Panel suggests ways to harmonise Sarfaesi Act with Bankruptcy code

A joint committee of Parliament on the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill has recommended significant changes in the proposed legislation, including harmonising it with the Insolvency and Bankruptcy Code for payment to secured creditors.

The committee, in its report submitted to the Lok Sabha on Friday, has recommended nearly two dozen amendments to the bill (which was tabled in Parliament in May this year) to help improve ease of business and to reduce the non-performing asset problem.
The recommendations of the committee headed by BJP MP Bhupendra Yadav on the debt recovery tribunal and the Sarfaesi Act are in sync with the bankruptcy code that was passed in the last session of Parliament.

''…on and after the commencement of the Insolvency and Bankruptcy Code 2016, in cases where insolvency and bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code,'' said the report.

The finance ministry hopes to get the amendment bill passed in the current session of Parliament, which will help improve the 'ease of doing business' by faster resolution of bad loans.

In view of the previous Supreme Court judgment and tenancy protection laws in various states, the committee has also suggested specifying cases where Debt Recovery Tribunals (DRTs) can pass orders permitting the banks to take action for enforcement of securities under section 17.

Further, it has proposed doing away with the provision to empower tribunals to give an interim ex-parte order to prevent disposing of the assets within 30 days of a show-cause notice to the defendant as it ''may be a violation of the principles of natural justice''. Instead, it has suggested giving ''adequate opportunity'' to the borrower before an adverse adjudicatory stance is taken against him.

It has also suggested reviewing the definitions of a number of terms, including ''intangible assets'', to include those that may be ''prescribed by the central government in consultation with the Reserve Bank of India''.

''Lending against security of intangible assets is evolving and with a view to empower Central Government to specify the type of intangible assets from time to time,'', it said, adding that modes of recovery of such assets can also be prescribed by the central government from time to time.
Similarly, it has also recommended amendments to the definition of ''asset reconstruction company'' (ARC) and ''secured creditor''.

It has also suggested tightening the provision for exemption from stamp duty for acquiring financial assets by ARCs to prevent its misuse for other purposes.

To keep a check on ARCs, it has also proposed empowering the RBI to carry out their audit and inspection from time to time.

It has also suggested authorising a judicial member in the Debt Recovery Tribunals (DRTs) to function as the presiding officer and increasing the maximum age of the chairpersons of Appellate Tribunal to 70 years.

The report of the JPC contains measures that go a long way to assure investors of transparent tax policies and security of their funds in the event of disputes, Yadav said. He expressed the hope that the JPC report would be considered by the cabinet soon so that an amended law can be passed in the current monsoon session of Parliament.

The committee, however, left the job of designation of agricultural land to the states.

"The business of designating tribal, forest, agricultural land is not easy and often varies from state to state," explained Yadav.

The MP, who has previously headed committees on the GST and bankruptcy code, said he saw the 21 major amendments recommended by the JPC being an important part of a series of measures taken by the Modi government to make business more transparent and reduce the scope for discretion and corruption.

Yadav said the report calls for fixing a 30-day window to submit a view on the status of properties being taken over by banks and financial institutions, reducing the possibility of delays and connivance between officials and affected parties.

The committee also felt that a vacancy in a tribunal need not delay proceedings as a similarly placed judicial official can also hear a case relating to debt recovery and the securitisation of financial assets and enforcement of security interest Act.

Yadav said there were some 70,000 disputes that add up to around Rs5-lakh crore, and the changes recommended to the two Acts will help reduce pendency with several cases relating to individuals and corporates. The contentious issue of tenancy in properties that are to be taken over has also been addressed with the tribunal now expected to reach an assessment on whether tenants predate the dispute. "This is necessary as sometimes tenancies are created to delay or stall the recovery process," he explained.

The committee has suggested that non-financial institutions also be allowed to take over stressed assets apart from asset reconstruction companies. This would help in reducing NPAs, the panel pointed out.