Structured Finance is a complex financial instrument offered to businesses with intricate financing needs not typically executed by conventional financial products. This type of financing is typically used to securitize assets, real estate, non-performing loans, amongst other things. SimranLaw’s experts will dissect the legal framework governing structured finance in India, providing insights drawn from years of experience to deepen your understanding of law.
1. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act):
The SARFAESI Act allows banks and financial institutions to auction residential or commercial properties of defaulting borrowers. Under this Act, non-performing assets can be securitized, enabling banks to transform these illiquid assets into a tradable security.
2. The Companies Act, 2013:
The Companies Act, 2013 has certain provisions relating to debentures, which are integral to structured finance. Section 71 of the act deals with the issue and redemption of debentures, while Section 372A discusses inter-company loans and investments.
3. The RBI Guidelines:
The RBI provides guidelines on securitization transactions and norms for entry into insurance that banks must comply with. In 2006, RBI issued guidelines on securitization of standard assets which regulate the creation of special purpose vehicles (SPVs), the role of originators, and minimum holding periods.
4. SEBI Regulations:
SEBI has issued a number of regulations concerning structured products. For example, the SEBI (Issue and Listing of Debt Securities Regulations), 2008, provides comprehensive norms for the issue and listing of non-convertible debt securities.
1. Mardia Chemicals Ltd. vs. ICICI Bank Ltd:
The judgment in this case paved the way for the success of securitization in India. The Supreme Court validated the constitutional validity of the SARFAESI Act, affirming that it does not violate the principles of fairness and reasonableness.
2. Essar Steel India Limited vs. Reserve Bank of India:
This judgment provided further clarity on the SARFAESI Act. The court held that the RBI’s directions on insolvency resolution are in sync with the Insolvency and Bankruptcy Code, 2016, and that the RBI is empowered to issue such directions to banking companies for resolution of stressed assets.
Structured finance, although complex, offers a viable solution for sophisticated financial needs. The legal framework in India provides a balanced regulatory environment to ensure compliance and safeguard interests. SimranLaw experts, backed by their extensive experience, are adept in providing comprehensive legal insights into structured finance within the Indian context.