LEGAL ASPECTS OF BANKING OPERATIONS INDIAN INSTITUTE OF BANKING & FINANCE MODULE C & D 11.10.07

1. LEGAL ASPECTS OF BANKING OPERATIONSINDIAN INSTITUTE OF BANKING & FINANCEMODULE C & D11.10.07

2. **SARFAESI Act 2002, extends to whole of India including the State of Jammu & Kashmir. Also applicable to housing finance companies. .. The act is effective from 21.06.2002. It also covers the earlier loans which are outstanding.

3. .. Based on the observation of the Supreme Court in the Mardia Chemicals vs Union of India case, the Government of India issued notification amending the provisions of the SARFAESI Act. The amendment stipulates payment of 50% amount instead of 75% as originally enacted. (When appealed)

4. . Take over of loans or advances from the Bank or Financial Institution for the purpose of recovery is known as Asset reconstruction. . The word Board is used in the Act refers to the Securities and Exchange Board of India (SEBI)

5. 01.. The SARFAESI Act is not applicable to a.. Regional Rural Banks b.. Nationalized Banks c.. Co-operative Banks d.. State Bank of India and their Associate banks

6. . Default should have been committed by the debtor. . The borrower’s account should have been classified as NPA as per the guidelines of RBI. . The Act is applicable only to a Secured creditor and not to an unsecured creditor

7. 02..Which one is not pertaining to Hypothecation. a.. A charge in or upon any movable property b.. Right in favour of the creditor c.. Possession also with the lender d.. Retaining the ownership with the owner of the property

8. 03..Bank G has lent to N a sum of Rs.2 lacs on the hypothecation of a car. Identify the Originator as per the provisions of the SARFAESI Act. a.. Borrower N b.. Bank G c.. Both are not Originators d.. SEBI

9. **Obligor is a person liable to pay to the lender (originator). As per the contract terms and conditions or otherwise. He has to discharge any obligation in respect of a financial asset whether existing, future, conditional or contingent or and includes a borrower.

10. 04.. Identify the odd item (Qualified Institutional Buyer) a.. Bank b.. Insurance company c.. Individual Investor d.. An Asset Management Company

11. The securitization company or reconstruction Company to raise funds from qualified institutional buyers by formulating schemes. .Separate scheme wise accounts to be Maintained. .The Scheme invites subscription to security receipts proposed to be issued by such company under the scheme.

12. 05.. Acquisition of financial asset from the originator, by Securitisation or reconstruction company is known as a.. Reconstruction b.. Securitisation c.. Transfer of Assets d.. None of these

13. ..On acquisition of financial asset the securitisation or reconstruction company becomes the owner of financial asset and steps into the shoes of the lender bank or financial institution. .. RBI is the regulatory authority for securitisation or reconstruction company.

14. 06..The minimum capital requirement for securitisation or reconstruction company, at the time of registration is a.. Rs. 30 Crore b.. Rs. 50 Crore c.. Rs.100 Crore d.. Rs.200 Crore

15. .. Securitisation company is a company registered under the Companies Act,1956 for the purpose of securitisation. It also needs registration from RBI under the provisions of SARFAESI Act. .. Security agreement includes an agreement, instrument or any other document or arrangement under which security interest is created in favor of secured creditor

16. 07..The securitisation company can set up separate trusts scheme wise and act trustees for such schemes as provided in the Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions,2003. The beneficiaries of such trusts are a.. Investors b.. Debtors c.. Creditors d.. Lending Bankers

17. 08..The creation of mortgage by deposit of title deeds with the secured creditor is considered as a.. Security Receipt b.. Security Agreement c.. Secured Asset d.. Secured Debt

18. ..Secured debt means a debt which is secured by any security interest. ..Secured Asset means the property on which security interest is created. .. The powers given by SARFAESI Act for enforcement of securities are against secured assets only

19. 09..Security Receipt is issued a.. To Borrower by the Bank b.. To Qualified Institutional buyer by the Reconstruction Company c.. To Creditor by the Securitisation Company d...To Reconstruction company by the Securitisation Company

20. ..The security receipt evidences the purchaser’s undivided right, title and interest in the security. ..These receipts are transferable in the market. .. Sponsor is a person holding not less than 10% of the paid up capital of securitisation or reconstruction company.

