Bank Issue of Security

Chanderprabhu Jain College of Higher Studies
&
School of Law
An ISO 9001:2015 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi& Approved by Bar Council of India)
E-NOTES
Class : B.A.LL.B VI Semester
Paper Code : LLB 308
Subject : Investment and Competition Law
UNIT-2
Role of Banks to Issue Securities

Banks are the heart of our financial system. They hold the deposits of millions of person,
governments, and business units they make funds available through their lending and investing
activities to borrowers- individuals, business firms and governments. In doing so, they facilitate
both the follow of goods and services from procedure to consumers and the financial activities of
governments. Thus, Banks are the heart of ourfinancial structure.
Role of Banks to Issue Securities

Commercial banks undertake a wide variety of activities, which play a critical role in the economy
of a country. They pool and absorb risks for depositors and provide a stable source of investment
and working capital funds to various sectors of the economy. In addition, they provide a smooth
functioning payment system that allows financial and real resources to flow relatively freely to
their highest return uses. They are also a back up source of liquidity for any sector in the economy
in temporary difficult. Banks are important source of funds for small borrowers who often have
limited access to other sources of external finance.
The three main interrelated functions of commercial banks are:
i. Holding of deposits
ii. Creating credit through lending and investment activities
iii. Providing a mechanism for payments and transfers of funds for various productive
activities. The extension of credit or lending is, thus, the principal activity ofa commercial bank.
The diverse range of services provided by the commercial banks are:
• Accepting deposits
Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Ph: 91-11-27284333 / 34. Toll Free No. : 1800117677. Website: www.cpj.edu.in. E-mail: cpj.chs@gmail.com
&
School of Law
• Advancing loans
• Overdraft and Cash Credit Facility
• Payment on standing instructions
• Withdrawal of money on demand
• Collection of bills and promissory notes
• Trading in shares and debentures on behalf of customer i.e
• Issue Securities
• Locker Facility
• ATM Card, Debit Card, Credit Card Facility
• Mobile banking
• Internet banking
Thus, it can be said that Banks are the heart of our financial structure, since they have the ability,
in cooperation with the Reserve Bank of India, to add to the money supply of the nation and create
additional purchasing power. Bank‘s lending, investments and related activities facilitate the
economic processes of production, distribution, and consumption.
The commercial banks are owned publicly or privately or by the combination of the two. The
banks help in mobilizations of saving across the economy. It is governed by the Banking
Regulation Act of India, 1949.
Changing Functions of Banks from Direct Lending to ModernSystem of Investment Banking

Traditionally, banks either engaged in commercial banking or investment banking. In commercial
banking, the institution collects deposits from clients and gives direct loans to businesses and
individuals.
The stock market crash of 1929 and ensuring Great Depression caused the U.S government to
reach the conclusion that financial markets needed to be more closely regulated in order to protect
&
School of Law
the financial interests of average Americans. This resulted in the separation of investment banking
commercial banking.
From 1933 (Glass-Steagall Act) until 1999 (Gramm-Leach-Bliley Act), the United States
maintained a separation between investment banking and commercial banks. In the United States,
it was illegal for a bank to have both commercial and investment banking until 1999, when the
Gramm-Leach-Bliley Act legalized it.
The Glass-Steagall Act of 1933 introduced the separation of bank types according to their business
(commercial and investment banking). In order comply with the new regulation, most large banks
split intoseparate entities.
This act separated investment and Commercial banking activities. At the times, ―improper
banking activity", or what was considered overzealous commercial bank involvement in stock
market investment,was deemed the main culprit of the financial crash. According to that reasoning,
commercial banks took on too much risk with depositors' money.
Commercial banks were accused of being too speculative in the pre- Depression era, not only
because they were investing their assets but also because they were buying new issues for resale to
the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards.
Banking itself became sloppy and objectives became blurred. Unsound loans were issued to
companies in which the bank had invested, and clients would be encouraged to invest in those
samestocks.
In the United States, The Securities Act of 1933 became a blueprint for how investment banks
underwrite securities in the public markets. The Act established the practices of due diligence,
issuing a preliminary and final prospectus, and pricing and syndicating a new issue. The 1934
Securities Exchange Act addressed securities exchanges and broker- dealer organizations. The
1940 Investment Company Act and 1940 Investment Advisors Act established regulations for
fiduciaries, such as mutual funds, private money managers and registered investment advisors.
Provisions of the Glass-Steagall Act that prohibit a bank holding company from owning other
financial companies were repealed on November 12,1999,by the Gramm-Leach-Bliley Act. The
repeal of the Glass-Steagall Act of 1933 effectively removed the separation that previously existed
between Wall Street investment banks and depository banks. The Gramm-Leach-Bliley Act
allowed banking institutions to provide a broader range of services, including underwriting and
other dealing activities.

