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NBFCs and HFCs get the Ticket to Qualified Buyers Club
-Neha Malu & Dayita Kanodia (finserv@vinodkothari.com)
Under the SARFAESI Act, only qualified buyers can invest in security receipts (SRs). The term “Qualified Buyer” has been defined under section 2(1)(u) of the SARFAESI Act, 2002, to mean a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or an ARC or any asset management company making investment on behalf of a mutual fund, a foreign institutional investor registered with SEBI, or any category of non-institutional investors as may be specified by the RBI in consultation with SEBI from time to time, or any other body corporate as may be specified by SEBI.
Earlier, in exercise of the power to notify a body corporate as a QIB (now, QB)1 for the purpose of SARFAESI Act, SEBI, vide Notification dated March 31, 20082 notified NBFCs registered under section 45-IA of the RBI Act, 1934, provided the following conditions were fulfilled:
- systemically important non-deposit taking non-banking financial companies (NBFCs) with asset size of one hundred crore rupees and above3; and
- other non-deposit taking NBFCs which have asset size of fifty crore rupees and above and “Capital to Risk – weighted Assets Ratio” (CRAR) of 10% as applicable to non-deposit taking NBFCs as per the last audited balance sheet.
Definition of Qualified Buyers Amended
Now, vide gazette notification dated February 28, 20254, the scope of qualified buyers under the SARFAESI Act has been expanded to explicitly include all NBFCs and HFCs regulated by the RBI. This amendment clarifies and broadens the range of participants who can acquire security receipts from ARCs, thereby enhancing liquidity in the distressed asset market. This notification supersedes the earlier March 31, 2008 notification (discussed above).
However, the allowance for all NBFCs and HFCs to act as qualified buyers comes with the following conditions:
- such non-banking financial companies including housing finance companies shall ensure that the defaulting promoters or their related parties do not directly or indirectly gain access to secured assets through security receipts; and
- such non-banking financial companies including housing finance companies shall comply with such other conditions as the Reserve Bank of India may specify from time to time
Analysis of the conditions specified in the 28th February notification
- The first condition provides that the NBFC or HFC participating as QB shall ensure that (1) the defaulting promoters or (2) their related parties do not, directly or indirectly, regain control over the secured assets through SRs.
The intent behind the condition quite evidently is to prevent defaulting promoters and their related parties from circumventing the resolution process and regaining control over the stressed assets through security receipts.
Now, the pertinent questions in relation to the above stated condition is (a) are as follows:
- Who constitutes a “defaulting promoter” in the context of this condition, and does ineligibility extend indefinitely, or is there a specific timeline after which the promoter may become eligible?
Section 29A(c)5 of the IBC was introduced to prevent defaulting promoters from regaining control over their stressed companies through the resolution process. This aligns with the objective of the February 28, 2025, notification, which seeks to prevent defaulting promoters and their related parties from indirectly reacquiring secured assets via SRs.
Under section 29A(c) of the IBC, a promoter of a corporate debtor classified as an NPA for over a year is ineligible to participate in the resolution process unless the default is cured. The underlying principle is that those responsible for financial distress should not benefit from restructuring their own assets.
Further, as per the RBI Prudential Framework for Resolution of Stressed Assets, 2019, when changing control of a borrowing entity and reclassifying a credit facility as ‘standard,’ it must be established that the acquirer is not disqualified under section 29A of the IBC. Additionally, the ‘new promoter’ must not be linked – whether as a person, entity, subsidiary, or associate, domestically or overseas – to the existing promoter/promoter group.
Therefore, for interpreting the present condition, inference may be drawn from section 29A(c) of the IBC.
As for the timeline for re-eligibility, section 29A(c) provides that a promoter may regain eligibility upon full repayment of all overdue amounts, including interest and charges, before submitting a resolution plan. In the author’s view, a similar approach may be considered for the present condition.
- What constitutes “direct” and “indirect” control in the context of this restriction?
Since the condition ensured at the time of issuance of SRs is required to be fulfilled by the ARC vide para 23.1(ii) of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, it comes to an intriguing question as to how can the NBFC/ HFC grant access to the defaulting promoters. The SR investor is simply one of the investors. Any sale of the loans, if any, will have to be done by the ARC and not the SR holder.
Therefore, it appears that the intent of this requirement, possibly applicable when the NBFC/HFC becomes a major buyer of the SRs, is that it does not have any specific funding or other obligation from the defaulter/ defaulter’s promoters.
- From where will the definition of “related party” be derived?
The term “related party” has been defined in several legal frameworks like Companies Act, 2013, SEBI LODR Regulations (in case of listed companies), Accounting Standards (AS-18, Ind AS 24, as may be applicable) and IBC. This raises the question of which definition should apply in the present context.
In this context, section 2(2) of the SARFAESI Act provides that-
Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the Transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.
Given the above stated provision of the SARFAESI Act, it is reasonable to infer that the definition of “related party” may be derived from the Companies Act, 2013.
