Statement of Objects and Reasons

The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.

It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for--

1. registration and regulation of securitisation companies or reconstruction companies by the Reserve Bank of India;

2. facilitating securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities;

3. facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;

4. empowering securitisation companies' or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;

5. facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions

6. declaration of any securitisation company or reconstruction company regis­tered with the Reserve Bank of India as a public financial institution for the purpose of section 4A of the Companies Act, 1956;

7. defining 'security interest' as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;

8. empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time;

9. the rights of a secured creditor to be exercised by one or more of its officers authorised in this behalf in accordance with the rules made by the Central Government;

10. an appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal;

11. setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitisation, asset reconstruction and creation of security interest;

12. application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities;

13. non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where eighty per cent, of the loans are repaid by the borrower.

The Bill seeks to achieve the above objects.

AN ACT to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto,

be it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:--

Short title, extent and commencement.(Section 1)

1. This Act may be called the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

2. It extends to the whole of India.

3. It shall be deemed to have come into force on the 21st day of June, 2002.

In this Act, unless the context otherwise requires,--

Appellate Tribunal: means a Debts Recovery Appellate Tribunal established under sub-section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

Asset Reconstruction: means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance;

Bank means--

1. a banking company; or

2. a corresponding new bank; or

3. the State Bank of India; or

4. a subsidiary bank; or

5. such other bank which the Central Government may, by notification, specify for the purposes of this Act;

Banking Company: shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949;

Board: means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992;

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;

Central Registry: means the registry set up or cause to be set up under sub­section (1) of section 20;

Corresponding New Bank: shall have the meaning assigned to it in clause (da) of section 5 of the Banking Regulation Act, 1949;

Debts Recovery Tribunal: means the Tribunal established under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

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 in accordance with the directions or guidelines issued by the Reserve Bank;

Financial Asset means debt or receivables and includes--

1. a claim to any debt or receivables or pan thereof, whether secured or unsecured; or

2. any debt or receivables secured by, mortgage of, or charge on, immovable property; or

3. a mortgage, charge, hypothecation or pledge of movable property ; or

4. any right or interest in the security, whether fall or part underlying such debt or receivables; or

5. 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

6. any financial assistance;

Financial Institution: means--

1. a public financial institution within the meaning of section 4A of the Companies Act, 1956;

2. any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

3. the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges ) Act, 1958;

4. any other institution or non-banking financial company as defined in clause (f) of section 45-1 of the Reserve Bank of India Act, 1934, which the Central Government may, by notification, specify as financial institution for the purposes of this Act;

Hypothecation: means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property;

Non-Performing Asset: means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to assets classifications issued by the Reserve Bank;

Notification: means a notification published in the Official Gazette;

Obligor: means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower;

Originator: means the owner of a financial as set which is acquired by a securitisation company or reconstruction company for the purpose of securitisation or asset reconstruction;

Prescribed: means prescribed by rules made under this Act;

Property: means--

1. immovable property;

2. movable property;

3. any debt or any right to receive payment of money, whether secured or unsecured;

4. receivables, whether existing or future;

5. intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature;

Qualified Institutional Buyer: means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or any asset management company making investment on behalf of mutual fund or provident fund or gratuity fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder, or any other body corporate as may be specified by the Board;

Reconstruction Company: means a company formed and registered under the Companies Act, 1956 for the purpose of asset reconstruction;

Registrar of Companies: means the Registrar defined in clause (40) of section 2 of the Companies Act, 1956;

Reserve Bank: means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934;

Scheme: means a scheme inviting subscription to security receipts proposed to be issued by a securitisation company or reconstruction company under that scheme;

Securitisation: means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;

Securitisation Company: means any company formed and registered under the Companies Act, 1956 for the purpose of securitisation;

Security Agreement: means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

Secured Asset: means the property on which security interest is created;

Secured Creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes--

1. debenture trustee appointed by any bank or financial institution; or

2. securitisation company or reconstruction company; or

3. any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;

Secured Debt: means a debt which is secured by any security interest;

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 Receipt: means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation;

Sponsor: means any person holding not less than ten per cent. of the paid-up equity capital of a securitisation company or reconstruction company;

State Bank of India: means the State Bank of India constituted under section 3 of the State Bank of India Act, 1955;

Subsidiary Bank: shall have the meaning assigned to it in clause (A) o: section 2 of the State Bank of India (Subsidiary Banks) Act, 1959.

Words and expressions used and not defined in this Act but defined in the India Contract Act, 1872 or the Transfer of Property Act, 1882 or the Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 shall have the same meanings respectively assigned to them in those Acts.