Supreme Court Settle on the Definition of Non-Performing Assets

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OLYMPUS DIGITAL CAMERAIn India, many entrepreneurs of companies that are under problem have drawn the Reserve Bank of India to the hon’ble Apex Court for the reason that they were far-sighted standards. These standards challenge equality before law enshrined under Article 14 of the Indian Constitution. In the recent times, the case was heard by the Supreme Court where it settled the correct description of non-performing assets. The Court considered the definition of Securitization Act formulated by the Parliament and also the definition provided by the Reserve Bank of India. These definitions were challenged on the ground of being unconstitutional. The petition was initiated by Gold Star Jewellers, Shelter Pharma, Seema Jewellers, Deccan Chronicle Holdings and Natraj Ships Agency. According to the opinions of the legal scholars, the definitions were contradictory and hence against law.

During the pendency of the case, the Court ordered status quo to the entrepreneurs as well as the companies. The reports say that the order was issued to 55 companies in Gujarat and Tamil Nadu until the court considers the case on 12th of this November. Similar petition was brought before the Gujarat High Court and decided by it. In this case the hon’ble High Court of Gujarat hit behind some of the powers of the controllers that describes non performing assets under section 2(1)(o)(a) of the Securitization Act, 2002. The section points out the classification of the non performing assets as provided by Reserve Bank. The decision of the Court makes it mandatory for the Reserve Bank to formulate strategies for the organizations.

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In the High Court, eminent lawyers Masoom Shah and Vishwas Shah raised the argument that the SARFAESI Act, 2002 should be made applicable for every borrower consistently. They also disputed the strategies fixed by RBI for the recognition of income and categorization of assets under the prudential plans as against the constitutional law. The High Court, but upheld the guidelines of RBI and stated that RBI was acting within the limits of its power. The petition was partially allowed by the High Court pointing out that the regulators are permitted to consider the matter more widely which forces a person to advance loan from them by specifying longer term as non performing assets. It shall also take strict plans to determine shorter period to announce some of the prevailing secured assets to be non performing assets. This can be done for the benefit of the financial institution alone.

The Advocates who appeared before the hon’ble Gujarat High Court put forward two sided contention that Section 2(1)(o) of the SARFAESI Act, 2002 was against the constitutions and violates the principle of equality enshrined under Article 14. The section is framed contrary to the provisions of the original enactment. The lawyers also submitted that Paragraph 2.1 as enumerated in the RBI strategies violates the equality principle and hence arbitrary and unjust. The definition of non performing assets provided under the RBI guidelines are opposing, different and contradictory to the definition stated under Central enactment and hence ultra vires the Constitution.

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But, in the High Court, the decision was unfavorable to the entrepreneurs of the Companies and hence they preferred an appeal before the Supreme Court. Here, the Court settled the issue by giving a proper and practical definition to the ‘non performing assets’. The legal scholars are of the opinion that the Supreme Court judgment makes it compulsory for the Reserve Bank to frame guidelines but it cannot issue such strategies until the case is disposed. Moreover, the banks as well as other finance companies that have their own statutes can determine the period to categorize the non performing assets. The Power Finance Corporation had declared six months duration to categorize the non performing assets when it was public financial institution in 1990. But from 2010, it has come to the status of non-banking finance company under the Reserve bank.