The Supreme Court of India, through its order in the case of ICICI Bank Limited v Official Liquidators of M/s APS Star Industries Limited & Others, has temporarily allowed banks to trade in debts pending its final hearing of a special leave petition (SLP) on 14 April. The SLP was filed against a judgment made by Gujarat High Court on 12 January, which disallowed the trading in debts by banks. The case focused on ICICI, which executed a deed of assignment in favour of Kotak Mahindra Bank in which a basket of ICICI’s non-performing assets was assigned and transferred on an “as is where is” basis to Kotak Mahindra at a defined purchase price.
The Supreme Court is hearing from three banks: ICICI, Kotak Mahindra and Standard Chartered. It has also allowed the intervention of the Indian Banks Association and the Reserve Bank of India (RBI) as additional parties to the case. The eventual outcome of the SLP will be a “judgment in rem” (a judgment on the status of a particular subject, property or thing, as opposed to one pronounced on individuals). As such, the decision will apply not only to ICICI and Kotak Mahindra, but to all future transactions of this nature.
In an earlier hearing of the SLP on 9 February, the court directed that no steps should be taken by the banks to implement the impugned high court judgment.
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The division bench of the Supreme Court, headed by Justice SH Kapadia, directed that while the disposal of the SLP was pending, repayments under the secured loans had to be made to the assignee of such loans (Kotak Mahindra). It also directed ICICI and Kotak Mahindra to furnish an undertaking that they would reverse debt-trading transactions, entered into during the pendency of the SLP, if the SLP was dismissed. The court clarified that its interim order to allow banks to temporarily conduct business as usual should not be construed as an acceptance of the transaction pending the outcome of the SLP.
The Supreme Court’s final judgment will have extensive ramifications for asset backed securitization (ABS) in India, which is at a nascent stage. If the SLP is dismissed, many observers feel that ABS would effectively be banned in the country, putting India’s banks at a competitive disadvantage against their foreign counterparts, for which ABS is a standard practice.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
