Security Laws in India

8/13/2019 Security Laws in India

1/42

Introduction

Constitution of Working Group

Based on the recommendations of Joint Parliamentary Committee (JPC) the Reserve Bank of

India advised the Indian Banks Association to set up a Workin !roup to revie" and

su est chan es in the la"s relatin to creation# enforcement and re istration of $ecurity

Interest% Accordin ly# "ith the approval of the &ana in Committee# the IBA# in

'cto er **+# formed a Workin !roup under the Chairmanship of ,r% Anil -

-handel"al# the then ./ecutive ,irector of Bank of Baroda and presently# Chairman 0

&ana in ,irector of ,ena Bank to address the issues%

1he Workin !roup comprised the follo"in mem ers2

3% $hri ! & Ramamurthy./ecutive ,irector Industrial ,evelopment Bank of India 4imited

% $hri $ C !upta4e al Advisor Reserver Bank of India

+% $hri $ - $inha!eneral &ana er 0 Advisor (4a")$tate Bank of India

5% $hri - Prasad!eneral &ana er (,B$# 6I,)Reserve Bank of India

7% $hri R 8 Pradeep!eneral &ana er (4a")Bank of India

9% $hri & 1 :deshi,eputy !eneral &ana er (4a")Bank of Baroda

;% $hri $ % $hri < - !uptaAsst% !eneral &ana er (4e al),ena Bank

?% $hri $udhir JhaChief &ana er (4a")ICICI Bank 4td%

3*% $hri & R :mar=i @ Convenor


2/42

Chief Advisor (4e al)Indian Banks Association


3/42

Terms of Reference for the Working Group were:

3% 1o revie" the various methods of creation of security interest presently availa le

under different statutes and the ri hts of secured creditors vis@avis other

creditors# oth secured and unsecured# su est measures# includin le islative

amendments# to create security interest "ithout any defect%

% 1o revie" the present re istration re uirements and pu licity aspects relatin to

various types of security interest# oth under the $AR6A.$I Act and other

statutes and su est measures for developin comprehensive re istration

mechanism providin sufficient pu licity and pu lic access%

+% 1o e/amine the mechanism for enforcement of security interest provided in the

$ecuritisation and Reconstruction of 6inancial Assets and .nforcement of

$ecurity Interest Act# ** ($AR6A.$I) to su est further measures to

stren then the enforcement of mechanism%

5% 1o e/amine the priority rule amon st the various claimants upon the property

"here security interest is created and measures to perfect the ri hts of secured

creditors under $AR6A.$I Act vis@a@vis other secured creditors%

7% 1o su est measures for protectin the ri hts of secured creditors under

$AR6A.$I Act "hen the o"ner is under insolvency "indin up "ith referenceto $ICA Part


4/42

At the second meetin of the Workin !roup held on nd April **5 the information

compiled y the IBA on the feed ack received from anks and others "as deli erated y

the Workin !roup%

1hereafter# the Workin !roup and the Deads of the 4e al ,epartments of the anks met on

7 th &ay **5 and discussed several issues relatin to security la"s in India%

Both the $u @!roups held separate meetin s on 9 th &ay **5 and discussed the road

contours of the report%

1he fifth meetin of the Workin !roup "as held on > th &ay **5 in the IBA 'ffice at

&um ai% At this meetin # oth the $u @!roups made presentation of the draft reports%1he mem ers deli erated and su ested modifications chan es to the draft reports%

At the si/th meetin held on + rd July **5# the draft reports "ere further deli erated and the

$u @!roups su mitted their respective reports%

1he reports of oth the $u @!roups "ere taken up for deli erations at the meetin of the

Workin !roup held on +* th Au ust **5% 1hereafter# the Workin !roup su mitted its

Report to the IBA%

EEEE

Acknowledgements

1he &em ers of the Workin !roup are thankful to the IBA for settin up the !roup "hich

ave them an opportunity to deli erate on vital issues relatin to security la"s in India

and make recommendations% 1he !roup is also thankful to the &em er Banks of IBA

and others for their valua le feed ack "hich facilitated deli erations of the meetin s%

1he mem ers of the Workin !roup are thankful to $hri & R :mar=i# Chief Advisor (4e al)#

IBA and Convenor of the Workin !roup for his painstakin task in oin throu h the

draft report of the Workin !roup and crystalliFin the same%

EEEE

5


5/42

Background of E isting !aw

1he commercial la"s in India "ere enacted in late nineteenth century and althou h

they have stood the test of time and formed the foundation of commercial la" in

India# no ma=or chan es in such la"s have een made to meet the demands of

lo alisation and market@oriented economy% 1here is a need to modify our

commercial la"s to reduce the le al arriers faced y individuals operatin in the

market on their o"n terms to produce "ealth% In this connection# the !roup noted the

vie"s of the $upreme Court e/pressed in the case of &ardia Chemicals 4td% # "hich reads as under2

"Economic conditions ha#e #astl( changed since the enactment ofthe Transfer of 'ropert( Act in $%%&* The role of the unscrupulousmone( lenders dominating in the field of credit is no longer #alid-without reliance on institutionali4ation of credit- the +anks andanother ,inancial Institutions are the ma0or mone(lenders of credittoda(* In their dealings with their mortgagors- it is anachronisticto assume that the( will adopt the unscrupulous mone(lenders*3

In fact# in e/tendin credit# the necessity for suita le safe uards to anks and other

financial institutions is no" ri htly stressed% It is understanda le that the le al

frame"ork essentially is conceived to deal "ith unscrupulous moneylenders is no

lon er appropriate to deal "ith credit iven y anks and other financial institutions%

7


6/42

1he !roup noted that the :nited 8ations Commission on International 1rade 4a"

(:8CI1RA4) has set up a Workin !roup


7/42

can e created only at Presidency 1o"ns of -olkata# Chennai and &um ai

and such other to"ns as may e notified y the $tate !overnments%

d) 1here is no clear provision in re ard to treatment of machineries em edded in

land as immova le or mova le property%

e) 1he 1P Act contains provisions relatin to transfer of actiona le claims% 1hedefinition of actiona le claim in section + does not include a receiva le

"hich is secured y any security of pled e# hypothecation or mort a e% As a

result# there is no specific statutory provision for transfer of a receiva le

"hich is secured y any security% 6urther# there is no clear provision for

transfer of future receiva les%

7*&* Registration Act

1he Re istration Act contains provisions for the purpose of maintainin land recordsRe istry and re istration of all transactions relatin to immova le properties%

Do"ever# the la" does not provide for issue of title certificates y the re istration

authorities and the documents re istered are sale deeds# mort a e deeds and lease

deeds and similar other documents creatin or transferrin any interest in an

immova le property% $ince there is no system of issue of title certificate for the

property o"ned y any person# it is difficult to offer such property as a security#

particularly in cases "here it is ancestral property occupied y the o"ners and they

do not hold any sale deeds or any other document evidencin title% 1here are many

cases "here a person derives his title to property y succession or partition% 1here is

further difficulty in rural areas "here house properties located in a villa e are

collectively kno"n y the particular villa e name and are abadi lands "ithout any

specific title certificate in favour of occupant of any portion of the land%

+%+% Indian 6uccession Act

1he la" relatin to succession to property "hether testate or non@testate is not clear

on account of multiple personal la"s overnin succession% :nder the Indian

$uccession Act# 3? 7 a succession certificate is issued only in cases# "here the claim

pertains to de ts# shares and securities% Where the assets are in the nature of other

properties and valua les# succession certificate cannot e issued% Where the deceased

has left a Will# it is not compulsorily re uired to e pro ated# in some $tates% 1here

is no uniform system for rant of heirship certificate or le al representation or

succession certificate y any authority constituted under statutory provisions%

;


