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Stamp Duty on Debt Assignment

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13th Feb, 2018

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Introduction

Assignment of debt is one of the most common forms of transactions in financial markets. It essentially entails transfer of a debt from a creditor (assignor) to a third-party (assignee). One of the biggest challenges faced in debt assignment transactions in India is the significant stamp duty implication on the deed of assignment. Considering the volume of assignment transactions undertaken generally by banks and financial institutions or by asset reconstruction companies (“ ARCs ”), the stamp duty levied becomes a significant cost in such transactions. The Constitution of India (“ Constitution ”) confers upon the Parliament and each State Legislature the power to levy taxes and other duties. The subjects on which the Parliament or a State Legislature or both can legislate are specified in the Seventh Schedule of the Constitution. The Seventh Schedule is divided into 3 (three) lists:

• Union List;
• State List; and
• Concurrent List.

The Parliament has the exclusive power to legislate on the subjects enumerated in the Union List. The State List enumerates the subjects on which each State Legislature can legislate and such laws operate within the territory of each State. The Parliament, as well as the State Legislatures, have the power to legislate over the subjects listed in the Concurrent List.

The entry pertaining to levy of stamp duty in the Union List is as follows: -

“91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.”

The entry pertaining to levy of stamp duty in the State List is as follows: -

“63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty.”

The entry pertaining to levy of stamp duty in the Concurrent List is as follows: -

“44. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty.” [emphasis supplied]

From the aforementioned entries, it is clear that the power to legislate on the rate of stamp duty chargeable on instruments of debt assignment (since it is not covered under Entry 91 of the Union List) is with the State Legislature. However, the power to determine whether stamp duty can be charged or not on a specific instrument is in the Concurrent List. In this regard, it may be noted that pursuant to the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“ Amendment Act ”), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“ SARFAESI ”) and the Indian Stamp Act were amended to provide for an exemption from stamp duty on a deed of assignment in favour of an ARC.

As mentioned above, the power to legislate on whether stamp duty is payable or not on an instrument is in the Concurrent List. Therefore, the Parliament has the power to legislate on the aforesaid subject.

Pursuant to the Amendment Act, section 5(1A) was inserted in SARFAESI which provides that any agreement or document for transfer or assignment of rights or interest in financial assets under section 5(1) of SARFAESI in favour of an ARC is not liable to payment of stamp duty.

In several States, notifications have been issued for remission and/ or reduction of stamp duties on debt assignment transactions. For instance, in Rajasthan, the stamp duty chargeable on any agreement or other document executed for transfer or assignment of rights or interests in financial assets of banks or financial institutions under section 5 of SARFAESI in favour of ARCs 1 has been remitted. Further, in Maharashtra, the stamp duty on instrument of securitization of loans or assignment of debt with underlying security has been reduced to 0.1% (zero point one percent) of the loan securitized or the debt assigned subject to a maximum of Rs. 1,00,000 (Rupees one lac) 2 .

Certain State Governments, such as those of Rajasthan and Tamil Nadu have reduced the stamp duty based on the nature of the financial asset being assigned. In Rajasthan, the stamp duty has been reduced for assignment of standard assets whilst in Tamil Nadu, the stamp duty has been reduced for assignment of non-performing assets and assignment in favour of ARCs.

This paper discusses a recent decision by the Allahabad High Court in the case of Kotak Mahindra Bank Limited v. State of UP & Ors. 3 (“ Kotak case ”), where it was held that an instrument of assignment is chargeable with stamp duty under Article 62(c) (Transfer) of Schedule 1B of the Indian Stamp Act, as applicable in Uttar Pradesh (“ UP Stamp Act ”), as opposed to Article 23 (Conveyance) of Schedule 1B of the UP Stamp Act.

The stamp duty payable in various States under Article 23 or the relevant provision for conveyance is on an ad valorem basis whereas the stamp payable under Article 62(c) or relevant provision for transfer of interest secured, inter alia, by bond or mortgage deed, is a nominal amount. For instance, in Uttar Pradesh, the stamp duty payable under Article 62(c) is Rs. 100 (Rupees one hundred).

Decision in the Kotak case

In the Kotak case, Kotak Mahindra Bank Limited (“ Kotak ”) had purchased and acquired certain loans from State Bank of India (“ Assignor ”) along with the underlying securities.

The question for consideration before the full bench of the Allahabad High Court was whether the deed executed by the applicant with the underlying securities would be chargeable with duty under Article 62(c) or Article 23 of Schedule 1B of the UP Stamp Act.

The court observed that in order to determine whether an instrument is sufficiently stamped, one must look at the instrument in its entirety to find out the true character and the dominant purpose of the instrument. In this case it was observed that the dominant purpose of the deed of assignment entered into between Kotak and the Assignor (“ Instrument ”), was to transfer/ assign the debts along with the underlying securities, thereby, entitling Kotak to demand, receive and recover the debts in its own name and right.

Article 11 of Schedule 1B of the UP Stamp Act provides that an instrument of assignment can be charged to stamp duty either as a conveyance, a transfer or a transfer of lease. The court observed that since the Instrument was not a transfer of lease, it would either be a conveyance or a transfer.

The court referred to the definition of conveyance in the UP Stamp Act, which reads as follows:

““ Conveyance ”. — “Conveyance” includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for [by Schedule I, Schedule IA or Schedule IB] [as the case may be];” [emphasis supplied]

The court held that the term conveyance denotes an instrument in writing by which some title or interest is transferred from one person to other and that the use of the words “on sale” and “is transferred” denote that the document itself should create or vest a complete title in the subject matter of the transfer, in the vendee. In this case since under the Instrument, the rights of the Assignor to recover the debts secured by the underlying securities had been transferred to Kotak, it was held that the requirement of conveyance or sale cannot be said to be satisfied.

The court further observed that debt is purely an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property. Where a transaction does not affect the transfer of any immovable or movable property, Article 23 of Schedule 1B cannot have any applicability.

The court’s view was that since debt along with underlying securities is an interest secured by bonds and/ or mortgages, transfer of such debt would be chargeable under Article 62(c).

The court further clarified that under the Instrument, merely the right under the contract to recover the debts had been transferred. Since the borrower(s) had never transferred the title in the immovable property given in security to the Assignor, the Assignor could merely transfer its rights i.e. mortgagee's rights in the property to recover the debts. It was further observed that the Assignor never had any title to the underlying securities and that it merely had the right to enforce the security interest upon default of the borrower(s) in repayment. The right transferred to Kotak was primarily the right to recover the debts, in accordance with law, by proceeding against the underlying security furnished by the bonds/ mortgage deed(s).

Therefore, the court held that the Instrument was chargeable with stamp duty under Article 62(c) of Schedule 1B of the UP Stamp Act.

Whilst coming to the conclusion that assignment of debt would not constitute a conveyance, the court referred to the definition of conveyance to state that debt is an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property.

In this regard, it may be noted that there are various judicial precedents 4 , where it has been held that an interest (including mortgage interest) in immovable property is itself immovable property.

However, even assuming assignment of debt with underlying securities over immovable property amounts to a conveyance, it

may be pertinent to refer to the definition of conveyance in the UP Stamp Act which specifically excludes a conveyance which is otherwise provided for by the Schedule to the UP Stamp Act.

Article 62(c) of the UP Stamp Act reads as follows:

“62. Transfer (whether with or without consideration) – … (c) of any interest secured by a bond, mortgagedeed or policy of insurance--”

In view of the above, transfer of any interest secured by a mortgage deed, which is covered under Article 62(c), would be excluded from the meaning of conveyance and would be chargeable to stamp duty under Article 62.

In this regard it may be pertinent to refer to the definitions of ‘bond’ and ‘mortgage deed’ under the UP Stamp Act, which is as follows:

“" Bond " includes

(a) any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;

(b) any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and

(c) any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another

“" Mortgage-deed ". — "mortgage-deed" includes every instrument whereby, for the purpose of securing money advanced, or to be advanced, by way of loan, or an existing or future debt, or the performance of an engagement, one person transfers, or creates, to, or in favour of another, a right over or in respect of specified property;”

In view of the above, where a debt secured by a bond or a mortgage deed is assigned under a deed of assignment, the stamp duty payable on such deed of assignment will be under Article 62(c) of the UP Stamp Act or corresponding provisions of the Stamp Act of other States.

However, in cases of unsecured loans or loans secured by an equitable mortgage (where there is no mortgage deed), the deed of assignment would attract ad valorem stamp duty chargeable on conveyance, since the same will not get covered under Article 62(c) or similar provisions in other states.

