The SARFAESI Judgment

The  SARFAESI Judgment

A critical appraisal

On 16-12-2016 the Supreme Court of India while hearing an appeal in the case  titled State Bank of India v. Santosh Gupta–2 judges bench—(hereinafter for brevity Santosh Gupta case) against the DB judgment of JK High Court in Bhupinder Singh Sodhi v. Union of India,  2015 (1) SLJ 105, set aside the said HC judgment in total. A furore over Santosh Gupta case is being witnessed nowadays in the State. Here I will highlight the main features of Santosh Gupta case with references to the related facts, case-law & comments to enable the readers to appreciate the nitty-gritty of matter insofar as far as its implications & consequences for JK State are concerned. However, I may state here that Santosh Gupta holding that JK does have “no vestige” of sovereignty outside the Constitution of India & that the State’s own Constitution is “subordinate to” the Constitution of India has been in response to Bhupinder Singh Sodhi supra where the JK HC upheld “sovereign” & “autonomous” character of the State Constitution. But to note, these were not the main issues before the Supreme Court because “the bone of contention” was “ whether SARFAESI in its application to the State of Jammu & Kashmir would be held to be within the legislative competence of Parliament” (Santosh Gupta , para 5). So, in this view, it seems to be obiter of the Court based on a reading of sections 3, 5 & 6 of the State Constitution read with its Preamble. This write up is not intended to embark upon this discussion of “sovereignty” or “subordination” here, inter alia, for the reason that overwhelming majority population of the State doesn’t seem to be inclined to indulge in this type of discussion in as much as they do not ask for, nor consider to discuss even “self-rule”, “autonomy” or “self-document” in the face of their colossal sacrifices for their basic human right since decades agreed by India & testified by the world community till date. Here we shall discuss the main ratio of Santosh Gupta in the light of historical facts, case law & its implications & consequences for the State as under: 


1. Following  the law laid down by larger benches of the Supreme Court in Prem Nath Kaul v. State of Jammu & Kashmir ,  AIR 1959 SC 749= (1959) SCR Supl. (2) 270 (05 judges); Puranlal Lakhanpal v. President of India, AIR 1961 SC 1519= (1962) 1 SCR 688 (07 judges) ; and Sampat Prakash v. State of J&K, AIR 1970 SC 1118= (1969) 3 SCR  574 (03 judges, ) Santosh Gupta reiterated that State of JK for historical reasons enjoys a “special position” in the union of India among the States & that Article 370, though was intended to be temporary or transitional, has become a “permanent feature of the Constitution” for the reasons mentioned in Article 370(3) that says that without recommendations of the State Constituent Assembly, Article 370 could not be abrogated. Since the State Constituent Assembly was dissolved on 25-01-1957 without making such a recommendation, Article 370 has stayed permanently on the Constitution. But at para 12 Santosh Gupta makes a strange observation in these words: “… (Article 370) is in fact in current usage and will continue to be in force until the specified event in sub-clause (3) of the said article takes place”. (italics supplied) What kind of specified event is yet to take place for its abrogation, when the State Constituent Assembly has lost its existence on its dissolution, the thing noted in aforesaid Constitution Bench rulings of the Supreme Court?  Factually speaking, Article 370 which might have proved as bulwark to protect “the sovergnity”, what so speak of autonomy, of the State if the successive regimes in JK since 1950 had not rendered it an empty shell or a toothless tiger for their “vested interests” at the cost of overall Kashmiris’ national interests.  The things will become further clear from the following discussion. 


2. Under Chapter XI of the Constitution of India the legislative powers of the Parliament & State Assemblies are divided into three Lists 1, 2 &3 commonly called Union List, State List & Concurrent List. The Parliament has power to legislate on the items mentioned in Union List & Concurrent List while States have power to legislate on the items mentioned in State List & Concurrent List. In case both State & Union legislate on an item under Concurrent List & if there is repugnancy between the two, the State Law has to give way to the Union law.  Unlike that of other States, the Constitution of India that commenced on 26-12-1950 didn’t apply to the State of JK under Article 394 except through Article 370. Article 370 (1) states that the power of Parliament to make laws for JK shall be limited to:  (I) those matters in the Union List and the Concurrent List which are declared by the Presidential Order to correspond to matters specified in the Instrument of Accession (i.e. defense, foreign affairs & communication) BUT only in consultation with the State Government and (ii) such other matters in the said Lists as the Presidential Order may specify BUT only with the concurrence of the State Government. (Emphasis added).


