” [Insertion]“financial assistance” means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution;“financial assistance” means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution including funds provided for the purpose of acquisition of any tangible asset on hire or financial lease or conditional sale or under any other contract or obtaining assignment or licence of any intangible asset or purchase of debt securities;This definition is an ingredient of the definition of “borrower”. Borrower has been defined to mean any person who has been granted financial assistance by any banks or financial institutions. The definition of the term financial assistance has been widened to include the funds provided by such banks and financial institutions for the purpose of acquisition of any tangible asset either on financial lease or hire or conditional sale or under any contract or for obtaining license of any intangible asset or funds provided for purchasing debt securities.

SARFAESI Act covered only subscription to debentures; however, the Amendment Bill 2016 extends its arm to cover purchase of debentures under the term.

Clause 4 (section 2(1)(l)) – definition of “financial asset”

[Insertion]

“financial asset” means debt or receivables and includes—

XX (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (vi) any financial assistance;

“financial asset” means debt or receivables and includes—

XX (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; (va) any beneficial right, title or interest in any tangible property given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to acquire such tangible property; or (vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or (vi) any financial assistance;

With changes proposed in definition of borrower, debt and financial assistance, the Amendment Bill 2016 also propose changes in the term “financial asset”. Refer our analysis above for respective definitions. Notably, “financial assistance” is part of “financial assets” wherein both secured and unsecured debts form part of the term “financial assets”.
Clause 4 (section 2(1)(m)) – Definition of “financial institution”

[Insertion]

“financial institution” means– XX (iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958); XX“financial institution” means– XX (iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958); (iiia) a debenture trustee registered with the Board and appointed for debt securities; (iiib) asset reconstruction company, whether acting as such or managing a trust created for the purpose of securitisation or asset reconstruction, as the case may be

XX

This definition may be divided into 2 parts – part which is listed in the Act itself and a part which is “to be notified” in terms of power granted to it. The term is proposed to be amended to include debenture trustee appointed while issuance of debt securities and asset reconstruction company created.
Clause 4 (section 2(1)(ma)) – Insertion of new definition “financial lease”

[Insertion]

No such provision(ma) “financial lease” means a lessor’s right in a tangible asset, other than a negotiable instrument or negotiable document, under the lease agreement where lessee, at the expiry of the term of the lease or on payment of agreed residual value of the asset, becomes the owner of the asset;The definition of financial lease as mentioned in the Amendment Bill, 2016 has a clear departure from the definition provided for in the accounting standards.

The definition of financial lease under the Amendment Bill, 2016 requires the ownership of the asset to get transferred to the lessee end of the lease term or by virtue of payment of agreed residual value.

Further, the definition of financial lease should be aligned with the accounting standards to ensure that there are no gaps.

Clause 4 (section 2(1)(na)) – Insertion of new definition “negotiable document”No such provision(na) “negotiable document” means a document, which embodies a right to delivery of tangible assets and satisfies the requirements for negotiability under any law for the time being in force including warehouse receipt and bill of lading;Insertion of new definition. The term financial lease has been defined to mean lessor’s right in a tangible asset other than negotiable instrument or negotiable document. In order to have a clear understanding on the definition of negotiable documents the same has been defined and proposed for insertion.
Clause 4 (section 2(1)(u)) – Definition of “qualified institutional buyer” [insertion]“qualified institutional buyer” means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under sub-section (4) of section 3 or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder, or any other body corporate as may be specified by the Board;“qualified institutional buyer” means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under sub-section (4) of section 3 or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder or any other category of non-institutional investors specified by the Reserve Bank under sub-section (1) of section 7 in consultation with the Board from time to time, or any other body corporate as may be specified by the Board;The Amendment Bill, 2016 propose for an amendment in sub-section (1) of section 7 of the SARFAESI Act. Clause 7 of the Amendment Bill, 2016 provides for amendment in section 7 (1) as follows: for the words “other than by offer to public”, the words “or such other category of investors as may be specified by the Reserve Bank in consultation with the Board, from time to time,” shall be substituted. In order to meet the proposed changes the definition has been expanded to include any other category of non-institutional investors specified by the RBI in consultation with the Board.
Clause 4 (section 2(1)(v)) – Definition of “reconstruction company”“reconstruction company” means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;OmittedThe same has been omitted pursuant to change in the nomenclature. Further, a new clause defining the term “asset reconstruction company” has been proposed to be included. Same has been discussed above.
Clause 4 (section 2(1)(za)) – Definition of “securitisation company”“securitisation company” means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation;OmittedThe same has been omitted pursuant to change in the nomenclature. Further, a new clause defining the term “asset reconstruction company” has been proposed to be included. Same has been discussed above.
Clause 4 (section 2(1)(zd)) Definition of “secured creditor”

[Insertion]

“secured creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes— (i) debenture trustee appointed by any bank or financial institution; or (ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution,“secured creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes— (i) debenture trustee appointed by any bank or financial institution; (ia) a debenture trustee appointed by any company for debt securities; or (ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution, (iv) any bank or financial institution holding any right, title or interest upon any tangible property given on hire or financial lease or conditional sale or under any other contract, which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or any credit provided to enable the borrower to acquire the tangible property; or (v) any bank or financial institution holding any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or an obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or obtain licence of intangible asset;Under the existing law, only those debenture trustees, appointed by banks and FIs are treated as secured creditor, but the now debenture trustees appointed by companies for issue of debt securities are also covered under the term secured creditor. This insertion in the list of secured creditors is flowing from the inclusion of fund raising through debt securities under the definition of debt.

