The Reserve Bank of India on Friday has suggested that managements of defaulter companies can get back their units seized by banks, if they pay up within five year.

The draft guidelines issued by RBI has made these changes in the Sarfaesi Act. The Act had given, for the first time, banks the legal backing to take over plants and machinery of companies that consistently defaulted on their loans.

According to the proposed norms, on realisation of its dues in full or within a period of five years from the date of acquisition of assets or such extension thereof as may be permitted by RBI, whichever is earlier, the custodians shall restore the management of the business to the borrower, as provided in Section 15(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act.

The proposed guidelines would ensure fairness and transparency, and build in a system of checks and balances in the whole exercise, said RBI while announcing the draft guidelines.

Bankers have reacted positively to the proposal. ?Its a welcome move by RBI and it will help the banks in their NPA management?, said AK Jalota, general manager (recovery), Bank of India. Others said the new detailed proposal will bring in more clarity while dealing with assets of defaulting companies. This includes the issue of valuing assets as well. The original borrower (or promoter), after paying back the dues, can get back the ownership of the enterprise. This is expected to create a positive environment for settling of the bank?s dues with speed. ?The results of this on employees and investment will, however, be seen over a period of time,? added Jalota.

The Sarfaesi Act was enforced in 2002 with a view to allow banks to recover their dues from defaulters and allow them to dispose of the defaulters? assets. Earlier, there was criticism that the assets of small & medium sector enterprises were the ones rounded off under the Act and then sold at throwaway prices. This was seen to be benefitting the middlemen and the entrepreneurs lost out.

RBI explained that a securitisation company or reconstruction company (SC/RC) may resort to change in or takeover of the management of the business of the borrower for the purpose of realisation of its dues from the borrower subject to the provisions of these guidelines.

A SC/RC may resort to change in or take over of the management of the business of the borrower, when the amount due to it from the borrower is not less than 25% of the total assets owned by the borrower; and where the borrower is financed by more than one secured creditors (including SC/RC) representing not less than 75% of the total secured debt agree to such action. The takeover of the management of the business of the borrower by the SC/RC may be undertaken only if the effort for change in the management of the business of the borrower has failed, said RBI.

Every SC or RC shall frame its policy regarding change in or takeover of the management of the business of the borrower, with the approval of its board of directors and make it available to the borrowers.

The change in or takeover of the management of the business of the borrower should be done only after the proposal is examined by an independent advisory committee to be appointed by the SC/RC consisting of an independent valuer and technical/ finance/legal professionals.

The advisory committee would assess the situation of the borrower, time-frame available for recovery of the debt from the borrower and other aspects. It will recommend to the SC/RC for a change in or takeover of the management of the business of the borrower which is necessary for effective running of the business leading to recovery.