REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIALASSETS OF BANKS AND FINANCIALINSTITUTIONSCentral

Section 7 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

7. Issue of security by raising of receipts or funds by 1[asset reconstruction company].--(1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any 1[asset reconstruction company], may, after acquisition of any financial asset under subsection (1) of section 5, offer security receipts to qualified institute buyers 2[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,] for subscription in accordance with the provisions of those Acts.

(2)A 3[asset reconstruction company] may raise funds from the 4 [qualified buyers] by formulating schemes for acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired out of investments made by a 4[qualified buyer] and ensure that realisations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme. 5[(2A) (a) The scheme for the purpose of offering security receipts under sub-section (1) or raising funds under sub-section (2), may be in the nature of a trust to be managed by the 3[asset reconstruction company], and the 3[asset reconstruction company] shall hold the assets so acquired or the funds so raised for acquiring the assets, in trust for the benefit of the 4[qualified buyers] holding the security receipts or from whom the funds are raised.
1. (b)The provisions of the Indian Trusts Act, 1882 (2 of 1882) shall, except in so far as they are inconsistent with the provisions of this Act, apply with respect to the trust referred to in clause (a) above.]
(3)In the event of non-realisation under sub-section (2) of financial assets, the 4[qualified buyers] of a 3[asset reconstruction company], holding security receipts of not less than seventy-five per cent. of the total value of the 6[security receipts issued under a scheme by such company], shall be entitled to call a meeting of all the 4[qualified buyers]and every resolution passed in such meeting shall be binding on the company.
(4)The 4[qualified buyers] shall, at a meeting called under sub-section (3), follow the same procedure, as nearly as possible as is followed at meetings of the board of directors of the 3[asset reconstruction company], as the case may be.

Summary

Asset reconstruction companies can raise money by offering security receipts to specific types of expert investors.
These receipts can be offered to qualified buyers or other categories of investors defined by the Reserve Bank.
The company must keep completely separate and distinct accounts for every different scheme it launches.
Money collected from a specific scheme must be used only for that scheme's assets and to pay back those specific investors.

Practical examples

1A company called Mega Assets wants to buy a huge portfolio of bad loans from a national bank. To get the money, it creates the "July Recovery Scheme" and sells security receipts to three insurance companies and two large banks. Mega Assets keeps a separate bank account and ledger just for this July scheme so the investors can see exactly where their money is going.

2The "Diamond Growth Trust" is a scheme run by an asset reconstruction company that has struggled to recover any money for two years. A large pension fund owns 80% of the receipts in this trust. Because they own more than 75%, the pension fund calls a mandatory meeting of all investors to vote on changing how the assets are managed.

FAQ

1. Who can buy security receipts issued under Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002?

Security receipts can be offered to qualified buyers and other categories of investors, including non-institutional ones, as specified by the Reserve Bank under Section 7 of the Act.

2. How must an asset reconstruction company manage funds for different projects under Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002?

The company must maintain separate and distinct accounts for each scheme and ensure realizations from specific assets are used for that specific scheme as per Section 7 of the Act.

Test yourself

Q1.Under Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, what is the minimum percentage of value required for investors to call a meeting if assets are not realized?

Q2.According to Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, what must an asset reconstruction company do regarding the accounts of different schemes?

Q3.Under Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, in what form can a scheme for offering security receipts be structured?

Q4.If a resolution is passed at a meeting called by qualified buyers under Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, who is it binding on?

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