The Ordinance empowers both the Secured Creditor and ARCs/SCs in respect of enforcement of security interest and for Asset Reconstruction. However securitisation of taken over financial assets, issuing security receipts to qualified institutional investors and raising resources there-against can only be handled by ARCs/SCs set up under the Ordinance and/or registered with RBI. These powers under Section 5 to 8 of the Ordinance vests exclusively with ARC/SC of above category and not with the Secured Creditor, though it may be possible for the secured creditor to incorporate an ARC/SC as subsidiary of its Organisation, and overview this function. However such details can be confirmed only after the procedural Rules under the Ordinance are formulated by the Central Government and operational guidelines are framed and issued by RBI.

The provision of the ordinance does not apply to-

1. a lien on any goods, money or security given under the Indian Contract Act,

2. any conditional sale, hire purchase, lease or any other contract in which no security interest has been created,

3. any security interest for repayment of any financial asset not extending Rs. 1 lakh,

4. any security interest created on agricultural land and

5. in cases where the amount due is less than 20% of the principal amount and interest thereon.

Consequently Banks/FIs or ARC/SC cannot exercise any powers under the Ordinance in respect of borrowers pertaining to this category. Recovery of overdues relating to these borrowers is to be pursued under the regular channel, i.e. through lok adalat, civil courts or DRT.

The ordinance makes fractional transfer legally sacrosanct. This would allow future flows to be transferred. The highlight of the ordinance is that it overrides the bankruptcy law provisions on transfers prior to bankruptcy.

The ordinance covers only financial assets and that too by banks and financial institutions.

1. Getting physical possession of the secured assets- First the bank/financial institution themselves to invoke powers under the Ordinance and obtain physical possession of the secured assets. It is preferable for the banks/FI to handle this task themselves, as this may prompt the borrower even at this early stage to come forward with concrete measures for repayment.

2. Transferring Assets to ARC/SC:- These can then be valued through a justified formulae acceptable to both the ARC/SC and the bank/FI and transferred as provided under Section 5(1)(a) or (b).(The Ordinance does not provide a methodology for valuation. It may be covered later under the Rules or under guidelines to be issued by RBI).

3. Securitisation of the Assets by ARC/SC:- ARC/SC to formulate a scheme for securitisation of these assets and issue security receipts for equivalent value of the assets to a qualified Institutional buyer and raise funds needed to pay the bank/FI.

4. Asset Reconstruction by ARC/SC- The ARC/SC will then attend to Asset Reconstruction as per powers vested with them under the ordinance and move towards generating recurring cash flows by managing and operating the business or through part/full sale of the assets, as provided in the act.

5. Redemption of Debt to QIB- The bank/FI has already recouped cost of the secured assets. The ARC/SC has now to utilise the cash flow generate to redeem the security receipts sold to the QIB.

Various steps and stages discussed above will be dealt with in detail quoting the relevant provisions of the Ordinance in the subsequent pages.

In this page we will first consider about securitisation, which is the function assigned exclusively to ARC/SC under the ordinance, as covered under Section 5 to 8 of the Ordinance.

The ordinance gives the reconstruction company the right to acquire financial assets of any bank/financial institution by-

1. issuing debentures or bonds or any other security in the nature of the debenture.[Section 5(1) (a)]

2. They can also acquire assets by entering into an agreement, with such banks or financial institutions. [Section 5(1) (b)]

As the bank or the financial institution is the lender in relation to any financial asset acquired by the securitisation company, such company shall on such acquisition be deemed to be the lender and all rights of the bank or financial institution will transfer to the company in relation to such financial assets. [Section 5(2)]. This is further explained and amplified in Sections 5(4) and 5(5).

The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial assets by any securitisation company or reconstruction company, to the concerned obligor and any other concerned person and to the concerned registering authority in whose jurisdiction the mortgage, charge, hypothecation, assignment or other interest created on the financial assets had been registered.

Where a notice of acquisition of financial asset is given by a bank or financial institution, the obligor, on receipt of such notice, shall make payment to the concerned securitisation company or reconstruction company, as the case may be, and payment made to such company in discharge of any of the obligations in relation to the financial asset specified in the notice shall be a full discharge to the obligor making the payment from all liability in respect of such payment.

Where no notice of acquisition of financial asset is given by any bank or financial institution, any money or other properties subsequently received by the bank or financial institution, shall constitute monies or properties held in trust for the benefit of and on behalf of the securitisation company or reconstruction company, as the case may be, and such bank or financial institution shall hold such payment or property which shall forthwith be made over or delivered to such securitisation company or reconstruction company, as the case may be, or its agent duly authorised in this behalf.

The securitisation companies are not allowed to raise funds from the retail investors. A securitisation or reconstruction company can raise funds from the Qualified Institutional Investors by formulating a scheme for acquiring financial assets complying with provisions of the Companies Act, 1956, Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. The company should maintain separate accounts in respect of each such scheme for every financial asset acquired out of investments made by the Qualified Institutional Buyer. The company should ensure the realization of such financial assets and pay returns assured on such investments.

In the case of non-realization of the financial assets the Qualified Institutional Buyer of a securitisation company or reconstruction company holding security receipts of not less than 75% of the total value of the company is entitled to call a meeting of all the Qualified Institutional Buyers and every resolution passed in such meeting should be binding on the company.

Issue of security by raising of receipts or funds by securitisation company or reconstruction company is exempted from registration of security receipt.

Notwithstanding anything contained in sub-section (1) of section 17 of the Registration Act, 1908,--

1. any security receipt issued by the securitisation company or reconstruction company, as the case may be, under sub-section (1) of section 7, and not creating, declaring, assigning, limiting or extinguishing any right, title or interest, to or in immovable property except in so far as it entitles the holder of the security receipt to an undivided interest afforded by a registered instrument; or

2. any transfer of security receipts, shall not require compulsory registration [Section 8].

Where any dispute relating to securitisation or reconstruction or non-payment of any amount due including interest arises amongst any of the parties, namely, the bank, or financial institution, a securitisation company or reconstruction company or qualified institutional buyers, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly.

If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any securitisation company or reconstruction company from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such securitisation company or reconstruction company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any securitisation company or reconstruction company in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment of funds by the securitisation company or reconstruction company, as the case may be, and such company shall be bound to follow the policy so determined and the directions so issued.

Without prejudice to the generality of the power vested as above, 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--

1. 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;

2. the aggregate value of financial assets which may be acquired by any securitisation company or reconstruction company.

Pending cases in BIFR/DRT/courts can be proceeded against under this ordinance

Civil Courts will not have any jurisdiction and cannot grant any injunction. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or an Appellate Tribunal is empowered by or under this Ordinance to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Ordinance or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.[Section-34]

The provisions of this Ordinance shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The provisions of this Ordinance or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and Financial Institutions Act, l993 or any other law for the time being in force.

No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963.

The Central Government may, by notification and in the Electronic Gazette as defined in clause (s) of section 2 of the Information Technology Act, 2000, make rules for carrying out the provisions of this Ordinance.
Section 38 (1)]

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:--