The market practice until now has been to stamp the deed of assignment of debt under the relevant article for Conveyance in the applicable Stamp Act. In fact, in States such as Maharashtra, the State Government has issued notifications for reduction of stamp duty on a deed of assignment under the article for Conveyance.

The judgment passed by the Allahabad High Court in the Kotak case may prove to be a welcome step in reducing the incidence of stamp duty on debt assignment transactions. However, it would need to be seen whether in other States a similar view is taken by stamp duty authorities.

This update has been prepared by Aastha (Partner), Debopam Dutta (Managing Associate) and Abhay Jain (Associate).

1 Notification No. F4(3)FD/Tax/2017-110 dated March 8, 2017 issued by Finance Department (Tax Division) Government Of Rajasthan.

2 Notification No.Mudrank-2002/875/C.R.173-M-1 dated May 6, 2002 issued by Revenue & Forests Department, Government of Maharashtra.

3 Reference Against MISC. Acts. No. 1 of 2016, order dated February 9, 2018.

4 Bank of Upper India Ltd. (in liquidation) v. Fanny Skinner and Ors., AIR 1929 All 161. See also Prahlad Dalsukhrai and Ors. v. Maganlal Muljibhai Tewar, AIR 1952 Bom 454 and Harihar Pandey v. Vindhayachal Rai and Ors., AIR 1949 Pat 170.

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• Notifications

Master Directions

The transferor(s) should also make appropriate disclosures with regard to the quantum of excess provisions reversed to the profit and loss account on account of sale of stressed loans. Also, the lenders should disclose the distribution of the SRs held by them across the various categories of Recovery Ratings assigned to such SRs by the credit rating agencies.

87. Transferors shall report each loan transfer transaction undertaken under these directions to a trade reporting platform as notified by the Reserve Bank. The detailed instructions in this regard will be issued separately. In anticipation of the same, lenders shall maintain a database of loan transfer transactions with adequate MIS concerning each transaction till the reporting platform is notified and the related instructions are issued.

Chapter VI: Repeal of circulars

88. The list of circulars / directions / guidelines / parts of Master Directions that stand repealed with immediate effect is given below:

Entities to which lenders are permitted to transfer stressed loan exposures under Clause 58 of these directions

1. Scheduled Commercial Banks;

2. All India Financial Institutions (NABARD, NHB, EXIM Bank, SIDBI and 17 NaBFID );

3. Small Finance Banks;

4. All Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs);

5. Asset Reconstruction Companies registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

6. A company, as defined in sub-section (20) of Section 2 of the Companies Act, 2013 other than a financial service provider as defined in sub-section (17) of Section 3 of the Insolvency and Bankruptcy Code, 2016. Acquisition of loan exposures by such companies shall be subject to the relevant provisions of the Companies Act, 2013.

1 Amended vide amendment dated December 05, 2022

2 Amended vide amendment dated December 05, 2022

3 Inserted vide amendment dated December 28, 2023

4 Inserted vide amendment dated December 05, 2022

5 Amended vide amendment dated December 05, 2022

6 Inserted vide amendment dated December 05, 2022

7 Amended vide amendment dated December 05, 2022

8 Inserted vide amendment dated December 28, 2023

9 Amended vide amendment dated December 05, 2022

10 Amended vide amendment dated December 05, 2022

11 Inserted vide amendment dated December 05, 2022

12 Amended vide amendment dated December 05, 2022

13 Amended vide amendment dated December 05, 2022

14 Deleted vide amendment dated December 05, 2022

15 Inserted vide amendment dated December 05, 2022

16 Amended vide amendment dated December 05, 2022

17 Inserted vide amendment dated December 28, 2023

IBC: AN ASSIGNEE IS a financial creditor under ibc and can continue CONTINUING PROCEEDINGS initiated under SECTION 7 by the assignor – nclat

The Hon’ble Division Bench, National Company Law Appellate Tribunal, ( NCLAT) comprising of Justice Ashok Bhushan (Chiarperson) and Baru Mitra, Member (Technical) in Siti Networks Ltd. vs Assets Care & Reconstruction Enterprise Ltd . & Anr (Comp. Appl. (AT)(Ins.) No. 1449 of 2022.) on 13 th December 2022 held that an Assignee is a Financial Creditor within the meaning of Section 5(7) of the Insolvency & Bankruptcy Code , 2016 (“Code”) and has every right to continue proceeding under Section 7 of the Code initiated by the Assignor.

Factual Summary:

In the present case, various facilities were sanctioned and disbursed to Siti Networks Ltd (“Corporate Debtor”) by ‘Housing Development Finance Corporation Limited’ (“HDFCL”). Subsequently on account of failure to maintain financial discipline the account of the Corporate Debtor was categorized as NPA and HDFCL proceeded to initiate Corporate Insolvency Resolution process under Section 7 of the Code against the Corporate Debtor. Thereafter, HDFCL assigned the Debt to Assets Care and Reconstruction Enterprise limited (“ACRE”) vide registered Assignment Deed dated 29.06.2022. Hence, ACRE filed an Application seeking substitution as Financial Creditor in the Company Petition filed by HDFCL before Hon’ble NCLT, Mumbai. The same was vehemently opposed by the Corporate Debtor on the basis of judgment passed by the co-ordinate Bench of the Hon’ble NCLT, Bengaluru whereby such an Application was dismissed.

The Hon’ble NCLT, Mumbai however was pleased to allow substitution of the Financial Creditor on the grounds of valid Assignment of debt, lack of precedents set by higher forums, and no express prohibition in the code preventing an Assignee to come on record and continue the pending proceedings. Aggrieved by the order passed by the Hon’ble NCLT, Mumbai the Corporate Debtor has approached the Hon’ble NCLAT by way of the present Appeal.

Contentions of parties:

Learned counsel for the Corporate Debtor argued, that the Assignee couldn’t have been permitted to continue proceedings initiated by HDFCL under Section 7 and may file a fresh Petition on the basis of Assignment. Further, the Counsel placed reliance on the judgment of the Hon’ble NCLT, Bengaluru Bench whereby it was held that it is a prerogative of the Assignor to file a miscellaneous Application impleading the necessary party and where such Application is not pursued, the Assignor having assigned the debt cannot prosecute and the Assignee cannot substitute itself as Applicant.

Learned Counsel for the ACRE vehemently argued that in the light of Section 5(4) of the SARFAESI Act, 2002 which provides for the continuation of all proceedings by an Assignee who acquires any Financial Asset, the Respondent is well within their rights to continue proceedings initiated by the Assignor, on the grounds of a valid assignment of debt. The Learned Counsel further referred to Order XXII Rule 10 of the Civil Procedure Code, 1908 (“CPC”) which categorically recognizes the right of an Assignee to continue a proceeding with the leave of the Court on the basis of devolution of rights.

Findings of NCLAT:

The Hon’ble NCLAT after hearing the submissions of the Learned Counsels for the parties upheld the contention that an Assignee can very well continue proceedings initiated by the Assignor on the premise of Section 5(4) of the SARFAESI Act, 2002 and Order XXII Rule 10 of CPC as correctly interpreted by the Learned Counsel for ACRE.

Further, the Hon’ble Bench clarified that the judgment of the Hon’ble NCLT, Bengaluru relied upon by the Learned Counsel for the Corporate Debtor was erroneous in law and cannot be relied upon as a binding precedent.

The Hon’ble NCLAT while confirming the order passed by Hon’ble NCLT, Mumbai reiterated that neither the Code nor any Regulations in any manner prohibit the continuation of proceedings by an Assignee. The Hon’ble NCLAT relied on the language in Section 5(7) of the Code which squarely covers a person to whom a financial debt is legally assigned or transferred to, within the definition of a ‘Financial Creditor.’

Accordingly, the Appeal was dismissed for lack of merit.

