Indian laws covering hypothecation

Previously, hypothecation was not defined for a long time under Indian law and it was more on the basis
of practice and usage. However, now under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interests Act (SARFAESI), hypothecation is defined as “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 crystallization into fixed charge on movable property.”
Formalities for creation of hypothecation
In hypothecation, a “deed of hypothecation” is executed by the security provider in favour of the lender.
The charge created under the deed of hypothecation is governed by the terms of the document, which
provides in detail the powers and provisions safeguarding the interest of the lender. Hypothecation over
a motor vehicle must be noted on the registration certificate of the motor vehicle.
The other formalities for hypothecation include payment of appropriate Stamp Duties as per rates in
each state and in case of companies, filing with ROC will be required. After 2016 and the formation of
CERSAI (under SARFAESI) Central Registry of Securitisation and Asset Construction and Security Interest
of India, a government body set up for such purpose, it is mandatory to file creation, modification, or
satisfaction of security interest in hypothecation of plant and machinery, stocks, book debts, and
receivables.
How is hypothecation removed?
You can remove the hypothecation by paying off the entire loan amount. The bank will issue a No
Objection Certificate (NOC) to you. This document will state that no dues are pending. You can submit
the copies to the Regional Transport Authority and the insurance company so that the registration and
insurance can be converted in your name instead of the bank’s name.
Conclusion
Hypothecation is a way in which the borrower can raise funds by providing movable security as
collateral. The borrower still gets to use it since the possession usually remains with the borrower
himself. This loan (hypothecation) is provided by either the bank or the financer at a rate lower than the
unsecured loan as it provides a sense of security to the lender. However, the lender takes a risk as there
may be instances where the borrower sells off the hypothecated asset without the knowledge of the
lender. To provide protection to a large extent to both, i.e., the borrower and the lender, the lender
shall conduct periodic checks and the parties shall add proper clauses in the hypothecation agreement.
References
1. https://www.investopedia.com/terms/h/hypothecation.asp
2. https://www.upnest.com/1/post/hypothecation-agreement/
3. https://www.masterclass.com/articles/hypothecation-real-estate-explained#3-advantages-of-
hypothecation-agreements