LEGAL AND THEORETICAL FRAMEWORK OF INSOLVENCY AND BANKRUPTCY IN INDIA – Shaurya Olakh

Introduction

The RDDBFI Act was passed in 1993 on the advice of various committees and sub-committees. This Act came into force on June 24, 1993. The Act required the establishment of Debt Recovery Tribunals in Calcutta, Delhi, Jaipur, Bangalore, Ahmedabad, Chennai, Guwahati, Patna, Jabalpur, and Bombay. The first and only Appellate Tribunal was set up in Bombay to hear appeals. The committees’ reports are duly considered when enacting the laws.

SARFAESI Act, 2002

The SARFAESI Act was approved by the President on December 17th and published in the Indian Gazette Noification on December 18th. This Act was first published in the Gazette of India on June 21, 2002. So the Act came into force on June 21, 2002. The Act aimed to implement the Narasimham Committee-ll and Andhyarujina Committee’s recommendations.

Goals and Objectives

One essential factor in India’s rapid economic growth has been the financial industry. Since the SARFAESI Act was enacted over an existing Act (the RDDBFI Act, 1993), the following objectives and grounds were stated:

• Although India’s banking industry was progressively embracing global prudential and accounting standards, certain aspects of the Indian banking and financial sector remained behind those of other nations.
• No legal provision for assisting bank and financial institution securitisation.[1]
• Unlike international banks, Indian banks and financial institutions could not buy and sell securities.
• Then-current commercial practises and banking sector reforms are incompatible.
• The delayed pace of loan recovery led to an increase in NPA for banks and financial institutions.

Objectives

There were many objectives behind passing of the Act. Some important of them are clearly visible in the preamble to the Act.

The objectives are:

• to regulate securitisation and reconstruction of financial assets; 
• to enforce security interest; 
• to deal with the issues connected with securitisation and reconstruction of financial assets and enforcement of security interest and incidental thereto; 

1. to enable banks and financial institutions of India to – 

1. realise long-term assets; 
2. manage problems of liquidity; 
3. manage asset-liability mismatches: 
4. improve recovery of debts by exercising powers to take possession of securities and sell them without judicial intervention; and 
5. reduce NPAs by adopting measures for recovery or reconstruction; and to establish Securitisation and Asset Reconstruction companies.

Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions.

Since the High Level Committee advocated creating ASF to take over creditor banks’ bad loans.[2] Sec 3 of the Act deals with the registration of Securitisation and Reconstruction Companies, which are totally private, with the RBI, while Section 4 elaborates on when the RBI can cancel their registration. Section 10 illustrates the primary activities of an S&R Company. Sec. 12 authorises the RBI to set policy and direct these firms. Any securitisation or reconstruction business can buy any bank’s financial assets:

1. for consideration agreed upon by the company and the bank or financial institution, integrating therein such terms and conditions as may be agreed upon; or
2. by negotiating with the bank or financial institution a transfer of financial assets to the company on mutually agreed terms.

[1] Abdullah, S. N., Board structure and ownership in Malaysia: The case of distress listed companies, 6(5) Corporate Governance 582–594 (2006.

[2] Adler, B.E., The Law of last resort, 55(6) Vanderbilt Law Review 1661–1698 (2002).