CERSAI 2.0: A Preliminary Guide

-Mahesh Jethani (finserv@vinodkothari.com)

All Scheduled Commercial Banks (including RRBs), Small Finance Banks, Local Area Banks, all Co-operative Banks, all NBFCs and All India Financial Institutions are required register creation of security interest over an asset with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).

An upgraded version of Security Interest portal i.e. CERSAI 2.0, is going to be released on August 3, 2020, which shall introduce some novel changes such as the offline functionality for adding security interest transactions and no maker-checker concept. In the following writeup we intend to explore the legal requirements for registering on CERSAI 2.0 and the process of registration along with scenario before and after the portal goes live.

The registration process is based on the limited study of the user manual for registration provided on the website of CERSAI.

Legal Requirement for Registration on CERSAI

The objective behind setting up of CERSAI is to have a centralised database for security interests provided in favour of financial institutions. For this purpose, various regulations require the financial/lending institutions to register creation of security interest, which are as follows:

RBI Guidelines and Notifications

Para 108 of Master Directions for NBFC-SIs[1] and para 94 of Master Direction for NSIs[2] makes it mandatory for applicable NBFCs to file records of equitable mortgages with the CERSAI.

Further, a notification[3] issued by the RBI, requires NBFCs to register the following, in addition to the security interest (mortgage) created through deposit of title deeds –

  1. Security interest in immovable property by mortgage other than mortgage by deposit of title deeds;
  2. Security interest created by way of hypothecation of plant and machinery, stocks, debts including book debts or receivables, whether existing or future;
  3. Security interest in intangible assets, being know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature;
  4. Security interest in any ‘under construction’ residential or commercial or a part thereof by an agreement or instrument other than mortgage.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)

The SARFAESI Act regulates securitisation, reconstruction of financial assets and deals with enforcement of security interest. Section 23 of the Act reads as under:

“The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed“

Accordingly, all transactions of securitisation and asset reconstruction and creation of security interest are required to be registered.

CERSAI 2.0- Entity Registration Process

The Entity Registration functionality shall be accessible on the CERSAI 2.0 portal. In order to register details of security interest and access various functionalities available on the portal, entities must be registered. Post implementation of chapter IV-A of SARFAESI Act entities are broadly classified into three main categories –

  • Secured Creditors
  • Other Creditors
  • Revenue Authorities

Secured Creditors

The secured creditors can be any of the following entities- Public Sector Banks, Private Sector Banks, NBFCs, Security Trustees, RRBs, Cooperative Banks, ARCs, Factoring Companies, etc. Following shall be the registration process for secured creditors:

  1. On the portal Open Entity Registration Form using path Entity Registration -> Entity Registration
  2. User will get the following two modes of Entity Registration
    1. via CKYC
    2. via Digital signature

In case digital signature option is selected, it shall be ensured that the user has a valid Class III digital signature while registering the entity in the CERSAI 2.0 portal.

It is to be noted that users which are already using Digital Signature in CERSAI 1.0 can continue to use the same in CERSAI 2.0 also (irrespective of the class of Digital Signature) and once their Digital Signature expires they will have to procure a new Digital Signature of Class – III.

  1. The CERSAI 2.0 system will not enforce digital signature for the users with following roles: – Asset based Search – Debtor based Search – AOR search – Online Reports – MIS Reports – RMS Reports – Batch Reports. Except the above-mentioned roles, Digital Signature is mandatory for all other roles to login in CERSAI 2.0 system.
  2. Once the entity fills in the details such as employee Id, username, email ID, mobile number, date of birth, it can submit the form.
  3. Upon submission, an Entity Registration Form will open. The Form is divided into 3 tabs.
    1. First Tab is Entity User Details, which captures information related to the Entity which is being registered in CERSAI 2.0 portal.
    2. Second tab is Primary User Admin (PUA) 1 which captures information related to PUA1 of the Entity.
    3. Tab 3 captures the details of PUA2 of the entity.
  1. In the first tab, there is dropdown menu for Entity Category, which provides the following options to choose from:
    • Secured Creditor
    • ARC
    • Factoring Company
    • Revenue Authority
    • Other Creditors

The applicant shall select the appropriate category based on its nature of business.

