Much needed progress seen in debt recovery laws

While the passage of the goods and sales tax (GST) bill has stolen the limelight, much was achieved by lawmakers in a productive monsoon session of the Indian parliament. An unheralded achievement is the passage of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, by both the upper and the lower houses of parliament.

The omnibus bill amends the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), the Indian Stamp Act, 1899 (Stamp Act), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act), and the Depositories Act, 1996, with “the aim to improve ease of doing business and facilitate investment leading to higher economic growth and development”.

The bill was introduced in May 2016 and promptly referred to a joint parliamentary committee of both houses of parliament. The committee deliberated on the bill, considered comments from the public and submitted its report on 22 July. The bill was passed by the Lok Sabha (lower house) on 1 August and by the Rajya Sabha (upper house) on 9 August. The bill’s passage has been welcomed in financial circles with some of its provisions being praised for bringing much needed certainty to the current suite of debt recovery legislation.

Among the major changes introduced by the bill is the insertion into the Stamp Act of a new section 8F to exempt the transfer/assignment of financial assets to an asset reconstruction company from the application of stamp duty. While stamp duty (except on certain specified items) is reserved for states to legislate on, similar provisions have been introduced in the past.

A big financial hurdle for sales of non-performing assets by banks to asset reconstruction companies was the lack of a uniform stamp duty rate on assignment of financial assets. While some states had prescribed stamp duty caps, in other states the stamp duty was calculated as a fixed percentage of the consideration, thereby defeating the commercial rationale of the deal.

The bill also amends SARFAESI with a view to streamlining the enforcement of security interest. For instance, where a secured creditor requests the assistance of the district magistrate or the chief metropolitan magistrate for taking possession of a secured asset, an amendment to section 14 of SARFAESI requires the magistrate to pass the necessary orders within 30 days of the application by the secured creditor.

Section 20 of SARFAESI contemplated the creation of a central registry for recording transactions entered into by asset reconstruction companies and the creation of security interest. The bill introduces a new section 20A, which mandates the integration of this registry with the registries established under the Companies Act, 2013, the Registration Act, 1908, the Merchant Shipping Act, 1958, the Motor Vehicles Act, 1988, the Patents Act, 1970, the Designs Act, 2000, and any other records under any other law.

This consolidation of records is a much needed reform, which removes the requirement for lenders to search multiple registries before creating security interest.

Notably, the bill also provides that a creditor that has not registered its security interest in the central registry will not be able to exercise any right of enforcement in respect of such security interest.

The bill also introduces some much needed procedural reforms to the RDB Act, including allowing electronic filing of applications, written statements, pleadings, and other documents. The amendments to the RDB Act also contemplate serving and delivery of summons and notices in electronic form. Further, at a substantive level, the bill introduces a new section 31B, which provides that notwithstanding any other law, the rights of secured creditors to recover secured debts will have priority over all other debts including dues to the central and state governments, and any local authority. This section reflects a paradigm shift on the part of the lawmakers.

The bill is a good move and shows the government’s commitment to improve the business environment. The amendments introduced by the bill are a veritable panacea, and have been warmly welcomed by banks and financial institutions, which have been under stress partly because of their inability to enforce security and recover delinquent loans. In addition to this, the government’s move to notify non-banking financial companies with assets of ₹5 billion (US$74.5 million) or more as “financial institutions” for the purposes of SARFAESI, thereby entitling them to benefits of SARFAESI, has provided much needed succour to the lending community. Notably, this benefit only applies for secured loans with a principal amount of up to ₹10 million.

One hopes that the amendment bill will soon be notified into effect.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.