SARFAESI Act issue – Responding to Readers

  • M. J. Aslam

In response to my write up on the recent Supreme Court judgment about the applicability of the SARFAESI Act to the State of JK & other related issues published in Kashmir Watch ( I have received a lot of positive feedback from the readers which is highly encouraging for which I hereby express my sincere thanks to all of them. Two important queries have been, however, raised in the feedback seeking clarification & elucidation of the same from me. The two questions are actually nothing but what is being invariably suggested, nowadays, in some local newspapers of Kashmir & also found in the common discourse among various circles of life here about the SARFAESI issue. Two questions posed to me are as: (1) it is proposed by some in local dailies that filing of the Curative Petition is the only solution to set right the adverse effects of the present judgment insofar as the JK State, its property & other rights are concerned. Is filing of the Curative Petition before the Supreme Court solution to the problem? (2)  The State Government is reportedly mulling over the idea of setting up of an Asset Reconstruction Company at State level clothed with State Subject status & exclusive power of acquiring the impaired assets of the banks operating in JK and , then, selling them to the State Subjects only. Is proposed ARC solution to the problem?

Before I respond to these questions, I must clear it here that I have not deliberately referred to these two “proposed remedies” in my said column for the reasons that will be no-brainer in my coming answers to these questions here. Let me respond to the query no. 1 first. The concept of Curative Petition was for the first time evolved by the Supreme Court of India in Rupa Ashok Hurra v. Ashok Hurra, AIR 2002 SC 1771= 2 SCR 1006 = 4 SCC 388  . In that case, the question was raised before the Supreme Court whether the aggrieved petitioner whose review petition of a final order of the Supreme Court under Article 137 of the Constitution has been dismissed by it has any further remedy to seek review of the dismissal order of his review petition. The Supreme Court affirmed the question by holding that it has inherent power under the Constitution to correct its final order of dismissal of a review petition by allowing what it called the Curative Petition by the aggrieved person.  However, it remarked that except when very strong reasons exist, the Supreme Court should not entertain an application seeking reconsideration of its order which has become final on dismissal of a review petition lest floodgates are opened for filing a second review petition as a matter of course in the guise of a curative petition under the inherent power. But on what grounds such an extra-ordinary remedy could be availed of? The Supreme Court itself stated the grounds/requirements for filing of the Curative Petition at Para 47-54 of the judgment. First & foremost, the Curative Petition applies where a review petition of a judgment under Article 137 of the Constitution was filed by the petitioner but dismissed by circulation by the Court.  It means that that the Curative Petition is in reality “second review petition” that is sparingly & not regularly allowed by the Supreme Court. But no such situation exists here as where the State or any other person like mortgagor/s of the JK immovable properties could think of filing the Curative Petition in the Supreme Court. So, filing of Curative Petition under the circumstances is grossly a bad idea. Secondly, a cursory look at the grounds/requirements on which the Curative Petition is sought from the Court will hardly leave any doubt in the mind of a layman even that such an attempt , if the situation occurs for that, will be surely an exercise in futility. Thirdly, if the State, however, intends to file “review petition” in the Supreme Court under Article 137 against Santosh Gupta judgment, it can be filed only within prescribed 30 days of the judgment & legally, on the ground of any “apparent error” in the order. Moreover, it will be heard by the same bench, if available, and according to the principle of stare decisis the Courts usually do not unsettle their earlier orders except for very “strong reasons”, and last but not least, in view of the facts & circumstances attending the whole matter at hand, in my humble opinion, there doesn’t seem to be good chance of reversal or modification of the Santosh Gupta order.

I will now respond to the second question mentioned above. Firstly, it has to be noted that Asset Reconstruction Companies are a concept in bad loan landscape of Indian economy that has its roots in the SARFAESI Act, 2002 itself. Although registered under the Companies Act, 2013, ARC has to operate, only with the prior license of the RBI, within the four walls of the Act & the RBI Guidelines issued from time to time. The Amendment Act No.44 of 2016 (August) {already published in official gazette of India} made to the SARFAESI Act & some other Acts has conferred wide ranging powers on the RBI in a changing business environment of India which include the power to examine the statements & information, audit & inspect ARCs & penalize an ARC, if it fails to comply with RBI directions.

In India till date out of 16 ARCs, only two, namely, ARCIL (Asset Reconstruction Company India Limited) followed by RARC (Reliance Asset Reconstruction Company Limited of Anil Ambani Group) are comparatively operational while the rest are still sluggish not active & able enough for the job of reconstruction or management of stressed assets. The ARCs in India are in both private & public sectors. Since the ARC mechanism failed to resolve the bad assets acquired from the banks, the GOI was few years back mulling over an idea of forming a Central ARC with equity contribution from GOI & RBI & in fact experts from IMF too were consulted in this regard as to how to set up & operationalise Central ARC . But it seems that the idea did not go any further as the then RBI Governor, Dr. Raghuram Rajan, was averse to such an idea of GOI & RBI contributing to the capital of CARC on the ground “why should taxpayers pay for reckless lending by banks in the past”, fearing thus, “moral hazard” in the process of execution of such an idea.