&
School of Law
The financial crisis in 2007/2008, led to questioning of the business model of the investment bank.
The Investment Banking industry began to collapse. Investment banks Bear Stearns (founded in
1925) and Merrill Lynch (1914) were acquired by commercial banks. Lehman Brothers (1850)
filed for bankruptcy and Goldman Sachs (1869) and Morgan Stanley (1935) abandoned their status
as investment banks by converting themselves into traditional commercial banks.
Unlike commercial banks, investment banks do not take deposits. There are two main lines of
business in investment banking. Trading securities for Cash or for other securities (i.e.,
facilitating transactions, market-making), or the promotion of securities (i.e., underwriting,
research, etc.) is the "sell side‖ while dealing with pension funds, mutual funds, hedge funds, and
the investing public (who consume the products and services of the sell-side in order to maximize
their return on investment) constitutes the ―buy side‖. Many firms have buy and sell side
components.
This act separated investment and Commercial banking activities. At the times, ―improper
banking activity", or what was considered overzealous commercial bank involvement in stock
market investment,was deemed the main culprit of the financial crash. According to that reasoning,
commercial banks took on too much risk with depositors' money.
Objective of Investment Bank

The objectives of Investment Banking include:
• Guidance
• Project Formulations
• Implementation
• Modernization
• Diversification
• Mobilizing resource
• Raising Capital
Investment Banking Activities

&
School of Law
Investment Banks provide a wide range of financial services to clients. They structure Mergers and
Acquisition deals, raise capital, analyze prospects of listed companies, and offer advice, trade in
securities on behalf of clients etc.
Therefore, activities of Investment Banking are as follows:-
• Intermediary between issuer and investor
• Offering brokerage services to public & institutional investors
• Provide access to equity and fixed income capital
• Underwriting and distributing new security issues
• Providing financial advice to corporate clients especially onsecurity issues, M&A Deals
• Due Diligence
• Providing financial research to investors, corporate customer
• Providing fee-based asset management services
• Merchant Banking, Venture Capital Investing
• Providing Bridge Loans For M&A, New Financing
• Arranging & Funding Syndicated Loans
• Foreign Exchange, Trading & Hedging
• Arranging Swaps, Other Risk Management Tools etc
Investment Banks and Investment Banking in India

Investment Banking in India has evolved over a period of time. As per Indian Regulations, it is
not allowed for one legal entity to perform all investment banking functions. Bankruptcy
remoteness is a key feature while structuring the business lines of an Investment banks.
Therefore, Indian Investment Banks follow conglomerate structure by keeping their business
segments in different corporate entities to meet regulatory norms.

&
School of Law
In India Commercial Banks investment are of three types, viz, government securities, other
approved securities and non-approved securities. These three are broadly categorised as SLR
investments (Government and other approved securities) and non-SLR investments (comprising
commercial papers, shares, bonds, and debentures issued by the corporate sector). Banks are
required to invest a prescribed minimum of their net demand and time liabilities in Government
and other approved securities under the Banking Regulation Act, 1949.
For a long time, commercial banks in India were discouraged from undertaking investments in
shares and debentures of joint stock companies. However, the policy in this regard was liberalised
from 1985. The ambit of eligible investment was enlarged to cover commercial paper (CP), units
of mutual funds, as non-SLR investments. Similarly, the limit on investments in the capital
market has been revised from time to time. Aggregate exposure(both fund and non-fund based) of
banks to the capital market in all forms under direct and indirect exposures was stipulated at 40 per
cent of net worth in terms of the guidelines issued on December 15, 2006, which came into effect
from April 1, 2007.
Top 10 Investment Banking Firms in India are:
• Australia and New Zealand Banking Group Limited Popularly known as A.N.Z. Bank
• Citi Bank
• Deutsche Bank
• J.P. Morgan
• Goldman Sachs
• Hong Kong and Shanghai Banking Corporation (HSBC)
• D.S.P. Merrill Lynch Limited
• Morgan Stanley India Company Private Limited
• ABN-Amro Bank