3. As mentioned above, the Indian Constitution did not apply at all to the State of JK at the time of its commencement nor the Government of India Act, 1935 which was adopted by the Indian Constitution applied to JK state till JK framed its own Constitution in 1957. The Ruler, Maharaja Hari Singh had in his Instrument of Accession made it clear that despite conditional accession he shall not be bound by any future Constitution of India. (For details see Ashok Kumar v. State of J&K, JK HC deiced on 09-10-2015). However, a conduit pipe was used in the shape of Article 370 to connect JK with Indian Dominion constitutionally in view of “peculiar circumstances” that were going on in UN about JK State at that time. The main architect of Article 370 was Shri N. Gopal Swami Ayanger, Indian Rly. Minster & once PM of JK from Madras and in the Constituent Assembly of India, Sheikh M. Abdullah, Mirza Afzal Beigh , Maulana Masoodi & Moti Ram Bagda represented JK & conceded to the idea of inclusion of the said provision in the Indian Constitution. (Article 370: A Constitutional History of Jammu and Kashmir (2011) page 11, AG Noorani). 


4. Once the provision was made, started the flow of the Presidential orders from UOI right from 1950 when some provisions of the Constitution were extended to the State, of course, with the concurrence of the State government. This first Order of 1950 was superseded by the Mega Presidential Order of 1954 called Constitution (Application to Jammu and Kashmir) Order, 1954 which came into force on 14 May 1954. Till 1994 alone, by various Presidential Orders (numbering 47) made with Concurrence of the State Governments of the time, 260 of total 395 Articles of Indian Constitution have been extended to the State & 94 of 97 entries in the Union List have been applied to the State of J& K. (Ibid at pages 11-14). The omission of Entries in Union List with respect to JK has now come down to only four i.e. Entries 8, 9, 34, and 79, with a few other Entries being modified or substituted, and in fact the entire Constitution of India, as it existed in June 1964, has been made applicable by Presidential order of 1954 as amended repeatedly by a number of subsequent Presidential orders to the State of Jammu & Kashmir. (Santosh Gupta, paras 18& 19). 


5. Here we are concerned with the SAFAESI Act‘s applicability to the State of JK. So, we will now focus on the relevant issue.  This law basically provides for three things: (1) securitization of financial assets; (2) reconstruction of impaired loan assets & (3) enforcement of security interest. Security interest means non possessory securities of hypothecation & mortgages other than usufractuary mortgages. The sale of mortgaged properties of land & structures thereon in case of NPA (default) by the borrower can be effected by (a) bank or FI (financial institution) or (b) by ARC (Asset Reconstruction Company to whom loan asset alongwith underlying mortgage properties has been sold by bank or FI) by following procedure prescribed under section 13 read with the Security Interest (Enforcement) Rules, 2002 as modified from time to time by the Central government.  


6. The Act has been held “constitutionally valid” by the Supreme Court in Mardia Chemicals Ltd v. Union of India, (AIR 2004 SC 2371). The Supreme Court has since then repeatedly held that this Act has been passed by Parliament by exercising its legislative power under Entry 45 of the Union List. To note, this Entry has been extended to the State of JK by the Presidential Order of 1954. There is unanimity on these points in the Supreme Court decisions till now & Bhupinder Singh Sodhi supra has also confirmed it.  