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Securitisation Transactions in India – Legal Validity

Pratish Kumar (Partner, Juris Corp)

Ankit Sinha (Principal Associate)

Garima Parakh (Associate)

1)        Background

Securitisation was introduced in India as part of the wave of financial reforms in 1999 to expand the funding capacity of banks and non-banking financial companies ( “NBFCs” ). With a volume of INR 1.57 lakh crore in December 2019 [1] , securitisation is a popular resource-raising mechanism, especially amongst NBFCs and housing finance companies ( “HFCs” ). This is also common in banks for meeting the priority sector lending requirements. The steady upward trend in securitisation transactions, from INR 1.44 lakh crore in the nine months preceding the financial year 2019 to INR 1.57 lakh crore in the nine months preceding the financial year 2020, is also reflective of the severe liquidity crunch faced by NBFCs and HFCs in recent times. [2]  

Redistribution of risk can be achieved by way of sale of certain assets by banks or financial institutions, in any of the following manners – 

(a)      Direct assignment : In a direct assignment transaction, assets owned by the originator bank or financial institution ( “Originator” ) are sold directly to the buyer(s). The said assets are reflected in the books of account of the buyer(s). A key principle in direct assignment transactions is that of true sale, which is required to be adhered to for a valid assignment of the standard assets. A direct assignment transaction is the most preferred mode of down selling standard assets. [3]

(c)       Listed transactions : The Securities and Exchange Board of India( “SEBI” ) has notified the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 ( “SDI Regulations” ). These regulations, inter-alia specify disclosure requirements for public issuance and listing of securitised debt instruments ( “SDIs” ) (both publicly issued and privately placed) and obligations of the parties involved in the transaction. Under the SDI Regulations, a special-purpose distinct entity is a trust that acquires debt or receivables from funds mobilised by the entity, by issuing SDIs through one or more schemes. A certificate or instrument is issued to an Investor by the special purpose distinct entity, which possesses any debt or receivable, including mortgage debt assigned to such an entity by the Originator and the trustee. This certificate acknowledges the beneficial interest of the Investor in such debts or receivables.

Certain securitisation transactions which do not involve loan receivables (for example, lease receivables) are undertaken under the SDI Regulations. Securitisation of loan receivables may also be listed under the SDI Regulations. However, due to lack of an investor base, such transactions are not very common in India.

We have received many queries in relation to the legal validity of securitisation transactions. In specific, interested clients have raised questions as to whether Courts in India have upheld the validity of securitisation transactions (not Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 related provisions). While we have seen very few case laws on securitisation transactions in India, it is noteworthy to mention that all such judicial pronouncements indicate that the Courts in India have recognized and upheld the structure of securitisation transactions, their legality and feasibility.

The underlying basis of securitisation transactions is assignment of actionable claims. This forms part of laws relating to transfer of property. In this article, we are not dealing with case laws relating to ‘actionable claims’ and have restricted it to those relating to securitisation transactions.

2)        Case laws

Two landmark judgments, of the Hon’ble Supreme Court of India and Hon’ble High Court of Bombay recognise the role of Investors / buyers under securitisation and direct assignment transactions to be as creditors and further uphold the principles of true sale and bankruptcy remoteness.

(a)      ICICI Bank Limited v. Official Liquidator of APS Star [6]

The core question before the Hon’ble Supreme Court of India was whether assignment of debt is a permissible activity under the Banking Regulation Act, 1949 ( “BR Act” ). In this case, ICICI Bank Limited ( “Assignor” ) had, by way of deeds of assignment, assigned certain non-performing loans, including that availed by APS Star Industries Ltd. ( “Debtor” ), to Kotak Mahindra Bank ( “Assignee” ). Winding-up proceedings were initiated against the Debtor, and the Assignee sought to substitute the Assignor in the winding-up petitions. The Hon’ble Supreme Court of India relied upon certain provisions of the BR Act and the Reserve Bank of India’s ( “RBI” ) Guidelines on Purchase / Sale of Non Performing Financial Assets Scope dated 13 th July 2005, to hold that banking companies can venture into new areas of business apart from their principle business of lending and accepting deposits, as long as they do not attract prohibitions and restrictions such as those contained in Sections 8 and 9 of the BR Act. In arriving at this conclusion, the Hon’ble Supreme Court of India relied upon Section 6(1)(a) read together with Section 6(1)(n) of the BR Act which permits banks to, inter se , deal in non-performing assets ( “NPAs” ). The Hon’ble Supreme Court of India concluded that, dealing in NPAs is a bona fide banking business and that assignment of NPAs is a well-recognised tool used in the interest of banking policy to resolve the issue of NPAs.

(b)      Interim applications in the Dewan Housing Finance Corporation Limited (DHFL) cases

A series of applications were filed by the assignees of DHFL against an ad-interim order of the High Court of Bombay dated 10 th October 2019 ( “Order” ), which had restrained DHFL from making any payments to its creditors, unless made to all secured creditors on a pro-rata basis from its current and future receivables. The applications sought a modification to the Order to allow payments to be made to the plaintiffs under securitisation and assignment agreements entered into with DHFL. The Hon’ble High Court of Bombay while accepting the contentions put forth by the plaintiffs, modified the Order to allow payments to be made to banks under such agreements. In doing so, the Hon’ble High Court of Bombay recognised the aspect of bankruptcy remoteness of such securitisation and direct assignment transactions.

3)        Securitisation Transactions: Legal Framework

(a)      The guidelines pertaining to securitisation and direct assignment of standard assets were issued by the RBI on 1 st February 2006. These guidelines were subsequently revised by the RBI on receipt of comments from concerned stakeholders and issued on 7 th May 2012 (the “Guidelines” ). The Guidelines are organised in three Sections. Section A contains provisions relating to securitisation of assets. Section B contains stipulations regarding transfer of standard assets through direct assignment of cash flows. Section C enumerates the securitisation transactions which are currently not permissible in India.

(b)      Section A of the Guidelines deals with requirements to be met by the originating bank and the assets eligible for securitisation. The said Section of the Guidelines states that in a single securitisation transaction, the underlying assets should represent the debt obligations of a homogeneous pool of obligors. Section A of the Guidelines also specify the assets that cannot be transferred.

(c)       Section B of the Guidelines deals with the requirements to be met by the originating bank and the assets eligible to be transferred by way of direct assignment. The said Section of the Guidelines states that banks are permitted to transfer a single standard asset or a part of such asset or a portfolio of such assets to financial entities through an assignment deed. Section B of the Guidelines also specifies the assets which cannot be transferred. Specifically, assets purchased from other entities cannot be transferred by way of direct assignment.

(d)      The Guidelines also stipulate the minimum holding period and minimum retention requirement to be satisfied under Sections A and B, respectively and the true sale criteria which in effect requires immediate legal separation of the selling bank from the assets that are sold.

(e)      For securitisation under the SDI Regulations, please refer to paragraph 1) (c) above.

(f)        As regards stamp duty laws, stamp duty is applicable on such transaction documents at the time of execution. Many States (for example, Maharashtra, Karnataka and the National Capital Territory of Delhi) have provided certain relaxations on payment of stamp duty re assignment of debt. The quantum of stamp duty may be ascertained once the place of execution is finalised.

(g)      As regards registration of the transaction documents, the law in certain States (for example, the National Capital Territory of Delhi) require the document relating to the assignment of loan receivables to be mandatorily registered.

[1]   ICRA, ‘ICRA: Securitisaton market on path to see all-time high issuance volume in FY2020 despite some headwinds’, press release dated 21 st January 2020.

[2]   ICRA, ‘ICRA: Securitisaton market on path to see all-time high issuance volume in FY2020 despite some headwinds’, press release dated 21 st January 2020.

[3]   Anand Shah et. al., ‘India: Securitisation 2020: Trends and Developments in India’, (Mondaq, 21 st  January 2020) <https://www.mondaq.com/india/securitization-structured-finance/885822/securitisation-2020-trends-and-developments-in-india>

[4]   RBI, ‘Report of the In-house Working Group on Asset Securitisation’, 29 th December 1999   <https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/10788.pdf>

[5] Anand Shah et. al., ‘India: Securitisation 2020: Trends and Developments in India’, (Mondaq, 21 st January 2020) <https://www.mondaq.com/india/securitization-structured-finance/885822/securitisation-2020-trends-and-developments-in-india>

[6]   Civil Appeal No.8393 of 2010.

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• Judgments 9830

...leviable on excess drawing/temporary overdraft limit before assignment of debt to the Appellant (Assignee) and charging of such penal interest against the Corporate Debtor after assignment of ...be a component of debt not covered by the assignment . Besides it is not a crystallised debt in the hands of the Appellant (Assignee). Viewed in this context, the claim cannot be said to have been...lawful assignee of the debt owed by the Corporate Debtor to Karnataka Bank Limited is aggrieved of upholding of rejection of its claim to the extent of charging penal interest against the Corporate...

...submitted that, in any event, an activity of assignment of debt would fall within five of the clauses in Section 6(1) of the BR Act, 1949, namely, clause (a), clause (c), clause (g), clause (l) and....20. In reply, Shri T.R Andhyarujina, learned Senior Counsel appearing for the borrower, inter alia submitted that the assignment of financial instruments in possession of ICICI Bank Ltd. to Kota...clients of ICICI Bank in favour of the assignee”. That, the assignment of a debt can never carry with it the assignment of the obligations of the assignor. Unless there is a novation of t...

...these circumstances, the assignment of debt to the petitioner was not a bona fide one. It had been done on 31-3-2006 surreptitiously without knowledge of answering respondent and stood vitiated. He also...expeditiously within a time frame.6. Learned counsel for petitioner submits that the challenge to the assignment of debt apart from being legally unsustainable, was devoid of merit and was...petitioner thereby recognizing the assignment of debt in favour of the petitioner.7. During the course of arguments, we had put to learned counsel for the parties that prima facie there does...

