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VINOD KOTHARI's new book Deliveries start from 3rd week of January 2003 SECURITISATION,
Incisive commentary on the law and rules with comprehensive introduction to securitisation, asset reconstruction and enforcement of security interests 2003 edition This treatise is the first comprehensive and incisive coverage on the Indian law of securitisation, asset reconstruction and enforcement of security interests. Besides dealing threadbare with the provisions of the law, the book provides the reader a thorough grasp of the concepts of securitisation, asset management and the rights of a secured lender.
Highlights:
Publication details Year of publication: January 2003 Number of pages: xxxii+ 544 Size: Royal Binding: Hard bound with colour jacket Price: In India Rs 900/- Outside India USD 65 ISBN NO. 81-901463-0-1
Academy of Financial
Services
PART I : INTRODUCTION TO SECURITISATION, ASSET RECONSTRUCTION AND ENFORCEMENT OF SECURITY INTERESTS Chapter 1: INTRODUCTION TO SECURITISATION 3 Basic meaning of securitisation: 4 Asset securitisation: 5 What is an asset-backed security? 7 Legal preference by isolation: 8 Capital market window: 9 Use of special purpose vehicles: 9 Some definitions of securitisation: 9 Securitisation of receivables: 10 Quick guide to Jargon: 11 Securitisation and structured finance: 13 SOME QUICK Features of securitisation: 14 What receivables are securitisable: 14 Creation of security: 15 Special purpose vehicle: 15 Re-distribution of risks: 16 Rating 17 Securitisation as a tool of risk management: 17 Securitisation and credit derivatives: 18 Synthetic securitisation: 18 Economic impact of securitisation: 19 -1 Facilitates creation of markets in financial claims: 19 -2 Disperses holding of financial assets: 19 -3 Promotes savings: 19 -4 Reduces costs: 20 -5 Diversifies risks: 20 -6 Focuses on use of resources, and not their ownership: 20 -7. Smoothens impact of recession: 20 The alchemy of securitisation: is the sum of parts more than the whole? 21 The alchemy of structured finance: 21 Structured finance: 21 Lower costs due to higher leverage 22 Capturing scale and volume efficiencies 23 risks and benefits of securitisation: 23 Abdication of credit: 25 Trading on thin capital: 25 Increases opacity of banks: 27 The case of Superior Bank 27 Cross-sector risk transfers: 28 Monetary policy sterilised: 29 MODUS-OPERANDI OF SECURITISATION BRIEFLY EXPLAINED 29 FEATURES OF SECURITISATION OF RECEIVABLES: 32 -1 Mode of asset-based financing: 32 -2 Mode of structured financing: 33 -3 Securitisation of claims against third parties: 33 -4 Recourse features: 34 -5 Asset features: 34 1. Asset should represent cashflows: 34 2. Quality of the receivables: 35 3. Diversification of the portfolio: 35 4. Size of individual receivable: 36 5. Maturity composition of the receivables: 36 6. Periodicity of payments: 36 7. Homogeneity of the assets: 36 8. No executory clauses: 37 9. Capacity to assign: 37 10. Independence from the originator: 37 11. Assets should be free of withholding taxes/ pre-paid taxes: 37 -6 Issuer features: 38 1. Receivables as major assets: 38 2. Financial and organisational strength: 39 -7 SPV features: 40 -8 Investor features 41 Securitisation and factoring: 41 Securitisation and ring fencing: 42 Asset classes: 43 broad types of securitisation structures: 45 Cash versus synthetic structures: 47 True sale versus secured loan structures: 47 Pass-through versus collateral structure: 48 Discrete trust versus master trust: 48 Direct portfolio transfers: 49 Pass-through structure 50 Steps in a pass through transaction 51 Nature of pass through certificates: 52 Difficulties in the pass through structure: 53 Refinements in the pass through structure: 54 PAY-THROUGH STRUCTURE: 55 Collateralised mortgage obligation bonds: 59 Refinements in CMO structure: 61 Revolving assets securitisation: 63 Future flows securitisation: 64 Advantages of securitisation for the issuer 71 1.Lower cost 71 2Alternative investor base 72 3.Perfect matching of assets and liabilities 72 4.Makes the issuer-rating irrelevant 72 5.Multiplies asset creation ability: 72 6.Allows higher funding: 73 7.Off-balance sheet financing: 73 8.Helps in capital adequacy requirements: 73 9.Improves capital structure 74 10.Better opportunity of trading on equity with no increased risk: 74 11.Extends credit pool: 74 12.Not regulated as a loan: 74 13.Reduces credit concentration: 75 14.Avoids interest rate risk: 75 15.Arbitraging by repackaging: 75 16.Arbitraging on liquidity and term structure: 75 advantages to the investors: 