Introduction Constitution of Working Group Based on the recommendations of Joint Parliamentary Committee (JPC) the Reserve Bank of India

advised the Indian Banks Association to set up a Workin !roup to revie" and su est chan es in the la"s relatin to creation# enforcement and re istration of $ecurity Accordin ly# "ith the approval of the &ana in Committee# the IBA# in !roup under the Chairmanship of ,r% Anil Interest%

'cto(er )**+# formed a Workin

-handel"al# the then ./ecutive ,irector of Bank of Baroda and presently# Chairman 0 &ana in ,irector of ,ena Bank to address the issues% 1he Workin !roup comprised the follo"in mem(ers2 3% $hri ! & Ramamurthy ./ecutive ,irector Industrial ,evelopment Bank of India 4imited $hri $ C !upta 4e al Advisor Reserver Bank of India $hri $ - $inha !eneral &ana er 0 Advisor (4a") $tate Bank of India $hri - Prasad !eneral &ana er (,B$# 6I,) Reserve Bank of India $hri R 8 Pradeep !eneral &ana er (4a") Bank of India $hri & 1 :deshi ,eputy !eneral &ana er (4a") Bank of Baroda $hri $ <is"anathan Asst% !eneral &ana er (4a") Pun=a( 8ational Bank $hri < - !upta Asst% !eneral &ana er (4e al) ,ena Bank $hri $udhir Jha Chief &ana er (4a") ICICI Bank 4td% $hri & R :mar=i @ Convenor

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Chief Advisor (4e al) Indian Banks Association

Terms of Reference for the Working Group were: 3% 1o revie" the various methods of creation of security interest presently availa(le under different statutes and the ri hts of secured creditors vis@avis other creditors# (oth secured and unsecured# su est measures# includin le islative amendments# to create security interest "ithout any defect% )% 1o revie" the present re istration reAuirements and pu(licity aspects relatin to various types of security interest# (oth under the $AR6A.$I Act and other statutes and su est measures for developin comprehensive re istration mechanism providin sufficient pu(licity and pu(lic access% +% 1o e/amine the mechanism for enforcement of security interest provided in the $ecuritisation and Reconstruction of 6inancial Assets and .nforcement of $ecurity Interest Act# )**) ($AR6A.$I) to su stren then the enforcement of mechanism% 5% 1o e/amine the priority rule amon st the various claimants upon the property "here security interest is created and measures to perfect the ri hts of secured creditors under $AR6A.$I Act vis@a@vis other secured creditors% 7% 1o su est measures for protectin the ri hts of secured creditors under est further measures to

$AR6A.$I Act "hen the o"ner is under insolvencyB"indin up "ith reference to $ICABPart <IA of the Companies Act% 9% ;% 1o su est measures for enhancin the value and accepta(ility of the collateral And 1o e/amine any other issues

Meetings of the Working Group 1he Workin !roup held seven meetin s for discussin the issues and finalisin the report% At the first meetin of the Workin !roup held on )* th 8ovem(er )**+# t"o $u(@!roups "ere formedC one $u(@!roup to deal "ith issues relatin to mova(le properties and another $u(@!roup to deal "ith issues relatin to immova(le properties% 1he first $u(@ !roup consisted to $hri & 1 :deshi as Convenor and $hri < - !upta and $hri $udhir Jha as mem(ers% 1he second $u(@!roup consisted to $hri ! & Ramamurthy as Convenor "ith $hri $ - $inha and $hri $ <is"anathan as mem(ers% 1he Workin !roup prepared a Auestionnaire and the same "as circulated (y the IBA to the (anks# academicians and professionals# seekin feed(ack from them%

At the second meetin the Workin !roup%

of the Workin !roup held on )) nd April )**5 the information

compiled (y the IBA on the feed(ack received from (anks and others "as deli(erated (y

1hereafter# the Workin !roup and the Deads of the 4e al ,epartments of the (anks met on 7th &ay )**5 and discussed several issues relatin to security la"s in India% Both the $u(@!roups held separate meetin s on 9 th &ay )**5 and discussed the (road contours of the report% 1he fifth meetin of the Workin !roup "as held on )> th &ay )**5 in the IBA 'ffice at &um(ai% At this meetin # (oth the $u(@!roups made presentation of the draft reports% 1he mem(ers deli(erated and su ested modificationsBchan es to the draft reports%

At the si/th meetin held on )+rd July )**5# the draft reports "ere further deli(erated and the $u(@!roups su(mitted their respective reports% 1he reports of (oth the $u(@!roups "ere taken up for deli(erations at the meetin of the Workin !roup held on +*th Au ust )**5% 1hereafter# the Workin !roup su(mitted its Report to the IBA% EEEE

Acknowledgements 1he &em(ers of the Workin !roup are thankful to the IBA for settin up the !roup "hich ave them an opportunity to deli(erate on vital issues relatin to security la"s in India and make recommendations% 1he !roup is also thankful to the &em(er Banks of IBA and others for their valua(le feed(ack "hich facilitated deli(erations of the meetin s% 1he mem(ers of the Workin !roup are thankful to $hri & R :mar=i# Chief Advisor (4e al)# IBA and Convenor of the Workin !roup for his painstakin task in oin throu h the draft report of the Workin !roup and crystalliFin the same% EEEE

Background of E isting !aw

1he commercial la"s in India "ere enacted in late nineteenth century and althou h they have stood the test of time and formed the foundation of commercial la" in India# no ma=or chan es in such la"s have (een made to meet the demands of lo(alisation and market@oriented economy% 1here is a need to modify our commercial la"s to reduce the le al (arriers faced (y individuals operatin in the market on their o"n terms to produce "ealth% In this connection# the !roup noted the vie"s of the $upreme Court e/pressed in the case of &ardia Chemicals 4td% <s% :nion of India and 'thers% (AIR )**5 $upreme Court )+;3)% 1he Don(le $upreme Court in its =ud ement "hile e/aminin the provisions of 1ransfer of Property Act as contained in section 7> 0 9? had reco niFed the situation "hich has under one a chan e "hen the Act "as enacted and "hich prevails today (y makin o(servations (in para 5+) as under2 "The position as pre#ailed in $%%& when the Transfer of 'ropert( Act was enacted has undergone a sea)change* What was concei#ed correct in the situation then pre#ailing ma( not +e so in the present da( situation* ,unctions of different institutions including the +anking and financial institutions ha#e changed and new functions ha#e +een introduced for financing the industries- etc* .ew economic and fiscal en#ironment is around more than $// (ears later after the enactment of the Transfer of 'ropert( Act* In this connection it has +een pointed out on +ehalf of the respondents that Ra0amannar Committee was appointed +( Go#ernment of India which su+mitted its report in $122 indicating the effect of the changed situation and the rele#ance of the pro#isions of the Transfer of 'ropert( Act in conte t thereof*3 1he Don(le $upreme Court also referred to Ra=amannar Committee Report# Auoted in the 8arasimham Committee Report# 3??># "hich reads as under2 "Economic conditions ha#e #astl( changed since the enactment of the Transfer of 'ropert( Act in $%%&* The role of the unscrupulous mone( lenders dominating in the field of credit is no longer #alidwithout reliance on institutionali4ation of credit- the +anks and another ,inancial Institutions are the ma0or mone(lenders of credit toda(* In their dealings with their mortgagors- it is anachronistic to assume that the( will adopt the unscrupulous mone(lenders*3 In fact# in e/tendin credit# the necessity for suita(le safe uards to (anks and other financial institutions is no" ri htly stressed% It is understanda(le that the le al frame"ork essentially is conceived to deal "ith unscrupulous moneylenders is no lon er appropriate to deal "ith credit iven (y (anks and other financial institutions% as

1he !roup noted that the :nited 8ations Commission on International 1rade 4a" (:8CI1RA4) has set up a Workin !roup <I for preparin a le islative uide on model security interest la"% 1he Workin !roup has held si/ sessions so far and $hri &%R% :mar=i# Chief Advisor (4e al)# Indian Banks Association# "ho is associated "ith :8CI1RA4 "ork# (riefed the !roup a(out the proposed recommendations of :8CI1RA4 "hich are e/pected to (e finaliFed (y $eptem(er )**7% 1he !roup also noted that :8CI1RA4 has prepared a Convention on Assi nment of Receiva(les "hich needs to (e considered "hile revie"in security 4a"s in India% &*$* This report consists of following parts: a5 6tud( of the present commercial laws in India and list of #arious shortcomings which need to +e addressed* +5 6uggestions for reforms either +( amendment of present law +( new legislation* c5 6uggestions for reforms in certain related laws for simplification of process of creation of securit( interest and its enforcement* d5 6ummar( of recommendations* 7*$* !aws relating to Transfer of Immo#a+le 'ropert( a) 1he 1ransfer of 'ropert( Act (1P Act)# 3>>) does not reco niFe the concept of o"nership ri hts in a portion of a multi@storeyed (uildin "hether residential or commercial% ConseAuently# it is difficult for a person o"nin such property to raise a loan a ainst the security of such property% In some $tates like &aharashtra# the structure of co@operative societies is (ein used for =oint o"nership of land and common amenities provided in a multi@ storeyed (uildin alon "ith individual o"nership ri hts in the apartments% In addition to this structure# Apartment '"nership Acts have (een enacted in some $tates for the purpose of clearly definin ri hts in apartments (ut there is a need for uniform Central 4a" in this respect# for the purpose of reco niFin o"nership ri hts in a portion of a (uildin Bstructure constructed on land# "hether used for residential# commercial or industrial purpose% () $ection 9? of the 1P Act provides for enforcement of the mort a e "ithout the intervention of the Courts (y an .n lish mort a ee% 1his provision does not apply to a Dindu# &ohammedan or a Buddhist or a mem(er of any other race# sect# tri(e or class from time to time specified in this (ehalf (y the $tate !overnment in the 'fficial !aFette% c) 1he 1P Act provides for a mort a e (y deposit of title deeds "ithout recordin any "ritin and "ithout any reAuirement of re istration% But such mort a e

can (e created only at Presidency 1o"ns of -olkata# Chennai and &um(ai and such other to"ns as may (e notified (y the $tate !overnments% d) 1here is no clear provision in re ard to treatment of machineries em(edded in land as immova(le or mova(le property% e) 1he 1P Act contains provisions relatin to transfer of actiona(le claims% 1he definition of actiona(le claim in section + does not include a receiva(le "hich is secured (y any security of pled e# hypothecation or mort a e% As a result# there is no specific statutory provision for transfer of a receiva(le "hich is secured (y any security% 6urther# there is no clear provision for transfer of future receiva(les% 7*&* Registration Act 1he Re istration Act contains provisions for the purpose of maintainin land records Re istry and re istration of all transactions relatin to immova(le properties% Do"ever# the la" does not provide for issue of title certificates (y the re istration authorities and the documents re istered are sale deeds# mort a e deeds and lease deeds and similar other documents creatin or transferrin any interest in an immova(le property% $ince there is no system of issue of title certificate for the property o"ned (y any person# it is difficult to offer such property as a security# particularly in cases "here it is ancestral property occupied (y the o"ners and they do not hold any sale deeds or any other document evidencin title% 1here are many cases "here a person derives his title to property (y succession or partition% 1here is further difficulty in rural areas "here house properties located in a villa e are collectively kno"n (y the particular villa e name and are abadi lands "ithout any specific title certificate in favour of occupant of any portion of the land% +%+% Indian 6uccession Act 1he la" relatin to succession to property "hether testate or non@testate is not clear on account of multiple personal la"s overnin succession% :nder the Indian $uccession Act# 3?)7 a succession certificate is issued only in cases# "here the claim pertains to de(ts# shares and securities% Where the assets are in the nature of other properties and valua(les# succession certificate cannot (e issued% Where the deceased has left a Will# it is not compulsorily reAuired to (e pro(ated# in some $tates% 1here is no uniform system for rant of heirship certificate or le al representation or succession certificate (y any authority constituted under statutory provisions%

