The Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 The act passed

in 2002 was pretty strict as such on the borrower. It took away all the rights of the borrower to be heard. He could not approach the Civil Court nor did the DRT come to his rescue till his property had been attached and sold off. All this has been changed substantially after the land mark judgement of the Honble Supreme Court in the case of Mardia Chemicals limited and Ors Vs. Union of India [2004] 51 SCL 513 (SC)1 which inserted Section 3-A which says that if on receiving the notice under Section 13(2) the borrower makes in any representations or raises any objections, the secured creditor shall be compelled to consider such representations and if he comes to the conclusion that the objection is not tenable , he shall communicate within 1 week the reasons in writing for the non acceptance. The Honble Supreme Court held in that very case that, not to give any hearing to the borrower is not in conformity to the laws of a democratic state, being against principles of natural justice. Thus the act now provides the borrower the right to be heard but this being, not appealable, may seem to be not enough, but the Act does not take away from the borrower the right to move High Court under Art 226 & 227 (as writ petition) and the high courts can and have taken very serious views of banks not acting Bonafide and of the reasons communicated not being reasonable and have actually struck down the move of banks to attach and sell assets of the alleged defaulters. The notice shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debt by the borrower. As regards enforcement of security in case of financing of financial asset by more than one secured creditor, it has been provided that none of them shall be entitled to exercise any rights conferred on them, unless the same is agreed upon by secured creditors representing not less than three-fourth in value of the amount outstanding as on a Record Date and such action shall be binding on all such secured creditors. It has also been provided that the dues of the workmen as per Section 529A of the Companies Act, 1956 will have to be paid in case the

Mardia Chemicals limited and Ors Vs. Union of India [2004] 51 SCL 513 (SC)

Company is in liquidation or being wound up after the commencement of this Act and the said amount will have to be deposited with the Liquidator. Apart from other measures regarding procedure and other methods for enforcement of security, one of the clauses which was relatively harsh on the borrower was, that, if any person including the borrower is aggrieved by any of the measures taken by the secured creditor, he may prefer an appeal to the Debt Recovery Tribunal within 45 days, only on depositing 75% of the amount claimed in the notice referred to herein above. Although the Debt Recovery Tribunal (DRT) has been empowered to waive or reduce the amount to be deposited for reasons to be recorded in writing, practically it was realised that it will be difficult for any DRT to reduce the amount at that stage without going into all the relevant facts and circumstances of the case of the representation/objections raised by the borrower. The Hon'ble Supreme Court in the case of Mardia Chemicals limited and Ors vs. Union of India struck down the provision under Section 17(2) as being unconstitutional as it was unreasonable and unnecessary. Thus although it may seem that the act is thoroughly in favour of the Creditor (which it practically is) its not actually against the Indian legal framework and has a lot of credibility. Exception to The Securitisation Act But the application of this act is not absolute. It does not absolutely apply over all kinds of mortgage transactions. This Act will not apply in some of the following cases: (i)A lien on any goods, money or security given by or under the Indian Contract Act or the Sale of Goods Act or any other Law for the time being in force; (ii) A pledge of movables; (iii) Creation of any security in any aircraft and any vessel; (iv) Any conditional sale, hire purchase or lease or any other contract in which no security interest has been created; (v) Any security interest for securing repayment of any financial asset, not exceeding Rs. 100000/- (Rupees One lakh); (vi) Any security interest created in agricultural land; (vii) Any case in which the amount due is less than 20% of the principal amount and

(viii) Any rights of an un-paid seller and any property not liable to attachment or sale as per the Civil Procedure Code Impact On Banking Other than freeing up the blocked assets of banks, securitisation can transform banking in other ways as well. The growth in credit off take of banks has been the highest in the last 55 years. But at the same time the incremental credit deposit ratio for the past one-year has been greater than one. What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. The growth of credit off take though has not been matched with a growth in deposits. Banks essentially have been selling their investments in government securities. By selling their investments and giving out that money as loans, the banks have been able to cater to the credit boom. This form of funding credit growth cannot continue forever, primarily because banks have to maintain an investment to the tune of 25 per cent of the net bank deposits in Statutory Liquidity Ratio (SLR) Instruments (government and semi government securities).The fact that they have been selling government paper to fund credit offtake means that their investment in government paper has been declining. Once the banks reach this level of 25 per cent, they cannot sell any more government securities to generate liquidity. And given the pace of credit off take, some banks could reach this level very fast. So banks, in order to keep giving credit, need to ensure that more deposits keep coming in.

