The Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest Ordinance 2002.

Executive Summary

The president of India promulgated an Ordinance called ‘ The Securitisation

and Reconstruction of Financial Assets’ which came into effect on 21.06.2002.
The principal objective of the ordinance is to facilitate quick and efficacious
recovery of the debts due to Banks and Financial Institutions from the
defaulting companies which are invariably sick. The debts which have been
classified as ‘non performing assets’ by the lending institutions, can now be
transferred to separate companies called ‘ Securitisation Company’ or
‘Reconstruction Company’ and recovered by such companies. The lending
institution is called the ‘originator’ and borrowing company is referred to as
‘obligor’ in the ordinance.

This article attempts to arrange the provisions of the ordinance into a tabular
format for ease of reference to the various provisions of the ordinance.

2 Definition (please refer the ordinance)

REGULATIONOF SECURITISATION AND

RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS
AND FINANCIAAL INSTITUTION

3 (1) SC/ RC (Securitization Company/ Reconstruction Company) shall

commence business after obtaining a certificate of registration
granted under this section and having owned fund not less than two
crores and not more than 15% of total financial assets acquired or to
be acquired by SC /RC.

RBI shall notify different amounts of owned fund for different class
of SC /RC.

An existing SC/RC shall obtain RBI approval with in six months on

commencement of this ordinance.
(2) Application for registration to be submitted to RBI.
(3) Before issuing registration RBI shall satisfy, by inspection of records
or other wise following conditions:

Sharad Jain , ACA 1

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

 That no losses incurred in preceding last 3 yrs by SC/RC;

 Adequate arrangement for realization of the FA acquired;
 QIB investments in SC/RC redeemed on respective due
dates;
 Adequate professional experience in finance, securitisation
and reconstruction activities of directors;
 Sponsors representation in board should not exceed 50% of
strength of the Board.
 (Sponsors mean holding greater than equal to 10% of shares
of SC/RC.)
 Director or not convicted for any offence including moral
turpitude;
 Sponsors are not a holding co of SC/RC or have controlling
interest in it.
 SC/RC complied all prudential norms of RBI.

(4) RBI, after satisfaction of all above clauses are being fulfilled then
grant the certificate of registration with or without any conditions.

(5) RBI has right to reject any application due to non compliance clause
3
(6) Every Co. should obtain RBI approval for substantial change in
management and change of registered office.

4 RBI can cancel registration under any circumstance as mentioned

below:

 Ceases to carry on the business of SC /RC;

 Ceases to receive or hold any investment from a QIB
 Unable comply conditions put on registration of company;
 Non-fulfillment of any sub clause of clause 3.
 Unable to comply with direction issued by RBI; non-
maintenance of accounts as specified by RBI; unable to
facilitate inspection of records; doesn't obtain prior approval
of RBI under clause 3 (6).

In public interest, RBI may give time for compliance of certain

clauses before cancellation of registration.

Sharad Jain , ACA 2

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

(2) Aggrieved SC/RC co may approach to RBI, on cancellation of

registration.
(3) In spite of cancellation of registration certificate, SC/RC shall
continue to be SC/RC co unless entire investment along with interest
is redeemed.
5(1) SC/RC can acquire FA (Financial Assets) of any bank and FI by
issue of debenture or bond or any security in the nature of the
debenture, for consideration agreed between such company and the
bank or FI, incorporating therein such terms and conditions as may
be agreed between them; or by entering into an agreement with such
bank or FI for the transfer of such financial assets to such company
on such terms and conditions as may be agreed upon between them.
(2) On acquisition of FA from FI or Bank, SC/RC shall be deemed to be
lender and all rights shall vest in such company in relation to FA.
(3) Unless other wise expressly provided by this ordinance all contracts,
deeds, bonds, approvals, permission relating to FA to which bank or
FI are party shall after acquisition shall apply to SC/RC.
(4) On the date of acquisition of FA any suit, appeal, or proceeding
pending by or against the bank or FI, same shall not be abate,
discontinued or be, in any way, prejudicially affected by reason of
the acquisition of FA by SC/RC. Such proceeding shall continue
against SC/RC.
6 Bank and FI shall give notice to obligor and concerned registrar
where FA has been registered, so that obligor discharges their
obligation by making payment directly to SC/RC. Incase no notice
given and any money received by bank and FI shall be money
received in trust on behalf of SC/RC.