+%5%

Indian Contract Act- $%2& 1he Contract Act contains provisions in $ection 3;)@3;9 re ardin possessory securities% But there is no provision in the Act in re ard to non@possessory securities such as hypothecation% 1he la" relatin to non@possessory securities is therefore covered (y the eneral principles of the contract and the decisions of the Courts from time to time% 1here are conflictin =ud ements on the ri hts of hypothecatee% 'ne vie" is that a hypothecatee can take possession and sell hypothecated asset privately (Chiran ilal <s% $BI (3??5) >* Company Cases 7+;(&P)% 1he other vie" is that the clause in hypothecation a reement empo"erin hypothecatee to take forci(le possession is void% (1arun Bhar ava <s% $tate of Daryana AIR )**+ P0D?>)% While the conflict is resolved (y conferrin po"ers of enforcement on (anks and financial institutions under the $AR6A.$I Act# there is a need to make a statute in re ard to non@possessory securities%

7*8*

6tamp 9ut( !aws 1he scheme of stamp duty la"s under the Constitution of India provides for po"ers of the $tate !overnments to prescri(e the rates of stamp duty in respect of most of the documents relatin to transfer or creation of interest in property# (oth mova(le and immova(le% As a result# there are multiple stamp duty la"s enacted (y each $tate applica(le in respective $tates% $uch multiple la"s and the multiple rates of stamp duty have (ecome an impediment in the ro"th and development of ne" financial instruments havin a character of transfera(ility any"here in India% :nder the provisions of the Constitution# ne otia(le instruments# share transfer# insurance policies# letters of credit# receipts etc% that have a characteristic of transfera(ility any"here in India# are "ithin the le islative competence of :nion of India% But there is no provision in terms of "hich it is possi(le to include any ne" instrument introduced in the financial market to (e iven a characteristic of ne otia(ility or transfera(ility any"here in India and provide a stamp duty for the same (y :nion of India to ensure uniformity of stamp duty rates in the country%

7*:*$* Recognition of rights of secured creditors a) As a le al principle# a secured creditor has priority over all other creditors and claimants and for recovery of secured loan he has the ri ht to enforce the securities and realiFe the secured loan% In the event of insolvency or "indin up proceedin s a ainst the (orro"er# the secured creditor has a ri ht to remain outside such proceedin s and enforce the securities% reco nised (y various statutes as under2 i5 6ection 8&1 ; 8&1A of the Companies Act- $18: 1hese principles are

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ii5 iii5 i#5 #5

6u+)section <:5 of section &% of the 'ro#incial Insol#enc( Act- $1&/ 6ection =2 of the 'ro#incial Insol#enc( Act- $1&/ 'ro#iso to section =2 of the 'residenc( Towns Insol#enc( Act- $1/1 6ection $:1<$5 of the Maharashtra !and Re#enue Code- $1:: <a 6tate law recogni4ing the principle of priorit(5*

() 1here are e/ceptions to a(ove principle created (y statute% If there is a statutory provision ivin priority to arrears of ta/ over all creditors includin secured creditors# such statutory ri hts prevail over the ri hts of secured creditors% $ome $tates have afforded priority to sales ta/ dues (y makin specific provision in the sales ta/ Acts% 1he $upreme Court has also held such statutory provisions as valid in follo"in cases2 i5 6tate Bank of Bikaner ; >aipur #s .ational Iron ; 6teel Rolling Corporation <$1185 & 6CC $1 ii5 9ena Bank #s Bhika+hai 'ra+hudas 'arekh ; Co* <&///5 8 6CC :1= c) In vie" of the enactment of special la"s (y the $tate ivin priority to the dues

of arrears of ta/ over security interest created# the ri hts of the secured creditors have (een eroded and diluted% It is not clear "hether the $tate la"s ivin priority to ta/ dues over secured creditors have (een enacted after o(tainin Presidents assent and are valid la"s under Article )75 of the Constitution inspite of the inconsistency "ith Central 4a"% 1he a(ove issue "as not raised (efore the $upreme Court and it has (een held that such la"s are constitutionally valid% Possi(ility of more such enactments (y the other $tate !overnment cannot (e ruled out and therefore# uncertainty prevails in re ard to ri hts of secured creditors% 1his aspect may have to (e (orne in mind "hile introducin <A1 system and replacin sales ta/ la"s% 7*:*&* The 6ecuritisation ; Reconstruction of ,inancial Assets and Enforcement of 6ecurit( Interest Act- <6AR,AE6I5 &//& 1he $AR6A.$I Act# for the first time reco niFes the concept of comprehensive security interest su(=ect to certain modifications as under2 a% 1he concept that any security created to secure due repayment of a loan shall (e treated as a security interest and shall (e enforcea(le "ithout the intervention of the court in the event of default# has (een duly incorporated in the $AR6A.$I Act% (% 1he concept of security interest under the $AR6.A$I Act includes a char e on or mort a e of immova(le property also%

c% 1itle retention contracts such as hire@purchase and lease are e/cluded from the concept of security interest% d% 1he concept of security interest has (een made applica(le only to the (anks and financial institutions and the la" has no universal application unlike possessory security re ime contained in the Indian Contract Act# 3>;)% e% Althou h a po"er to set up a Central Re istry has (een provided in the $AR6A.$I Act# the system of comprehensive security interest is introduced "ithout settin up the Central Re istry and the system operates on the (asis of the e/istin asset specific re istration systems operatin under various la"s% f% Althou h the Act provides for securitisation of financial assets on account of reAuirement of capital of Rs%3** crores or capital adeAuacy of 37G# no securitisation transaction are (ein undertaken under the provisions of $AR6A.$I Act% 6urther# securitisation of financial assets other than financial assets of (anks and financial institutions is not permissi(le under the Act% =*$* ?ire)purchase and financial lease transactions 1here is no statutory provision coverin hire@purchase and lease of mova(les% 1he Dire Purchase Act# 3?;) has so far# not (een (rou ht into force% As a result# the transactions of hire@purchase and lease of mova(les are overned (y the provisions of the Indian Contract Act# 3>;)% 6or the purpose of $ales 1a/# (y the Constitution (59 th Amendment) Act# 3?>)# clause )?A "as added in article +99 of the Constitution providin that a ta/ on the sale or purchase of oods inter@alia includes# a ta/ on the delivery of oods on hire)purchase and an( s(stem of pa(ment +( instalments* 6urther# the Institute of Chartered Accountants of India has provided accountin norms for lease and hire@purchase transactions in terms of "hich any asset iven on hire or lease is treated as an asset (elon in to the hirer or lessee and it is permissi(le for such hirer or lessee to claim depreciation in respect of such asset% 1he Income 1a/ Act# on the other hand# permits such depreciation to (e claimed (y the o"ner of the asset or lessor% $ince there are no specific statutory provisions# the contracts of hire@purchase and lease are treated as title retention contracts ena(lin the o"ner of the asset iven on hire and the lessor to take possession of the asset in the event of default and there(y ivin a super priority to such persons over secured creditors% 1he a(sence of la" in this area also adversely affects the interests of the consumer (ecause there is no specific reAuirement to ive credit for the instalment already paid (y such consumer "hen the asset is seiFed for default and sold and pay the surplus to the (orro"er% Conversely there is no provision for recovery of shortfall if the o"ner or lessor is una(le to realiFe the (alance value in full on sale of the asset%

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8*$*

@.CITRA! Work on 6ecurit( Interest !aw It is clear from the a(ove discussion that there is no sin le uniform la" in India "hich deals "ith creation# re istration# priority and enforcement of securities over property% $uch la" has (een enacted in the :nited $tates of America and the same is contained in Article ? of the :niform Commercial Code% 6urther# :nited 8ations Commission on International 1rade 4a" (:8CI1RA4) Workin !roup <I ($ecurity Interest) is preparin a le islative !uide for a &odel 4a" of security interest% $o far the said Workin !roup has held si/ sessions and drafts of le islative !uide have (een prepared (y the Workin !roup% It "ould (e "orth"hile referrin to the o(=ectives of :8CI1RA4 Workin !roup and the contents of the le islative !uide proposed to (e recommended to the mem(er countries of the :nited 8ations# (efore "e consider chan es in our le al system in re ard to secured transactions la"% -ey o(=ective of security transactions le islative !uide proposed to (e recommended are as under2 (a) Promote secured creditC (() Allo" a (road array of (usinesses to utiliFe the full value inherent in their assets to o(tain credit in a (road array of credit transactionsC (c) '(tain security ri hts in a simple and efficient mannerC (d) Reco niFe party autonomyC (e) Provide for eAual treatment of creditorsC (f) <alidate non@possessory security ri htsC ( ) .ncoura e responsi(le (ehaviour (y enhancin predicta(ility and transparencyC (h) .sta(lish clear and predicta(le priority rulesC (i) 6acilitate enforcement of creditors ri hts in a predicta(le and efficient mannerC (=) Balance the interests of the affected personsC (k) DarmoniFe secured transactions la"s%

8*&*$* With the enactment of $ecuritisation and Reconstruction of 6inancial Assets and .nforcement of $ecurity Interest Act# )**) ($AR6A.$I Act) certain key o(=ectives contained in draft recommendations of :8CI1RA4 have (een implemented in India% 1he chan es introduced (y the $AR6A.$I Act in the la" relatin to creation and enforcement of security over property are as under2 6inancial assets are made freely assi na(le not"ithstandin contained in any la" or any a reement ($ection 7) anythin

$ecurity interest is defined in eneric term ivin effect to su(stance over form to a limited e/tent Po"ers of enforcement of security interest have (een iven to the (anks and financial institutions ,efinition of property is made "ide to cover variety of property ri hts

33

$ince the e/istin la" in India does not permit enforcement of mort a es of immova(le properties# the same are also included in the definition of security interest "ith po"er of enforcement "ithout the intervention of the Courts%

