An Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.

BE it enacted by Parliament in the Fifty-third year of Republic of India as follows:--

CHAPTER I

PRELIMINARY

1. Short title, extent and commencement

(1) This Act may be called the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

(2) It extends to the whole of India.

(3) It shall be deemed to have come into force on the 21st day of June, 2002.

2. Definitions

(1) In this Act, unless the context otherwise requires,--

(a)        "Appellate Tribunal" means a Debts Recovery Appellate Tribunal established under sub-section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);

(b)        "asset reconstruction" means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance;

(c)        bank" means--

(i)     a banking company; or

(ii)    a corresponding new bank; or

(iii)   the State Bank of India; or

(iv)   a subsidiary bank; or

(v)    such other bank which the Central Government may, by notification, specify for the purposes of this Act;

(d)        "banking company" shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(e)        "Board" means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(f)         "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;

(g)        "Central Registry" means the registry set up or cause to bet set up under sub-section (1) of section 20;

(h)        "corresponding new bank" shall have the meaning assigned to it in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(ha)       "debt" shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

(i)         "Debts Recovery Tribunal" means the Tribunal established under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);

(j)         "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor ;

(k)        "financial assistance" means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution;

(l)    "financial asset" means debt or receivables and includes--

(i)         a claim to any debt or receivables or part thereof, whether secured or unsecured; or

(ii)        any debt or receivables secured by, mortgage of, or charge on, immovable property; or

(iii)       a mortgage, charge, hypothecation or pledge of movable property; or

(iv)        any right or interest in the security, whether full or part underlying such debt or receivables; or

(v)        any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or

(vi)        any financial assistance;

(m)    "financial institution" means--

(i)         a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956);

(ii)        any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);

(iii)       the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958);

(iv)        any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act;

(n)        "Hypothecation" means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property;

(o)        "non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,--

(a)        in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;

(b)        in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank;

(p)        "notification" means a notification published in the Official Gazette;

(q)        "obligor" means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower;

(r)         "originator" means the owner of a financial asset which is acquired by a securitisation company or reconstruction company for the purpose of securitisation or asset reconstruction;

(s)         "prescribed" means prescribed by rules made under this Act;

(t)         "property" means--

(i)         immovable property;

(ii)         movable property;

(iii)        any debt or any right to receive payment of money, whether secured or unsecured;

(iv)        receivables, whether existing or future;

(v)         intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature;

(u)        "qualified institutional buyer" means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under sub-section (4) of section 3 or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder, or any other body corporate as may be specified by the Board;

(v)         "reconstruction company" means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;

(w)        "Registrar of Companies" means the Registrar as defined in clause (40) of section 2 of the Companies Act, 1956 (1 of 1956);

(x)        "Reserve Bank" means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);

(y)        "scheme" means a scheme inviting subscription to security receipts proposed to be issued by a securitisation company or reconstruction company under that scheme;

(z)        "securitisation" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;

(za)       "securitisation company" means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation;

(zb)       "security agreement" means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

(zc)       "secured asset" means the property on which security interest is created;

(zd)       "secured creditor" means any bank or financial institution or any consortium or group of banks or financial institutions and includesó

(i)         debenture trustee appointed by any bank or financial institution; or

(ii)        securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or

(iii) any other trustee holding securities on behalf of a bank or financial institution,

in whose favour security interest is created for due repayment by any borrower of any financial assistance;

(ze)       "secured debt" means a debt which is secured by any security interest;

(zf)        "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31;

(zg)       "security receipt" means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation;

(zh)       "sponsor" means any person holding not less than ten per cent of the paid-up equity capital of a securitisation company or reconstruction company;

(zi)        "State Bank of India" means the State Bank of India constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);

(zj)        "subsidiary bank" shall have the meaning assigned to it in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959).

(2) Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.

COMMENTS

Appellate Tribunal

Sec. 8(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 provides for the establishment of one or more Appellate Tribunals by the Central Government.  Sec. 9 of that Act says, an Appellate Tribunal shall consist of one person only referred to as the Chairperson of the Tribunal, to be appointed by the Central Government.

Asset reconstruction

The word "asset" means property of all kinds, real and personal, tangible and intangible, including inter alia, for certain purposes, patents and causes of action which belong to any person including a corporation and the estate of a deceased.  The entire property of a person, association, corporation, or estate that is applicable or subject to the payment of his or her or its debts.--Black's Law Dictionary.  It means property in general all that one owns.--D.G. Gose v. State of Kerala (1980) 2 SCC 410.  In Shri Prithvi Cotton Mills v. Broach Borough Municipality AIR 1968 Guj 124, the word was held to mean items of properties held by a person minus the liabilities to be discharged by him.

"Reconstruction" is the act of constructing again.  It presupposes the non-existence of the thing to be reconstructed as an entity; that the thing before existing has lost its entity.--Miller Hatcheries v. Buckeye Incubator Co. C.C.A. M.O., 41 F. 2d. 619.