Also, the term extends to include banks and financial institutions as lessor under the definition of secured creditor. This amendment if enforced may have a large impact on the leasing industry. Pursuant to this provision the lessor would be on same footing as secured creditors. A lessor, being the real owner of the asset, has the right to repossess the asset without courts intervention at the time of default by the lessee and their claim ranks prior to the claim of other secured creditors.

Clause 4 (section 2(1)(zf)) – Definition of “security interest”

[Substitution]

“security interest” means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;“security interest” means right, title or interest of any kind whatsoever upon property created in favour of any secured creditor and includes— (i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible property, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible property; or (ii) such right, title or interest in any intangible asset or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset

Explanation.—For the purposes of this clause, it is hereby clarified that security interest shall not include the security interest referred to in section 31;

The key element in the definition of security interest is “security”. The amended term shall include right, title or interest on tangible property given on hire or financial lease or conditional sale or under any contract which secured the obligation to pay the unpaid portion or right, title or interest in any intangible property which secured the obligation to pay the unpaid amount.

Further, the existing law uses the term “property”, the mean of which is not clear. However, the proposed definition clearly covers both interests over tangible and intangible properties.

Clause 5 (section 3) – Registration of asset reconstruction companies

[Substitution]

(1) No securitisation company or reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without –

XX

(b) having the owned fund of not less than two crore rupees or such other amount not exceeding fifteen per cent of total financial assets acquired or to be acquired by the securitisation company or reconstruction company, as the Reserve Bank may, by notification, specify:

XX

(1) No asset reconstruction company shall commence or carry on the business of securitisation or asset reconstruction without –

XX

(b) having net owned fund of not less than two crore rupees or such other amount as the Reserve Bank, may, by notification, specify:

XX

Sub-section (1) of section 3 provides criteria to be meet by asset reconstruction company in order to commence the business of securitisation or asset reconstruction. The requirement has been proposed to be changed to having net owned fund of not less than Rs. 2 crores or such amount as RBI may notify.
Clause 5 (section 3) – Registration of asset reconstruction companies

[Substitution]

XX

(3) The Reserve Bank may, for the purpose of considering the application for registration of a securitisation company or reconstruction company to commence or carry on the business of securitisation or asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such securitisation company or reconstruction company, or otherwise, that the following conditions are fulfilled, namely:–

XX

(f) that a sponsor, is not a holding company of the securitisation company or reconstruction company, as the case may be, or, does not otherwise hold any controlling interest in such securitisation company or reconstruction company;

XX

XX

(3) The Reserve Bank may, for the purpose of considering the application for registration of a securitisation company or reconstruction company to commence or carry on the business of securitisation or asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such securitisation company or reconstruction company, or otherwise, that the following conditions are fulfilled, namely:–

XX

(f) that a sponsor of an asset reconstruction company is a fit and proper person in accordance with the criteria specified by the Reserve Bank for such persons;

XX

As per the amendments, a sponsor has to be a fit and proper person as per the criteria laid down by the RBI.
Clause 5 (section 3) – Registration of asset reconstruction companies

[Substitution]

XX

(6) Every securitisation company or reconstruction company, shall obtain prior approval of the Reserve Bank for any substantial change in its management or change of location of its registered office or change in its name:

PROVIDED that the decision of the Reserve Bank, whether the change in management of a securitisation company or a reconstruction company is a substantial change in its management or not, shall be final.

XX

Explanation: For the purposes of this section, the expression “substantial change in management” means the change in the management by way of transfer of shares or amalgamation or transfer of the business of the company.

XX

(6) Every asset reconstruction company, shall obtain prior approval of the Reserve Bank for any substantial change in its management including appointment of any director on the board of directors of the asset reconstruction company or managing director or chief executive officer thereof or change of location of its registered office or change in its name:

PROVIDED that the decision of the Reserve Bank, whether the change in management of a securitisation company or a reconstruction company is a substantial change in its management or not, shall be final.

XX

Explanation: For the purposes of this section, the expression “substantial change in management” means the change in the management change affecting the sponsorship in the company by way of transfer of shares or amalgamation or transfer of the business of the company.

The securitisation company or reconstruction company is required to obtain prior approval of RBI for any substantial change in the management. However, the same has been proposed to be changed with an additional requirement of obtaining prior approval before appointment of any director on the Board of the asset reconstruction company including managing director or chief executive officer.
Clause 6 (section 5) – Acquisition of rights or interest in financial assets

[Insertion]

(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution–(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any asset reconstruction company may acquire financial assets of any bank or financial institution—

XX

(1A) Any document executed by any bank or financial institution in favour of the asset reconstruction company under sub-section (1) for the purpose of acquiring financial assets shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899. (1B) An asset reconstruction company may acquire the financial asset of any bank or financial institution for the purpose of asset reconstruction where a borrower has failed to pay the secured debt or any instalment thereof on due date, whether or not the account of such borrower is classified as non-performing asset.