8*&*&* Althou h the ne" concepts have (een introduced (y the $AR6A.$I Act# the focus of that Act is in re ard to ivin po"ers to the (anks and financial institutions to enforce security interests% 1he $AR6A.$I Act does not address issues of creation of security interest# re istration of such security interest and rules of priorities amon st different parties holdin security interest and other claimants% It is therefore necessary to make chan es in our e/istin la"s to cover a(ove aspects of secured transactions% :*$* A+0ecti#es of secured transactions law If "e look at the key o(=ective of a secured transaction la" it is necessary to allo" a (road array of (usinesses to utiliFe the full value inherent in assets to o(tain credit in a (road array of credit transactions% 6or the purpose of achievin this o(=ect it is necessary to clearly define the concept of property% :*&* 9efinition of 'ropert( 1he e/pression HpropertyI is defined in various la"s in India# the latest (ein section )(3)(t) of the $AR6A.$I Act "hich defines property as under2 HpropertyI means J (i)immova(le propertyC (ii) mova(le property (iii) any de(t or any ri ht to receive payment of money "hether secured or unsecured (iv) receiva(les# "hether e/istin or future (v) intan i(le assets# (ein kno"@ho"# patent# copyri ht# trade mark# licence# franchise or any other (usiness or commercial ri ht of similar nature% While the a(ove definition makes the concept of property very "ide# facilitatin creation of security interest over such property# the various types of mova(le properties are not specifically covered (y the definition% It is true that (y usin the e/pression Hmova(le propertyI in the definition of property# any asset "hich is mova(le "ill (e covered (y the definition (ut for the purpose of clearly definin the ri hts and o(li ations conseAuent upon creation of security over such property it needs to (e considered "hether the definition of property should (e made more specific (y classifyin mova(les as under2 (a) (() (c) Intan i(le property Investment property Inventory

3)

(d) (e) (f) ( ) (h) (i) (=) (k)

KConsumer oods A ricultural produce Receiva(les .Auipments and &achinery 6i/ed Assets ,ocument of 1itle to !oods Consumer !oods Certificate of 1itle ested a(ove# it "ill

If the cate oriFation of various mova(le properties is done as su facilitate makin

provision for ri hts and o(li ations of different parties havin

interest in such properties% $uch cate oriFation "ould also facilitate re istration of interest in such properties (y providin a suita(le re istration system so that persons dealin "ith such properties "ould (e in a position to ascertain any encum(rances that may (e e/istin on such properties% By e/emptin consumer oods from re istration reAuirement it "ill (e possi(le to permit free sale of consumer oods "ithout verification of re istration% The Group is of the #iew that for ha#ing an effecti#e registration s(stem a detailed categor( wise definition of propert( ma( ha#e to +e introduced in our law- as under: <a5 Intangi+le propert(- +eing know)how- patent- cop(right- trade)mark+rands- goodwill- licence- franchise or an( other +usiness- commercial or personal right of similar nature*

<+5 In#estment propert(: In this categor( of propert( in#estments such as share certificates- units of mutual funds- de+entures- +ondsgo#ernment securities including Bisan Cikas 'atra- Indira Cikas 'atra- etc* which represent the #alue of the in#estment made +( a person should +e treated as in#estment propert(* 6uch in#estment propert( would also include all securities as defined under the 6ecurities Contracts Regulation Act- $18:* <c5 In#entor(: As goods held +( a person for sale or lease or to +e furnished under contract of ser#ice or consists of raw materials- semi) finished goods- work in process or finished goods or materials used or consumed in a +usiness*

<d5 DConsumer goodsE means goods that are used or +ought for use primaril( for personal famil( or household purposes* <e5 Agricultural produce or commodities including products of dair(animal hus+andr(- aFuaculture- horticulture- floriculture- other plantations and other farm products* Recei#a+les: As a right to pa(ment of a monetar( o+ligation for an( sale- assignment or lease of goods or ser#ices* 6uch definition of recei#a+le should e clude rights to pa(ment e#idenced +( an( +ill of e change or other instruments- deposit accounts- in#estment propert(*

<f5

3+

<g5

EFuipments and Machiner(: As goods other than in#entor( or fi ed assets*

<h5 ,i ed Assets: As goods that ha#e +ecome so related to or part of the land that an interest in such fi ed assets arises out of the right to the land* <i5 9ocument of Title to Goods: This e pression is defined +( section &<=5 of 6ale of Goods Act- $17/* But there is a need to pro#ide a legal framework for negotia+ilit( of such documents of title and a s(stem for gradation and #aluation of the goods represented +( such documents of title* The s(stem needs to +e de#ised to facilitate trade in commodities +( dealing with the documents of title to such commodities* Certificate of Title: As a certificate of title meaning a certificate with respect to which an( law pro#ides for recording the securit( interest for the propert( co#ered +( such certificate of title <for e*g*registration certificate of motor #ehicle issued under the Motor Cehicles Act5*

<05

2*$*$* 6ecurit( Interests Davin considered the cate oriFation of mova(le properties into different specific types of properties the Workin !roup considered various kinds of security interests that can (e created over the mova(le properties% Broadly such security interests are divided into t"o parts as under2 <i5 <ii5 'ossessor( 6ecurities .on)'ossessor( 6ecurities

:nder the Indian la" possessory security is covered (y statute (ut there are no provisions in re ard to non@possessory securities e/cept the recently enacted $AR6A.$I Act% 2*$*&* 'ossessor( 6ecurities: $ections 3;)@3;9 of the Indian Contract Act# 3>;) contains provisions for pa"n or pled e of mova(les and ri hts of the lender a ainst such security are laid do"n (y the Act# "hich can (e e/ercised "ithout the intervention of the Courts% 1his provision is in operation for more than hundred years and there is no need to distur( the settled la" in this respect% Do"ever# in re ard to specific assets that can (e iven in pled e# there is a need to consider certain chan es in the e/istin le al provisions% 1here is e/tensive lendin no (ankin activity a ainst the security of shares of listed pu(lic limited companies and under $ection 3?()) of the Bankin Re ulation Act# it is provided that company shall hold shares in any company "hether as pled ee# mort a ee or a(solute o"ner of an amount e/ceedin +*G of the paid@up capital of that company or +*G of its o"n paid@up capital and reserves# "hichever is less% 1he

35

shares of any company are taken as security (y the (anks and financial institutions in follo"in cases2 i) 'verdraft facility a ainst listed and approved shares of any pu(lic limited company% ii) Pled e of shares of listed companies as an additional or collateral security for a loan or overdraft iven a ainst some other prime security% iii) Pled e of promoters shares in cases of pro=ect finance "here the loans and advances are secured (y a char e over the entire (lock of assets of the (orro"er and the pled e of shares is taken (y the (ank to ensure that the promoter continues to (e involved in the pro=ect and does not transfer his interest "ithout the consent or kno"led e of the (ank% $uch a pled e also ena(les the lender to sell or dispose off the securities alon "ith mana ement of the company (y e/ercisin the ri hts as a pled ee althou h in practice such ri hts are rarely e/ercised% While the reAuirement of the provisions of $ection 3? placin a ceilin of +*G of the share capital of the company may (e =ustified in respect of loans referred to at su(@ paras (i) 0 (ii) a(ove# there is no =ustification for placin that restriction in respect of pled e of promoters share holdin "ith the lender% 6urther# in terms of the RBI instructions# it is necessary that the (ank holdin shares as a pled ee or mort a ee must et such shares transferred in its o"n name (refer to RBI circular no%,B',%BC%?*B3+%*;%*7B?> dated )>th Au ust# 3??>)% 1his means that promoters shares in e/cess of +*G cannot (e accepted in pled e% 6urther# "here the (ank takes promoters share holdin in pled e# if such shares are transferred in the name of the (ank# the effect "ill (e that the (ank itself "ill (ecome the promoter and may have to face various lia(ilities as the o"ner of the company% environmental or other statutory lia(ilities relatin $uch lia(ility may (e to la(our dues# "orkmen

compensation etc% 1his particular aspect of takin promoters shares as a pled e (y the (anks has arisen for consideration (ecause the provisions of $ection 3?()) of Bankin Re ulation Act do not apply to financial institutions and the practice of takin pled e of shares is prevalent amon the development financial institutions and the (anks "ere only participatin as a consortium mem(er in the term lendin % With the development of the concept of universal (ankin and (anks entry into the field of term lendin on a very lar e scale# it "ill (ecome necessary for the (anks also to take pled e of promoters shares as a collateral security alon "ith other securities% The Group therefore recommends that restriction on holding of such shares e ceeding 7/G +e withdrawn in respect of pledge of promoters shares and dispense with the reFuirement of transfer of such shares in the name of the +ank*

37

2*$*7*

Warehouse Receipts In the past fe" years there has (een a consistent ro"th in lendin a ainst a ricultural commodities% 6or the purpose of protectin the interest of the lenders as also the farmers "ho need to realiFe the (est price for the produce# it is essential to devise a system for stora e of commodities in "arehouses# radation and valuation of the commodities and issue of "arehouse receipt certifyin the Auality and Auantity of the commodity stored in the "arehouse and finally makin such "arehouse receipts a ne otia(le document% :nder the provisions of section )(5) of $ale of !oods Act# 3?+*# definition of Kdocuments of title to of title2 (i) use in the ordinary course of (usiness as proof of the possession or control of the oods and (ii) authority to possessor of the document of title to transfer or receive oods represented (y the document either (y endorsement or delivery% Do"ever# there is a need to make a separate le islation for the purpose of makin "arehouse receipts a ne otia(le instrument and devisin a system for certification of the Auality and Auantity of commodities stored in "arehouses% It is true that a "arehouse receipt does not strictly conform to the definition of ne otia(le instrument contained in the 8e otia(le Instruments Act# 3>>3% But there can (e no le al o(=ection to treat such "arehouse receipts as ne otia(le document (y enactin a special statute for the purpose% oods includes "arehouse keepers certificate% 1he said definition incorporates follo"in characteristics of a document

2*$*7*

Changes recommended in 'ossessor( 6ecurities !aw a5 .o change in e isting law contained in sections $2& to $2: of the Indian Contract Act- $%2&* +5 6uita+le amendments ma( +e made to 6ection $1 of the Banking Regulation Act or an Arder e empting applica+ilit( of 6ection $1<&5 ma( +e issued +( the Central Go#ernment under section 87 of the Banking Regulation Act- in respect of pledge of promoters shares taken as a collateral securit( +( the term)lenders in pro0ect financing acti#it(* c5 A proposal to enact a separate law for the purpose of making warehouse receipts negotia+le instruments is under consideration of the Ministr( of Consumer Affairs- ,ood and 'u+lic 9istri+ution* The Group concurs with the proposal and suggests that necessar( pro#isions for treatment of warehouse receipts as negotia+le instruments ma( +e enacted to facilitate trade in agricultural commodities* E cept the a+o#e suggestions- no other changes are suggested in the e isting law relating to possessor( securities*