&
School of Law
Differences Between Investment Bank and Commercial Bank The basic difference between
investment bank and commercial bank are as follows:
 A financial intermediary set up to provide investment and advisory services to the companies is
known as an investment bank, Commercial Bank is a bank established to provide banking
services to the general public.
 Investment bank offers customer specific service whereas,commercial bank offers standardized
services
 The customer base of a commercial bank is comparatively higher than an investment bank.
 The investment bank is related to the performance of the stock market while economic
growth and the credit demand affectthe rate of interest charged by the commercial bank.
 The investment bank is a banker to the individual, government, corporations, etc. On the other
hand, commercial bank is a banker to all the citizens of the country.
 The investment bank generates its income from fees and commission whereas Commercial
Bank, generates income from interest and fees.
Laws Governing Investment Banking Practices
In the absence of a comprehensive piece of legislation governing financial services in India,

various services are regulated through a variety of Acts and Rules and by different regulators.
Investment Banking in India is regulated by various legislations and the regulatory powers are also
distributed between different regulators depending on the constitution and status of the investment
bank. Pure investment banks that do not have presence in the lending or banking business are
governed primarily by the capital market regulator Securities and Exchange Board of India
(SEBI).
However, multi-national banks and non-banking financial corporation‘s which are investment
banks are regulated primarily by the Reserve Bank of India (RBI) in their core business of
banking or lending and in so far as the investment banking segment is concerned, they are also
regulated by SEBI. An overview of the regulatory framework is as under:
All investment banking companies incorporated under the Companies Act 1956 or 2013, are
governed by the provisions of that Act.
Multi-national banks are regulated by the Reserve Bank of India under Reserve Bank of India Act,
1934 and the Banking Regulation Act, 1949.
Investment banking companies that are constituted as non- banking financial companies are
&
School of Law
regulated operationally by the RBI under Chapter IIIB of the RBI Act, 1934
Functionally, different aspects of investment banking are regulated under the Securities and
Exchange Board of India (SEBI) Act, 1992 and the guidelines and regulations issued there under.
These are as follows:
• SEBI (Issue of capital & Disclosure Requirements) regulations2009

• SEBI (Substantial Acquisition of Shares) Regulations 2011
• SEBI (Prohibition of Insider Trading) Regulations 1992
• SEBI (Foreign Institutional Investors) Regulations 1995
• SEBI (Venture Capital Funds) Regulations 1996
• SEBI (Foreign Venture Capital Investors) Regulations 2000
• SEBI (Mutual Funds) Regulations 1996
• SEBI (Merchant Bankers) Regulations 1992,
• SEBI (Buy-Back of Securities) Regulations, 1998
• Securities Contracts (Regulation) Act,1956
Investment banks that are set up in India with foreign direct investment are governed in respect
of the foreign investment by the Foreign Exchange Management Act, 1999.
Apart from the above specific regulations relating to investmentbanking, investment banks are also
governed by other general laws applicable to all other businesses in India like tax laws, contract
laws, arbitration law etc
Therefore, wherever public interest to such a large extent is involved and it may become necessary
to achieve an object which serves the public purposes, individual rights may have to give way.
Public interest has always been considered to be above the private interest. Interest of an individual
may, to some extent, be affected but it cannot have the potential of taking over the public interest
having an impact on the socio-economic drive of the country. The two aspects are inter-twined
which are difficult to beseparated.