Section 5 is a non-obstante clause. This section grants power to asset reconstruction company to acquire financial asset of any banks or financial institution either by issuing bonds or debentures or by entering into an agreement for the transfer. Two more options have been proposed under the Amendment Bill, 2016 – document executed for acquiring the financial assets, the document so entered has been exempted from stamp duty pursuant to provisions of section 8F of the Indian Stamp Act, 1899 or where the borrower has failed to pay the secured debt or any instalment then the asset reconstruction company may acquire the financial asset of bank or financial institution; however, the same does not depend on whether the account of such borrower is classified as NPA.
Clause 6 (section 5) – Acquisition of rights or interest in financial assets

[Insertion]

(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the asset reconstruction company, such asset reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets. (2A) If the bank or financial institution is holding any right, title or interest upon any tangible property or intangible asset to secure payment of any unpaid portion of the purchase price of the asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire the tangible property or assignment or licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on acquisition of such financial assets.Sub-section (2) vest powers to the asset reconstruction company on acquiring the financial assets. Similarly, Sub-clause (2A) has been proposed to be included in terms of leases.
Clause 6 (section 5) – Acquisition of rights or interest in financial assets

[Insertion]

(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of the securitisation company or reconstruction company, as the case may be.(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the asset reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, asset reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of the asset reconstruction company, as the case may be.

(3A) Notwithstanding anything contained in any other law for the time being in force, on the basis of the document executed under sub-section (1), the name of the asset reconstruction company shall be substituted in all the registration records or public records or such other records and in all legal proceedings filed by or against the bank or financial institution before any court, tribunal or any other authority and such asset reconstruction company shall be entitled to exercise all the rights of such bank or financial institution.

Sub-clause (3A) provides that based on the documents executed under sub-section (1) the name of the asset reconstruction company shall be substituted in all the registration records or public records or such other records and in all legal proceedings filed by or against the bank or financial institution before any court, tribunal or any other authority. Such asset reconstruction company shall have all the rights as vested with banks and financial institutions.
Clause 7 (section 7) – Issue of security by raising of receipts or funds by asset reconstruction company

[Substitution]

(1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), Securities Contracts (Regulation) Act, 1956 (42 of 1956), and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any securitisation company or reconstruction company, may, after acquisition of any financial asset under sub-section (1) of section 5, offer security receipts to qualified institutional buyers (other than by offer to public) for subscription in accordance with the provisions of those Acts.(1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), Securities Contracts (Regulation) Act, 1956 (42 of 1956), and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any asset reconstruction company, may, after acquisition of any financial asset under sub-section (1) of section 5, offer security receipts to qualified institutional buyers (or such other category of investors as may be specified by the Reserve Bank in consultation with the Board, from time to time) for subscription in accordance with the provisions of those Acts.An asset reconstruction company after acquiring financial assets under section 5 (1) may offer security receipts to qualified institutional buyers or such other category of investors as may be specified by the RBI in consultation with the Board for subscription without violating any provisions of the Companies Act, 2013 or SCRA, 1956 or SEBI Act, 1992.
Clause 8 (section 9) – Measures for assets reconstruction

[Substitution]

Without prejudice to the provisions contained in any other law for the time being in force, a securitisation company or reconstruction company may, for the purposes of asset reconstruction, having regard to the guidelines framed by the Reserve Bank in this behalf, provide for any one or more of the following measures, namely:– (a) the proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower; (b) the sale or lease of a part or whole of the business of the borrower; (c) rescheduling of payment of debts payable by the borrower; (d) enforcement of security interest in accordance with the provisions of this Act; (e) settlement of dues payable by the borrower; (f) taking possession of secured assets in accordance with the provisions of this Act.(1) Without prejudice to the provisions contained in any other law for the time being in force, an asset reconstruction company may, for the purposes of asset reconstruction, provide for any one or more of the following measures, namely:— (a) the proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower; (b) the sale or lease of a part or whole of the business of the borrower; (c) rescheduling of payment of debts payable by the borrower; (d) enforcement of security interest in accordance with the provisions of this Act; (e) settlement of dues payable by the borrower; (f) taking possession of secured assets in accordance with the provisions of this Act; (g) conversion of any portion of debt into shares of a borrower company: Provided that conversion of any part of debt into shares of a borrower company shall be deemed always to have been valid, as if the provisions of this clause were in force at all material times.

(2) The Reserve Bank shall, for the purposes of sub-section (1), determine the policy and issue necessary directions including the direction for regulation of management of the business of the borrower and fees to be charged.

(3) The asset reconstruction company shall take measures under sub-section (1) in accordance with policies and directions of the Reserve Bank determined under sub-section (2).

This section provides for measures that may be taken for asset reconstruction. Keeping as the measures as is, one more measure have been inserted which provides for conversion of any portion of debt into shares of a borrower. Insertion of proviso provides for validity of conversion at all time. Further, sub-clause (2) casts an responsibility on RBI to issue directions incl. directions on regulation of management of the business of the borrower and fees to be charged and such directions shall be complied by the asset reconstruction company.
Clause 9 (section 12) – Power of Reserve Bank to determine policy and issue directions

[Insertion]

XX

(2) Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give directions to any securitisation company or reconstruction company generally or to a class of securitisation companies or reconstruction companies or to any securitisation company or reconstruction company in particular as to– (a) the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof; (b) the aggregate value of financial assets which may be acquired by any securitisation company or reconstruction company.

XX

(2) Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give directions to any asset reconstruction company generally or to a class of asset reconstruction companies or to any asset reconstruction company in particular as to– (a) the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof; (b) the aggregate value of financial assets which may be acquired by any securitisation company or reconstruction company;

(c) the fee and other charges which may be charged or incurred for management of financial assets acquired by any asset reconstruction company; (d) the transfer of security receipts issued to qualified institutional buyers.