7 Without prejudice of provisions of Co Act, SEBI, SCRA, SC/RC on

receipt of FA will issue security receipts to QIB. SC/RC may raise
funds from QIB by formulating schemes for acquiring FA and shall
keep and maintain separate and distinct accounts in respect of each
such scheme for every FA acquired out of investments made by a
QIB and ensure that realization of such FA is held and applied
towards redemption of investment and payment of return assured on
such investment under relevant schemes.
(3) In event of non-realization of FA the resolutions passed by 75%
QIBs, shall be binding on the company.
(4) Procedures for QIB meeting shall be similar to that of BOD meeting

Sharad Jain , ACA 3

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

of SC/RC.
8 Security receipt issued by SC/RC is exempted from registration
under Registration Act 1908, on issue and on subsequent transfer.
9 SC/RC can take one or more measures for assets reconstruction
issued by RBI:

 Proper management of the business of borrower by change in

management, take over;
 The sale lease of part of the business;
 Rescheduling of payment of debts;
 Enforcement of security interest in accordance with the
provisions of this ordinance;
 Settlement of dues payable by the borrower;
 Taking possession of secured assets.
10 SC /RC can act as agent to bank and FI; manager; receiver if
appointed by court. Provided no pecuniary liability to sc/rc.
11 Any dispute among parties shall be resolved by conciliation or
arbitration, as per Arbitration and Conciliation Act, 1996.
12 RBI empowered to make any policies such as bad debt provisioning;
capital adequacy etc and issue direction from time to time as
required in the interest of the public.

Further, it may issue procedure for acquisition of FA and aggregate

value of FA to be acquired.

ENFORCEMENT OF SECURITY INTEREST

13(1) Notwithstanding anything contained in section 69 and section 69A

of the Transfer of Property Act 1882, any security interest crested in
favor of any secured creditor may be enforced, without the
intervention of court or tribunal, by such creditors in accordance
with the provisions of this ordinance.
(2) Where borrower who is under liability to a secured creditors under a
security agreement makes any default in repayment of secured debt
or any installment thereof, his account shall be classified as NPA by
the secured creditors and a notice can be issued to repay entire
secured debt with in 60 days, failing which secured creditor shall be
entitled to exercise all or any of the rights under section (4).
(3) The above notice shall give complete detail of amount payable by

Sharad Jain , ACA 4

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

the borrower.
(4) In case borrower unable to discharge his liability with stipulated
period shall take any of the measures mentioned below:

 Take possession of secured assets of the borrower including

right to transfer, sale, assignment;
 Take over the management of the secured assets of the
borrower including the right to transfer by way of lease,
assignment, sale;
 Appoint any person to manage the secured assets the
possession of which has been taken over by the secured
creditors;
 Require at any time by notice in writing, to any person
having possession of the secured assets on behalf of
borrower, to repay amount due towards secured creditors;
Any payment made to secured creditor by any person shall lead to
valid discharge of liability of the borrower.

According to recent Supreme Court judgment in favour of Mardia

Chemicals, apex court directed that secured creditors can proceed
under clause 13(2) & (4) but cannot part with the assets by way of
sale , assignment, lease. (ET 9/10/02 Pg 3). Apex court did not
provide any stay on the Ordinance.
However, company can go for one time settlement with the secured
creditor, which can allow parting with assets.
(6) Any transfer of assets in any of the above mode shall lead to valid
transfer of assets in favour of transferee with all rights in or in
relation to the secured assets.
(7) The borrower shall repay any cost incurred by secured creditors.
Money received on disposal of assets first applied towards the cost,
charges and expenses, secondly towards debt and balance if any paid
to the person entitled thereto in accordance with his rights and
interest.
(8) If dues of secured creditor are repaid before the date fixed for sale of
secured assets then such sale of assets shall be withheld not steps
towards transfer of same shall be further initiated.
(9) In case of joint secured creditors no such steps mentioned in sub
section (4) shall apply unless creditors representing not less then
75% in value of the amount outstanding as on the record date do it.

However, incase company is under liquidation than provision of

Sharad Jain , ACA 5

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

section 529A of Co Act shall apply. Here on sale of assets after

payment of workmen dues balance amount shall be paid to secured
creditors with an undertaking in case short /excess of workmen dues,
shall be adjusted by him.
(10) On sale of secured assets if dues of secured creditors are not
satisfied then an application can be filed to the Debt Recovery
Tribunal having jurisdiction or a competent court for recovery of
balance amount.
(11) Secured creditors can proceed against guarantors or sell the assets
pledge under this ordinance.
(12) One or more of his officers can exercise the rights of secured
creditors.
(13) No borrower can transfer the secured assets after getting a notice
with prior consent of the secured creditors.
14(1) Chief Metropolitan Magistrate or District magistrate to assist
secured creditor in taking possession of assets.
15(1) Manner and effect of take over of management

On business take over by the secured creditors (SC) a notice in news

paper is publish to this affect and SC appoints as many persons they
think fit to run the business.