Then, in Budget Session of 2016-17, the Indian FM assured of easing the provisions of the SARFEASI Act with respect to equity holding in ARC by its sponsor to 100% contribution from existing 50% limit whileas the remaining 50% is to be held by individuals. In this sense, the ARCs would become 100% subsidiaries of their sponsors.  In that budget speech, it was said that non-institutional investors including foreign investors would also be allowed to invest in the security receipts issued by the ARCs.

The Amendment Act No.44 of 2016 has made sweeping changes in several provisions of the Act following the above budget speech of FM of India. The amended Act has provided for exemption of stamp duty on assignment/sale of stressed assets to the ARCs by the banks. But the problem does not end there. There are several other issues faced by ARCs in India. The banks are not willing to sell their bad assets at such huge discounts as generally required by the ARCs at such a low valuation as 50% of the stressed asset.  

In the light of foregoing discussion, the following points need a thorough consideration & answer before thinking about setting up of State level ARC. First, who will provide capital for floating a State ARC, the State Government alone or State Government with one or more banks operating in JK? Second, whether all banks or only one or two banks will contribute to the equity? Third, whether “moral hazard” factor, in the words of ex-RBI Governor won’t come in picture if State & some other bank/s contribute in this direction? Four, while acquiring a bad loan, sale price from the ARC usually comes in the shape of security receipts /bonds/debentures, and not cash. If so, won’t it be simply a shadow change in balance sheet of banks from loans & advances to investment column, and who will subscribe to those security receipts, the banks themselves or institutional or non institutional buyers? Fifth, is the proposed State ARC going to be vested with the power of acquiring loan asset together with underlying mortgage security simply for selling the property for recovery of debt? If so, who will decide the cost of the loan asset assigned to the ARC? Sixth, since the loan asset will be acquired at a discount, it means that the discount will be business profit of the sponsor of ARC: be that State alone or together with some other bank/s. Seventh, assignment of stressed assets to ARC is an “option” available to the banks & other secured creditors under the SARFAESI Law. It is not compulsory for the secured creditors as they are fee to enforce their securities at their own without intervention or engagement of outside agencies like ARCs. But it seems that it will be “compulsory” for the banks in JK to transfer their stressed assets along with underlying securities to the proposed State ARC. But for that the State needs legislation or amendment to some State law to bind the banks. Is it possible to pass such legislation/amendment when it will plainly fall within the domain of “banking” which is not within the legislative competence of the State?

Viewed from the angle of the discussion made hereinabove, the proposed State ARC will be strange type of ARC unknown to Indian banking & financial sectors. It will be better to call it Property Selling Agency but, to remember, if it is named & registered as ARC, it will be governed by the provisions of the SARFAESI Act, 2002 & the RBI guidelines.

As is apparent from the discussion above, the proposal to establish State level ARC is fraught with host of intricate problems to some of which I have drawn attention.  For these reasons, it is my humble view, the proposal is not a viable solution to the problem faced by JK in the light of the SARFAESI Act & consequential effects of the Supreme Court decision at hand.  The solution lies in humble suggestions made in my column cited above.

(Note: The views expressed in this article are very personal of the author & not of the organisation he works for)


One comment on “SARFAESI Act issue – Responding to Readers

  • January 8, 2017 at 6:33 am

    I completely agree to the author that “””’It will be better to call it Property Selling Agency but, to remember, if it is named & registered as ARC, it will be governed by the provisions of the SARFAESI Act, 2002 & the RBI guidelines.”””

    I have had number of discussions with the present Finance Minister when he was the economic advisor and then Chairman J&K bank and in my experience of suffering because of the situation in Kashmir in both 1990’s and subsequently and what i have seen in Malaysia when there were mass NPA’S in the corporates in Malaysia when its Prime Minister Mahathir Mohamad had confrontation with USA and the ringit overnight lost its value and almost all big companies lost so much money that they not only became bankrupt but the banks who had lent to them became bankrupt.

    I had suggested through KCCI the same model by which Malaysia tackled the problem

    1)Declare the unit /business sick as per the prevalent policy of the state.
    2)Let the unit holder give a revival plan with requirement of new capital.
    3)Based on above the state give soft loan on no interest or low percentage with new repayment period provided the unit is viable.

    We have to understand that in Kashmir particularly the NPA’S is because of the ongoing conflict and is the reason that there is no conflict insurance or Investment insurance which now all trade bodies have also demanded which has been demanded by KCCI from 2003.

    The asset reconstruction company idea came from the same idea of a company KHAZANAH created in Malaysia when the problem came as described by me above. KHAZANAH had the difference that the previous management from which the asset was taken was a part of revival and the units were nurtured back to health and either the previous owners took them back or were sold to new businessmen.

    DR Mubeen Shah
    Past President
    Kashmir Chamber of Commerce & Industry


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