Developing the Asian Markets for Non-Performing Assets
- Developments in India
By
Sumant Batra
Partner,
Kesar Dass B & Associates
Corporate Lawyers
New Delhi
FAIR III – Session V

What is a Non Performing Asset ?

In India, an asset is classified as Non-Performing Asset (NPA) if interest or installments of principal due remain unpaid for more than 180 days.

However, with effect from March, 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by a bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.
FAIR III – Session V

Recent Significant Developments in Law

DEBT RECOVERY TRIBUNALS

THE COMPANIES (SECOND AMENDMENT) ACT, 2002

SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT 2002

CORPORATE DEBT RECONSTRUCTING SCHEME
FAIR III – Session V

Recovery of Debts Due to Banks and Financial
Institutions Act, 1993
The Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (DRT Act) enables:

The banks and financial institutions to initiate recovery proceedings before the Debt Recovery Tribunals constituted under the DRT Act in various states in India.
 DRT’s deal with recovery applications by following a summary procedure.
FAIR III – Session V

Recovery of Debts Due to Banks and Financial
Institutions Act, 1993

Once their claim is adjudicated, a Recovery Certificate for the amount found due and payable is issued by Debt Recovery
Tribunal.

On the basis of the Recovery Certificate, execution proceedings are initiated by the Recovery Officer appointed for facilitating recovery of money under the Recovery Certificate.

The DRT Act and the rules and regulations framed there under provide for a self-contained mechanism and procedure for execution of Recovery Certificates
FAIR III – Session V

The Companies (Second Amendment) Act, 2002

The Companies (Second Amendment) Act, 2002 (Second
Amendment) enables:

Setting up of a National Company Law Tribunal (NCLT). NCLT will have –

The power to consider revival and rehabilitation of companies– a mandate presently entrusted to BIFR under
SICA.

The jurisdiction and power relating to winding up of companies presently vested in the High Court.
FAIR III – Session V

The Companies (Second Amendment) Act, 2002

The jurisdiction & power exercised by the Company Law Board under the 1956 Act.

The Company Law Board will stand abolished.

Various new provisions introduced and amendments carried.
FAIR III – Session V

Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Securitisation and Reconstruction of Financial Assets And
Enforcement of Security Interest Act,2002 (SARFESI) enables:

Enforcement of security interests by secured creditors in movable (tangible or intangible, including accounts receivable) and immovable property without the intervention of court.

Establishment of Asset Reconstruction Companies.

Securitisation of Assets.
FAIR III – Session V

Corporate Debt Restructuring Scheme
The CDR Scheme was sponsored by Reserve Bank of India in
2002. The main features of CDR Scheme are:

Legal basis for the mechanism will be provided by Inter-Creditor
Agreement. All participants in the CDR mechanism shall have to enter into a legally binding ICA with necessary enforcement and penal clauses.

It would be a voluntary system based on debtor-creditor agreement and inter-creditor agreement.
FAIR III – Session V

Corporate Debt Restructuring Scheme

The scheme will apply to accounts involving multiple banking accounts/ syndication/consortium accounts with outstanding exposure of Rs. 20 crore and above by banks and institutions.

The CDR system would only be applicable to standard and substandard accounts, with potential cases of NPAs getting a priority.

Till 31 July, 2003, 45 CDR proposals worth Rs 44,204 crore had been cleared.

Steel Sector was the biggest beneficiary. The Rs 9,863-crore,
Essar Oil CDR cleared in last July is, perhaps, the latest and biggest example.
FAIR III – Session V

Some General Observations on the New Laws

DEBT RECOVERY TRIBUNALS

THE COMPANIES (SECOND AMENDMENT) ACT, 2002

SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY
INTEREST ACT 2002

CORPORATE DEBT RECONSTRUCTING SCHEME
FAIR III – Session V

DEBT RECOVERY TRIBUNALS

A failure due to lack of suitable appointments & infrastructure

Delay

Many gray areas in the law

No improvement in recovery
FAIR III – Session V

The Companies (Second Amendment) Act, 2002

Implementation with same spirit

Suspension of proceedings

Defective trigger point for reorganization

Appointment of suitable judges

Training of judges
FAIR III – Session V

Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Build infrastructure

More Asset Reconstruction Companies to be approved.

To balance the law between creditor-debtor.
FAIR III – Session V

CORPORATE DEBT RECONSTRUCTING SCHEME

Need to make it more participative.

Need to provide legal sanctity.
FAIR III – Session V