"Securitisation" is defined as to mean acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.  A "reconstruction company" and a "securitisation company" are companies formed and registered under the Companies Act, 1956, for the purposes of "asset reconstructing" and "securitisation" respectively.

Bank

A bank is an institution of great value in the commercial world, empowered to receive deposits of money, to make loans, and to issue its promissory notes, (designed to circulate as money, and commonly called "bank-notes" or "bank-bills,") or to perform any one or more of these functions.  A bank is an institution, usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business.  The term "bank" is usually restricted in its application to an incorporated body; while a private individual making it his business to conduct banking operations is generally denominated a "banker".--Black's Law Dictionary

Sec. 2(d) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 defines a "bank" thus:

(d)     "bank" means:--

(i)    a banking company;

(ii)   a corresponding new bank;

(iii)  State Bank of India;

(iv)  a subsidiary bank, or

(v)   a Regional Rural Bank.

The definition of "bank" in s. 2(1)(c) of the present Act is also almost same except the addition of sub-cl. (v) including, "such other bank which the Central Government may, by notification, specify for the purposes of this Act, in the definition clause.

Banking company

A company carrying on the business of receiving money on deposit, loaning money, discounting notes, issuing notes for circulation, collecting money on notes deposited, negotiating bills, etc. generally is a banking company.

Clause (b) of section 5 of the Banking Regulation Act, 1949 defines "banking" to mean the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.  Under cl. (c), "banking company" means any company which transacts the business of banking in India.  Under the Explanation thereto, any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking.

Sec. 5(1)(c) of the Banking Companies Act, 1949, as amended in 1950, only means that transacting the business of banking should be the business of a company, and not that such business should have been transacted at any particular point of time.  Notwithstanding that a banking company may not be transacting the business of banking at any particular point of time on account of a supervening cause, it will not cease to be a banking company within the meaning of s. 5(1) : 1952 Ker LT 633.  The definition of the word "banking" does not include other commercial activities which a banking institution may engage in.--AIR 1970 SC 564.  The definition of `banking company' describes the nature of the business transacted in a banking company and it cannot be taken to mean that a company which was originally a banking company will cease to be one, or become one of a different category for the mere fact that the proceedings have been started for the liquidation of the company : 1961 Ker LT 889.  The essence of a banking business is receiving money on current account for deposit from the public repayable on demand and withdrawable by cheque, draft or otherwise.  The Act would, therefore, apply only to the limited class of cases where the bank or banker allows the withdrawal of money by the issue of cheques : AIR 1961 Mad 8.

Under section 2(b) and section 2(a) respectively of the Banking Companies Acquisition and Transfer of Undertakings) Acts, 1970 and 1980, a banking company does not include a foreign company within the meaning of section 591 of the Companies Act, 1956.

Board

Sub-s. (1) of s. 3 of the Securities and Exchange Board of India Act, 1992 provides for the establishment and incorporation of the Securities and Exchange Board of India (SEBI).  Under sub-s. (2), the SEBI shall be a body corporate by its name, having perpetual succession and a common seal, with power to acquire, hold and dispose of both movable and immovable property, and to contract and shall, by the said name, sue or be sued.

Borrower

"To borrow" is to solicit and receive from another any article of property, money or thing of value with the intention and promise to repay or return it or its equivalent.  If the item borrowed is money, there normally exists an agreement to pay interest for its use.  In a broad sense, the term means a contract for the use of money.  The term may be used to express the idea of receiving something from another for one's own use.  The word "loan" is the correlative of "borrow."--Black's Law Dictionary.

To borrow is to receive with the implied or expressed intention of returning the same or an equivalent--Webster's Ninth New Collegiate Dictionary.

A "borrower" is he to whom a thing or money is lent at his request.  "Borrower," within the automobile liability policy covering borrower of vehicle during loading and unloading, may be defined as someone who has, with permission of owner, temporary possession and use of property of another for his own purposes.--Liberty Mut. Ins. Co. v. American Emp. Ins. Co., Tax., 556 S.W. 2d 242, 244

In Hindu Law, a father who is the Karta of the joint family consisting of himself and his sons can become a borrower in his capacity as Karta and if the loan is for legal necessity or for the benefit of the joint family estate he would render the joint family property liable for such debt and if it is for his personal benefit the joint family property even in the hands of the sons would be liable if the debt is not tainted with illegality or immorality.--Venkatesh Dhonddev Deshpande v. Sou. Kusum Dattatraya Kulkarni, AIR 1978 SC 1791

Corresponding new bank

Under s. 5(da) of the Banking Regulation Act, 1949, "corresponding new bank" means a corresponding new bank constituted under s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.  Sec. 3 of the said Act is as under:

"3. Establishment of corresponding new banks and business thereof--(1) On the commencement of this Act, there shall be constituted such corresponding new banks as are specified in the First Schedule.