39

2*&*$* .on)'ossessor( 6ecurities: 1he non@possessory securities may (e of any of the follo"in kinds2 i5 ?(pothecation ii5 ,loating charge iii5 Transfer of Title as a securit( i#5 Retention of Title :nder our e/istin le al system e/cept the definition of HhypothecationI contained in the $AR6A.$I Act and eAuatin HhypothecationI and Hfloatin char eI (ein 8on@ Possessory $ecurities "ith the concept of security interest as defined under the said Act# there are no other provisions in any other la" in re ard to creation of security of hypothecation# ri hts and o(li ations of hypothecator and hypothecatee and the rules of priority in re ard to various claims on the hypothecated property% $imilarly the concept of floatin char e as reco niFed (y the Companies Act# 3?79 reAuirin that a floatin char e created on the assets of the Company should (e re istered "ith the Re istrar of Companies under section 3)7 of the Companies Act# 3?79% But as far as the ri hts and o(li ations of the char e holders and the company creatin the char e# etc%# are all overned (y the decided cases of the courts and there are no statutory provisions overnin such non@possessory security interest over mova(le property% 2*&*&* @.CITRA! suggestions on .on)'ossessor( 6ecurities In this respect draft recommendations of :8CI1RA4 provide as under2 "'re)default rights and o+ligations of the parties: The purpose of the pro#isions of the law on pre)default rights and o+ligations of the parties is to: <a5 'ro#ide rules on additional terms for a securit( agreement with a #iew to rendering secured transactions more efficient and predicta+leH <+5 Reduce transaction costs +( eliminating the need to negotiate and draft terms to +e included in the securit( agreement where the rules pro#ide an accepta+le +asis for agreementH <c5 Reduce potential disputesH <d5 'ro#ide a drafting aid or check list of issues the parties ma( wish to address at the time of negotiation and conclusion of the securit( agreement- and <e5 Encourage part( autonom(*3 6uppleti#e rules The law should include suppleti#e- non)mandator( rules that would appl( in the a+sence of contrar( agreement of the parties* 6uch rules should- inter alia: <a5 'ro#ide for the care of the encum+ered assets +( either the grantor <+orrower5 or the secured creditor in possession of the encum+ered assets:

3;

<+5 'reser#e the securit( rights- including the right to proceeds or ci#il fruits deri#ed from the encum+ered assetH <c5 'ro#ide for the right to use- commingle and dispose of the encum+ered assets +( the grantor <+orrower5 in the ordinar( course of +usinessH and <d5 6ecure the discharge of a secured o+ligation once it has +een performed* Basic approaches to securit( The purpose of the recommendations on +asic approaches to securit( is to specif( that the law follows a unitar( and functional approach* The law should include a comprehensi#e and consistent set of pro#isions on non)possessor( securit( rights in tangi+les and intangi+les* The law should also pro#ide for possessor( securit( rights in tangi+les* The law should pro#ide that de#ices that perform securit( functions- such as the transfer of title for securit( purposes- andunless otherwise pro#ided in the law- retention of title de#icesincluding conditional sales- financial leases and hire)and)purchase agreements- are to +e treated in the same wa( as secured transactions*

Creation as +etween the parties The purpose of the pro#isions of the law dealing with creation is to specif( the wa( in which a securit( right in mo#a+le propert( is created as +etween the grantor and the secured creditor* The law should specif( that a securit( right is created +( agreement +etween the grantor and the secured creditor* IA creditor ma( retain title to goods to secure pa(ment of the purchase price of the goods or its economic eFui#alent under a conditional sale- financial lease or a hire)purchase agreement as pro#ided in law other than this lawJ* The creation of a possessor( securit( right reFuires- in addition to agreement- the deli#er( of possession of the assets to +e encum+ered to the secured creditor or another third part( who holds the assets on +ehalf of the secured creditor <other than the grantor or an agent or emplo(ee of the grantor5* The law should pro#ide that the securit( agreement must- at a minimum- identif( the secured creditor and the grantor- and reasona+l( descri+e the secured o+ligation and the assets to +e encum+ered* A generic description of the secured o+ligation and the encum+ered assets should +e sufficient*3

3>

2*&*7* Recommendations on law for non)possessor( securities The Indian Contract Act- $%2& alread( contains pro#isions in regard to possessor( securit( interest o#er mo#a+les* ,urther the Indian !aw of Contracts also pro#ides for part( autonom( +ut in the conte t of non) possessor( securit( interests it is necessar( to make statutor( pro#isions for the manner of creation of securit( interest- the rights and o+ligations of the person creating the securit( <grantor5 and the person in whose fa#our such securit( is created <grantee5* 6uch law can pro#ide for the method of creation of securit( interest- +( a written agreement- without an( further act or deed- the rules of priorit( amongst different claimants and the reFuirement of registration of an( securit( interest created for such propert(* 2*&*=* 1he other important issue that "as considered (y the Workin !roup is "hether to include transactions of hire purchase and financial lease as security interest transactions# as proposed to (e recommended (y :8CI1RA4 Workin !roup <I% It is also pertinent to note the la" in :$A in re ard to hire@purchase and lease transactions% :nder the provisions of the :niform Commercial Code the concept of comprehensive security interest has (een introduced# in terms of "hich# any transaction of hire purchase# financial lease or purchase money credit or conditional sale is treated as security interest% (Article 3@)*3(+;) of the :niform Commercial Code of :$A)% 1he (asis for eAuatin financial leases and hire purchase transactions "ith that of the security interest is that in su(stance# such transactions are loan transactions% If "e adopt the same principles and eAuate hire purchase and financial lease transactions "ith security interest# there are advanta es for (oth the parties to such contracts as under2 As far as the consumer# "ho takes any mova(le property on hire or a lease or (y availin loan a ainst hypothecation of asset the form of transaction matters little% But if the transaction is not treated as a security interest the o"ner or lessor of the asset "ho takes possession in the event of default retains the entire sale proceeds% As a result# the consumer "ho has taken the asset on lease or hire loses the (enefit of the money already paid for the asset% As far as lessors and the o"ners of such assets are concerned in the event of default their ri ht is to take possession of the concerned asset and recover the (alance amount paya(le (y the lessee or hirer% $uch o"ner or lessor have no ri ht to claim the shortfall if any# after the asset is sold in the event of default% If the transaction is treated as a security interest in the e/amples iven a(ove# the consumer "ill (e entitled to the surplus and the o"ner of the asset "ill (e entitled to claim shortfall% 'ver and a(ove the reasons stated a(ove# the Workin !roup

3?

noted that at present there is no la" overnin hire purchase transactions and lease of mova(les% All such contracts relatin to hire purchase and lease are at present overned (y the eneral principles of the la" of contract contained in the Indian Contract Act# 3>;)% 2*&*8* Recommendation The Working Group is of the #iew that there is a need to adopt the concept of comprehensi#e securit( interest and include all transactions of financial leasehire purchase- conditional sales and purchase mone( credit as securit( interest +( adding a new chapter in relation to non)possessor( securit( rights o#er mo#a+le properties- in the Indian Contract Act- $%2&* 2*&*:* Effect on .B,C 6ector 1he Workin !roup also noted that the a(ove recommendation involves a chan e in the financial activities of the 8on@Bankin 6inance Companies (8BC6s) "ho are mainly en a ed in the activity of hire purchase and financial lease of mova(les% At present such 8B6Cs are e/ercisin ri hts of o"nership over the assets iven on hire or lease in the event of default for the purpose of realiFation of the (alance amount paya(le (y the lessee or a hirer of the asset% 1he system is operatin satisfactorily and such 8B6Cs are in effect havin ri hts of enforcement "ithout the intervention of the Court% If the recommendation as su ested a(ove (y the Workin !roup is implemented it "ould involve a decision to e/tend the $AR6A.$I Act to 8B6Cs% It needs to (e noted that at present the 8B6Cs are e/ercisin ri hts of takin possession of the assets iven on lease or hire in the event of default in payment of a reed instalments# (y virtue of retention of title to such asset in their favour% If the la" is amended as recommended (y the Workin !roup such 8B6Cs "ill (e e/ercisin same ri hts of takin possession and sellin the assets iven on lease or hire (ut the (asis of such action "ould (e as a secured creditor instead of as a o"ner retainin title to the property% As far as the (orro"ers are concerned# there "ill not (e any chan e in the ri hts availa(le to them and on the contrary such a chan e "ill (e for the (enefit of the consumers% 6urther# the ri hts and o(li ations of the parties "ould (e clearly defined and overned (y statutory provisions% 2*&*2* ?ire)purchase K !ease treated as 6ale As stated in para 5%3 a(ove# for the purpose of sales@ta/# transactions of hire purchase and financial lease are treated as sale of oods and the transaction is made su(=ect to sales@ta/ (y the $tate !overnments% .ven if such transactions are treated as security interest transactions# it "ould (e possi(le to classify such transactions as sales for the purpose of levy of sales@ta/ (y the $tate !overnment on such transactions% .ven in a loan transaction# "here a (ank or a financial institution ives a loan# say for purchase

)*

of a car and o(tains hypothecation of the car in its favour# the (orro"er "ill (e payin sales@ta/ "hen (y usin the loan "ith his o"n mar in# he makes payment for purchase of the car% 'n the same analo y# "hen the lessor or the o"ner of the hire purchase asset pays for the asset# to (e iven on lease or hire# he "ill (e reAuired to pay sales@ta/ on such sale% 1he treatment of hire purchase and lease transaction as sales under the provisions of the Constitution and sales@ta/ la"s of the $tates "ould not# therefore# come in the "ay of treatin such transactions as security interest% 2*7* ,inance against recei#a+les Althou h $ection 3+* of the 1ransfer of Property Act makes provisions for assi nment of actiona(le claims# there are no statutory provisions for the purpose of creation of security interest over receiva(les or for transfer of receiva(les "ith underlyin securities under the e/istin la"% In this respect# the Workin !roup noted that the :nited 8ations Convention on Assi nment of Receiva(les in International 1rade has (een si ned (y five countries in ,ecem(er )**3% 1he o(=ect of the said Convention is to adopt uniform rules overnin the assi nment of receiva(les to promote the availa(ility of capital and credit at (etter and afforda(le rates and thus to facilitate the development of international trade% 1he said Convention incorporates certain principles in re ard to free assi na(ility of receiva(les and other matters to protect the ri hts and o(li ations of de(tors and lenders% $ome of the important principles relatin to assi nment of receiva(les contained in the said :nited 8ations Convention are as under2 i5 An assignment is not ineffecti#e as +etween the assignor and the assignee or as against the de+tor or as against a competing claimantand the right of an assignee ma( not +e denied priorit(- on the ground that it is an assignment of more than one recei#a+le- future recei#a+les or parts of or undi#ided interest in recei#a+les- pro#ided that the recei#a+les are descri+ed: a5 Indi#iduall( as recei#a+les to which the assignment relatesH or +5 In an( other manner- pro#ided that the( can- at the time of the assignment or- in the case of future recei#a+les- at the time of conclusion of the original contract- +e identified as recei#a+les to which the assignment relates* ii5 @nless otherwise agreed- an assignment of one or more future recei#a+les is effecti#e without a new act of transfer +eing reFuired to assign each recei#a+le* iii5 An assignment of a recei#a+le is effecti#e notwithstanding an( agreement +etween the initial or an( su+seFuent assignor and the de+tor or an( su+seFuent assignee limiting in an( wa( the assignorEs right to assign its recei#a+les