  1. After selecting the entity category, the applicant shall choose from the drop down menu for Type of Entity, which has the following options:
    • NBFC Accepting Public Deposit
    • NBFC Not Accepting Public Deposit
    • Public Sector Bank
    • Private Bank
    • Foreign Bank
    • Intermediary
    • Housing Finance Company
    • Regional Rural Bank
    • Co-operative Bank
    • Security Trustee
    • Financial Institution
    • Local Area Bank
  2. After selecting the relevant category and entity type, and filling the mandatory details such as name, PAN, GSTIN, registration number, entity registration date, address and mail id, the applicant shall select the relevant role for which the registration is being done- such as Assignment of Receivable, Asset Reconstruction, Asset Search, AOR Search
  3. In second and third tab, the details of primary users are captured. The following mandatory details are required to be given: username, father/mother name, employee ID, email id, mobile number, date of birth, department and residential address. After filling the required details, form shall be submitted.
  4. Upon Submission, system will save the entity registration request in pending state and give a reference number to the user for tracking the entity registration request. The user shall then download the entity registration filled-up form, attach supporting documents and send to CERSAI office offline.
  5. Upon receiving the physical documents, CERSAI admin users will fetch the transaction from their Entity Registration queue and approve the request upon verifying the request against the physical documents sent by the user. If CERSAI admin user’s approval, the entity will be registered successfully, and system will send notification to the PAUs. However, if the CERSAI admin user rejects the request, the entity representative user will have to apply afresh.
  6. On successful registration of the entity, Entity Code will be generated, and system will automatically create two notional accounts for the entity in the Central Registry portal – Usable account and TDS Account.

Other creditors

In the other entities section, the following kinds of creditors may register themselves:

  • Individuals
  • BOI
  • HUFs
  • Sole Proprietorship.

The initial process shall be the same as that of registration of secured creditors (as explained above). However, the primary user tab shall not be there.

After filling all the mandatory fields and upon submission of the form, a link shall be generated for creation of password which shall be sent to the user email id provided while filling form.

After clicking on the said link, the user will enter User ID for which password need to be set. A Set Password Form will open and after filling all the mandatory fields and clicking on Reset button the password will be reset successfully.

User registered in CERSAI 2.0 portal, using Entity Registration – OC can now access the CERSAI 2.0 application using newly created User Id and Password.

Conclusion:

The new portal has come up with the solutions to technical flaws in the existing portal. However, it is yet to be seen if the CERSAI 2.0 brings some revolutionary change or is it just limited to technical upgradations. The CERSAI has also stopped taking registration requests till the new portal goes live. The registration process may have other knick knacks which shall come out once the process is operative.

 

[1]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD44NSIND2E910DD1FBBB471D8CB2E6F4F424F8FF.PDF

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11439&Mode=0

 

EASE OF RECOVERY FOR NBFCS?

–  Ministry of Finance relaxes the criteria for NBFCs to be eligible for enforcing security interest under SARFAESI

-Richa Saraf (richa@vinodkothari.com)

 

The Ministry of Finance has, vide notification[1] dated 24.02.2020 (“Notification”), specified that non- banking financial companies (NBFCs), having assets worth Rs. 100 crore and above, shall be entitled for enforcement of security interest in secured debts of Rs. 50 lakhs and above, as financial institutions for the purposes of the said Act.

BACKGROUND:

RBI has, in its Financial Stability Report (FSR)[2], reported that the gross NPA ratio of the NBFC sector has increased from 6.1% as at end-March 2019 to 6.3% as at end September 2019, and has projected a further increase in NPAs till September 2020. The FSR further states that as at end September 2019, the CRAR of the NBFC sector stood at 19.5% (which is lower than 20% as at end-March 2019).

To ensure quicker recovery of dues and maintenance of liquidity, the Finance Minister had, in the Budget Speech, announced that the limit for NBFCs to be eligible for debt recovery under the SARFAESI is proposed to be reduced from Rs. 500 crores to asset size of Rs. 100 crores or loan size from existing Rs. 1 crore to Rs. 50 lakhs[3]. The Notification has been brought as a fall out of the Budget.

Our budget booklet can be accessed from the link below:

http://vinodkothari.com/wp-content/uploads/2020/02/Budget-Booklet-2020.pdf

ELIGIBILITY FOR INITIATING ACTION UNDER SARFAESI

To determine the test for eligible NBFCs, it is first pertinent to understand the terms used in the Notification.

The Notification provides that NBFCs shall be entitled for enforcement of security interest in “secured debts”. Now, the term “secured debt” has been defined under Section 2(ze) of SARFAESI to mean a debt which is secured by any security interest, and “debt” has been defined under Section 2(ha) as follows:

(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and includes-

(i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or conditional sale or under any other contract;

(ii) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable any borrower to acquire the intangible asset or obtain licence of such asset.

Further, Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, provides that the term “debt” means “any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities.”

Therefore, NBFCs having asset size of Rs. 100 crores and above as per their last audited balance sheet will have the right to proceed under SARFAESI if:

  • The debt (including principal and interest) amounts to Rs. 50 lakhs or more; and
  • The debt is secured by way of security interest[4].