&
School of Law
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002
Background of the Act
The Statement of object and reason accompanying the introduction of the Bill in Parliament sets
out the background in which the SARFAESI Act was enacted:-
―The Financial sector has been one of the key drivers in India‘s efforts to achieve success in
rapidly developing its economy. While the Banking industry in India is progressively complying
with international prudential norms and accounting practices. There are certain areas in which the
banking and financial sector do not have a level playing field as compared to other participant in
the financial markets in the world. There is no legal provision for facilitating securitistation of
financial assets of bank and financial institutions. Further, unlike international banks, the banks
and financial institutions in India do not have power to take possession of securities and sell them.
Our existing legal framework relating to commercial transactions has not kept pace with the
changing commercial practices and financial sector reforms.
This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-
performing assets of banks and financial institutions. Narasimham Committee I and II and
Andhyarujina Committee constituted by the Central Government for the purpose of examining
banking sector reform have considered the need for changes in the legal system in respect oft these
areas. These committees, inter alia, have suggested enactment of a new legislation for
securitization and empowering banks and financial institutions to take possession of the securities
and to sell them without the intervention of the court. Acting on these suggestions, the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance,2002 was promulgated on the 21st June 2002 to regulate securitisation and
reconstruction of financial assets and enforcement of security interests and for matters connected
therewith or incidental thereto.
The provision of the Ordinance would bank and financial institutions to realize long-1erm assets,
manage problem of liquidity, asset liability mismatches and improve recovery by exercising
powers to take possession of securities, sell them and reduce nod-performing assets by adopting
measures for recovery or reconstruction, to replace the said ordinance by an enactment a Bill was
introduced in the House of the people but it could not be passed.
Thereafter, President of India on 21st August 2002, in exercise of power conferred by clause (1) of
article 123 of the Constitution promulgated the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interests (Second) Ordinance, 2002. To replace the second
ordinance by an Act of Parliament the Securitisation and Reconstruction of Financial Assets and
&
School of Law
Enforcement of Security Interest Bill was introduced in the Parliament, The Bill was passed by the
both Houses of Parliamentand received the assent of the President on 17th December 2002. It
came into force w.e.f. 21st June 2002, the day first ordinance was enacted.
To put in a nutshell: The SARFAESI Act has been enacted to regulate securitisation and to provide
for reconstruction of financial assets. It also provides for enforcement of security interest and for
matters connected therewith. (Transcore v. Union of India (2008) 1 SCC 125)
Object and purpose of the Act

The object and purpose of the Securitisation Act is to facilitate recovery of the dues of the banks
and financial institutions by a non-adjudicatory process. The ordinary recovery mechanism
contemplated under Code of Civil Procedurs1908 was not considered sufficient. Thus, the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was introduced for a special
and speedier mechanism for the recovery, Almost a decade of experience proved that the recovery
process was not achieving the intended objects and hence, the SARFAESI Act to regulate
securitisation and reconstruction of financial assets and enforcement of security interest was
enacted.
The Act enables banks or financial institutions to enforce their security interests expeditiously
without being required to move a Court or Tribunal.This is consistent with the object of Parliament
to facilitate the enforcement of security interests by a non-adjudicatory process. (National
Polymers v. Union of India, AIR 2011 Bom132). The Act removes fetters on the rights of the
secured creditor and enables the banks and financial institutions to realize long-term assets,
management problems of liquidity, asset liability mismatches and improve recovery exercising
powers to take possession of securities, sell them and reduce non-performing assets (NPA) by
adopting measures for recovery of measures for recovery of reconstruction [Authorised Officer,
Indian Overseas Bank v, Ashok Sawstruction2009 SC 2420]
Constitutionality of the Act
In Mardi Chemicals Ltd. v. Union of India, AIR 2004 SC 2371, the Supreme Court noticed that
the Act put one party in an advantageous condition but for that reason the Act cannot be said to be
unconstitutional in view of the fact that the object of the Act is to achieve speedy recovery of the
dues declared as NPA and better availability of capital liquidity and resources to help in growth of
the economy of the country and welfare of the people in general which would subserve the public
interest. It further observed as follows:
&
School of Law
―though the transaction may have the character of a private contract yet the question of great
importance behind such transaction as a whole having far-reaching effect on the economy of the
country cannot be ignored, purely restricting it to individual transactions, more particularly when
financing is through banks and financial institutions utilizing the money for the people in general,
namely, the depositors in the banks and public money at the disposal of the financial institutions.
Therefore, wherever public interest to such a large extent is involved and it may become necessary
to achieve an object which serves the public purposes, individual rights may have to give way.
Public interest has always been considered to be above the private interest. Interest of an individual
may, to some extent, be affected but it cannot have the potential of taking over the public interest
having an impact on the socio-economic drive of the country. The two aspects are inter-twined
which are difficult to beseparated.
Definitions [Section 2]
Section 2 of the Act is the definition/interpretation clause. It provides definitions of certain

