UV ASSEST RECONSTRUCTION COMPANY LTD. v. UNION OF INDIA & ORS.

1. The petitioner, an asset reconstruction company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), has approached this Court being aggrieved by the refusal of the respondent no.2 to substitute its name as the new pledgee in place of the original pledgee, the State Bank of India (SBI) in respect of the pledged shares of M/s Burnpur Cement Ltd. (BCL), which now stands assigned to the petitioner.

2. At the outset, I may be noted that BCL, which had availed various term loans from the SBI consortium, with the SBI being the ‘lead banker’ (SBI Consortium), and therefore, a ‘Restructuring Package’ was sanctioned in March 2015, the terms whereof were set out in a Master Restructuring Agreement (MRA) dated 30.03.2015. In accordance with the terms of this MRA, 2,17,99,826 equity shares were pledged by the BCL with the SBI by way of a Pledge Agreement of the same date.

3. In Clause 5 of the Pledge Agreement, it was specifically agreed between the parties that in the event of non-payment of Facilities together with interest, additional interest, liquidated damages and other amounts, or any portion thereof, by the pledgors to the lenders, the SBI would be entitled to be registered as beneficial owners of the pledged shares, with a right to sell/cause to be sold the pledged shares. As the BCL did not repay the term loans in accordance with the MRA in time, its account was declared by the SBI as a Non Performing Asset (NPA), and the same with all underlying securities, both moveable and immoveable, was acquired by the petitioner. Consequently, a Debt Assignment Agreement was entered into between the SBI, as the Assignor, and the petitioner, as the Assignee, which was in accordance with Section 5 of the SARFAESI Act, registered on 26.06.2019. It may be noted that the petitioner entered into similar Debt Assignment Agreements with the other members of the SBI Consortium, i.e., with the Central Bank of India on 29.03.2019, and with the Punjab National Bank on 04.08.2022.

4. It is the petitioner’s case that, as a consequence of execution of the Debt Assignment Agreement dated 17.05.2019, it became the new pledgee in place of the SBI, and in terms of Section 5(3) of the SARFAESI Act had also taken over the role of SBI as its ‘successor in interest’ qua the management of BCL. The petitioner, therefore, approached the respondent no.2, which is the National Depository established under the National Securities Depositories Limited (NSDL), for substitution of its name in the record maintained by respondent no.2 in respect of the pledged shares of the BCL.

5. In response to the petitioner’s request, the respondent no.2 directed the petitioner to submit an indemnity bond, and also submit the requisite forms, after getting them signed by the original pledgee, SBI. In compliance with the directions of respondent no.2, the petitioner duly forwarded the indemnity bond, and the requisite documents required from the SBI. The respondent no.2, vide its email dated 08.09.2022, then informed the petitioner that though, the process for facilitating the change of pledgee through the pledgor depository participants was likely to be completed soon, it was required to deposit certain depository system charges. However, after the petitioner deposited these charges on 16.09.2022, the respondent no.2 took a sudden u-turn, and vide its email dated 04.10.2022, informed the petitioner that its request could not be accepted. The petitioner was also informed that objections against the substitution had also been received in respect of 2 of the 17 pledged accounts, from one of the pledgers, namely Mr.Ashok Gutgutia. Aggrieved with this rejection, the petitioner has approached this Court..

6. Learned senior counsel for the petitioner submits that, even though, the petitioner is not pressing its allegations regarding the manner of functioning of the respondent no.2, whereby despite having earlier informed the petitioner that its request for substitution was being processed, has now taken a decision not to incorporate the petitioner’s name as a pledgee. He submits that the petitioner has, pursuant to the Debt Deed Assignments entered into with the SBI and other members of the consortium in accordance with the provisions of the SARFAESI Act, is entitled to be treated as a lender in relation to these pledged shares of BCL. Once the ownership of these pledged shares already stands vested in favour of the petitioner by virtue of Sections 5(2) & (3) of the SARFAESI Act, the respondent no.2 cannot refuse to incorporate the necessary changes. He, therefore prays that the respondent no.2 be directed to forthwith incorporate the name of the petitioner as the pledgee in respect of these pledged shares.

