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(c) They should verify the loan applications within a reasonable period of time. If additional
details/ documents are required, they should intimate the borrowers immediately.
(d) In the case of small borrowers seeking loans up to Rs 2 lakh, the lenders should convey in
writing, the main reasons/reasons which, in the opinion ofthebank after due consideration, have
led to rejection of the loan applications within the stipulated time.
Loan Appraisal and Terms/Conditions
(a) Lenders should ensure that there is proper assessment of credit application by borrowers.
They should not use margin and security stipulation as a substitute for due diligence on credit
worthiness of the borrower.
(b) The lender should convey to the borrower the credit limit along with the terms and conditions
thereof and keep the borrower's acceptance of these terms and conditions given with his full
knowledge on record.
(c) Terms and conditions and other caveats governing credit facilities given by banks /arrived at
after negotiation by lending institution and the borrower should be reduced in writing and dulycertified by the authorized official. A copy of the loan agreement with a copy each of the
enclosures quoted in the loan agreement should be furnished to theborrower.
(d) As far as possible, the loan agreement should clearly stipulate credit facilities that are solely
at the direction of lenders. These may include approval or disallowance of facilities, such as,
drawings beyond the sanctioned limits, honoring cheques issued for the purpose other than
specifically agreed to in the credit sanction, and disallowing drawing on a borrowal account of
non-compliance with the terms ofsanction. It may also be specifically stated that the lender does
not have an obligation to meet further requirements of the borrowers on account of growth in
business and so on without proper review of credit limits.
(e) In the case of lending under consortium arrangement, the participating lenders should evolveprocedures to complete appraisal of proposals in the time bound manner to the extent feasible,
and communicate their decisions on financing or otherwise within a reasonable time.
Disbursement of Loans Including Changes in Terms and Conditions
Lenders should ensure timely disbursement of loans sanctioned in conformity with the terms and
conditions governing such sanction. They should give notice of any change in the terms and
conditions including interest rates, service charges and so on. They should also ensure that
changes in interest rates and charges are affected only prospectively.
Post-disbursement Supervision
(a) Post-disbursement supervision by lenders, particularly in respect of loans up to Rs 2 lakh,
should be constructive with a view to taking care of any 'lender-related' genuine difficulty that
the borrower may face.
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(b) Before taking a decision to recall/accelerate payment or performance under the agreement or
seeking additional securities, lenders should give notice to borrowers, as specified in the loan
agreement or a reasonable period, if no such condition exists in the loan agreement.
(c) Lenders should release all securities on receiving payment of loan or realization of loan
subject to any legitimate right or lien for any other claim lenders may have against borrowers. If
such right of set off is to be exercised, borrowers should be given notice about the same with full
particulars about the remaining claims and the documents under which lenders are entitled to
retain the securities till the relevant claim is settled/paid.
General
(a) Lenders should restrain from interference in the affairs of the borrowers except for what is
provided in the terms and conditions of the loan sanction documents (unless new information,
not earlier disclosed by the borrower, has come to the notice of the lender).
(b) They must not discriminate on grounds of sex, caste and religion in the matter of lending.
However, this does not preclude lenders from participating in credit-linked schemes framed forweaker sections of the society.
(c) In the matter of recovery of loans, the lenders should not resort to under harassment, that is,
persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, and
soon.
(d) In case of receipt of request for transfer of borrowal account, either from the borrower or
from a bank, which proposes to take-over the account, the consent or otherwise, that is, objection
of the lender, if any, should be conveyed within 21 days from the date of receipt of request.
The Fair Practices Code based on the guidelines outlined above should be put in place in respect
of all lending prospectively, but not later than August 1, 2003. Banks would have the freedom of
drafting the Fair Practices Code, enhancing the scope of the guidelines but in no way sacrificingthe spirit underlying the above guidelines. For this purpose, the Boards of Directors ofbanks
should lay down a clear policy.
