The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act) seeks to amend four laws, including (i) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), (ii) Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act); (iii) Indian Stamp Act, 1899 and (iv) Depositories Act, 1996. The Act has been published in the Gazette of India on 12.08.2016; however, the date of coming into effect of the Act is yet to be notified.
The amendments in the SARFAESI Act 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.
The amendments in the RDDBFI Act inter alia, include (i) expeditious adjudication of recovery applications; (ii) electronic filing of recovery applications, documents and written statements; (iii) priority to secured creditors in repayment of debts; (iv) Debenture Trustees as Financial Institutions;(v) empowering the Central Government to provide for uniform procedural rules for conduct of proceedings in the Debts Recovery Tribunals and Appellate Tribunals.
Major amendments to the SARFAESI Act
Sections 12, 12B, 12C & 12D-Enhanced powers to Reserve Bank of India (RBI): In addition to the existing powers of RBI to examine the statements and any information of Asset Reconstruction Companies (ARCs) related to their business, the Act empowers the RBI to issue directions to ARCs for regulation of the fee and other charges which may be charged, to carry out audit and inspection of ARCs and to remove the Chairman or any director or appoint additional directors on the board of directors of the ARCs. The Act further authorises RBI to penalise ARCs if they fail to comply with any directions issued by it.
Section 13(2)(i) Proviso-Debenture Trustees empowered to take action without classifying debt as NPA: The Act empowers debenture trustees to take action for enforcement of security interest, against borrowers who have raised funds by issue of debt securities, without classification of the debt as Non-Performing Asset, which is a mandatory requirement for other secured creditors.
Section 14(1)-Time-limit for passing orders by Magistrate on the application for assistance: The SARFAESI Act allows secured creditors to take possession of the secured asset, against which a loan had been provided, upon a default in repayment. In the case of difficulty in taking over possession, the secured creditor can take the assistance of District Magistrate/Chief Metropolitan Magistrate. The Act further provides that this process will have to be completed within 30 days by the Magistrate. However, if the Magistrate is unable to pass an order within this time limit due to reasons beyond his control, he shall do so, within such further period not exceeding 60 days.
Section 15(4) Proviso- Secured creditor not required to restore possession in certain cases: In case the secured creditors have acquired controlling stake in a Company by conversion of debt into shares, then secured creditors shall not be liable to restore the management of the business to such borrower, even after realisation of the entire outstanding due of the borrower.
Section 17- Right to challenge enforcement of security interest by a tenant or person claiming interest in the property: The Debt Recovery Tribunals (DRT) have been empowered to examine the application of a person claiming any tenancy or right over the property against which the secured creditors have taken action for the purposes of enforcement of security interest.
Section 20A- Creation of database and Integration of registration system: The Act creates a Central Registry to maintain records of transactions related to secured assets. The Act creates a central database to integrate records of property registered under various registration systems of State and Central Governments with this Central Registry. This includes integration of registrations made under Companies Act, 2013, Registration Act, 1908 and Motor Vehicles Act, 1988.
Section 26B & 26C – Registration of charges by Secured Creditors and other charge holders: These new sections provide for extending the provision of registration to all lenders other than secured creditor for creation, modification or satisfaction of any security interest over any property of the borrower with a Central Registry. It further provides for registration of attachment order of courts and by government authorities like revenue, tax etc. of Central, State Government or any other local authority. Such registration shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry.
Section 26D – Restriction on right to enforce securities: This new section mandates that the Secured Creditors can enforce securities under the SARFAESI Act only if the security interest created by the borrower in favour of the secured creditor has been registered with the Central Registry.
Section 26E-Priority for debts of secured creditors: On registration of the security interest with the Central Registry, the Act provide priority to debts due to Secured Creditors over all others debts, revenues, taxes, cesses and rates payable to Central Government, State Government or any other local authority.
Sections 30A, 30B, 30C & 30D: Constitution of Adjudicating Authority: The Act provides for an Adjudicating Authority and Appellate Authority for imposing penalty and also the procedure for recovery of such penalty, on ARCs or any other persons found not complying with the directions of the RBI. The Adjudicating Authority and Appellate Authority shall consist of a committee of officers of the RBI.
