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 non-
performing 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