IMPACT OF SECURITISATION ACT,2002 ON MORTGAGE TRANSACTIONS The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, fondly called by bankers as Securitisation Act, has recently been enacted conferring powers on banks and financial institutions, if they are secured creditors, to realize the securities by sale etc., without intervention of court. The Act contains a provision overriding the provision of Section 69 of the Transfer of Property Act, 1882, viz., sub-section (1) of Section 13 of the said Act. The provisions of the Act have been made applicable exclusively to banks and financial institutions as secured creditors to enforce their security interest with a view to recovering their

debts. That is, if the banks and financial institutions are secured creditors having lent against securities like mortgage of immovable property, charge, hypothecation they can take over and sell such securities after giving 60 days notice to the borrowers so as to adjust the loan, without resort to litigation in a competent court of law. The provisions of the Act cannot be considered to have been extended to the secured creditors in general. In a nutshell, the provisions of Section 69 of the Transfer of Property Act, 1882 can be ignored by the banks and financial institutions in the matter of recovery of their debts ex curia whereas other creditors have to file a suit in a competent court for recovery of the loan. Otherwise, Section 69 of the Transfer of Property Act, 1882 still remains on the statute and is applicable to other creditors who are not banks and financial institutions. The banks and financial institutions are empowered to short-circuit the legal process to enforce the securities for recovery of their loans while the other creditors such as individuals, association of persons have to undergo the rig morale of court proceedings. Section 13 of the securitisation and reconstruction of financial assets & enforcement of securities interest Act, 2002 (SARFAESI Act) provides for security enforcement. The SARFAESI Act deals with the security enforcement of only the banks and financial institutions. While the Transfer of Property Act, 1882 deals with the transfer of property and its enforcement inter vivos i.e. between living persons. Living persons include also the juristic persons such as a corporation. Thus the banks and financial institutions fall under the ambit of both the Act. Notwithstanding anything contained in section 69 or 69A of the TPA, any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. The TPA (section 69 and 69A) provides for similar provisions whereby sale of the mortgage property in certain cases can be affected by the mortgagee without any intervention on the part of the court for the purpose of recovery of debt of mortgage money. The condition corresponding to the non-intervention of Court in the case of mortgagees right to sale is dealt with in section 69 and 69A of TPA. The Transfer of Property Act, 1882 rarely provides for instances where the sale may be affected by the mortgagee without intervention of the court. These instances are laid down in section 69 as follows:

(a) where the mortgage is an English mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Mohammedan or Buddhist or a member of any other race, sect, tribe or class from time to time specified in this behalf by the State Government, in the Official Gazette; (b) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage-deed and the mortgagee is the government; (c) where a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage-deed and the mortgaged property or any part thereof was, on the date of the execution of the mortgage-deed, situate within the towns of Calcutta, Madras, Bombay, or in any other town or area which the State Government may, be notification in the Official Gazette, specify in this behalf. Moreover there are conditions after which the mortgagor may affect the sale. Either, a notice of three months must be given before exercising the power of sale; or some interest under the mortgage amounting at least to five hundred rupees is in arrear and unpaid for three months after becoming due. Under the SARFAESI Act, where the borrower defaults in repayment of secured debt or any installment thereof and his account in respect of such debt is classified as a non-performing asset by the secured creditor who may then require the borrower by a notice in writing to discharge the liabilities within 60 days from such notice, failing which the creditor may exercise any or all of the rights mentioned under section 13(4) of the Act. These are as folllows: Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset; Take over the management of the business of the borrower, including the right to transfer by way of lease, assignment or sale and realize the secured asset; appoint any person, to manage the secured assets the possession of which has been taken over by the secured creditor; and Require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor so much of the money as is sufficient to pay the secured debt.

However the section of non intervention by the court or tribunal is not absolute in the case of application of SARFAESI Act. This is because; proviso to the clause 3 of the said section gives an opportunity to the borrower to approach the Debt Recovery Tribunal (DRT) if aggrieved by the action of the creditor. Debt Recovery Tribunal may be approached by any person, including the borrower, and the tribunal must not take more than 4 months to dispose off such cases. The most important and the only benefit the creditor may derive by choosing this method of debt enforcement is the expeditious disposal of cases by the DRT.