words/terms used in the Act to give certainty to their meaning. When a word has been defined in
the interpretation clause, prima facie it governs wherever the word is used in the body of the
statute. [Vanguard Fire and General Insurance Co. Ltd. v. Fraser & Ross, AIR 1960 SC 971]
“Appellate Tribunal” [Section: 2(1) (a)]
In this Act, ―Appellate Tribunal‖ means a Debts Recovery Appellate Tribunal established under
sub-section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993
Section:2(1)(a) of the Act provides that any person aggrieved by the order passed by the ―Debt
Recovery Tribunal‖ can file an appeal to the authority called as the ‗Appellate Tribunal‘, subject to
the maintainability of the appeal. The tribunals are constituted by the Central Government for
various States as per the provisions of the Recovery of Debts due to Banks and Financial
Institutions Act, 1993
“Asset Reconstruction” [Section: 2(1) (b)]
―Asset Reconstruction‖ means acquisition by any 2 [asset reconstruction company] of any right or
interest of any bank or financial institution in any financial assistance for the purpose of realisation
of such financial assistance.

&
School of Law
According to Section: 2(1) (b) ―asset reconstruction‖ means acquisition of any right or interest, of
any bank or financial institution, in any financial assistance, By any asset reconstruction company,
for the purpose of realisation of such financial assistance. In simple words, it is the takeover of
loans or advances from the bank or financial institution for purpose of recovery.
“Asset Reconstruction Company” [Section: 2(1) (ba)]
―Asset Reconstruction Company‖ means a company registered with Reserve Bank under section 3
for the purposes of carrying on the business of asset reconstruction or securitisation, or both
“Bank” [Section: 2(1) (c)]
―Bank‖ means—a banking company; or a corresponding new bank; or the State Bank of India; or a
subsidiary bank; or a multi-State co-operative bank; or such other bank which the Central
Government may, bynotification, specify for the purposes of this Act;
“Banking Company” [Section: 2(1) (d)]
―Banking Company‖ shall have the meaning assigned to it in clause (c) of section 5 of the Banking
Regulation Act, 1949
“Board” [Section: 2(1) (e)]
―Board‖ means the Securities and Exchange Board of India established under section 3 of the
Securities and Exchange Board of India Act, 1992
“Borrower” [Section: 2(1) (f)]
―Borrower "means any person who has been granted financial assistance by any bank or financial
institution or who has given any guarantee or created any mortgage or pledge as security for the
financial assistance granted by any bank or financial institution and includes a person who
becomes borrower of a asset reconstruction company]consequent upon acquisition by it of any
rights or interest of any bank or financial institution in relation to such financial assistance or who
has raised funds through issue of debt securities.
According to Section: 2(1) (f) ―borrower‖ means:-
 Any person who has been granted financial assistance by anybank or financial institution

&
School of Law
 Who has given any guarantee
 Who has created any mortgage or pledge as security for the financial assistance granted by any
bank or financial institution
 A person who becomes borrower of an asset reconstruction company consequent upon

acquisition by it of any rights or interest of any bank or financial institution in relation to such
financial assistance or who has raised funds through issue of debtsecurities
“Central Registry” [Section: 2(1) (g)]
―Central Registry‖ means the registry set up or cause to be set up under sub-section (1) of section
20;
“Company” [Section: 2(1) (ga)]
―Company‖ means a company as defined in clause
(20) Of section 2 of the Companies Act, 2013
“Corresponding New Bank” [Section: 2(1) (h)]
―Corresponding New Bank‖ shall have the meaning assigned to it in clause (da) of section 5 of the
Banking Regulation Act, 1949
“Debt” [Section: 2(1) (ha)]
―Debt‖ shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 and includes—
Unpaid portion of the purchase price of any tangible asset given on hire or financial lease or
conditional sale or under any other contract; Any right, title or interest on any intangible asset or
license or assignment of such intangible asset, which secures the obligation to pay any unpaid
portion of the purchase price of such intangible asset or an obligation incurred, or credit otherwise
extended to enable any borrower to acquire the intangible asset or obtain license of such asset;
“Debts Recovery Tribunal” [Section: 2(1) (i)]
―Debts Recovery Tribunal‖ means the Tribunal established under sub-section (1) of section 3 of
the Recovery of Debts due to Banks and Financial Institutions Act, 1993

