NPA Ordinance Could Do With More Clarity

Updated: Aug 26 2002, 05:30am hrs
Earlier in this article the broad impact of the Securitisation Ordinance was sought to be analysed. An important conclusion was that borrowers will be forced to come to the settlement table.

Under section 13(13), no borrower can sell, lease, etc the secured asset once Notice under the Ordinance is served on him, except in the ordinary course of business. However, this exception may pose difficulty and may unintentionally help the fraudulent defaulters who may sell off the secured asset and siphon off the sale proceeds. If any portion of the Ordinance is amended before the same is enacted, such amendment / s should be made effective from the date of the Act coming into force, rather than from the date of Ordinance, i.e., 21.06.2002. Otherwise, the Banks and Financial Institutions which have already started taking steps under the Ordinance may be affected adversely. For example, IFCI has transferred NPAs worth Rs 4,000 crore to the Reconstruction Company, namely, IFCI Asset Care Enterprise in view of new Ordinance. Though flat powers are conferred on Banks for taking possession of assets, right of appeal is also given to the borrower. Against the steps taken by the Banks, like, possession of asset, etc., the aggrieved borrower may file appeal under section 17 before DRT within 45 days from the date of initiation of steps, though 75 per cent of dues as stated in the Notice or such lower amount as DRT may direct will have to be deposited with DRT. Similar right of appeal before the DRAT within 30 days is given under section 18. It is apprehended that such rights of appeal, though necessary to some extent, may prolong the taking of possession of asset by Banks and the motive of expediting the recovery of dues by introducing the new Ordinance may not be fully served.

The purpose behind exempting agricultural land from being seized, etc. by the Banks as specified under section 31(i) is difficult to understand. It appears that such blanket exemption will encourage that particular class of people in wrong doing, though not so intended by the legislature. Though non-financial assistance in the form of Guarantee, L/C are covered, Lease and HP are not covered and hence such latter types of transactions will not get the benefit of the Ordinance. Section 2(1)(m) defining Financial Institution does not include NBFCs, though sub-clause (iv) empowers the Central Government to notify as Financial Institution any Non Banking Finance Company as defined in section 45I(f) of the Reserve Bank of India Act, 1934. On the other hand, State owned Financial Institutions, like, IDBI, ICICI, IFCI, etc. (covered by section 4A of the Companies Act) qualify under the Ordinance. Such discrimination is uncalled for and the Non Banking Finance Companies should also be provided level playing field, especially when foreign Banks are covered.

Further clarification is required on the the following points:- Presently, many cases of Banks and Financial Institutions are pending before BIFR and DRTs. Section 13(1) of the Ordinance states that secured interest can be enforced without intervention of the court or tribunal. Also, section 35 overrides all other laws in case of any inconsistency with any other law. It is not clear whether the Banks can use the powers conferred under the Ordinance in case of such pending cases also. Section 13(10) states that where dues are not fully satisfied by invoking the provisions of the Ordinance, the balance amount may be recovered by filing an application with Debt Recovery Tribunal or court. It seems the presently pending cases can be subjected to the provisions of the Ordinance. It also needs to be clarified whether BIFR can be treated as court. Section 13(4) provides for management of secured asset only. Where a company has hundreds of assets, the management of isolated secured assets is how far feasible is difficult to decide and the Ordinance is silent on this. One of the conditions that every Securitisation Company and Reconstruction Company has to fulfil for registration under section 3(1)(b) is that it must have Owned Fund of atleast Rs 2 Crore or such other amount not exceeding 15 per cent of total financial assets acquired or to be acquired by such Company as Reserve Bank of India may prescribe. Section 2(2) states that any word or expression used in the Ordinance but not defined may be borrowed from either Indian Contract Act, 1872 or Transfer of Property Act, 1882 or the Companies Act, 1956 or Securities and Exchange Board of India Act, 1992, if so defined in either of said enactments. However, the expression Owned Fund is not defined by any of the said laws. Here, NBFC Prudential Norms (Reserve Bank) Directions, 1998 dated 31.01.1998 may come to rescue. The said term is defined in Paragraph 2(1)(xiii) of the said Directions to mean the aggregate amount of paid-up equity share capital, compulsorily convertible Preference Share Capital, free reserves, share premium, capital reserve representing surplus on sale of asset but excluding revaluation reserve. The said aggregate amount to be reduced by accumulated losses, intangible assets and deferred revenue expenditure, if any.

One of the conditions that every Securitisation Company and Reconstruction Company has to fulfil for registration under section 3(3)(a) is that such company must not have incurred loss during last 3 years. However, the term Loss is not defined and hence may become a matter of controversy. Out of sale proceeds of secured asset, amount payable to workmen is to be set aside. It means tax dues, like, income tax, sales tax, etc. will be put on the backburner and dues of Banks will pre-empt such statutory liabilities. This does not appear to be fair to tax authorities.