Mortgage Creation and Security Enforcement

1. Mortgage Creation and Security Enforcement IFMR Capital June, 2013

2. Relevance of Security Creation • Secured loans v. Unsecured loans • Focus is on debt recovery options in cases where borrower is unwilling to repay • Standardised documentation and effective security creation for easy enforcement Types of Security

3. Relevant Documents • Conversion certificate required to change agricultural land to residential/commercial property

4. Relevant Documents • Title Deeds (sale deed, partition deed, gift deed, settlement deed, etc.) • Parent Documents (tracing chain of prior title deed) • Patta, Chitta, Adangal, A-register extract, EC • Revenue records • Agreement to sell, security documents • Legal title search report is normally taken for the last 13-30 years to verify chain of prior title deeds

5. Relevant Documents Additional requirements for: • Leasehold properties • Permission of lessor for sale, mortgage creation • Conditions of lease to be reviewed and complied with • Allotment letter, possession letter and conveyance deed • Builder properties • Construction agreement • Tripartite agreement

6. Valid execution of documents • Deed v. Contract • Witnessing and notorisation • State specific stamp duty and registration charges • Equitable mortgage – deposit of title deeds, confirmation letter, MODT to be registered in some states • Power of Attorney

7. Enforcement of Security

8. SARFAESI • The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 • Permits banks and Financial Institutions to directly take possession of secured assets • This can be done 60 days after providing a notice for discharge of liabilities • Only involves costs associated directly with recovery and no additional legal costs • The remedy is not available to most NBFCs unless notified by the Central Government

9. Post Dated/Blank Cheques Criminal liability can be imposed for dishonor of a cheque that has been issued to discharge a subsisting debt or liability under Section 138 of the Negotiable Instruments Act

10. Post Dated/Blank Cheques • A legal presumption exists that the cheque was validly issued for a subsisting debt or liability • The case is mandated to be completed within 6 months as far as feasible • Being a criminal case repayment is not directly ensured under this option, but often acts as an effective deterrent • It is advisable to obtain a written undertaking from the issuer authorizing the lender to fill up details in the signed cheque to effect payment that is due • Cheque should not have been issued merely as a security prior to the loan disbursement • Scalability is an issue with this option • Default on ECS also follow similar procedure

11. Arbitration • Arbitration clause to be included in the agreement • A third party unbiased arbitrator will decide the case based on the claims and evidence presented before it • More informal and does not require adherence to procedural laws, making it a simpler and faster process • Costs of arbitration are typically high and disproportionate to the benefits if the claim amounts are small • Arbitral award is final and automatically enforceable after 3 months. • Dissatisfied parties often seek to set aside the award on grounds of procedural irregularities and public policy

12. Thank You