&
School of Law
“Debt Securities” [Section: 2(1) (ia)]
―Debt Securities‖ means debt securities listed in accordance with the regulations made by the
Board under the Securities and Exchange Board of India Act, 1992
“Default” [Section: 2(1) (j)]
―Default‖ means— non-payment of any debt or any other amount payable by the borrower to any
secured creditor consequent upon which the account of such borrower is classified as non-
performing asset in the books of account of the secured creditor; or non-payment of any debt or
any other amount payable by the borrower with respect to debt securities after notice of ninety
daysdemanding payment of dues served upon such borrower by the debenture trustee or any other
authority in whose favour security
interest is created for the benefit of holders of such debt securities;
“Financial Assistance” [Section: 2(1) (k)]
―Financial Assistance "means any loan or advance granted or any debentures or bonds subscribed,
or any guarantees given, or letters of credit established, or any other credit facility extended by any
bank or financial institution including funds provided for the purpose of acquisition of any tangible
asset on hire or financial lease or conditional sale or under any other contract or obtaining
assignment or license of any intangible assetor purchase of debt securities
“Financial Asset” [Section: 2(1) (l)]
―Financial Asset‖ means debt or receivables and includes—
A claim to any debt or receivables or part thereof, whether securedor unsecured; or

 any debt or receivables secured by, mortgage of, or charge on,immovable property; or
 a mortgage, charge, hypothecation or pledge of movable property; or
 any right or interest in the security, whether full or part underlying such debt or receivables; or
 any beneficial interest in property, whether movable or immovable, or in such debt,
receivables, whether such interest is existing, future, accruing, conditional or contingent; or
 any beneficial right, title or interest in any tangible asset given on hire or financial lease or
conditional sale or under any other contract which secures the obligation to pay any unpaid
portion of the purchase price of such asset or an obligation incurred, or credit otherwise
provided to enable the borrower to acquire such tangible asset; or
 any right, title or interest on any intangible asset or license or assignment of such intangible
&
School of Law
asset, which secures the obligation to pay any unpaid portion of the purchase price of such
intangible asset or an obligation incurred, or credit otherwise extended to enable the borrower
to acquire such intangible asset or obtain license of the intangible asset;or
 any financial assistance.
“Financial Lease” [Section: 2(1) (ma)]
―Financial Lease‖ means a lease under any lease agreement of tangible asset, other than negotiable
instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain
time in consideration of payment of agreed amount periodically and where the lessee becomes the
owner of the such assets at the expiry of the term of lease or on payment of the agreed residual
amount, as the case may be;
“Hypothecation” [Section: 2(1) (n)]
―Hypothecation‖ means a charge in or upon any movable property, existing or future, created by a
borrower in favour of a secured creditor without delivery of possession of the movable property to
such creditor, as a security for financial assistance and includes floating charge and crystallization
of such charge into fixed charge on movable property
According to Section: 2(1) (n) ―Hypothecation‖ means:-
• a charge in or upon any movable property
• existing or future
• created by a borrower
• in favour of a secured creditor
• without delivery of possession of the movable property to such creditor, as a security for
financial assistance and includes floating charge and crystallization of such charge into fixed
charge on movable property
“Negotiable Document” [Section: 2(1) (na)]
―Negotiable Document "means a document, which embodies a right to delivery of tangible assets
and satisfies the requirements for negotiability under any law for the time being in force including
warehouse receipt and bill of lading
&
School of Law
Non-Performing Asset” [Section: 2(1) (o)]