)3

i#5 This article applies onl( to assignments of recei#a+les: a5 Arising from an original contract that is a contract for the suppl( or lease of goods or ser#ices other than financial ser#ices- a construction contract or a contract for the sale or lease of real propert(H +5 Arising from an original contract for the sale- lease or licence of industrial or other intellectual propert( or of proprietar( informationH c5 Representing the pa(ment o+ligation for a credit card transactionH or d5 Awed to the assignor upon net settlement of pa(ments due pursuant to a netting agreement in#ol#ing more than two parties* #5 A personal or propert( right securing pa(ment of the assigned recei#a+le is transferred to the assignee without a new act of transfer* If such a right- under the law go#erning it- is transfera+le onl( with a new act of transfer- the assignor is o+liged to transfer such right and an( proceeds to the assignee* #i5 A right securing pa(ment of the assigned recei#a+le is transfera+le notwithstanding an( agreement +etween the assignor and the de+tor or other person granting that right- limiting in an( wa( the assignorEs right to assign the recei#a+le or the right securing pa(ment of the assigned recei#a+le*3 While incorporatin the a(ove principles and other provisions contained in the :nited 8ations Convention# an e/ercise of comparin it "ith our e/istin la" and modifyin the Convention to suit our reAuirements "ill have to (e undertaken# "hich can (e done at the sta e of actual draftin of the Bill for amendments% 1he Workin !roup has# therefore# not undertaken the e/ercise of identifyin specific provisions of the Convention# "hich need to (e incorporated in the proposed amendment to the Contract Act* At the same time- the Working Group is of the #iew that there is a need to make specific pro#isions in our law for assigna+ilit( of all recei#a+les including future recei#a+les and such law can +e +ased on the principles contained in the @nited .ations Con#ention* %*$*$* Registration of Charges: In re ard to the priority (et"een the security interest holders and other claimants# it "ill (e necessary to introduce a system of re istration of char es of mova(le properties% 1he $AR6A.$I Act contemplates settin up of such a Re istry# (ut e/cept char es on mova(les (elon in to companies incorporated under the Companies Act# there is no reAuirement of re istration of char es on mova(les% $uch a re istration system is operated under the Companies Act (y Re istrars of

))

Companies% Insofar as mova(le asset o"ned (y individuals# partnership firms and other non@corporate (orro"ers are concerned# there is no reAuirement of re istration of char es over mova(le properties% 6urther# in respect of certain cate ories of mova(le assets# there are asset specific re istration systems in operation and re istration is reAuired in respect of char es created on such assets irrespective of "hether the asset is held (y a corporate or non@corporate entity% Re istration of motor vehicles is one such cate ory of asset% 1he !roup understands that such re istration systems have (een set up in :$A# Canada# 8e" Lealand and Australia# "hich are operatin on certain modified principles and are totally computeriFed re istries% 1he (road principles applica(le to such re istries are contained in the draft report of :8CI1RA4 Workin !roup as under2 "Effecti#eness as against third parties <A5 The purpose of the pro#isions of the law on the effecti#eness of a securit( right as against third parties is to reFuire an additional step +efore a securit( right ma( +ecome effecti#e as against third parties so as to: <k5 To alert third parties dealing with the mo#a+le assets of the grantor of the risk that those assets ma( +e encum+ered +( a securit( rightH and To pro#ide a temporal e#ent for ordering priorit( among secured creditors and +etween a secured creditor and other classes of competing claimants*

<l5

<B5

The law should pro#ide for the esta+lishment of a general securit( rights registr( ha#ing the following characteristics: <a5 <+5 Registration is effected +( filing a notice of the securit( right as opposed to a cop( of the securit( documentationH The record of the registr( is centrali4edH that is- it contains all notices of securit( rights registered under the secured transactions law of the enacting 6tateH The registration s(stem is set up to permit the inde ing and retrie#al of notices according to the name of the grantor or according to some other relia+le identifier of the grantorH The registr( is open to the pu+licH Reasona+le pu+lic access to the registr( is assured through such measures as: <i5 6etting fees for registration and searching at a cost) reco#er( le#elH and <ii5 Making a#aila+le remote modes or points of accessH The registration s(stem is administered and organi4ed to facilitate efficient registration and searching* In particular:

<c5

<d5 <e5

<f5

)+

<i5

A notice ma( +e registered without #erification or scrutin( of the sufficienc( of its contentH

<ii5 6u+0ect to the financial and infrastructural capacit( of the enacting 6tate- notices are stored in electronic form in a computer data+aseH <iii5 6u+0ect to the financial and infrastructural capacit( of the enacting 6tate- registrants and searchers ha#e electronic access to the registr( record- or telephone or telecop( access- and <g5 The law pro#ides rules on the allocation of lia+ilit( for loss or damage caused +( an error in the administration or operation of the registration and searching s(stem*3

%*$*&*

Amendments to 6AR,AE6I Act for introducing new registration s(stem 1he provisions contained in the $AR6A.$I Act empo"erin the Central !overnment to set up a computeriFed Central Re istry do not provide for operation of the Re istry on the a(ove principles# as stated in :8CI1RA4 recommendation% It may (e necessary to amend the provisions of the $AR6A.$I Act to facilitate settin up a computeriFed Central Re istry on the lines of such re istries operatin in :$A# Canada# 8e" Lealand etc% $ettin up of such a Re istry "ould o a lon "ay in providin a statutory (ackin to the security interest created in favour of the (anks and financial institutions and ena(lin them to claim priority over other claimants "hile enforcin the securities% Introduction of such a re istration system "ould (e conducive to credit ro"th and access to credit "ould (ecome easy resultin in competition amon st lenders and (etter interest rates for the (orro"ers% While considerin amendment to the provisions of the $AR6A.$I Act for the purpose of settin up computeriFed Central Re istry# it may also (e considered "hether mova(le assets need to (e classified into different cate ories to facilitate re istration and access to specific asset@"ise data in the Re istry% The Group- thereforerecommends suita+le amendments to the 6AR,AE6I Act to facilitate setting up of Central Registr(- operating on notice filing and first to file to get priorit( principles* 1he $AR6A.$I Act is applica(le to security interests created in favour of (anks and financial institutions only and the la" does not apply to other lenders such as non@(ankin finance companies% 6urther# the re istration system does not contemplate re istration of attachment of properties or appointment of receivers (y any Court# 1ri(unal or any other authority in e/ercise of statutory po"ers% The Group- therefore- recommends that: a5 pro#isions relating to Central Registr( should +e made applica+le to all charges created on the mo#a+le propert( and

)5

+5

registration s(stem should +e e tended to an( orders of attachment of properties pursuant to ordersKdecrees of an( Court or Tri+unal or an( other competent authorit( empowered to issue such attachment orders*

%*$*7*

Ather amendments to 6AR,AE6I Act As stated in clause (f) of para +%9%) of this report# no securitisation transactions are (ein undertaken under the $AR6A.$I Act% 1he !roup is of the vie" that there is a need to se re ate securitisation of standard assets from the $AR6A.$I Act and enact separate independent le islation for securitisation of financial assets as recommended (y the Andhyaru=ina Committee% $uch a la" can provide separate re ulatory $uch frame"ork for securitisation transaction for the purpose of protection of investors "ho invest in de(t instruments issued under securitisation schemes% transactions may not (e matter for concern for the Reserve Bank if there is a true sale of assets of the (anks% The Group- therefore- recommends a separate enactment for securitisation transactions which should encompass securitisation of all financial assets and recei#a+les and not onl( financial assets of the +anks and financial institutions as is the case under the 6AR,AE6I Act*

1*$*

'riorit( Rules In re ard to the priority rules amon st different claimants on the same property as stated in para +%9%3 a(ove the principle that the secured creditors have a priority over all the claimants is reco niFed under different provisions of Companies Act and other insolvency la"s% In spite of such clear provisions there is a misconception in the minds of !overnment authorities entrusted "ith the function of recovery of ta/es and other claims of the !overnment that dues of !overnment have a priority over all creditors includin secured creditors% $ome of the $tate !overnments have amended the $ales@1a/ Acts prevalent in the $tate for the purpose of ivin priority to arrears of $ales@1a/ over the claims of secured creditors% In order to encoura e secured credit# it is necessary that the le al provisions in re ard to ri hts of secured creditors are very clearly laid do"n% At present on account of the various $tate la"s makin a contrary provision the (anks and financial institutions face num(er of difficulties in the matter of enforcin their claims as secured creditors% 1he !roup is therefore of the vie" that there is a need to make a declaratory provision in the proposed amendment that the claims of the secured creditors shall have priority over all the claims includin the claims of the !overnment% An e/press declaratory provision to this effect in a Central 4a"# "hich "ill (e enacted later to the e/istin $tate la"s "ill prevail over the $tate la"s and such declaratory provision "ould have the effect of

)7

renderin the $tate la"s invalid and non@operative (ein inconsistent "ith the Central 4a"# in vie" of the provisions contained in Article &8= of the Constitution of India*

)9

1*&*&*

Recommendations <a5 The Group therefore recommends that a declarator( pro#ision for the priorit( to the secured creditors o#er the unsecured creditors and other claimants including the Go#ernment ma( +e incorporated in the amendment suggested to the Indian Contract Act- $%2& in respect of mo#a+les as also to section =% of the Transfer of 'ropert( Act- $%%& which contains pro#isions for priorit( of rights created +( transfer of immo#a+le propert(* In the alternati#e- such declarator( pro#ision ma( +e incorporated in the Transfer of 'ropert( Act making it applica+le to +oth mo#a+le and immo#a+le propert(*

<+5 A#er and a+o#e the claims of the Go#ernment there are issues relating to claims inter se the #arious creditors as well as claims of third parties against the properties o#er which securit( interest is created* In regard to such issues the Group recommends that the registration reFuirements should +e made compulsor( for all secured transactions and the creditors whose securit( interest is registered should get the priorit( o#er all other claimants* 1*&*7* !I6 'E.9E.6 $ection 7) of the 1P Act deals "ith transfer of property pendin suit relatin thereto commonly kno"n as lis pendens% 1he purport of the provision of section 7) is that durin the pendency of a suit touchin any ri ht in the immova(le property# the property cannot (e transferred or other"ise dealt "ith (y any party to the suit so as to affect the ri hts of other party thereto under any decree or order that may (e made therein% By virtue of amendments made (y Bom(ay Act 5 of 3?+? (applica(le to the $tate of &aharashtra and !u=arat) the notice of pendency of such suit is reAuired to (e re istered under section 3> of the Indian Re istration Act# 3?*> and only if the notice is so re istered the prohi(ition "ill apply% 1here is no reAuirement of lis pendens in other $tates% 6ince it in#ol#es title to immo#a+le properties +ased on which the +anks and institutions pro#ide financial assistance- the Working Group recommends that the Registration Act ma( +e amended +( a Central enactment reFuiring registration of lis pendens in order to safeguard the interest of the lenders* 1*&*=* ATTAC?ME.T BE,ARE >@9GEME.T- I.>@.CTIA.6- A''AI.TME.T A, RECEICER AR A.L AT?ER I.TERIM RE!IE, CA.,ER.I.G IMMACAB!E 'RA'ERTL 1he Re istration Act has (een amended (y some $tate !overnments to facilitate re istration of orders passed (y the Courts and any other authorities for attachment (efore Jud ement# In=unction# appointment of receiver# etc% 1he re istration of such orders provides notice to the pu(lic% As such- the Registration Act +e amended to facilitate registration of such orders passed +( Courts and 9e+t Reco#er( Tri+unals to pro#ide pu+lic notice of such orders*

);