... of BIFR, it was not disclosed to the Company Court till the winding-up order was passed on 19-4-2010, the assignment of debt of Rs 160 crores by IFCI for Rs 85 lakhs, are admitted facts. The order..., staking a claim for being substituted as a secured creditor under the Sarfaesi Act consequent to the assignment of debt to it by IFCI. That the claim was not simply with regard to assignment of an...Navin Sinha, J.— Leave granted. The appellant is an assignee of debt by Industrial Finance Corporation of India Ltd. (hereinafter called as “IFCI”) for the outstandings of M/s...

...Securitisation Act") on the ground that the debt of the plaintiff to the ICICI Bank has been assigned in favour of the respondent bank by executing the deed of assignment under the...observation that assignment of the debt is valid. It is further observed that a benefit under the contract can always be assigned. Reference is made to the...passed in Civil Application No.395/2009 dated 10.08.2009 was passed in view of the judgment of the Division Bench of this Court prohibiting the assignment of debt . However, as the judgment ...

...liabilities of the petitioner. In fact, the reading of the petition and the arguments now raised show that the grievance is in respect of assignment of debt by the Bank. The borrower has no intere...such transaction but even if such transaction is finalized, the petitioner will not have any right to dispute the assignment of debt . The petitioner as a borrower is bound by the terms of the contract...executed by the petitioner with the Bank.In view of the said fact, we do not find any intervention, at the instance of the petitioner, in respect of assignment of debt , is warranted...

Can't display summary as content is Scanned, Please open the judgment to see full content.

..., 2002 (for short, the SARFAESI Act). Appellant No. 1, thereafter, wrote a letter to the defendants, who were the guarantors/mortgagors, informing them about the assignment of the debt . Appellant No. 2...appeal.4. Mr. S.L Gupta, the learned Counsel appearing for the appellants, has submitted that after the assignment of the debt by appellant No. 1 under section 5 of the rddbfi act in... assignment of debt .5. Mr. Gupta has also contended that though leave of the Tribunal was not sought by the applicant for the continuance of the O.A, yet the Tribunal below could not have...

... assignment of debt . The prayer as sought by the Applicant is as under:- a. "Allow the present Application and take on record the change in Committee of Creditors pursuant...to assignment of debt by Standard Chartered Bank (SCB) in favour of Assets Care and Reconstruction Enterprises Limited vide an Assignment Agreement dated 21.11.2023...-5697/2023 1. This is an Application filed under Regulation 28 of the CIRP Regulations, 2016 r/w Rule 11 of NCLT Rules, 2016 by M/s ARCK Resolution Professionals LLP being...

...counsel appearing for Axis Bank opposed to grant liberty to the applicant in IA 112/2018 to file another Application.In the memo it is clearly stated so far as assignment of debt is... of debt .Learned counsel appearing for Applicant in IA 173/2018 represented that notice served on Asst. Provident Fund Commissioner, Mumbai on 23.06.2018 and offered to file proof of....Applicant in IA 112/2018 filed memo seeking permission to withdraw IA 112/2018 on the ground that assignment has already taken place and IA 112/2018 become infructous.Learned...

...file of the first respondent and quashing the same and further directing the first respondent to release the deed of assignment of debt . 2. The case of the petitioner is.... The third respondent executed a deed of conveyance as assignment of debts dated 26.03.2009 thereby assigning the debts recovery rights to the petitioner, which is the subject matter of the said debt . As.... Thereafter, it was presented for registration. The second respondent impounded the assignment of debts under Section 33 of the Indian Stamp Act and issued a notice dated 11.08.2009 thereby seeking as to why stamp duty sho...

...-1 dated 25 January, 2002, the Government ordered the reduction of stamp duty payable on an instrument of securitization of loans or assignment of debt with underlying securities, to 75 p...this order the duty with which an instrument of securitization of loans or assignment of debt with underlying securities chargeable under Article 20 (a) of Schedule I to the said Act to 75 paise for..., the Bank assigned the debt in favour of the appellant herein, which is an Asset Reconstruction Company registered with the Reserve Bank of India under Section 3 of The Securitisation and Reconstruction...

...for the Official Liquidator submitted that the issue which was pending before the Hon'ble Supreme Court with regard to assignment of debt has been now decided by the Hon'ble...Court with regard to the issue of assignment of debt . The applicant is a company which is registered as Securitization and Reconstruction Company under Section 3 of the Securitization and...Recovery Tribunal, Ahmedabad for recovery of the dues of the company in liquidation. The Debt Recovery Tribunal passed an order on 31.01.2007. Industrial Investment Bank of India, thereafter, informed...

...Section 434 of the Companies Act claiming that sum of more than Rs. 13.30 crores was due as on 31.8.2007 The appellant gave reply, disputing ...Regulation Act, 1949 will govern the assignment of debt as per RBI guidelines.2. Maxlux Glass Private Ltd. v. ICICI Limited...that assignment of debt is an activity covered by the Banking Regulation Act.9. Apart from the above, we asked learned counsel for the appellant whether the appellant was willing to pay...

...the debt in favour of the assignee. According to them when the debt or the decree was assigned for a consideration at a throwaway price of Rs. 55 lac and odd, by virtue of the alleged assignment ...1. The Court:- The present writ petition is filed in the nature of Public2. Interest Litigation contending that the agreement dated 17th November, 2009, wherein assignment ... of debt /decree executed between the creditor bank and assignee in respect of the debts of the company under liquidation is an unconscionable one. According to the petitioner a group of employees under...

...confirmation and shall make such appointment after confirmation by the Board.3. In this case a technical issue had cropped up in the past that whether on Assignment of Debt , the Assignees who...were originally the “related party”, be treated as “non-related party” on Assignment of Debt . So the question that when an Assignor assigns a Debt then whether the Assignee steps into the shoes of the...-section 4 of Section 22 the Adjudicating Authority is required to forward the name of the replaced Resolution Professional as proposed by the Committee of Creditors to the Board for its...

...Claiming himself to an employee of one M/S Fort Gloster Industries Ltd. and on the ground that due to non starting of commercial production by the management in view of assignment of ...

...:“An assignment of debt cannot be treated as forming part of a cause of action for the purpose of giving jurisdiction to the Court at the place of the assignment . ...traversed, in order to support his right to the judgment of the Court, in the case of assignment of a debt the plaintiff will be bound to prove that the debt was assigned in his favour by the assi...and therefore the assignment is a part of the cause of action. Therefore, in a suit brought by an assignee of a debt , the cause of action partly arises because of the assignment ...

...the impugned order dated 12.12.2011 vide Pa.Mu. No. 61460/P1/2009 on the file of the 1 respondent and quash the same and further direct the 1 respondent to release the deed of assignment of debt ....validity of the agreement presented for registration. The consideration of Rs. 25 lakhs is payable to the petitioner if he collects the debt of Rs. 25 crores from the said A.L. Vadivelu. But, the actual ...not otherwise specifically provided for by Schedule I.”5. The word “conveyance” includes the following acts:(i) Transfer/ Assignment of decree;(ii) Transfer/ Assignment ...

...from the date of the Deed of Assignment , we stand released from the ownership under the Financial Instruments as per the terms of the Deed of Assignment , and you shall look only to Kotak Mahindra ...and finds no merit in the present petition. The assignment of debt is permissible in terms of Section 130... of the Transfer of Property Act, 1882. Learned counsel for the petitioner could not point out any prohibition in the documents of loan prohibiting assignment of debt in favour of an another...

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Assignment Agreement Of Asset Reconstruction Companies: To Be Registered Or Not

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One of the most popular types of transactions in financial markets is debt assignment. It encompasses transferring a debt from a creditor (assignor) to a third party (assignee). The dialogue of having a registered and an unregistered assignment agreement is currently one of the most important issues faced in debt assignment transactions in India. Given the amount of assignment transactions conducted by banks and financial institutions or asset reconstruction companies ("ARCs") in general, the recognition behind the agreement constitutes a major task in such transactions.

Assignment is primarily a contractual notion that refers to an arrangement, in which, one party's rights and duties are transferred to another. By virtue of assignment, the assignee undertakes the role of its assignor and agrees to be bound by it as well as gets the right to enforce it. The rights/interest under an assignment agreement are detailed under Section 5 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"). While such acquisition, the said agreement must also meet the standards of the Indian Contract Act of 1872 ("Act") in order to be legitimate.