The Board of Directors should also lay down the appropriate grievance redressal mechanism
within the organization to resolve disputes arising in this regard. Such a mechanism should
ensure that all disputes arising out of the decisions of lending institutions' functionaries are heard
and disposed of at least at the next higher level. They should also provide forperiodical review
of the compliance of the Fair Practices Code and the functioning of the grievances redressal
mechanism at various levels of controlling offices. A consolidated report of such reviews may be
submitted to the Board of Directors at regular intervals, as may be prescribed by it.
Page no. 12.59-12.64
on behalf of the bank/FI, in whose favoursecurity interest is created for due repayment by any
borrower of any financial assistance. Security interestis the right/title/ interest of any kind upon
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property created in favour of any secured creditor, and includes any
mortgage/charge/hypothecation/assignment otherthan the following:
(1) a lien on any goods/money/security given by, or under the, Indian Contract Act/Sales of
Goods Act/any otherlaw for the time being in force,
(2) a pledge of movables in terms of Section 172 of the Indian Contract Act,
(3) creation of any security interest in any aircraft under the Aircraft Act,
(4) creation of security interest in any vessel underthe Merchant Shipping Act,
(5) any conditional sale/hire-purchase/lease/any othercontract in which no security interest has
been created,
(6) any rights ofthe unpaid sellerunder the Sales of Goods Act,
(7) any properties not liable to attachment underthe Code of Civil Procedure,
(8) any security interest for securing repayment of any financial asset not exceeding Rs one lakh,
(9) any security interest created in agricultural land and
(10) any case in which the amount due is less than 20 per cent of the principal amount and
interest thereon.
Asset reconstruction refers to the acquisition by a SCR of any right/interest of any bank/Fl in
any financial assistance (i.e., loans/advance granted or debentures/bonds subscribed or
guarantees given or letters of credit established or any other credit facility extended by a
bank/FI) for the purpose of its realization.
The application for registration to the RBI by any SRC should be in the specified form/manner.
Before granting registration, the RBI would satisfy itself by inspection of records/books of the
applicant SRC or otherwise that the following conditions are satisfied:
(a) the SRC has not made any loss in any of the preceding three years,
(b) it has made adequate arrangements for realisation of financial assets acquired forsecuritisation/reconstruction and would be able to pay periodical returns and redeem on
respective due date on the investments made in the company by the QlBs/other persons,
(c) its directors have adequate professional experience in matters related to finance, securitisation
and reconstruction,
(d) not more half of its Directors are nominees of any sponsor or associated in any manner with
the sponsor (i.e. any person holding a minimum of I 0percent of the paid-up equity capital of
SRC) or any of its subsidiaries,
(e) any of its Directors has notbeen convicted of any offence involving moral turpitude,
(f) a sponsoris not a holding company or does not otherwise hold any controlling interest, in the
SRC, and
(g) it has complied with/is in aposition to comply with the prudential norms specifiedby the
RBI. While granting the certificate of registration, RBI may impose such conditions as it may
deem fit. Prior approval of the RBI would be necessary for (i) any substantial change in the
management (i.e. the change in management by way transfer of shares or amalgamation or
transfer of its business) or (ii) change of location of the registered office or (iii) change in the
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name ofthe S RC. The decision of the RBI that the change in management in substantial ornot
wouldbe final.
Cancellation of Registration
The registration of a SRC can be cancelled by the RBI if it
(a) ceases to carry on business of a SRC,
(b) ceases to receive/hold any investment from a QIB,
(c) has failed to comply with any condition subject to which the certificate of registration had
been granted,
(d) at any time fails to fulfill any of the conditions which were taken into account while
considering application for registration,
(e) fails to (i) comply with any directions issued by the RBI under the provisions of the
SRFAESI Act, (ii) maintain accounts in accordance with any law/directions/order issued by the
RBI under the provisions of the SRF AESI Act, (iii) submit/offer for inspection its books of
accounts/otherrelevant documents when demandedby the RBI and (iv) obtain prior approval ofthe RBI for substantial change in its management/change of location of its registered
office/change in its name. Any SRC aggrieved by the order of rejection of application for
registration or cancellation of registration may prefer an appeal within 30 days to the
Government.