8/42

+%5% Indian Contract Act- $%2&

1he Contract Act contains provisions in $ection 3; @3;9 re ardin possessory

securities% But there is no provision in the Act in re ard to non@possessory securities

such as hypothecation% 1he la" relatin to non@possessory securities is therefore

covered y the eneral principles of the contract and the decisions of the Courts fromtime to time% 1here are conflictin =ud ements on the ri hts of hypothecatee% 'ne

vie" is that a hypothecatee can take possession and sell hypothecated asset privately

(Chiran ilal * Company Cases 7+;(&P)% 1he other vie" is that the

clause in hypothecation a reement empo"erin hypothecatee to take forci le

possession is void% (1arun Bhar ava )% While

the conflict is resolved y conferrin po"ers of enforcement on anks and financial

institutions under the $AR6A.$I Act# there is a need to make a statute in re ard to

non@possessory securities%

7*8* 6tamp 9ut( !aws

1he scheme of stamp duty la"s under the Constitution of India provides for po"ers

of the $tate !overnments to prescri e the rates of stamp duty in respect of most of the

documents relatin to transfer or creation of interest in property# oth mova le and

immova le% As a result# there are multiple stamp duty la"s enacted y each $tate

applica le in respective $tates% $uch multiple la"s and the multiple rates of stamp

duty have ecome an impediment in the ro"th and development of ne" financial

instruments havin a character of transfera ility any"here in India% :nder the

provisions of the Constitution# ne otia le instruments# share transfer# insurance

policies# letters of credit# receipts etc% that have a characteristic of transfera ility

any"here in India# are "ithin the le islative competence of :nion of India% But there

is no provision in terms of "hich it is possi le to include any ne" instrument

introduced in the financial market to e iven a characteristic of ne otia ility or

transfera ility any"here in India and provide a stamp duty for the same y :nion of

India to ensure uniformity of stamp duty rates in the country%

7* *$* Recognition of rights of secured creditors

a) As a le al principle# a secured creditor has priority over all other creditors and

claimants and for recovery of secured loan he has the ri ht to enforce the

securities and realiFe the secured loan% In the event of insolvency or "indin up

proceedin s a ainst the orro"er# the secured creditor has a ri ht to remain

outside such proceedin s and enforce the securities% 1hese principles are

reco nised y various statutes as under2

i5 6ection 8&1 ; 8&1A of the Companies Act- $18

>


9/42

ii5 6u+)section < 5 of section &% of the 'ro#incial Insol#enc( Act- $1&/iii5 6ection =2 of the 'ro#incial Insol#enc( Act- $1&/i#5 'ro#iso to section =2 of the 'residenc( Towns Insol#enc( Act- $1/1#5 6ection $ 1


10/42

c% 1itle retention contracts such as hire@purchase and lease are e/cluded from the

concept of security interest%

d% 1he concept of security interest has een made applica le only to the anks and

financial institutions and the la" has no universal application unlike possessory

security re ime contained in the Indian Contract Act# 3>; %e% Althou h a po"er to set up a Central Re istry has een provided in the

$AR6A.$I Act# the system of comprehensive security interest is introduced

"ithout settin up the Central Re istry and the system operates on the asis of the

e/istin asset specific re istration systems operatin under various la"s%

f% Althou h the Act provides for securitisation of financial assets on account of

re uirement of capital of Rs%3** crores or capital ade uacy of 37G# no

securitisation transaction are ein undertaken under the provisions of

$AR6A.$I Act% 6urther# securitisation of financial assets other than financialassets of anks and financial institutions is not permissi le under the Act%

=*$* ?ire)purchase and financial lease transactions

1here is no statutory provision coverin hire@purchase and lease of mova les% 1he

Dire Purchase Act# 3?; has so far# not een rou ht into force% As a result# the

transactions of hire@purchase and lease of mova les are overned y the provisions of

the Indian Contract Act# 3>; % 6or the purpose of $ales 1a/# y the Constitution (59 th

Amendment) Act# 3?> # clause ?A "as added in article +99 of the Constitution providin that a ta/ on the sale or purchase of oods inter@alia includes# a ta/ on the

delivery of oods on hire)purchase and an( s(stem of pa(ment +( instalments*

6urther# the Institute of Chartered Accountants of India has provided accountin

norms for lease and hire@purchase transactions in terms of "hich any asset iven on

hire or lease is treated as an asset elon in to the hirer or lessee and it is permissi le

for such hirer or lessee to claim depreciation in respect of such asset% 1he Income

1a/ Act# on the other hand# permits such depreciation to e claimed y the o"ner of

the asset or lessor% $ince there are no specific statutory provisions# the contracts ofhire@purchase and lease are treated as title retention contracts ena lin the o"ner of

the asset iven on hire and the lessor to take possession of the asset in the event of

default and there y ivin a super priority to such persons over secured creditors%

1he a sence of la" in this area also adversely affects the interests of the consumer

ecause there is no specific re uirement to ive credit for the instalment already paid

y such consumer "hen the asset is seiFed for default and sold and pay the surplus to

the orro"er% Conversely there is no provision for recovery of shortfall if the o"ner

or lessor is una le to realiFe the alance value in full on sale of the asset%

3*


11/42

8*$* @.CITRA! Work on 6ecurit( Interest !aw

It is clear from the a ove discussion that there is no sin le uniform la" in India "hich

deals "ith creation# re istration# priority and enforcement of securities over property%

$uch la" has een enacted in the :nited $tates of America and the same is contained

in Article ? of the :niform Commercial Code% 6urther# :nited 8ations Commissionon International 1rade 4a" (:8CI1RA4) Workin !roup


12/42

$ince the e/istin la" in India does not permit enforcement of mort a es ofimmova le properties# the same are also included in the definition of securityinterest "ith po"er of enforcement "ithout the intervention of the Courts%

8*&*&*Althou h the ne" concepts have een introduced y the $AR6A.$I Act# the focus of

that Act is in re ard to ivin po"ers to the anks and financial institutions to enforce

security interests% 1he $AR6A.$I Act does not address issues of creation of security

interest# re istration of such security interest and rules of priorities amon st different

parties holdin security interest and other claimants% It is therefore necessary to make

chan es in our e/istin la"s to cover a ove aspects of secured transactions%

*$* +0ecti#es of secured transactions law

If "e look at the key o =ective of a secured transaction la" it is necessary to allo" a

road array of usinesses to utiliFe the full value inherent in assets to o tain credit ina road array of credit transactions% 6or the purpose of achievin this o =ect it is

necessary to clearly define the concept of property%

*&* 9efinition of 'ropert(

1he e/pression Hproperty is defined in various la"s in India# the latest ein section

(3)(t) of the $AR6A.$I Act "hich defines property as under2

Hproperty means (i)immova le property(ii) mova le property(iii) any de t or any ri ht to receive payment of money "hether secured or

unsecured(iv) receiva les# "hether e/istin or future(v) intan i le assets# ein kno"@ho"# patent# copyri ht# trade mark# licence#

franchise or any other usiness or commercial ri ht of similar nature%

While the a ove definition makes the concept of property very "ide# facilitatin

creation of security interest over such property# the various types ofmova le properties are not specifically covered y the definition% It is true that y

usin the e/pression Hmova le property in the definition of property# any asset

"hich is mova le "ill e covered y the definition ut for the purpose of clearly

definin the ri hts and o li ations conse uent upon creation of security over such

property it needs to e considered "hether the definition of property should e made

more specific y classifyin mova les as under2

(a) Intan i le property

( ) Investment property(c) Inventory

3


13/42

(d) KConsumer oods

(e) A ricultural produce

(f) Receiva les

( ) . uipments and &achinery

(h) 6i/ed Assets(i) ,ocument of 1itle to !oods

(=) Consumer !oods

(k) Certificate of 1itle

If the cate oriFation of various mova le properties is done as su ested a ove# it "ill

facilitate makin provision for ri hts and o li ations of different parties havin

interest in such properties% $uch cate oriFation "ould also facilitate re istration of

interest in such properties y providin a suita le re istration system so that personsdealin "ith such properties "ould e in a position to ascertain any encum rances

that may e e/istin on such properties% By e/emptin consumer oods from

re istration re uirement it "ill e possi le to permit free sale of consumer oods

"ithout verification of re istration% The Group is of the #iew that for ha#ing an

effecti#e registration s(stem a detailed categor( wise definition of propert( ma(

ha#e to +e introduced in our law- as under:


