How to recover dues in India

India has been witnessing an increase in foreign direct investment (FDI), lending and other international investments as more and more banks, financial institutions (FIs), private equity (PE) funds and investors are looking at India to meet their growth plans and internal rate of return (IRR) targets. The fundamental attractions that India offers are its growing domestic consumption and the perception that among the emerging markets, its regulatory and judicial framework is more strong and dependable.


There has been a rise (a) in lending by foreign banks and institutions in India under the external commercial borrowings route (popularly called “foreign currency loans”), (b) in buyer and supplier credits as well as (c) in the participation of foreign subsidiaries of Indian parties – through various structured finance options only available to such foreign subsidiaries. This article focusses on the legal recourse available to a foreign lender and/or investor to protect its interests.  


Recovery modes available to foreigners


If the borrower/investee company becomes delinquent, the following legal rights are available to foreign banks and lending institutions:

  • Foreign lenders can file a suit for recovery in the concerned court with jurisdiction in India. Depending on the complexity of the transaction, place of jurisdiction, amount involved, nature of dispute, etc a suit for recovery is generally prolonged and takes time. However, the aggrieved party can obtain certain ad interim orders for the attach­ment or restraint on the rights of the borrowers/guarantors from further selling or disposing of, mortgaging or charging their assets.
  • Foreign lenders can take the precaution of including an arbitration clause in the contract, preferable in a neutral jurisdiction, other than India. The contract can state the specific laws which will apply in the event of a dispute. Several contracts have already been executed which provide for arbitration and prescribe the place of jurisdiction as Singapore or London and the proceedings are agreed to be governed by English laws. 
  • Although the arbitration award is obtained on a relatively fast track mode in such situations, the difficulty arises in executing the arbitration award as the borrower/guarantor is, in any case, in India and its assets are ordinarily in India itself. While in theory, the foreign lender gets an executable decree / award from the foreign jurisdiction, in practical terms, the same foreign lender faces difficulty in executing the decree, when such execution is applied for in Indian courts, because there are only a few countries which are recognized as a “reciprocating territory” under Indian laws (Civil Procedure Code, 1908) whereby any decree or award passed by certain courts in such reciprocating countries can be directly enforced in India. 
  • Foreign lenders can also apply for winding up of the company where the borrower is a company incorporated under the Indian Companies Act 1956. This option has its own merits and demerits as it is more of a pressure tactic than a means for recovery.

Legislation to aid foreign banks


The foreign banks and foreign FIs in India (including the foreign banks which have the licence from RBI to carry on the banking business in India as ‘scheduled banks’) have special rights. On account of a plethora of pending cases, important legislation has been passed to ensure that foreign banks and foreign FIs in India can recover dues in an expeditious manner from delinquent borrowers: (i)  the Recovery of Debts due to Banks and Financial Institutions Act 1993 (“DRT Act”); and (ii) the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFESI”).


Discouraging frivolous appeals


The Indian government has established debt recovery tribunals (DRT) all over the country, empowering them to handle applications for recovery filed by banks and FIs against delinquent borrowers on a fast track mode. The nature of proceedings before the DRT is expected to be speedy. Any party aggrieved by the orders of the DRT can file an appeal before the debt recovery appeal tribunal (DRAT). The Indian government, realizing the delaying tactics followed by the borrowers in choosing appeals against any orders passed by DRT, has also incorporated a provision to the effect that appeals shall not be entertained by the DRAT unless 75% of the amount of debt so due from a borrower is deposited with the DRAT.


Further, certain amendments to the DRT Act in 2000 vested more powers with the DRTs, the most important being the power to direct the borrowers to furnish additional security (if the tribunal finds that the borrowers may dispose off any security) and the power to order attachment of the properties of the borrower, to put the borrower under detention in civil prison, to appoint a receiver, etc.


In order to prevent multifarious litigation at different forums practised by borrowers to frustrate the enforcement mechanism, provisions to try counter-claims of the borrower by the DRT itself as a part of the same recovery application have also been introduced. This has been a great deterrent to the borrowers and discourages frivolous appeals and petitions and forum-shopping by the borrowers.