Acquisition ofRights/Interest in Financial Assets
Any SRC may acquire financial assets of any bank/FI [i.e. a public financial institution (PFI),
any institution specified by Government under the provisions of the Recovery of Debts Due to
Banks and Financial Institutions Act, the International Finance Corporation, any other financialinstitution or non-banking finance company (NBFC)which the Government may specify as a
financial institution] (a) by issuing a debenture/bond/any other security in the nature of a bond
for consideration and on terms and conditions mutually agreed upon and (b) by entering into an
agreement with them for the transfer of such financial assets on terms and conditions mutually
agreed upon. If the bank/Fl is a lender in relation to any financial asset so acquired by it, the SRC
would be deemed to be the lender and all rights would vest in the SRC in relation to such
financial assets. All contracts, deeds, bonds, agreements, powers of attorneys, 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 relevant financial asset, and which are
subsisting or having effect immediately before its acquisition would be of as full force and effectagainst/in favour of the SRC as may be enforced/acted upon as fully and effectively as if the
SRC bad been a parity in place of the bank/Floras if they had been issued in favour of the SRC.
Similarly, if on the date of the acquisition of the financial asset, any suit, appeal or other
proceedings of whatever nature relating to the relevant financial asset is pending by or against
the bank/FI, the same would not abate or be discontinued or be in any way prejudicially affected
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by reason of its acquisition by the SRC. The suit/appeal/other proceedings may be continued,
prosecuted and enforced by/against the SRC.
Notice to Obligor and Discharge of his Obligations
An obligormeans a person liable to the originator(i.e. the owner of the financial asset acquired
by the SRC) under a contract or otherwise to pay financial asset/discharge any obligation in
respect of a financial asset whether existing, future, conditional or contingent and includes the
borrower. A borrower means any person who has (i) been granted financial assistance by a
bank/Fl or (ii) given any guarantee/created any mortgage or pledge as security for the financial
assistance from the bank/Fl. It includes a person who becomes borrower of a SRC consequent
upon acquisition by it of any rights/interests of any bank/FI in relation to such financial
assistance. The bank/Fl may give a notice of acquisition of financial assets by any SRC to (i) the
concerned obligor/any other concerned person, (ii) the concerned registering authority including
Registrar of Companies in whose jurisdiction the mortgage/charge/hypothecation/ assignment or
other interest created on the financial assets has been registered. On receipt of the notice, theobligor should make payment to the SRC and such payment in discharge of any obligation in
relation to the specified financial assets would be a full discharge from all liability in respect of
such payment. Where no notice for acquisition of financial asset is given by a bank/FI,
money/other properties [i.e. immovable property; movable property; any unsecured or secured
debt (i.e. secured by any security interest)/any right to receive payment of money; existing or
future receivables; and intangible assets such as know-how, patent, copy right, trade mark,
licence, franchise or any other business/commercial right of similar nature)] subsequently
received by them, should constitute money/properties held in trust for the benefit, and on behalf,
of the SRC and immediately made over/delivered to the SRC or its duly authorised agent.
Issue of Security By Raising of Receipts/Funds
After acquisition of financial assets, a SCR may offer security receipts to the QIBs(other than by
offer to public) for subscription in accordance with the provisions of the Companies Act, SEBI
Act, and Securities Contracts Regulation) Act. It may raise funds from them by formulating
schemes for acquiring financial assets. It should keep/maintain separate/distinct accounts for
each scheme for every financial asset acquired out of investments madeby a QIB, and ensure
that realizations of the financial assets are held and applied towards redemption ofinvestments
and payment of returns assured on such investments under the relevant scheme(s). In case of
non-realisation offinancial assets, the QIBs holding at least 75 per cent of the total value of the
security receipts issued would be entitled to call a meeting of all the QJB to pass any resolution
which wouldbe binding on the SRC.
Registration of Security Receipt
Any issue or transfer of security receipt issued by a SRC which do not create, declare, assign,
limit orextinguish any right/title/interest to/in immovableproperty except to the extent it entitles
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the holders of security receipts to an undivided interest afforded by a registered instrument,
would not required compulsory registration.