14/42


15/42

shares of any company are taken as security y the anks and financial institutions in

follo"in cases2

i) 'verdraft facility a ainst listed and approved shares of any pu liclimited company%

ii) Pled e of shares of listed companies as an additional or collateralsecurity for a loan or overdraft iven a ainst some other prime security%

iii) Pled e of promoters shares in cases of pro=ect finance "here the loansand advances are secured y a char e over the entire lock of assets ofthe orro"er and the pled e of shares is taken y the ank to ensure thatthe promoter continues to e involved in the pro=ect and does not transferhis interest "ithout the consent or kno"led e of the ank% $uch a pled ealso ena les the lender to sell or dispose off the securities alon "ithmana ement of the company y e/ercisin the ri hts as a pled eealthou h in practice such ri hts are rarely e/ercised%

While the re uirement of the provisions of $ection 3? placin a ceilin of +*G of the

share capital of the company may e =ustified in respect of loans referred to at su @

paras (i) 0 (ii) a ove# there is no =ustification for placin that restriction in respect of

pled e of promoters share holdin "ith the lender% 6urther# in terms of the RBI

instructions# it is necessary that the ank holdin shares as a pled ee or mort a ee

must et such shares transferred in its o"n name (refer to RBI circular

no%,B',%BC%?* 3+%*;%*7 ?> dated >th

Au ust# 3??>)% 1his means that promotersshares in e/cess of +*G cannot e accepted in pled e% 6urther# "here the ank takes

promoters share holdin in pled e# if such shares are transferred in the name of the

ank# the effect "ill e that the ank itself "ill ecome the promoter and may have to

face various lia ilities as the o"ner of the company% $uch lia ility may e

environmental or other statutory lia ilities relatin to la our dues# "orkmen

compensation etc% 1his particular aspect of takin promoters shares as a pled e y

the anks has arisen for consideration ecause the provisions of $ection 3?( ) of

Bankin Re ulation Act do not apply to financial institutions and the practice oftakin pled e of shares is prevalent amon the development financial institutions and

the anks "ere only participatin as a consortium mem er in the term lendin % With

the development of the concept of universal ankin and anks entry into the field of

term lendin on a very lar e scale# it "ill ecome necessary for the anks also to take

pled e of promoters shares as a collateral security alon "ith other securities% The

Group therefore recommends that restriction on holding of such shares

e ceeding 7/ +e withdrawn in respect of pledge of promoters shares and

dispense with the reFuirement of transfer of such shares in the name of the

+ank*

37


16/42

2*$*7* Warehouse Receipts

In the past fe" years there has een a consistent ro"th in lendin a ainst

a ricultural commodities% 6or the purpose of protectin the interest of the lenders as

also the farmers "ho need to realiFe the est price for the produce# it is essential to

devise a system for stora e of commodities in "arehouses# radation and valuation of

the commodities and issue of "arehouse receipt certifyin the uality and uantity of

the commodity stored in the "arehouse and finally makin such "arehouse receipts a

ne otia le document% :nder the provisions of section (5) of $ale of !oods Act#

3?+*# definition of Kdocuments of title to oods includes "arehouse keepers

certificate% 1he said definition incorporates follo"in characteristics of a document

of title2

(i) use in the ordinary course of usiness as proof of the possession orcontrol of the oods and

(ii) authority to possessor of the document of title to transfer or receiveoods represented y the document either y endorsement or

delivery%

Do"ever# there is a need to make a separate le islation for the purpose of makin

"arehouse receipts a ne otia le instrument and devisin a system for certification of

the uality and uantity of commodities stored in "arehouses% It is true that a

"arehouse receipt does not strictly conform to the definition of ne otia le instrument

contained in the 8e otia le Instruments Act# 3>>3% But there can e no le alo =ection to treat such "arehouse receipts as ne otia le document y enactin a

special statute for the purpose%

2*$*7* Changes recommended in 'ossessor( 6ecurities !aw

a5 .o change in e isting law contained in sections $2& to $2 of theIndian Contract Act- $%2&*

+5 6uita+le amendments ma( +e made to 6ection $1 of the BankingRegulation Act or an rder e empting applica+ilit( of 6ection$1


17/42

2*&*$* .on)'ossessor( 6ecurities:

1he non@possessory securities may e of any of the follo"in kinds2i5 ?(pothecationii5 ,loating chargeiii5 Transfer of Title as a securit(i#5 Retention of Title

:nder our e/istin le al system e/cept the definition of Hhypothecation contained in

the $AR6A.$I Act and e uatin Hhypothecation and Hfloatin char e ein 8on@

Possessory $ecurities "ith the concept of security interest as defined under the said

Act# there are no other provisions in any other la" in re ard to creation of security of

hypothecation# ri hts and o li ations of hypothecator and hypothecatee and the rules

of priority in re ard to various claims on the hypothecated property% $imilarly the

concept of floatin char e as reco niFed y the Companies Act# 3?79 re uirin that a

floatin char e created on the assets of the Company should e re istered "ith theRe istrar of Companies under section 3 7 of the Companies Act# 3?79% But as far as

the ri hts and o li ations of the char e holders and the company creatin the char e#

etc%# are all overned y the decided cases of the courts and there are no statutory

provisions overnin such non@possessory security interest over mova le property%

2*&*&* @.CITRA! suggestions on .on)'ossessor( 6ecurities

In this respect draft recommendations of :8CI1RA4 provide as under2"'re)default rights and o+ligations of the parties:

The purpose of the pro#isions of the law on pre)default rights ando+ligations of the parties is to:


18/42


19/42

2*&*7* Recommendations on law for non)possessor( securities

The Indian Contract Act- $%2& alread( contains pro#isions in regard topossessor( securit( interest o#er mo#a+les* ,urther the Indian !aw ofContracts also pro#ides for part( autonom( +ut in the conte t of non)possessor( securit( interests it is necessar( to make statutor(pro#isions for the manner of creation of securit( interest- the rightsand o+ligations of the person creating the securit(


20/42

noted that at present there is no la" overnin hire purchase transactions and

lease of mova les% All such contracts relatin to hire purchase and lease are at

present overned y the eneral principles of the la" of contract contained in the

Indian Contract Act# 3>; %

2*&*8* Recommendation

The Working Group is of the #iew that there is a need to adopt the concept ofcomprehensi#e securit( interest and include all transactions of financial lease-hire purchase- conditional sales and purchase mone( credit as securit( interest+( adding a new chapter in relation to non)possessor( securit( rights o#ermo#a+le properties- in the Indian Contract Act- $%2&*

2*&* * Effect on .B,C 6ector

1he Workin !roup also noted that the a ove recommendation involves a chan e in

the financial activities of the 8on@Bankin 6inance Companies (8BC6s) "ho are

mainly en a ed in the activity of hire purchase and financial lease of mova les% At

present such 8B6Cs are e/ercisin ri hts of o"nership over the assets iven on hire

or lease in the event of default for the purpose of realiFation of the alance amount

paya le y the lessee or a hirer of the asset% 1he system is operatin satisfactorily

and such 8B6Cs are in effect havin ri hts of enforcement "ithout the intervention

of the Court% If the recommendation as su ested a ove y the Workin !roup is

implemented it "ould involve a decision to e/tend the $AR6A.$I Act to 8B6Cs% It

needs to e noted that at present the 8B6Cs are e/ercisin ri hts of takin possession

of the assets iven on lease or hire in the event of default in payment of a reed

instalments# y virtue of retention of title to such asset in their favour% If the la" is

amended as recommended y the Workin !roup such 8B6Cs "ill e e/ercisin

same ri hts of takin possession and sellin the assets iven on lease or hire ut the

asis of such action "ould e as a secured creditor instead of as a o"ner retainin

title to the property% As far as the orro"ers are concerned# there "ill not e any

chan e in the ri hts availa le to them and on the contrary such a chan e "ill e for

the enefit of the consumers% 6urther# the ri hts and o li ations of the parties "ould

e clearly defined and overned y statutory provisions%

2*&*2* ?ire)purchase K !ease treated as 6ale

As stated in para 5%3 a ove# for the purpose of sales@ta/# transactions of hire purchase

and financial lease are treated as sale of oods and the transaction is made su =ect to

sales@ta/ y the $tate !overnments% .ven if such transactions are treated as security

interest transactions# it "ould e possi le to classify such transactions as sales for the

purpose of levy of sales@ta/ y the $tate !overnment on such transactions% .ven in a

loan transaction# "here a ank or a financial institution ives a loan# say for purchase

