Bank Auction Property is a good news for people who would like to buy a property at a cheaper rate. Govt and RBI have put a huge amount of pressure on banks to clean their books. Therefore, you must have observed mega auction of properties conducted by almost all the banks. At the same time, let me be honest that bank auction property is high risk investment. You have to be extra cautious and vigilant while participating in such auctions. You may check my post, Complete Guide to Bank Auction Process for more details.
Recently, the Govt of India passed The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016. This bill amends 4 laws including SARFAESI Act i.e. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. In my opinion, these amendments will encourage more and more people to participate in bank auction property. Bank auction will help to buy your dream home at discounted rate. If you are sure that there are no legal issues/loopholes in bank auction property then you may bid/participate. Let’s check out the 6 recent changes in SARFAESI Act
Bank Auction Property – The Recent Changes in SARFAESI Act
1. Possession of the Property:
Under the SARFAESI act, at the time of the auction, the bank has either symbolic possession or physical possession of the property. In layman terms, symbolic possession means a bank or financial institution does not have the key of the property. In other words, the property is still occupied by the borrower or the defaulter. Though under the SARFAESI Act, In the case of payment default, secured creditor i.e. bank can take physical possession of the property i.e. collateral. In certain cases, it is not feasible for the bank to take physical possession because of XYZ reasons. The secured creditor issues symbolic possession notice and then proceed with the auction based on symbolic possession.
Normally i don’t suggest reader’s of the blog, to participate in bank auction property with symbolic possession. The information on physical/symbolic possession is shared by the secured creditor through Public Notice for Auction. Due to oversight, the bidder fails to notice the type of possession. Thus he/she is stuck. Some of the readers shared their experience how they are running from pillar to post to get physical possession even after 100% payment is released to the bank.
The secured creditor can undertake the process to take possession with the help of district magistrate. But after recent amendment, this process will be completed within 30 days by the district magistrate without the intervention of court or tribunals. Now the borrower or defaulter cannot approach court or tribunal for an injunction order on the possession of the property. The most common ground for such stay order is a commitment to clear loan liabilities. This amendment will help successful bidders of properties with symbolic possession.
2. Management of the Company:
The bank auction property of the company is risky compared to individual defaulters. Recently, one of the readers posted a query on my blog related to auction in which the defaulter is a company. The company is under liquidation. In such cases, official liquidator becomes the custodian of all the assets of the company. The million dollar question is whether the secured creditor can auction the property as the company is already under liquidation. The reason being, the official liquidator can also auction the assets of the company and settle the claims of company’s creditors. Secondly, who owns auction rights on the collateral i.e. secured creditor (bank) or official liquidator. Therefore, there is a lot of confusion in such cases. Sometimes the liquidation of the company is applied to delay the bank auction.
The recent change in the SARFAESI Act empowers District Magistrate to assist secured creditor i.e. bank in taking over the management of the company, in the case of payment default by the company. It will sort some of the issues related to the right of the secured creditor on the collateral and to avoid any disputes. The banks will have right to convert their outstanding debt into equity shares and will have say in the decisions of the company. Bank may hold a controlling stake of 51% or more in the company.
3. Central Registry of Secured Assets:
This is one of the much-awaited steps. In some of the cases, i observed that fraudulently the property is mortgaged to more than one bank/financial institution. Secondly, there is no way for potential buyers to check whether the property is mortgaged or not. In short, the intent of the property owner is to commit financial fraud or cheat the bank or potential buyer. To avoid this, in states like Maharashtra, it is mandatory to file the notice of intimation regarding the deposit of title deed with the sub-registrar office.
The recent amendment proposes to create a central registry of all the secured assets. It will maintain records of all the transactions related to secured assets. Besides property, the central registry of secured assets will also include all types of registrations under Companies Act, 2013, Registration Act, 1908 and Motor Vehicles Act, 1988. In short, this central registry will be master/central database of any mortgaged asset in India. I hope the access to this central registry will be provided to common public obviously at a nominal fee. Therefore, in future, if i wish to purchase any property i can check whether it is mortgaged or not.
4. Registration with the Central Registry is MUST to take possession
To further fix the loophole related to issues highlighted by me in point no 2 and 3. It is mandatory for the secured creditor to register with the central registry to take possession of the collateral. It will fix the issue of two claimants over same collateral/property. Once the secured creditor is registered with the central registry, it will have priority over other creditors in repayment of dues.
In the example shared by me in point no 2. If the bank register it’s security interest over collateral. In this case, even if the official liquidator auction the collateral, the first right over the proceeds/repayment of dues from collateral rests with the secured creditor viz-a-viz other creditors.
5. RBI as the regulator for Asset Reconstruction Companies
Asset Reconstruction Companies or ARC purchase the bad loans or NPA’s of the banks. Their business model is to purchase at a low price and auction/sell at high price. It is high risk business. On the other hand, the successful bidders of ARC auction may find it difficult to get their disputes resolved as ARC’s were not regulated.
The good news is that now RBI can examine any statement or information of ARC business. RBI can also conduct audit and inspection of these companies. All the ARC’s will be governed by the directions issued by the RBI. In the case of any violation, ARC can be penalized by the RBI. I hope RBI will also address the customer grievances.
6. Waiver of Stamp Duty for transfer of asset from banks to ARC’s
As i mentioned in point no 5 that ARC purchase the bad loans or NPA’s from bank. Therefore, it increases the cost of property auctioned through ARC. The good news is that from now on the stamp duty will not be charged on transfer of financial assets including loans & collaterals from banks to ARC’s. My personal reading is that benefit of the same will be passed to the bidders. Normally, the ARC property auction is cheaper than bank auction property. The stamp duty charges are between 5% to 7%. Therefore, ARC auction may offer a further discount of 5% to 7%. At the same time remember that risk is high in case of ARC property auction compared to bank auction property. If you are seasoned property investor then you can earn some cool profit by participating in ARC auction.
Words of Wisdom:
Bank auction property is a bit complex subject for a common buyer. To avoid any future shock, it is advisable to take professional help or hire a local lawyer who can help you in the entire process. The due diligence plays a very crucial role in bank auction property. As i keep highlighting in my each and every post on bank auction property that such properties are sold on “As is Where is & What is There is Basis“. It is one of the most powerful legal clauses in my opinion. The bank or ARC can release themselves from any liability citing this clause.
Last but not the least, most of the properties are auctioned under SARFAESI Act but always remember it is not by default. There is another act called Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI). Therefore, it is important to check under which Act the property is auctioned. The provisions and clauses of both the acts are different. It is important for you to understand all the rule and regulations that govern the bank auction property.
Copyright © Nitin Bhatia. All Rights Reserved.