7. Entry 45 of List 1 provides for “banking” which includes not only mobilization of deposits for lending & investment but the creditor’s right of recovery in case there is default by the borrower by selling his charged assets as recovery of loan is included in the subject of “banking”. This is admitted position of law. (Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275). Parliament has till date passed several legislations by exercising its powers under the said Entry 45. Before commencement of the Constitution, there were several Acts passed by the British & adopted by India after 1947 about banking & the same has been continuing till date. BUT a cursory look at the opening provisions of those Central Laws shows that each Act begins with very important words in their commencement clauses as: “This Act shall be applicable to the whole of India except the State of J & K”. Examples: RBI Act, 1934, Banking Regulation Act, 1949, Negotiable Instruments Act, 1881, Recovery of Debts Due to Banks & Financial Institutions Act, 1993. The expression “except the State of J & K” in those legislation was originally placed in view of Article 370. Then, except DRT Act, 1993, this expression was removed by the Jammu & Kashmir (Extension of Laws) Act, 1956 from the said Central laws & that Extension of Laws Act was passed pursuant to the Presidential order of 1954 cited above. In simple words, these Central Acts on the subject of “banking” were extended to the State of JK under Presidential Order of 1954 by following procedure under Article 370 (1). However, to note here, DRT Act, 1993 has not been adopted by or extended to the State till date because there is no such Concurrence given by the State government till now &, consequently, we don’t have DRT & DRAT mechanism in the State. Any borrower feeling aggrieved by an action taken by bank or FI or ARC u/s 13(4) of the SARAESI has a right to appeal before DRT & DRAT concerned. As DRT Act providing for setting up DRT/DRAT in the State was absent, this was another hindrance in implementation of the SARAESI in the State.  


8. As regards the SARFAESI Act, 2002, the expression “…..except the State of J & K” was/is missing therein which apparently has been a “deliberate omission” on the part of Indian Lawmakers of this Act. My first & foremost submission is that despite being a valid banking legislation, the then State Government should have noticed the error & objected to it & asked the UOI to extend it only with necessary “modifications” & “emissions” to safeguard the interests of JK State subjects (as highlighted in Bhupinder Singh Sodhi supra) by a valid Jammu & Kashmir (Extension of Laws) Act as was done in the past with other Central laws on banking & as required under Article 370(1). Instead of noticing this “deliberate omission” & nipping the evil in its budding stage, unfortunately, the State Governments kept mum (I had referred to these anomalies in the Act in my book titled “Legal Aspects of Bank Lending (2010). Instead, they pleaded for extension of the Act by indirect Concurrence by asking GOI to provide for absence of the DRT mechanism in the Act. Thus, at the request of the State Government, sections 17A & 18B were inserted in the Act by its 2004 Amendment. After several years of passage of the Act when the State Government found that the Act was likely to impinge on immovable property rights of the State Subjects, they were mulling of framing an analogous legislation of SARFAESI or making amendments to it. Quite bizarre, how could the State frame its own law on a “banking” subject when it didn’t have legislative competence to do so under any law & how could it amend the Act for the same reasons.  Had the State power to do so, who stopped them since 2002? Had the things been properly appreciated by those at helm of affairs at right time & instead of pursuing wrong procedures, the problem would not have precipitated down to this stage.  


9. Santosh Gupta holds that Concurrence of the State Government as envisaged under Article 370 is required for a Presidential Order that extends any Entry in Union List & Concurrent List or any Constitutional provision to the State of JK but no such Concurrence is required for extension of a Parliamentary Law like SARFAESI Act to the State. For this purpose, it draws a distinction between Constitutional amendment & Parliamentary Law under Article 370 & proviso to Article 368. (Para 15). Respectfully, if were so, then, why other Central Laws on banking mentioned above were not directly applied to the State & why it always  needed JK Extension of Laws Act with Concurrence of the State Government to be passed? Again, why then, DRT Act, 1993 which also is a law passed under Entry 45 of Union List has not been applied to the State so far? 


10. Other than State List, the Union & Concurrent Lists almost completely till now have been got extended to the State by various Presidential Orders by the State Governments. At para 19 Santosh Gupta states that Entry 6 (dealing with the transfer of property) and Entry 11A (administration of justice) of the Concurrent List do not apply to the JK State because the former has not been extended to the State & the latter does not apply because the 42nd Amendment to the Constitution of India, in 1977, which introduced Entry 11A into the Concurrent List, is itself not applicable. But at para 22, the Court says that the items that are in Concurrent List or State List could be lifted from those Lists & placed by the Constitutional Amendment which will be applicable in the State only with Concurrence of the State Government. “Nothing is frozen so long as the drill of Article 370 is followed”. In other words, it means that Entry 6 (dealing with the transfer of property) can be lifted & put in Union List by Parliament with concurrence of the State Government. Rest you can imagine!  