(2) The paid-up capital of every corresponding new bank constituted under sub-section (1) shall, until any provision is made in this behalf in any scheme made under section 9, be equal to paid-up capital of the existing bank in relation to which it is the corresponding new bank.

(2A) Subject to the provisions of this Act, the authorised capital of every corresponding new bank shall be one thousand five hundred crores of rupees divided into one hundred fifty crores fully paid-up shares of ten rupees each:

PROVIDED that the Central Government may, after consultation with the Reserve Bank and by notification in the Official Gazette, increase or reduce the authorised capital as it thinks fit, so however that after such increase or reduction, the authorised capital shall not exceed three thousand crores or be less than one thousand five hundred crores, of rupees.

(2B) Notwithstanding anything contained in sub-section (2), the paid up capital of every corresponding new bank constituted under sub-section (1) may from time to time be increased by,--

(a)        such amounts as the Board of Directors of the corresponding new bank may, after consultation with the Reserve Bank and with the previous sanction of the Central Government, transfer from the reserve fund established by such bank to such paid-up capital;

(b)        such amounts as the Central Government may, after consultation with the Reserve Bank, contribute to such paid up capital;

(c)        such amounts as the Board of Directors of the corresponding new bank may, after consultation with the Reserve Bank and with the previous sanction of the Central Government, raise by public issue of shares in such manner as may be prescribed, so however that the Central Government shall, at all times, hold not less than fiftyone per cent of the paid-up capital of each corresponding new bank.

(2BB) Notwithstanding anything contained in sub-section (2), the paid-up capital of a corresponding new bank constituted under sub-section (1) may, from time to time. and before any paid-up capital is raised by public issue under clause (c) of sub-section (2B), be reduced by--

(a)        the Central Government, after consultation with the Reserve Bank, by cancelling any paid-up capital which is lost, or is unrepresented by available assets;

(b)        the Board of Directors, after consultation with the Reserve Bank and with the previous sanction of the Central Government, by paying off any paid- up capital which is in excess of the wants of the corresponding new bank:

PROVIDED that in a case where such capital is lost, or is unrepresented by available assets because of amalgamation of another corresponding new bank or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) with the corresponding new bank, such reduction may be done, either prospectively or retrospectively, but not from a date earlier than the date of such amalgamation.

(2BBA)(a) A corresponding new bank may from time to time and after any paid-up capital has been raised by public issue under clause (c) of sub-section (2B), by resolution passed at an annual general meeting of the shareholders entitled to vote, voting in person, or, where proxies are allowed, by proxy, and the votes cast in favour of the resolution are not less than three times the number of the votes cast against the resolution by the shareholders so entitled and voting, reduce its paid-up capital in any way.

(b) without prejudice to the generality of the foregoing power the paid-up capital may be reduced by,--

(i)         extinguishing or reducing the liability on any of its shares in respect of share capital not paid-up;

(ii)         either with or without extinguishing or reducing liability on any of its paid up shares, cancelling any paid-up capital which is lost, or is unrepresented by available assets, or

(iii) either with or without extinguishing or reducing liability on any of its paid-up shares, paying off any paid share capital which is in excess of the wants of the corresponding new bank.

(2BBB) Notwithstanding anything contained in sub-section (2BB) or sub-section (2BBA), the paid-up capital of a corresponding new bank shall not be reduced at any time so as to render it below twenty-five per cent of the paid-up capital of that bank as on the date of commencement of the Banking Companies (Acquisition and Transfer of Undertakings) Amendment Act, 1995.

(2C) The entire paid-up capital of a corresponding new bank, except the paid-up capital raised by public issue under clause (c) of sub-section (2B), shall stand vested in and allotted to the Central Government.

(2D) The shares of every corresponding new bank not held by the Central Government shall be freely transferable :

PROVIDED that no individual or company resident outside India or any company incorporated under any law not in force in India or any branch of such company, whether resident outside India or not, shall at any time hold or acquire by transfer or otherwise shares of the corresponding new bank so that such investment in aggregate exceed the percentage, not being more than twenty per cent, of the paid-up capital, as may be specified by the Central Government by notification in the Official Gazette.

Explanation : For the purposes of this clause "company" means any body corporate and includes a firm or other association of individuals.

(2E) No shareholder of the corresponding new bank, other than the Central Government, shall be entitled to exercise voting rights in respect of any shares held by him in excess of one per cent of the total voting rights of all the shareholders of the corresponding new bank.

(2F) Every corresponding new bank shall keep at its head office a register, in one or more books, of the shareholder (in this Act referred to as the register) and shall enter therein the following particulars:

(i)         the names, addresses and occupations, if any, of the shareholders and a statement of the shares held by each shareholder, distinguishing each share by its denoting number;

(ii)         the date on which each person is so entered as a shareholder;

(iii)        the date on which any person ceases to be a shareholder; and

(iv)             such other particulars as may be prescribed :

PROVIDED that nothing in this sub-section shall apply to the shares held with a depository.

