Master Circular: Securitisation & Reconstruction Companies Guidelines 2003

RBI/2008-2009/12 DNBS (PD) CC. No. 10/SCRC/10.30.000/ 2008-2009 July 01,  2008 The Securitisation Companies and Reconstruction Companies (Reserve Bank)  Guidelines and Directions, 2003 The Reserve Bank had issued final guidelines and directions to Securitisation Companies and Reconstruction Companies on April 23, 2003 relating to registration, owned fund, permissible business, operational structure for giving effect to the business of securitization and asset reconstruction, deployment of surplus funds, internal control system, prudential norms, disclosure requirements, etc. and Guidance Note, vide  Notification No. DNBS.2/CGM(CSM)-2003, dated April 23, 2003  read with Company Circular DNBS (PD) CC.1/SCRC/10.30/2002-2003 dated April 23, 2003.   2. A copy of the above guidelines and directions together with Guidance Notes duly updated as on June 30, 2008 is reproduced below. Yours faithfully,     (P. Krishnamurthy) Chief General Manager-in-Charge Reserve Bank of India Department of Non-Banking Supervision Central Office, World Trade Centre, Centre  1 Cuffe Parade, Colaba Mumbai Notification No. DNBS.2/CGM(CSM)-2003, dated April 23, 2003 The Securitisation Companies and Reconstruction Companies  (Reserve Bank) Guidelines and Directions, 2003 The Reserve Bank of India, having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Reserve Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Securitisation Company or Reconstruction Company from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such Securitisation Company or Reconstruction Company, it is necessary to issue the guidelines and directions relating to registration, measures of asset reconstruction, functions of the company, prudential norms, acquisition of financial assets and matters related thereto, as set out below hereby, in exercise of the powers conferred by Sections 3, 9, 10 and 12 of the Securitisation  and Reconstruction of Financial Assets  and Enforcement of Security Interest Act, 2002, issues to every Securitistion Company or Reconstruction Company, the guidelines and directions hereinafter specified.   Short title and commencement 1.  (1) These guidelines and directions shall be known as ‘The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003’. (2) They shall come into force with effect from April 23, 2003 and any reference in these guidelines and directions to the date of commencement thereof shall be deemed to be a reference to that date. Applicability of the Directions 2.  The provisions of these guidelines and directions shall apply to Securitisation Companies or Reconstruction Companies registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, in respect of the trust/s mentioned in paragraphs 8 herein, the provisions of paragraphs 4, 5, 6,9, 10(i), 10(iii) 12,13,14 and 15 shall not be applicable. 3 .  Definitions (1)  (i)  "Act” means the Securitisation and Reconstruction of Financial Assets and    Enforcement of Security Interest Act, 2002; (ii) “Bank” means the Reserve Bank of India constituted under Section 3 of the Reserve Bank of India Act, 1934; (iii)  "Date of acquisition" means the date on which the ownership of financial assets has been acquired by Securitisation Company or Reconstruction Company; (iv) "Deposit" means deposit as defined in the Companies ( Acceptance of Deposits) Rules 1975 framed under Section 58 A of the Companies Act, 1956; (v) Fair value means the mean of the earning value and the break up value; (vi)  “Non-performing Asset” (NPA) means an asset in respect of which: a) Interest or principal ( or instalment thereof) is overdue for a  period of 180 days or more from the date of acquisition or the due date as per contract between the borrower and the originator, whichever is later; b) interest or principal (or instalment thereof) is overdue for a   period of 180 days or more from the date fixed for receipt thereof  in the plan formulated for realisation of the assets referred to in paragraph 7(1)(6) herein; c) interest or principal (or instalment thereof) is overdue on expiry of the planning period, where no plan is formulated for realisation of the assets referred to in paragraph 7(1)(6) herein; or d) any other receivable, if it is overdue for a period of 180 days ; or more in the books of the Securitisation Company or Reconstruction Company . Provided that the Board of Directors of a Securitisation Company or Reconstruction Company may, on default by the borrower, classify an asset as a non-performing asset even earlier than the period mentioned above (for facilitating enforcement as provided for in Section 13 of the Act). (vii)   “Overdue” means an amount which remains unpaid beyond the due  date;  (viii) “Owned Fund” means the aggregate of paid up equity capital, paid up preference capital to the extent it is compulsorily convertible into equity capital, free reserves (excluding revaluation reserve), credit balance in Profit and Loss Account as reduced by the debit balance on the profit and loss account and Miscellaneous Expenditure (to the extent not written off or adjusted), book value of intangible assets and under / short provision against NPA / diminution in value of investments, and over recognition of income, if any; and further reduced by the book value of the shares acquired in a Securitisation Company or Reconstruction Company, and  other deductions required on account of the items qualified by the auditors in   their report on the financial statements ; (ix) "Planning period" means a period not exceeding twelve months allowed for formulating a plan for realization of non-performing assets (in the books of the originator) acquired for the purpose of reconstruction; (x)  “Standard asset” means an asset, which is not an NPA. (xi)  "Trust" means trust as defined in Section 3 of the Indian Trusts Act, 1882. (2) Words or expressions used but not defined herein and defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, shall have the same meaning as assigned to them in that Act. Any other words or expressions not defined in that Act shall have the same meaning as assigned to them in the Companies Act, 1956. 