1. Securities for Advances

2. Types of Advances with respect to Securities i. Clean Advances against Intangible / Personal Securities: Money lent against Promissory Notes, bill of exchange, and guarantees etc. These are the personal exclusive undertaking by some party to pay the amount of advance O/S against a borrower

3. ii. Secured Advances Against Tangible Securities: Money lent against tangible securities which can be realized from sale or transfer. These include Shares, Stocks, Land & Building and goods.

4. Types of Securities on the basis of Purpose: i. Prime Securities: The main cover of the financed amount. It can be the stock, TFC, Shares etc. which can be liquidized usually without involving the courts. ii. Collateral / Secondary Securities: – Securities in addition to Prime Securities. – Reasons: Prime security is not stable in nature. It is difficult to realize the security. – Collaterals may be deposited by a third person as well, eg. Shares, house etc.

5. Types of Securities on the basis of Immovability: i. Movable Securities: Those securities which are both legally and physically in the possession of the lending bank. Paper securities, term deposit receipts, and merchandize are its examples. ii. Immovable Securities: – Those Securities where the legal possession or the right to takeover is entrusted to the lending bank but the physical possession remains with the borrower. – Bank holds the Property Documents and the Authority to take property but the possession remains with the borrower.

6. LEGAL FORMS OF SECURITIES:

7. MOVABLE PROPERTIES: 1. Banker’s Lien: “Lien” is the banker’s right to withhold property until the claim on the property is paid. Lien is an implied pledge. – i.e. the bank has a right to sell the securities after a reasonable notice. Lien cannot be applied on securities held in the safe custody as here bank acts as a bailee and not as the banker. Lien would attach the dividend warrants and profit coupons as and when received by the banker. However, these coupons can be released one by one when falling due for payment, provided that the payment of loan as per terms of agreement is regular. Ear marking on Deposited Money upto a specific amount also comes under the definition of Banker’s Lien.

8. 2. Banker’s Charge: A charge is created over particular assets as security for borrowings or other indebtedness (mortgage, debenture or other security documentation). Sec. 10 of the Transfer of Property Act defines charge as: Where immovable property of one person is by act of parties, or operation of law, made security for payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions herein before contained which apply to a simple mortgage shall, so far may be, apply to such charge. This means: – a charge is a right of payment out of certain property. – it can be created by act of parties or by operations of law. Registration of Charge: The document specifying the creation of charge on an immovable property should be registered with SECP within 21 days.

9. FIXED VS. FLOATING CHARGE: There are essentially two types of charge - floating and fixed: FLOATING CHARGE A floating charge is a form of security under which all the assets of the business, other than those which are subject to a mortgage or fixed charge, are used as security for the loan. The great advantage of the floating charge is that you can sell or use the assets - such as your stocks - as if they are free of any charge, at least until the lender tells you otherwise. A floating charge is appropriate to assets and material which is subject to change on a day-to-day basis, such as stock. Individual items move into and out of the charge as they are bought and sold in the ordinary course of events. If you fail to repay the loan in accordance with the terms under which it was granted, the lender can activate certain remedies, such as: – Converting the security to a fixed charge (thus stopping you from selling the assets). – Appointing a receiver or administrator to run the business. – Seizing and selling any - or all - of the assets to pay off the loan. A floating charge is described as “an equitable charge” on the assets of a going concern.

10. FIXED CHARGE: A fixed charge is a form of security under which a specific item of property or an asset such as a piece of machinery is used as security for the loan. If you fail to repay the loan in accordance with the terms under which it has been granted, the asset in question is forfeit. It is a periodic charge that does not vary with business volume (as insurance or rent or mortgage payments etc.) It is effectively the same, from the lender's point of view, as the mortgage on your home - and just as with your home, you cannot sell the assets subject to a fixed charge without getting the charge released or lifted by the lender. (Forfeit: to lose the right to do or have something because you have broken a rule.)