*


21/42

of a car and o tains hypothecation of the car in its favour# the orro"er "ill e payin

sales@ta/ "hen y usin the loan "ith his o"n mar in# he makes payment for

purchase of the car% 'n the same analo y# "hen the lessor or the o"ner of the hire

purchase asset pays for the asset# to e iven on lease or hire# he "ill e re uired to

pay sales@ta/ on such sale% 1he treatment of hire purchase and lease transaction assales under the provisions of the Constitution and sales@ta/ la"s of the $tates "ould

not# therefore# come in the "ay of treatin such transactions as security interest%

2*7* ,inance against recei#a+les

Althou h $ection 3+* of the 1ransfer of Property Act makes provisions for

assi nment of actiona le claims# there are no statutory provisions for the purpose of

creation of security interest over receiva les or for transfer of receiva les "ith

underlyin securities under the e/istin la"% In this respect# the Workin !roup noted

that the :nited 8ations Convention on Assi nment of Receiva les in International

1rade has een si ned y five countries in ,ecem er **3% 1he o =ect of the said

Convention is to adopt uniform rules overnin the assi nment of receiva les to

promote the availa ility of capital and credit at etter and afforda le rates and thus to

facilitate the development of international trade% 1he said Convention incorporates

certain principles in re ard to free assi na ility of receiva les and other matters to

protect the ri hts and o li ations of de tors and lenders% $ome of the important

principles relatin to assi nment of receiva les contained in the said :nited 8ations

Convention are as under2

i5 An assignment is not ineffecti#e as +etween the assignor and theassignee or as against the de+tor or as against a competing claimant-and the right of an assignee ma( not +e denied priorit(- on the groundthat it is an assignment of more than one recei#a+le- future recei#a+lesor parts of or undi#ided interest in recei#a+les- pro#ided that therecei#a+les are descri+ed:

a5 Indi#iduall( as recei#a+les to which the assignment relatesH or

+5 In an( other manner- pro#ided that the( can- at the time of theassignment or- in the case of future recei#a+les- at the time ofconclusion of the original contract- +e identified as recei#a+les towhich the assignment relates*

ii5 @nless otherwise agreed- an assignment of one or more futurerecei#a+les is effecti#e without a new act of transfer +eing reFuired toassign each recei#a+le*

iii5 An assignment of a recei#a+le is effecti#e notwithstanding an(agreement +etween the initial or an( su+seFuent assignor and thede+tor or an( su+seFuent assignee limiting in an( wa( the assignor sright to assign its recei#a+les

3


22/42

i#5 This article applies onl( to assignments of recei#a+les:

a5 Arising from an original contract that is a contract for the suppl(or lease of goods or ser#ices other than financial ser#ices- a

construction contract or a contract for the sale or lease of realpropert(H

+5 Arising from an original contract for the sale- lease or licence ofindustrial or other intellectual propert( or of proprietar(informationH

c5 Representing the pa(ment o+ligation for a credit card transactionHor

d5 wed to the assignor upon net settlement of pa(ments duepursuant to a netting agreement in#ol#ing more than two parties*

#5 A personal or propert( right securing pa(ment of the assignedrecei#a+le is transferred to the assignee without a new act of transfer*If such a right- under the law go#erning it- is transfera+le onl( with anew act of transfer- the assignor is o+liged to transfer such right andan( proceeds to the assignee*

#i5 A right securing pa(ment of the assigned recei#a+le is transfera+lenotwithstanding an( agreement +etween the assignor and the de+tor orother person granting that right- limiting in an( wa( the assignor sright to assign the recei#a+le or the right securing pa(ment of theassigned recei#a+le*3

While incorporatin the a ove principles and other provisions contained in the :nited 8ations Convention# an e/ercise of comparin it "ith our e/istin la" and modifyin

the Convention to suit our re uirements "ill have to e undertaken# "hich can e

done at the sta e of actual draftin of the Bill for amendments% 1he Workin !roup

has# therefore# not undertaken the e/ercise of identifyin specific provisions of the

Convention# "hich need to e incorporated in the proposed amendment to the

Contract Act* At the same time- the Working Group is of the #iew that there is a

need to make specific pro#isions in our law for assigna+ilit( of all recei#a+les

including future recei#a+les and such law can +e +ased on the principles

contained in the @nited .ations Con#ention*

%*$*$* Registration of Charges:

In re ard to the priority et"een the security interest holders and other claimants# it

"ill e necessary to introduce a system of re istration of char es of mova le

properties% 1he $AR6A.$I Act contemplates settin up of such a Re istry# ut

e/cept char es on mova les elon in to companies incorporated under the

Companies Act# there is no re uirement of re istration of char es on mova les% $ucha re istration system is operated under the Companies Act y Re istrars of


23/42

Companies% Insofar as mova le asset o"ned y individuals# partnership firms and

other non@corporate orro"ers are concerned# there is no re uirement of re istration

of char es over mova le properties% 6urther# in respect of certain cate ories of

mova le assets# there are asset specific re istration systems in operation and

re istration is re uired in respect of char es created on such assets irrespective of"hether the asset is held y a corporate or non@corporate entity% Re istration of

motor vehicles is one such cate ory of asset% 1he !roup understands that such

re istration systems have een set up in :$A# Canada# 8e" Lealand and Australia#

"hich are operatin on certain modified principles and are totally computeriFed

re istries% 1he road principles applica le to such re istries are contained in the draft

report of :8CI1RA4 Workin !roup as under2

"Effecti#eness as against third parties


24/42


25/42

+5 registration s(stem should +e e tended to an( orders of attachment of

properties pursuant to ordersKdecrees of an( Court or Tri+unal or an(

other competent authorit( empowered to issue such attachment orders*

%*$*7* ther amendments to 6AR,AE6I ActAs stated in clause (f) of para +%9% of this report# no securitisation transactions are

ein undertaken under the $AR6A.$I Act% 1he !roup is of the vie" that there is a

need to se re ate securitisation of standard assets from the $AR6A.$I Act and enact

separate independent le islation for securitisation of financial assets as recommended

y the Andhyaru=ina Committee% $uch a la" can provide separate re ulatory

frame"ork for securitisation transaction for the purpose of protection of investors

