This presentation is used in my classroom lecture. Some resources have also been thankfully borrowed from Slideshare.

1. Legal Aspect of Loan
Documentation &
Creation of Charge
K R Chandra
FM, IIBM, Guwahati

2. What is a Legal ?
And Why Legal?
Name some Acts…

3. Indian contract Act, 1872
Indian Evidence Act, 1872
NI Act,1881
BR Act, 1949
RBI Act, 1934…….

4. Legal- Sanctioned by Law
 Banking relationship a contract
 Governed by Indian contract Act, 1872
 Borrower as also Depositor covered
 Document prepared to create Evidence under section 3 of Indian Evidence Act, 1872
 Written record for creating evidence while lending

5. Why we need documents?
 For creation of charge on securities
 To provide acceptable evidence to the court of law for enforcing
 Banker acquires right to file money suit based on DP Note , N I Act,1881
 Identified borrower, guarantor and security
 A record- Written Evidence
 Recording of happening of an event
 Provides scope for protective clause
 Period of limitation can be decided

6. Process of documentation
 Drafting
 Stamping
 Filling up
 Signing/ Execution
 Checking and vetting
 Recording
 Registration
 Documentation charges collection
 Safe keeping
 Keeping documents alive

7. Pre - requisites of documentation
 Correct name (of borrower / Guarantor)
 Proper recital /drafting
 Proper stamping
 Description of Security
 Consideration amount
 Terms of Repayment as also other terms mutually agreed upon
 Place and date of Execution
Due registration of above document would make it valid and legally enforceable

8. Witnessing
 Section 3 of Transfer of Property Act: After execution to be witnessed by
 2 or more persons not party to transaction
 The following documents:
1. Mortgage deed
2. Sale deed
3. Guarantee deed
4. POA
5. Will
6. Assignment on Instrument

9. Stamping
Governed by Indian Stamp Act, 1899
 Any document which creates or relinquishes or transfers a right contained in
document must be stamped to be accepted as evidence in court
 The following documents to be stamped as per Central Act (Union List):
1. DP Note
2. Bill of Exchange, Bill of Lading
3. Money receipts & Insurance Policy
4. Letter of credit
5. Share Transfer form
Others by State Law i.e. Mortgage, Guarantee, POA, Partnership deed

10. Stamping- Contd….
Types of stamp
 Postal
 Judicial
 Non Judicial:
1. Adhesive
2. Non- Adhesive
3. Embossed/ E-Stamp
 Cancellation of stamp is also crucial- so that it is not reused
 Place of execution and payment of stamp duty

11. Care to be taken at the time of
documentation
 Alterations to be authenticated by executants
 Same handwriting , same ink
 Full Signature (not initials)
 Date and Place of execution
 Date should coincide with first disbursement
 POA should be registered
 Document Checked stamp on reverse with authentication
 Illiterate persons- Contents to be explained in the language he/she knows
 LHT for Male and RHT for female

12. CERSAI/ SARFAESI Act, 2002
 As per provisions of SARFAESI Act 2002- CERSAI created
 Central Registry – to maintain central register in Electronic form
 As per rules under above Act creation of security interest to be registered
 Within 30 days of such creation
 Beyond 30 days penalty is to be paid
 With penalty within 60 days must be registered

13. Documentation by Borrowers
 Individuals:- Major, sound mind, undischarged solvent
1. Should be in good sense and not in drunken state
2. Exceptions for financing minors:
3. Security documents to be executed by Guardians
 Companies:- charges created by companies to be registered with ROC
1. Immovable assets
2. Book debts
3. Movable assets [ other than pledge]
4. Floating Charge on undertaking
5. Charge on goodwill, patents, uncalled shares etc.

14. Documentation by Borrowers- contd…
 CHG-1 to be filled in within 30 days of creation of charge- ON-LINE
 ROC may condone delay upto 270 days { with additional Fees}
 Beyond 300 days CLB to sanction registration of charge
1. Should be in good sense and not in drunken state
2. Exceptions for financing minors:
3. Security documents to be executed by Guardians
 Companies:- charges created by companies to be registered with ROC
1. Immovable assets
2. Book debts
3. Movable assets [ other than pledge]
4. Floating Charge on undertaking

15.  Limitation Act: Maximum period within which Bank can enforce it’s right
 The Right to Recovery in Court of Law
 No suit allowed after lapse of period as following:
a. DP Note- 3 years
b. Mortgage- 12 years
c. Gurantee- 3 years
d. Execution of decree- 12 years
e. Generally 3 years in respect of loan accounts
Limited Periods of Documents

16. Precautions of documentation- Do’s &
Dont’s
 Always take full set of documents
 Fill in Correctly
 Never deliver blank documents
 Preferably documents should be signed by Borrower/ not POA
 Photocopies may be made available to borrowers on demand
 Original documents may be returned within 15 days of closure of A/C

17. What is Charge?
 A Company raises funds by issue of shares,
debentures, taking loans from banks and financial
institution.
 When a bank provides loan to a company, it
requires collateral to ensure the principal amount
repayment and interest thereon.
 The interest thus created is known as charge

18. How to create Charge?
 Pledge, hypothecation and mortgage are 3 methods
used by lenders to create charge
 Pledge – pledge is used when the lender takes
actual possession of the property. Example Gold
loan. The bank takes possession of gold
 Hypothecation is charge without transfer of
possession of property.
 Mortgage- Immovable Asset

19. Pledge

20. Hypothecation

21. Mortgage

22. How to create a Charge-Contd…
 The process of creating security over the asset is creation of charge
 A wise creditor demands security
 Security is a right over debtors property
 It is in addition to right of action
 Documentation is done for creation of charge on securities

23. Types of Charges
 Fixed Charge- Specific property which can not be dealt with by borrower without
consent of holder of charge
 Floating Charge- Equitable charge of on asset (or class of property) of the
Borrower which keeps continuously changing i.e. Stock in trade
 Pari Passu Charge- in favour of several creditors with equal priority in proportion
to the amount of advance

24. Registration of Charges
 The process of creating security over the asset is registration of charge
 The following charges are to be registered with the Registrar:
1. A charge for the purpose of securing any issue of debenture
2. A charge on uncalled capital
3. A charge on Immovable property
4. A charge on Book debt
5. A charge on any movable property not being pledge

25. Thanks