11. PLEDGE: A pledge is an oath.oath A pledge (also sometimes called a pawn) is a form of possessory security, and accordingly, the assets which are being pledged need to be physically delivered to the beneficiary of the pledge (the pledgee). The pledgee has a common law power of sale in the event of a default on the secured obligations which arises if the secured obligations are not satisfied by the agreed time (or, in default of agreement, within a reasonable period of time). If the power of sale is exercised, then the holder of the pledge must account to the pledgor for any surplus after payment of the secured obligations. Parties Involved: – Pledger or Pawnor – Pledgee or Pawnee

12. Contd… Ownership remains with the pledger but the pledgee has the exclusive possession until the advance is repaid in full. A pledge does not confer a right to appoint a receiver or foreclosure (take possession). If the holder of pledge sells or disposes of the pledged assets when not entitled to do so, they may be liable in conversion to the pledger. A reasonable notice must be served to Pledger before selling the security.

13. Hypothecation: When property in the goods is charged as security for a loan from the bank but ownership and possession is left with the borrower. The security is granted by means of a Letter of Hypothecation which provides for a banker’s charge on the hypothecated goods. If the possession is handed over to the lender, the charge is converted into pledge. Hypothecation is much riskier than other modes of finance. Hypothecation creates a floating charge on the movable assets of a going concern.

14. Contd… Hypothecation agreement should be in writing to avoid ambiguity. Registration of a hypothecation agreement is optional. However, for the company, registration is mandatory. Rights of the Bank: Right to inspect. Right to demand insurance of hypothecated security. Right to demand sufficient balance of security to cover the value of the contract. Right to lodge a stop-order to cease dealing in goods in case of default of loan.

15. What is the difference between a mortgage, hypothecation and pledge? In a mortgage there is transfer of interest in the immovable property till the re-payment of the loan. Hypothecation involves movable property, which is given as security for the loan. Possession of movable property remains with the debtor. In the case of pledge too, movable property is the security. Here, the creditor is given possession of the movable property.

16. Registration Requirement: All liens and charges, including hypothecation / agreements evidencing charge on assets of all limited companies are required to be registered with the Registrar of Joint Stock Companies “within 21 days from the creation of loan / charge.” In other words, within 21 days from the date of execution (signing) of the Letter of Hypothecation etc. In cases of sole-proprietorship, partnership and non- incorporated associations, charges are not required to be registered.

17. ADVANCES AGAINST IMMOVABLE PROPERTY The word land as a legal term comprises not only the surface of the soil, but everything above, including water, and everything below it. Immovable property includes land, buildings, benefits to raise out of land and things attached to the earth or permanently fastened to anything attached to the earth, hereditary allowances, rights to ways, lights, ferries and fisheries but does not include: ∙ Standing timber and growing crops or grass ∙ Fruit upon and juice in trees whether in existence or to grow in future; and ∙ Machinery embedded in or attached to the earth when dealt with apart from the land.

18. Land as Security for Advances: Advantage: Increase in the value of land Disadvantage:Mortgage of land is a complicated process and can be disputable. Difficult to assess correct value. Process: – Preliminary enquiries – Investigation of title (Legal Opinion and original title docs.) – Valuation of Property (Valuation Report) – Search for prior charge (Search Report or Non-encumbrance certificate from District Registrar) – Appropriate form of Charge Registered Mortgage (Mortgage Deed) Equitable Mortgage (Memorandum of Deposit of Title Deed) – Registration of Charge

19. MORTGAGE A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced. A mortgage transfers the interest in the immovable property and this transfer is actual. The following conditions must be fulfilled: Mortgage must be effected only on a written document duly signed by mortgagor and attested by two witnesses. This written document is called a Mortgage Deed. The document must be stamped and registered.

20. Some Terminologies: Right of Redemption: – This is the right exercised by the mortgagee. – The mortgage of property does not take away the ownership of the property from the mortgagor. – He only transfers an interest in the property. – Therefore, it is the right of the mortgagor to redeem the property by paying the mortgage money along with interest/markup due on it at any time even after the stipulated date for the payment. – However, this right can only be exercised if the court decree has not been declared.

21. Right to Foreclosure: It is a right exercised by the mortgagee. A suit to obtain a decree that a mortgagor shall be absolutely debarred of his right to redeem the mortgaged property. In this case, the court directs the mortgagor to pay the O/S within a specified time period; and if he fails to do so, he is absolutely debarred of his right to redeem the property.

