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Committees which stressed the need to set up specialised institutions for the purpose.
a.
Committee on the Financial System ( Chairman Shri M. Narsimham, 1991); Committee on Banking Sector Reforms ( Chairman Shri M. Narsimham, 1998) Committee on restructuring of weak public sector banks (Chairman Shri M.S. Verma)
b.
c.
Proposal in the Union Budget for the year 2002-2003 SARFAESI ordinance was promulgated on June 21, 2002 Enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) in December 2002
What is Securitisation?
Process by which a single asset/ pool of assets is sold by the originator (seller) to a remote SPV (buyer). Assets completely transferred with ownership pattern
What is Reconstruction
Section
2 (1)(b) of the SARFAESI Act defines Asset Reconstruction as the acquisition of Financial Asset for the purpose of realisation. It includes all the measures for the purpose of realization of the acquired Financial Asset That is, Change in or taking over the Management of the business of the borrower,
What is Reconstruction
Sale or lease of the Assets or whole of business of the of the borrower offering the reschedulement facility to the borrower by providing temporary accommodation to the borrower, settlement of dues of the borrowers Taking possession of the secured assets of the borrower in accordance with provisions of the SARFAESI Act.
Thus it is clear that the process of securitization of acquired assets involves acquisition of assets by a SC/RC, transfer of these assets to trust and issue of Security Receipts by the SC/RC in the capacity of trustee of the trust, to the Qualified Institutional Buyers.
The Asset Reconstruction, on the other hands, involves evolving of resolution strategy for the acquired assets by employing any of the methods given in SARFAESI Act, 2002
To all banks
Public Sector Private Sector Foreign Banks Urban Cooperative banks Regional Rural Banks Any other bank/FI which Central Govt may specify by notification - Contd-
Financial institutions
All PFIs within the meaning of Section 4-A of the Companies Act, 1956. International Financial institutions viz. International Finance Corporation and Asian Development Bank Housing Finance Companies registered with NHB and with Tier I capital of Rs. 10 crore or above as per audited balance sheet for the year ended March 31, 2003. Any other institution which the Central Govt. by notification may specify.
SARFAESI Act
Enables setting up of Asset Management Companies to acquire NPAs of any bank or Fis
SARFAESI Act
Failing
which
the
company
can
take
possession
of
Assets,
take
over
the
management of Assets and appoint any person to manage the secured Assets
Borrowers have the right to appeal to the Debts Tribunal after depositing 75% of the amount claimed by the second creditor
Basic requirements
(contd)
Directors representing the shareholders holding 10% or more of the paid up equity should not be more than 50% of the total no. of directors on the Board of SC/RC.
No Foreign investment allowed in the paid up equity before SC/RC is registered with the Bank. After any SC/RC is registered with the Bank, FDI up to 74 % of the paid up equity allowed with the prior approval of FIPB.
SARFAESI Act
Facilitating securitization of financial assets of banks/FIs with or without the benefit of underlying securities; Empowering SC/RCs to raise funds by issue of SRs to QIBs; Facilitating reconstruction assets acquired of financial
QIBs
Qualified institutional buyer means a Financial institutions or an insurance company or a bank or a state financial corporation or state industrial development corporation, making an investment on behalf of a mutual fund or provident fund or foreign institutional investor, registered under the SEBI Act,1992. Company registered under the companies act, 1956 cant be a QIB. To be a QIB, then the company has to
The registration process of SC/RCs with RBI started in the year 2003. Asset Reconstruction Company (India) Ltd. (Arcil) promoted by SBI, ICICI Bank, IDBI Bank and PNB was the first SC/RC to be granted registration in August 2003.
As SCRC are not banks or FIs no sale of assets between SCRCs permitted. Securitisation under Sarfaesi Act has not taken off as desired
Borrowers prevent expeditious transfers of assets to SCRC by raising a number of issues Stamp duty charges are not uniform across states and are high Banks themselves hesitant to sell at discount and negotiate with borrower directly
14 registered SCRCs - ARCIL, ASREC , Pegasus Min NOF Rs 2 cr. For registration For commencement Rs 100 cr or 15 % of asset acquired, whichever is low. FDI in ARCS 74 % Focus of Regulation is on management of companies, management of assets, 15 % capital adequacy In order to ensure stake and interest in SR issued SCRCs have to invest not less than 5 percent of SRs issued in each scheme floated and hold till redemption of such SRs to other investors SCRCs to periodically declare NAV of SRs so that QIBs know the value of such investments and comply with disclosure norms
There is some difference in the processes for the securitisation of standard assets and NPAs through SC/RCs The points of difference have been given below
Normal financial and accounting parameters Through special purpose vehicle by bank/ NBFC which may be a company or trust
Through a company which is incorporated under Companies Act 1956 which in turn float trusts after acquisition of assets
Mainly NPAs, some portion can be standard even Purpose is mainly to help the banks/ FIs to clean their balance sheet of the toxic assets. Risks/ CRAR are generally already covered by creating sufficient provisions. Liquidity is not main purpose.
Purpose is risk management, risk diversification, liquidity management and CRAR management
Only banks/ FIs can sell their NPA assets to ARCs . NBFCs not covered.
Only companies registered with RBI can undertake securitisation of NPAs to get benefit of SARFAESI Act provisions.
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