Measures for Assets Reconstruction
Any SRC may for the purposes of asset reconstruction, having regard to the guidelines framedby
the RBI in this behalf,provide for any one or more of the following measures, namely:
(a) the proper management of the business of the borrower, by change in, or takeover of, the
management of its business;
(b) the sale orlease of a part or whole ofthebusiness ofthe borrower;
(c) rescheduling ofpayment ofdebts payable by theborrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower; and
(t) taking possession of secured assets in accordance with theprovisions ofthis Act.
Other Functions of SRCAny SRC may (a) act as an agent for any bank/FI for the purpose of recovering theirdues from
theborroweronpayment ofsuch fees or charges as may be mutually agreed upon between the
parties; (b) act as a manager [i.e. any person to manage the secured assets (i.e. theproperty on
which security interest is created) the possession of which has been taken over by the secured
creditor (i.e. anybank/FI or any consortium group of banks/FIs and includes debenture trustees
appointed by a bank/FI, a SRC, any other trustee holding securities on behalf of a bank/FI, in
whose favour security interest is created for due repayment by any borrower of any financial
assistance)] on such fee as may be mutually agreed upon between the parties; and (c) act as
receiver if appointed by any court or tribunal. However, it cannot act as a manager ifacting as
such gives rise to any pecuniary liability.Any SRC (other than a subsidiary) which has beengranted a certificate of registration can commence or carry on, with the prior approval of the
RBI, anybusiness other than that of securitisation or asset reconstruction.
Resolution of Disputes Any dispute relating to securitisation or reconstruction or non-payment
of any amount due including interest arising amongst any of the parties, namely, thebank/Fl/a
SRCA would be settled by conciliation or arbitration as provided in the Arbitration and
Conciliation Act, 1996, as if the parties to the dispute have consented in writing for
determination of such dispute by conciliation or arbitration and the provisions ofthat Act would
apply accordingly.
Power of RBI To Determine Policy and Issue Directions
If satisfied that in the public interest or to regulate financial system of the country to its
advantage or to prevent the affairs of any SRC from being conducted in a manner determined to
the interest ofinvestors or in any manner prejudicial to the interest ofthe SRC, it is necessary or
expedient so to do, the RBI may determine thepolicy and give directions to all orany SRC in
matters relating to income recognition, accounting standards, making provisions for bad and
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doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment
of funds and the SRC would be bound to follow the policy and the directions issued The RBI
may issue directions in particular as to (a) the type of financial assets of a bank/FI which can be
acquired and procedure for acquisition of such assets and valuation thereof; and (b) the aggregate
value of financial assets which may be acquired by any SRC.
Enforcement of Security Interest
Any security interest created in favour of any secured creditor would be enforced, without the
intervention of the courts/tribunal, by the concerned creditor according to the provisions
discussed below.
If a borrower who is under a liability to a secured creditor under any security agreement (i.e. an
agreement/instrument/any other document or arrangement under which security interest is
created in favour of the secured creditor including the creation ofmortgage by deposit of title
deeds with the secured creditor), defaults in repayment of his secured debt/any installment and
his account is consequently classified as NPA, the secured creditor may require by a writtennotice giving details of the amount payable and the secured assets intended tobe enforced in the
event of non-payment to discharge in full his liabilities within 60 days from the date of the
notice. After receipt of notice, the borrowershould not transfer by way of sale/lease or otherwise
(other than in the ordinary course of business) any of these secured assets without prior written
consent of the secured creditor. Defaultmeans non-payment of any principal debt/interest/any
other amount payable by the borrower to any secured creditor, consequent upon which the
account of the borrower is classified as NPA (i.e. an asset/account of aborrower classifiedby a
bank/Fr as sub-standard/doubtful/loss asset in accordance with the RBI directions/guidelines
relating to asset classification) in the books of the secured creditor in accordance with RBI
directions/guidelines. In case of failure of the borrower, the secured creditor may take recourse toone/more of the following measures to recoverhis debt:
Take possession/take over management of the secured assets of the borrower including the
right to transfer by way of lease/assignment/sale for realizing the assets;
Appointment a managerto manage the concerned secured assets; and
Require at any time by written notice any person, who has acquired any of the secured assets
from the borrower and from whom any money is due/may become due to the borrower, to pay
the secured creditor so much money as is sufficient to pay the secured debt. Any payment made
by such a person would give him a valid discharge as if the payment is made to the borrower.