Sub-section (2) provides for powers vested with RBI to issue direction to any asset reconstruction company particularly or in general or to certain class of such companies on such matters as specified under clause (a) and (b). New clause has been proposed in the Amendment Bill, 2016 with respect to fees and other charges incurred for management of financial asset and transfer of security receipts issued by QIB.
Clause 10 (section 12B) – Power of Reserve Bank to carry out audit and inspection.

[Insertion]

No such provisions.12B. (1) The Reserve Bank may, for the purposes of this Act, carry out audit and conduct inspection of an asset reconstruction company from time to time. (2) It shall be the duty of an asset reconstruction company and its officers to provide assistance and cooperation to the Reserve Bank to carry out audit or inspection under sub-section (1). (3) Where on audit or inspection or otherwise, the Reserve Bank is satisfied that business of an asset reconstruction company is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such asset reconstruction company, the Reserve Bank may, for securing proper management of an asset reconstruction company— (a) remove the Chairman or any director or appoint additional directors on the board of directors of the asset reconstruction company; or (b) appoint any of its officers as an observer to observe the working of the board of directors of such asset reconstruction company. (4) It shall be the duty of every director or other officer or employee of the asset reconstruction company to produce before the person, conducting an audit or inspection under sub-section (1), all such books, accounts and other documents in his custody and to provide him such statements and information relating to the affairs of the asset reconstruction company as may be required by such person within the stipulated time specified by him. The provisions pertaining to power of RBI to carry out audit and inspection did not exist prior to amendments proposed under the Amendment Bill, 2016. This provision empowers RBI to carry out audit and inspection of asset reconstruction company and to remove the Chairman or any director or appoint additional directors on the board of directors of the asset reconstruction company, or to appoint any of its officers as an observer to observe the working of the board of directors of such asset reconstruction company for securing proper management of an asset reconstruction company.
Clause 10 (section 12C) – Penalties for noncompliance of directions of the Reserve Bank.

[Insertion]

No such provisions.12C. (1) Where any asset reconstruction company fails to comply with any direction issued by the Reserve Bank under section 9 or section 12 or section 12A or any other provision of this Act, the Reserve Bank may impose on such asset reconstruction company a penalty not exceeding one crore rupees or twice the amount involved in such failure whichever is more, and where such failure is a continuing one, with a further penalty which may extend to one lakh rupees for every day during which such failure continues. (2) For the purpose of imposing penalty under sub-section (1), the Reserve Bank shall serve a notice on the asset reconstruction company under default requiring it to pay the amount of penalty specified in such notice. (3) Reserve Bank under sub-section (1) shall be payable within a period of thirty days from the date of issue of notice under sub-section (2). (4) Where the asset reconstruction company fails to pay the penalty within the specified period under sub-section (3), the Reserve Bank may by order cancel its registration: Provided that an opportunity of being heard shall be given to such asset reconstruction company before cancellation of its registration. The provisions pertaining to penalties for noncompliance of directions issued by RBI did not exist prior to amendments proposed under the Amendment Bill, 2016.
Clause 10 (section 12D) – Failure to pay penalty.

[Insertion]

No such provisions.12D. Without prejudice to the provisions contained in sub-section (4) of section 12C, if any asset reconstruction company fails to pay the penalty under sub-section (3) of section 12C within the specified period, a complaint may be filed against such company and the officer of such company who is in default, in accordance with section 30.The provisions pertaining to failure to pay penalty did not exist prior to amendments proposed under the Amendment Bill, 2016.
Clause 11 (section 13) – Enforcement of security interest

[Insertion]

No such proviso.(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under subsection (4).

Provided that— (i) the requirement of classification of secured debt as nonperforming asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities and the provisions for enforcement of security interest under this Chapter shall apply to such borrower; and (ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee.

The proviso provides that if a borrower has raised funds through issue of debt securities then the classification of secured debt as non-performing asset shall not apply. However, the provisions pertaining to enforcement of security interest shall not apply to such borrower and the debenture trustee shall be entitled to enforce security interest in the case of default in the same manner as provided under section 13 with modifications as may be required.
Clause 11 (section 13) – Enforcement of security interest

[Substitution]

(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for lease, assignment or sale of the secured assets,— (i)the secured assets shall not be leased, assigned or sold by the secured creditor; and (ii) in case, any step has been taken by the secured creditor for lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for lease or assignment or sale of such secured assets.The amendment provides that if the all the dues incurred by the secured creditor are tendered to him before the date fixed for lease, assignment or sale of the secured assets then such secured assets shall not be leased, assigned or sold by the secured creditor. However, where such secured assets has been leased, assigned or sold by the secured creditor before tendering of such amount then no further step shall be taken by such secured creditor. This clause only provides an clarity; however, the intent remains the same.
Clause 12 (section 14) – Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset

[Insertion]

(1) Where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him– (a) take possession of such asset and documents relating thereto; and (b) forward such assets and documents to the secured creditor.

XX

Provided further that on receipt of the affidavit from the Authorised officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of the secured assets:

XX

(1) Where the possession of any secured assets is required to be taken by the secured creditor or if any of the secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act, the secured creditor may, for the purpose of taking possession or control of any such secured asset, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being made to him– (a) take possession of such asset and documents relating thereto; and (b) forward such assets and documents to the secured creditor.