(2G) Notwithstanding anything contained in sub-section (2F), it shall be lawful for every corresponding new bank to keep the register in computer floppies or diskettes subject to such safeguards as may be prescribed.

(3) Notwithstanding anything contained in the Indian Evidence Act, 1872 a copy of, or extract from, the register, certified to be a true copy under the hand of an officer of the corresponding new bank authorised in this behalf by it, shall, in all legal proceedings, be admissible in evidence.

(4) Every corresponding new bank shall be a body corporate with perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property, and to contract, and may sue and be sued in its name.

(5) Every corresponding new bank shall carry on and transact the business of banking as defined in clause (b) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) and may engage in one or more of the other forms of business specified in sub-section (1) of section 6 of that Act.

(6) Every corresponding new bank shall establish a reserve fund to which shall be transferred the share premiums and the balance, if any, standing to the credit of the reserve fund of the existing bank in relation to which it is the corresponding new bank, and such further sums, if any, as may be transferred in accordance with the provisions of section 17 of the Banking Regulation Act, 1949 (10 of 1949).

(7)(i)The corresponding new bank shall, if so required by the Reserve Bank, act as agent of the Reserve Bank at all places in India where it has a branch, for--

(a)        paying, receiving, collecting and remitting money, bullion and securities on behalf of any Government in India; and

(b)        undertaking and transacting any other business which the Reserve Bank may from time to time entrust to it.

(ii)         The terms and conditions on which any such agency business shall be carried on by the corresponding new bank on behalf of the Reserve Bank shall be such as may be agreed upon.

(iii)        If no agreement can be reached on any matter referred to in clause (ii), or if a dispute arises between the corresponding new bank and the Reserve Bank as to the interpretation of any agreement between them, the matter shall be referred to the Central Government and the decision of the Central Government thereon shall be final.

(iv)        The corresponding new bank may transact any business or perform any functions entrusted to it under clause (i), by itself or through any agent approved by the Reserve Bank."

Debt

Under section 2(ha), as inserted by the enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, "debt" shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Debts Recovery Tribunal

Sec. 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 provides for the establishment of one or more Debts Recovery Tribunals by the Central Government to exercise the jurisdiction, powers and authority conferred on such Tribunals by or under that Act.  Under s. 4 of the said Act, a Tribunal shall consist of only one person (Presiding Officer) appointed by the Central Government.

Default

"Default" is, not doing something required by duty or law; neglect; a failure to pay financial debts; failure to appear at the required time in legal proceeding.

Default means nothing more, nothing less, than one doing what is reasonable under the circumstances--not doing something which you ought to do, having regard to the relations which you occupy towards the other persons interested in the transaction--Re, Young and Haston's Contract (1885) 31 ChD 168.

Default is an omission which ought to have been done, specifically, the omission or failure to perform a legal or contractual duty or to observe a promise or discharge an obligation (e.g. to pay interest or principal on a debt when due).  The term also embraces the idea of dishonesty and of wrongful act, or an act of omission discreditable to one's profession.--Vide Black's Law Dictionary

Non-prosecution of the case, such as by not pressing it amounts to default.  Default may include non-appearance, non-payment of fees, failure to produce necessary documents or failure to do other things for successful prosecution.--Md. Goffar Baig v. Md. Abdul Khaleek AIR 1957 AP 991

`Default' in s. 2(2)(b), Civil Procedure Code, is not confined to a default in appearance only; it includes default of all kinds.ˇ--Tafazul v. Shah Mohammad AIR 1949 All 261. Order 9, r. 6 of the Code enables the court to pass a decree ex parte if the plaintiff appears but the defendant does not, when the suit is called on for hearing.

The word `default' has been defined in Vol. I of the Webster's Third New International Dictionary at page 590 thus: to fail to fulfil a contract or agreement, to accept a responsibility; to fail to meet a financial obligation.--S. Sundaram Pillai v. V.R. Pattabiraman AIR 1985 SC 582

Financial asset

Financial asset under s. 2(1)(l) means debt or receivables including those specified under sub-cls. (i) to (vi) thereof. Debt is a sum of money due under an express or implied agreement such as a bond or bill or note; amount due or payable from one person to another in return for money, services, goods or other obligation.  "Receivable" is also debt due.  The word means that which is due and owing a person or company, (e.g. account receivable).  In book-keeping, the name of an account which reflects a debt due.

