The Reserve Bank of India has issued a revised draft of its guidelines on securitisation transactions. This takes into account reform efforts internationally to deal with distorted incentives of originators in downselling financial assets soon after their creation. The preamble to the revised draft sets forth the rationale: 1.1 Securitisation involves the pooling of assets and the subsequent sale...
Legality of Sale of NPAs Between Banks
Last week, the Supreme Court issued its ruling on whether non-performing assets/loans (NPAs) can be transferred between banks without the concurrence of the borrowers. The case involved a transfer of NPAs (relating to the borrower, APS Star Industries Ltd.) from ICICI Bank to Kotak Mahindra Bank. The borrower was in liquidation. When the assignee Kotak Mahindra Bank sought before the Company...
The Meaning of a “Debt”
We have discussed the role of the Debt Recovery Tribunal on this blog, and noted the Supreme Court’s decision in Nahar holding that an “independent suit” filed by a borrower is maintainable in civil court, despite the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDB Act”). This Monday (May 3), the Supreme Court considered another crucial issue in this...
The Resurgence of Securitization and CDS
The concepts of securitization and credit default swaps (CDS) have acquired a negative connotation over the last couple of years since they were said to have triggered the global financial crisis during the second half of 2007. More, importantly, the assets involved were sub-prime loans that underwent a process of disintermediation due to which risk perceptions on the underlying assets were...
Securitisation and Debt Recovery – A Centre-States Conflict?
The Constitution has devised an elaborate scheme of distribution of legislative powers, and the competence of a legislature to enact a law has normally been challenged by a private citizen to whom the law applies. The latest battleground looks to be the fairly recent structure of securitization, debt recovery and other FI-friendly legislation. The first major decision of the Supreme Court on this...
Securitization: ‘True Sale’ of Receivables
In order to make a securitization transaction bankruptcy-proof with respect to the originator (seller) of receivables, it is necessary that there is a ‘true sale’ of the receivables to the assignee (purchaser). Failing this, the transaction could be recharacterized as a secured loan, thereby altering the rights and obligations of the parties under law (sometimes contrary to their original...
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