1*&*8

1he !roup noted that a Bill for settin up credit information companies is already introduced in Parliament and the Credit Information Companies (Re ulation) Bill is e/pected to (ecome a la" in due course% In this respect# the !roup su ests that in many cases of defaults# it is found (y (ankers that defaulters are ivin different versions a(out their assets and income therefrom to the (anks and ta/ authorities% 1he ta/ authorities can seek information from (anks a(out the accounts of their customers% But the (anks do not have any po"ers to o(tain information a(out the details of assets and income disclosed (y any assessee in the ta/ returns# to facilitate recovery of defaulted loans% $ince recovery of (ank loans is in the interest of depositors "hose funds are used for lendin activity# (anks can (e iven access to information availa(le "ith ta/ authorities for the purpose of recovery of defaulted loans% The Group- therefore- recommends that Income)ta Act ma( +e suita+l( amended empowering +anks to o+tain information a+out an( assessee from ta authorities in respect of accounts which are classified as non)performing assets*

$/*$*$* Amendment of 6ection :1 $ection 9? of the 1ransfer of Property Act empo"ers the mort a ee to sell the mort a ed property in the event of default su(=ect to the follo"in conditions2 <i5 In cases where the mortgage is an English Mortgage and neither the mortgagor nor the mortgagee is a ?indu- Mohamedian or Buddhist* Where the power of sale without the inter#ention of the court is e pressl( conferred on the mortgagee and the mortgaged propert( is located in towns of Calcutta- Madras and Bom+a( or such other towns as might +e notified* It is clear from the a+o#e pro#ision that a lender cannot e ercise powers of enforcement of a mortgage in respect of an( non)corporate +orrowers- as also in respect of properties located outside the notified towns* There is a need to remo#e all the restrictions and conditions specified in section :1 and permit sale of mortgaged propert( in respect of English Mortgages irrespecti#e of the caste- or race to which the mortgagees +elong to and irrespecti#e of the location of the mortgaged properties* Remo#al of such restrictions contained in section :1 of the Transfer of 'ropert( Act would facilitate lending against the securit( of English Mortgages e#en +( lenders other than +anks and financial institutions* The Group recommends amendment of section :1 of the Transfer of 'ropert( Act to empower an( mortgagee holding mortgage of an( propert( in India to enforce the English Mortgage without the inter#ention of the Court*

<ii5

)>

$/*$*&* Mortgage +( deposit of Title 9eeds: :nder the provisions of section 7>(f) of the 1ransfer of Property Act a person can create a mort a e (y delivery of document of title to immova(le property to a creditor "ith intent to create security thereon% $uch mort a e (y delivery of title deeds can (e created only in the to"ns of Calcutta# &adras and Bom(ay and any other to"n# "hich may (e notified (y the $tate !overnment% &ost of the metropolitan and other to"ns have (een notified (y the $tate !overnments for the purpose of a(ove provision% Do"ever# "ith the ro"th and development that has taken place in the country and the e/tent of inter@state trade and commerce it is necessary that the restriction on creation of mort a e (y deposit of title deeds only at notified to"ns is "ithdra"n% $/*$*7* 6tamp 9ut( on Mortgage +( deposit of Title 9eeds 'ne other important issue "hich needs to (e noted in re ard to mort a e (y deposit of title deeds is that no "ritten document is reAuired to (e e/ecuted "hile creatin mort a e (y deposit of title deeds% 1he o(=ect of this provision "as to facilitate raisin a loan a ainst security of a property in an emer ency# "ithout (ein reAuired to e/ecute a "ritten document of mort a e and et the same re istered% 1he purpose of the provision is to facilitate raisin money "ithout such formalities% In the past fe" years some of the $tate !overnments have levied stamp duty on any memorandum or record or "ritin relatin to deposit of title deeds% It is the practice amon st the (ankers to record the memorandum containin particulars of the (orro"er# the loan sanctioned and the particulars of the property in respect of "hich mort a e (y deposit of title deeds is created% $uch memorandum or "ritin "hich is recorded only to link the holdin of the title deeds "ith the particular loan is (ein treated as an instrument su(=ect to stamp duty% $uch levy of stamp duty (y the $tate !overnments defeats the very purpose for "hich the facility of raisin money (y creatin a mort a e of immova(le property (y deposit of title deeds is provided% In order that a person can avail the (enefit of raisin a loan a ainst security of mort a e (y deposit of title deeds# it is necessary to provide that any memorandum or "ritin recordin a past transaction of deposit of title deeds (y the lender shall not (e construed or treated as an instrument for the purpose of stamp duty% $/*$*=* 6ecurit( Interest o#er flatsKapartments 1he 1ransfer of Property Act does not reco niFe the concept of a flat or an apartment in the multi@storeyed (uildin constructed on immova(le property% $ome $tates like &aharashtra and !u=arat are usin the structure of co@operative society for the purpose of conferrin o"nership ri hts in the flatBapartment alon "ith the ri ht to

)?

use the common amenities provided in the (uildin (y the society% $ome $tates like &aharashtra have also enacted &aharashtra Apartment '"nership Act ivin statutory reco nition to the o"nership ri hts in an apartment% It needs to (e noted that in many ur(an areas in the country# multi@storied structures are comin up and the portions of a multi@storeyed (uildin are (ein used for industrial# commercial and residential purposes% But there is no formal le al reco nition to the ri hts of a person in respect of the portion o"ned or purchased (y him% It is therefore necessary to enact a ne" la" for the purpose of reco niFin property ri hts in a portion of a (uildin alon "ith the ri ht to avail the common facilities provided in such (uildin % $tatutory reco nition to such ri hts of o"nership "ould facilitate availin credit a ainst security of such assets% 6or this purpose either the 1ransfer of Property Act needs to (e amended or a separate Central 4a" may (e enacted on the lines of the &aharashtra Apartment '"nership Act% It may (e added that such a la" needs to cover not only residential (ut also commercial and industrial premises% $/*&*$* 9efinition of Immo#a+le 'ropert( 1he distinction (et"een mova(le and immova(le property is a thorny issue% In $irpur Paper &ills 4td% <s% Collector of Central ./cise# Dydera(ad (AIR 3??> $C 35>?)# the $upreme Court did not interfere "ith the findin of the lo"er court that machine attached to the earth "ere merely for operational efficiency and "as not immova(le property% 1he !roup feels that the distinction (et"een mova(le and immova(le property in relation to Mmachinery may (e maintained on the lines of the said =ud ement of the $upreme Court% 1he a(ove classification# in so far as# HmachineryI is concerned# may (e le islatively reco niFed (y addin an e/planation to the definition of Himmova(le propertyI in !eneral Clauses Act and 1ransfer of Property Act% Dence# the Workin !roup recommends that in $ection +()9) of !eneral Clauses Act and $ection + of 1ransfer of Property Act# the follo"in e/planation (e added to the definition HImmova(le PropertyI% ./planation2 &achinery attached to the earth is not immova(le property% $/*&*&* Certificate of Title to 'ropert( 1he system of recordin the o"nership ri ht of immova(le property is "ith reference to re istration of deeds and documents involvin transfer of any interest in immova(le property of the value of Rs%3** and more% But the diverse personal la"s applica(le in the country# acAuisition of ri hts in immova(le property are (y means other than "ritten document in ones favour% 1hus a person may acAuire interest or

+*

even o"nership ri hts in immova(le property (y virtue of partition in a Dindu undivided family or (y acAuisition to the property (elon in to the deceased or under a Will made (y a deceased person% In the a(sence of a uniform civil code applica(le in the country there is no system of issuin a title certificate to the o"ner of a land (y any authority of the !overnment (acked (y any statutory provisions% 1his creates a situation "here a person may (e holdin o"nership ri hts for immova(le property for num(er of years "ithout holdin any document or title deed in respect of such o"nership ri ht% 6urther in rural areas there is no system of demarcatin land "ith reference to the o"nership ri hts held in land (y different persons% 1he name of the villa e land is normally referred to (y the particular name of the villa e or as A(adi land% 1here is a need to set up a system for the purpose of rant of the certificate of title to any person "ho is entitled to the land (y virtue of his succession as a le al heir or acAuisition of ri hts (y partition or (y purchase or any other means% $uch certificate of title should (e issued (y the Revenue or other !overnment authorities "hich "ould constitute a document of title clearly certifyin the location or the area of the land o"ned (y the holder of the title certificate% $ystem should provide for procedure for modification of such certificate "hen there are chan es in ri hts# title and interests in the property% $uch a system "ould facilitate reco nition of the o"nership ri hts and ena(le the o"ner to raise loans a ainst the security of such property o"ned (y him% $/*&*7* 'ower of Attorne( 6ales 1he mode of transfer of property is also not uniform in the country% In certain $tates# the ,evelopment Authorities allot the housin units to various applicants and prohi(it them from transferrin such units% 1hese persons have invented methods to overcome the restriction on transfera(ility and have resorted to the rant of Po"er of Attorney coupled "ith interest% Creation of security interest (y the occupant# namely the Attorney# in his o"n ri ht# is not reco niFed under la"% 1hou h the said person has paid the consideration to the ori inal allottee# he is not reco niFed as the person o"nin the property% Banks and Institutions find it difficult to advance loans to such persons even for acAuirin property from the true o"ner% <alid mort a e created on the properties are defeated (y such imperfect transfers%

+3

$/*&*=* Recommendations In conclusion- the law relating to transfer of immo#a+le propert( needs to +e amended for following purposes: <i5 Restrictions contained in section :1 relating to the status of parties to mortgage and the location of the mortgaged propert( to +e deleted and an( English Mortgage created +( an( person in respect of immo#a+le propert( located an(where in India to +e made enforcea+le without the inter#ention of the court* ,latsKApartments and other portions of +uildings to +e gi#en statutor( recognition for ownership rights in such portions +( a Central !aw on the su+0ect* 'ro#isions of section 8%<f5 of the Transfer of 'ropert( Act to +e amended for permitting creation of mortgage +( deposit of title deeds an(where in India* A s(stem for issue of certificate of title to propert( to +e introduced either +( amendment of Transfer of 'ropert( Act and Registration Act or +( enacting a new law for the purpose* 6uch a law should also co#er grant of succession certificates +oth testamentar( and non)testamentar( in respect of all assets of the deceased* Machiner( attached to earth to +e declared as not immo#a+le propert(*

<ii5

<iii5

<i#5

<#5

$$*$*

6uccession of 'ropert(: 'ne other issue related to reco nition of o"nership ri hts over property and title certification is the issue relatin to succession to property (oth mova(le and immova(le "hether testamentary or non@testamentary% 'n account of multiple personal la"s applica(le in the country there is no uniform system in re ard to issue of any succession certificate or le al heirship certificate% 1he provisions contained in the Indian $uccession Act relate to succession certificate in respect of any de(t paya(le to the deceased% $uch succession certificate does not cover any other In re ard to pro(ate of the Wills under the mova(le or immova(le properties%

provisions of the $uccession Act it is not compulsory to o(tain a pro(ate of the Will# e/cept in Bom(ay# Calcutta and &adras in terms of sections 7; and )3+ of the Indian $uccession Act# 3?)7% In the a(sence of clear statutory provisions reAuirin compulsory pro(atin of Wills and o(tainin of succession certificates irrespective of the personal la" applica(le to the successors or location of the properties# it (ecomes e/tremely difficult to reco niFe the ri hts of persons to any such properties there(y affectin their a(ility to raise credit a ainst the security of such property% It is