"ho invest in de t instruments issued under securitisation schemes% $uch

transactions may not e matter for concern for the Reserve Bank if there is a true saleof assets of the anks% The Group- therefore- recommends a separate enactment

for securitisation transactions which should encompass securitisation of all

financial assets and recei#a+les and not onl( financial assets of the +anks and

financial institutions as is the case under the 6AR,AE6I Act*

1*$* 'riorit( Rules

In re ard to the priority rules amon st different claimants on the same property as

stated in para +%9%3 a ove the principle that the secured creditors have a priority over

all the claimants is reco niFed under different provisions of Companies Act and other

insolvency la"s% In spite of such clear provisions there is a misconception in the

minds of !overnment authorities entrusted "ith the function of recovery of ta/es and

other claims of the !overnment that dues of !overnment have a priority over all

creditors includin secured creditors% $ome of the $tate !overnments have amended

the $ales@1a/ Acts prevalent in the $tate for the purpose of ivin priority to arrears

of $ales@1a/ over the claims of secured creditors% In order to encoura e secured

credit# it is necessary that the le al provisions in re ard to ri hts of secured creditors

are very clearly laid do"n% At present on account of the various $tate la"s makin a

contrary provision the anks and financial institutions face num er of difficulties in

the matter of enforcin their claims as secured creditors% 1he !roup is therefore of

the vie" that there is a need to make a declaratory provision in the proposed

amendment that the claims of the secured creditors shall have priority over all the

claims includin the claims of the !overnment% An e/press declaratory provision to

this effect in a Central 4a"# "hich "ill e enacted later to the e/istin $tate la"s "ill

prevail over the $tate la"s and such declaratory provision "ould have the effect of

7


26/42

renderin the $tate la"s invalid and non@operative ein inconsistent "ith the Central

4a"# in vie" of the provisions contained in Article &8= of the Constitution of India*

9


27/42

1*&*&* Recommendations


28/42

1*&*8 1he !roup noted that a Bill for settin up credit information companies is already

introduced in Parliament and the Credit Information Companies (Re ulation) Bill is

e/pected to ecome a la" in due course% In this respect# the !roup su ests that in

many cases of defaults# it is found y ankers that defaulters are ivin differentversions a out their assets and income therefrom to the anks and ta/ authorities%

1he ta/ authorities can seek information from anks a out the accounts of their

customers% But the anks do not have any po"ers to o tain information a out the

details of assets and income disclosed y any assessee in the ta/ returns# to facilitate

recovery of defaulted loans% $ince recovery of ank loans is in the interest of

depositors "hose funds are used for lendin activity# anks can e iven access to

information availa le "ith ta/ authorities for the purpose of recovery of defaulted

loans% The Group- therefore- recommends that Income)ta Act ma( +e suita+l(amended empowering +anks to o+tain information a+out an( assessee from ta

authorities in respect of accounts which are classified as non)performing assets*

$/*$*$* Amendment of 6ection 1

$ection 9? of the 1ransfer of Property Act empo"ers the mort a ee to sell the

mort a ed property in the event of default su =ect to the follo"in conditions2


29/42

$/*$*&* Mortgage +( deposit of Title 9eeds:

:nder the provisions of section 7>(f) of the 1ransfer of Property Act a person can

create a mort a e y delivery of document of title to immova le property to a

creditor "ith intent to create security thereon% $uch mort a e y delivery of title

deeds can e created only in the to"ns of Calcutta# &adras and Bom ay and anyother to"n# "hich may e notified y the $tate !overnment% &ost of the metropolitan

and other to"ns have een notified y the $tate !overnments for the purpose of

a ove provision% Do"ever# "ith the ro"th and development that has taken place in

the country and the e/tent of inter@state trade and commerce it is necessary that the

restriction on creation of mort a e y deposit of title deeds only at notified to"ns is

"ithdra"n%

$/*$*7* 6tamp 9ut( on Mortgage +( deposit of Title 9eeds'ne other important issue "hich needs to e noted in re ard to mort a e y deposit

of title deeds is that no "ritten document is re uired to e e/ecuted "hile creatin

mort a e y deposit of title deeds% 1he o =ect of this provision "as to facilitate

raisin a loan a ainst security of a property in an emer ency# "ithout ein re uired

to e/ecute a "ritten document of mort a e and et the same re istered% 1he purpose

of the provision is to facilitate raisin money "ithout such formalities% In the past

fe" years some of the $tate !overnments have levied stamp duty on any

memorandum or record or "ritin relatin to deposit of title deeds% It is the practice

amon st the ankers to record the memorandum containin particulars of the

orro"er# the loan sanctioned and the particulars of the property in respect of "hich

mort a e y deposit of title deeds is created% $uch memorandum or "ritin "hich is

recorded only to link the holdin of the title deeds "ith the particular loan is ein

treated as an instrument su =ect to stamp duty% $uch levy of stamp duty y the $tate

!overnments defeats the very purpose for "hich the facility of raisin money y

creatin a mort a e of immova le property y deposit of title deeds is provided% In

order that a person can avail the enefit of raisin a loan a ainst security of mort a e

y deposit of title deeds# it is necessary to provide that any memorandum or "ritin

recordin a past transaction of deposit of title deeds y the lender shall not e

construed or treated as an instrument for the purpose of stamp duty%

$/*$*=* 6ecurit( Interest o#er flatsKapartments

1he 1ransfer of Property Act does not reco niFe the concept of a flat or an apartment

in the multi@storeyed uildin constructed on immova le property% $ome $tates like

&aharashtra and !u=arat are usin the structure of co@operative society for the

purpose of conferrin o"nership ri hts in the flat apartment alon "ith the ri ht to

?


30/42

use the common amenities provided in the uildin y the society% $ome $tates like

&aharashtra have also enacted &aharashtra Apartment '"nership Act ivin

statutory reco nition to the o"nership ri hts in an apartment% It needs to e noted

that in many ur an areas in the country# multi@storied structures are comin up and

the portions of a multi@storeyed uildin are ein used for industrial# commercialand residential purposes% But there is no formal le al reco nition to the ri hts of a

person in respect of the portion o"ned or purchased y him% It is therefore necessary

to enact a ne" la" for the purpose of reco niFin property ri hts in a portion of a

uildin alon "ith the ri ht to avail the common facilities provided in such uildin %

$tatutory reco nition to such ri hts of o"nership "ould facilitate availin credit

a ainst security of such assets% 6or this purpose either the 1ransfer of Property Act

needs to e amended or a separate Central 4a" may e enacted on the lines of the

&aharashtra Apartment '"nership Act% It may e added that such a la" needs tocover not only residential ut also commercial and industrial premises%

$/*&*$* 9efinition of Immo#a+le 'ropert(

1he distinction et"een mova le and immova le property is a thorny issue% In

$irpur Paper &ills 4td% $C

35>?)# the $upreme Court did not interfere "ith the findin of the lo"er court that

machine attached to the earth "ere merely for operational efficiency and "as not

immova le property% 1he !roup feels that the distinction et"een mova le andimmova le property in relation to Mmachinery may e maintained on the lines of the

said =ud ement of the $upreme Court%

1he a ove classification# in so far as# Hmachinery is concerned# may e le islatively

reco niFed y addin an e/planation to the definition of Himmova le property in

!eneral Clauses Act and 1ransfer of Property Act% Dence# the Workin !roup

recommends that in $ection +( 9) of !eneral Clauses Act and $ection + of 1ransfer

of Property Act# the follo"in e/planation e added to the definition HImmova leProperty %

./planation2 &achinery attached to the earth is not immova le property%

$/*&*&* Certificate of Title to 'ropert(

1he system of recordin the o"nership ri ht of immova le property is "ith reference

to re istration of deeds and documents involvin transfer of any interest in

immova le property of the value of Rs%3** and more% But the diverse personal la"s

applica le in the country# ac uisition of ri hts in immova le property are y means

other than "ritten document in ones favour% 1hus a person may ac uire interest or

+*


31/42

even o"nership ri hts in immova le property y virtue of partition in a Dindu

undivided family or y ac uisition to the property elon in to the deceased or under

a Will made y a deceased person% In the a sence of a uniform civil code applica le

in the country there is no system of issuin a title certificate to the o"ner of a land y

any authority of the !overnment acked y any statutory provisions% 1his creates asituation "here a person may e holdin o"nership ri hts for immova le property

for num er of years "ithout holdin any document or title deed in respect of such

o"nership ri ht% 6urther in rural areas there is no system of demarcatin land "ith

reference to the o"nership ri hts held in land y different persons% 1he name of the

villa e land is normally referred to y the particular name of the villa e or as A adi

land% 1here is a need to set up a system for the purpose of rant of the certificate of

title to any person "ho is entitled to the land y virtue of his succession as a le al

heir or ac uisition of ri hts y partition or y purchase or any other means% $uchcertificate of title should e issued y the Revenue or other !overnment authorities