7. Today, learned counsel for the respondent no.3/SEBI submits that the said respondent has no role in the present petition, and therefore, prays that the said respondent be deleted from the array of parties. On the other hand, learned senior counsel for the respondent no.2, while not denying the receipt of the processing charges, as also the requisite documents seeking substitution of the petitioner’s name in place of the original pledgee, SBI, submits that there is no provision either in the Depositories Act, 1996 or in the SEBI (Depositories and Participant) Regulations, 2018, for incorporating such changes. Moreover, one of the pledgors has approached the respondent no.2 specifically opposing this request, and therefore, the respondent is justified in not processing the petitioner’s request.

8. Having considered the submissions of the parties and perused the record, it may first be apposite to note the contents of Sections 5 (2) and (3) of the SARFAESI Act, under which, the petitioner has acquired the ownership of the pledged shares of the BCL. The same read as under:- “5. Acquisition of rights or interest in financial assets. (1) …. (2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the 2 [asset reconstruction company], such 3 [asset reconstruction company] shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets. (2A)… (3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the 3 [asset reconstruction company], as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, 3 [asset reconstruction company], as the case may be, had been a party thereto or as if they had been issued in favour of 3 [asset reconstruction company], as the case may be.”

9. From a bare perusal of the aforesaid provisions of the SARFAESI Act, I find that the said Act envisages transfer of assets by the original lenders, including banks and financial institutions to asset reconstruction companies like the petitioner. The same further prescribes that the buyer of these assets, in accordance with the provisions of the SARFAESI Act, would be treated as the lender for all purposes. In the present case, once it is not denied that the petitioner has, in accordance with Section 5 of the SARFAESI Act, purchased the NPA account of BCL, alongwith all assets, including the pledged shares, there can be no doubt that the petitioner is the new pledgee of these shares. In my considered view, once the petitioner has, in accordance with law, become the new pledgee, having acquired these shares by way of a Debt Assignment Deed, a necessary corollary thereof would be that, as a buyer, its right to deal with these pledged shares is absolute, and is therefore, required to be recognised by all third parties, including statutory authorities like the respondent no.2.

10. Even otherwise, by way of its request to respondent no.2, the petitioner has merely sought that its right to deal with the shares acquired by it under the SARFAESI Act, be noted in its records. Once the original pledgee, with whom the shares were pledged by the BCL for availing certain loans, has issued specific instructions to the respondent no.2 to substitute the name of the petitioner in its place, there is no justification for the respondent no.2 to deny the petitioner’s request. Merely because the Depositories Act, 1996 or the SEBI (Depositories and Participant) Regulations, 2018 do not lay down any procedure for making such a substitution, does not imply that the respondent no.2 can refuse to incorporate changes in the ownership of the pledged shares, which already stand vested with the petitioners by way of Section 5(2) and (3) of the SARFAESI Act. The respondent’s plea that the substitution is opposed by one of the pledgors, namely Mr Ashok Gutgutia, and can therefore, not be permitted, is equally misconceived. Once the pledgors, who have admittedly not repaid the loan till date, had agreed in Clause 5 of the Pledge Agreement dated 30.03.2015, that it will be open for the SBI to sell the pledged shares to any third-party, they cannot now be permitted to raise any objection to the substitution of the name of the petitioner, who has purchased these shares by way of the Debt Assignment Agreements.

11. The petition therefore deserves to succeed, and is accordingly allowed by directing the respondent no.2 to carry out the necessary substitution of the petitioner’s name as a pledgee in its record qua the 17 accounts of the BCL, within three weeks.

REKHA PALLI (JUDGE) DECEMBER 6, 2022