MORTGAGE

A mortgage is a method of creating charge on immovable properties like land and

building. Section 58 of the Transfer of Property Act 1882, define a mortgage as
follows:
"A mortgage is the transfer of an interest in specific immovable property for the
purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt, or the performance of an engagement which may
give rise to a pecuniary liability."
In terms of the definition, the following are the characteristics of a mortgage:
(1) A mortgage can be effected only on immovable property. Immovable property
includes land, benefits that arise out of land and things attached to earth like
trees, buildings and machinery. But a machine which is not permanently fixed to
the earth and is shift able from one place to another is not considered to be
immovable property.
(2) A mortgage is the transfer of an interest in the specific immovable property. This
means the owner transfers some of his rights only to the mortgagee. For
example, the right to redeem the property mortgaged.
(3) The object of transfer of interest in the property must be to secure a loan or
performance of a contract which results in monetary obligation. Transfer of
property for purposes other than the above will not amount to mortgage. For
example, a property transferred to Liquidate prior debt will not constitute a
mortgage.
(4) The property to be mortgaged must be a specific one, i.e., it can be identified by
its size, location, boundaries etc.
(5) The actual possession of the mortgaged property is generally with the mortgager.
(6) The interest in the mortgaged property is re-conveyed to the mortgager on
repayment of the loan with interest due on.
(7) In case, the mortgager fails to repay the loan, the mortgagee gets the right to
recover the debt out of the sale proceeds of the mortgaged property.
Forms of Mortgages
Section 58 of the transfer of Property Act enumerates six kinds of mortgages:
(1) Simple mortgage.
(2) Mortgage by conditional sale.
(3) Usufructuary mortgage.
(4) English mortgage.
(5) Mortgage Ly deposit of title deeds.
(6) Anomalous mortgage.
(1) Simple Mortgage
In a simple mortgage, the mortgager does not deliver the possession of the
mortgaged property. He binds himself personally to pay the mortgage money and
agrees either expressly or impliedly, that in case of his failure to repay, the
mortgagee shall have the right to cause the mortgaged property to be sold and
apply the sale proceeds in payment of mortgage money.
 The essential feature of the simple mortgage is that the mortgagee has no power
to sell the property without the intervention of the court. The mortgagee can:
(i) apply to the court for permission to sell the mortgaged property, or
(ii) file a suit for recovery of the whole amount without selling the property.
(2) Mortgage by Conditional Sale
In this form of mortgage, the mortgager ostensibly sells the property to the
mortgagee on the following conditions:
(i) the sale shall become void on payment of the mortgage money.
(ii) the mortgagee will retransfer the property on payment of the mortgage money.
(iii) the sale shall become absolute if the mortgager fails to repay the amount on a
certain date.
(iv) the mortgagee has no right of sale but he can sue for foreclosure.
Foreclosure means the loss of right possessed by the mortgager to redeem the
mortgaged property. The mortgagee has the right to institute a suit for a decree
so that the mortgager will be absolutely debarred from his right to redeem the
property. The right to foreclosure arises when the time fixed for repayment
expires and the mortgager fails to repay the mortgage money. Without the fore
closure order the mortgagee will not become the owner of the property.
(3) Usufructuary Mortgage
Under this form of mortgage, the mortgager delivers possession of the property
or binds himself to deliver possession of the property to the mortgagee. The
mortgagee is authorized to retain the possession until the debt is repaid. The
mortgager reserves the right to recover the property when the money is repaid.
The essential feature of this form of mortgage is that the mortgagee is entitled to
receive rents and profits relating to the mortgaged property till the loan is repaid
and appropriate the same in lieu of interest or in repayment of the loan or both.
The mortgager is not personally liable to repay the mortgage money. So the
mortgagee cannot sue the mortgager for repayment. He can neither sue
foreclosure nor sue for sale of the mortgaged property; the only remedy for the
mortgagee is to remain in possession of the property and pay himself out of the
rents or profits of the mortgaged property. Since there is no time limit he has to
wait for a very long time to recover his dues.
(4) English Mortgage
The English mortgage has the following characteristics:
(1) The mortgager transfers the property absolutely to the mortgagee. The
mortgagee, therefore, is entitled to take immediate possession of the property.
The transfer is subject to the condition that the property shall be transferred
on repayment of the loan.
(2) The mortgager also binds himself to pay the mortgage money on a certain
date.
 (3) In case of non-repayment, the mortgagee has the right to sell the mortgaged
property without seeking permission of the court in circumstances mentioned
in section 69 of the Transfer of Property Act.
(5) Mortgage by Deposit of Title Deeds
When a debtor delivers to a creditor or his agent document of title to immovable
property, with an intention to create a security there on, the transaction is called
mortgage by deposit of title deeds. Such a mortgage is restricted to the towns of
Kolkata, Mumbai and Chennai and other towns notified by the State government
for this purpose in the Official Gazette. This type of mortgage requires no
registration. This form of mortgage is also known as equitable mortgage.
(6) Anomalous Mortgage
In terms of this definition an anomalous mortgage is one which does not fall
under anyone of the above five terms of mortgages. Such a mortgage can be
effected according to the terms and conditions of the mortgager and the
mortgagee. Usually it arises by a combination of two or more of the above said
mortgages. It may' take various forms depending upon custom, usage or
contract.
Legal Mortgage Vs. Equitable Mortgage
On the basis of transfer of title to the mortgaged property, mortgages are divided into
two types, namely:
(i) Legal Mortgage.
(ii) Equitable Mortgage.
Legal Mortgage
In a legal mortgage, the legal title to the property is transferred in favour of
mortgagee by a deed. The deed is to be registered when the principal money is Rs.
100/- or more. On repayment of the loan, the legal title is retransferred to the
