Asset finance is a sophisticated financial instrument that allows businesses to obtain the capital they need to purchase assets such as machinery, vehicles, or technology. As a specialized practice area in law, asset finance involves numerous legal provisions that determine its functioning in diverse jurisdictions. SimranLaw, a leading law firm based in Chandigarh, India, provides an insightful look into these regulations for the Indian context. Drawing from years of experience, our legal experts aim to deepen readers’ understanding of this intricate area of law by examining the key legal provisions governing asset finance in India.
1. The Sarfaesi Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI) Act, 2002 is one of the most critical legal provisions regulating asset finance in India. This act allows banks and other financial institutions to auction residential or commercial properties to recover loans. The SARFAESI Act holds a substantial weight in asset finance, especially in cases of loan defaults.
In the landmark case, Mardia Chemicals Ltd vs ICICI Bank Ltd (2004), the Supreme Court of India upheld the constitutional validity of the Act. The court ruled that banks and financial institutions have a right to recover their dues without the intervention of the courts.
2. The Companies Act, 2013
The Companies Act, 2013 provides for asset finance through debentures – long-term securities yielding a fixed rate of interest, issued by a company and secured against assets. Under section 71, it stipulates the terms and conditions for debenture issuance by companies. Notably, debentures cannot confer any voting rights to holders. Also, the Act limits the number of debenture holders to 500 for private companies.
3. The Insolvency and Bankruptcy Code (IBC), 2016
The IBC, 2016 is another critical legal provision that governs asset finance practice in India. It provides a process to resolve insolvency, that is, when individuals or businesses are unable to repay outstanding debt.
In the case of K. Sashidhar vs Indian Overseas Bank & Ors (2019), the Supreme Court clarified that if a resolution plan is rejected by the requisite majority of the Committee of Creditors, the Adjudicating Authority must initiate liquidation process under Section 33(1) of the IBC. This judgment has significant implications for asset finance, as it reinforces the rights and roles of creditors in the insolvency process.
4. The Reserve Bank of India (RBI) Guidelines
The RBI guides the asset finance operations through various directives. For instance, it prescribes Prudential Norms for Income Recognition, Asset Classification and Provisioning (IRACP), which govern the way financial institutions recognize income, classify assets, and make provisions for bad and doubtful debts.
5. The Goods and Services Tax (GST) Act, 2017
The GST Act affects asset finance by its impact on leasing. The GST is applicable on leasing transactions, making it an essential consideration for companies involved in asset finance practice.
In conclusion, understanding these key legal provisions can help in maneuvering the complex landscape of asset finance in India. SimranLaw, with its cadre of seasoned experts, can provide guidance that can strategically navigate through these complex legal terrains.