76 1.Better Security: 76 2.Good ratings: 77 3.Rating resilience: 77 4.Better matching with investment objectives: 77 5.Good spreads: 77 6.Few instances of default: 77 7.Moral responsibility: 78 8.Better matching with investment objectives: 78 Threats in securitisation: 78 1. Costly source: 78 2. Uneconomical for lower requirements: 78 3. Passes on data-base to investors: 79 4. Leaves the entity with junk assets: 79 chapter 2: Introduction to Asset Reconstruction, Asset management and resolution companies: 82 The idea of asset reconstruction in India: 83 The problem of non-performing loans: 85 Stock problem and flow problem: 88 Approaches to Resolution: Creditor-led approach versus AMC approach: 89 Bank-led approach: 89 The AMC approach: 89 Models of Asset management Companies: 91 AMC models : based on ownership: 91 AMC models: based on multiplicity: 93 AMC models: Based on Resolution approach: 93 Asset Management Companies: Global experience: 94 United States of America: 94 Mexico: 95 Japan: 95 Korea: 96 Malaysia: 96 Thailand: 97 Indonesia: 97 China: 98 APENDIX 1: Important Features of the Thailand Asset Management Corporation Law 99 Who can transfer assets to TAMC 99 Legal effect of the transfer of NPLs to TAMC: 99 Pricing of NPLs for purchase by TAMC: 100 Powers granted to the TAMC in respect of the debt: 101 Debt Restructuring 101 Business Restructuring 101 The Disposition of Collateral: 102 Appendix 2: Important features of the Pengurusan Danaharta Nasional Berhad Act 1998 103 CHAPTER 3: Introduction to Enforcement of Security Interests 111 Move for a modern law on secured transactions: 112 EBRD's Core principles of law on secured transactions: 113 ADB's project for Asian countries: 115 Essential principles of security enforcement law as per World Bank working paper: 116 Security Enforcement law in India: 120 Security interests on immovable property: 121 Mortgages: 121 Ingredients of a mortgage: 121 Types of mortages: 122 Rights of the mortgagee: 123 Charges: 124 Security interest in specific movable property: 125 Pledge: 126 Hypothecation: 127 Floating charges or security interest in general property: 129 Floating charges in case of a going concern: receivership 130 Floating charges in case of winding up: 131
PART II: SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
Section Index 135 Preamble 137 Legislative History 138 Chapter I Preliminary
section 1: Short title, extent and commencement 139 Scope of the law: 140 Three-in-one: 140 Object of the legislation: enabling or regulatory? 141 Operation of the law: prospective or retrospective? 142 Section 2: definitions 142 sub-section (1) (a) Appellate Tribunal 142 (b) Asset Reconstruction 143 Operation of the law: prospective or retrospective? 142 Wanders miles away: 143 A short history of the word "asset reconstruction": 144 (c) Bank Bank and "banking companies" 145 (d) banking company 146 Importance of the definition: 146 Meaning of "banking company" 146 (e) board 147 A definition of no use: 147 (f) borrower 147 Significance of the definition: 148 Meaning of "borrower": 148 Guarantors and security providers: 149 Guarantors as primary borrowers? 149 Meaning of guarantor and security provider: 149 Borrower of securitisation company or reconstruction company: 151 Continued relation a must: 151 Assignment of borrower relationship: 151 (g): Central registry 151 (h): Corresponding new bank 152 (i) Debts recovery tribunal: 152 (j) default 153 Significance of the definition: 153 Connection with the NPA guidelines of the RBI: 153 Elements of default: 153 NPA classification in case of banks: 155 NPA classification for non-banking financial companies: 156 Prudential regulations in case of financial institutions: 157 What if the RBI Directions/ guidelines are not applicable: 157 In case of guarantors: 157 (k): Financial asistance 157 Significance of the definition: 158 Comprehensive or inclusive? 158 Loan or advance granted: 158 Originated loans: 159 Subscription to bonds or debentures: 159 Guarantees given/ letters of credit provided: 160 Other credit facilities: 160 (l): Financial asset 162 Words of different import: financial asset, financial assistance, secured debt, any debt: 162 Significance of the definition: 163 Meaning of "financial asset": 163 UNCITRAL model law: 164 Accounting standards definition: 165 First limb: Any debt or receivable: 165 Debt and receivable: 166 Receivables as actionable claims: 166 Second limb: "any includes.." 