mortgagor. This method of creating charge is expensive as it involves registration
charges and stamp duty.
Equitable Mortgage
An equitable mortgage is effected by mere delivery of documents of title to property
to the mortgagee. The mortgagor through Memorandum of deposit undertakes to
grant a legal mortgage if he fails to pay the mortgage money.
Essential Requirements of Equitable Mortgage
(1) An equitable mortgage requires three essential features
i. there must be a debt existing or future,
ii. there must be deposit of title deeds, are the title deeds should be deposited
as security for the debt.
(2) Registration of documents is not necessary.
 Royal Printing Works and Others Vs. Oriental Bank of Commerce (7990). It was
established in the above case, that where a security is furnished by deposit of
title deeds, no registration is necessary.
(3) An equitable mortgage can be effected only in the towns of Kolkata, Mumbai and
Chennai and in certain places notified by the State Government.
Sulochana and Others Vs. The Pandyan Bank Ltd. It was held in the above case
that the debtor need not produce the documents and deposit the same in person
in any of the towns mentioned in that Section. If the intention was to deposit the
documents in the towns mentioned and the documents were duly forwarded,
such deposit shall be deemed to have been made in the towns specified in the
Section.
Sabasiva Rao Vs. Bank of Baroda (1989). It was held that even if certified copies
of documents of title to goods are deposited, if the intention of the deposit is for.
security to cover a loan, it would amount to equitable mortgage.
(4) The documents are to be retransferred to the mortgagee on repayment of the
debt.
(5) The mortgagee is empowered to apply to the court to convert the equitable
mortgage into a legal mortgage, if the mortgager fails to repay the loan on a
specified date.
Advantages
(1) No registration is required in equitable mortgage and so stamp duty is saved.
(2) It involves minimum formalities.
(3) The information regarding such mortgage is kept confidential between the lender
and borrower. So the reputation of the borrower is not affected.
Disadvantages
(1) If the mortgagor fails to repay, the mortgagee must get the decree for the sale of
the property. Getting a decree is expensive and time consuming.
(2) The borrower may hold the title deeds not on his own account, but in the capacity
of a trustee. If an equitable charge is created, the claim of the beneficiary under
the trust will prevail over equitable mortgage.
(3) There is the risk of subsequent legal mortgage in favour of another party. If the
equitable mortgagee parts with the security, even for a short period, the debtor
may create a second legal mortgage over the same property. In that case, the
second mortgage shall have the first priority over the equitable mortgagee. The
mortgagee should be very careful in this regard.
Rights of Mortgager
(1) Rights of Redemption: The mortgager has a right to redeem the mortgaged
property provided:
a. he-pays the mortgage money on due date at the proper place and time,
b. the right of redemption has not been terminated by an act of the parties or by
decree of a court.
The mortgager who has redeemed the mortgage is entitled to the following rights:
(a) to get back the mortgage deed and all other documents relating to the
mortgaged property,
(b) to obtain possession of the mortgaged property from the mortgagee, as in the
case of English mortgage,
(c) to have the mortgaged property retransferred at his cost to him or to such
third person as he may direct.
(2) Accession to Mortgaged Property: During the possession of the property, if the
mortgagee has voluntarily made any improvement in the property, the mortgager,
on redeeming the property, is entitled to all such additions or improvements,
unless there is a contract to the contrary.
(3) Right to Transfer to Third Party: The mortgager may require the mortgagee to
transfer the mortgaged property to a third person instead of retransfer to him.
(4) Right to Inspection and Production of Documents: The mortgager has the
right to inspect and make copies of all documents of title in the custody of
mortgagee.
Rights of Mortgagee
(1) Right to sue for mortgage money: The mortgagee has the right to file a suit in
a court of law for the mortgage money in the following cases:
a. Where the mortgager binds himself to repay the mortgage money, as in the
case of simple and English mortgage.
b. Where the mortgaged property is wholly or partly destroyed or the security is
rendered insufficient and to mortgager has not provided further security.
c. Where the mortgagee is deprived of the whole or a part of his security by the
wrongful act of the mortgager.
d. Where the mortgager fails to deliver the mortgaged property in case the
mortgagee is entitled to it.
(2) Right of sale: The mortgagee in case of a simple, English and equitable
mortgage has the right to sell the property after filing a suit and getting a decree
from a court.
 A mortgagee has a right of sale without the intervention of the court under certain
circumstances mentioned in Section 69 of Transfer of Property Act.
(3) Right of foreclosure: The mortgagee has a right to obtain from the Court a
decree for foreclosure against the mortgager, that is, the mortgager is absolutely
debarred of his right to redeem the property. The right of fore closure is allowed in
(i) a mortgage by a conditional sale, and the anomalous mortgage.
(4) Right of accession to property: If any addition is made to the mortgaged
property, the mortgagee is entitled to such addition for the purpose of security
provided there is no contract to the contrary. For example, A mortgages a certain
plot of land to B and afterwards constructs a building on it. B is entitled to the
building and land as security for the loan.
(5) Right of possession: The mortgagee is entitled to the possession of the
mortgaged property as per the terms of mortgage deed. Such a right is available
in usufructuary mortgage.
Sub-Mortgage
A sub-mortgage is created when the mortgagee gives the mortgaged property as
security for advance. The mortgaged security is the property of the mortgagee and
so he has the right to re-mortgage for securing loans.
The sub-mortgagee is placed in the position of the original mortgagee and entitled to
receive the mortgage money, sue for the property and realise, the security.
Therefore, a sub-mortgage is also known as 'mortgage of mortgagee.'
Tacking
A borrower can legally create any number of mortgages on his property. But the
mortgage will rank in priority according to the dates of mortgage. For example, a
property is mortgaged in the following order.
1-1-03 in favour of A Rs.l0,OOO
1-2-03 in favour of B Rs. 8,000
1-3-03 in favour of C Rs. 6,000

