The Supreme Court judgment upholding the implementation of a central banking law to J&K comes after years of neglect on part of the Government to take steps for protection of lending institutions within its own system

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|| ZUHAIB YOUSF MIR

               The recent verdict of Supreme Court on implementation of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) of 2002 in Jammu and Kashmir has created a lot of debate in the state about what really is the meaning of autonomy within the ambit of Article 370 which grants special status to the state. There are however few fundamental aspects that one needs to be acquainted with in order to understand the consequences of this Apex court’s decision. The SARFAESI Act was enacted by the Parliament in 2002. Under this Act, banks can seize property of the borrowers and dispose it off. The Apex Court had on December 17 asserted that the state of Jammu and Kashmir has “no vestige of sovereignty outside the Constitution of India”. Enacted in 2002, SARFEASI Act empowers banks to sell the mortgages of the borrowers outside the court process, in case borrowers fail to repay their loans, by moving a tribunal to take possession of secured assets of the borrower and sell them outside the court process.

           There are two observations that one can draw. Firstly, the Supreme Court said, “SARFAESI Act deals with recovery of debts due to banks and financial institutions, which is relatable to a subject under the Union List and parliamentary legislation did not require concurrence of the state government since the Centre had power to make law on this subject.” The point here is that except for the matters related to defense, foreign affairs and telecommunication, every law that is being made by the parliamentary has to be ratified by the legislature if it has to be implemented in the state of Jammu and Kashmir (or if the provision is there in article 370). So in this context there is a need to decide once for all what are the contours under which the consent of the state legislature for passing a particular law is necessary. The second aspect is that one need to understand the reason, which propelled the Reserve Bank of India to push for implementation of the Act in J&K: the low loan-deposit ratio. The finance minister Haseeb Drabu in his article in the mint in 2013 wrote “a practical solution is required to provide commercial banks greater power for recovery of bad assets.

Finance minister Haseeb Drabu in his article in the mint in 2013 wrote that a practical solution was required to provide commercial banks greater power for recovery of bad assets. For this, instead of bringing in SARFAESI through an ordinance and jeopardizing the special status of J&K, what the state government needs to do as a majority shareholder in J&K Bank is to get the bank to set up an asset reconstruction company (ARC).

             For this, instead of bringing in SARFAESI through an ordinance and jeopardizing the special status of J&K, what the state government needs to do as a majority shareholder in J&K Bank is to get the bank to set up an asset reconstruction company (ARC). It should be a company incorporated in J&K as a “state subject”. All commercial banks can have an equity stake in it as long as the majority stake is held by the state government and the J&K Bank.” In his article he also added “The mandate of this local ARC should be to buy all the impaired assets in the state. These may include some assets of commercial banks but more importantly of other financial institutions such as the State Finance Corporation.” So it is time that our Chief Minister takes a stand as to where her allegiance lies regarding this issue. Blunders by State The Supreme Court’s decision came after years of inaction on part of State Government to amend J&K Transfer of Property Act to incorporate provisions similar to those in the central Act for protecting interests of banks in case of default by borrowers. Details show how successive governments in J&K slept over the issue by ignoring to amend the State Act despite repeated reminders by the Government of India to state to amend the relevant state laws for protecting the interests of banks.

           Following differences between J&K Government and New Delhi over applicability of section 13 (4) of SARFAESI Act and the corresponding rules in J&K, both the Governments had in 2009 arrived at a consensus over protection of lending by financial institutions. As per the agreement, the State was to make a provision similar to section 13 (4) of the SARFAESI Act and the rules in State’s Transfer of Property Act for protecting interests of banks. On its part, the Government of India had given assent to amend SARFAESI Act to exempt J&K from applicability of the section 13 (4) and make it mandatory on banks to decide upon sale of immovable property in J&K as per provision of the J&K Transfer of Property Act. However there was no action on part of the State Government to amend the Transfer of Property Act which finally saw the Supreme Court delivering the judgment, asking the government to implement the central law by quashing the High Court judgment that had debarred implementation of the central law in J&K. “Had the State Government amended J&K Transfer of Property Act 1977 in time for allowing Banks to initiate action against defaulters under the state law itself, the case would have never landed in courts,” said a senior official in the State’s Law Department. As per the agreement, the State was to make a provision similar to section 13 (4) of the SARFAESI Act and the rules in State’s Transfer of Property Act for protecting interests of banks.

The SC decision came after years of inaction on part of Government to amend Transfer of Property Act to incorporate provisions similar to those in the central Act for protecting interests of banks. Details show how successive governments in J&K slept over the issue.

           On its part, the Government of India had given assent to amend SARFAESI Act to exempt J&K from applicability of the section 13 (4) and make it mandatory on banks to decide upon sale of immovable property in J&K as per provision of the J&K Transfer of Property Act. The section 13 (4) says in case the borrower fails to discharge his liability in full within the period specified…the secured creditor may take recourse to one or more of following measures to recover his secured debt: take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset, take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset. While the SARFAESI Act, enacted in 2002, allows financial institutions to auction properties in case borrowers fail to repay their loans, it was however challenged in the State High Court on the grounds that the Parliament had no powers to make laws on immovable property in J&K owing to state’s special status. The differences had prompted both state and Government of India to find a way for protecting financial interests of the banks under the state law. An official said some years back the Government had also mooted a proposal to draft a bill for securing interests of banks by allowing them to sell mortgaged property of defaulters but strictly as per the laid down laws in the state. “Even a draft bill was prepared but nobody knows what happened to that,” said the official.