to presentation - IFMR Finance Foundation

Privileged and Confidential
Mortgage Creation and Security Enforcement
IFMR Capital
June, 2013
Relevance of Security Creation
• Secured loans v. Unsecured loans
• Focus is on debt recovery options in cases where borrower is
unwilling to repay
• Standardised documentation and effective security creation for easy
Types of Security
Movable Property
• Hypothecation
• Eg: Vehicles, stock and machinery
• Pledge
• Eg: gold, shares
• Charge
• Eg: fixed or floating charge over current assets
Immovable Property
• Registered simple mortgage
• Equitable mortgage by deposit of title deeds
Relevant Documents
Classification of property
• Freehold
• Leasehold
• Private/Govt agency
• Government land
Nature of property
• Residential
• Commercial
• Agricultural
Conversion certificate required to change agricultural land to
residential/commercial property
Relevant Documents
Title Deeds (sale deed, partition deed, gift deed, settlement deed, etc.)
Parent Documents (tracing chain of prior title deed)
Patta, Chitta, Adangal, A-register extract, EC
Revenue records
Agreement to sell, security documents
• Legal title search report is normally taken for the last 13-30 years to verify
chain of prior title deeds
Relevant Documents
Additional requirements for:
• Leasehold properties
– Permission of lessor for sale, mortgage creation
– Conditions of lease to be reviewed and complied with
– Allotment letter, possession letter and conveyance deed
• Builder properties
– Construction agreement
– Tripartite agreement
Valid execution of documents
• Deed v. Contract
• Witnessing and notorisation
• State specific stamp duty and registration charges
• Equitable mortgage – deposit of title deeds, confirmation letter,
MODT to be registered in some states
• Power of Attorney
Enforcement of Security
Unsecured Loans
Secured Loans
Summary Suit
Post-dated / Blank cheques
Lok Adalats
• Debt Recovery Tribunal
• Lok Adalats
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002
Permits banks and Financial Institutions to directly take possession of
secured assets
This can be done 60 days after providing a notice for discharge of liabilities
Only involves costs associated directly with recovery and no additional legal
The remedy is not available to most NBFCs unless notified by the Central
Post Dated/Blank Cheques
Criminal liability can be imposed for dishonor of a cheque that has
been issued to discharge a subsisting debt or liability under
Section 138 of the Negotiable Instruments Act
Cheque is
dishonored and
returned upon
presentation at the
Within 30 days of
dishonor, a
demand notice is
sent to the Issuer
seeking payment
of the amount
If the amount is not
paid within 15 days
of Demand Notice,
a criminal
complaint can be
filed within one
month subsequent
to this period
Post Dated/Blank Cheques
A legal presumption exists that the cheque was validly issued for a
subsisting debt or liability
The case is mandated to be completed within 6 months as far as
Being a criminal case repayment is not directly ensured under this
option, but often acts as an effective deterrent
It is advisable to obtain a written undertaking from the issuer
authorizing the lender to fill up details in the signed cheque to effect
payment that is due
Cheque should not have been issued merely as a security prior to
the loan disbursement
Scalability is an issue with this option
Default on ECS also follow similar procedure
Arbitration clause to be included in the agreement
A third party unbiased arbitrator will decide the case based on the
claims and evidence presented before it
More informal and does not require adherence to procedural laws,
making it a simpler and faster process
Costs of arbitration are typically high and disproportionate to the
benefits if the claim amounts are small
Arbitral award is final and automatically enforceable after 3 months.
Dissatisfied parties often seek to set aside the award on grounds of
procedural irregularities and public policy
Thank You