Rajasthan HC stays securitisation ordinance

NEW DELHI: The Rajasthan High court has ordered an interim stay on the ordinance, ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest ’02’ that seeks to restore creditors’ rights. The interim stay has been given in the case filed by Modern Syntex (of the Ranka group of companies) against IDBI — the lead lender. IDBI has proceeded to take over the assets of Mordern Syntex under the ordinance, acting on behalf of IFCI too.
The corporation has given IDBI the right to proceed on its behalf in a case of payment default by Modern Syntex. The writ petition was filed on behalf of Modern Syntex and not the promoters. Financial institutions will now have to respond to the writ petition. They are planning an appeal to the division bench in Jaipur for vacation of stay.
The government, on its part, is yet to make up its mind. Senior finance ministry officials said they would soon get the opinion of the law ministry in the matter.
In a similar case, the Delhi High Court today deferred the hearing of Merdia Chemicals v/s IDBI till October 3. This case was merged with the apparel and accessory maker GIVO’s appeal against IFCI.
This is a major setback to banks and financial institutions who have combined bad loans of over Rs 100,000 crore and have been looking to the ordinance to recover a good part of this amount. The ordinance allows lenders to take over, without further legal sanction, the assets offered as security by borrowers in case of default on debt servicing. With the stay order, the fate of numerous proceedings initiated by banks and financial institutions will remain uncertain.
Chapter III of the Ordinance gives creditors sweeping powers to act against defaulting borrowers. Section 13 says, “...Any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Ordinance.�
After a loan fails to be serviced for two quarters, it becomes classified as non-performing, upon which the lender can put the borrower on notice that unless payments are made within 60 days, it can take control of the secured assets, sell them, put them under a manager of the lender’s choice etc. Various sections of industry have already been voicing their concern on the sweeping powers given to banks and financial institutions. They feared banks and institutions would misuse the power to the dis-advantage of the borrower.
Under existing laws, lenders are obliged to go through lengthy legal procedures before they can exercise their rights on secured assets. This is a major reason for the ill-health of the financial sector.
The securitisation ordinance is a significant piece of reform that does much to correct the current imbalance in the equations between the lender and the borrower. All banks and financial institutions have started sending notices to defaulting borrowers under the Ordinance.
Banks had a bad experience in cases where banks had initiated action before the ordinance came to power. As the cases kept rolling on and on the realizable value of the assets dropped drastically on account of the time lag.
What in fact remained was the salvage value, explained senior bankers. The ordinance was initially promulgated on June 24. But it had to be re-promulgated in the month of August after the monsoon session ended as efforts to get the ordinance passed in the Parliament failed.