11. Santosh Gupta at paras 21, 25-27 & 30 has dealt with the issue of repugnancy U/Article 254 of the Constitution between a Central Legislation & a State Legislation passed under the Concurrent List. It states that the Supreme Court in UCO Bank v. Dipak Debbarma, (decided on 25-11-2016), has held that section 87 of the Tripura Act, 1960 that allowed sale of mortgaged property to a member of Scheduled Tribe only within Tripura was to give way to the SARFAESI Act as the latter Act does not put any embargo on the category of persons to whom mortgaged property can be sold by the bank for realisation of its dues & that the SARFAESI Act will prevail over section 87 of the Tripura Act, 1960. Because in case of repugnancy , the State Legislation must give way to the Parliamentary Legislation under the rules of interpretation of statutes. Although Santosh Gupta hastened to add that UCO Bank v. Dipak Debbarma does not apply “on all fours to Santosh Gupta case”, yet the principle established by it u/Article 246 has been stressed upon. 


12. It needs to be mentioned here that Central Bank of India v. State of Kerala, (2009) 4 SCC 94 is another important case that deals with an important matter under the SARFAESI Act & State Commercial Laws. In case of default of loan, a banker under the SARFAESI repossess the property of the defaulter & under the State Sales/Vat Tax Acts the States are also empowered to seize the property of the dealer for arrears of sales tax. Both have power under the respective laws to sell the property for satisfaction of their dues. Which claim shall prevail was the question put before the Supreme Court in that case. The Court upholding the prior right of the States’ Laws held that the two sets of legislations have been enacted with reference to entries in different lists in the 7th Schedule. Therefore, Article 254 cannot be invoked per se for striking down State legislations on the ground that the same are in conflict with the Central legislations. That apart, there is no ostensible overlapping between two sets of legislations & that the primacy of the SARFAESI Act has not been reserved under the Act over the State Laws. However, it may be noted here that Article 35A (dealing with the rights of State Subjects as far as their immovable properties, etc, are concerned) that was inserted in the Constitution by Presidential Order of 1954 has received assent & approval of the President, so by virtue of Article 254(2) the State Laws on immovable properties of the State Subjects, etc, in Article 35A will remain intact. 


13. Vide paras 32, 33, 37 & 44 , Santosh Gupta holds that the SARFASI Act deals with “banking”  & recovery measures of loans by sale of property, etc, is “ancillary” to it and that “in pith & substance” it is not relatable to the subjectmatter of “transfer of property “, and that the SARFAESI Act is entirely referable to Entries 45 & 95( latter dealing with jurisdiction & powers of all courts except SC)  of the Union List ( extended to JK by PO of 1954) & that it is not correct to  first dissect an Act into various parts and then refer those parts to different Entries in the legislative Lists as done in Bhupinder Singh Sodhi. Then, quoting section 140 of the JK Transfer of Property Act ( that allows sale of mortgaged property by a creditor to a State Subject only) & Proviso to Rule 8 (5) of the Security  Interest (Enforcement) Rules, 2002 , the Court held that this Rule “can’t be brushed aside & that section 140 above will be respected in auction sales” ( of immovable properties of JK) under the SARFAESI Act & that “there is no repugnancy or collision between section 140 & the SARFAESI Act provisions". The Court remarked that Rule 8 (5) cannot be “brushed aside” as done by Bopinder Singh Sodhi. At para 46, the Court referring to Article 35A of the Constitution, held that the rights therein are expressly preserved in Rule 8(5) proviso cited above. So far so good. But at paras 40 & 44, the Court has made observations that Must be very disturbing for the State of JK. It has said that “anything that comes in the way of SARFAESI by way of a JAMMU & KASHMIR LAW must necessarily give way to the said law by virtue of Article 246 of the Constitution of India as extended to the JK read with section 5 of the Constitution of Jammu & Kashmir” (Para 40). And, at para 44, it again repeated the said view that an attempt has first to be made to harmonise section 140 of the JK TP Act with the SARFAESI, and if such harmonization is impossible, it is clear that by virtue of Article 246  read with section 5 of the JK Constitution, section 140 of the JK TP Act has to give way to the SARFAESI, and not the other way around.