4 .  Registration and matters incidental thereto [(i) Every Securitisation Company or Reconstruction Company shall apply for registration in the form of application specified vide Notification No.DNBS.1/CGM(CSM)-2003,  dated March 7, 2003 and obtain a certificate of registration from the Bank as provided under Section 3 of the Act;] (ii) A Securitisation Company or Reconstruction Company, which has obtained a certificate of registration issued by the Bank under Section 3 of the Act, can undertake both securitisation and asset reconstruction activities; [(ii) (a) A Securitisation Company or Reconstruction Company shall commence business within six months from the date of grant of Certificate of Registration by the Bank; Provided that on the application by the Securitisation Company or Reconstruction Company, the Bank may grant extension for such further period, not exceeding one year in aggregate from the date of grant of Certificate of Registration. (ii) (b) A Securitisation Company or Reconstruction Company, which has obtained a Certificate of Registration from the Bank under Section 3 of the Act and not commenced business as on the date of the Notification shall commence business within six months from the date of Notification.”] [(ii) © Provisions of  section 45 -IA, 45-IB and 45-IC of RBI Act,1934 shall not apply to non banking financial company, which is a securitisation company or reconstruction company registered with the Bank under section 3 of the SARFAESI Act,2002]. (iii) Any entity not registered with the Bank under Section 3 of the Act may conduct the business of securitisation or asset reconstruction outside the purview of the Act. 5  Owned Fund Every Securitisation Company or Reconstruction Company seeking the Bank’s registration under Section 3 of the Act, shall have a minimum Owned Fund of Rs. 2 crore. [Provided that every Securitisation company or reconstruction company seeking the Bank’s registration under Section 3, or carrying on business on commencement of the Securitisation Companies and Reconstruction Companies (Reserve Bank) (Amendment) Guidelines and Directions, 2004, shall have a minimum Owned Fund not less than fifteen percent of the total financial assets acquired or to be acquired by the Securitisation Company or Reconstruction Company on an aggregate basis, or Rs. 100 crore, whichever is less; Provided further that – (i) the minimum Owned Fund for any Securitisation Company or Reconstruction Company shall in no case be less than Rs two crore; (ii) a Securitisation Company or Reconstruction Company carrying on business on the commencement of the Securitisation Companies and Reconstruction Companies (Reserve Bank) (Amendment) Guidelines and Directions, 2004 shall reach the level of minimum Owned Fund specified in the first proviso within three months from such commencement; (iii) while computing the amount for the purpose of the first proviso, no account shall be taken whether the assets are transferred to a trust set up for the purpose of Securitisation or not; (iv)  the amount shall be continued to be held by the Securitisation Company or Reconstruction Company until realisation of assets and redemption of security receipts issued against such assets;  [(v) the Securitisation Company or Reconstruction Company shall  invest in the security receipts issued by the trust set up for the purpose of securitisation, an amount not less than 5% under each scheme: provided further that- a Securitisation Company or Reconstruction Company which has already issued the security receipts shall achieve the minimum subscription limit in security receipts under each scheme within a period of six months from the date of the Notification.]] 6 .  Permissible Business (i) A Securitisation Company or Reconstruction Company shall commence/undertake only the securitisation and asset reconstruction activities and the functions provided for in Section 10 of the Act. (ii) A Securitisation Company or Reconstruction Company, which is carrying on any other business, shall cease to do such business by June 20, 2003; (iii) A Securitisation Company or Reconstruction Company shall not raise monies by way of deposit. 