– Vinod Kothari | finserv@vinodkothari.com
Based on the decision on the Monetary Policy Committee[1], the RBI, on 5th August, 2022, hiked the repo rate by 50 bps, to 5.4%. This brings the policy rate to the level where it was before the Pandemic (a brief time chart of the repo rate may be referred below). Thus, while the impact of COVID-19 may still be long and persisting, but the COVID-19 reliefs are all gone.
Read more →The new paradigm of lending partnerships in India
– Vinod Kothari | finserv@vinodkothari.com
In the world of lending, there is a new buzzword – sourcing partnership. This partnership entails the coming together of two entities, both which, let us presume, are financial entities. The one which has strong origination abilities partners with the one which has strong funding abilities, such that credit assets are sourced, serviced and risk-absorbed by the first one (say, Originating Partner), and are housed on the balance sheet of the latter (say, Funding Partner). The Originating Partner takes the credit risk, to a degree sufficient to absorb the expected losses and unexpected losses of the credit assets, continues to service the assets, and eats the entire excess spread, being the difference between the actual portfolio rate of return and the Funding Partner’s expected yield. The Funding Partner puts the loans on its balance sheet, gets only the expected yield, and essentially takes the risk in the Originating Partner, often collateralised by a funding deposit. Thus, the lender has loans with practically no risk, and the originator has risks with no loans.
Read more →– Team Corplaw | corplaw@vinodkothari.com
Consultation Paper on Applicability of SEBI PIT Regulations to MF units
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Proposals include stock broker registration, 6 months lock-in after allotment by an issuer
Growth of investor interest in fixed income investment options is a sign of maturity of a market. Indian investors have traditionally been looking at securities markets for equity-type returns and use mutual funds, bank deposits etc. for fixed returns. However, in recent years, the avenues for fixed income investing in corporate bonds, P2P lending platforms, various types of collective investment schemes such as property shares[1], etc. have flourished. Hence, as investors become active and aware, they no longer limit themselves to mutual funds. Investors are now moving to debt trading platforms, which is the subject matter of SEBI’s Consultation Paper on Online Bond Trading Platforms[2] (‘Paper’). Due to stringent requirements for debt listing, the number of issuances, the number of listed debt issuances to the public is relatively low. Considering the growing investor interest, the lack of volumes of public issuances and limitations of trading of bonds through electronic bond platforms, several platforms started offering listed and unlisted debt securities to investors. This is what we are referring to as “debt trading platforms” here.
Read more →– Sikha Bansal, Partner & Shraddha Shivani, Executive | corplaw@vinodkothari.com
Pledge[1], hypothecation, mortgage – these are all forms of security interest[2], albeit with different features. Although the common objective of any form of security interest is to create a right in rem[3] (rather than in personam[4]) in favour of the lender, the effectiveness of the security interest would depend on the extent of overarching rights created by such security interest in favour of the lender. In another article[5], we have drawn a quick snapshot of the characteristics of each form of security interest. For instance, in hypothecation, the lender does not have any right of possession or any beneficial interest in the property, and the lender’s rights are limited to cause a sale on default; on the other hand, a mortgage (depending upon the type) may have far better rights – including the right to have the title, beneficial interest, etc. In fact, as we discuss elaborately in this article, a mortgage has several motivations for the lender.
However, a conventional notion around mortgages has been that the concept of ‘mortgage’ is only applicable to immovable property. This common view arises in view of explicit provisions under the Transfer of Property Act, 1882 (‘TP Act’). On the other hand, there are no written/codified provisions on mortgage of movable property. It is not that the Courts have not discussed and debated on the same. There have been ample opportunities before the Courts (as this article highlights), wherein Courts have upheld mortgages of movable properties as well. As such, it cannot be said that there has not been any decisive jurisprudence around the subject, however, the recent ruling of Supreme Court in PTC India Financial Services Limited v. Venkateshwar Kari and Another strongly revives the discussion and reinforces the argument that ‘mortgage of movables’ is perfectly possible, although not exactly in terms of the Contract Act; however, under common law principles of equity and natural justice. In fact, in his book Securitisation, Asset Reconstruction and Enforcement of Security Interests, Vinod Kothari, has discussed about ‘chattel mortgages’.
Here, it is important to understand the relevance of this discussion. As we discuss below, a mortgage is seen as the strongest form of security interest – a pledge or a hypothecation create much lesser rights in favour of the secured lender. Hence, from a lender’s perspective, it is always beneficial to have ‘better’ rights in terms of beneficial interest and control. Also, mortgages can be of various kinds (as discussed below), hence, the parties may have the flexibility to structure and opt for a suitable form of security interest.
The article thus, studies the jurisprudence around mortgage of movable property, and the principles which must be followed in order to effect the same. The article also studies how the PTC India ruling has revived the discussion around mortgage of movables. However, before we do so, it would be extremely important to understand the features of a mortgage and how a mortgage can be used as a superior tool of security interest.
Read more →Resolution Team | resolution@vinodkothari.com
Our compilation of older SC rulings relating to IBC can be read here
Our compilation of NCLAT rulings relating to IBC part -1 can be read here
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