22. Kinds of Mortgage According to Transfer of Property Act: 1. Simple or Legal Mortgage 2. Mortgage by Conditional Sale 3. Usufructuary Mortgage 4. English Mortgage 5. Mortgage by Deposit of Title Deed 6. Anomalous Mortgage

23. 1. Registered or Legal Mortgage It is also known as Simple Mortgage. It gives the mortgagee a right to cause the mortgaged property to be sold, and the proceeds of the sale to be applied in payment of obligation. The right of Foreclosure (right of possession) is not available to the mortgagee. Essentials of Registered Mortgage: – Legal Title of the Property to be transferred to the mortgagee but physical possession remains with the mortgagor. – The mortgagor binds himself to personally pay the mortgage money and get the property released. – In case mortgagor is unable to make payment, a decree from the court may be obtained for sale of property.

24. Contd…. – However, in Pakistan bank have power to sell the property without intervention of court provided that the Legal Mortgage is drafted in the form of an English Mortgage and three months’ NOTICE, as required under Law, is given to the customer. – It should be registered compulsorily. – Registered Mortgage is expensive and cumbersome because the Mortgage Deed warrants a heavy stamp duty and it requires prior production of Tax Clearance Certificate and non-encumbrance certificate. Compulsory registration with Registrar of Assurances, also known as Sub-Registrar. Registration with the Registrar of Companies in case mortgagor is a limited company.

25. 2. Mortgage by Conditional Sale According to Sec. 58 of Transfer of Property Act 1956: Where the mortgagor ostensibly sells the mortgaged property on condition that on default of payment of the loan, the sale shall become absolute or on condition that on such payment being made the sale shall become void, or shall transfer the property to the to the seller. – Registration is compulsory. – The right to foreclosure is available. – Bankers are usually reluctant to accept such a mortgage as they have to virtually purchase the property on the condition of re-selling it to the mortgagor when he repays the mortgage money. – Otherwise, the bank will take the cumbersome and risky step to sell the property.

26. 3. Usufructuary Mortgage Under the Usufructuary Mortgage: – Possession of the mortgaged property is delivered to the mortgagee. – The mortgagee is authorized to retain the possession until payment of the loan is made. – The mortgagee is also authorized to receive a part of or full rent and profits acquiring from the mortgaged property in lieu of markup or principal. – A mortgagee can only continue to enjoy the mortgaged property till redemption. – The mortgagee has no right to institute a suit for sale, nor the right of foreclosure is available to him. – Registration is necessary. Less practical and bankers usually avoid such mortgage.

27. 4. English Mortgage: Under English Mortgage: – The mortgagor binds himself to repay mortgage-money on a certain date. – The mortgage property is transferred absolutely to the mortgagee, and is followed by a delivery of possession. – The transfer is made on the condition that upon repayment of the mortgage-money, the mortgagee will re-transfer the property to the mortgagor. And if it is not done, the mortgagor can file a suit for redemption. – The mortgagee has the remedy of sale but does not have the right of foreclosure.

28. 5. Mortgage by Deposit of Title Deed: Also known as Equitable Mortgage. Under this mortgage: – There should be a debt for mortgage. – The debtor delivers to the creditor the documents of title of immovable property as security. – No Mortgage Deed is drafted. – Instead, the banker accepts the original Title Deed along with the “Memorandum of Deposit of Title Deed” and “Agreement to Create Registered Mortgage”, duly drafted on the stamped papers. – Mortgagee has no authority to foreclosure.

29. Contd… Recorded in the Record of Rights, also known as Revenue Records. Registration with the Registrar of Companies in case mortgagor is a limited company. Since equitable mortgage is time saving, less expensive and requires no registration or execution of mortgage-deed, it is quite common as collateral security. Title Deed of a property is a document by which a property is acquired.

30. 6. Anomalous Mortgage A mortgage which is not a registered mortgage, a mortgage by deposit of title deed, an English mortgage, or a mortgage by deposit of title deeds. Under this mortgage, the rights and liabilities of the parties shall be determined by their contract as evidenced in the mortgage deed.