Financial Institution

Sec. 4A of the Companies Act, 1956 lays down :

"4A. Public financial institutions--(1) Each of the financial institutions specified in this sub-section shall be regarded, for the purposes of this Act, as a public financial institution, namely :-- (i) the Industrial Credit and Investment Corporation of India Limited, a company formed and registered under the Indian Companies Act, 1913 (7 of 1913); (ii) the Industrial Finance Corporation of India, established under s. 3 of the Industrial Finance Corporation Act, 1948 (15 of 1948); (iii) the Industrial Development Bank of India, established under s. 3 of the Industrial Development Bank of India Act, 1964 (18 of 1964); (iv) the Life Insurance Corporation of India, established under s. 3 of the LIC Act, 1956 (31 of 1956); (v) The UTI, established under s. 3 of the UTI Act, 1963 (52 of 1963); (vi) the Infrastructure Development Finance Company Limited, a company formed and registered under this Act; (vii) the securitisation company or reconstruction company which has obtained a certificate of registration under sub-s. (4) of s. 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

(2) Subject to the provisions of sub-s. (1), the Central Government may, by notification in the Official Gazette, specify such other institution as it may think fit to be a public financial institutionˇ:

PROVIDED that no institution shall be so specified unless--(i) it has been established or constituted by or under any Central Act, or (ii) not less than fifty-one per cent of the paid-up share capital of such institution is held or controlled by the Central Government.

Sec. 2(h)(ii) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 ropes into the ambit of the definition of "financial institution", such other institution also as the Central Government may, having regard to its business activity and the area of its operation in India, by notification specify, in addition to a public financial institution within the meaning of s. 4A of the Companies Act.

The word `debt', no doubt, means something recoverable by an action for debt, and nothing can be recovered in an action for debt except what is ascertained or can be ascertained.  A claim for an amount which is unascertained cannot justly be called a debt.--Ogdens Ltd. v. Weinberg (1906) 95 LT 567

Debt is a sum of money due by certain and express agreement; as by bond for a determinate sum, a bill or note, a special bargain, or a rent reserved on a lease, where the amount is fixed and specific, and does not depend upon any subsequent valuation to settle it.  The word "debt," in the definition of a mortgage as a hypothecation or pledge of property as security for a debt, means a duty or obligation to pay, for the enforcement of which an action lies.  Stollenwerck v. Marks & Gayle 188 Ala. 587, 65 So. 1024, Ann. Cas. 1917C, 981; Gibson v. Hopkins 80 W. Va. 756, 93 S.E. 826.  Standing alone, the word "debt" is as applicable to a sum of money which has been promised at a future day, as to a sum of money now due and payable.  To distinguish between the two, it may be said of the former that it is a debt owing, and of the latter that it is a debt due.  A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time.  A sum payable upon a contingency, however, is not a debt, or does not become a debt until the contingency has happened.  People v. Arguello 37 Cal. 524.  A "debt" is a specified sum of money owing to one person from another, including not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment.  Angola Brick & Tile Co. v. Millgrove School Tp., Steuben Country 73 Ind. App. 557, 127 N.E. 855; Dewey v. Denson 31 Ga. App. 352, 120 S.E. 805.  The words "debt" and "liability" are not necessarily synonymous.  As applied to the pecuniary relations of parties, liability is a term of broader significance than debt.  Coulter Dry Goods Co. v. Wentworth 171 Cal. 500, 153 P. 939.  Liability is responsibility; the state of one who is bound in law and justice to do something which may be enforced by action.  This liability may arise from contracts either express or implied, or in consequence of torts committed.  McElfresh v. Kirkendall 36 Iowa 226.  "Liability" ordinarily means an obligation which may or may not ripen into a debt.  Irving Bank-Columbia Trust Co. v. New York Rys. Co., DCNY 292 F. 429.  Yet "debt" may sometimes include various kinds of liabilities.  See Allen v. Cosmopolitan Trust Co. 247 Mass. 334, 142 N. E. 100; Carroll v. Bowling 151 Md. 59, 133 A. 851.

Sec 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 defines "debt" thus:

"Debt" means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application.

`Debt' could be defined as a liability to pay in present or in future unascertainable sum of money.  On a deposit being made, the depositee, incurs a liability although the time for repayment would come only when a demand is made.--Ramanathan Chettiar v. Ramanathan Chettiar, AIR 1968 SC 1047. Consideration which remains unpaid in respect of assets purchased by assessee from another company is a `debt' due from assessee.--Commissioner of Wealth Tax Madras v. Spencer & Co. Ltd. AIR 1973 SC 2376

A "debt" is a chose-in-action and is heritable and assignable and it is treated as property in India under the Transfer of Property Act which calls it an "actionable claim".--Delhi Cloth and General Mills Ltd. v. Harnam Singh AIR 1955 SC 590

The word `debt' is applicable to a sum of money which has been promised at a future day as to a sum now due and payable.--Union of India v. Raman Iron Foundry AIR 1974 SC 1265

Rule 7(3) of Security Interest (Enforcement) Rules, 2002 states that sale of asset covered under s. 2(1)(iii) or 2(1)(iv) shall be as if it is a sale of movable secured asset and provisions of the Rules as applicable to sale of movable assets apply.

