labels: Banks general, Economy - general
RBI issues draft guidelines for takeover of defaulting companies news
06 December 2008

The Reserve Bank of India has released new draft guidelines as part of the norms called "Change in or takeover of the management of the business of the borrower by SC / RC" under Section 9(a) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act).

These guidelines are aimed at giving more powers to the securitisation or reconstruction company to recover assets of a borrower company. The RBI has also opens a window for the defaulting borrower to claim back assets if able to repay with five years of default.

Key changes
The key changes proposed in these guidelines are:

  • A securitisation company /reconstruction company (SC/RC) may resort to change in or take over of the management of the business of the borrower for realization of its dues from the borrower.  However the management can be restored to the borrower if the dues are in full or after five years from the acquisition of the assets, whichever is earlier.
  •  A securitisation or reconstruction company can resort to a change in management or takeover of the borrower company if more than 25 per cent of the total assets are held by it or if the borrower is financed by more than one creditor and more than 75 per cent of the secured credit is held by the creditors.
  • RBI has also specified other conditions that may compel such a takeover:
  • Wilful default in repayment of the loan amount,
  • Selling or disposal of a significant part of the assets secured to the SC / RC without its prior approval, threatening by the borrower to discontinue the business
  •  If the SC/RC is convinced that the management is acting in a manner that affects the interests of the creditors.
  • f the management is incompetent to run the business.
  • If serious dispute have arisen among the promoters and directors of the borrower.
  •  If there are grounds to believe that the borrower is unable to pay the debt.
  • Willful default would also mean non-payment of dues following siphoning of funds.
  • Failure to acquire financial assets, or non-utilisation of funds borrowed, or disposal of financed assets.
  • Misrepresentation of records pertaining to the transaction with the SC/RC, dealing/disposal of secured assets without the approval of the SC/RC or fraudulent transactions by the borrower in respect of the assets secured by the creditors.
  • The reconstruction companies will have to give a notice of 60 days to the borrower indicating its intention to effect change in or takeover in the management of his business and give him time to file objections. 

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RBI issues draft guidelines for takeover of defaulting companies