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K.R. Srivats
Sarbajeet K. Sen

New Delhi , Sept. 6

THE Securities and Exchange Board of India (SEBI) has now stepped in to help banks and financial institutions in their efforts to tackle non-performing assets (NPAs).

In what would substantially smoothen the process of recovery of bad debts, SEBI has said that the takeover code would not get triggered in when change of management control in defaulting companies has taken place due to action taken by lenders under the Securitisation Act.

"The takeover code has been amended to specify that it (the code) would not be applicable in cases where actions taken by lenders under the Securitisation Act leads to a change in management control in the defaulting companies," sources told Business Line.

The move to amend the code has been necessitated by representations from lenders that it might become a hindrance in enforcing provisions of the Securitisation Act relating to change in management. Apprehensions had been expressed that the absence of an explicit exemption under the takeover code could lead to legal complications during the recovery process.

Besides providing powers to attach and sell the assets of defaulting borrowers, the Securitisation Act (The Securitisation and Reconstruction and Financial Assets and Enforcement of Security Interest Act, 2002) gives powers to lenders to also effect a change in management of such companies. Banks and institutions can proceed with such action only after serving due notice to the borrower asking for settlement of the dues.

Action under the Securitisation Act has been slow in the recent past since the validity of the legislation had been challenged by some of the chronic defaulters against whom the lenders had initiated action. The borrowers had also challenged the provision in the Act that had required them to deposit 75 per cent of the disputed amount if they are aggrieved at the action taken against them. The Supreme Court in its judgment had upheld the validity of the legislation. However, it had struck down the provision on upfront payment as it felt it was too biased in favour of the lenders.

However, it is understood that the Finance Ministry is planning to approach the Supreme Court to incorporate a lower limit of upfront payment to ensure that borrowers do not proceed with frivolous appeals. The banking sector feels that in the absence of a provision of an upfront payment of at least 25 per cent, all lenders would end up challenging the actions taken by them at the court of appeal.

More Stories on : Regulatory Bodies & Rulings | Mergers & Acquisitions | Non-Performing Assets

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