Wide flexibility has been provided to the secured creditor.  This may not be held as over-delegation, as in State Financial Corporation v. Jagdamba Oil Mills 2002 AIR SCW 500, it was held that any mode of sale of assets can be adopted.  The only requirement is that it should be fair and transparent.

Hypothecation

"Hypothecate" is to pledge property as security or collateral for a debt.  Generally, there is no physical transfer of the pledged property to the lender, nor is the lender taken title to the property, though he has the right to sell the pledged property upon default.--Moore v. Wardlaw, C.C.A. Tex. 522 S.W. 2d 552, 554

Hypothecation is defined as "a right which a creditor has over a thing belonging to another, and which consists in the power to cause it to be sold in order to be paid his claim out of the proceeds."

Hypothecation is the act of pledging a thing as security for a debt or demand without parting with the possession.--Wharton's Law Lexicon

Hypothecation though not necessarily accompanied by possession of the property and though it may not create a title as such, would indeed provide a security.--Hindustan Machine Tools Ltd. v. Nedungadi Bank Ltd. AIR 1995 Kar 185

Under s. 100 of the Transfer of Property Act, 1882, where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions thereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.  A charge which falls under said s. 100 is enforceable by a suit for sale.  On the other hand, a charge created by a decree can be enforced by sale of the property in execution.--Seethalakshmi Ammal v. Srinivaso AIR 1958 Mad 23

Non-performing asset

"Non-performing asset" is a colourable substitute for "bad debt" about which there is no reasonable expectation of recovery.  The Reserve Bank of India's Prudential Norms on Asset Classification defines a `non-performing asset (NPA)' as "a credit facility in respect of which the interest and or instalment of principal has remained `past due' for a specified period of time."  An asset, including a leased asset, becomes NPA when it ceases to generate income for a bank.  Any amount due to bank under any credit facility is `overdue' if it is not paid on the due date fixed by the bank.

Obligor

Obligor is a person who binds himself to another by contract, or one who places himself under a legal obligation or promisor.  "Obligation of a contract" is that which the law in force when contract is made obliges parties to do or not to do, and the remedy and legal means to carry it into effect.  It is the duty of performance, and the phrase includes everything within the obligatory scope of the contract, and it includes the means of enforcement.  Illustration (i) of s. 114 of the Indian Evidence Act, 1872 raises a statutory presumption that when a document creating an obligation is in the hands of the obligor, the obligation has been discharged.

Originator

Originator is the owner of the financial asset, the original lender. Ownership is a collection of rights to use and enjoy an asset or property, including right to transmit it to others.  According to Halbury's Laws of England, ownership consists of inumerable rights over property, for example, the rights of exclusive enjoyment, of destruction, alteration and alienation, and of maintaining and recovering possession of the property from all other persons.  Such rights are conceived not as separately existing, but as merged in one general right of ownership.

"Owner" is the person in whom is vested the ownership, dominion, or title of property; proprietor.  He also has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy and do with as he pleases, even to spoil or destroy it as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right.  Legal owner is one who is recognised by the law as the owner of the property.  In a more particular sense, he is one in whom the real estate is vested, but who holds it in trust for the benefit of another, the latter being called the "equitable owner."--Black's Law Dictionary

The word "owner" has different  meanings in different contexts.  Under certain circumstances a lessee may be considered as the owner of the property leased to him.--R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax AIR 1972 SC 126

Property

Property is treated as belonging to any person having custody or control of it, or having in it any proprietary right or interest, or having a charge on it.

The only effect of the deletion of art. 19(1)(f) is that the right to property has lost its protection as a `fundamental rights'; it does not abolish the rights of property as they exist under the ordinary law, for instance, the right of a landlord to evict a tenant under the Rent Control Acts.--Patel Roadways v. State of Tamil Nadu AIR 1985 Mad 119

As a legal concept, "property" is the sum of a bundle of rights and in the case of tangible property would include the right of possession, the right to enjoy, the right to destroy, the right to retain, the right to alienate and so on.--Guru Datta Sharma v. State of Bihar AIR 1961 SC 1684

"Property" is a term of widest import and subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold or enjoy.--Ahmed G.H. Ariff v. CWT AIR 1971 SC 1691

Any legal right which can be enforced through a court is a right in the nature of "property" within the meaning of art. 31.--Delhi Cloth and General Mills Co. Ltd. v. Rajasthan State Electricity Board AIR 1986 SC 1126

Qualified Institutional Buyer (QIB)

Securitisation process begins when the originator segregates loans or lease or receivables into pools which are relatively homogeneous in regard to types of credit, maturity and interest rate risk.  The pools of assets are then transferred to a Special Purpose Vehicle (SPV).  The SPV issues asset-backed securities in the form of debt, certificates of beneficial ownership and other instruments.     