XX

Provided further that on receipt of the affidavit from the Authorised officer, the District Magistrate or the Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass suitable orders for the purpose of taking possession of the secured assets within a period of thirty days from the date of application:

XX

This insertion provides time period of 30 days within which the District Magistrate/Chief Metropolitan Magistrate shall dispose of the applications filed by banks or financial institutions.
Clause 12 (section 14) – Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking possession of secured asset

[Insertion]

XX

(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary.

XX

XX

(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used, such force, as may, in his opinion, be necessary. (2A) Any application under sub-section (1) may be made by— (a) two or more banks as secured creditors with or without any financial institution where they have converted part of their respective debts into shares of a borrower company in compliance with the provisions of sub-section (2) of section 19 of the Banking Regulation Act, 1949 or obtained transfer of shares of the promoter shareholders held in pledge as security for any financial assistance in the name of such banks, thereby jointly holding more than fifty per cent. share capital of the borrower company; or (b) any asset reconstruction company or financial institution or any other assignee holding more than fifty-one per cent. share capital of the borrower company.

Explanation.—For removal of doubts, it is hereby clarified that the conversion of debt into shares of any borrower company by the secured creditors shall not in any way affect the rights of the secured creditors to enforce securities and recover the balance amount of debt under this Act or any other law for the time being in force.

Section 14 has been proposed to be amended to provide two or more banks as secured creditor without any financial institution where they have converted part of their respective debts into shares of a borrower company or obtained transfer of shares of the promoter shareholders held in pledge as security for any financial assistance in the name of such banks, thereby jointly holding more than 15% share capital of the borrower company or an asset reconstruction company or financial institution or any other assignee holding more than 51% share capital of the borrower company to file an application under the said section.
Clause 13 (section 15) – Manner and effect of take over of management

[Insertion]

XX

(4) Where the management of the business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him.

XX

(4) Where the management of the business of a borrower had been taken over by the secured creditor, the secured creditor shall, on realisation of his debt in full, restore the management of the business of the borrower to him.

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, it shall not be necessary for the secured creditor to restore the business to such borrower.

It provides an exception to restore the business of the borrower in case where the secured creditor has acquired controlling interest in the borrowing company pursuant to conversion of part of its debt into shares of a borrowing company.
Clause 14 (section 17)

[Substitution]

Heading – Right to appealSubstitution of heading- Application against measures to recover secured debtsProvides for change in the heading of section 17.
Clause 14 (section 17) – Application against measures to recover secured debts

[Insertion]

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application alongwith such fee, as may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken:

XX

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application alongwith such fee, as may be prescribed to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken:

XX

(1A) An application under sub-section (1) shall be filed before the Debts Recovery Tribunal within the local limits of whose jurisdiction— (a) the cause of action, wholly or in part, arises; or (b) where the secured asset is located.

(1B) Where any person, in an application under sub-section (1), claims any tenancy or any other right upon the property over which the security interest has been created for the secured debt, the Debts Recovery Tribunal shall have the jurisdiction to examine such claims and pass such orders as it deems appropriate.

XX

An application shall be filed before such DRT within which the local limits of whose jurisdiction cause of action, wholly or in part, arises; or where the secured asset is located. Further, this amendment would empower DRTs to decide the claims of tenancy or any other right of third parties over the secured assets.
Clause 14 (section 17) – Application against measures to recover secured debts

[Insertion]

XX

(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the secured creditors as invalid and restore the possession of the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section 13.

XX

XX

(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the business to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in sub-section (4) of section 13 taken by the secured creditors as invalid and restore the possession of the secured assets to the borrower or restore the management of the business to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section 13.

Provided that if the Debts Recovery Tribunal is of the opinion that an applicant other than the borrower is entitled to restoration of possession of secured assets or management of the business of the borrower, the Debt Recovery Tribunal shall restore the possession of assets or management to such person.

XX

DRT shall restore the possession of asset or management to such applicant who DRT believes is entitled to restoration of possession of secured assets or management of the business of the borrower.
Clause 15 (section 20A) – Integration of registration systems with Central Registry.

[Insertion]

No such provisions.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 of 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 it shall not be necessary for any person to register security interests over properties which are already registered under any registration system referred to in sub-section (1) with the Central Registry under this Act.

This insertion provides for integration of records registered with various registration systems. The Central Registry shall have the complete database of security interest on property rights.
Clause 15 (section 20B) – Delegation of powers.

[Insertion]

No such provisions.20B. The Central Government may, by notification, delegate its powers and functions under this Chapter, in relation to establishment, operations and regulation of the Central Registry to the Reserve Bank, subject to such terms and conditions as may be prescribed.This section empowers Central Government to delegate its powers and functions to Reserve Bank regarding Central Registry.
Clause 16 (section 23) – Filing of transactions of securitisation, reconstruction and creation of security interest

[Insertion/ Substitution]

The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed, within thirty days after the date of such transaction or creation of security, by the securitisation company or reconstruction company or the secured creditor, as the case may be:

PROVIDED that the Central Registrar may allow the filing of the particulars of such transaction or creation of security interest within thirty days next following the expiry of the said period of thirty days on payment of such additional fee not exceeding ten times the amount of such fee.

Provided further that the Central Government may, by notification, require registration of all transactions of securitisation, or asset reconstruction or creation of security interest while are subsisting on or before the date of establishment of the Central Registry under sub-section (1) of section 20 within such period and on payment of such fees as may be prescribed.