167 Clause (i): Fractional interests in receivables: 167 Clause (ii): Debt secured by mortgage of immovable property: 169 Clause (iii): mortgage, charge, hypothecation or pledge of movable property: 170 Clause (iv): security interests underlying receivables: 170 Clause (v): any beneficial interest in property, etc: 171 Beneficial interest in property may clash with Trusts law 172 Assignability of Future flows: 172 Assignability of conditional receivables: 174 Clause (vi): Any financial assistance: 175 (m) financial institution 175 Significance of the definition: 176 Legislated part: 176 To be notified part: 178 Are housing finance companies "finance companies"? 179 (n): hypothecation 179 Relevance of the definition: 180 Hypothecation means a charge: 180 Movable property, existing or future: 182 Without delivery of possession of the movable property: 182 And includes floating charge, etc: 183 Exceptions under sec 31: 183 (o): non-performing asset 183 (p): notification 184 (q): Obligor 184 Significance of the definition: 184 Meaning of obligor: 184 (r): originator 184 (s): prescribed 185 (t): Property 185 Was this required? 186 General meaning of property: 186 Impact of the definition: 186 (u): qualified institutional buyer 187 (v): reconstruction company 188 (w): registrar of companies: 189 (x): Reserve bank 189 (y) scheme 189 (z) : securitisation 190 Asset reconstruction and securitisation mixed up 191 A definition that leads nowhere: 191 What is securitisation: 191 Mode of raising funds: 192 Any originator: 193 (za): securitisation company 194 Qualifications of a Special purpose vehicle: 194 Is "securitisation company" an SPV, or the entity behind the SPV? 197 (zb): security agreement 197 (Ir)relevance of the definition: 198 (zc): Secured asset 198 Relevance of this definition: 198 Secured asset in case of floating charges: 198 Rulings in case of Brumark and Cosslett: 199 How to tell a floating charge: 199 When does a floating charge crystallize: 200 Application of this law to floating charges: 200 (ZD): SECURED CREDITOR 201 Meaning of "secured creditor" 201 Debenture trustee: 202 (ZE): SECURED DEBT 203 "Secured debt" and "financial assistance" 203 (zf): security interest 203 Right, title or interest: 203 Created: 204 Mortgage: 204 Assignment for security: 205 Other than those specified in sec 31: 205 (zg): security receipt 206 Security receipts and "undivided interest" 206 Receipt or other security: 207 Undivided interest: 207 Security receipts as securities: 208 Transferability of security receipts: 208 (zh): sponsor 210 Sponsor and originator: 210 Legal equity and economic equity: 210 (zi): State Bank of India 211 (zj): subsidiary bank 211 sub-section (2) 211 Respectively assigned 211 Chapter II Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions
SECTION 3: Registration of securitisation companies or reconstruction companies 212 SUB-section (1) 212 Business of securitisation 212 Business of asset reconstruction: 214 No securitisation company... 215 Is a securitisation company an SPV? 216 Does an SPV have to be a securitisation company? 216 Net worth requirement: 217 Provisions for existing companies: 218 sub-section (2) 219 sub-section (3) 219 Preconditions for registration as also continued registration: 220 Condition (a) : No losses 221 Condition (b) : Ability to pay periodical returns and redeem investments: 222 Arrangement for realisation of financial assets: 222 Ability to pay returns and redeem investments: 222 Condition (c): Professional expertise of directors: 223 Condition (d): Independent directors: 223 Condition (e): Clean directors: 224 Condition (f): independent company: 224 Condition (g): Prudential norms: 225 sub-section (4) 225 sub-section (5) 226 sub-section (6) 226 section 4: Cancellation of certificate of registration 227 SUB-SECTION (1) 227 SUB-SECTION (2) 230 sub-section (3) 230 section 5: Acquisition of rights or interest sub-section (1) 231 Purport of the section: 231 The sweep of the non-obstante clause: 232 Notwithstanding the agreement: 232 Notwithstanding any other law: 232 Financial assets of banks/ financial institutions: 233 By issuing a debenture: 233 Does the debenture-route help? 234 By entering into an agreement: 235 Transfers by oral or executory agreements: 235 sub-section (2) 236 Mandatory provision: 236 Shall be deemed to be the lender: 236 Modification of charge: 238 sub-section (3) 238 Purport of the provision: 238 Against or in favour of 239 sub-section (4) 239 Continuation of legal proceedings: 239 section g: notice to obligor and discharge sub-section 1 240 Obligor Notification: 240 Obligor notification under common law: 241 Obligor notification under the present law: 242 Notice to concerned registering authortiy: 243 Sub-section (2) : Effect of notice: 244 Obligor notice with retention of servicing: 244 Sub-section (3) : Effect of no-notice: 244 "Shall forthwith be made over or delivered" 245 Co-mingling: 246 Section 7: Issue of security by raising of receipts or funds by securitisation company or reconstruction company 247 sub-section (1) 247 Purport of the section: 247 Issue of security receipts: 247 Issuance of security receipts: 247 After acquisition of the financial assets: 248 Other than by offer to public: 248 sub-section (2) 249 Is sub-section (2) independent of sub-section (1): 249 Schemes for acquiring financial assets: 249 The question of ring-fencing: 250 Various classes under a scheme: 250 sub-section (3) 251 Investors' rights: 251 Investor meetings in case of bonds: 251 Investor meetings in case of pass-through certificates: 252 Investor meetings in case of security receipts: 252 In the event of non-realisation: 253 75% of QIBs: 253 In case of demat securities: 255 sub-section (4) 256 section 8: exemption from registration of Purport of the section: 256 Registration of the transfer of financial assets: 257 section 9: measures for asset reconstruction 258 Powers of securitisation companies/ asset reconstruction companies: 258 The basic issue: can the statute give more than the parties intended? 259 For the purposes of asset reconstruction: 260 Section 9 or section 13? 261 Sec. 9 (a) : Change or takeover of management of the borrower: 261 Change in management: 262 Takeover of management: 263 Sec 9 (b): Sale or lease of business of borrower: 263 Sec 9 (c) : Rescheduling of payments: 265 Sec. 9 (d): Enforcement under section 13: 265 Section 9 (e): Settlement of dues payable by the borrower: 265 Section 9 (f): Right to take possession: 265 Right of appeal: 265 section 10: other functions of securitisation company or reconstruction company 256 Any business other than that of.. 267 Business of the securitisation company: 267 Business of reconstruction company: 268 Recovery agent: 268 Asset manager: 268 Receivership: 269 Sub-section (2) : any other business with RBI approval: 269 Existing companies: 269 section 11: resolution of disputes 270 Purport of the section: 270 Implication of arbitration agreement: 270 Parties covered by this section: 271 Section 12: power of reserve bank to Chapter III: Enforcement of security interest
Section 13: enforcement of security interest 273 sub-section (1) 273 Significance of this Chapter: 273 Significance of this section: 273 Enforcement of security interests: 273 Notwithstanding sec. 69/69A of TP Act: 275 Scope of the non-obstante clause: 275 The spirit of a security interest: sec. 67 of TP Act: 276 Claim for money: 277 Suit for foreclosure: 277 Suit for sale: 277 Mortgage of public facilities: 278 Enforcement in case of joint interests: 278 In case of other security interests: 278 Impact of the present law on common law principles: 278 Choice of remedies 279 Enforcement of Security Interests Rules: 279 sub-section (2) 280 Elements of action under this section: 280 60 days' Notice in writing: 281 sub-section (3) 282 Contents of the notice: 282 sub-section (4) 283 Significance of the sub-section: 283 Discharge of liability in full 283 Measures to recover the secured debt: 284 Measures in case of a company under liquidation: 284 Measures in case of floating charges: 284 Clause (a) : Takeover of possession of secured assets: 286 Manner of taking over possession: 286 Procedure under Civil Procedure Code: 287 Effect of taking over of possession: 290 Clause (b): Takeover of management of assets: 290 Clause (c) : Appointment of manager: 291 Clause (d) : Right to attach receivables on sale of secured assets: 292 Sale of the asset by the secured creditor: 292 Duties of the secured creditor: 293 Proper care of the secured asset 293 Duty to get the best price: 294 Effect of actions under sec. 13 (4): 296 sub-section (5) 297 sub-section (6) 298 Can there be a sale without possession? 297 Nature of sale by the creditor: 298 Manner of making the sale: 298 Who can be the buyer? 299 sub-section (7) 300 Action has been taken against a borrower: 300 All costs, charges and expenses: 300 Money shall be held in trust: 300 Question of priorities: 301 sub-sectiOn (8) 304 Equity of redemption: 304 sub-section (9) 305 Purport of this sub-section: 306 Multiple security interests on the asset: 308 Will this section apply where the "secured lender" is not a "secured creditor"? 309 Three-fourths in value: 309 Effect of the agreement among secured creditors: 310 Distribution rules for companies not in liquidation: 311 Distribution rules for companies in liquidation: 311 Rights of a secured creditor to stay outside winding up: 312 Sale of assets when company is in winding up: Sanction of Court required? 