Privileged and Confidential Mortgage Creation and Security Enforcement IFMR Capital June, 2013

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 Hypothecation Eg: Vehicles, stock and machinery Pledge Eg: gold, shares Charge Eg: fixed or floating charge over current assets Movable Property Registered simple mortgage Equitable mortgage by deposit of title deeds Immovable Property Types of Security

Relevant Documents Conversion certificate required to change agricultural land to residential/commercial property Classification of property Ownership Freehold Leasehold Private/Govt agency Government land Nature of property Residential Commercial Agricultural

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 years to verify chain of prior title deeds

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

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

Summary Suit Post-dated / Blank cheques Arbitration Lok Adalats Unsecured Loans Debt Recovery Tribunal SARFAESI Act Lok Adalats Secured Loans Enforcement of Security

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

Post Dated/Blank Cheques Cheque is dishonored and returned upon presentation at the Bank Within 30 days of dishonor, a demand notice is sent to the Issuer seeking payment of the amount If the amount is not paid within 15 days of Demand Notice, a criminal complaint can be filed within one month subsequent to this period 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

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

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

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