(1) The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed, within thirty days after the date of such transaction or creation of security, by the securitisation company or reconstruction company or the secured creditor, as the case may be:

PROVIDED that the Central Registrar may allow the filing of the particulars of such transaction or creation of security interest within thirty days next following the expiry of the said period of thirty days on payment of such additional fee not exceeding ten times the amount of such fee.

Provided further that the Central Government may, by notification, require registration of all transactions of securitisation, or asset reconstruction or creation of security interest while are subsisting on or before the date of establishment of the Central Registry under sub-section (1) of section 20 within such period and on payment of such fees as may be prescribed.

(2) The Central Government may, by notification, extend the registration of transaction relating to different types of security interest created on different kinds of property with the Central Registry.

(3) The Central Government may, by rules, prescribe forms for registration of different types of security interest under this section and fee to be charged for such registration.

Amendment provides for omission of time limit. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Amendment Rules, 2016[4] (hereinafter referred to as “Amendment Rules, 2016”) provides for filing of particulars of various transaction with CERSAI in such form and manner as prescribed under the Amendment Rules, 2016. Third proviso to sub-rule (1) of rule 5 of the Amendment Rules, 2016 requires the secured creditor to file particulars of all transactions under sub-rule (2A) to (2D) of rule 4 on or before such date as the Central Government may notify.

Further, it empowers Central Government to extend the registration of transaction relating to different types of security interest created on different kinds of property with Central Registry by way of notification and forms and fees by way of rules.

Clause 17 –

Insertion of new chapter IV A after section 26A

Section 26A dealing with ratification by Central Government in matters of registration, modification and satisfaction etc. was inserted pursuant to enactment of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act 2012.CHAPTER IVA -REGISTRATION BY SECURED CREDITORS AND OTHER CREDITORS

26B. (1) The Central Government may, by notification, extend the provisions of Chapter IV relating to Central Registry to all creditors other than secured creditors specified in clause (zd) of sub-section (1) of section 2, for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower.

(2) From the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed. (3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under this Act.

(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government in such form and manner as may be prescribed.

(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner, on payment of such fee, as may be prescribed.

26C. (1) Without prejudice to the provisions contained in any other law for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or any other creditor or filing of attachment order under this Chapter shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be.

(2) Where security interest or attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under the provisions of Chapter IV and Chapter IVA, the claim of such secured creditor or other creditor holding attachment order shall have priority over any subsequent security interest created upon such property and any sale, transfer, lease or licence of such property or attachment order subsequent to such registration, shall be subject to such claim: Provided that nothing contained in this sub-section shall apply to transactions carried on by the borrower in the ordinary course of business.

26D. Notwithstanding anything contained in any other law for the time being in force, from the date of commencement of the provisions of Chapter IVA, 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 duly filed with the Central Registry.

26E. 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.

Section 26B propose to provide for extending the provision of registration to all creditors other than secured creditor for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower.

Notably, sub-clause (1) of clause 26B provides that the Central Government may extend the provisions of this Chapter to all creditors except secured creditor. Note that the word used is “may”, therefore, if the Central Government if thinks fit may issue such notification. Further, sub-clause (2) provides that any creditor may file particulars of transaction. The phrase used is “may” which implies that even if the Central Government issues notification requiring the creditors to file particulars of transaction, the creditors may or may not file such particulars.

Sub-clause (4) provides that an authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assesse and details of tax or other government dues from such date as may be notified by the Central Government.

Clause 26C provides that registration of security interest shall be effective from the date and time of registration of transaction or filing of attachment orders with the registry. The claim of creditor holding attachment order shall have priority over the subsequent security interest created upon such property. However, the provisions of sub-clause (2) shall not apply to the transactions carried on by the borrower in the ordinary course of business.

Clause 26D provides that a secured creditor shall be entitled to enforce securities only if it is registered with Central Registry.

Clause 26E provides that the debts due to secured creditor shall rank in priority over all other debts. Note that this clause is a non-obstante clause; therefore, once this clause is notified it shall override any other section of any law which is in force.

Clause 18 (section 27) – Penalties

[Insertion]

If a default is made—

XX

If a default is made—

XX

Provided that provisions of this section shall be deemed to have been omitted from the date of coming into force of the provisions of Chapter IVA and section 23 as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.

From the date of enforcement of Chapter IVA and section 23 as amended, section 27 shall deemed to be omitted.
Clause 19 (section 28)

Penalties for non-compliance of directions of Reserve Bank

If any securitisation company or reconstruction company fails to comply with any direction issued by the Reserve Bank under section 12, or section 12A such company and every officer of the company who is in default, shall be punishable with fine which may extend to five lakh rupees and in the case of continuing offence, with an additional fine which may extend to ten thousand rupees for every day during which the default continues.OmittedThe Amendment Bill, 2016 provides for insertion of new clause i.e. clause 12C pertaining to penalties for non-compliance of direction of the Reserve Bank. Pursuant to which the Amendment Bill 2016 propose for omission of the section 28 of the SARFAESI Act.
Clause 20 (section 30A) – Power of adjudicating authority to impose penalty.

[Insertion]

No such provisions30A. (1) Notwithstanding anything contained in section 12C or section 29, where any person fails or contravenes or commits any default of the nature referred to in those sections, the adjudicating authority may, by an order, impose on such person, a penalty not exceeding one crore rupees or twice the amount involved in such failure or contravention or default where such amount is quantifiable, whichever is more, and where such failure or contravention or default is a continuing one, a further penalty which may extend to one lakh rupees for every day, after the first, during which such failure or contravention or default continues.