7   Asset Reconstruction (1)  Acquisition of Financial Assets (i) Every Securitisation Company or Reconstruction Company shall frame with the approval of its Board of Directors, a ‘Financial Asset Acquisition Policy’, within 90 days of grant of Certificate of Registration, which shall clearly lay down the policies and guidelines covering, inter alia, (a) norms and procedure for acquisition,  (b) types and the desirable profile of the assets; (c) valuation procedure ensuring that the assets acquired have  realisable value which is capable of being reasonably estimated and independently valued; (d) in the case of  financial assets acquired for asset reconstruction, the  broad parameters for formulation of plans for their realisation. (ii) The Board of Directors may delegate powers to a committee comprising any  director and/or any functionaries of the company for taking decisions on proposals for acquisition of financial assets; (iii) Deviation from the policy should be made only with the approval of the Board of  Directors. (2)  Change or take Over of Management/ Sale or Lease of Business of the Borrower No Securitisation Company or Reconstruction Company shall take the measures specified in Sections 9(a) and (b) of the Act, until the Bank issues necessary guidelines in this behalf. (3)  Rescheduling of Debts (i) Every Securitisation Company or Reconstruction Company shall frame a policy,  duly approved by the Board of Directors, laying down the broad parameters for rescheduling of debts due from borrowers; (ii) All proposals should be in line with and supported by an acceptable business plan, projected earnings and cash flows of the borrower; (iii) The proposals should not materially affect the asset liability management of the Securitisation Company or Reconstruction Company or the commitments given to investors; (iv) The Board of Directors may delegate powers to a committee comprising any director and/or any functionaries of the company for taking decisions on proposals for reschedulement of debts; (v) Deviation from the policy should be made only with the approval of the Board of Directors. (4)  Enforcement of Security Interest While taking recourse to the sale of secured assets in terms of Section 13(4) of the Act, a Securitisation Company or Reconstruction Company may itself acquire the secured assets, either for its own use or for resale, only if the sale is conducted through a public auction.  (5)   Settlement of dues payable by the borrower (i)  Every Securitisation Company or Reconstruction Company shall frame a policy duly approved by the Board of Directors laying down the broad parameters  for settlement of debts due from borrowers; (ii) The policy may, interalia, cover aspects such as cut-off date, formula for computation of realisable amount and settlement of account, payment terms and conditions, and borrower’s capability to pay the amount settled; (iii) Where the settlement does not envisage payment of the entire amount agreed upon in one instalment, the proposals should be in line with and supported by an acceptable business plan, projected earnings and cash flows of the borrower; (iv) The proposal should not materially affect the asset liability management of the Securitisation Company or Reconstruction Company or the commitments given to investors; (v) The Board of Directors may delegate powers to a committee comprising any director and/or any functionaries of the company for taking decisions on proposals for settlement of dues; (vi) Deviation from the policy should be made only with the approval of the Board of Directors. (6)  Plan for realisation (i) Every Securitisation Company or Reconstruction Company may, within the  planning period, formulate a plan for realisation of assets, which may provide for one or more of the following measures: (a)  Rescheduling of payment of debts payable by the borrower; (b)  Enforcement of security interest in accordance with the provisions of the Act; (c)  Settlement of dues payable by the borrower; (d)  Change or take over of the management, or sale or lease of the whole or part of business of borrower after formulation of necessary guidelines in this behalf by the Bank as stated in paragraph 7(2) herein above. (ii) The plan for realisation shall clearly spell out the steps proposed to reconstruct the   assets and realise the same within a specified timeframe, which shall not in any case exceed five years from the date of acquisition. 8 Securitisation (1)  Issue of Security Receipts A Securitisation Company or Reconstruction Company shall give effect to the provisions of Sections 7(1) and (2) of the Act through one or more trusts set up exclusively for the purpose. The Securitisation Company or Reconstruction Company shall transfer the assets to the said trusts at the price at which those were acquired from the originator ; (i) The trusts shall issue Security Receipts only to qualified institutional buyers; and hold and administer the financial assets for the benefit of the qualified institutional buyers; (ii) The trusteeship of such trusts shall vest with the Securitisation Company or Reconstruction Company; (iii) A Securitisation Company or  Reconstruction Company proposing to issue Security Receipts, shall, prior to such an issue, formulate a policy, duly approved by the Board of Directors, providing for issue of security receipts  under each scheme formulated by the trust ; (iv) The policy referred to in sub-paragraph (iii) above shall provide that the security receipts issued would be transferable/assignable only in favour of other qualified institutional buyers.  (2)  Disclosures Every Securitisation Company or Reconstruction Company intending to issue Security Receipts shall make disclosures as mentioned in the  annexure . 9. Requirement as to capital adequacy (1) Every Securitisation Company or Reconstruction Company shall maintain, on an ongoing basis, a capital adequacy ratio, which shall not be less than fifteen percent of its total risk weighted assets. The risk-weighted assets shall be calculated as the weighted aggregate of on balance sheet and off balance sheet  items as detailed hereunder: Weighted risk assets On-Balance Sheet items

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2008-2009/12 · issued 01 Jul 2008. The plain-English explanation above is BankPulse’s own independent summary.

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