A question may raise in this connection whether C, by redeeming the prior mortgage
of A is entitled to tack to the first mortgage?

According to Section 93 ofTransfer of Property Act, no subsequent mortgagee by

paying off a prior mortgage acquires any priority in respect of his original security.
A ‘Mortgage’ means transfer of an interest in a specific immovable property for the purpose of
securing the payment of money advanced as a loan, an existed or future debt. The transferor is
called a ‘Mortgagor’ and transferee a ‘Mortgagee’ and an instrument by which transfer is made
called ‘MORTGAGE DEED’ which actually depends upon the payment of money secured
as ‘Mortgage Money’ as defined under ‘Section:58’ of‘The Transfer Of Property Act, 1882’.
‘Reverse Mortgage’ is the new concept in India and less effective though it is very popular in the
western countries, but in India it can be seen as from the numbers of persons i.e. 150 persons
have availed its benefit till now and this type of mortgage is basically helps senior citizens to get
regular payments from the financial entities or banks against the mortgage of his property. A
reverse mortgage is totally a different concept from a regular mortgage process where a person
pays the bank for a mortgaged property and unlike other loans, this need not be repaid by the
borrower.
‘Reverse Mortgage’ is one of the important types of mortgage where owner of the
immovable property surrenders his title of the property to a financial entity or bank. The
concept is simple, a senior citizen who holds a house or property, but lacks a regular source of
income can put mortgage his property with a bank or housing finance company (HFC) and the
bank or financial entity pays the person a regular payment. The good thing is that the person who
‘reverse mortgages’ his property can stay in the same house for his life time and continue to
receive the much needed regular payments. So, effectively owner of the property will continue to
stay at the same place and also get paid for it. Any house owner over 60 years of age is eligible for
a reverse mortgage and the maximum loan which can be granted is up to 60% of the value of
residential property. The Reverse Mortgage is otherwise called as lifetime mortgage.
‘Reverse Mortgage’ loan amount based on the three things i.e. value of the property, term of the
mortgage agreement and rate of payment with interest which depends upon the age of the owner
of the property/ borrower of the loan amount. A mechanism for valuation and computation of the
mortgage property depends upon the law of probability which will be assessed by the
professionals. The loan amount can be provided through monthly, quarterly, half-yearly or
annually or lump sum money based on the mutual understanding of the parties to the mortgage
agreement. The maximum period of a loan which can be provided by the banks to the reverse
mortgage borrower is for 15 years but the lender has to revaluate the property at least once in the
5 years so that it will assist him to get more money as a loan from the bank which is totally based
on the value of the property. The value of the property is generally revisited periodically, if the
value of the property increased then senior citizen will get an option to increase the loan amount.