(2) For the purpose of imposing penalty under sub-section (1), the adjudicating authority shall serve a notice on the person in default requiring that person to show cause why the amount specified in the notice should not be imposed as a penalty and a reasonable opportunity of being heard shall be given to such person.

(3) No complaint shall be filed against any person in default in any court pertaining to any failure or contravention or default in respect of which any penalty has been imposed and recovered by the Reserve Bank under this section.

(4) Where any complaint has been filed against a person in default in any court in respect of failure or contravention or default of the nature referred to in section 12C or section 29, no proceeding for imposition of penalty against that person shall be taken under this section

Explanation.— For the purposes of this section and sections 30B, 30C and 30D,— (i) “Adjudicating authority” means such officer or a committee of officers of the Reserve Bank, designated as such from time to time, by notification, by the Central Board of Reserve Bank;

(ii) “person in default” means the asset reconstruction company or any person which has committed any failure or contravention or default under section 12C or section 29, as the case may be, and such other person incharge of such company or any such other person shall be liable to be proceeded against and punished under section 33 for such failure or contravention or default committed by such company or person.

Insertion of penalty clause:

Who shall be liable – any person.

Offence – contravenes or commits any default of the nature referred in section 12C or section 29.

Penalty –

1. Rs. 1 crore or

2. Twice the amount involved in such failure or contravention or default where such amount is quantifiable

(Whichever is more)

If such contravention or default is a continuing – Penalty – not more than Rs. 1 lakh per day during which such contravention or default is continuing.

Compliances to be ensured for imposing penalty –

1. Serve a notice on the person in default;

2. Give an opportunity of being heard.

Complaint shall not be filed in any court after recovery of penalty by the RBI. However, if complaint has been filed then the same shall not be entertained.

Clause 20 (section 30B) – Appeal against penalties.

[Insertion]

No such provisions30B. A person in default, aggrieved by an order passed under sub-section (1) of section 30A, may, within a period of thirty days from the date on which such order is passed, prefer an appeal to the Appellate Authority: Provided that the Appellate Authority may entertain an appeal after the expiry of the said period of thirty days, if it is satisfied that there was sufficient cause for not filing it within such period. The authority the order of which is appealable – Adjudicating Authority

Who can file an appeal?person in default aggrieved by an order passed

Where an appeal can be filed – Appellate Authority

Time-limit for filing an appeal – within a period of 30 days

Extension of time-limit – no limit specified, though there is a provision for extension

Clause 20 (section 30C) – Appellate Authority.

[Insertion]

No such provisions30C. (1) The Central Board of Reserve Bank may designate such officer or committee of officers as it deems fit to exercise the power of Appellate Authority.

(2) The Appellate Authority shall have power to pass such order as it deems fit after providing a reasonable opportunity of being heard to the person in default.

(3) The Appellate Authority may by an order stay the enforcement of the order passed by the adjudicating authority under section 30A, subject to such terms and conditions as it deems fit.

(4) Where the person in default fails to fulfil the terms and conditions imposed by order under sub-section (3) without reasonable cause, the Appellate Authority may dismiss the appeal

This clause deals with the Appellate Authority and its powers.
Clause 20 (section 30D) – Recovery of penalties.

[Insertion]

No such provisions30D. (1) Any penalty imposed under section 30A shall be recovered as a “recoverable sum” and shall be payable within a period of thirty days from the date on which notice demanding payment of the recoverable sum is served upon the person in default and, in the case of failure of payment by such person within such period, the Reserve Bank may, for the purpose of recovery,—

(a) debit the current account, if any, of the person in default maintained with the Reserve Bank or by liquidating the securities, if any, held to the credit of such person in the books of the Reserve Bank;

(b) issue a notice to the person from whom any amount is due to the person in default, requiring such person to deduct from the amount payable by him to the person in default, such amount equivalent to the amount of the recoverable sum, and to make payment of such amount to the Reserve Bank.

(2) Save as otherwise provided in sub-section (4), a notice issued under clause (b) of sub-section (1) shall be binding on every person to whom it is issued, and, where such notice is issued to a post office, bank or an insurance company, it shall not be necessary to produce any pass book, deposit receipt, policy or any other document for the purpose of any entry or endorsement thereof before payment is made, notwithstanding any rule, practice or requirement to the contrary.

(3) Any claim in respect of any amount, arising after the date of issue of notice under sub-section (1) shall be void as against the demand contained in such notice.

(4) Any person, to whom the notice is sent under sub-section (1), objects to such notice by a statement on oath that the sum demanded or any part thereof is not due to the person in default or that he does not hold any money for or on account of the person in default then nothing contained in this section, shall be deemed to require, him to pay such sum or part thereof, as the case may be.

(5) Where the statement made by the person under sub-section (4) false in material particulars, such person shall be personally liable to the Reserve Bank to the extent of his own liability to the person in default on the date of the notice, or to the extent of the recoverable sum payable by the person in default to the Reserve Bank, whichever is less.

(6) The Reserve Bank may, at any time, amend or revoke any notice issued under sub-section (1) or extend the time for making the payment in pursuance of such notice.

(7) The Reserve Bank shall grant a receipt for any amount paid to it in compliance with a notice issued under this section and the person so paying shall be fully discharged from his liability to the person in default to the extent of the amount so paid.

