The process of the legislative measure has just been initiated and the ordinance issued. Still it is not complete. It is an ad-hoc temporary measure and will lapse automatically, if follow up steps are not complied and the ordinance converted into an enactment by tabling and passing the corresponding Bill in both houses of Parliament.

An enactment without the subordinate legislation covering the procedural rules is a half measure. Banks and financial institutions can take recourse to the Ordinance only when the relative Rules & Guidelines are framed and published.

The ordinance does not address comprehensively about securitisation , as it does not cover the procedure for securitisation for assets other than Non-performing Assets of Banks/FIs.

The investments in the securitisation company are permitted only to Qualified Institutional Buyers (QIBs). Restriction on others on investments might have a negative effect on the growth of the securitisation market.

There is some problem with regard to the Income Tax Act. It complicates the problem under Section 88 of the Income Tax Act as the securitisation companies are deemed to be lenders. The problem of taxation in case of multiple classes of securities remain the same. Another problem area of withholding tax is also untouched.

The ordinance was expected to solve the problem of stamp duty which was seen as hindrance for growth of securitisation market but the ordinance further complicates the stamp duty issue. The acquisition of the financial asset can be made by issuing debentures. This instrument requires stamp duty on transfer and even while issue. In case of acquisition by agreement it also requires stamping, as it is a conveyance. Since the security receipts are a security under SCRA and Companies Act, the issue of this receipt is stampable as `receipt'. The transfer of security receipt is also stampable except under the demat form. Apart from this the state level stamp duties remain the same.

The immovable property still requires registration. Mortgage-backed receivables are considered as immovable property in law therefore registration requirement continue to apply. The definition of security receipts rules out pay-through securitisation that is very popular globally. The ordinance takes security receipt as transfer of undivided interest and not as undivided beneficial interest making security receipt a legal property.

The ordinance gives special powers to take over management of the borrowers. This in the context of securitisation is totally new. The Reserve Bank of India as prudential regulator of the securitisation company is unheard of in any other part of the world. The compulsory registration requirement for each securitisation transaction and all modifications made and open to inspection by any person is also something new.

The securitisation model suggested in the ordinance is somewhat different from the models available. The two popular ones are the pass through form and the pay through form. In the pass through form, the special purpose vehicle is a trustee and the investors are the beneficial owners. In the pay through form the special purpose vehicle is seen as owner. A security trustee holds charge for investors and the investors become debt investors. In the proposed model under the ordinance the securitisation company is seen as a collective device and the investors are seen as joint owners.

During the acquisition and sale of the assets of the borrower by the company issues relating to valuation of assets and fixation of realizable value of assets have to be cleared. Value need to be arrived in transparent manner. Such values should be fairly discounted in the opinion of the values acting on behalf of the concerned banks.

The ordinance needs to iron out some other inequalities. During the disposal of the security, the seller and the beneficiary are the same. If the value of the security exceeds the dues to the secured creditor then a sale at a value enough to cover his dues would be adequately self serving but unfair to all other stakeholders. The provision transferring management control effectively gives rights to secured creditor over all properties therefore permitting the creditors to take recourse to unsecured assets. Secured creditors can proceed against guarantors without court intervention and without taking the measures for disposal of security from the borrowers.

The ordinance will change the mindset of the creditors. It will remove from the minds of creditors the sense of lack of control. It will remove the sense of complacency from the borrowers.

The provision of the securitisation and reconstruction of financial assets ordinance would provide the teeth for banks and financial institutions to get rid of their NPAs. The banks have been able to recover bad loans from smaller borrowers by enforcing their rights. But the problem is not with these smaller borrowers but with the larger players some of whom are `willful defaulters'. These players take refuge in the legal system, which is time-consuming. The total number of suits filed against borrowers who have received advances of over Rs. 1 crore were 5013 aggregating to around Rs. 28,000 crore as on March 31, 2000.

Though the primary objective of this ordinance is to speed up the process of managing NPAs, it goes a step further on developing the securitisation market in India. The ordinance would help in the development of securitisation market in India. The ordinance brings clarity on some of the gray areas in the securitisation deals. In effect the laws governing securitisation have become clear. This would help in the growth of the securitisation market in India, which so far has been very small.

The ordinance makes fractional transfer legally sacrosanct. This would allow future flows to be transferred. The highlight of the ordinance is that it overrides the bankruptcy law provisions on transfers prior to bankruptcy.

