Legal Aspects of Non-Performing Assets

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LEGAL ASPECTS OF NON-PERFORMING ASSETS

KNOWHOW FOR MANUFACTURE AND TECHNIQUES TO ELIMINATE NON-PERFORMING ASSETS BY PROCESS OF SECURITISATION

Securitisation

The concept of securitisation has been adopted more recently from the American financial system and has been described as processing of acquiring financial asset and packaging the same for investments by several investors. The term ‘securitisation’ has not been defined as such, but has been used in certain rules, regulations and notifications. In the recently enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “the Securitisation Act”) the term securitisation has been defined as “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 interests in such financial assets or otherwise”. The Securitisation Act, 2002

The Securitisation Act has been enacted mainly for tackling the growing menace non-performing assets by securitisation of assets by sale to ARC, which is to issue of security receipts to the investor and for enforcement of security interest by banks and financial institutions. Initially, many were delighted to find that the securitisation process as a class has come to stay in the Indian legal system, and the problem of the non-performing assets of banks and financial institution would stand resolved since the banks and financial institutions would be able to enforce its security interest without intervention of the courts. The quantum of non performing assets has been growing by leaps and bounds and has been playing havoc on the Indian financial system since as at the end of the year 2001 the total amount of outstanding NPAs stood at Rs.83,500/- crores. After enactment of the Securitisation Act, 2002 the wilful defaulters cannot now hide behind long-winded judicial process but at the same time the bank also cannot recover dues arising out of underwriting commitments obligations and equity finance by way of share subscriptions, so also the shares acquired by exercise of option for conversion of loan into equity. The Securitisation Act, 2002 does not also ensure or guarantee full recovery of the entire outstanding over dues fully. In the result the financial health of the banks will not improve because, in absence of adequate assets not more than 20 percent of NPAs would be recovered by resorting to the provisions of the Securitisation Act, 2002. The IT Tribunal ruling in case of Vishvapriya Financial Service and Securities Ltd would jolt development of asset securitisation in autofinance and housing finance sector. The company was utilising funds obtained from the investors for deployment in fixed income security and had guaranteed fixed rate of return. The contention of the company that it was only agent for the investors and has evolved only a pay-through structure was not accepted by the tribunal, which held that the company was liable for the withholding taxes on the payments made to the investors.

Growth of Banking Practice in India

In the long run from the concept of ancient money lenders, India march forward to the realm of banking, which has since branched out in the concept of the development banking, the narrow banking and the universal banking. So also from simple current and savings bank accounts, the bank finance has extended to structured finance, trade finance and export finance and finance for

*ACS, LL.M., CAIIB.

infrastructure, and the last few years saw emergence of fee based services in form of merchant bankers, financial advisers and managers to the public issue and private placement of shares debentures and bonds, syndication of loan facilities, external borrowings, forex services, treasury...
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