+)

therefore necessary to enact a ne" la" or amend the e/istin le al provisions for follo"in purposes2 (e) (f) A system for issue of title certificate to any person "ho is entitled to o"nership or any other ri hts in any immova(le property% Appointin a statutory authority in various parts of the country for the purpose of rant of succession certificate in respect of properties o"ned (y a deceased person as also le al heirship certificate to the le al heirs% In vie" of the diverse personal la"s applica(le such a ne" la" settin up authorities for the purpose of rant of succession certificates may also have to clearly specify the rules of succession and the various le al heirs entitled to succeed the property under various personal la"s to facilitate issue of succession certificate% 1he list of such le al heirs applica(le under various personal la"s has (een attempted (y the !roup and is enclosed to the report as Appendi )I% 1he !roup "ishes to place on record that a(ove su estions re ardin succession to property are (ein made to facilitate lendin a ainst security of property "ithin the e/istin le al frame"ork and there is no su estion for any chan e in personal la"s%

$&*$*$* In addition to the a(ove su estion for amendments in relation to security interest over property# the !roup "ishes to su est certain other amendments "hich need to (e undertaken to create an environment conducive to secured lendin % $&*$*&* 1he first su estion relates to amendment of section )> of the Indian Contract Act%

As $ection )> no" stands any uarantee issued (y a (ank in India remains operative durin the limitation period for makin a claim under the uarantee "hich is normally three years (ut if the uarantee is in favour of !overnment it is thirty years% By addition of a proviso to $ection )> it is proposed to permit (anks and financial institutions to stipulate that ri hts under a uarantee shall (e e/tin uished if no claim is made "ithin the specified period "hich shall not (e less than one year% $uch provision in the uarantee "ill have the effect of curtailin the limitation period% $uch an amendment "ill facilitate acceptance of uarantees issued (y Indian (anks at international level and ena(le the (anks to remove such contin ent lia(ilities% contin ent lia(ilities% uarantees from their $uch an amendment is necessary in vie" of strin ent

reAuirements of capital commitments and provisionin norms for (anks in respect of

++

$&*$*7* 1he second su estion relates to section 7>AA of the Companies Act# 3?79% 1he said section "as inserted "%e%f% 3+%3)%)*** "ith an o(=ective to protect the interest of small depositors% It inter alia provide for the companies raisin pu(lic deposits to intimate the tri(unal the details of the default of non@payment "ithin the prescri(ed time disclosure of default and restrictions "hile raisin fresh deposits etc% 1he su(@ section (;) of the said section 7>AA provides as under2 "Where a compan( had accepted deposits from small depositors and su+seFuent to such acceptance of deposits- o+tains funds +( taking a loan for the purpose of its working capital from an( +ank it shall first utili4e the funds so o+tained for the repa(ment of an( deposits or an( part thereof or an( interest thereupon +efore appl(ing such funds for an( other purpose*3 $&*$*=* In vie" of the a(ove provisions a company "hich has accepted deposits from small depositors is under a statutory o(li ation to apply the "orkin capital funds for payment to the depositors% 1he application of "orkin capital funds "hich are intended and meant for manufacturin activity of the unit if made and utiliFed for any other purpose "ill affect the financial via(ility of the company and in turn "ill lead to default of repayment to the lender Bank% Provision contained in section 7>AA(;) as stated a(ove is o(viously inconsistent "ith the lendin norms for "orkin capital and the effect of the provision "ill (e that (anks "ill (e reluctant to lend or continue to lend to a company holdin deposits from small depositors and the very o(=ect of the provision "ill (e defeated% 1he !roup# therefore# su of section 7>AA of the Companies Act# 3?79% $7*$* 'ro+lem of Multiple 6tamp 9uties 4astly# the !roup "ishes to su est a chan e in the le al frame"ork relatin to po"er to levy stamp duties on instruments affectin property ri hts% 1here is a need to reco niFe a ne" kind of instrument "hich is derived from or relates to any transaction in the financial market# and has the characteristic of transfera(ility any"here in India and even lo(ally# alon "ith the (enefit of underlyin securities% $uch an instrument like a securitised de(t instrument in a securitisation of housin loans# "hen transferred from one investor to other "ill involve transfer of undivided interest in underlyin mort a es of houses% :nder our e/istin stamp duty system# strictly in la" such transfer of de(t instrument "ill amount to transfer of interest in immova(le property and "ill (e reAuired to (e stamped as a conveyance and also re istered% 1his impediment to financial transaction has to (e removed (y chan in the la"% It appears that there are t"o alternative solutions to the pro(lem2 ests deletion of su(@section (;)

+5

Alternati#e $ Amend the Constitution of India and make a clear provision for le islative po"ers for :nion of India in respect of stamp duty on any instrument "hich has the characteristic of ne otia(ility and transfera(ility any"here in India or outside India% Alternati#e & Assume le islative po"er of the :nion under the residuary entry ?; in the :nion 4ist in the $eventh $chedule to the Constitution and amend the Indian $tamp Act and Re istration Act# 3?*> for the purpose of levy of stamp duties on and re istration of any ne" instruments that are similar to ne otia(le instruments% 1he !roup is of the vie" that since alternative 3 may take time# the second alternative can (e tried to achieve the o(=ect in vie"% $=*$* Whether di#ersion of funds to +e made an offence: 1he Workin !roup also considered "hether siphonin off B diversion of funds (orro"ed from (anks or financial institutions should (e made an offence% 1his issue "as clearly e/amined (y the IBA in the past and the Workin !roup a rees "ith the follo"in vie"s of IBA conveyed to the RBI2 1he Auestion "hether siphonin off B diversion of funds (orro"ed from a (ank or financial institution should (e made an offence per se is not amena(le to a strai ht HN.$I# (ecause the dividin line (et"een ina(ility to repay (anks loans and failure to pay on account of deli(erate use of funds for some other purpose contrary to the intents and purposes of the sanction of loan# is very thin% By makin such acts like diversion B siphonin off funds criminal per se there is a dan er that innocent and enuine (orro"ers# "ho are una(le to repay the loan for the reasons (eyond their control "ould (e treated as criminals% 1he difficulties in clearly definin an offence to punish deli(erate and "ilful default arisin out of diversion B siphonin off funds can (e e/plained illustratively as under2 ,acilit( i) 1erm loan for machinery Instances of di#ersion a) 4oan availed (ut machinery not purchased and there "as never any intention to repay the loan or create an asset% () 4oan availed (ut cheaper or used machine purchased or over invoicin "as done as to the value of machine# deli(erately to deceive the (ank% Whether should +e made criminal offence HNesI should (e part of cheatin % HNesI should (e made criminal act% $ince# amounts to o(tainin loan (y makin false representation%

+7

c) 4oan availed and machinery purchased% &anufacturin started (ut income not sufficient to pay interest and instalment of term loan% d)4oan availed and manufacturin started% AdeAuate surplus enerated to repay loan instalments (ut surplus used for (uyin another machine or more ra" materials to increase capacity utiliFation or for any other purpose connected "ith manufacturin activity% e) AdeAuate surplus enerated in the (usiness out of assets acAuired from loan proceeds# (ut surplus is not used for servicin the loan% 6unds are used for personal and other purposes and default is committed% a) 4oan availed (ut sale of product or conduct of (usiness is at a loss% It may happen that surplus is adeAuate to pay 1erm 4oan interest and instalment (ut not "orkin capital% ()4oan availed (ut not used for (usiness purpose% 6ake proof of purchase of oods B ra" materials# etc% produced% $tock statements# "hich are false or inflated in value furnished% c)4oan availed and used for intended purpose (ut the (usiness activity is not eneratin adeAuate surplus% Inflated stock statements iven to sho" that there is no irre ularity% d)4oan availed and (usiness conducted profita(ly (ut there is a default in repayment of loan and interest% iii) Bills Purchase B ,iscountin a) Bills dra"n representin enuine trade transactions (ut dishonor on account defect in oods% ()Bills are accommodation (ills "ithout enuine trade transaction and not retired%

1his may (e a mere default in repayment and hence may not (e made an offence% ,efault is more in the nature of (reach of contract rather than a criminal conduct and hence should not (e included%

1hese kinds of cases can (e considered for inclusion%

ii) Workin Capital

1hese instances cannot (e included%

1hese instances can (e included%

1hese instances may (e included as a part of an offence% 1he instance should (e carefully studied# so that default due to enuine difference B dispute may not (e included% Conduct may not (e treated as criminal% 1hese instances can (e covered for the purpose of offence%

While "e a ree that there is a need for such a la"# "hich "ould punish deli(erate and "ilful default arisin out of diversion B siphonin off funds# as an offence under criminal la"# it is necessary to ensure that sufficient care is taken to e/clude those instances of loan defaults (as can (e seen from the illustrations a(ove) arisin due to enuine reasons# so that the la" encoura es ood (orro"ers and punishes only "ilful defaulters% In our vie"# the provisions contained in the Indian Penal Code# 3>9* adeAuately meet the reAuirement and no amendments to IPC need to (e undertaken% EEEE

+9

A''E.9IM)I !egal heirs under #arious personal laws i5 ?indus a) Primary heirs of a Dindu male are2 i% ii% iii% iv% v% vi% vii% i% ii% iii% iv% ii5 $on(s) ,au hter(s) Wife &other Children of Predeceased children Wido" of predeceased son Children of predeceased rand children $on(s) ,au hter(s) Dus(and Children of predeceased children

() Primary heir(s) of a Dindu female are2

Muslims a) Primary heirs of a $unni &uslim are2 i% ii% iii% iv% v% i% ii% iii% iv% v% $on(s) ,au hter(s) 6ather &other $pouse (Dus(andBWife) $pouse (Dus(andBWife) &other 6ather $on(s) ,au hter(s)

() Primary heirs of a $hia &uslim are2

iii5

Christians a) Primary heirs of a Christian are2 i% $pouse (Dus(andBWife) ii% $on(s) iii% ,au hter(s)

i#5

'arsis a) Primary heirs of a Parsi male are2 i% ii% iii% iv% v% vi% i% ii% iii% iv% Wife (Wido") $on(s) ,au hter(s) &other 6ather Children of predeceased children Dus(and $on(s) ,au hter(s) Children of predeceased children EEEE

() Primary heirs of a Parsi female are2

+;

Brief 6ummar( of Recommendations

6*.o*

'ara .o* Issue +%3a 3 3*%3%5 '"nership ri hts in the portion of multistory (uildin are not reco niFed (y 1ransfer of Property Act% 1he o"ner finds difficulty to raise loan a ainst security of such portion in the (uildin Bflat%

Recommendations

1o reco niFe such o"nership ri hts in a portion of (uildin it is recommended to enact uniform Central 4a" on the lines of Apartment '"nership Act in &aha@rashtra% 1his "ill reco niFe property ri hts not only in the portion of the (uildin (ut also ri ht to avail common facilitiesBamenities availa(le in the (uildin %