The ordinance puts the onus of finding a solution with the borrower, as it effectively prevents the referral of Companies to BIFR

By way of minimum protection for the borrowers against arbitrary proceedings in the matter of Enforcement of Security Interest, taking recourse to the provisions of the Ordinance the protection of Appeal to the DRT/Appellate DRT are provided. The provision to make an appeal with the DRT& Appellate /Tribunal provided the borrowers deposits 76% of the amount claimed. However, the right to waive this lies with DRT.

Writing In the Financial Express dated 07th October 2002, under the title "LENDING INSTITUTIONS NEED RECOVERY POWERS BUT THEIR ACTIONS MUST BE FAIR AND TRANSPARENT", Mrs.Sucheta Dalal, Columnist refers to "uncomfortable Questions" being raised by Defaulters on the merits of the Ordinance and its legal/constitutional validity. Mardia Chemicals has filed a Writ Petition and has raised pertinent issues. Writes Mrs.Sucheta Dalal "Without going into the rights or wrongs (since it is subjudice) of the matter, here are some issues raised by Mardia Chemicals in its writ petition, which calls for a fair, transparent and non-arbitrary recovery policy by the lenders."

"The company has challenged the constitutionality of Sections 13 and 34 of the Ordinance, which deal with methods of recovery and jurisdiction and allegedly allow the lenders to be judge of their own cause."

"The Ordinance gives sweeping powers to lenders and their enforcement has far-reaching consequences for companies. But it does not have clear guidelines for implementation or specify an independent authority/officer who would exercise the power. This, it claims, could "result in corruption, despotism, favouritism and biased decisions".

"Thirdly, it raises the issue of lenders' liability saying that many of its problems are due to the failure of institutions to disburse sanctioned money. It alleges that ICICI's failure to disburse Rs 300 crore out of a sanctioned sum of Rs 413 crore for a set of expansion projects in the late 1990s is the root of its many problems (apart from a wrong closure ordered on the grounds of environmental problems). The issue of companies suffering because of the lenders' failure to make timely disbursals of sanctioned loans after project implementation has commenced will probably be a recurring theme in the litigation to prevent seizure of assets under the Ordinance."

"Fourthly, lenders may also have to answer specific allegations of bias or favouritism of the sort made by Mardia Chemicals. For instance, the company claims that its problems with ICICI Bank started after it refused to allow the institution to arm-twist it into selling its caustic chlorine plant to Reliance Industries at "a throw away" price. It accuses ICICI of trying "to ruin" the company due to this refusal and says that it led to other banks and institutions also withdrawing their support to the company."

"Fifthly, Mardia claims that ICICI and other institutions have "waived huge amounts of money to various industrial houses and even disbursed further amounts despite being in default in order to bailout these industrial houses for extraneous considerations". It goes on to name names and mentions Arvind Mills, the Essar Group (Essar Steel, Essar Shipping and Essar Power), Ispat Group (Ispat Alloys, Ispat Steel and Ispat Industries), Jindal Vijaynagar, Malvika Steel, Bellary Steel, Kirloskar Ferro Alloys, Jain Irrigation, Andhra Cement, Star Paper Mills and Lloyds Steel as some of the companies which have benefited from such bailouts. This will probably be the toughest question for institutions to answer. The restructuring of Arvind Mills is especially sticky because a bunch of foreign banks, led by Commerz Bank, had also challenged ICICI's actions in court. The large lending to politically powerful business groups and the frequent restructuring of their loans, continued classification as standard loans, and large waivers of interest are being questioned by several smaller companies."

"Sixthly, the claim made by the institutions are themselves disputed, if not "extravagant or fanciful" as claimed by Mardia. The Ordinance allows the lending institutions to be their own judge in such matters without any room for appeal."

"And finally, Mardia claims that there is no provision to "undo" actions if the Debt Recovery Tribunal or the Appellate Tribunal holds in favour of companies whose assets have been sold under the Ordinance."

Many of these are pertinent questions and although the investing public and the people are in favour of recovery powers for lending institutions, these powers cannot be arbitrary and untrammeled. The institutions will have to draw up guidelines to prove that their actions are just, fair and accountable."

As on date the issue of constitutional validity of the Ordinance remains sub-judice. The Ordinance will get a proper shape only when the pending litigation is considered and disposed of by the Honourable Court, and revisions need, if any, for securing the bonafide interests of all parties involved are carried out by the Government, and also it is made complete with necessary Rules and Guidelines.