"hich "ould constitute a document of title clearly certifyin the location or the area

of the land o"ned y the holder of the title certificate% $ystem should provide for

procedure for modification of such certificate "hen there are chan es in ri hts# title

and interests in the property% $uch a system "ould facilitate reco nition of the

o"nership ri hts and ena le the o"ner to raise loans a ainst the security of such

property o"ned y him%

$/*&*7* 'ower of Attorne( 6ales

1he mode of transfer of property is also not uniform in the country% In certain $tates#

the ,evelopment Authorities allot the housin units to various applicants and

prohi it them from transferrin such units% 1hese persons have invented methods to

overcome the restriction on transfera ility and have resorted to the rant of Po"er of

Attorney coupled "ith interest% Creation of security interest y the occupant# namely

the Attorney# in his o"n ri ht# is not reco niFed under la"% 1hou h the said person

has paid the consideration to the ori inal allottee# he is not reco niFed as the persono"nin the property%

Banks and Institutions find it difficult to advance loans to such persons even for

ac uirin property from the true o"ner%


32/42

$/*&*=* Recommendations

In conclusion- the law relating to transfer of immo#a+le propert( needs to+e amended for following purposes:


33/42

therefore necessary to enact a ne" la" or amend the e/istin le al provisions for

follo"in purposes2

(e) A system for issue of title certificate to any person "ho is

entitled to o"nership or any other ri hts in any immova le property%(f) Appointin a statutory authority in various parts of the

country for the purpose of rant of succession certificate in respect of

properties o"ned y a deceased person as also le al heirship certificate to

the le al heirs% In vie" of the diverse personal la"s applica le such a

ne" la" settin up authorities for the purpose of rant of succession

certificates may also have to clearly specify the rules of succession and

the various le al heirs entitled to succeed the property under various

personal la"s to facilitate issue of succession certificate% 1he list of suchle al heirs applica le under various personal la"s has een attempted y

the !roup and is enclosed to the report as Appendi )I %

1he !roup "ishes to place on record that a ove su estions re ardin succession to

property are ein made to facilitate lendin a ainst security of property "ithin the

e/istin le al frame"ork and there is no su estion for any chan e in personal la"s%

$&*$*$* In addition to the a ove su estion for amendments in relation to security interest over

property# the !roup "ishes to su est certain other amendments "hich need to e

undertaken to create an environment conducive to secured lendin %

$&*$*&*1he first su estion relates to amendment of section > of the Indian Contract Act%

As $ection > no" stands any uarantee issued y a ank in India remains operative

durin the limitation period for makin a claim under the uarantee "hich is normally

three years ut if the uarantee is in favour of !overnment it is thirty years% By

addition of a proviso to $ection > it is proposed to permit anks and financial

institutions to stipulate that ri hts under a uarantee shall e e/tin uished if no claim

is made "ithin the specified period "hich shall not e less than one year% $uch

provision in the uarantee "ill have the effect of curtailin the limitation period%

$uch an amendment "ill facilitate acceptance of uarantees issued y Indian anks at

international level and ena le the anks to remove such uarantees from their

contin ent lia ilities% $uch an amendment is necessary in vie" of strin ent

re uirements of capital commitments and provisionin norms for anks in respect of

contin ent lia ilities%

++


34/42

$&*$*7* 1he second su estion relates to section 7>AA of the Companies Act# 3?79% 1he said

section "as inserted "%e%f% 3+%3 % *** "ith an o =ective to protect the interest of

small depositors% It inter alia provide for the companies raisin pu lic deposits to

intimate the tri unal the details of the default of non@payment "ithin the prescri ed

time disclosure of default and restrictions "hile raisin fresh deposits etc% 1he su @section (;) of the said section 7>AA provides as under2

"Where a compan( had accepted deposits from small depositors andsu+seFuent to such acceptance of deposits- o+tains funds +( taking aloan for the purpose of its working capital from an( +ank it shall firstutili4e the funds so o+tained for the repa(ment of an( deposits or an(part thereof or an( interest thereupon +efore appl(ing such funds foran( other purpose*3

$&*$*=*In vie" of the a ove provisions a company "hich has accepted deposits from small

depositors is under a statutory o li ation to apply the "orkin capital funds for payment to the depositors% 1he application of "orkin capital funds "hich are

intended and meant for manufacturin activity of the unit if made and utiliFed for any

other purpose "ill affect the financial via ility of the company and in turn "ill lead to

default of repayment to the lender Bank% Provision contained in section 7>AA(;) as

stated a ove is o viously inconsistent "ith the lendin norms for "orkin capital and

the effect of the provision "ill e that anks "ill e reluctant to lend or continue to

lend to a company holdin deposits from small depositors and the very o =ect of the

provision "ill e defeated% 1he !roup# therefore# su ests deletion of su @section (;)

of section 7>AA of the Companies Act# 3?79%

$7*$* 'ro+lem of Multiple 6tamp 9uties

4astly# the !roup "ishes to su est a chan e in the le al frame"ork relatin to po"er

to levy stamp duties on instruments affectin property ri hts% 1here is a need to

reco niFe a ne" kind of instrument "hich is derived from or relates to any

transaction in the financial market# and has the characteristic of transfera ility

any"here in India and even lo ally# alon "ith the enefit of underlyin securities%

$uch an instrument like a securitised de t instrument in a securitisation of housin

loans# "hen transferred from one investor to other "ill involve transfer of undivided

interest in underlyin mort a es of houses% :nder our e/istin stamp duty system#

strictly in la" such transfer of de t instrument "ill amount to transfer of interest in

immova le property and "ill e re uired to e stamped as a conveyance and also

re istered% 1his impediment to financial transaction has to e removed y chan in

the la"% It appears that there are t"o alternative solutions to the pro lem2

+5


35/42

Alternati#e $

Amend the Constitution of India and make a clear provision for le islative po"ers for

:nion of India in respect of stamp duty on any instrument "hich has the

characteristic of ne otia ility and transfera ility any"here in India or outside India%

Alternati#e &

Assume le islative po"er of the :nion under the residuary entry ?; in the :nion 4ist

in the $eventh $chedule to the Constitution and amend the Indian $tamp Act and

Re istration Act# 3?*> for the purpose of levy of stamp duties on and re istration of

any ne" instruments that are similar to ne otia le instruments%

1he !roup is of the vie" that since alternative 3 may take time# the second alternative

can e tried to achieve the o =ect in vie"%

$=*$* Whether di#ersion of funds to +e made an offence:

1he Workin !roup also considered "hether siphonin off diversion of funds

orro"ed from anks or financial institutions should e made an offence% 1his issue

"as clearly e/amined y the IBA in the past and the Workin !roup a rees "ith the

follo"in vie"s of IBA conveyed to the RBI2

1he uestion "hether siphonin off diversion of funds orro"ed from a ank or

financial institution should e made an offence per se is not amena le to a strai ht

HN.$ # ecause the dividin line et"een ina ility to repay anks loans and failure

to pay on account of deli erate use of funds for some other purpose contrary to the

intents and purposes of the sanction of loan# is very thin% By makin such acts like

diversion siphonin off funds criminal per se there is a dan er that innocent and

enuine orro"ers# "ho are una le to repay the loan for the reasons eyond their

control "ould e treated as criminals% 1he difficulties in clearly definin an offence

to punish deli erate and "ilful default arisin out of diversion siphonin off funds

can e e/plained illustratively as under2

,acilit( Instances of di#ersion Whether should +emade criminal offence

i) 1erm loan formachinery

a) 4oan availed ut machinery not purchased and there "as never anyintention to repay the loan or createan asset%