21. 10.. The Securitisation or reconstruction company to commence business or carry on business subject to • It obtains certificate of registration from the Registrar of Companies • It has the owned funds not less than Rs3 crore or such other amount not to exceed 10% of the financial assets acquired to be acquired • Correct b.. Incorrect • From SEBI and not Registrar of Companies; Not less than Rs 2 crore and not to cross 12% • None of these

22. ..Depending on the nature of security asset RBI has the powers to specify different amounts of owned funds for different companies. ..The company can formulate separate schemes for acquisition of financial asset. ..The securitisation or reconstruction company can act as trustees for such trusts and manage the assets held in trust.

23. ..The Securitisation or reconstruction company can acquire financial asset without execution of any deed of assignment or transfer in its favor by the concerned bank or the financial institution. ..Assignment is complete on the acquiring company issuing debenture or bond and incorporating therein the terms and conditions of acquisition.

24. .. The securitisation involves two stages. In the first stage it is acquisition of financial assets and undivided interest therein. Second stage is issue of security receipts in favor of investors for the purpose of raising money from investors

25. 11..As per the provisions of SARFAESI Act the document to be executed requires (identify which one is not correct) a.. Payment of stamp duty b.. As per the provisions of the Indian Stamp Act c.. State Stamp duty laws d.. Central Stamp duty laws

26. ..As per RBI guidelines, a...an acquisition of funded assets should not include take over of outstanding commitments, if any, of any bank or financial institution to lend further. b…terms of acquisition of security interest in non-fund based transactions should provide for the relative commitments to continue with bank or financial institute till demand for further funding arises

27. 12..Which one is correct (Securitisation matter) • Security receipt is in favor of investor • Security receipt is issued with RBI’s permission • Security receipt can not be transferred • Security receipt is issued to the borrower who has failed to repay

28. 13..When the bank decides that the financial asset now be acquired by the securitisation company, a notice of such development to be given to a.. The Obligor b.. Such notice is not optional c.. The Obligor, which is compulsory d.. The Obligor which is not compulsory under the Act.

29. .. If the obligor is a company there is no need for modification of charge, when the notice regarding acquisition of financial asset by a securitisation company, is not given to the debtor company. However, if such notice is given to the obligor company, then notice to the Registrar of companies becomes essential.

30. 14.. A bank had advanced to a person who had defaulted leading to a securitisation company acquiring the financial asset. In fact no notice has been issued to the obligor. Later on the debtor remits some amount towards his dues to the bank from where he had availed the financial facility. a.. The bank can utilise the funds b.. The bank has an obligation to remit to the securitisation company c.. The bank first of all should not accept such payment d.. The bank has to enquire why the debtor had not paid earlier when the liability was outstanding with them.

31. ..The securitisation or reconstruction company raises funds for acquisition of asset by issue of security receipts. Public/individual investors are barred from investing in a securitisation or reconstruction company by the Act. ..Realisation of the asset is held and applied towards redemption. i.e., repayment of investments as assured while issuing the security receipt.

32. 15..In case there is no realization and repayment by the securitisation or reconstruction company, then the qualified institutional buyers are entitled to call a meeting of all qualified institutional buyers making investments in that scheme and the resolution passed in the meeting. a.. The first institutional buyer has the right to call for such meeting b.. The qualified institutional buyers holding not less than 75% of the total value of security receipts has the right c.. Any one of the Institutional investor who takes the lead gets the priority d.. None of the above

33. .. When the securitisation or reconstruction company issues security receipts the holder of the security receipts is entitled to an undivided interest in the financial asset. .. In such an event the security receipt does not require registration which is other wise compulsory under the Registration Act,1908

34. 16..XYZ bank has got a security receipt from a securitisation company. They wish to transfer the same. Then a.. Such security receipt need not be registered b.. Such security receipt has to be registered c.. Such security receipt cannot be transferred d.. Such security receipt has to be retained by the bank who is the original institutional investor and hence there is no question of registration / non registration.

