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  Supreme Court arms the Securitisation Act

Three developments last week promise to further reform and mature India’s financial markets.

On April 8, India’s Supreme Court disposed off a case filed by Mardia Chemicals against a consortium of bankers led by ICICI Bank. The issue was whether the banks could sell the properties they had attached in satisfaction of the monies dues to them. The Hon’ble Court has determined, yes, the banks are free to sell the locked assets. The judgment interpreted some provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002. More popularly, it is the Securitisation Act.

The likes of Rasiklal Mardia of Mardia Chemicals are not easy to tame. They belong to the now diminishing tribe of entrepreneurs that sprouted in India’s protected economy that flourished till the 1990s. They sat blissfully forever behind a curtain of slack laws that helped them ignore repayment of huge loans they had taken. Banks’ non-performing assets [NPA] mushroomed, even as they stood wringing their hands.

When the Securitisation Bill was passed in Nov 2002, it permitted banks to attach properties of defaulters. Several thousand defaulters realised their game was up and came to the table for settlements. But Mr Mardia gave them a breather for he is an endlessly creative man. He appealed to the Supreme Court that while the law permitted banks to attach assets, they may not sell them. Defaulters scattered again hoping Mardia might win. The Court last week, disagreed with him, but curiously, speaking to Business Line, Mr Mardia has claimed that the verdict is a victory for him! He probably refers to the Judges permitting further appeals. Or his peculiarly innovative mind is searching for new loop-holes.

Be that as it may, it doesn’t bother the banks. They believe a great majority of defaulters will now return to the negotiating table. There are several hidden bonuses due to the comfort level banks now feel. Secure that their loans are safe, banks are likely to consider greater number of loan applications. With lending risk reducing, interest rates are likely to fall as well. Increase in credit and at cheap rates will spur investments and create jobs.

Also last week, the business press reported that Ernst and Young [E & Y] has predicted that 2004 will be a watershed year for India, when over Rs 15,000 crores will be recovered by banks. One way the banks will go about collecting their money is by creating special purpose companies that will be vested with the bad debts. These in turn will be sold off to other corporates for whom these assets are a good buy. E&Y suggests that there are opportunities in India for global investors, opportunity funds and investment banks. They have invested over $20 billion around the world in distressed assets and India is an emerging market. 

To round off this series of connected news, let us note the novel suggestion made by Mr Justice Rajendra Babu of the Supreme Court. Addressing a joint conference organised by FICCI and the Bar Association of India on ‘Reinventing the Indian Legal System for achieving double-digit growth’, he proposed that India set up special courts for handling business cases. By hiving off cases relating to company law, bankruptcies, corporate taxation and disputes to these courts, he suggested business transactions will become fairer and fast. These courts will also relieve the pressure on mainstream courts that deal with civil and criminal cases.

Taken together, these developments hold much promise for the economy.