MR Umarji Aug 2, 2011, 01.49am IST
The object of setting up a secured transaction registry is to make security interests over property effective against third parties. In the event of a default by the borrower, the rights of enforcement are available to the creditor who can realise the value of the asset by selling it.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act recognises security interests over property and empowers lenders to enforce and realise securities in default. Such provisions are not linked to registration of the security interest in the central registry.
The Act has been in operation for the last nine years without registration requirements. Hence the object of setting up the central registry is to provide a database of security interests over property rights to secure loans and advances granted by banks and financial institutions.
In our system of lending against property, the borrower is allowed to remain in possession of the property and the law recognises non-possessory security rights over property. Recognition of non-possessory security rights poses information challenges for third parties and other lenders. It is important for potential buyers or lenders to be aware whether assets in a person's possession are subject to prior security interest.
Absence of a registration system creates a false impression about the wealth of the property owner. Under the central registry system any person is to be provided the right to search the registry for any property and ascertain whether there is any borrowing against such property. Once such registration is done, there is a public notice of security interest held by lenders.
The other issue is why one more registry when there are multiple registration systems already operating under different laws, which are functioning satisfactorily. The primary object of the registration systems operating under different laws is to record title to property.
Thus, a buyer of residential property has to register the sale deed in the land records registry under the Registration Act, 1908 to record his ownership rights. If such property is mortgaged, there is a transfer of interest in the property, which also requires registration.
The other registration systems under the Motor Vehicles Act, 1988, Merchant Shipping Act, 1958, Patents Act, 1970 and Designs Act, 2000 all have their primary objective of recording ownership.
Provision in such laws for registration of encumbrances on property rights is incidental to ownership rights and such encumbrance registration is not designed to create an environment conducive to secured lending.
On the other hand, Sarfaesi Act creates an environment to facilitate secured lending by recognising rights of lenders to enforce securities and registration of security rights over property under the new registration system.
Introduction of a registration system under the Sarfaesi Act for registration of mortgage by deposit of title deeds is a first step in the launch of a project to create a database of encumbrances on all categories of property rights, for the benefit of any person dealing with such property.
Eventually, the central registry system is extended to all mortgages and charges on immovable properties; hypothecation of identifiable movable assets such as motor vehicles construction and other equipment, plants, machineries, computer system, etc.All categories of movables are covered so long as the amount secured is 1 lakh or more.
In order to make the Central Registry project truly effective and complete, it is necessary to undertake further reforms to extend the registration system to all lenders. It is also important to require registration (with the central registry) of any attachment orders including orders issued by all revenue authorities for recovery of arrears of tax; make the exercise of right of enforcement of security subject to registration requirements; make provisions for effectiveness of registration from the date and time of registration instead of the date of creation of security interest; link existing registration systems with the central registry or segregation of registration of security interests on property rights from the registries recording title to property and integrate security interest part with the Central Registry credit.
The establishment of Central Registry is intended to facilitate the growth of secured lending. It is necessary to draw up future plans for extending the system to security interests created in favour of NBFCs and all other lenders so that the database is complete and can be relied on for lending decisions.
(The author is chief advisor, legal, IBA).
No comments:
Post a Comment