According to Section:2(1)(o), non-performing asset (NPA) is an asset or account of a borrower
classified by a bank or financial institution as sub-standard doubtful or a loss asset, in accordance
with the directions or under guidelines relating to asset classification issued by the Reserve Bank.
For classification of any account as NPA it is important that the classification is done as per the
RBI directives.
“Notification” [Section: 2(1) (p)]
―Notification‖ means a notification published in theOfficial Gazette;
“Obligor” [Section: 2(1) (q)]
―Obligor‖ means a person liable to the originator, whether under a contract or otherwise, to pay a
financial asset orto discharge any obligation in respect of a financial asset, whetherexisting, future,
conditional or contingent and includes borrower;
According to Section: 2(1) (q) obligor means a person liable: -
i. To pay to the originator, whether under a contract or otherwise
ii. To discharge any obligation in respect of financial asset, whether existing, future, conditional
or contingent
iii. Any includes a borrower
“Originator” [Section: 2 (1) (r)]
―Originator‖ means the owner of a financial asset which is acquired by a asset reconstruction
company for the purpose of securitisation or asset reconstruction;
Qualified Buyer” [Section: 2(1) (u)]
―Qualified Buyer‖ means a financial institution, insurance company, bank, state financial
corporation, state industrial development corporation, trustee of asset reconstruction company
which has been granted a certificate of registration under sub-section (4) of section 3 or any asset
management company making investment on behalf of mutual fund or a foreign institutional
&
School of Law
investor registered under the Securities and Exchange Board of IndiaAct, 1992 or regulations made
there under, any category of non- institutional investors as may be specified by the Reserve Bank
under sub-section (1) of section 7 or any other body corporate as may be specified by the Board;
Rights of Borrowers
The above observations make it clear that the SAFAESI act was able to provide the effective
measures to the secured creditors to recover their long standing dues from the Non-performing
assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the
law.
 The borrowers can at any time before the sale is concluded, remit the dues and avoid losing
the security.
 In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal
consequences.
 The borrowers will be entitled to get compensation for such acts.
 For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the
DRAT in appeal. The limitationperiod is 45 days and 30 days, respectively.
Pre-conditions
The Act stipulates four conditions for enforcing the rights by a creditor.
 The debt is secured
 The debt has been classified as an NPA by the banks
 The outstanding dues are one lakh and above and more than 20% of the principal loan
amount and interest there on.
 The security to be enforced is not an Agricultural land
Methods of Recovery
According to this act, the registration and regulation of securitization companies or reconstruction
companies is done by RBI. These companies are authorized to raise funds by issuing security
receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of
securities given for financial assistance and sell or lease the same to take over management in the
event of default. This act makes provisions for two main methods of recovery of the NPAs as
follows: Securitisation: Securitisation is the process of issuing marketable securities backed by a
&
School of Law
pool of existing assets such as auto orhome loans.
After an asset is converted into a marketable security, it is sold. A securitization company or

reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by
forming schemes for acquiring financial assets. Asset Reconstruction: Enacting SARFAESI Act
has given birth to the Asset Reconstruction Companies in India. It can be done by either proper
management of the business of the borrower, or by taking over it or by selling a part or whole of
the business or by rescheduling of payment of debts payable by the borrower enforcement of
security interest in accordance with the provisions of this Act.
Further, the act provides Exemption from the registration of security receipt. This means that
when the securitization company or reconstruction company issues receipts, the holder of the
receipts is entitled to undivided interests in the financial assets and there is not need of registration
unless and otherwise it is compulsory under the Registration Act 1908. However, the registration
of the security receipt is required in the following cases:
 There is a transfer of receipt
 The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or
interest in a immovable property.
The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of
mortgage, hypothecation or creation of a security interest. There are some exceptions in the act
such as personal belongings. However, only that property given as security can be proceeded
under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged
residential house, it is also NOT exempted from the Sarfaesi act.
Powers of Debt Recovery Tribunal
The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of
powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal
may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts
Recovery Tribunal.
Role of Chief Metropolitan Magistrate or District Magistrate The Chief Metropolitan

Magistrate or District Magistrate has been mandated to assist secured creditor in taking
possession of secured asset. These officers will make sure that once the creditor has given him in
writing that all other formalities of the act have been done, the CMM or DM will take possession

&
School of Law
of such asset and documents relating thereto; and forward such assets and documents to the
secured creditor. Now, here, you have to note that such an act of the CMM or DM cannot be called
in question in any court or before any authority.
Role of High Court
The act allows taking the matter to high courts only in some matters related to the implementation
of the act in Jammu & Kashmir. However, High Courts have been entertaining writ petitions
under article 226 (Power to issue writs) of the constitution of India
Proposed amendments to the Act
The government had approved bill to amend the act. The Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these
amendments: Banks and asset reconstruction companies (ARCs) will be allowed to convert any
part of the debt of the defaulting company into equity. Such a conversion would imply that lenders
or ARCs would tend to become an equity holder rather than being a creditor of the company.
The amendments also allows banks to bid for any immovable property they have put out for
auction themselves, if they do not receive any bids during the auction. In such a scenario, banks
will be able to adjust the debt with the amount paid for this property. This enables the bank to
secure the asset in part fulfillment of the defaulted loan.
Banks can then sell this property to a new bidder at a later date to clear off the debt completely.
However lenders will be able to carry this property on their books only for seven years, as per the
Banking Regulation Act, 1949
Certain provisions of SARFAESI act to apply after central registry is set up (section 39)
Section 39 of the act provides that the provisions of sub section (2), (3) and (4) of section 20 and
section 21, 22, 23, 24, 25, 26 and 27 shall apply after the central registry is set up under sub -
section (1) of section 20.
 Power to remove difficulties (section 40) Section 40 of the act provides as follows-
 If any difficulty arises in giving effect to provisions of this act, the central government may, by
order published in the official gazette , make such provisions not inconsistent with the
provisions of this act may appear necessary for removing the difficulty.
&
School of Law
 Every order made under this section shall be laid, as soon nas may be after it is made, before
each house of parliament.
Important Cases of Debt Recovery Tribunal

