CAIIB BRBL Module C Unit 5 : Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions

01/11/2023

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CAIIB Paper 4 BRBL Module C Unit 5 : Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module C (IMPORTANT ACTS/LAWS & LEGAL ASPECTS OF BANKING OPERATIONS – PART B) Unit 5 : Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions, Aspirants must go through this article to better understand the topic, Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions and practice using our Online Mock Test Series to strengthen their knowledge of Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions. Unit 5 : Regulation Of Securitisation And Reconstruction Of Financial Assets Of Banks And Financial Institutions

Registration Of Asset Reconstruction Company

The Asset Reconstruction company can commence or carry business, only after complying with the following two conditions:

It obtains certification of registration from the Reserve Bank of India by applying in prescribed format
It has the owned funds at the time of registration not less than Rupees two crore or such other higher amount as Reserve Bank may, by notification, specify.

Such registered companies can raise money for their acquisition activities by issue of security receipts for formulating schemes. This Act has provided the legal framework for this activity.
Depending on the nature of security asset, the Reserve Bank of India has the powers to specify different amounts of owned funds for different class or classes of securitization companies or reconstruction companies.
If any Asset Reconstruction Company wants to make any substantial change in its management or a change in the registered address or change in the name, then that needs prior approval of the Reserve Bank of India.

Following conditions are required to be fulfilled by ARCs as per Section 3(3) of the act:-

That the ARC has not incurred losses in any of the three preceding financial years
That such ARC has made adequate arrangements for realization of the financial assets acquired for the purpose of securitization or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on the investments made in the company by the qualified buyers
That the directors of ARC have adequate professional experience in matters related to finance, securitization and reconstruction
That any of its directors has not been convicted of any offence involving moral turpitude.

That a sponsor of an asset reconstruction company is a fit and proper person in accordance with the criteria as may be specified in the guidelines issued by the Reserve Bank for such persons.
That asset reconstruction company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank
That asset reconstruction company has complied with one or more conditions specified in the guidelines issued by the Reserve Bank for the said purpose.

Cancellation Of Certificate Of Registration

As per Section 4 of the SARFAESI Act 2002, the registration granted to the Asset Reconstruction Company by the Reserve Bank of India is cancellable on following grounds:

The company ceases to carry on the business of securitization or asset reconstruction, or
The company ceases to receive or hold any investment from a qualified institutional buyer, or
The company fails to comply with any of the conditions subject to which the certificate of registration was granted, or

The company fails to-

Comply with any of the directions issued by RBI.
Maintain accounts in accordance with the requirements of any law or any direction or order issued by the RBI, or
Submit or offer for inspection its books of accounts or other relevant documents when so demanded by RBI or
Obtain prior approval of the Reserve Bank of India for change in management or change in registered office or change of name.

The securitization or reconstruction company whose registration is cancelled can prefer an appeal within thirty days from the date of communication of order, to the Central Government.

Even if the application for registration is rejected or the already existing registration is cancelled, the company shall be deemed as Securitisation Company or Asset Reconstruction Company, until the company pays the dues of the investors along with interest within the period as the RBI may specify.

Acquisition Of Rights Of Interest In Financial Assets

The Asset Reconstruction Company can acquire the financial asset of any bank or financial institution by any of the following ways:

By issuing a debenture or bond or any other security in the nature of debenture for the agreed consideration and agreed terms and conditions between the bank/financial institution and the ARCs.
By entering into an agreement with such bank or financial institution for the transfer of financial asset to such company on terms and conditions as may be agreed between them.

Any document executed by any bank or financial institution under sub-section (1) in favor of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitization shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899.

Notices To Obligor And Discharge Of Obligation Of Such Obligor

When the bank or financial institution decides, that the financial asset be now acquired by the ARC, a notice may be given about such an acquisition to the obligor. Giving of such notice is optional and not compulsory under the Act.
In case, the obligor is a company and creation of charge has been registered, then also the giving of notice to the respective registrar is optional. Thus, there is no need of modification of charge with the Registrar of Companies
However, if the bank or financial institution decides to give notice to the obligor, then notice to the ROC is required to be given when the obligor is a company.

If notice of acquisition as said above is given to the obligor, it is necessary that the obligor should make payments to the concerned Asset Reconstruction Company. Such payments amount to a valid discharge of liability of the obligor making the payment.
If notice of acquisition, as said above is not given, the money or property received by the bank or financial institution from the obligor shall be held by such bank or financial institution in trust and shall be handed over to the concerned Asset Reconstruction Company. (Section 6)

Issue Of Security Receipts And Raising Of Funds By ARC

ARC raises funds for acquisition of an asset by issue of security receipts. Only the qualified institutional buyers or such other category of investors including non-institutional investors as may be specified by the Reserve Bank in consultation with the Board, from time to time, can buy these security receipts.
In the event of non-realization under sub-section (2) of financial assets, the qualified buyers of an asset reconstruction company, holding security receipts of not less than 75% of the total value of the security receipts issued under a scheme by such company, shall be entitled to call a meeting of all the qualified buyers and every resolution passed in such meeting shall be binding on the company.

Measures Of Asset Reconstruction

ARC may, for the purposes of asset reconstruction, provide for any one or more of the following measures, namely:-

The proper management of the business of the borrower, by change in, or takeover of, the management of the business of the borrower
The sale or lease of a part or whole of the business of the borrower
Rescheduling of payment of debts payable by the borrower
Enforcement of security interest in accordance with the provisions of this Act
Settlement of dues payable by the borrower
Taking possession of secured assets in accordance with the provisions of this Act
Conversion of any portion of debt into shares of a borrower company

Powers Available With RBI

To Determine Policy & Issue Directions: The powers available with the RBI under the SARFEASI Act 2002 is detailed in Sections 12, 12A and 12B of the statute.
To call for Statements and Information: In terms of Section 12 A The Reserve Bank may at any time direct a asset reconstruction company to furnish it within such time as may be specified by the Reserve Bank, with such statements and information relating to the business or affairs of such asset reconstruction company
To carry out Audit and Inspection: Section 12 B details the powers available with the RBI to carry out audits and inspections in an Asset Reconstruction Company.

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CAIIB 4 Module C Unit 5 ( Ambitious_Baba )