All rights in, or in relation to, the secured asset would be vested in the transferee as if the transfer
had been made by the owner (borrower) of the secured asset. All costs/charges/exposures
properly incurredby the secured creditor, or expenses incidental there to, would be recoverable
from the borrower. The money received by the secured creditor would be held in trust to be
applied, firstly, in payment of such costs/charges/expenses and, secondly, in discharge of the
creditors' dues. Thebalance would be paid to the person entitled thereto according to his rights
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and interests. If the total dues of the secured creditor including costs/charges/expenses incurred
are paid before the date for sale/transfer the secured assets would not be sold/ transferred by him.
In case of financing of a financial asset by more than one secured creditor/joint financing, a
secured creditor would be entitled to exercise any/all rights conferred on him on failure of the
borrower to discharge in full his liabilities only with the agreement of the secured creditors
representing at least 75 per cent of the amount outstanding, that is, principal, interest, any other
dues payable by the borrower in respect of the secured asset as per the books of accounts of the
secured creditor, as on a record date (i.e. the date agreed upon by the secured creditors
representing not less than 75 per cent of the amount outstanding on that date). However, (i) in
case of a company in liquidation, the realisation from the sale of secured assets would be
distributed according to the provisions of Section 529-A ofthe Companies Act; and (ii) in case
of winding up of a company, the secured creditor who opts to realise his security instead of
relinquishing it andproving his debt underSection 529( 1) of the Companies Act may retain the
sale proceeds of his secured assets of the depositing workmen's dues with the liquidatorunder
Section 529-A of the Companies Act, Where dues of a secured creditor are not fully satisfiedwith the sale proceeds of the secured assets, he may file an application to the Debt Recovery
Tribunals or a competent court for recovery of the balance from the borrower. The secured
creditors would be entitled to proceed against the guarantors/sell the pledged assets without first
taking any of the measures specified above, namely, (i) taking possession ofsecured assets,(ii)
taking over of management of the secured assets, (iii) appointment of a managerto manage the
secured assets and (iv) requiring any person owing money to the borrower to pay it to the
secured creditor. For taking possession/control ofany secured asset, a secured creditor can take
the help of Chief Metropolitan/District Magistrate who would take steps or use such force as
may be necessary for the purpose. Their act cannot be questioned in any court or before any
authority.
Manner and Effect of Take Over of Management
On taking overofthe management ofaborrower, the secured creditor by publishing a notice in
an English newspaperand a newspaper in an Indian language in circulation in aplace where the
principal office of the borrower is situated, may appoint director(s) in case of compan:)'-
borrowers and administrator(s) in other cases. All persons holding office as directors of the
company/holding any office and having powerof superintendence, directions and control of the
business of the borrower would be deemed to have vacated their respective offices. Any contract
of management between the borrower and any director/manager would be deemed to be
terminated. All the property and effects ofthe business of the borrowerwouldbe deemed to be in
the custody of the director(s)/administrator(s) appointed by the secured creditors from the date of
the publication of the notice. They alone wouldbe entitled to exercise all powers derived from
the memorandum or articles ofassociation of the company of the borrower or from any other
source.
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After the takeover of the management of the business of the borrower-company by the secured
creditor, shareholders/any other person cannot lawfully appoint/nominate a director, unless
approved by the secured creditor, any shareholders resolution cannot be implemented and
proceedings for its winding up/appointment of a receiver would lie in any court only with his
consent. On realistion of his debt in full, the secured creditor would restore the management of
the business of the borrower to him. However, no managing director/director/ manager/any
person in charge of management of the business of the borrower would be entitled to any
compensation for the loss of office/premature termination ofany contract of management entered
into by him with the borrower. But they can recoverfrom the business ofthe borrowermoneys
recoverable otherwise than by way of compensation.