- The second condition mandates compliance with any additional requirements that RBI may prescribe from time to time. This provision grants the RBI flexibility to introduce further safeguards or operational guidelines as necessary, ensuring that the participation of NBFCs and HFCs remains in line with evolving regulatory and market considerations.
Conclusion
In essence, the February 28, 2025, amendment marks a significant step in expanding the pool of qualified buyers to include all NBFCs and HFCs regulated by the RBI, thereby enhancing liquidity and participation in the security receipt market. However, the accompanying conditions ensure that increased participation does not lead to the compromise of regulatory objectives. Thus, while the amendment strengthens the investor base and improves liquidity in SRs market, it also introduces necessary safeguards to prevent potential misuse by entities with prior exposure to defaulting borrowers.
Related Resources:
- SARFAESI Act for NBFCs – Frequently Asked Questions
- ARC rights to use SARFAESI for debts assigned by non-SARFAESI entities
- The SARFAESI Act originally used the term Qualified Institutional Buyer (QIB), which was subsequently amended in 2016 and replaced with Qualified Buyer (QB). ↩︎
- https://www.sebi.gov.in/acts/qibnotification.pdf ↩︎
- In 2015, the threshold for classification of an NBFC as systemically important was increased from Rs. 100 Cr to Rs. 500 Cr but there was no consequent notification to modify the earlier notification in line with the changes in the regulatory framework for NBFCs. Even under the Scale-Based Regulation (SBR) framework, while references to Systemically Important NBFCs were replaced, the absence of an updated notification led to the continued reliance on the earlier definition. Consequently, to maintain regulatory continuity and consistency in the treatment of NBFCs, NBFCs with an asset size of ₹500 crore or more should have qualified as QBs. ↩︎
- https://egazette.gov.in/%28S%28j1ssisiqkc1nzfdmqesgfw5u%29%29/ViewPDF.aspx ↩︎
- Read more about the ineligibility criteria u/s 29A in our earlier article titled “INELIGIBILITY CRITERIA U/S 29A OF IBC: A NET TOO WIDE?” available at: https://vinodkothari.com/wp-content/uploads/2019/06/Ineligibility-Criteria-under-sec.-29A-of-IBC.pdf ↩︎
Supreme Court confirms, sale certificates from confirmed auction sales do not require mandatory registration
Barsha Dikshit and Neha Malu | resolution@vinodkothari.com
In the context of an auction sale conducted during liquidation or by a secured creditor, the sale certificate serves as a critical document, evidencing the transfer of title to the purchaser upon confirmation of the sale. Its legal nature and the procedural requirements such as registration and the payment of stamp duty have often been a subject of scrutiny and debate.
The Hon’ble Supreme Court in the matter of State of Punjab & Anr. v Ferrous Alloy Forgings P. Ltd. & Ors. reaffirmed the principle that a sale certificate issued by the authorised officer is not compulsorily registrable under section 17(1) of the Registration Act, 1908. The Court further clarified that compliance with Section 89(4) of the Registration Act, which provides for forwarding of a copy of the sale certificate by the authorised officer to the registering authority, is sufficient to satisfy the statutory requirements. However, in instances where the purchaser voluntarily presents the original sale certificate for registration or uses the same for some other purpose, the document is liable to attract stamp duty as prescribed under the Indian Stamp Act, 1899, or the relevant state enactments governing stamp duty.
This article examines the legal framework governing sale certificates in auction sales, analyzing the procedural and practical nuances associated with their registration and the evolving interpretations rendered by courts in the context of SARFAESI Act and Insolvency and Bankruptcy Code, 2016.
Read more →Recovery of debt by HFCs and initiation of SARFAESI action in case of a decided civil suit: Two significant rulings by High Courts
-Shrestha Banerjee & Archisman Bhattacharjee I finserv@vinodkothari.com
Introduction
The High Courts of Madhya Pradesh and Kerala recently rendered two judgments delving into crucial legal inquiries surrounding the recoverability and enforcement of security interests in instances of borrower default via initiation of SARFAESI proceedings by financial institutions.
The Madhya Pradesh High Court’s ruling specifically addresses the recoverability of Housing Finance Companies (HFCs) in relation to the initiation of SARFAESI actions following borrower default. Conversely, the Kerala High Court’s judgement examines the enforcement of security interests through SARFAESI actions, where the same has been initiated without placing consideration on any judgement delivered by the civil courts concerning such recovery.
In this article, we aim to analyse both judgments, shedding light on their implications and legal interpretations.
Read more →ARC rights to use SARFAESI for debts assigned by non-SARFAESI entities
– Archana Kejriwal
Asset reconstruction companies, formed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’/‘the Act’) are an important part of the country’s ecosystem to tackle non-performing loans. ARCs buy and resolve non-performing loans by acquiring them from the financial system.