An advantage of the Reverse Mortgage scheme is that the owner of property will not be liable to
pay Income Tax under ‘Income Tax Act’ because in reverse mortgage transaction whatever
amount has been received either in lump sum or monthly installment by the owner of the property
as loan amount, will not be considered as a Income earned. A reverse mortgage scheme which is
basically for the benefit of senior citizens, however in a reverse mortgage transaction any transfer
of capital asset will not be considered as transfer or alienation of immovable property as it is also
stated by the central government notification, hence it will not attract the provision of capital gains
tax.
The financial entity or the bank has authoritative power to recover the loan amount, wherein it has
been conferred with a right to sell the mortgage property in the case if incumbent or borrower
either passes away or leaves the house. The loan amount can be repaid or prepaid by the legal
heirs of the borrower at any time during the period of loan with the accumulated interest amount
and have the mortgage released without resorting to the sale of property. In case if there is a sale
of mortgage property by the bank for repayment of the loan amount then whatever is the
additional amount received by the bank need to be paid to the heirs of the senior citizen but only
after clearing the loan amount payment by the bank.

The reverse mortgage scheme offered by some of the leading banks in India could bring the
required answers to the suffering senior citizens. Most of the people in the senior age groups,
either by inheritance or by virtue of building assets have properties in their names, but they were
not able to convert it into instant and regular income stream due to its illiquid nature. The ‘Union
Budget 2007-2008’ had a great proposal which introduced the ‘Reverse Mortgage’ scheme. A
Reverse Mortgage scheme is always provides more benefits to the senior citizens who does not
have any source of income and through this scheme owner of the property can ensure a regular
cash flow in times of need and can enjoy the benefit of staying in the property as well. But a
reverse mortgage scheme is a big failure in the country like India where number of persons using
this scheme is very less. Reverse Mortgage thus, is very beneficial for senior citizens who want a
regular income to meet their everyday needs, without leaving their houses.
 Introduction

The Foreign Exchange Management Act, 1999 (FEMA) replaces the

Foreign Exchange Regulation Act (FERA). FERA was introduced in 1974 to
consolidate and amend the then existing law relating to foreign exchange. FERA
was amended in 1993 to bring about certain changes, as a result of
introduction of economic reforms and liberalization of Indian Economy. But it
was soon realized that FERA had by and large outlived its utility in the changed
economic scenario and therefore replaced by FEMA in 1999.

Meaning

FEMA was introduced by the Finance Minister in Lok Sabha on August 4, 1998.
The Bill aims “to consolidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange
market India.” It was adopted by the parliament in 1999 and is known as the
Foreign Exchange Management Act, 1999. This Act extends to the whole of
India and shall also apply to all branches, offices and agencies outside India
owned or by a person resident in India.

Objectives and Reasons for enactment of FEMA

FEMA was enacted to consolidate and amend the law relating to foreign
exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange
market in India (Preamble). The statement of objects and reasons set the tone
of the enactment of new legislation:

i. The Foreign Exchange Regulation Act, 1973, was reviewed in 1993 and several
amendments were enacted as part of the ongoing process of economic
liberalization relating to foreign investments and foreign trade for closer
interaction with the world economy. At that stage, the central government
decided that the further exchange of the Foreign Exchange Regulation Act
would be undertaken in the light of subsequent developments and experience
in relation to foreign trade and investment. It was subsequently felt that a
better course would be to repeal the existing Foreign Exchange Regulation Act
and enact a new legislation. A task force constituted for the purpose submitted
its report in 1994 recommending substantial changes in the existing Act.

ii. Significant developments have been taking place since 1993 such as substantial
increase in foreign exchange reserves, growth in foreign trade, rationalization of
tariffs, current account convertibility, liberalization of Indian investments
abroad, increased access to external borrowings by Indian corporate and
participation of Foreign investors in the stock markets.

