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February 19, 2009
Supreme Court Stays Ban on Debt-Trading By Banks
The Hon’ble Supreme Court of India (“Court”)
vide its order in ICICI Bank Limited v. Official Liquidators
of M/s. APS Star Industries Limited & Others, S.L.P.
(Civil) No(s). 2240/2009 dated February 16, 2009 (“SLP”)
has temporarily allowed banks to trade in debt, pending final
hearing of the SLP on April 14, 2009. The SLP is filed against
the judgment of the Gujarat High Court (“Impugned
Judgment”) dated January 12, 2009 which had disallowed
trading in debt by banks. In the instant case, ICICI Bank
Limited (“Assignor Bank”) executed a deed of
assignment in favour of the Kotak Mahindra Bank Limited (“Assignee
Bank”) by which a basket of NPAs of the Assignor Bank
along with underlying security interest, if any, were
assigned/transferred on “as is where is” basis to the Assignee
Bank at a defined purchase price (“Transaction”).
Please refer to our Hotline dated January 28, 2009 (Court
disallows trading in NPAs by Banks) for more
information on the Impugned Judgment.
Standard Chartered Bank has also preferred a special leave
petition before the Court against the Impugned Judgment since
the eventual outcome of this SLP would be a judgement in rem
and to that extent would severally affect such Transactions in
general and not merely the Assignee Bank and the Assignor Bank.
The Court has clubbed the hearing of all the three appealing
banks viz: ICICI Bank, Kotak Mahindra Bank and Standard
Chartered Bank (“Banks”). The Court allowed
intervention of the Indian Banks’ Association and the Reserve
Bank of India (“RBI”) as additional parties to
the appeal moved by the Banks.
At an earlier hearing of the SLP on February 9, 2009, the Court
had directed that no steps should be taken by the banks to
implement the Impugned Judgment.
INTERIM ORDER:
The division bench of the Court headed by Justice S. H. Kapadia
allowed the Assignee Bank, on furnishing of an undertaking, to
participate in proceedings held by the Asset Sales Committee as
also in proceedings before the Company Court. The Court directed
that pending the final disposal of the SLP, repayments under the
secured loans be made to the assignee of such loans (in the
instant case, Assignee Bank). The Court has further directed the
Assignor Bank and the Assignee Bank to furnish an undertaking
that the debt-trading transactions, which they enter into during
the pendency of the SLP, will be reversed if this SLP is finally
dismissed. The Court noted that this order dated February 16,
2009 is required to ensure that the secured debtors of the
assigned loans are not unrepresented. The Court made it amply
clear that Court’s interim order to allow banks to temporarily
conduct business as usual should not be construed as an
acceptance of the Transaction pending the present SLP.
ANALYSIS:
Though this order has proved to be a temporary relief for the
Banks, the final judgment of the Court would certainly have
extensive ramifications for the Asset Backed Securitization (“ABS”)
market in India, which is at a nascent stage. ABS market in
India would take a huge impact, including risk of completely
fizzling out, if this SLP is dismissed. ABS business is a global
market practice and the judgment would reflect the way Indian
banks can compete or do business on globally accepted norms.
BASEL II (The international financial industry standard which
requires financial institutions to maintain sufficient cash
reserves to cover risk associated with financial operations)
comprehensively lays down banking norms for securitization and
the banks’ requirement to maintain capital adequacy ratios.
It would also be interesting to see the submissions of RBI in
this matter, since through its guidelines dated July 13, 2005
the RBI has laid guidelines for banks, FIs and NBFCs purchasing/
selling non-performing financial assets, from/ to other
banks/FIs/NBFCs (excluding securitization companies/
reconstruction companies).
We will continue to keep you updated on the progress of this
SLP.
Source:
http://courtnic.nic.in/supremecourt/temp/dc%20224009p.txt
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Litigation & Dispute
Resolution Team
You can direct your queries or comments to the authors
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