This article primarily focuses on the judgement pronounced by the Hon'ble National Company Law Appellate Tribunal, Principal Bench, New Delhi [Company Appeal (AT) (Ins) No. 470 of 2023] in the matter of Naresh Kumar Agarwal Vs. CFM Asset Reconstruction Pvt. Ltd. & Anr. - Company Appeal (AT) (Ins) No. 470 of 2023, in which the Hon'ble Appellate Tribunal has adjudicated upon the issue of registering the assignment agreement under Section 5 of SARFAESI Act.

Before understanding the ratio of the said judgment, it is pertinent to look into the brief facts of the case:

State Bank of India ("SBI") sanctioned credit facilities in favour of Action Ispat and Power Private Limited ("Principal Borrower"). In 2013, Master Restructuring Agreement was executed between the SBI and several other Banks with the Principal Borrower. M/s Nikhil Footwear Pvt. Ltd. ("Corporate Debtor") executed a Deed of Guarantee in 2013 in favour of SBICAP Trustee Company Ltd. Another Master Restructuring Agreement was executed in 2016. Thereafter, SBI filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("Code") qua Principal Borrower bearing CP (IB) No. 1096 of 2018 which was duly admitted by the Adjudicating Authority vide its order dated 23.03.2022. However, in January, 2021 SBI ("Assignor") and CFM ARC ("Assignee") signed an assignment agreement wherein, SBI assigned debt owned by the Principal Borrower to CFM ARC. Subsequently, CFM ARC filed an application under Section 7 of the Code qua Corporate Debtor bearing CP (IB) No. 106/PB/2022 which was duly admitted by the Adjudicating Authority vide its order dated 28.02.2023. Aggrieved by the order dated 28.02.2023, the Shareholder preferred an Appeal before the Hon'ble Appellate Tribunal.

The opposing viewpoints and methods on this vital subject opened up a bag of worms. The main contention put forth by the Appellant was that the Assignment Agreement being an unregistered one, there was no valid assignment in favour of ARC so as to entitle it to initiate proceedings under Section 7 of the Code. Appellant further contented that the Adjudicating Authority having already commenced CIRP against the Principal Borrower by admitting Section 7 application filed by the State Bank of India, on the basis of same debt and same set of facts, another applications cannot be admitted simultaneously.

The Respondent reciprocated by submitting that Assignment of the financial debt by Bank or Financial Institution in favour of the ARC can be effected in accordance with the statutory scheme provided in Section 5 of the SARFAESI Act and it does not contemplate Assignment of financial debt by registered document. Moreover, an application under Section 7 of IBC was already admitted qua another Corporate Guarantor filed by ARC which was passed, based on the same assignment.

Section 5 of the SARFAESI Act, is an enabling provision to empower the ARCs to acquire financial assets in the manner provided in Section (5)(1). While considering the facts and circumstances of the case, the Hon'ble Appellate Authority, clarified that a deeming provision is contained in Section 5(2), which gives the ARC the authority to acquire financial assets in the manner specified therein. According to Section 5(2), ARC shall, upon such acquisition, be deemed to be the lender and shall be entitled to all rights of such bank or financial institution. The legislator always has a purpose and an objective in mind when it employs the deeming fiction. However, it cannot be the intent of the Code to hinder ARCs from filing an application solely by means of an unregistered assignment. Therefore, the Hon'ble Appellate Tribunal held that,

"...We, thus, are of the view that argument of the Appellant that application under Section 7 by Respondent No. 1 – Assignee of the State Bank of India was not maintainable, cannot be accepted"

"...Section 7 is an enabling provision which permits the Financial Creditor to initiate CIRP against a Corporate Debtor. The Corporate Debtor can be the Principal Borrower as well as the Corporate Guarantor."

"...no error has been committed by the Adjudicating Authority in admitting Section 7 application. We, thus, do not find any error in the impugned order admitting Section 7 application..."

Conclusion:

All in all, it stands settled by the Appellate Authority that when an ARC acquires an asset in a particular manner and procedure, as prescribed under the provisions of Section 5 of SARFAESI Act, the deeming section will come into play rather than the importance being given towards the document being registered or not. However, it has been made evident by the Appellate Tribunal that the instant ratio shall be applicable, only if the assignments pertain to ARCs, in accordance with the provisions prescribed under the SARFAESI Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Insolvency/Bankruptcy/Re-Structuring

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Applicability of SARFAESI to Assignment of Loan by an NBFC

[ Siddharth Tandon is a BB.A. LL.B student at National Law University, Jodhpur]

The primary objective of enacting the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (or the SARFAESI Act) was to empower the financial institutions by identifying and remedying the problem of non-performing assets (NPA) by providing efficient solutions such as recovery of NPA without intervention of courts. Although from the time of its enactment the Act did recognise non-banking financial companies (NBFCs) as coming under the ambit of ‘ financial institutions ’, it required the Central Government to pass a notification stating the same. The need for such a notification was felt by the Central Government almost thirteen years after the Act came into force, when it was stated by the then Finance Minister of India, Mr. Arun Jaitley, in his 2015 budget speech.

After almost eighteen months, the Central Government passed a notification recognizing and listing a total of 196 substantially important NBFCs, which were allowed to take benefit of the provisions of the SARFAESI Act. The notification also listed certain conditions to be fulfilled by the NBFCs to come under the purview of the Act. The NBFCs should be:

• Covered under clause (f) of section 45-I of the Reserve Bank of India Act ( or the RBI Act), 1934, which defines ‘NBFCs’
• Registered with RBI;
• Having assets worth rupees five hundred crore and above as per their last audited balance sheet.

In addition to this, the notification also highlighted that only those NBFCs with “such security interest which is obtained for securing repayment of secured debt with principal amount of rupees one crore and above” will be allowed to make use of sections 13 to 19 of the SARFAESI Act, which are of utmost importance when it comes to recovery of loan arrears.

This is where the notification leads to a problem. Only NBFCs which have given secured loans having a principal amount of rupees one crore or more are allowed to make use of sections 13 to 19 of the Act for recovery of the loan, while the other financial institutions have a reduced threshold of rupees one lakh. Hence, an issue arises during the assignment of loan by an NBFC to any other financial institution, where the principal amount is less than rupees one crore. Will such financial institution, which otherwise would have been allowed to use the provisions of the Act, be allowed in this situation where it is an assignee of a loan from an NBFC not coming under the purview of the Act.

The word “assignment” can be defined as “a transfer or setting over of property, or of some right or interest therein, from one person to another; the term denoting not only the act of transfer, but also the instrument by which it is effected”. [i] As has previously been held in multiple cases , ‘assignment of loan or debt’ is permissible under the provisions of the Transfer of Property Act.

The law of assignment is based on the principle of “nemo dat quad non habet” , meaning that ‘the assignee cannot have better rights than that of the assignor’. This maxim forms the basis of the issue that if an NBFC itself does not have the right to make use of provisions of recovery of loan arrears of SARFAESI Act, how the assignee financial institution can do the same.

This question was dealt by the Bombay High Court in 2015 in Kotak Mahindra Bank Ltd v Trupti Sanjay Mehta and Others . In this case, an NBFC had sanctioned a loan to an institution which had defaulted in paying back the loan. The debt was subsequently assigned to a bank, which invoked the SARFAESI Act for recovery of the amount. The borrower filed an application with the Debt Recovery Tribunal (DRT) stating that as the original lender did not possess the right to enforce the Act, the assignee should not be allowed to do the same. Aggrieved by the judgment of the DRT which was pronounced against the bank, it filed a petition in the Bombay High Court.

The High Court delved into the definition of ‘borrower’ as defined in the SARFAESI Act to hold: “The third part [of the definition of ‘borrower’] … clearly restricts the definition to a ‘borrower’ of a Bank or Financial Institution who acquires any right or interest and specifically excludes any other type of Institution”. It went on to state that “by virtue of the restrictive definition, only debts which are assigned to a Bank from another Financial Institution (or vice versa), such debts alone are covered under the term “borrower”. If the legislature intended to expand the scope of “borrower” to mean any debt assigned to a Bank or Financial Institution by a Non-Banking Financial Institution or any other private person, it would not have excluded a Non- Banking Financial Institution or any other person in the last part of the definition.” It finally held: “The Objects and Reasons of the SARFAESI Act … clearly disclose that this mechanism has … been designed only for the benefit of Banks and Financial Institutions and not for other categories such as Non-banking Financial Institutions etc.”

The Court read the Act restrictively by not allowing ‘NBFCs’ to be interpreted into the provisions. But to place reliance on this case for answering the issue in contention would not be correct. This is because the Bombay High Court gave this judgment during the time when the Central Government had not come up with the notification identifying various NBFCs coming under the purview of the Act. Though it cannot be said that the notification overruled the judgment, it can definitely be stated that it changed the legal environment in which this issue exists. After the notification, the reasoning of the Bombay High Court holds little water.