14. At par 44, in reply to Bhupinder Singh Sodhi that the Parliament had no power to enact sections 17A & 18B in the SARFAESI Act as the “administration of justice” is a State subject, Santosh Kumar said that administration of justice is undoubtedly State subject but Parliament under Entry 95 of the Union List has power to confer jurisdiction on the Courts within a State. 


Conclusions & suggestions: 

(A) What kind of specified event for abrogation of Article 370 is going to take place as mentioned at para 1 above. The State & all parties must deliberate upon it before it is too late.  

(B) The distinction drawn by the Court between Constitutional Presidential Order & a Parliamentary law for the requirement & no requirement of the State’s Concurrence under Article 370 is again contradictory to the set procedure as mentioned at para 9 above. The people at helm of affairs in the State need to seriously think about it & take up this matter with UOI lest a further flood of Central Laws in the light of this ruling inundates the State.  

(C ) In view of discussion at para 10, there is an apprehension that Entry 6 (dealing with the transfer of property) may be lifted & put in Union List by Parliament with the concurrence of any Government in the State. This apprehension needs to be set to rest once for all.  

( D) Santosh Gupta holds that in view of Proviso to Rule 8 (5) of the Security  Interest (Enforcement) Rules, 2002 & Article 35 A of the Constitution the property rights of State Subjects under section 140 of the State TP Act have to be respected  in auction sales under the SARFAESI Act, yet in the same breath the Court has observed that if there is a conflict between the SARFAESI Act & the State Laws in this regard, the latter  has to  give way to the SARFAESI, and that there is not the other way around. Even if obiter & not ratio, it is likely to open a very Serious Inroad in the property rights scheme of JK State Subjects that is protected under the State Laws as well as Article 35A of the Constitution of India.  The State should think of this point also very seriously. In Central Bank of India v. State of Kerala, (2009) 4 SCC 94 the Supreme Court has held that Article 254 (repugnancy between Central Law & State Law) cannot be invoked per se for striking down State legislations on the ground that the same are in conflict with the Central legislations.

(E) Since the very inception of the SARFAESI Act, this Law has undergone a number of modifications & changes from time to time. Immediately, after Mardia Chemicals Ltd case (2004), the Act was substantially amended to address the concerns of the borrowers & mortgagors. A number of subsections were added to section 13 in particular to make it borrower & industry friendly, to strike a balance between the rights of both. Again, in 2012 major changes have been made in the Act by adding number of provisions to it & new Rules to its Security Enforcement Rules. There is nothing sacrosanct about this Law. In the light of Santosh Gupta judgment at hand, the Government must express its major concerns mentioned hereinabove & get the same suitably addressed by the UOI by adding few subsections to section 13 to secure interests of State Subjects qua their immovable properties. ……..It is suggested that the desired amendment must make it clear that (a) sale of immovable properties situated within the territory of JK if charged to any bank or FI, the same MUST be sold to a State Subject only; (b) any loan asset if transferred to any ARC or Securitisation Company for asset reconstruction or securitization, the underlying mortgaged property, if there will be any,  will devolve upon the ARC or SC only as a sub-mortgagee under a valid document to be nominally stamped & registered under the JK State Laws & that ARC/SC, if such occasion arises, shall be bound to sell the property to a State Subject only; (c) Sale Certificates issued/to be issued by the bank, FI, ARC or SC, as the case may be, under the Security Interest ( Enforcement ) Rules must be got compulsorily stamped & registered under the related State Laws. To mention, in several States, these Sale Certificates issued by banks in auction sales under the Act are compulsorily stamped & registered eg, State of Kerala, etc.

