India passes law for easier debt recovery – another significant step in ease of doing business

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“Act”) was passed by the Indian Parliament on 9 August 2016 and was published in the Official Gazette on 16 August 2016 after receiving Presidential assent. The Act has amended 4 (four) legislations – the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”); the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”); the Indian Stamp Act, 1899 (“Stamp Act”); and the Depositories Act, 1996 (“Depositories Act”). The Act sets a time limit for disposal of debt recovery cases and seeks to improve ease of doing business by ensuring speedier resolution of loan defaults. The Act will help expedite disposal of thousands of pending cases and is expected to ease the non-performing assets situation of Indian banks. The Act will, however, not apply to loans for agricultural land or student loans. The key highlights of the Act are listed below:

  1. Amendments to the SARFAESI Act:
  • The SARFAESI Act allows secured creditors to take possession over a collateral against which a loan had been provided when there is a default in repayment. This process is undertaken with the assistance of the District Magistrate/ Chief Metropolitan Magistrate (collectively, the “Magistrates”), and does not require the intervention of courts or tribunals. The Act now provides that this process will have to be completed within 30 days by the Magistrates, which may be extended to 60 days only in extraordinary circumstances.
  • The SARFAESI Act creates a central registry to maintain records of transactions related to secured assets. The Act creates a central database to integrate records of property registered under various registration systems with this central registry. This includes integration of registrations made under the Companies Act, 2013, the Registration Act, 1908 and the Motor Vehicles Act, 1988.
  • The Act provides that an unsecured creditor filing particulars of transactions or creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under the SARFAESI Act.
  • The SARFAESI Act empowered the Reserve Bank of India (“RBI”) to examine the statements and any information of asset reconstruction companies related to their business. The Act now further empowers the RBI to carry out audit and inspection of these companies and to remove the chairman or any director of an asset reconstruction company, and if required, to appoint any of the RBI’s officers to observe the working of the board of directors of such companies.
  • Further, the Act now provides that under the SARFAESI Act, secured creditors shall, inter alia,mean debenture trustee appointed by any bank or financial institution and a debenture trustee registered with the Securities and Exchange Board of India.
  1. Amendments to the RDDBFI Act:
  • While the RDDBFI Act provided for banks and financial institutions to file cases in tribunals having jurisdiction over the defendant’s area of residence or business, the Act now allows banks to file cases in tribunals having jurisdiction over the area of the bank’s branch office where the debt is pending.
  • The Act further permits the central government to provide for uniform procedural rules for conduct of proceedings in the Debt Recovery Tribunal (“DRT”) and/ or the Debt Recovery Appellate Tribunal (“DRAT”), as the case may be. Certain procedures under the RDDBFI Act may now be undertaken in electronic form such as presentation of claims by parties and summons issued by tribunals under the RDDBFI Act.
  • The Act, inter alia, also provides for expeditious adjudication of recovery application and provides for reduction in the time for filing an appeal from 45 days to 30 days under the RDDBFI Act. The RDDBFI Act earlier provided that where an appeal was to be filed by a person from whom the amount of debt is due to a bank, such a person would have to deposit 75% of the amount of debt with the DRAT as deposit. The Act has now reduced the amount of deposit to 50%.
  •  Along with existing requirements, , every applicant under the RDDBFI Act will now also have to (a) state particulars of the debt secured by security interest over properties or assets belonging to any defendants and the estimated value of such securities; (b) state the particulars of any other properties or assets, if any, owned by any of the defendants, if the estimated value of securities is not sufficient to satisfy the debt claimed,; and (c) seek an order directing the defendant to disclose to the tribunal particulars of other properties or assets owned by the defendants, if the estimated value of such other asset is not sufficient to recover the debt.
  • Further, no defendant under the RDDBFI Act may on the service of summons transfer by way of sale, lease or otherwise except in the ordinary course of business any of the assets over which security interest is created without the prior approval of the DRT.
  • The Act has increased the retirement age of presiding officers and chairpersons, as the case may be, of DRT and DRAT from 62 years to 65 years and from 65 years to 70 years, respectively. It also makes presiding officers and chairpersons eligible for reappointment to their positions.
  1. Amendment to Stamp Act: The Act provides that stamp duty under the Stamp Act will not be charged on transactions undertaken for transfer of financial assets in favour of asset reconstruction companies subject to the changes as contained in the SARFAESI Act above.
  2. Amendment to Depositories Act: The Act has also amended the Depositories Act and states that  every depository on receipt of information from a participant, (a) shall register any transfer of security in favour of an asset reconstruction company; and (b) may register any issue of new shares in favour of any bank or financial institution or asset reconstruction company or any other assignee of such bank or financial institution and/ or asset reconstruction company by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and the bank or financial institution or asset reconstruction company.

A copy of the Act may be accessed at the following link: