Column : Debt recovery Bill needs a relook

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SummaryThe Bill proposes that ARCs can convert part of company debt into equity. That means ARCs will not get the first charge on assets.

The government has listed the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, for consideration and passing during the current session of Parliament. This Bill amends two Acts: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act), and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). This Bill was not referred to the Parliamentary Standing Committee for examination.

The Bill aims to achieve a few objectives. It permits asset reconstruction companies and securitisation companies to convert loans of borrower companies into equity shares. It permits banks to purchase immovable assets of borrower companies in lieu of their loan obligations. It includes multi-state cooperative banks within the definition of banks. Currently, banks and financial institutions need to respond to representation from borrowers within seven days; the Bill increases this to 15 days. It enables banks or any person to file a caveat, so that they are heard by the Debt Recovery Tribunal before granting a stay. It enables the central government to require by notification, the registration of all transactions of securitisation or asset reconstruction or security interest, which are subsisting before the creation of the Central Registry. The Bill provides the central government with the power to direct, in public interest, that the provision of the Sarfaesi Act may not apply or may apply with modifications to a class or classes of banks or financial institutions.

The first two proposals listed above may need careful scrutiny by Parliament when it considers the Bill.

The first one is an addition to the power of securitisation and reconstruction companies. Asset reconstruction works in the following manner. Suppose a company has taken a loan from a bank, say for R100, and the company is likely to default (or has defaulted) on its loan related payments. Asset reconstruction company (ARC) will buy the loan from the bank, at a discount (say, R60). It expects to recover the money from the company through liquidating the security against the loan. It would expect to recover an amount greater than the price it paid for the loan. The Sarfaesi Act provides the ARC with certain powers. It may enforce a change in the management of the company, require the company to sell or lease its business, reschedule debt related payments, take possession of the secured assets etc.

This process ensures greater liquidity with banks.

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