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The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 is listed for discussion in Rajya Sabha today.[i] The Bill aims to expeditiously resolve cases of debt recovery by making amendments to four laws, including the (i) Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and (ii) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 The 1993 Act created Debt Recovery Tribunals (DRTS) to adjudicated debt recovery cases. This was done to move cases out of civil courts, with the idea of reducing time taken for debt recovery, and for providing technical expertise. This was aimed at assisting banks and financial institutions in recovering outstanding debt from defaulters. Over the years, it has been observed that the DRTs do not comply with the stipulated time frame of resolving disputes within six months. This has resulted in delays in disposal, and a high pendency of cases before the DRTs. Between March 2013 and December 2015, the number of pending cases before the DRTs increased from 43,000 to 70,000. With an average disposal rate of 10,000 cases per year, it is estimated that these DRTs will take about six to seven years to clear the existing backlog of cases.[ii] Experts have also observed that the DRT officers, responsible for debt recovery, lack experience in dealing with such cases. Further, these officers are not adequately trained to adjudicate debt-related matters.[iii] The 2016 Bill proposes to increase the retirement age of Presiding Officers of DRTs, and allows for their reappointment. This will allow the existing DRT officers to serve for longer periods of time. However, such a move may have limited impact in expanding the pool of officers in the DRTs. The 2016 Bill also has a provision which allows Presiding Officers of tribunals, established under other laws, to head DRTs. Currently, there are various specialised tribunals functioning in the country, like the Securities Appellate Tribunal, the National Company Law Tribunal, and theNational Green Tribunal. It remains to be seen if the skills brought in by officers of these tribunals will mirror the specialisation required for adjudicating debt-related matters. Further, the 1993 Act provides that banks and financial institutions must file cases in those DRTs that have jurisdiction over the defendant’s area of residence or business. In addition, the Bill allows cases to be filed in DRTs having jurisdiction over the bank branch where the debt is due. The Bill also provides that certain procedures, such as presentation of claims by parties and issue of summons by DRTs, can now be undertaken in electronic form (such as filing them on the DRT website). Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The 2002 Act allows secured creditors (lenders whose loans are backed by a security) to take possession over a collateral security if the debtor defaults in repayment. This allows creditors to sell the collateral security and recover the outstanding debt without the intervention of a court or a tribunal. This takeover of collateral security is done with the assistance of the District Magistrate (DM), having jurisdiction over the security. Experts have noted that the absence of a time-limit for the DM to dispose such applications has resulted in delays.[iv] The 2016 Bill proposes to introduce a 30-day time limit within which the DM must pass an order for the takeover of a security. Under certain circumstances, this time-limit may be extended to 60 days. The 2002 Act also regulates the establishment and functioning of Asset Reconstruction Companies (ARCs). ARCs purchase Non-Performing Assets (NPAs) from banks at a discount. This allows banks to recover partial payment for an outstanding loan account, thereby helping them maintain cash flow and liquidity. The functioning of ARCs has been explained in Figure 1. 
It has been observed that the setting up of ARCs, along with the use out-of-court systems to take possession of the collateral security, has created an environment conducive to lending.[iii] However, a few concerns related to the functioning of ARCs have been expressed over the years. These concerns include a limited number of buyers and capital entering the ARC business, and high transaction costs involved in the transfer of assets in favour of these companies due to the levy of stamp duty.[iii] In this regard, the Bill proposes to exempt the payment of stamp duty on transfer of financial assets in favour of ARCs. This benefit will not be applicable if the asset has been transferred for purposes other than securitisation or reconstruction (such as for the ARCs own use or investment). Consequently, the Bill amends the Indian Stamp Act, 1899. The Bill also provides greater powers to the Reserve Bank of India to regulate ARCs. This includes the power to carry out audits and inspections either on its own, or through specialised agencies. With the passage of the Bankruptcy Code in May 2016, a complete overhaul of the debt recovery proceedings was envisaged. The Code allows creditors to collectively take action against a defaulting debtor, and complete this process within a period of 180 days. During the process, the creditors may choose to revive a company by changing the repayment schedule of outstanding loans, or decide to sell it off for recovering their dues. While the Bankruptcy Code provides for collective action of creditors, the proposed amendments to the SARFAESI and DRT Acts seek to streamline the processes of creditors individually taking action against the defaulting debtor. The impact of these changes on debt recovery scenario in the country, and the issue of rising NPAs will only become clear in due course of time. [i] Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, http://www.prsindia.org/administrator/uploads/media/Enforcement%20of%20Security/Enforcement%20of%20Security%20Bill,%202016.pdf. [ii] Unstarred Question No. 1570, Lok Sabha, Ministry of Finance, Answered on March 4, 2016. [iii] ‘A Hundred Small Steps’, Report of the Committee on Financial Sector Reforms, Planning Commission, September 2008, http://planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf. [iv] Financial Sector Legislative Reforms Commission, March 2013, http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf.
The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India. However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget. Last week, the Finance Minister pushed back the implementation of GAAR by a year. What is GAAR? GAAR was first introduced in the Direct Taxes Code Bill 2010. The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit. The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests. Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. As per the Bill, arrangements which lack commercial substance could involve round trip financing, an accommodating party and elements that have the effect of offsetting or cancelling each other. A transaction that disguises the value, location, source, ownership or control of funds would also be deemed to lack commercial substance. The Bill as introduced also presumed that obtaining a tax benefit was the main purpose of an arrangement unless the taxpayer could prove otherwise. Why? GAAR was introduced to address tax avoidance and ensure that those in different tax brackets are taxed the correct amount. In many instances of tax avoidance, arrangements may take place with the sole intention of gaining a tax advantage while complying with the law. This is when the doctrine of ‘substance over form’ may apply. ‘Substance over form’ is where real intention of parties and the purpose of an arrangement is taken into account rather than just the nomenclature of the arrangement. Many countries, like Canada and South Africa, have codified the doctrine of ‘substance over form’ through a GAAR – type ruling. Issues with GAAR A common criticism of GAAR is that it provides discretion and authority to the tax administration which can be misused. The Standing Committee responded to GAAR in their report on the Direct Taxes Code Bill in March, 2012. They suggested that the provisions should ensure that taxpayers entering genuinely valid arrangements are not harassed. They recommended that the onus should be on tax authorities, not the taxpayer, to prove tax avoidance. In addition, the committee suggested an independent body to act as the approving panel to ensure impartiality. They also recommended that the assessing officer be designated in the code to reduce harassment and unwarranted litigation. GAAR Amendments On May 8, 2012 the Finance Minister amended the GAAR provisions following the Standing Committee’s recommendations. The main change was to delay the implementation of GAAR by a year to “provide more time to both taxpayers and the tax administration to address all related issues”. GAAR will now apply on income earned in 2013-14 and thereafter. In addition, the Finance Minister removed the burden upon the taxpayer to prove that the main purpose of an alleged impermissible arrangement was not to obtain tax benefit. These amendments were approved with the passing of the Bill. In his speech, the Finance Minister stated that a Committee had also been formed under the Chairmanship of the Director General of Income Tax. The Committee will suggest rules, guidelines and safeguards for implementation of GAAR. The Committee is expected to submit its recommendations by May 31, 2012 after holding discussions with various stakeholders in the debate.
