Securitisation firms can take over management of borrower: RBI

A securitisation company (SC) or reconstruction company (RC) may take over the management of the business if the dues are 25 per cent or more of the total assets of the borrower, and where more than 75 per cent of the total secured debt has been financed by more than one secured creditor.

These draft guidelines have been issued by the Reserve Bank of India (RBI) as part of the norms called ‘Change in or takeover of the management of the business of the borrower by SC/RC’ under Section 9(a) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act).

As per the draft guidelines, the SC/RC may restore the management to the company upon realisation of the dues or after a period of five years from the date of acquisition of assets, whichever is earlier.

RBI has also specified other conditions that may compel such a takeover: willful default in repayment of the loan amount, selling or disposal of a significant part of the assets secured to the SC/RC without its prior approval, threatening by the borrower to discontinue the business, if the SC/RC is convinced that the management is acting in a manner that affects the interests of the creditors, if the management is incompetent to run the business, if serious dispute have arisen among the promoters and directors of the borrower and, simply, if there are grounds to believe that the borrower is unable to pay the debt.

Wilful default would mean non-payment of dues following siphoning of funds, failure to acquire financial assets, or non-utilisation of funds borrowed, or disposal of financed assets, misrepresentation of records pertaining to the transaction with the SC/RC, dealing/disposal of secured assets without the approval of the SC/RC or fraudulent transactions by the borrower in respect of the assets secured by the creditors.

Every SC/RC should frame a policy for the takeover of the management of the borrower company and make it available to the borrower. The policy should entail recommendation of takeover by an independent advisory committee appointed by the SC/RC, or an independent valuer, following due diligence. The board of directors of the company, including at least two independent directors of the SC/RC, should deliberate on the recommendations of the committee before the takeover happens.