Laws Relating to Securities and Mode of Charges – Free E-Book

Laws Relating to Securities and Mode of Charges E-Book: ‘Laws Relating to Securities and Mode of Charges’ is a part of Paper 3 for JAIIB. That is the Legal and Regulatory Aspects of Banking paper. For the IIBF JAIIB certification, it is necessary to score a minimum of 45 marks on each paper. Hence, candidates should learn each topic as well as possible, especially the high-weightage ones. This blog will provide all information on ‘Laws Relating to Securities and Mode of Charges’ for the JAIIB exam. This includes the definition, classification, differences, advantages, and disadvantages. Candidates will also be able to download the free PDF format of these notes in this blog. We hope these concise and thorough notes will help make your JAIIB preparation smoother.

Law Relating to Securities and Modes of Charge

Learn more about the Law Relating to Securities and Modes of Charge in this article. Continue reading to get entire notes for JAIIB examinations.

Mortgage

• “A mortgage is the transfer of an interest in specific immovable property, to secure the payment of money advanced or to be advanced by way of loan, on existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability,” according to Section 58 of the Transfer of Property Act, 1882.
• The mortgagor just gives up his or her interest in the property, not possession. A mortgage is a transfer of interest in the mortgaged property, not just a contract. Except for usufructuary mortgages, possession of the property stays with the mortgage.
• Immovable property (IP) is defined as “land, profit flowing from land, and items affixed, permanently fastened to soil” under Section 3 of the General Clauses Act.
• The term for the transferor is ‘mortgagor’, and the term for the transferee is ‘mortgagee’.
• The original money and the interest on which payment is secured are referred to as the mortgage money, and the instrument, if any, by which the transfer is made is referred to as the mortgage deed.

Essential features of mortgages

• Mortgages can be for covering general amounts, current payments, and future loans or advances.
• Relationship: At the moment of deposit, the bank and the mortgagor must have a creditor as well as a debtor relationship (or a contract of guarantee).
• Future debt: the existence of the debt is not a necessity. This relationship is established even when a debt application is submitted and accepted.
• Effective date: A registered mortgage (and equitable mortgage) takes effect on the day the mortgage is recorded (Section 47 & 48 of the Indian Registration Act).
• Enhanced limitations: Since the mortgage just does not cover the enhanced amount, a supplemental registration deed is necessary to cover the enhanced bank limits.
• Loan repayment: When the mortgagor repays the loan, the mortgage is no longer legal. 

Different kinds of mortgage

1. Section 58(B) of Transfer of Property Act: Simple Mortgage

• Without Court Intervention, the mortgagee has no authority to sell.
• There is no entitlement to receive rent payments.
• The property is not in your possession.
• Registration is mandatory.

2. Section 58 (c) of Transfer of Property Act: Mortgage by conditional sale

• The sale is fictitious and not real.
• If the mortgagor does not pay the money on the agreed-upon date, the apparent sale will become absolute if the mortgagor applies to the court and obtains a decision in his favor.
• The mortgagee has the right to sue for foreclosure but not for the sale of the property.
• Because there is no personal commitment to loan service, bankers do not choose this sort of mortgage.

3. Section 58(d) Transfer of Property Act: Usufructuary Mortgage

• The mortgagee takes ownership of the mortgaged property. Possession in this context refers to legal possession rather than physical possession.
• The mortgagee is entitled to earn rentals and profits from the property.
• The mortgagee is not permitted to sue the mortgagor for debt repayment, sale, or repossession of the mortgaged property.
• If the mortgagor does not file a redemption suit within 30 years, the mortgagee becomes the sole owner of the property.

Bankers dislike this type of mortgage for the following reasons:

• There is no personal agreement in place to settle the amount.
• This approach will take a very long time to recoup the money.

4. Section 58(e) Transfer of Property Act: English Mortgage

• Despite the total transfer of the property to the mortgagee, it contains a personal covenant to pay on a specific date.
• The property has been transferred to the mortgagee in its entirety. 
• In the case that the mortgage is paid off, the property will be returned to the mortgagor.
• The mortgagee has the right to sue the mortgagor to collect the money and get a sale decree.

5. Section 58(f) Transfer of Property Act: Mortgage by deposit of title deeds

• The transaction is known as a mortgage by deposit of title deeds when a person in any of the places designated by the government concerned gives to a creditor or his agent papers of title to the immovable property to form a security interest therein.

6. Section 58(g) Transfer of Property Act: Anomalous Mortgage

• An “Anomalous Mortgage” is a mortgage that is not simple, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage, or a mortgage by deposit of title documents within the meaning of this section.
• It has a negative definition and should not be any of the aforementioned mortgages.
• It’s a hybrid of two mortgages: Usufructuary and simple mortgages
• conditional sale coupled with a usufructuary mortgage

Difference between Equitable Mortgage and Pledge

Pledge	Mortgage
The pledgee receives just a restricted stake in the property, while the pledger retains ownership.	In this case, the legal ownership of the property goes to the mortgagee, subject to the mortgagor’s ability to redeem the property.
The Pawnee owns “special property” in the pledged goods and can sell them if the pledger defaults, but only after giving due notice.	Before taking action against the mortgaged property, the mortgagee usually seeks a court order.
Pawnee does not have the legal power to foreclose. He has no choice but to sell the property to pay his debts.	The mortgagee may be able to foreclose on the property under certain circumstances.

