Developing the Asian Markets for Non-Performing Assets - Developments in India

1. Developing the Asian Markets for Non-Performing Assets- Developments in India By Sumant Batra Partner, Kesar Dass B & Associates Corporate Lawyers New Delhi

2. 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.

3. 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

4. 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.

5. 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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. DEBT RECOVERY TRIBUNALS • A failure due to lack of suitable appointments & infrastructure • Delay • Many gray areas in the law • No improvement in recovery

13. 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

14. 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.

15. CORPORATE DEBT RECONSTRUCTING SCHEME • Need to make it more participative. • Need to provide legal sanctity.