The present Act replaces SPV by independent securitisation company or reconstruction company.  Under the Act, such securities will be offered to QIBs as defined in s. 2(1)(u) thereof and no public participation is envisaged.

Reconstruction company

The provisions of `asset reconstruction' combine the features of securitisation and enforcement of security interest.  Like securitisation, in `asset reconstruction' also, `financial asset' (debt or receivable) is acquired from bank/Financial Institution, and not the asset as such.  However, in asset reconstruction, the right or interest of any bank/Financial Institution is acquired for the purpose of realisation of such financial assistance.  Thus, non-performing asset alone can be acquired for asset reconstruction.

The basic idea is to form  a `reconstruction company'.  The asset reconstruction Company will have to be registered with Reserve Bank of India.  Such company will be a public financial Institution under s. 4A of Companies Act, 1956.

The asset reconstruction company will devise a separate scheme for each of the financial asset taken over.  QIB will invest in such `scheme'.  The `reconstruction company' will issue `security receipts' to QIB.  The security receipt will represent undivided interest in such financial assets.  The reconstruction company will realise the financial assets and redeem the investment and payment of returns to QIB under each scheme.

Registrar of Companies

Sec. 2(40) of the Companies Act, 1956 defines "Registrar" to mean a Registrar, or an Additional, or Joint,  a Deputy or an Assistant Registrar, having the duty of registering companies under that Act.

Reserve Bank

Sec. 3 of the Reserve Bank of India Act, 1934 provides for the establishment and incorporation of Reserve Bank, sub-s. (1) whereunder, a bank to be called the Reserve Bank of India shall be constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of that Act.  By virtue of sub-s. (2), the Bank is a body corporate by the said name, having perpetual succession and a common seal, and shall by the said name sue and be sued.

Securitisation

Securitisation is a process through which illiquid assets are transferred into a more liquid form of assets and distributed to a broad range of investors through capital markets.  The lending institution's assets are removed from its balance sheet and are instead, funded by investors through a negotiable financial instrument.  The security is backed by the expected cash flows from the assets.

In securitisation, the lending institution's assets are removed from balance sheet of that institution and are instead, funded by investors.  These investors purchase a negotiable financial instrument evidencing this indebtedness. By securitisation, long-term illiquid assets of original lender get converted into current assets.

Securitisation company

The purpose of securitisation is to avoid mismatch between assets and liabilities of banks and financial institutions.  The lending company really `sells' its loans to the investors through SPV.

The securitisation company can acquire `financial asset' from banks and financial institutions, by issuing debentures, bonds or by entering into any arrangement with the bank or financial institution.  Once the securitisation company takes over `financial asset', that company will be treated as lender and `secured creditor' for all the purposes. A securitisation company can also act as asset reconstruction company, and vice versa.

Security agreement

The term "security' is usually applied to an obligation, pledge, mortgage, deposit, lien, etc. given by a debtor in order to assure the payment or performance of his debt, by furnishing the creditor with a resourse to be used in case of failure in the principal obligation.  It is a collateral given by debtor to secure loan, a document that indicates loan. Under s. 2(h) of the Securities Contracts (Regulation) Act, 1956, securities include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of s. 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement  of Security Interest Act, 2002 (ii) government securities, and (iia) such other instruments as may be declared by the Central Government to be securities rights or interest in securities;

Security agreement is an agreement which creates or provides for a security interest between the debtor and a secured party, an agreement granting a creditor a security interest in personal property, which security interest is normally perfected either by the creditor taking possession of the collateral or by filing financial statements in the proper public records.  Security interest is the interest in property obtained pursuant to security agreement.--Black's Law Dictionary

Secured asset and security interest

Security interest is a form of interest in property which provides that the property may be sold on default in order to satisfy the obligation for which the security interest is given.  It is an interest in personal property or fixtures which secures payment or performance of an obligation, including the interest of an assignee of the proceeds of a letter of credit.  "Secured asset" is the property on which the said interest is created.

Secured creditor

Secured creditor is a creditor holding security the realisation of which would satisfy his claim; a creditor who holds some special pecuniary assurance of payment of his debt, such as a mortgage, collateral, or lien.  Under s. 2(e) of the Provincial Insolvency Act, 1920, he is a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor.  `Secured creditor' includes a landlord who under any enactment for the time being in force has a charge on land for the rent of that land within the meaning of s. 2(g) of the Presidency Towns Insolvency Act, 1909.  A `secured creditor' under both the Acts has three courses open to him--(a) he may realise his security and then proceed for the balance; (b) he may relinquish his security and prove for his whole debt; and (c) he may state in his proof the value at which he assesses his security and prove for the balance after deducting the assessed value.  The Companies Act, 1956 also follows the insolvency rules in respect of the secured creditor of a company in liquidation by s. 529 of that Act.