+%3( ) 3*%3%3 .nforcement of mort a e "ithout intervention of Court is availa(le under .n lish mort a e "here neither the mort a or nor mort a ee is a Dindu# &ohamedian or Buddhist and "hen the property is situated in Presidency or notified to"ns% Restrictions like Reli ion# place of property should (e removed (y amendin section 9? of 1%P% Act% 1his "ill encoura e lendin a ainst security of .n lish &ort a e even (y lenders other than Banks and 6Is% Restrictions on creation of mort a e only at notified to"ns should (e "ithdra"n% 1he &emorandum of .ntry or recordin a past transaction should not (e treated as an instrument for the purpose of stamp duty# i%e% &emorandum of .ntry should not attract any stamp duty%

+%3c 3*%3%) .Auita(le mort a e can (e created (y deposit of title deeds only at Presidency and notified to"ns% 1he .Auita(le &ort a e does not reAuire si nin of any a reement or instrument as the o(=ect of providin this type of mort a e "as to facilitate raisin loan "ithout reAuirin any "ritin # payment of stamp duty or any re istration% 'ver the years some of the $tate !overnments have levied stamp duty on &emorandum of .ntry "hich is not an instrument% 4evy of stamp duty defeats the purpose of raisin loans a ainst the security of .Auita(le mort a e "hich is created (y oral deposit of title deeds%

3*%3%+

+%3d 5 3*%)%3 1he distinction (et"een movea(le and immova(le property very often (ecomes su(=ect of various interpretations% 1he treatment of machineries em(edded in the earth is not clearly defined under the 4a"% 1here is a need for clarity on the su(=ect% 1he distinction (et"een mova(le and immova(le property in relation to the machinery may (e reco niFed on the lines of $upreme Court =ud ment in the case of $irpur Paper &ills 4td% 1he &achinery attached to earth should not (e treated as immova(le property% 1he 1%P Act and !eneral Clauses Act needs to (e amended%

+%3%e 7 ;%+ 1here is no 4a" overnin creation of security interest over receiva(les or transfer of receiva(les secured (y securities% 1here is also no provision for transfer of future receiva(les% $pecific provision in 4a" (e made for assi na(ility of receiva(les (ased on the principles contained in :nited 8ations convention%

+%) 9 3*%)%) 1he Re istrar of Assurances keeps records relatin to re istration of transactions of immova(le properties (ut there is no system of issue of title certificate% In certain A system should (e evolved to rant certificate of title to such persons% $uch certificate can (e issued (y

+>

cases# the o"ner drive his title to property under a partition deed or (y inheritanceB succession and in such cases there is no document B title deed to evidence their o"nership% $imilarly there are cases "here o"nership ri hts are claimed under A(adi 4and% In the a(sence of title deeds or certificate of title# the o"ner find difficulty to raise loan% +%+ ; 33%3 ,ue to multiple Personal 4a"# the concept of issuance of $uccession certificate is not uniform% 1here is also no system uniformly applica(le for rant of le al heirship certificate or le al representation (y the authorities% In certain cases there is no mandatory provision to o(tain the pro(ate of a Will %

Revenue or other !overnment Authorities ivin the title and the particulars of the property# "hich shall reco niFe the o"nership ri hts%

A system (e evolved for issue of title certificate to the person entitled to the property% $tatutory authority for rant of succession certificate (e appointed in various parts of the country %

+%5 > ;%3%) 1he 4a" on pled e of mova(les contained in Indian Contract Act is adeAuate and no chan e in Contract Act is called for% Do"ever# section 3?()) of Bankin Re ulation Act "hich restricts holdin of +*G of eAuity in any company "hether as a Pled ee or &ort a ee is not =ustified# for the reasons that there is e/tensive lendin activity a ainst security of shares# "ith the development of universal (ankin Banks are undertakin term loan activities and there is no such prohi(ition in the case of 6Is% Pled e of promoters share ensures continuity of promoter in the pro=ect financed (y the Bank and also ena(les the Bank to sell the security alon "ith the &ana ement of the company in case of default% 1he restriction of holdin shares e/ceedin +*G (e "ithdra"n in respect of pled e of promoters shares and dispense "ith the reAuirement of transfer of such shares in the name of the Bank%

+%5 ? ;%)%3 ;%)%+ 1here is no 4a" to re ulate non@possessory security% 1he 4a" relatin to non@possessory security is overned (y the contract (et"een the parties and (y =udicial pronouncements% $AR6A.$I Act )**) provides the definition of ODypothecationO (ut the said also do not provide the mechanism for creation of security of hypothecation# ri ht and o(li ation of the parties and rules of priority in re ard to various claims on hypothecation property% 1he Company Act provide for re istration of floatin char e and certain char es on the assets of the company (ut the reAuirement of re istration therein do not apply to non@corporate entities% It is necessary to make statutory provision for manner of creation of security interest# the ri hts and o(li ations of the parties to the hypothecation transaction and the rule of priority amon different claimants and the reAuirement of re istration of char es%

+%7 3*

$tamp 4a"s and rate of stamp duty differ from $tate to $tate% 1he multiplicity of stamp la"s and different rates of stamp duties in various $tates is an impediment of ro"th and development of financial instrument "hich calls for ne otia(ility or transfera(ility any"here in India% 1he po"er to levy stamp duty on instruments affectin

A central stamp la" needs to (e enacted%

+?

3+%3

property ri hts needs to (e iven re@look to reco niFe the ne" kind of securities de(t instrument "hich has the characteristic of ne otia(ility and transfera(ility any"here in India and even lo(ally alon "ith the (enefit of underline securities% 1his "ill facilitate and evolve a free# ne otia(le and transfera(le de(t instrument in the market "ithout treatin such transactions as conveyance deed reAuirin re istration%

+%9%3 33 ?%3 1he priority of dues of secured creditors over other claimants includin !overnment is reco niFed under the Companies Act and other Insolvency 4a"s (ut difficulties are e/perienced at enforcement and distri(ution sta e% $ecured creditors have ri ht to remain outside "indin up proceedin s and realise its securities% $ome $tates have amended their respective $ales 1a/ Acts to ive priority to the $ales ta/ dues over the dues of secured creditors% $o there is a need for clearin definin the ri hts of the secured creditors% 1he Central 4a" should declare that the claims of secured creditors shall have priority over all other claims includin the claims of the !overnment%

5%3 3) ;%)%; 'n hire purchase and lease of mova(les there is no statutory provision% 1he Dire Purchase Act 3?;) has not (een (rou ht into force% 1hese transaction are overned (y the contract (et"een the parties% $uch contracts are treated as 1itle Retention Contract ena(lin the o"ner to take possession of assets there(y ivin super priority to such persons over secured creditors% In :%$%A% $uch transaction are treated as security interest (ecause in su(stance such transactions are loan transactions% If these transaction are treated as security interest then the consumer "ill (e entitled to the surplus sale proceeds and the o"ner shall (e entitled to claim the shortfall% All transactions of financial lease# hire purchase etc% (e treated as security interest (y addin a ne" chapter relatin to non@ possessory security ri ht over mova(le properties% 1his "ill also ena(le 8B6Cs to sell the leaseB hire assets in the capacity as secured creditor instead of as o"ner retainin title to the property "hich "ill (e in the (eneficial interest of (oth rantor and rantee%

+%9%) 3+ 7%3 7%)%3 7%)%) 1he $AR6A.$I Act addresses some of the o(=ectives of :8CI1RA4 (ut the Act does not address issues of creation# re istration and rules of priorities amon different parties in relation to security interest% 1he Act do not apply to title retention contracts like D%P% and lease a reements% 6urther it applies to Banks and 6Is and do not apply to other lenders and has no universal application like in the case of pled e under Contract Act% 1he central re istry under the Act is confined to Asset $pecific Re istration% 1here is a need to chan e the e/istin la" to cover these aspects of secured transactions%

5*

>%3%3 35 >%3%) 1o determine priority amon various $ecurity Interest holders# a re istration system for mova(les properties needs to (e introduced% At present char e on mova(le assets needs to (e re istered under Companies Act and the same do not apply to 8on@coporate entities% In :%$%A% there is a re istration mechanism "hich operates on notice filin system and the records of re istration are centraliFed% :nder $AR6A.$I Act settin up of Central Re istry is proposed (ut the same do not operate on the lines prevalent in :$A% An effective re istration system "ill o lon "ay in providin statutory (ackin to security interest created in favour of Banks and 6Is% Amend $AR6A.$I Act to provide for computeriFed central re istry% It may (e considered "hether mova(le assets needs to (e classified in different cate ories to facilitate re istration and assess to specific asset@"ise data in the re istry%

37

?%)%+

4is Pendens i%e% ,isputes relatin to immova(le property pendin in the court# particulars are reAuired to (e filed in some states like &aharashtra and !u=arat%

1o safe uard the interest of the lenders a central enactment should provide for compulsory re istration of particulars of 4is Pendens so that Banks and 6Is providin financial assistance are a"are of the titles of the properties%

53

39

?%)%5

$ome $tate !overnment enactments provide for re istration of certain interim orders passed (y the courts like attachment (efore =ud ement# in=unction# appointment of Receiver% 1he re istration of such orders provides notice to the pu(lic and protect the interest of the lenders%

1he Re istration Act (e amended to facilitate re istration of all such orders in all the $tates%%

3;

3*%)%+

Po"er of Attorney $ales are (ein adopted as a mode of transfer of property instead of e/ecutin conveyance deed# "ith a vie" to avoid stamp duty and overcome restrictions on transfera(ility% 1hou h the attorney has paid the sale consideration (ut is not reco niFed as o"ner "ith perfect le al title and thus he cannot raise loan a ainst such property%

$uch transaction of po"er of attorney sales should not (e reco niFed under the 4a"%

3>

3)%3%)

Banks and 6Is issuin Bank !uarantees may (e permitted to restrict the period of limitation for enforcin the uarantee (y the (eneficiary as it "ill help the Banks to remove the e/pired uarantees from its Books thus improvin the capital adeAuacy%

$ection )> of the Contract Act (e amended%

3?

3)%3%+

1he provisions in the Companies Act reAuirin a company to utiliFe the "orkin capital funds o(tained from the Bank# first to"ards the deposits accepted from small depositors "ill lead to default of repayment to lender Bank%

$uch a provision in section 7>AA(;) of Companies should (e deleted%

)*

;%3%+

Warehouse receipts are not ne otia(le% 1here is ro"in lendin activities a ainst a riculture commodities% It is necessary to ive these receipt the character of ne otia(le instrument so that they are freely ne otia(le% 1his "ill facilitate trade in a ricultural commodities% Whether siphonin off B diversion of funds (orro"ed from (anks or financial institutions should (e made an offence%

$eparate le islation to make WR as ne otia(le instrument and devisin system for certification of Auality and Auantity of commodities stored in "arehouses# is recommended%

)3

35%3

1here is no need to amend the Indian Penal Code# 3>9*# makin diversion of funds a crime%

))

Ri ht of the (anks and institutions to call information on income and "ealth of constituents from 1a/ Authorities to stren th credit and 8PA &ana ement akin to po"ers of 1a/ Authorities under $ection 3++(9) of Income 1a/ Act%

8ecessary amendment in 4a" (e made%

5)