Another case, which indirectly deals with this issue, is Indiabulls Housing Finance Limited v. Deccan Chronicles Holdings Limited . The Supreme Court in this case held: “No doubt, till the respondent (an NBFC) was not a ‘financial institution’ within the meaning of Section 2(1)(m)(iv) of the Act, it was not a ‘secured creditor’ as defined under Section 2(1)(zd) of the Act and, thus, could not invoke the provisions of the Act. However, the right to proceed under the Act accrued once the Notification was issued.” It further held: “… the definition clauses dealing with ‘debt securities’, ‘financial assistance’, ‘financial assets’, etc., clearly convey the legislative intent that the Act applies to all existing agreements irrespective of the fact whether the lender was a notified ‘financial institution’ on the date of the execution of the agreement with the borrower or not.”

This case, though relevant in the sense that it portrays the inclusive nature of the statute, does not directly give us the answer to the present issue.

An analysis of the present legal regime, including the cases of various courts as well as statutes have not been able to correctly provide us with a clear answer. The case of Trupti Sanjay Mehta , though directly dealing with the question, cannot be relied upon as the judgment came before the notification was passed. Similarly, the IBFSL judgment cannot be relied upon, as it is less about assignment of loan and more about whether an NBFC is allowed to make use of provisions of the Act even if the loan was given out before the notification was passed.

Therefore, according to the author, in order to arrive at an answer, a different and a more inclusive viewpoint needs to be taken. The right to make use of the provisions of SARFAESI Act cannot be considered as a contractual right, which can be transferred or taken away by way of contract. Thus, the fact that an assignee cannot have better rights than that of assignor is not applicable as the rule is in relation to contractual rights, and not in respect to legal rights. At this point, reliance can be placed on the case of ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd. , where it was held: “In assigning the debts with underlying security, the bank [a financial institution] is only transferring its asset and is not acquiring any rights of its client(s)…The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt … without in any manner affecting the rights of the borrower(s) in the assets.”

Thus, as long as there is no interference with the right of the borrower, the assignment of loan should be held to be rightful, along with the assignee having full discretion to make use of the Act for recovery of loan.

– Siddharth Tandon

[i] Alexander M. Burrill, A Treatise on the Law and Practice of Voluntary Assignments for the Benefit of Creditors §1, at 1 (James Avery Webb ed., 6 th ed. 1894).

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The stamp duty payable during assignation of debt by Asset Reconstruction Companies – By Adv. Haaris Moosa

In Phoenix Arc Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT (hereafter Phoenix ARC) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959

The stamp duty payable during assignation of debt by Asset Reconstruction Companies

Adv. Haaris Moosa

Stamping has been used by litigators as a deus ex machina for long. Insufficient stamping determines the fate of a case quite independent of its facts or merits. The interplay of the stamping legislations with the Insolvency and Bankruptcy Code, 2016 (IB Code, 2016), has not been adequately analysed by either courts or tribunals.  Stamping in India is regulated by both Union and State legislations since it is covered by Entry 91 of the Union List and Entry 63 of the State List. The Union legislation is the Indian Stamp Act, 1899 (ISA, 1899) 1 and almost all the States have their own stamping statutes. The stamping legislations of old vintage have stood their ground even with the coming of avant garde legislations meant to streamline commercial transactions like the Arbitration and Conciliation Act, 1996, SARFAESI Act, 2002, Companies Act, 2013 and now the IB Code,2016.

In Phoenix ARC Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT  (hereafter Phoenix ARC ) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959) 2 .  The Hon’ble NCLT held that the applicability of KSA 1959 2 is not ruled out by the prescription under Section 8F of the Indian Stamp Act, 1899 (ISA, 1899) which exempts ARCs from paying any stamp duty on “ any agreement or other document for transfer or assignment of rights or interest in financial assets of banks or financial institution s” covered under section 5 of the SARFAESI Act, 2002.

KSA, 1959 in section 25, declares the assignment of a debt to be a conveyance, and the duty payable has been pegged at 8%. In the instant case, the Tribunal found that the assignment deed was to be stamped at 8% as per Section 25 of KSA, 1959 since the agreement was made in Kerala. Interestingly in the instant case, the stamp duty as per KSA, 1959 comes to Rs. 6,33,99,500/- while the assignment deed was found to be made on a non-judicial stamp paper of Rs. 500/-. Consequently, the Tribunal found the assignment deed to be unenforceable for insufficient stamping. Phoenix ARC breaks new ground in holding that the assignment of a debt to an Asset Reconstruction Company is liable to be stamped as per the concerned state stamping legislation.

In Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta [2019] ibclaw.in 07 SC  (hereafter Essar Steel ) the supreme court confirmed the decision of the NCLAT, [2019] ibclaw.in 109 NCLAT in affirming the decision of the NCLT in rejecting an application that suffered from insufficient stamping. And held that “Further, the submission of the Appellants that they have now paid the requisite stamp duty, after the impugned NCLAT judgment, would not assist the case of the Appellants at this belated stage. These appeals are therefore dismissed.” 3 Quite to the contrary, in Praful Nanji Satra v. Vistra ITCL (India) Ltd. (2022) ibclaw.in 550 NCLAT , the NCLAT went on to reject an argument for dismissal of an application for insufficient stamping, holding that the only issue that the NCLT in IBC proceedings can look at is whether there has been a default, and nothing further. It was also held that insufficient stamping is a curable defect. The effect of insufficient stamping has attracted contradictory judgments from the NCLAT and the Supreme Court. However, Phoenix ARC follows the correct law laid down by the Supreme Court in Essar Steel .

It is to be noted that proceedings under Code are non-adversarial. Any applicant seeking to initiate corporate insolvency proceedings is required to produce documents that satisfy the Adjudicating Authority (the NCLT) proving the default committed by the corporate debtor. Such an applicant is also required to ensure that the financial contracts on which they rely are legally sound and are not truncated. While structuring true sale transactions for assignment of debt (standard assets or NPA), compliance under the applicable stamping legislations must be ensured to avoid legal complications.

Disclaimer:  The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws ( http://www.ibclaw.in ). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws ( http://www.ibclaw.in ) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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Advocates can’t be held liable for deficiency under Consumer Protection Act: Supreme Court

Justice bela m trivedi clarifies that advocates, however, can be sued ‘in the ordinary course of law for negligence’..

The Supreme Court on Tuesday ruled that advocates cannot be held liable for deficiency of service under the Consumer Protection Act and opined that the top court’s 1995 ruling which held that doctors and other medical professionals can be held liable under the 1986 Act should be revisited.

A bench of Justices Bela M Trivedi and Pankaj Mithal said the legislature never intended to bring the services rendered by lawyers under the purview of the Consumer Protection Act, as re-enacted in 2019, overruling a 2007 judgment of the National Consumer Disputes Redressal Commission which held that the services provided by lawyers are covered under section 2 (o) of the Consumer Protection Act 1986.

Reading out her judgment, Justice Trivedi clarified, “We have categorically said that we do not propose to say that they cannot be sued in the ordinary course of law for negligence but they are not covered under the Consumer Protection Act.”

Justice Trivedi said the court “had distinguished the profession from business and trade”.

“We have said that a profession would require advanced education and training in some branch of learning or science. The nature of work is also skilled and specialised one, a substantial part of which will be mental rather than manual. Therefore having regard to the nature of work of the professional which requires a high level of education, training and proficiency, and which involves skill and specialised kind of mental work operating in specialised spheres that achieving success would depend on many other factors beyond one’s control,” she explained.

“A professional cannot be treated at par with businessmen or traders or service providers of products or goods as contemplated in the Consumer Protection Act,” Justice Trivedi said. “We are therefore of the considered opinion that the very purpose of the Act…was to provide protection to the consumer from the unfair trade practices and unethical business practises only. There is nothing to suggest that the legislature ever intended to include professions or professionals in the purview of the Act.”

The bench accordingly opined that the 1995 Supreme Court judgment in Indian Medical Association v. VP Shantna “deserves to be revisited” and added that it had requested the Chief Justice of India to refer it to a larger bench for the purpose. The court had in that case held that doctors and other medical professionals can be held liable under the Consumer Protection Act.

The bench held that the legal profession is sui generis (unique) and cannot be compared with any other profession.

On the question “whether it’s a service under a contract of service”, the bench said, “We have considered the provisions of Advocates Act, Bar Council Rules and in the light of Consumer Protection Act and said that the relationship between the Advocate and his client from the above point of view would indicate unique attributes. Advocates are generally perceived to be their clients’ agents and owe fiduciary duties to their clients. Advocates have to respect the clients’ autonomy to make decisions at a minimum as to the objectives of the representation. The advocates are not entitled to make concessions or give any undertaking to the court without express instructions from the client. It is the solemn duty of the advocates not to transgress the authority conferred on him by his client.”

