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Mumbai : The finance ministry is working on a new law for secured credit
that will help banks and financial institutions to realise dues from companies
dealing in intangible assets like software. The new law may override the
provisions of the Transfer of Property Act, 1882, and the Contract Act,
1872. For example, cash flow is the
only collateral when a bank funds a software firm. The new law will redefine
intangible properties like software. The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (Sarfaesi) Act, 2002, allows lenders to sell financial assets
to securitisation and reconstruction companies.
Banks and institutions can seize the
assets of any defaulter after serving a 60-day notice and are at liberty to
sell the assets in order to recover the dues.
?However, there are a lot of grey areas. While the Sarefaesi Act focuses
on creation and enforcement of securities, it does not address the issue of
prioritisation of various claims on assets,? said a government source.
The move has been triggered by a
decision of the United Nations Commission on International Trade Law (Uncitral)
to have uniform commercial laws in member countries. Financial Sector Secretary
N S Sisodia recently attended an Uncitral meeting in New York. Two Uncitral
working groups are now studying security interest and insolvency
provisions. The Transfer of Property
Act and the Contract Act do not address such issues. Even hypothecation laws do
not specify the rights and obligations of the parties involved.
Uncitral wants to develop an efficient
legal regime for security rights in goods involved in a commercial activity,
including inventory. The decision to
work on a model law for secured credit was prompted by the need for an
efficient legal regime that will remove legal obstacles to secured credit.
This, in turn, will influence the availability and the cost of credit. ?In the longer term, a flexible and
effective legal framework for security rights could serve as a useful tool to
increase economic growth,? an Uncitral document said.
Why the law is needed
Cash
flow is now the only collateral when a bank funds a software firm. There
is no provision for intangible property like software. The
securitisation law does not address the issue of prioritising various claims on
assets. Hypothecation
laws do not specify the rights and obligations of the parties involved. The
new law may override the provisions of the Transfer of Property Act and the
Contract Act. |