Amendments to the RDDBFI Act
Section 11-Presiding Officer and Chairman: The RDDBFI Act established Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs). The Act increases the retirement age of Presiding Officers of Debt Recovery Tribunals from 62 years to 65 years. Further, it increases the retirement age of Chairpersons of Appellate Tribunals from 65 years to 70 years. It also makes Presiding Officers and Chairpersons eligible for reappointment.
Section 19-Filing of Application: The Act provides that Banks and Financial Institutions will be required to provide along with the Original Application, all documents and evidence, which it relies on for expeditious adjudication of the recovery application. The Original Application can be filed before the tribunal having jurisdiction over the area of bank or branch where the debt claimed is for the time being maintained.
Section 19(3A)- Application to contain details of assets: An application for recovery to be filed by the Bank or Financial Institution before DRT shall state the particulars of debt secured by the security interest or property or assets and the estimated value of such securities. Further, if the estimated value is not sufficient to satisfy the claim, the application shall also state other properties or assets owned by the defendants and the value of such other assets.
Section 19(4)-Show cause notice to the defendants: The Act provides for issue of a Show Cause Notice to the defendants directing them to show cause within 30 days of service of the summons as to why reliefs claimed by the applicant should not be granted and also for a direction to the defendants to disclose any other properties or assets held by them. It further empowers the DRT to pass an ex-parte order restraining the defendant from dealing or disposing of properties.
Section 19(4A)-Bar on dealing with properties: On receipt of the summons of DRT, the defendants are barred from transferring or dealing with the properties or asset without prior approval of DRT.
Section 19 (22A):- Recovery Certificate to be deemed as a decree for initiation of winding up proceeding: The Act provides that the Recovery Certificate issued by the Presiding Officer shall be deemed to be a decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 or insolvency proceedings against any individual or partnership firm and stipulates that Presiding Officer shall take every effort to complete the proceedings in two hearings.
Section 19A- Filing of original applications, documents and written statements in electronic form: The Act provides for the filing of recovery applications, documents and written statements and issue of summons and notices in electronic form and display of interim and final orders of the DRTs and DRATs on their website. It further provides that the pleading including application, written statement etc. shall be authenticated by Digital Signature.
Section 21-Reduction in amount to be deposited for filing appeal: The Act provide for deposit of fifty percent of amount of debt due, for the purpose of filing of appeal and also provide that the amount may be reduced by such amount which shall not be less than twenty-five per cent of the amount of such debt so due.
Section 22A-Unifrom procedure in DRTs and DRATs: A new section has been inserted as Sec. 22A to empower the Central Government to prescribe uniform procedural rules to be observed by the Debt Recovery Tribunals and Debt Recovery Appellate Tribunals in the conduct of their proceedings.
Section 27-Power of Presiding Officer to grant time: The Presiding Officer is empowered to grant time for payment of the amount in the Recovery Certificate, provided the defendant makes a down payment of not less than twenty-five percent of the amount claimed and gives an unconditional undertaking to pay the balance within a reasonable time, which is acceptable to the Bank or Financial Institutions for stay of proceedings under Recovery Certificate.
Section 30 (A)-Deposit of amount for filing the appeal against an order of Recovery Officer: The Act provide for the requirement of deposit of fifty percent of debt payable by the defendant/ borrowers for filing an appeal against orders of Recovery Officers.
Section 31 (B):- Priority of secured creditors: The Act provide priority to secured creditors over all other claimants including claims of Central Government, State Government or local authority.
Amendment to the Indian Stamp Act, 1899
Section 8F: A new section 8F is inserted to the Indian Stamp Act, whereby agreement or other document for transfer or assignment of rights or interest in financial assets of Banks or Financial Institutions in favour of any ARC shall not be liable for payment of stamp duty.
Amendments to the Depositories Act, 1996
Sections 1A & 1B- The Act has inserted two new sections to the Depositories Act for facilitating the transfer of shares held in pledge or on conversion of debt into shares, in favour of ARCs by Banks or FIs.