In spite of delay which has crept in on these forums/ DRTs, the disposal rates of the recovery cases for banks have been en­couraging, a testimony to the success, albeit limited, of the DRT Act in India as far as foreign banks and foreign FIs are concerned.


SARFESI has teeth


With the speedy growth of the Indian economy, it was felt that DRTs alone were not enough to address the growing concerns of foreign banks and FIs to recover their outstanding dues against delinquent borrowers and therefore, the Indian government enacted SARFESI in 2002. SARFESI empowers the banks/secured lenders to recover their non-performing dues from borrowers without the intervention of the court. 


Once the asset becomes a non-performing asset (NPA) in the books of the banks, the bank has to serve a notice on the delinquent borrower and can thereafter take steps to take possession of the secured assets without the intervention of the court in case the dues are not repaid within the notice period. In several cases, the banks within a couple of days after the expiry of the notice period have been able to get protection from the Metropolitan Magistrate by way of police help to take the physical possession of secured assets.


Over the last few years, the procedures have become fairly standard and well-accepted. In addition, the Supreme Court of India, in Mardia Chemicals versus Union of India ((2004) 4 SCC 311) upheld the Constitutional validity of the SARFESI Act and also in Transcore versus Union of India (2006 (12) Scale 585), the Apex court approved the concept of greater or complete autonomy of the banks and FIs in settling doubts in asset classification and in recovery of their dues without the intervention of the court or DRT and placed emphasis on the appropriate internal mechanism for speedy resolution of disputes. All these measures have given enough teeth to the secured lenders to recover their dues. SARFESI has been a resounding success.


Creating a viable financial system


Foreign lenders cannot file or maintain any action before the DRT. Further, foreign lenders are denied the right to initiate any action under the SARFESI Act. Thus, the best and most expeditious relief – which is available to domestic banks and FIs in India and to foreign banks and FIs which have obtained a licence from the RBI – is not available to the foreign banks and FIs that do not possess such licence. This is an anomaly.  


To better understand this anomaly, one may have to look at the Foreign Exchange Management Act, 1999 under which permission of the RBI had to be obtained for the creation of any security by means of immoveable properties, of shares or of guarantees. The RBI in July 2008 sub-delegated this power of issuing ‘no objection’ to the authorized dealers and simplified the procedure by stipulating certain minimum criteria, which has now facilitated the taking of great exposure by foreign lenders, due to their better security cover.  


Though the Indian government has relaxed the security creation norms for external commercial borrowings, concurrent amendments in the laws have not taken place. The DRT Act and SARFESI Act remain available only to the banks and FIs licensed by RBI. This may be owing to the fact that (i) external commercial borrowings can be obtained from not only banks and FIs but also from other ‘recognized lenders’; and (ii) few countries are recognized as ‘reciprocating territory’ under Indian laws and therefore few countries would recognize any award, decree or enforcement options as no reciprocity exists between such country and India.


Ultimately, however, the financial system becomes viable only when the interest of the lenders and investors is adequately protected. Whereas Indian businessmen or industrialists have secured foreign currency loans and/or structured finance by creating security on the moveable and immoveable assets or mortgaging the personal assets as approved by RBI in its 2008 circular, foreign lenders should also be allowed to enforce their rights at par with any other bank or FI in India.  


Correcting lender inequalities


The efficiency of the DRTs and action under SARFESI has been proved beyond doubt. Today, any delinquent borrower is mindful about any action under the SARFESI Act which compels delinquent borrowers to honour their commitment vis-à-vis lenders. 


But the inequality amongst lenders needs to be corrected. The Government could consider the applicability of the provisions of DRT Act and SARFESI Act (i) to only foreign banks and FIs which have a presence in India so as to prevent foreign lenders arbitraging on the Indian parties and their assets; (ii) to only banks and FIs and not to any other ‘recognized lenders’ as is available to Indian lenders presently; and (iii) to only foreign lenders from a ‘reciprocating territory’, keeping at par the reciprocity arrangement with other countries so that lenders and borrowers inter-se from such countries vis-à-vis India are treated at par and no disparity of rights and obligations subsists amongst them. 


Rajesh Narain Gupta is a managing partner  and S Babu a partner (banking & finance) at S N Gupta & Company Advocates, India




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