35. ..Asset reconstruction means acquisition of any right or interest of any bank or financial institution in any financial asset for the purpose of realisation. Powers to take measures for asset reconstruction are given without any prejudice to the provisions contained in any other law.

36. ..If the cause of default in an unit is mismanagement or lack of expertise on the part of the existing management the securitisation or reconstruction company has the powers to take over the management or change the management. This power can be exercised even when there is no default.

37. ..The SARFAESI Act is silent about the grounds or reasons on the basis of which action of acquisition can be taken. Therefore, loan agreements between bank/financial institution and the borrower are required to be taken into account as provisions of this do not have overriding effect on existing contracts and laws.

38. 17..A securitisation or recosnstruction company can raise funds by way of deposits. a.. Under special circumstances only b.. Cannot raise funds by way of deposits c.. If need arises with the permission of RBI d.. As and when required with the permission of RBI,SEBI and Company Law Board

39. 18.. When the asset is acquired for reconstruction there is limit of six years for such reconstruction. a.. True b.. False c.. Not 6 years but 5 years d.. No such restriction on number of years

40. 19..Which one is not correct a… At the time of enforcing securities as per the provisions of SARFAESI Act, the securitisation company may itself acquire secured assets for use or resale if such resale is through a public auction. b.. The Securitisation company is permitted to set up trusts who can issue security receipts. c.. While issuing security receipts detailed disclosures are required to be made by the securitisation company d.. While issuing security receipts detailed disclosures are not required to be made by the reconstruction company.

41. 20..While a securitisation company is taking over the financial asset from the creditor bank, they will issue a.. Debenture b.. Security Receipt c.. Undertaking d.. None of these

42. ..Under the SARFAESI act a secured creditor can enforce the security interest created in his favor without the INTERVENTION of the Court or Tribunal. ..The act deals with how the notice to be given by the secured creditor asking for repayment of the out standings.

43. ..The secured creditor bank to give a notice asking the debtor to clear the liability in full within 60 days from the date of notice. .. The above is applicable to such debtors who have defaulted and classified as NPA. .. There is no bar for the creditor to seek the other legal remedies such as resorting to filing of suit in a competent court

44. 21..Identify which one is not incorrect. (SARFAESI Act) a.. Notice as per the provisions of the act is a routine one b.. Notice as per the provisions of the act is a statutory notice. c.. The Act does contemplate a reply form the borrower to the notice. d.. When the offer of sale of property is accepted by the purchaser and the secured creditor accepting the offer confirms the sale, the purchaser has to deposit 50% of the offer price.

45. 22..The authorized officer is authorized to issue sale certificate. Such certificate is conveyance of immovable property and requires stamping as per the provisions of Stamp Act. a.. True b.. False c.. Relevant State Laws d.. Central Laws

46. ..As the powers of enforcing securities need to be exercised prudently, fairly and with due care and caution the Rules framed under SARFAESI Act provide that Authorized Officer should be of the level equivalent to Chief Manager of a public sector bank or equivalent or any other authorised person exercising powers of superintendence, direction and control of the business or affairs of the creditors, as the case may be.

47. ..For taking possession and then sale of immovable property, the secured creditor is required to serve a possession notice on the borrower and by affixing the possession notice on the outer door or at the conspicuous place at the property. ..The authorised officer is required to publish the possession notice in two leading newspapers, one of which should be in vernacular language.

48. 23..Before sale of immovable property by the secured creditor, the borrower has to be given a notice about the sale. a.. 30 days of sale b. 15 days of sale c.. 45 days of sale d. 60 days of sale

49. 24.. If the price for secured asset is coming less than the reserve price, the authorized officer can sell the asset at a lower price a.. Then his decision will be final b.. With the consent of the secured creditor c.. With the consent of the borrower and the secured creditor d.. Without consulting any one

50. ..When the secured creditor is required to take possession or control of the secured asset or to sell such secured asset, he can take the help of the Chief Metropolitan Magistrate or District Magistrate. ..For seeking their help a request in writing is required. ..To approach the authority within whose jurisdiction the secured asset or documents related to it are situated.