“An advocate is bound to seek instructions from his client or his authorised agent before taking any action or making any statement or concession which may directly or remotely affect the legal rights of the client. An advocate represents the client before the court and conducts proceedings on behalf of the client. He is the only link between the court and the client. And therefore the responsibility is onerous. He is expected to follow the instructions of his client rather than substituting his client…Thus, a considerable amount of control is exercised by the client over the manner in which the advocate renders services during the course of employment,” the bench further said.

“All these attributes strengthen our opinion that services hired or availed of an advocate would be that of contract of personal service and would therefore stand excluded from the definition of service contained in Section 2(42) of the Consumer Protection Act 2019,” the bench added.

The ruling said that “as a necessary corollary, a complaint alleging deficiency in service against advocates practising legal profession would not be maintainable under the Consumer Protection Act”.

In a concurring ruling, Justice Mithal said he had considered consumer protection laws in other countries. “In India also, the services or professionals, particularly that of lawyers, have to be excluded from the consumer protection law in accordance with the intentions expressed in enacting these Acts. The legislature in India and in some other countries have not intended to include the services rendered by professionals to their clients within the purview of the Consumer Protection Act,” he added.

Ananthakrishnan G. is a Senior Assistant Editor with The Indian Express. He has been in the field for over 23 years, kicking off his journalism career as a freelancer in the late nineties with bylines in The Hindu. A graduate in law, he practised in the District judiciary in Kerala for about two years before switching to journalism. His first permanent assignment was with The Press Trust of India in Delhi where he was assigned to cover the lower courts and various commissions of inquiry. He reported from the Delhi High Court and the Supreme Court of India during his first stint with The Indian Express in 2005-2006. Currently, in his second stint with The Indian Express, he reports from the Supreme Court and writes on topics related to law and the administration of justice. Legal reporting is his forte though he has extensive experience in political and community reporting too, having spent a decade as Kerala state correspondent, The Times of India and The Telegraph. He is a stickler for facts and has several impactful stories to his credit. ... Read More

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Accounting for Direct Assignment under Indian Accounting Standards (Ind AS)

By Team IFRS & Valuation Services ( [email protected] ) ([email protected])

Introduction

Direct assignment (DA) is a very popular way of achieving liquidity needs of an entity. With the motives of achieving off- balance sheet treatment accompanied by low cost of raising funds, financial sector entities enter into securitisation and direct assignment transactions involving sale of their loan portfolios. DA in the context of Indian securitisation practices involves sale of loan portfolios without the involvement of a special purpose vehicle, unlike securitisation, where setting up of an SPV is an imperative.

The term DA is unique to India, that is, only in Indian context we use the term DA for assignment of loan or lease portfolios to another entity like bank. Whereas, on a global level, a similar arrangements are known by various other names like loan sale, whole-loan sales or loan portfolio sale.

In India, the regulatory framework governing Das and securitisation transactions are laid down by the Reserve Bank of India (RBI). The guidelines for governing securitisation structures, often referred to as pass-through certificates route (PTCs) were issued for the first time in 2006, where the focus of the Guidelines was restricted to securitisation transactions only and direct assignments were nowhere in the picture. The RBI Guidelines were revised in 2012 to include provisions relating to direct assignment transactions.

Until the introduction of Indian Accounting Standards (Ind AS), there was no specific guidance regarding the accounting of direct assignment transactions, therefore, a large part of the accounting was done is accordance with the RBI Guidelines. The introduction of Ind ASes have opened up several new challenges for the financial entities.

Following issues are relevant:

• Whether DA would lead to de-recogntion?
• Whether there will be a gain on sale upon such de-recognition?
• Whether DA should be be treated as a partial transfer of asset or transfer of the whole asset?
• Continuing valuation of retained interest?

In this article, we intend to discuss those issues and suggest potential solutions for those as well.

Prior to addressing the above issues, the following is a comparison between DA and securitisation for a better understanding:

De recognition in case of Direct Assignment

Ind AS 109, provides a clear guidance as to the de recognition principles to be followed. Para 3.2.2 says that:

“3.2.2 Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 3.2.3–3.2.9, an entity determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows.

 (a) Paragraphs 3.2.3–3.2.9 are applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions.

(i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, paragraphs 3.2.3–3.2.9 are applied to the interest cash flows.

 (ii) The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument, paragraphs 3.2.3–3.2.9 are applied to 90 per cent of those cash flows. If there is more than one counterparty, each counterparty is not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share.

 (iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows from a financial asset, paragraphs 3.2.3–3.2.9 are applied to 90 per cent of those interest cash flows. If there is more than one counterparty, each counterparty is not required to have a proportionate share of the specifically identified cash flows provided that the transferring entity has a fully proportionate share.

(b) In all other cases, paragraphs 3.2.3–3.2.9 are applied to the financial asset in its entirety (or to the group of similar financial assets in their entirety). For example, when an entity transfers (i) the rights to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of the cash flows from a group of receivables, but provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the principal amount of the receivables, paragraphs 3.2.3–3.2.9 are applied to the financial asset (or a group of similar financial assets) in its entirety.”

If the de recognition criteria is not met in entirety, then all the conditions mentioned in para 3.2.2(a) has to be satisfied, which talks about fully proportionate share of total cash flows from the financial asset and fully proportionate share of specifically identified cash flows of the financial asset. If these conditions are met, then partial de recognition is possible. The part that is still recognized, is not connected with de recognition and further accounting related to de recognition. However, for actually de recognizing the asset, the de recognition criteria in para 3.2.3 and para 3.2.6 has to be looked at.

Para 3.2.3 goes as follows:

“3.2.3 An entity shall derecognise a financial asset when, and only when:

(a) the contractual rights to the cash flows from the financial asset expire, or

 (b) it transfers the financial asset as set out in paragraphs 3.2.4 and 3.2.5 and the transfer qualifies for derecognition in accordance with paragraph 3.2.6.”

Thus, if the contractual rights to the cashflows expire, then the asset can be de-recognized. If the condition is not met, then it has to be seen that whether the asset is transferred as per para 3.2.5 and the transfer meets the de recognition conditions set out para 3.2.6.

Para 3.2.6 states that:

“3.2.6 When an entity transfers a financial asset (see paragraph 3.2.4), it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:

(a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

 (b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall continue to recognise the financial asset.

 (c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the financial asset. In this case:

(i) if the entity has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

 (ii) if the entity has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see paragraph 3.2.16).”

Para 3.2.6 brings out that, if all the risks and rewards of ownership of financial asset is transferred, then the asset shall be de recognized. If the risks and rewards incidental to ownership of financial asset is not transferred, then obviously the asset cannot be de recognized. However, if there is a partial transfer of risks and rewards of ownership, then the surrender of control has to be evaluated. If there is surrender of control, then the asset can be de recognized. If not, there shall be partial de-recognition, that is, the asset shall be recognized in the books of the seller only to the extent of continuing involvement.

Computation of Gain on Sale

It is a general notion that a sale results in a gain or loss, be it arbitrary or anticipated, the same is required to be accounted for. In case of a direct assignment, there is a sale of the loan portfolios, however, the same completely depends upon whether the assigned loan portfolio is getting derecognised from the books of the assignor or not. If it is not derecognised from the books of the assignor, then the question of recognising a gain or loss on sale does not arise. However, if the sale qualifies for de-recognition, then the seller must book gain or loss on sale in the year of sale.

Upon reading of Ind AS 109 and study of example stated in application guidance in para B3.2.17, the way of computing the same can be derived as follows:

Gain on sale = Sale consideration – Carrying value of asset*Fair value of transferred portion/(Fair value of transferred portion + Fair value of retained portion)

This can be explained with the help of the following example:

The gain or loss on sale does not depend on the sale consideration completely. There may be cases where the carrying value of the transaction and sale consideration are same, i.e. at par transactions. As per Ind AS 109, the computation of gain on sale remains same in cases of at-par or premium structured transactions, however, even at-par transactions could lead to a gain or loss on sale..

The reason for same is that the computation of gain on sale takes into account the retained interest by the Assignor comprising of the difference between the interest on the loan portfolio and the applicable rate at which the direct assignment is entered into with the assignee, also known as the right of excess interest spread (EIS) sweep.

The above settles for the computation of the gain/loss, however, the bigger change seen in the present regime is on the part of recognition of such a gain in the books of the Assignor.