Accordingly, a bill to repeal and replace Foreign Exchange Regulation

Act, 1973 was introduced Lok Sabha on 04.08.1998. On reference to the
standing committee modifications and suggestions were submitted by the
standing committee in its report. After incorporating modifications and
suggestions of the standing committee, the central government decided to
introduce the new law, the Foreign Exchange Management Bill and repeal the
Foreign Exchange Regulation Act, 1973

Salient Features of FEMA

FEMA extends to whole of India. It shall also apply to all branches,

offices and agencies outside India, owned or controlled by a person resident
in India and also to any contravention there under committed outside India by
any person to whom the Act applies. Therefore joint ventures or wholly owned
subsidiaries, though outside India, but controlled from India are intended to be
covered by the Act. The new Act is meant to be user friendly with the object to
facilitate external trade and payments for promoting the orderly development
of foreign exchange in India.

Under the new law, the emphasis for determining the residential status
is on the actual period of stay in India, whereas under FEMA, the emphasis was
on the intention of the person. Under the new law, it is not necessary that the
person should be continuously and physically present in India. It will be
sufficient the total of stay in India is 182 days or more during the year.

The central government may from time to time give general or special
directions to the Reserve Bank and Reserve Bank shall comply with such
directions. The central government may by notification make rules to carry out
the provisions of the Act. The Reserve Bank may by notification make regulation
to carry out the provisions of the Act and rules there under. Every rule and
regulation made under the Act shall as soon as after it is made, be laid before
each house of parliament. If any difficulty arises in giving effect ti the provisions
of the Act, the central government may by order, do anything not inconsistent
with the provisions if the Act for the purpose of removing the difficulty.

Suspension of operation of FEMA

If the central government is satisfied that circumstances have arisen

rendering it necessary that any permission granted or restriction imposed by
the Act should cease to be granted or imposed or if it considers necessary in
public interest, the central government may by notification, suspend or relax to
such extent either indefinitely or for such period as notified, the operation of all
or any of the provisions of the Act.

Bar of legal proceedings

No suit, prosecution or other legal proceedings shall lie against the

central government or the Reserve Bank or any officer of the government or of
the Reserve Bank or any person exercising any power or discharging any
functions or performing any duties under the Act for anything done in good
faith or extended to be done under the Act or rule, regulation, notification,
direction or order made there under.

Repeal, Savings and Cognizance of offences

 With the enactment of FEMA, FERA stands repealed and appellate
board constituted under FERA shall stand dissolved. No court and adjudicating
officer shall take cognizance or notice of an offence or any contravention under
FEMA after the expiry of two years period from 1.6.2000. However, while FERA
was in force all offences committed under FERA shall continue to be governed
by FERA as if FERA had not been repealed. Any appeal preferred to the
Appellate Board under FERA but not disposed off before the commencement of
FEMA shall stand transferred and shall be disposed off by the Appellate Tribunal
constituted under FEMA. FEMA is for regulation and management of foreign
exchange through authorized person and provides for penalty for contravention
of the provisions. The object is for promoting orderly development and
maintenance of foreign exchange market in India.

Focus of law changed – from accounting & controlling in FERA to orderly development of
forex market and, facilitating external payments

Alignment of certain definitions such as Person, Person Resident in India, similar to Income
Tax law

Transaction regulated according to Nature – Current A/c and Capital A/c Transactions

Rigour of penal provisions diluted

–quantum of penalty reduced

–concept of Mens rea abolished

–No automatic imprisonment. Arrest only if penalty is not paid

–Penalty subject to Adjudication

–Compounding made possible

Central Government retains residuary power to suspend / relax the law

Activities such as payments made to any person outside India or receipts from them, along
with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the
central government the power to impose the restrictions.
-Restrictions are imposed on people living in India who carry out transactions in foreign
exchange, foreign security or who own or hold immovable property abroad.
Without general or specific permission of the MA restricts the transactions involving foreign
exchange or foreign security and payments from outside the country to India – the
transactions should be made only through an authorised person.
Deals in foreign exchange under the current account by an authorised person can be
restricted by the Central Government, based on public interest.
Although selling or drawing of foreign exchange is done through an authorised person, the
RBI is empowered by this Act to subject the capital account transactions to a number of
restrictions.
People living in India will be permitted to carry out transactions in foreign exchange, foreign
security or to own or hold immovable property abroad if the currency, security or property
was owned or acquired when he/she was living outside India, or when it was inherited by
him/her from someone living outside India.
Exporters are needed to furnish their export details to RBI. To ensure that the transactions
are carried out properly, RBI may ask the exporters to comply to its necessary requirements.