Pledge

A pledge is a contract in which a person deposits an object or thing with a lender of money as security for the return of a loan or the execution of a commitment, according to section 172 of the Indian Contract Act, 1872. A pawn is another term for a pledge. The Pawnor is the depositor or bailor, while the Pawnee is the depositee or bailee. The Pawnee is responsible for taking reasonable care of the property entrusted to him.

The following requirements must be met:

• Bailment of goods is required (bailment signifies the delivery of commodities).
• The bailment must be made by or for the debtor; and
• The bailment must be used to provide security for the repayment of a debt or the fulfillment of a commitment.
• The individual whose goods are bailed is known as a pawnor.
• Pawnee — A person who takes items as collateral.

Features of Pledge

• The Pawnee will receive the property that was pledged.
• The delivery must be by the contract.
• This delivery will be for security purposes only.
• Furthermore, the delivery of products will be contingent on their return.

Rights of Pawnee

• Pawnee has the right to keep the commodities committed until the debt, interest, and any other expenses for their upkeep are paid. 
• For example, X may put his gold jewelry up as collateral for a bank loan. In this scenario, the bank has the right to keep the gold jewelry not only to adjust the loan amount but also to pay interest on the amount of the loan.
• Pawnee has the right to sue for debt collection while keeping the commodities offered as collateral.
• He has the legal right to sue for the sale of pledged items and payment of money owed to him.
• Pawnee has the right to demand compensation for out-of-pocket expenditures. He cannot, however, keep items with him in this situation.
• After providing the pawner fair warning and time, the pawnee has the right to sell the items. After the sale of such commodities, the pawnee might sue the pawnor for any insufficiency. Also, any surplus from the sale of items must be returned to the pawnor.

If the pawnee sells the commodities pledged without providing the pawnor adequate notice and time, the pawnor has the following rights:

• Right to sue for the redemption of commodities in exchange for payment of a debt.
• Right to sue for damages and losses arising from conversion.

Advantages of Pledge

• Because the items are in the pawnee’s possession, they are simple to sell in the event of default. 
• The pawnor will not be able to generate further charges against the same assets if the banking takes adequate safeguards, such as monthly inspections.
• The pawnor will be unable to manipulate the stocks due to strict scrutiny.
• The banker can reclaim the sum under the insurance coverage even if the products are lost.
• The pledge formalities are less complicated than in the case of a mortgage.

Difference Between Hypothecation and Mortgage

Basis	Mortgage	Hypothecation
Meaning	A mortgage is a legal process in which the owner of real estate property transfers the title to the lender as security for the loan amount.	Hypothecation is a financial arrangement in which a person borrows money from a bank by pledging an asset as security while keeping ownership and possession of the item.
Applicable to	Immovable asset	Movable asset
Legal Document	Mortgage deed	Hypothecation agreement
Defined under	Transfer of Property Act, 1882	SARFAESI Act, 2002
Indicates	Transfer of an interest in the asset.	Security for payment of an amount.
Loan amount	High	Comparatively low
Tenure	Long	Comparatively short

Hypothecation 

Hypothecation is “a charge in or upon any movable property, existing or future, created by a borrower in favor of a secured creditor without delivery of possession of the movable property to such creditor, as security for financial assistance, and includes floating charge and crystallization of such charge into fixed on movable property” under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Sec 2 (n)). A cash credit account is similar to an overdraft account in that it is a running account with a fixed drawing limitation within the sanctioned limit. 

Advantages of Hypothecation

• In contrast to a demand loan account, where money can only be withdrawn once, the consumer can deposit and take money whenever he wants.
• Papers are obtained just once with a running account, as opposed to a demand loan, where new documents must be sought upon account adjustment if the loan is to be raised again.
• Interest is levied daily on the account’s real debit balance and is deducted quarterly, becoming due immediately. Banks may also levy a commitment fee for cash credit limits that have not been used.

Securities: Cash credit accounts may be opened against the hypothecation of raw material inventories, stock in process or finished goods or shops, spares, and so on. Banks often grant these loans to customers who are actively engaged in some economic activity continually, such as traders, manufacturers, and so on.

Stock statement and margins: Borrowers are expected to produce a statement of stocks and other securities charged to the bank at pre-determined periods, such as biweekly or monthly. Banks keep a margin on the security, which varies based on the form of the security and other factors.

Documents: To safeguard themselves, banks enter into cash credit agreements that place a charge on the products and other security against which the loans are made.

Renewals: Banks grant cash credit limits for a year, following which one can seek an extension for a further year on evaluation.

Precautions 

• A firm does not have the same security features as other banks when it comes to the security of the same commodities.
• The borrower only has access to one bank’s services, and he must provide a written undertaking.
• A bank name board should be near the securities, noting that the bank has responsibility for them.
• The bank shall undertake a periodic examination to ensure that the level of products maintained is the same as the one disclosed by the borrower and as per his books.
• Any borrower must produce a stock statement on a regular basis.
• Fire and other hazards should be covered by such stocks.

Legal aspects in Hypothecation Possession & Sale

Hypothecation is an equitable charge in which the borrower retains possession of the security on the creditor’s behalf. If the borrower fails to repay the advance against the securities hypothecation, the bank can take ownership of the securities with the borrower’s permission and become a pledgee. The bank gains full pledge rights, including the power to sell without the involvement of the court, when it becomes a pledgee. The bank also has the right under the Securitisation Act to sell the hypothecated securities without the participation of the court, as long as certain legal requirements are met.

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Laws Relating to Securities and Mode of Charges: Conclusion

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Laws Relating to Securities and Mode of Charges: Frequently Asked Questions

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