312 At what point of time does sec. 529A apply to the secured creditor: 314 Pari passu charge under sec. 529A: 314 First proviso: 315 Second to fifth proviso: 316 Dues of the secured creditor versus dues of the Crown: 317 sub-section (10) 318 Jurisdiction for the application: 318 Form and manner prescribed: 318 Powers of the Tribunal: 319 sub-section (11) 319 Purport of this sub-section: 319 Proceeding against the guarantor: 320 Sale of pledged assets: 321 sub-section (12) 321 Rules: 321 sub-section (13) 322 Freeze on secured assets: 322 Effect of contravention: 323 section 14: Chief Metropolitan Magistrate or District Magistrate to assist secured creditor 324 Purport of the section: 324 section 15: manner and effect of takeover A section out of place, out of nexus: 327 Appeal: 328 section 16: No compensation for loss of office 328 section 17: right of appeal 329 Elevating a lender to the status of an authority? 329 Post facto appeal? 330 Who can appeal: 331 Jurisdiction of the Debt Recovery Tribunal: 331 Sub-section (2): Deposit money before you appeal: 332 section 18: appeal to appellate Tribunal 334 section 19: right of borrower to receive Chapter IV: Central Registry section 20: central registry 335 Date of applicability: 336 An innocuous provision: 336 What all will be registered: 337 Sub-section (4): 337 section 21: central registrar 337 section 22: registrar of securitisation, section 23: filing of transactions of securitisation, reconstruction and security interest 339 Filing of particulars: 339 Securitisation transactions: 339 Asset Reconstruction transactions: 340 Creation of security interests: 340 Delayed filing: 342 section 24: modification of security interest section 25: securitisation company etc to Drafting blemishes: 343 section 26: right to inspect particulars 344 Chapter V: Offences and penalties section 27: Penalties 345 section28: penalties for non-compliance section 29: Offences 346 section 30: Cognizance of offence 346 Chapter VI: Miscellaneous Section 31: Provisions of the Act Scope of the exclusion provisions: 347 Clause (a): Statutory Liens: 348 Clause (b): Pledge of movables: 348 Clause (c) : Creation of security in aircrafts: 348 Clause (d): Vessels: 349 Clause (e): Conditional sale, hire purchase, lease, or unsecured contracts: 349 Clause (f): Rights of an unpaid seller: 350 Clause (g): Properties not liable to attachment under CPC: 350 Clause (h): Security interest for financial assets upto Rs. 1 lac: 352 Clause (i): security interest in agricultural land: 353 Clause (j) : Amount due being less than 20%: 353 section 32: protection of action taken in good faith 354 section 33: offences by companies 355 section 34: civil court not to have jurisdiction 356 Ouster of Civil jurisdiction: 356 Right of other concerned persons to approach Courts: 357 Right of appeal against reconstruction companies: 357 section 35: The provisions of this Act to Non-obstante clause: 358 Section 36: limitation 359 section 37: application of other laws not barred 359 section 38: Power of the central section 39: certain provisions of the Act apply after.. 360 section 40: power to remove difficulties 361 section 41: the amendments of certain section 42: repeal and savings 361 The schedule 362 Appendix 1: Model clauses in Memorandum of Association 365 Articles of Association: 365 Appendix 2; FAS 140 requirements for qualifying spes 368 appendix 3: S&P legal criteria for PART III: SUBORDINATE LAW The security interest (enforcement) rules 385 (1) short title and commencement 385 (2) definitions 386 (3) demand notice 387 (4) Procedure after issue of notice 388 (5) valuation of movable secured assets 391 (6) sale of movable secured assets 391 (7) Issue of certificate of sale 393 (8) sale of immovable secured assets 393 (9) Time of sale, issue of sale certificate, delivery of possession, etc 395 (10) appointment of manager 396 (11) procedure for recovery of shortfall 397 Forms 399
Draft of the application form for registration of securitisation/reconstruction company 412 Draft of general guidelines for Draft of prudential norms for securitisation/ reconstruction companies 441 PART IV: REFERENCE LAW Relevant extracts from THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 463 Debt Recovery Tribunal (Procedure) Rules, 1993 482 Debts Recovery Appellate Tribunal INDEX OF CASES 503 INDEX OF STATUTory instruments 508 SUBJECT INDEX 514
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