) 4oan availed ut cheaper or usedmachine purchased or overinvoicin "as done as to the value

of machine# deli erately to deceivethe ank%

HNes should e part ofcheatin %

HNes should e madecriminal act% $ince#amounts to o tainin

loan y makin falserepresentation%

+7


36/42

c) 4oan availed and machinery purchased% &anufacturin started ut income not sufficient to payinterest and instalment of term loan%

d)4oan availed and manufacturinstarted% Ade uate surplus eneratedto repay loan instalments ut surplusused for uyin another machine ormore ra" materials to increasecapacity utiliFation or for any other

purpose connected "ithmanufacturin activity%

e) Ade uate surplus enerated in the usiness out of assets ac uired fromloan proceeds# ut surplus is notused for servicin the loan% 6undsare used for personal and other

purposes and default is committed%

1his may e a meredefault in repaymentand hence may not emade an offence%

,efault is more in thenature of reach ofcontract rather than acriminal conduct andhence should not eincluded%

1hese kinds of cases can e considered forinclusion%

ii) WorkinCapital

a) 4oan availed ut sale of product orconduct of usiness is at a loss% Itmay happen that surplus is ade uateto pay 1erm 4oan interest andinstalment ut not "orkin capital%

)4oan availed ut not used for usiness purpose% 6ake proof of purchase of oods ra" materials#etc% produced% $tock statements#"hich are false or inflated in value

furnished%c)4oan availed and used for intended

purpose ut the usiness activity isnot eneratin ade uate surplus%Inflated stock statements iven tosho" that there is no irre ularity%

d)4oan availed and usiness conducted profita ly ut there is a default inrepayment of loan and interest%

1hese instances cannot e included%

1hese instances can eincluded%

1hese instances may eincluded as a part of anoffence%

1he instance should ecarefully studied# so thatdefault due to enuinedifference dispute maynot e included%

iii) BillsPurchase ,iscountin

a) Bills dra"n representin enuinetrade transactions ut dishonor onaccount defect in oods%

)Bills are accommodation ills"ithout enuine trade transactionand not retired%

Conduct may not etreated as criminal%

1hese instances can ecovered for the purposeof offence%

While "e a ree that there is a need for such a la"# "hich "ould punish deli erate and"ilful default arisin out of diversion siphonin off funds# as an offence undercriminal la"# it is necessary to ensure that sufficient care is taken to e/clude thoseinstances of loan defaults (as can e seen from the illustrations a ove) arisin due to

enuine reasons# so that the la" encoura es ood orro"ers and punishes only "ilful

defaulters% In our vie"# the provisions contained in the Indian Penal Code# 3>9*ade uately meet the re uirement and no amendments to IPC need to e undertaken%

EEEE

+9


37/42

A''E.9I )I!egal heirs under #arious personal laws

i5 ?indus

a) Primary heirs of a Dindu male are2

i% $on(s)

ii% ,au hter(s)iii% Wifeiv% &other v% Children of Predeceased childrenvi% Wido" of predeceased sonvii% Children of predeceased rand children

) Primary heir(s) of a Dindu female are2

i% $on(s)ii% ,au hter(s)iii% Dus andiv% Children of predeceased children

ii5 Muslims

a) Primary heirs of a $unni &uslim are2

i% $on(s)ii% ,au hter(s)iii% 6ather iv% &other v% $pouse (Dus and Wife)

) Primary heirs of a $hia &uslim are2

i% $pouse (Dus and Wife)

ii% &other iii% 6ather iv% $on(s)v% ,au hter(s)

iii5 Christians

a) Primary heirs of a Christian are2i% $pouse (Dus and Wife)ii% $on(s)iii% ,au hter(s)

i#5 'arsis

a) Primary heirs of a Parsi male are2i% Wife (Wido")ii% $on(s)iii% ,au hter(s)iv% &other v% 6ather vi% Children of predeceased children

) Primary heirs of a Parsi female are2

i% Dus andii% $on(s)

iii% ,au hter(s)iv% Children of predeceased children

EEEE

+;


38/42

Brief 6ummar( of Recommendations

6*.o* 'ara .o* Issue Recommendations

3 +%3a

3*%3%5'"nership ri hts in the portion of multistory

uildin are not reco niFed y 1ransfer ofProperty Act% 1he o"ner finds difficulty to raiseloan a ainst security of such portion in the

uildin flat%

1o reco niFe such o"nership ri hts in a portion of uildin it is recommended toenact uniform Central 4a" on the lines ofApartment '"nership Act in &aha@rashtra%1his "ill reco niFe property ri hts not onlyin the portion of the uildin ut also ri htto avail common facilities amenitiesavaila le in the uildin %

+%3

3*%3%3.nforcement of mort a e "ithout intervention ofCourt is availa le under .n lish mort a e "hereneither the mort a or nor mort a ee is a Dindu#&ohamedian or Buddhist and "hen the propertyis situated in Presidency or notified to"ns%

Restrictions like Reli ion# place of propertyshould e removed y amendin section 9?of 1%P% Act% 1his "ill encoura e lendina ainst security of .n lish &ort a e even

y lenders other than Banks and 6Is%

+

+%3c

3*%3%

3*%3%+

. uita le mort a e can e created y deposit oftitle deeds only at Presidency and notified to"ns%1he . uita le &ort a e does not re uire si ninof any a reement or instrument as the o =ect of

providin this type of mort a e "as to facilitateraisin loan "ithout re uirin any "ritin #

payment of stamp duty or any re istration% 'ver

the years some of the $tate !overnments havelevied stamp duty on &emorandum of .ntry"hich is not an instrument% 4evy of stamp dutydefeats the purpose of raisin loans a ainst thesecurity of . uita le mort a e "hich is created

y oral deposit of title deeds%

Restrictions on creation of mort a e onlyat notified to"ns should e "ithdra"n%

1he &emorandum of .ntry or recordin a past transaction should not e treated as aninstrument for the purpose of stamp duty#i%e% &emorandum of .ntry should notattract any stamp duty%

5+%3d

3*% %31he distinction et"een movea le and immova le

property very often ecomes su =ect of variousinterpretations% 1he treatment of machineriesem edded in the earth is not clearly defined underthe 4a"% 1here is a need for clarity on the su =ect%

1he distinction et"een mova le andimmova le property in relation to themachinery may e reco niFed on the linesof $upreme Court =ud ment in the case of$irpur Paper &ills 4td% 1he &achineryattached to earth should not e treated asimmova le property% 1he 1%P Act and!eneral Clauses Act needs to e amended%

7+%3%e

;%+1here is no 4a" overnin creation of securityinterest over receiva les or transfer of receiva lessecured y securities% 1here is also no provisionfor transfer of future receiva les%

$pecific provision in 4a" e made forassi na ility of receiva les ased on the

principles contained in :nited 8ationsconvention%

9+%

3*% %1he Re istrar of Assurances keeps records relatin tore istration of transactions of immova le properties utthere is no system of issue of title certificate% In certain

A system should e evolved to rantcertificate of title to such persons%$uch certificate can e issued y

+>


39/42

cases# the o"ner drive his title to property under a partition deed or y inheritance succession and in suchcases there is no document title deed to evidence theiro"nership% $imilarly there are cases "here o"nershipri hts are claimed under A adi 4and% In the a sence oftitle deeds or certificate of title# the o"ner finddifficulty to raise loan%

Revenue or other !overnmentAuthorities ivin the title and the

particulars of the property# "hich shallreco niFe the o"nership ri hts%

;+%+

33%3,ue to multiple Personal 4a"# the concept ofissuance of $uccession certificate is not uniform%1here is also no system uniformly applica le for

rant of le al heirship certificate or le alrepresentation y the authorities% In certain casesthere is no mandatory provision to o tain the

pro ate of a Will %

A system e evolved for issue of titlecertificate to the person entitled to the

property% $tatutory authority for rant ofsuccession certificate e appointed invarious parts of the country %