 Allahabad Bank vs Canara Bank & Another on 10 April, 2000. ..
 M/S Transcore vs Union of India & Anr on 29 November, 2006. ...
 Raghunath Rai Bareja and Another vs Punjab National Bank and others on 6 December, 2006.
...
 Nahar Industrial Enterprises Ltd vs Hongkong & Shanghai Banking Corp on 29 July, 2009.
Certain provisions of SARFAESI Act to apply after Central registry is set up (section 39)
Section 39 of the act provides that the provisions of sub – section (2),(3) and (4) of section 20 and
section 21,22,23,24,25,26 and 27 shall apply after the Central registry is set up or cause to be set
up under sub- section (1) of section 20.


Bank Issue of Security

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bank Issue of Security

Uploaded by

Copyright:

Available Formats

Chanderprabhu Jain College of Higher Studies

Class : B.A.LL.B VI Semester

Paper Code : LLB 308

Subject : Investment and Competition Law

Role of Banks to Issue Securities

Role of Banks to Issue Securities

ii. Creating credit through lending and investment activities

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

• Overdraft and Cash Credit Facility

• Payment on standing instructions

• Withdrawal of money on demand

• Collection of bills and promissory notes

• Trading in shares and debentures on behalf of customer i.e

• ATM Card, Debit Card, Credit Card Facility

Changing Functions of Banks from Direct Lending to ModernSystem of Investment Banking

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Objective of Investment Bank

Investment Banking Activities

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

• Intermediary between issuer and investor

• Offering brokerage services to public & institutional investors

• Provide access to equity and fixed income capital

• Underwriting and distributing new security issues

• Providing financial research to investors, corporate customer

• Providing fee-based asset management services

• Merchant Banking, Venture Capital Investing

• Providing Bridge Loans For M&A, New Financing

• Arranging & Funding Syndicated Loans

• Foreign Exchange, Trading & Hedging

• Arranging Swaps, Other Risk Management Tools etc

Investment Banks and Investment Banking in India

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Top 10 Investment Banking Firms in India are:

• Hong Kong and Shanghai Banking Corporation (HSBC)

• D.S.P. Merrill Lynch Limited

• Morgan Stanley India Company Private Limited

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Laws Governing Investment Banking Practices

In the absence of a comprehensive piece of legislation governing financial services in India,

• SEBI (Issue of capital & Disclosure Requirements) regulations2009

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

Background of the Act

Object and purpose of the Act

Constitutionality of the Act

Section 2 of the Act is the definition/interpretation clause. It provides definitions of certain

“Appellate Tribunal” [Section: 2(1) (a)]

“Asset Reconstruction” [Section: 2(1) (b)]

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

“Asset Reconstruction Company” [Section: 2(1) (ba)]

“Bank” [Section: 2(1) (c)]

“Banking Company” [Section: 2(1) (d)]

“Board” [Section: 2(1) (e)]

“Borrower” [Section: 2(1) (f)]

According to Section: 2(1) (f) ―borrower‖ means:-

Campus: Plot No. OCF, Sector A-8, Narela, Delhi-110040

 Who has given any guarantee

 A person who becomes borrower of an asset reconstruction company consequent upon

“Central Registry” [Section: 2(1) (g)]

“Company” [Section: 2(1) (ga)]

―Company‖ means a company as defined in clause

(20) Of section 2 of the Companies Act, 2013

“Corresponding New Bank” [Section: 2(1) (h)]