SARFAESI Amendment: The “Qualified Buyers” Confusion Remains

[Akhileshwari Anand Raj is a 3rd year B.Com LL.B (Hons.) student at Gujarat National Law University, Gandhinagar]

The amendments last year to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) were long overdue. They sought to ensure that the various banking and recovery laws were in consonance with each other, and they also facilitated the introduction of the Insolvency and Bankruptcy Code, 2016. Amendments were also made to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the allied rules, making changes to the maximum time allowed for proceedings, the number of adjournments and speedy trial measures to reduce the pendency of cases and a positive reduction in the amount of deposits to be made for instituting an application and for appeal.

Along with these reforms, provisions with respect to asset reconstruction companies (ARCs) were also amended, and this has been viewed as a step forward in speeding up the debt recovery process. These include a reduction in the requirements for registering an ARC, grant of powers to the Reserve Bank of India (RBI) to regulate these companies, lower fund requirements and removal of stamp duty to facilitate easier purchases.

One of the key amendments was the substitution of the term “Qualified Institutional Buyers” with “Qualified Buyers” throughout the SARFAESI Act. This change is viewed as one which will expand the ambit of those permitted to purchase security receipts. Security receipts are issued by ARCs to raise money, with which they purchase distressed assets from banks and other lenders. The concern is that the term “Qualified Buyers” is subject to notification by the Reserve Bank of India. Despite the lapse of one year since the amendment, the central bank has failed to notify the ambit of this term, leaving potential buyers and ARCs with no reprieve.

ARCs and the Amendment

Over the past few years, several ARCs have been established in India. However, not many have succeeded in their ventures, and they have failed to significantly contribute to the enhancement of debt recovery in India. Until the amendment, the law governing these companies was unfavourably stringent and highly restrictive. Timelines and costs were not in their favour either.

This amendment was the first to accord a suitable definition to ARCs in the SARFAESI Act, and included it within the ambit of other important definitions: financial institutions and secured creditor. This is significant because it gives ARCs a greater freedom to recover debts. The definition of a sponsor was changed, easing the requirements of who can be a sponsor. A sponsor is one who owns 10% or more of the ARC. Prior to the amendment, it could not be the holding company of the ARC; now it is permissible if the sponsor is “fit and proper”. The financial requirements to register an ARC have also been reduced. ARCs have been exempt from stamp duty imposed on purchase and sale of property under section 8(f) of the Indian Stamp Act.

Another significant issue still plaguing ARCs relates to the volume of business. The number of ARCs operating in India currently is 23. However, over 90% of the business is garnered by merely five of them. To revive the number of companies that receive a negligible amount of business, the ambit of buyers has been increased by amendment. The change from “Qualified Institutional Buyers” to “Qualified Buyers” is crucial as it comes with the implication that the public will be allowed to purchase security receipts.

The move to open security receipts to the public is supported by the government, as demonstrated by the Finance Minister’s 2017 Budget speech. It suggested that security receipts ought to be traded publicly on stock exchanges and this will be effected in the financial year 2017-18.

Security receipts are high risk hybrid instruments, combining elements of debt and equity. The returns are uncertain and are similar to dividend paid on equity shares, i.e., there is no assured return every year. Part of the reason why security receipts were not offered to the public was because of their volatile and high-risk nature.

The RBI Conundrum

This amendment has been appreciated by various stakeholders: from ARCs to fund managers. There is, however, a catch in putting this to use: the ambit of qualified buyers is unknown. The amendment states that the RBI will identify from time to time those who can qualify to be buyers despite being non-institutional buyers. The amendment came into force on 1 September 2016, and over a year later, no RBI notification has been released on the same.

With uncertainty looming over this, the relief proposed for ARCs to get back on track in the business has witnessed slow progress. The various amendments specific to ARCs have helped make transactions smoother, but the fundamental requirement of an ARC is to meet its funding needs. Only by raising its funds will it be able to acquire more distressed assets and carry on functions smoothly.

 – Akhileshwari Anand Raj

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