>+%5

;%3%1he 4a" on pled e of mova les contained inIndian Contract Act is ade uate and no chan e inContract Act is called for% Do"ever# section 3?( )of Bankin Re ulation Act "hich restricts holdinof +*G of e uity in any company "hether as aPled ee or &ort a ee is not =ustified# for thereasons that there is e/tensive lendin activitya ainst security of shares# "ith the developmentof universal ankin Banks are undertakin termloan activities and there is no such prohi ition inthe case of 6Is% Pled e of promoters shareensures continuity of promoter in the pro=ectfinanced y the Bank and also ena les the Bank tosell the security alon "ith the &ana ement of thecompany in case of default%

1he restriction of holdin shares e/ceedin+*G e "ithdra"n in respect of pled e of

promoters shares and dispense "ith there uirement of transfer of such shares inthe name of the Bank%

?+%5

;% %3

;% %+

1here is no 4a" to re ulate non@possessorysecurity% 1he 4a" relatin to non@possessorysecurity is overned y the contract et"een the

parties and y =udicial pronouncements%$AR6A.$I Act ** provides the definition ofODypothecationO ut the said also do not providethe mechanism for creation of security of

hypothecation# ri ht and o li ation of the partiesand rules of priority in re ard to various claims onhypothecation property% 1he Company Act

provide for re istration of floatin char e andcertain char es on the assets of the company utthe re uirement of re istration therein do notapply to non@corporate entities%

It is necessary to make statutory provisionfor manner of creation of security interest#the ri hts and o li ations of the parties tothe hypothecation transaction and the ruleof priority amon different claimants andthe re uirement of re istration of char es%

3*+%7

$tamp 4a"s and rate of stamp duty differ from $tate to$tate% 1he multiplicity of stamp la"s and different rates ofstamp duties in various $tates is an impediment of ro"thand development of financial instrument "hich calls forne otia ility or transfera ility any"here in India%

1he po"er to levy stamp duty on instruments affectin

A central stamp la" needs to eenacted%

+?


40/42

3+%3

property ri hts needs to e iven re@look to reco niFe thene" kind of securities de t instrument "hich has thecharacteristic of ne otia ility and transfera ility any"herein India and even lo ally alon "ith the enefit ofunderline securities% 1his "ill facilitate and evolve a free#ne otia le and transfera le de t instrument in the market"ithout treatin such transactions as conveyance deedre uirin re istration%

33+%9%3

?%31he priority of dues of secured creditors overother claimants includin !overnment isreco niFed under the Companies Act and otherInsolvency 4a"s ut difficulties are e/periencedat enforcement and distri ution sta e% $ecuredcreditors have ri ht to remain outside "indin up

proceedin s and realise its securities% $ome $tates

have amended their respective $ales 1a/ Acts toive priority to the $ales ta/ dues over the dues ofsecured creditors% $o there is a need for clearindefinin the ri hts of the secured creditors%

1he Central 4a" should declare that theclaims of secured creditors shall have

priority over all other claims includin theclaims of the !overnment%

35%3

;% %;'n hire purchase and lease of mova les there isno statutory provision% 1he Dire Purchase Act3?; has not een rou ht into force% 1hesetransaction are overned y the contract et"eenthe parties% $uch contracts are treated as 1itleRetention Contract ena lin the o"ner to take

possession of assets there y ivin super priorityto such persons over secured creditors% In :%$%A%$uch transaction are treated as security interest

ecause in su stance such transactions are loantransactions% If these transaction are treated assecurity interest then the consumer "ill e entitledto the surplus sale proceeds and the o"ner shall eentitled to claim the shortfall%

All transactions of financial lease# hire purchase etc% e treated as security interest y addin a ne" chapter relatin to non@ possessory security ri ht over mova le properties% 1his "ill also ena le 8B6Cs tosell the lease hire assets in the capacity assecured creditor instead of as o"nerretainin title to the property "hich "ill ein the eneficial interest of oth rantorand rantee%

3++%9%

7%3

7% %3

7% %

1he $AR6A.$I Act addresses some of theo =ectives of :8CI1RA4 ut the Act does notaddress issues of creation# re istration and rules of

priorities amon different parties in relation tosecurity interest% 1he Act do not apply to titleretention contracts like D%P% and lease a reements%6urther it applies to Banks and 6Is and do notapply to other lenders and has no universalapplication like in the case of pled e underContract Act% 1he central re istry under the Act isconfined to Asset $pecific Re istration%

1here is a need to chan e the e/istin la"to cover these aspects of securedtransactions%

5*


41/42

35>%3%3

>%3%1o determine priority amon various $ecurityInterest holders# a re istration system formova les properties needs to e introduced% At

present char e on mova le assets needs to ere istered under Companies Act and the same donot apply to 8on@coporate entities% In :%$%A% thereis a re istration mechanism "hich operates onnotice filin system and the records of re istrationare centraliFed% :nder $AR6A.$I Act settin upof Central Re istry is proposed ut the same donot operate on the lines prevalent in :$A% Aneffective re istration system "ill o lon "ay in

providin statutory ackin to security interestcreated in favour of Banks and 6Is%

Amend $AR6A.$I Act to provide forcomputeriFed central re istry% It may econsidered "hether mova le assets needsto e classified in different cate ories tofacilitate re istration and assess to specificasset@"ise data in the re istry%

37 ?% %+ 4is Pendens i%e% ,isputes relatin to immova le

property pendin in the court# particulars arere uired to e filed in some states like&aharashtra and !u=arat%

1o safe uard the interest of the lenders a

central enactment should provide forcompulsory re istration of particulars of4is Pendens so that Banks and 6Is

providin financial assistance are a"are ofthe titles of the properties%

53


42/42

39 ?% %5 $ome $tate !overnment enactments provide forre istration of certain interim orders passed y thecourts like attachment efore =ud ement#in=unction# appointment of Receiver% 1here istration of such orders provides notice to the

pu lic and protect the interest of the lenders%

1he Re istration Act e amended tofacilitate re istration of all such orders inall the $tates%%

3; 3*% %+ Po"er of Attorney $ales are ein adopted as amode of transfer of property instead of e/ecutinconveyance deed# "ith a vie" to avoid stamp dutyand overcome restrictions on transfera ility%1hou h the attorney has paid the saleconsideration ut is not reco niFed as o"ner "ith

perfect le al title and thus he cannot raise loana ainst such property%

$uch transaction of po"er of attorney salesshould not e reco niFed under the 4a"%

3> 3 %3% Banks and 6Is issuin Bank !uarantees may e permitted to restrict the period of limitation forenforcin the uarantee y the eneficiary as it"ill help the Banks to remove the e/pired

uarantees from its Books thus improvin thecapital ade uacy%

$ection > of the Contract Act eamended%

3? 3 %3%+ 1he provisions in the Companies Act re uirin acompany to utiliFe the "orkin capital funds

o tained from the Bank# first to"ards the depositsaccepted from small depositors "ill lead to defaultof repayment to lender Bank%

$uch a provision in section 7>AA(;) ofCompanies should e deleted%

* ;%3%+ Warehouse receipts are not ne otia le% 1here isro"in lendin activities a ainst a riculture

commodities% It is necessary to ive these receiptthe character of ne otia le instrument so that theyare freely ne otia le% 1his "ill facilitate trade ina ricultural commodities%

$eparate le islation to make WR asne otia le instrument and devisin systemfor certification of uality and uantity ofcommodities stored in "arehouses# isrecommended%

3 35%3Whether siphonin off diversion of funds

orro"ed from anks or financial institutionsshould e made an offence%

1here is no need to amend the Indian PenalCode# 3>9*# makin diversion of funds acrime%

Ri ht of the anks and institutions to callinformation on income and "ealth of constituentsfrom 1a/ Authorities to stren th credit and 8PA&ana ement akin to po"ers of 1a/ Authoritiesunder $ection 3++(9) of Income 1a/ Act%

8ecessary amendment in 4a" e made%

Documents

Security Laws in India