Finding serious illegalities in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, the Supreme Court on Thursday allowed Attorney-General Soli Sorabjee, financial institutions and defaulting companies to come up with suggestions to cure defects in the law. The hearing has been adjourned till September 15.

The bench headed by Chief Justice V N Khare observed that the law was now heavily in favour of lenders.

The judges also observed that the law might require redrafting. "Assets cannot be sold in a closed room," Khare remarked.

The areas on which there were fierce arguments in court included takeover of borrowers' assets without adjudication of claims, no reference to lenders' responsibility, absence of procedures in the Act, the condition that 75 per cent of the claim should be paid before the borrower can approach the debt recovery tribunal and absence of any provision for obtaining interim stay.

Section 13 of the Act says, "Any security interest created in favour of a secured creditor may be enforced without intervention of the court or tribunal."

If the borrower does not pay in full within 60 days, the creditor can take possession of his assets and transfer them to anyone.

The management of the defaulting company can also be taken over. The creditor can appoint a person to manage the assets taken over. This provision has been described as draconian.

Kapil Sibal, senior counsel representing Mardia Chemicals, against which lenders have moved under the seizure law, resumed arguments on behalf of the defaulters, stressing that "no law in the civilised world allowed takeover of assets of a company without the intervention of the court."

He said the defaulters must have some remedy before their assets were taken over and transferred to someone else.

If a running industry was taken over and given to somebody without experience in that field, the assets would be destroyed, he added.

The lenders have the option of invoking the Contract Act, the Debt Recovery Act and the Securitisation Act.

On the other hand, the only protection provided to borrowers is to approach the debt tribunal, where they have to deposit 75 per cent of the amount claimed. It is summary procedure there.

Sibal said while other advanced countries had laws prescribing lenders' responsibility, there was only a promise from the finance minister that a similar law would be passed here.

The Securitisation Act was passed in haste without reference to the parliamentary standing committee and an Ordinance was turned into the legislation, he said, adding that the Act carried several unconstitutionalities.

Sorabjee said the law was passed to meet an emergency situation when non-performing assets accumulated in enormous proportions.

Sibal on Wednesday said that India's NPAs were only 6 per cent of the gross domestic product, while in China they were 43 per cent and in Japan 26 per cent.

At one time, Sorabjee suggested that since the issues involved were far-reaching, a Constitution Bench should hear the nearly 100 petitions before the court. Most of them were transferred to the Supreme Court from high courts.

The attorney-general and counsel for the lenders at first tried to defend the law, but later suggested certain modifications to bring in natural justice and fair play.

These suggestions resulted in a cacophony of arguments, with nearly 10 senior counsel speaking at a time.

Therefore, the court told them to come up with constructive suggestions. It clarified that it would not hear the merits of the case again, but only consider their common recommendations.

Banks recover Rs 436 crore

The public sector banks have issued 32,043 notices under the Securitisation Act till May 2003 to recover an outstanding amount of Rs 11,447 crore (Rs 114.47 billion). The recoveries by the state-run banks till May were Rs 436 crore (Rs 4.36 billion) from 8,676 cases.

Nine financial institutions served notices to 182 companies for outstanding dues of Rs 946 crore (Rs 9.46 billion) till February 2003. The recoveries by FIs till end February were Rs 25.2 crore (Rs 252 million).

Union Bank of India tops the list of 27 public sector banks recovering Rs 117.51 crore (Rs 1.17 billion). The bank had issued 1,388 notices aggregating Rs 486.34 crore (Rs 4.86 billion).

Industrial Development Bank of India had issued notices to 41 borrowers till March 31 to recover Rs 1,459 crore (Rs 14.59 billion). ICICI Bank has sent around 50 notices to recover over Rs 2,500 crore (Rs 25 billion).

The list of corporates who had been issued notices includes Core Healthcare, Lloyds Metal Ltd, Usha Group, Shalimar Synthetics and Spectrum Power.