Secured debt

The word `debt' no doubt means something recoverable by an action for debt, and nothing can be recovered in an action for debt except what is ascertained or can be ascertained.  A claim for an amount which is unascertained cannot justly be called a debt.--Ogdens Ltd. v. Weinberg (1906) 95 LT 567

Debt is a sum of money due by certain and express agreement; as by bond for a determinate sum, a bill or note, a special bargain, or a rent reserved on a lease, where the amount is fixed and specific, and does not depend upon any subsequent valuation to settle it.  The word "debt," in the definition of a mortgage as a hypothecation or pledge of property as security for a debt, means a duty or obligation to pay, for the enforcement of which an action lies.  Stollenwerck v. Marks & Gayle 188 Ala. 587, 65 So. 1024, Ann. Cas. 1917C, 981; Gibson v. Hopkins 80 W. Va. 756, 93 S.E. 826.  Standing alone, the word "debt" is as applicable to a sum of money which has been promised at a future day, as to a sum of money now due and payable.  To distinguish between the two, it may be said of the former that it is a debt owing, and of the latter that it is a debt due.  A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time.  A sum payable upon a contingency, however, is not a debt, or does not become a debt until the contingency has happened.  People v. Arguello 37 Cal. 524.  A "debt" is a specified sum of money owing to one person from another, including not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment.  Angola Brick & Tile Co. v. Millgrove School Tp., Steuben Country 73 Ind. App. 557, 127 N.E. 855; Dewey v. Denson 31 Ga. App. 352, 120 S.E. 805.  The words "debt" and "liability" are not necessarily synonymous.  As applied to the pecuniary relations of parties, liability is a term of broader significance than debt.  Coulter Dry Goods Co. v. Wentworth 171 Cal. 500, 153 P. 939.  Liability is responsibility; the state of one who is bound in law and justice to do something which may be enforced by action.  This liability may arise from contracts either express or implied, or in consequence of torts committed.  McElfresh v. Kirkendall 36 Iowa 226.  "Liability" ordinarily means an obligation which may or may not ripen into a debt.  Irving Bank-Columbia Trust Co. v. New York Rys. Co., DCNY 292 F. 429.  Yet "debt" may sometimes include various kinds of liabilities.  See Allen v. Cosmopolitan Trust Co. 247 Mass. 334, 142 N. E. 100; Carroll v. Bowling 151 Md. 59, 133 A. 851.

Under s. 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, "debt" means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application.

Secured transaction is any transaction, regardless of its form, that is intended to create a security interest in personal property or fixtures, including goods, documents, and other intangibles.  `Secured debt' is a debt secured by collateral, e.g., mortgage, securities, deed, etc.

Security receipt

A receipt is a written acknowledgement of the receipt of money, or delivery of a thing of value, without containing any affirmative obligation upon either party to it.  It is a mere admission of a fact in writing.  And being a mere acknowledgement of payment, is subject to parol explanation or contradiction.--Black's Law Dictionary

It requires delivery or change of possession from seller to buyer, and can only be accomplished, in absence of tortious appropriation, by affirmative assent and conduct of seller.--Gerner v. Vasby, 75 Wis. 2d 660, 250 N.W. 2d 319, 324, 97 A.L.R. 3d 897

Sponsor

Sponsor is a surtey or one who makes a promise or gives security for another.  In the civil law, sponsor is one who intervenes for another voluntarily and without being requested. In a contract of guarantee, the person who gives the guarantee to performance of the promise or discharge the liability of a third person in case of his default.  The person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor".

State Bank of India

The State Bank of India Act, 1955 is an Act to constitute a State Bank of India, to transfer to it the undertaking of the Imperial Bank of India and to provide for other matters connected therewith or incidental thereto.  Sec. 3 of that Act providing for the establishment of the Bank reads:

3. Establishment of the State Bank--(1) A Bank to be called the State Bank of India shall be constituted to carry on the business of banking and other business in accordance with the provisions of this Act and for the purpose of taking over the undertaking of the Imperial Bank.

(2) The Reserve Bank, together with such other persons as may from time to time become shareholders in the State Bank in accordance with the provisions of this Act, shall, so long as they are shareholders and in the State Bank, constitute a body corporate with perpetual succession and a common seal under the same of the State Bank of India, and shall sue and be sued in that name.

(3) The State Bank shall have power to acquire and hold property, whether movable or immovable, for the purposes for which it is constituted and to dispose of the same.

Subsidiary bank

The State Bank of India (Subsidiary Banks) Act, 1959 provides for the formation of certain government or government associated banks as subsidiaries of the State Bank of India, and for the constitution, management and control of the subsidiary banks so formed.  Sec. 2(k) of that Act defines "subsidiary bank" to mean any new bank and to include the Hyderabad Bank and Saurashtra Bank.

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