Gujarat High Court notice to Centre over NPA defination in SRFAESI Act

BS Reporter / Mumbai/ Ahmedabad Jul 16, 2012, 00:49 IST

Gujarat High Court has issued notice to the Union government while hearing a petition challenging provision of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESIA), 2002, defining the non-performing assets (NPAs) and recovery mechanism from it.

A division bench of acting Chief Justice Bhaskar Bhattacharya and Justice J B Pardiwala, hearing the petition filed by a Surat-based textile firm last week, issued notice to the Union government and scheduled hearing after three weeks. The court also granted interim relief to the petitioner Goenka Fabrics and stayed any action by the Bank of India, which had initiated recovery under the SRFAESIA.

According to case details, the petitioner firm had defaulted on payment of loan to the Bank of India, following which the bank declared the company's account at NPA under SRFAESIA section 2(O) and initiated recovery proceeding as per the Reserve Bank of India (RBI) guidelines in such cases.

The petitioner firm through its lawyers Vishwas Shah and Masoom Shah have challenged the legality and validity of of section 2 (O) of SRFAESIA and have termed it as unconstitutional.


"The section 2 (O) of the Securitisation Act 2002,is unconstitutional as it is arbitrary and unreasonable. It refers to RBI guidelines, which has a definition which is completely in contrast to the one stated in the Act," the petition read. "The section relies on what is sub standard, loss making and doubtful account to understand the term NPA, while the RBI guideline relies on NPA to explain what is Sub Standard, loss making and doubtful account. Thus the whole definition is arbitrary and unreasonable," it added.



The petitioner further said, "The definition as stated in section 2 (O) empowers the bank to declare any account as NPA as per its whims and fancies. The delegation of power on the bank to declare a account NPA as per the definition which relies on RBI Guidelines which are ambiguous and contradictory to the definition stated in Securitization Act. Thus the section 2 (O) is required to be declared unconstitutional."


It further argued in the petition that the Bank cannot just on it’s own declare an account as NPA without showcasing when and how a performing asset became non-performing, and it also has to demonstrate the evidence and the proper documents to back the claim.


"The section 2 (O) violates article 14 , 19 and 21 of the Constitution of India. The Section as read with Prudential norms, creates confusion and disharmony, it fails to meet required criteria 13 of clarity and harmony," petitioner added.