(F) Mere amendments to the State TP Act & other Laws in this regard will not be enough.

(G) Secured creditors whether operating within or outside JK to whom State immovable properties are charged should co-operate with the State Government because the bankers whose interests are sufficiently secured in this law are concerned with recovery of their dues & not destruction of age old State property laws of the State Subjects which are otherwise also secured under the Indian Constitution (Article 35A).  

Two important points: 

The two proposals are invariably suggested, nowadays, in some local newspapers of Kashmir & also found in the common discourse among various circles of life here about the SARFAESI issue. These two proposals are: (1) it is proposed by some in local dailies that filing of the Curative Petition is the only solution to set right the adverse effects of the present judgment insofar as the JK State, its property & other rights are concerned. Is filing of the Curative Petition before the Supreme Court solution to the problem? (2)  The State Government is reportedly mulling over the idea of setting up of an Asset Reconstruction Company at State level clothed with State Subject status & exclusive power of acquiring the impaired assets of the banks operating in JK & , then, selling them to the State Subjects only. Is proposed ARC solution to the problem? 


Let me respond to the proposal no. 1 first. The concept of Curative Petition was for the first time evolved by the Supreme Court of India in Rupa Ashok Hurra v. Ashok Hurra, AIR 2002 SC 1771= 2 SCR 1006 = 4 SCC 388  . In that case, the question was raised before the Supreme Court whether the aggrieved petitioner whose review petition of a final order of the Supreme Court under Article 137 of the Constitution has been dismissed by it has any further remedy to seek review of the dismissal order of his review petition. The Supreme Court affirmed the question by holding that it has inherent power under the Constitution to correct its final order of dismissal of a review petition by allowing what it called the Curative Petition by the aggrieved person.  However, it remarked that except when very strong reasons exist, the Supreme Court should not entertain an application seeking reconsideration of its order which has become final on dismissal of a review petition lest floodgates are opened for filing a second review petition as a matter of course in the guise of a curative petition under the inherent power. But on what grounds such an extra-ordinary remedy could be availed of? The Supreme Court itself stated the grounds/requirements for filing of the Curative Petition at Para 47-54 of the judgment. First & foremost, the Curative Petition applies where a review petition of a judgment under Article 137 of the Constitution was filed by the petitioner but dismissed by circulation by the Court.  It means that that the Curative Petition is in reality “second review petition” that is sparingly & not regularly allowed by the Supreme Court. But no such situation exists here as where the State or any other person like mortgagor/s of the JK immovable properties could think of filing the Curative Petition in the Supreme Court. So, filing of Curative Petition under the circumstances is grossly a bad idea. Secondly, a cursory look at the grounds/requirements on which the Curative Petition is sought from the Court will hardly leave any doubt in the mind of a layman even that such an attempt , if the situation occurs for that, will be surely an exercise in futility. Thirdly, if the State, however, intends to file “review petition” in the Supreme Court under Article 137 against Santosh Gupta judgment, it can be filed only within prescribed 30 days of the judgment & legally, on the ground of any “apparent error” in the order. Moreover, it will be heard by the same bench, if available, and according to the principle of stare decisis the Courts usually do not unsettle their earlier orders except for very “strong reasons”, and last but not least, in view of the facts & circumstances attending the whole matter at hand, in my humble opinion, there doesn’t seem to be good chance of reversal or modification of the Santosh Gupta order. 

I will now respond to the second proposal mentioned above. Firstly, it has to be noted that Asset Reconstruction Companies are a concept in bad loan landscape of Indian economy that has its roots in the SARFAESI Act, 2002 itself. Although registered under the Companies Act, 2013, ARC has to operate, only with the prior license of the RBI, within the four walls of the Act & the RBI Guidelines issued from time to time. The Amendment Act No.44 of 2016 (August) {already published in official gazette of India} made to the SARFAESI Act & some other Acts has conferred wide ranging powers on the RBI in a changing business environment of India which include the power to examine the statements & information, audit & inspect ARCs & penalize an ARC, if it fails to comply with RBI directions. 