(2) On publication of above notice in newspaper all office bearer having

power of superintendence, direction and control stands
vacate/released from their respective powers.

Any contract of director, manager about holding of office stands

deemed to be terminated.

The administrators appointed by SC to take over the entire

operations including control over all property, actionable claims,
receivables and etc.

(3) In case management of a company under Companies Act, 1956 has

been taken over by the SC then notwithstanding anything contained
in the said Act or in MOA:

• Shareholders can appoint no directors.

• No resolutions can be passed with out the constant of the SC;

Sharad Jain , ACA 6

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

• No proceedings for winding up shall lie in any court without

the consent of the SC.
(4) SC shall restore the management of the business of the borrower on
realization of their debt inn full.
16(1) No officers, directors of borrower company shall be entitled to loss
of compensation on premature termination.

The released officers, directors etc are entitled to recover from the
business of the borrowers their dues except compensation.
17(1) Right to Appeal
Any person (including borrower) aggrieved by the measures
undertaken as mentioned in 13(4) can make an appeal with in 45
days to the Debt Recovery Tribunal (DRT).
(2) Appeal of borrower shall stand provided 75% of the amount claimed
in the notice as referred in 13(2) is deposited. However, DRT can
waive or reduce the amount to be deposited.
(3) DRT shall dispose the appeal as per the Recovery of Debt Due to
Banks and Financial Institutions Act, 1933 and rules.
18(1) Appeal to Appellate Tribunal (AT)

Any person aggrieved by the order of DRT can file an appeal to AT

with 30 days from the date of order.
(2) AT shall dispose the appeal as per the Recovery of Debt Due to
Banks and Financial Institutions Act, 1933 and rules.
19 If according to DRT or AT, the possession of assets by SC is wrong
then all such assets shall relapsed back to the borrower along with
the compensation as fixed by the tribunal.
Central Registry
20(1) The central government (CG) by notification shall set up central
registry for registration of transaction of Securitization and
reconstruction of financial assets and creation of security interest
under this Ordinance.
Location, power, territorial coverage all shall be ascertained by CG.
This act shall be in addition to different act for registration.
21 CG shall appoint central registrar.
22 Under this ordinance, a Register shall be maintained, which will
provide all information about assets registered including
Securitization of financial assets, reconstruction of financial assets,
creation of security interest.

Sharad Jain , ACA 7

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

The register can be maintained in electronic form.

23 The particulars for registration is to be filed with 30 days along with
prescribed fees with CR.
24 All modification in security interest is required to be filed with CR
by SC or borrower with in 30 days of payment and satisfaction.
25 Securitization company or reconstruction company or SC to report
satisfaction of security interest.
26 The particulars of Securitization etc can be inspected from the office
of CR on payment of fees.
OFFENCES AND PENALTIES
27 In case of any default made in filing of information as required
under section 23 to 25, every officer shall be punishable with a fine
of Rs.5000 per day.
28 Non-compliance of RBI direction u/s 12 shall levy penalty of Rs. 5
lacs and Rs10000 per day if offence continues.
29 Contravention of provision of this ordinance shall lead to one-year
imprisonment or fine or both.
30 Magistrate ranked not below first class shall hear all such offence.
MISCELLANEOUS
31 Non-applicability of this ordinance in certain cases.
32 Protection of action taken in good faith by SC.
33 Offence committed under this ordinance shall be punishable as per
this section.
34 Civil court not to have any jurisdiction over matters required to be
referred to DRT and AT.
35 This ordinance overrides any thing contained in any other law
relating to same provision.
36 SC has to ensure the claim should be made with the period of
limitation prescribed under the limitation Act, 1963.
37 Application other law not barred i.e. SEBI, Co Act, etc.
38 Power of CG to make rules.
39 Certain provisions shall apply after setting up of registry section
21to 27.
40 CG empowered to remove difficulties under this ordinance.

41 Amendments as specified in schedule shall be made in SEBI, SICA,

and Companies Acts.

No reference shall be made to BIFR after Securitization Company

has acquired the FA under section 5 (1) of the Ordinance 2002.

Sharad Jain , ACA 8

Eveready Industries India Ltd.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Ordinance 2002.

Abatement of reference made to BIFR where the process of

Securitization has begun before passing of any order by BIFR and
secured creditors not less than 75 % of outstanding amount of FA
have taken any measure for recovery as mentioned in section 13(4)
of the Ordinance 2002.

Sharad Jain , ACA 9

Eveready Industries India Ltd.