ARCs were traditionally focusing on acquiring large corporate loan exposures. However, recently, there is increasing participation of the ARCs in retail loans. When ARCs buy retail loans, it is quite likely that the lender or the loan does not qualify for SARFAESI right when the loan was with the lender. This may be either because of the nature of the lender (NBFCs having assets of less than Rs 100 crores) or the size of outstanding (less than Rs 20 lakhs). In such cases, once the ARC acquires the loans, will it have the rights under the SARFAESI Act?
The question becomes important, because in case of corporate loans, the advantage that ARCs had over the original lender was one of aggregation, that is, ARCs acquiring loans given to the same borrower by various lenders, and thus getting significant strength in relation to the borrower. This cannot be the case, obviously, with retail loans. Hence, if the acquiring ARC is no better than the outgoing NBFC, in what way does the transfer of the loans help to accelerate the recovery?
In this article, we discuss this important question.
Read more →Clog on redemption of mortgage after publication of sale notice – SC reiterates word of law u/s 13(8)
– Team Resolution | resolution@vinodkothari.com
Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( ‘SARFAESI Act’) provides methods that can be undertaken by a secured creditor to recover its dues in case of a default.
Section 13 of the SARFAESI Act being an important section contains provisions relating to ‘Enforcement of Security Interest’. Sub-section (2) and (4) of section 13 describes the manner and timeline within which the creditor can enforce its rights to recover the dues against a Non-Performing Asset (‘NPA’). While, on one hand, the creditor has a right to sell the secured asset; in juxtaposition is the right of the borrower to have the property released on repayment of dues. These rights are in conflict with each other and therefore, there is a need to have clarity around the point of time at which the borrower would lose the right of redemption and the lender’s right of sale becomes absolute.
At this stage, section 13(8) of the SARFAESI Act comes into picture. The present provision of section 13(8) states that where any default has been made by the borrower in terms of repayment of the dues, the amount outstanding if repaid by the borrower at any time before the date of publication of auction notice by the creditor, such a creditor shall not have any further right to transfer or to take any other step in relation to transfer of such secured asset. On a contrary, the earlier provision stated that the right of the borrower to redeem the mortgaged property shall be available till the date fixed for sale or transfer.
The provision of section 13(8) has often been debated upon wherein, several High Courts have held different views. However, a recent ruling of the Hon’ble Supreme Court in the matter of Celir Llp v Bafna Motors (Mumbai) Pvt. Ltd.[1] , has clarified the position and scope of section 13(8) before and after the amendment.
Read more →Security Interest: Meaning, forms, registration, enforcement, and effects of non-registration
-Team Vinod Kothari and Company | resolution@vinodkothari.com
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Open in new tab Tax dues subservient to dues of secured creditors under SARFAESI Act and RDDB Act
Neha Sinha, Executive, Vinod Kothari & Company
corplaw@vinodkothari.com
Introduction
SARFAESI Act and RDDB Act are specific laws for recovery of debts. Both these laws provide that the secured creditors can claim priority for the realisation of dues. On the other hand, State and Central tax authorities can also enforce the payment of tax dues under tax statutes, which often create a statutory first charge in favour of the authorities. This may give rise to situations wherein the secured creditors are competing with the tax authorities in respect of payment of dues. Such competing claims have to be resolved in case of insolvency/deficiency.
A similar situation arose in the case of Jalgaon Janta Sahakari v. Joint Commissioner of Sales.[1] The Division Bench of the Bombay High Court decided on the issue of the conflict between SARFAESI Act and RDDB Act, and State tax statutes, in respect of priority of claims. The primary that arose in this case was whether State tax authorities can claim priority, by virtue of first charge created under State tax statutes, over a secured creditor for liquidation of their respective dues.
Chapter IV-A of the SARFAESI deals with registration of charges by secured creditors and. Pursuant to section 26D therein, a secured creditor who has not registered the charge loses his right to enforce the security under SARFAESI. Section 26E, which has a non-obstante clause, accords priority to the secured creditor who has registered the charge in the CERSAI, over “all other debts and all revenue, taxes, cesses and other rates payable to the Central Government or State Government or local authority.” Similarly, section 31B of the RDDB Act gives states that “notwithstanding anything contained in any other law….rights of secured creditors shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.” Pertinently, the aforesaid provisions in both Acts have a non-obstante clause, having the effect of overriding any other law inconsistent with it.
In the instant case, by virtue of relevant State tax statutes, a first charge was created in favour of State tax authorities. This brings forth the conflict as to who shall have priority in terms of payment- that State tax authorities with first charge or the secured creditors with the registration of charge in CERSAI?
Mortgage on movable property – whether another lucrative option for lenders?
– Sikha Bansal, Partner & Shraddha Shivani, Executive | corplaw@vinodkothari.com
Introduction
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 →SARFAESI Act action: Abatement of references to BIFR
Vinod Kothari | resolution@vinodkothari.com
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