(8) Any person discharging any liability to the person in default after the receipt of a notice under this section shall be personally liable to the Reserve Bank— (a) to the extent of his own liability to the person in default so discharged; or (b) to the extent of the recoverable sum payable by the person in default to the Reserve Bank, whichever is less.

(9) Where the person to whom the notice is sent under this section fails to make payment in pursuance thereof to the Reserve Bank, he shall be deemed to be the person in default in respect of the amount specified in the notice and action or proceedings may be taken or instituted against him, for the realisation of the amount as if it were an arrear due from him, in the manner provided in this section.

(10) The Reserve Bank may enforce recovery of recoverable sum through the principal civil court having jurisdiction in the area where the registered office or the head office or the principal place of business of the person in default or the usual place of residence of such person is situated as if the notice issued by the Reserve Bank were a decree of the Court:

Provided that no such recovery shall be enforced, except on an application made to the principal Civil court by an officer of the Reserve Bank authorised in this behalf certifying that the person in default has failed to pay the recoverable sum.

This clause deals with recovery of penalty imposed under clause 30A and the manner in which the same can be recovered.
Clause 21 – (Section 31) – Provisions of this Act not to apply in certain casesThe provisions of this Act shall not apply to—

XX

(e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;

Omission of clause (e)Section 31 of the SARFAESI Act provides for cases where the provisions of the said Act shall not apply. Leases were not considered under the Act. However, the Bill proposed inclusion of leases under the Act.
Clause 22 –(Section 31A[5])

Power to exempt a class or classed of banks or financial institution.

[Substitution]

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(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive session aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.

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(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days, and if, both Houses agree in disapproving the issue of notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses. (3) In reckoning any such period of thirty days as is referred to in sub-section (2), no account shall be taken of any period during which the House referred to in sub-section (2) is prorogued or adjourned for more than four consecutive days. (4) The copies of every notification issued under this section shall, as soon as may be after it has been issued, be laid before each House of Parliament.

Section 31A empowers the Central Government to exempt certain class of banks or financial institutions from any of the provisions of the Act or to make the Act applicable to certain banks/ FIs with certain exception/ modification. Sub-section (2) provides for process to be followed at the time of issuing notification.
Clause 23 – (section 32) – Protection of action taken in good faith

[Substitution]

No suit, prosecution or other legal proceedings shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditor or borrower for anything done or omitted to be done in good faith under this Act.No suit, prosecution or other legal proceedings shall lie against the Reserve Bank or the Central Registry or any secured creditor or any of its officers for anything done or omitted to be done in good faith under this Act.Intent of this clause seems to protect the action taken by secured creditor or Reserve Bank or Central Registry or any of their officers, in good faith.
Clause 23 (section 38) – Power of Central Government to make rules

[Insertion]

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(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:– XX (b) the manner in which the rights of a secured creditor may be exercised by one or more of his officers under sub-section (12) of section 13; (ba) the fee for making an application to the Debts Recovery Tribunal under sub-section (1) of section 17; (bb) the form of making an application to the Appellate Tribunal under sub-section (6) of section 17; (bc) the fee for preferring an appeal to the Appellate Tribunal under sub-section (1) of section 18; (c) the safeguards subject to which the records may be kept under sub-section (2) of section 22; (d) the manner in which the particulars of every transaction of securitisation shall be filed under section 23 and fee for filing such transaction; (e) the fee for inspecting the particulars of transactions kept under section 22 and entered in the Central Register under sub-section (1) of section 26; (f) the fee for inspecting the Central Register maintained in electronic form under sub-section (2) of section 26;

XX

XX

(b) the manner in which the rights of a secured creditor may be exercised by one or more of his officers under sub-section (12) of section 13; (ba) the fee for making an application to the Debts Recovery Tribunal under sub-section (1) of section 17; (bb) the form of making an application to the Appellate Tribunal under sub-section (6) of section 17; (bc) the fee for preferring an appeal to the Appellate Tribunal under sub-section (1) of section 18; (bca) the manner of integration of records of various registration systems with the records of the Central Registry under section 20A; (bcb) the terms and conditions of delegation of powers by the Central Government to the Reserve Bank under section 20B; (c) the safeguards subject to which the records may be kept under sub-section (2) of section 22; (d) the manner in which the particulars of every transaction of securitisation shall be filed under section 23 and fee for filing such transaction; (da) forms for registration of different types of security interests and fee thereof under sub-section (3) of section 23; (e) the fee for inspecting the particulars of transactions kept under section 22 and entered in the Central Register under sub-section (1) of section 26; (f) the fee for inspecting the Central Register maintained in electronic form under sub-section (2) of section 26; (fa) the form and the manner for filing particulars of transactions under sub-section (2) of section 26B; (fb) the form and the manner of filing attachment orders with the Central Registry under sub-section (4) and fee under sub-section (5) of section 26B.

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In consequence to the amendments proposed under clauses 20A, 20B, 23 and 26B of the Act, the Central Government has been empowered to make rules on the same.

[1] http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/144_2016_LS_Eng.pdf – site last visited on June 28, 2016.

[2] http://www.drat.tn.nic.in/Docu/Securitisation-Act.pdf

[3] See more at: http://indiacorplaw.blogspot.in/2016/05/second-leg-of-sarfaesi-all-transactions.html

[4] http://egazette.nic.in/WriteReadData/2016/167743.pdf

[5] Inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 (No. 1 of 2013) effective from January 3, 2013.

(Author is Associated as Manager with Vinod Kothari & Company and can be reached at parmar@vinodkothari.com)

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