EFFECT OF NOTIFICATION:

An article of Economic Times[5] dated 07.02.2020 states that:

“Not many non-bank lenders are expected to use the SARFAESI Act provisions to recover debt despite the Union budget making this route accessible to more such lenders due to time-consuming administrative hurdles as well as high loan ticket limit.”

As one may understand, SARFAESI is one of the many recourses available to the NBFCs, and with the commencement of the Insolvency and Bankruptcy Code, the NBFCs are either arriving at a compromise with the debtors or expecting recovery through insolvency/ liquidation proceedings of the debtor. The primary reasons are as follows:

  • SARFAESI provisions will apply only when there is a security interest;
  • NBFCs usually provide small ticket loans to a large number of borrowers, but even though their aggregate exposure, on which borrowers have defaulted, is substantially high, they will not able to find recourse under SARFAESI;
  • For using the SARFAESI option, the lender will have to wait for 90 days’ time for the debt to turn NPA. Then there is a mandatory 60 days’ notice before any repossession action and a mandatory 30 days’ time before sale. Also, the debtor may file an appeal before Debt Recovery Tribunal, and the lengthy court procedures further delay the recovery.

While the notification seems to include a larger chunk of NBFCs under SARFAESI, a significant question that arises here is whether NBFCs will actually utilise the SARFAESI route for recovery?

 

[1] http://egazette.nic.in/WriteReadData/2020/216392.pdf

[2] https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=952

[3] https://www.indiabudget.gov.in/doc/Budget_Speech.pdf

[4] Section 2(zf) “security interest” means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes-

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

(ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset.

[5] https://economictimes.indiatimes.com/industry/banking/finance/banking/not-many-nbfcs-may-use-sarfaesi-act-to-recover-loan/articleshow/74012648.cms

INSOLVENCY OF FSPS AND THIRD PARTY RIGHTS UNDER SECURITISATION CONTRACTS

-Richa Saraf

(richa@vinodkothari.com)

 

The Insolvency and Bankruptcy Code, 2016 (“Code”) does not, in general, deal with insolvency of financial service providers (“FSPs”), as FSPs are seen to be systemic and complex structures with unique transactions in their kitty. However, the Dewan Housing Finance Corporation Limited (DHFL) collapse led to notification of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019[1] (“Rules”) under Section 227 of the Code. The Rules applied the law to FSPs, with certain modifications[2]. The Rules, inter alia, with respect to third party assets, stipulates that the moratorium provisions will not apply to such assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties. The Rules further state that the Administrator shall take control and custody of such third-party assets or receivables, but only for the limited purpose of dealing with them in the manner as may be notified by the Central Government.

Pending notification of clear rules with regard to third party assets with the FSPs, there were ambiguities, which demanded judicial intervention (see below). However, now, the Central Government has, vide notification dated 30.01.2020[3] (“Notification”), notified the manner in which third party assets in custody or possession of financial service providers (against whom insolvency proceedings have been initiated) has to be dealt with.

Read more

RBI now allows ARCs to hold more than 26% shares

By Mayank Agarwal ( finserv@vinodkothari.com )

Introduction

The ever-increasing volume of Non-Performing Assets has paralyzed the Indian banking sector, with the gross NPA figures reported to be around Rs. 8.4 lakh crores at the end of September 2017.[1] Forming around 12% of the total banking advances, the distressed Indian banking situation should have provided the Indian Asset Reconstruction Companies (ARCs) with a vast share of market to cater to and thus yield impressive results. However, the past few years have resulted in the contrary, with the Indian ARCs failing to live up to its expectations.

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APPLICATION UNDER SARFAESI- A Liberal Approach by the Supreme Court

By Richa Saraf, (legal@vinodkothari.com) Read more

Guidance Note to NBFCs for nomination of counsel in Delhi High Court

By Richa Saraf, (legal@vinodkothari.com)

BACKGROUND:

  1. In exercise of its powers under sub clause (iv) of clause (m) of sub section (1) of section 2 read with section 31A of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( “SARFAESI Act”), the Central Government issued a notification[1] dated August 5, 2016 notifying 196 Non- Banking Financial Companies (“Notified NBFCs”) as “Financial Institutions”, registered with the Reserve Bank of India (RBI) and having asset of Rs. 500 crore and above as per their last audited balance sheet, on which the SARFAESI Act is applicable. Read more

Impact of GST on factoring transactions

By Abhirup Ghosh, (gst@vinodkothari.com)

Factoring is a very popular product mode of working capital funding across the globe. In India, however, the picture is not quite rosy for factoring companies. Nevertheless, like every other thing in the country, factoring transactions will also be affected by the introduction of GST in India. Here in this article, we intend to walk you through the probable impact, GST would create on factoring transactions. Read more