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Apex court gives conditional nod to debt transactions by banks

The Supreme Court,on Monday,temporarily allowed the banks to go ahead with transactions related to assigning of debts subject to final disposal of their petitions.

Written by Press Trust Of India | New Delhi |
February 17, 2009 5:17:12 am

The Supreme Court,on Monday,temporarily allowed the banks to go ahead with transactions related to assigning of debts subject to final disposal of their petitions.

Three private banks — ICICI Bank,Kotak Mahindra Bank and Standard Chartered Bank — have moved the apex court challenging the Gujarat High Court judgment that banned trading in debts.

A bench headed by Justice S H Kapadia,while impleading the Indian Banks Association and Reserve Bank of India as parties,said transactions/activities related to assignment of debts can continue,provided ICICI Bank and Kotak Mahindra gave an undertaking that in case their petitions are dismissed they would revert all transactions. It also posted the matter for final hearing on April 14.

“It is made clear that in the case of dismissal of SLP,assignee and assignor will revert the transaction…,” the bench said.

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However,it said that it will look into issues whether the transactions were legal and whether the defaulting company had the right to challenge the issue of assignment of its debts to other banks.

Besides,the bench would also examine whether proper valuation was done before the transfer of company’s assets.

The order was passed on appeals challenging the high court verdict of January 12 that held that assigning debts by banks was not permissible under the Banking Regulation Act.

The Gujarat High Court added that the executed contracts of assigning debts were “illegal and the assignee banks were not entitled to be substituted for original lenders (assignor bank) in pending proceedings related to sick units”.

According to the banking industry,which has been realising its debts by assigning a value,the practice is quite prevalent in the international market.

Senior counsel Harish Salve and Mukul Rohtagi said banks identify sick loans (NPAs) and assign them for realisation at a value,adding that this form of recovery is common practice in the overseas market. They stressed that the RBI permitted them to sell debts with underlying securities.

Opposing the banks’ plea for stay,Senior Counsel S Ganesh said trading in debts was against laws of stamps,securitisation,registration,and Companies Act and the ICICI Bank had assigned the debt of around Rs 584 crore at a paltry sum of Rs 12 crore to Kotak Mahindra Bank.

The banks alleged that the high court order had undone the pro-active efforts of the RBI to enable the banking sector to deal with the fallout of increasing NPAs by opening a regulated secondary market for NPAs under the guidelines issued by the apex bank in 2005. The situation is likely to be exploited by defaulting firms as they would try to delay discharging their obligations,they added.

A bank while assigning debt with underlying securities,transfers its assets at a price and is no longer entitled to recover anything from the borrower,they said. The high court had passed the order on Kotak’s plea seeking transfer of a portfolio of debts on the basis of an assignment deed from ICICI Bank.

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