 In India till date out of 16 ARCs, only two, namely, ARCIL (Asset Reconstruction Company India Limited) followed by RARC (Reliance Asset Reconstruction Company Limited of Anil Ambani Group) are comparatively operational while the rest are still sluggish not active & able enough for the job of reconstruction or management of stressed assets. The ARCs in India are in both private & public sectors. Since the ARC mechanism failed to resolve the bad assets acquired from the banks, the GOI was few years back mulling over an idea of forming a Central ARC with equity contribution from GOI & RBI & in fact experts from IMF too were consulted in this regard as to how to set up & operationalise Central ARC. But it seems that the idea did not go any further as the then RBI Governor, Dr. Raghuram Rajan, was averse to such an idea of GOI & RBI contributing to the capital of CARC on the ground “why should taxpayers pay for reckless lending by banks in the past”, fearing thus, “moral hazard” in the process of execution of such an idea. 

Then, in Budget Session of 2016-17, the Indian FM assured of easing the provisions of the SARFEASI Act with respect to equity holding in ARC by its sponsor to 100% contribution from existing 50% limit whileas the remaining 50% is to be held by individuals. In this sense, the ARCs would become 100% subsidiaries of their sponsors.  In that budget speech, it was said that non-institutional investors including foreign investors would also be allowed to invest in the security receipts issued by the ARCs. 

The Amendment Act No.44 of 2016 has made sweeping changes in several provisions of the Act following the above budget speech of FM of India. The amended Act has provided for exemption of stamp duty on assignment/sale of stressed assets to the ARCs by the banks. But the problem does not end there. There are several other issues faced by ARCs in India. The banks are not willing to sell their bad assets at such huge discounts as generally required by the ARCs at such a low valuation as 50% of the stressed asset.  

In the light of foregoing discussion, the following points need a thorough consideration & answer before thinking about setting up of State level ARC. First, who will provide capital for floating a State ARC, the State Government alone or State Government with one or more banks operating in JK? Second, whether all banks or only one or two banks will contribute to the equity? Third, whether “moral hazard” factor, in the words of ex-RBI Governor won’t come in picture if State & some other bank/s contribute in this direction? Four, while acquiring a bad loan, sale price from the ARC usually comes in the shape of security receipts /bonds/debentures, and not cash. If so, won’t it be simply a shadow change in balance sheet of banks from loans & advances to investment column, and who will subscribe to those security receipts, the banks themselves or institutional or non institutional buyers? Fifth, is the proposed State ARC going to be vested with the power of acquiring loan asset together with underlying mortgage security simply for selling the property for recovery of debt? If so, who will decide the cost of the loan asset assigned to the ARC? Sixth, since the loan asset will be acquired at a discount, it means that the discount will be business profit of the sponsor of ARC: be that State alone or together with some other bank/s. Seventh, assignment of stressed assets to ARC is an “option” available to the banks & other secured creditors under the SARFAESI Law. It is not compulsory for the secured creditors as they are fee to enforce their securities at their own without intervention or engagement of outside agencies like ARCs. Judging from the mode of discourse in Kashmir about the issue, it seems that it will be made “compulsory” for the banks in JK to transfer their stressed assets along with underlying securities to the proposed State ARC. But for that the State needs legislation or amendment to some State law to bind the banks. Is it possible to pass such legislation/amendment when it will plainly fall within the domain of “banking” which is not within the legislative competence of the State? 

Viewed from the angle of the discussion made hereinabove, the proposed State ARC will be strange type of ARC unknown to Indian banking & financial sectors. It will be better to call it Property Selling Agency but, to remember, if it is named & registered as ARC, it will be governed by the provisions of the SARFAESI Act, 2002 & the RBI guidelines. 

As is apparent from the discussion above, the proposal to establish State level ARC is fraught with host of intricate problems to some of which I have drawn attention.  For these reasons, it is my humble view, the proposal is not a viable solution to the problem faced by JK in the light of the SARFAESI Act & consequential effects of the Supreme Court decision at hand.  The solution lies in humble suggestions made in my column cited above. 



(The views expressed in this article are personal of the author and not that of the organisation he works for)