Right to Appeal
Any person, including a borrower, aggrieved by any of the measures taken by the secured
creditor/his authorised officer to enforce his security interest, when aborrower fails to discharge
his liability in full, may prefer an appeal to the DRT (Debt Recovery Tribunal) within 45 daysfrom the date on which such measure had been taken. Such an appeal would be entertained only
if75 percent of the amount claimed in the notice is deposited with the DRT. However, for
reasons to be recorded in writing, the DRT may waive/reduce the amount of the deposit. Any
person aggrieved by an ordermade by the DRT may prefer an appeal to the Appellate Tribunal
(AT). If the DRT/AT holds thepossession of secured assets by the secured creditor as wrongful,
it would direct him to return them to the concerned borrower. The borrower would also be
entitled to payment of such cash compensation and cost as may be determined by the DRT/AT.
Central Registry
The provisions relating to central registry are discussed below.The Government may set up a Central Registry for registration of transaction of securitisation
and reconstruction of financial assets and creation of security interest. It may also appoint a
Central Registrar for registration of transactions relating to securitisation, reconstruction of
financial assets and security interest created over properties. A Central Register would be kept at
the head office of the Central Registry for entering the particulars of transactions relating to (1)
securitisation of financial assets, (2) their reconstruction and (3) creation of security interest. The
particulars of all such transactions should be filed with the Central Registrar in the specified
manner together with the prescribed fee within 30 days after the date of transaction by the
SRC/secured creditor. However, on payment of additional fee not exceeding 10 times of the fee,
an extension of 30 days may be allowed for filing the particulars.Whenever the
terms/conditions/extent/operation of any security interest registered are modified, the
SRC/secured creditor would be duty bound to send the particulars of the modifications to the
Central Registrar. They would also have to give intimation to the Central Registrar of the
payment or satisfaction in full of any security interest within 30 days on the basis of which a
memorandum of satisfaction would be entered into the Central Register.
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Offences and Penalties
Any default made (a) in filing the particulars of every transaction of securitisation/ asset
reconstruction/security interest created by a SRC/secured creditor, (b) in sending theparticulars
of the modifications of security interest registered and (c) in giving intimation of
payment/satisfaction in full, would be punishable with fine up to Rs 5,000 for every day of
default. Thepenalty for non-compliance of the RBI directionsby any SRC wouldbe fine up to
Rs 5 lakh, with an additional fine of Rs 10,000 for every day during which the default continues.
Offences involving contravention attempts to contravention/abetment of contravention of the
provisions of the SRF AFSI Act rules would be punishable with imprisonment for a term up to
one year or with fine or with both. Where an offence is committed by a company (i.e. a body
corporate including a firm/other association of individuals), every person who, when the offence
was committed, was in charge of, and was responsible to the company for the conduct of its
business as well as the company would be deemed to be guilty of the offences and liable to
punishment. However, if he proves that the offence was committed without his knowledge/hehad exercised due diligence to prevent the commission of such offence, such a person would not
be liable. Where it is proved that the offence was committed by a company with the
consent/convenience of, oris attributable to, any neglect on the part ofany director/partner in a
firm, manager ,secretary, other officer, he would be deemed to be guilty ofthe offence. A civil
court would neither have jurisdiction to entertain any suit/proceedings in respect ofany matter,
which a DRT/ AT is empowered to determine nor grant any injunctions against any action
taken/to be taken in pursuance of any power conferred by the SRFAESI Act or the Recovery of
the Debts Due to Banks and Financial Institutions Act.
Powers of Government to Make RulesThe Government may make rules for carrying out the provisions of the SRF AFSI Act, in
particulars to provide for the following matters:
The form and manner in which an application may be filed to the DRTs for recovery ofbalance amount,
The manner in which the rights of a secured creditormay be exercisedby his officer(s), The safeguards subject to which records may be kept in the Central Register, The manner in which the particulars ofevery transaction ofsecuritisation would be filed
with the Central Registrar and fee for filing such transaction,
The fee for inspecting particulars oftransactions entered in the Central Register, The fee for inspecting the Central Register maintained in electronic form, Any other matter requiring to be prescribed as per rules.