In the present scenario, Ind AS 109 prescribes that the gain on sale or de recognition be recorded upfront in the profit and loss statement.

For reference, para 3.2.12 states that:

“ 3.2.12 On derecognition of a financial asset in its entirety, the difference between:

(a) the carrying amount (measured at the date of derecognition) and

(b) the consideration received (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.”

Further in case of de recognition of a part of financial asset, para 3.2.13 states that:

“3.2.13 If the transferred asset is part of a larger financial asset (eg when an entity transfers interest cash flows that are part of a debt instrument, see paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between:

(a) the carrying amount (measured at the date of derecognition) allocated to the part derecognised and

(b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.”

Hence, it is clear that the gain on de recognition should be recorded in the profit and loss statement.

From a practical standpoint, the above recognition is seen as a demotivation for entering into a direct assignment transaction, since the same would result in a volatility or irregularity in the profit or loss statement of the NBFCs.

This approach is in stark contrast to what has been prescribed in the RBI Guidelines on Securitisation, which requires gain on sale to be amortised over the life of the transaction. As per the RBI Guidelines provide the following:

As per para 20.1 of RBI Guidelines on Securitisation of Standard Assets issued in 2006:

“In terms of these guidelines banks can sell assets to SPV only on cash basis and the sale consideration should be received not later than the transfer of the asset to the SPV. Hence, any loss arising on account of the sale should be accounted accordingly and reflected in the Profit & Loss account for the period during which the sale is effected and any profit/premium arising on account of sale should be amortised over the life of the securities issued or to be issued by the SPV. ”

Also, as per para 1.4.1. of RBI Guidelines on Securitisation of Standard Assets issued in 2012:

“The amount of profit in cash on direct sale of loans may be held under an accounting head styled as “Cash Profit on Loan Transfer Transactions Pending Recognition” maintained on individual transaction basis and amortised over the life of the transaction .”

As the accounting treatment offered by Ind AS defaces the profit and loss statement by distorting the income recognition pattern of the NBFCs, NBFCs are not in favour of recording this gain upfront. The concern is aggravated due to the liquidity crunch currently faced by the NBFCs caused by recent downfall of IL&FS. The default on payment obligations of loans and deposits amounting to approximately Rs. 90,000 crore, by India’s leading infrastructure finance company, shook the confidence of the lenders and triggered a panic sentiment amongst the market lenders including NBFCs. As a result of the panic, banks are unwilling to lend to the NBFCs and their cost of funds are going up. However, the banks are showing interest in acquiring their loan portfolios instead. Therefore, the NBFCs are somewhat being forced to accept this distortion in their profit or loss statement.

Another question that arises is- whether de-recognition in books of assignor affects recognition in the books of the assignee.

As per para 3.1.1 of Ind AS 109, an entity shall recognise a financial asset or a financial liability in its balance sheet when, and only when, the entity becomes party to the contractual provisions of the instrument. Therefore, the transferee should recognise the financial asset or financial liability in its balance sheet only when he becomes a party to the contractual provisions of the instrument.

Para B3.2.15 of the same standard, provides that if a transfer of a financial asset does not qualify for de-recognition, the transferee does not recognise the transferred asset as its asset. In such a case the transferee is required to derecognise the cash or other consideration paid and recognises a receivable from the transferor. The transferee may measure the receivable at amortised cost (if it meets the criteria in paragraph 4.1.2) if the transferor has both a right and an obligation to reacquire control of the entire transferred asset for a fixed amount (such as under a repurchase agreement).

Therefore, de-recognition from the books of the seller is clearly a determinant for recognition in the books of the buyer.

Impact on GST on the gain on sale

In the last couple of years, if there is anything that has bothered the financial entities in India, other than IndAS, then it has to be GST. Therefore, it becomes pertinent to take a look at whether GST will become applicable in any manner whatsoever.

Under GST regime, assignment of loans are treated as dealing in securities and are therefore exempted from GST. Link to our detailed writeup in this regard has been provided in the footnote [1] .

Reporting of Retained Interests

A partial de-recognition is where the transferor transfers only a part of the asset and retains a part of it.

Currently, as per the RBI Guidelines, NBFCs are required to comply with the minimum retention requirement of 10%, that is, they should have a continuing interest of 10% on the loans that it intends to transfer. Therefore, if an NBFC is intending to sell of a portfolio of Rs. 100 crores, it has to retain at least 10% of the said portfolio and can sell of only Rs. 90 crores representing the remaining part.

Therefore, this becomes a classic case of partial de-recognition.

The value of retained interest should be accounted for as per the original accounting criteria as and when it was originated. For instance, if the pool recognised under FVOCI method, the retained interst must continue to be valued at FVOCI.

The manner of recognition or valuation of the retained interest will not change when a part of the pool is sold off.

Before the introduction of Indian Accounting Standards, RBI guidelines were followed for de recognizing the asset and recording the gain on sale after de recognition. There was no accounting guidance for financial instruments and their de recognition. In the absence of it, RBI guidelines were followed which talked about true sale. In case, the conditions of true sale were satisfied, then the asset was de recognized and the gain was regularised over the period by amortising the gain on de recognition.

While a well-documented piece of legislation is welcomed, however, every new thing has some shortcomings. In this case, the irregularities in the profit and loss and the complexities surrounding the de-recognition test comes as shortcomings. However, it is expected, with the passage of time, these shortcomings will also be settled.

[1] http://vinodkothari.com/2018/06/gst-on-assignment-of-receivables-wrong-path-to-the-right-destination/

Can the Originator recognise a lower upfront income by giving impact of historical pre-terminations while discounting the future cash flows? This will reduce the impact of irregular upfront income to some extent.

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India’s government debt at safe levels: Nirmala Sitharaman

India’s debt-to-gdp ratio was at 81% in fy22, compared with 260.1% for japan, 121.3% for the us, 111.8% for france and 101.9% for the uk, the fm said..

New Delhi: Finance minister Nirmala Sitharaman on Monday said India’s government debt, including that of states, is safe and prudent going by debt sustainability norms and that the country is in a better position than others. 

The minister’s defence of the government’s debt management comes amid a political debate over economic indicators and the track record of the ruling and opposition parties in office.  Sitharaman said in a social media post that India’s debt-to-GDP ratio was at 81% in FY22, compared with 260.1% for Japan, 121.3% for the US, 111.8% for France and 101.9% for the UK. 

Sitharaman said that in a comparative analysis with other low and middle-income countries too, India's external debt scenario was robust. The minister said India's share of short-term debt in the total external debt is 18.7%, which is lower than that of China, Thailand, Turkey, Vietnam, South Africa, and Bangladesh. 

A lower proportion of short-term debt is beneficial as it implies less immediate repayment pressure. When considering the ratio of total external debt to Gross National Income (GNI), India emerges as the third least indebted country among all such economies, the minister said.

BJP, Congress defend their stance

The ruling Bhartiya Janata Party and the opposition Congress party have in recent months defended how they managed the economy and government finances while in office and have criticized the way the other did. 

The ruling party had also tabled a ‘black paper’ in Parliament, accusing the previous United Progressive Alliance regime of undermining the country’s macroeconomic fundamentals, while the Congress hit back at the government citing price rice and unemployment. The manifestos of the two parties are loaded with their economic agenda for the nation. 

Experts said that the latest spike in debt levels is on account of the covid pandemic. The Centre’s fiscal deficit had gone up to 9.2% of GDP in the pandemic year of FY21 from 4.6% in the year before, but subsequently moderated to 5.8% in the revised estimates for FY24. For the current fiscal, the estimate is 5.1%.

“The combined debt-to-GDP ratio of 81% is primarily the result of the impact of covid-19 and the fiscal stimulus that was initiated at that time. When slippage happens, it happens all at once but improvement, which has been happening over the last two years, will take some more time before India reaches closer to the Fiscal Responsibility and Budget Management (FRBM) level which prescribes an overall debt level of 60% of GDP. It is still above that level and it will take a few years before we reach that level," said EY chief policy advisor D K Srivastava. 

“On the other hand, some of the advanced countries which have run into very large debt are actually running unsustainable limits of debt, which is beginning to tell on their economic performance," said Srivastava.

Sitharaman said the NDA government is building a legacy of growth, transparency, and responsibility, which are hallmarks of governance that cares for the nation's future. The minister said the share of India's total external debt to its exports is 91.9%, positioning the country as the fifth-least indebted country among low and middle income countries in this respect. 

The minister also said the government debt is overwhelmingly rupee-denominated, with external borrowings from bilateral and multilateral sources contributing to less than 5% of total debt. So exposure to volatility in exchange rates tend to be on the lower end, Sitharaman said in her post. 

Also Read | Government committed to developing skills among youth: Nirmala Sitharama

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