SARFAESI Act,2002

( Chap VII)

PUTTU GURU PRASAD

INC GUNTUR
 Meaning and Objective
 The Securitization and Reconstruction of Financial assets and
Enforcement of Security Interest Act, 2002.
 One of most important steps for economic growth is the recovery of
debts.
 In India the Government of India has taken several steps to recover
bad debts of banks as well as the other financial institutions.
 One such step was the Recovery of Debts due to Banks and
Financial Institutions Act, 1993.
 The main objective was to speed up the recovery process in order
to reduce the continuance of non-performing assets (NPA’s).
 Recovery of Debt
 The recovery of bad debts was to be executed by establishment of
Debt Recovery Tribunals ( 29 Tribunals).
 In order to provide opportunity for an appeal from the decision of the
Tribunal the Government had established DRAT i.e. Debt Recovery
Appellant Tribunals (5 DRATs).
 The recovery performance was not encouraging and therefore the
Government wanted to enact an Act for controlling on the NPA’s
and on the creditor’s right of enforcement of security interest.
 Therefore the Parliament enacted the SARFAESI Act, 2002
 Objectives of the Act

 It has laid down the legal framework for securitization of the Assets.
 The transfer of NPA’s to asset reconstruction companies for the
disposal of the assets and to realize the proceeds.
 To enforce the security interest without the Court intervention.
 One of the provisions in the Act empowers the banks and financial
institutions to take over the immovable property that is hypothecated
or charged to enforce the recovering of debt by directly seizing the
property .
 Purpose
 The Act was made to help banks and other financial institutions in
recovering the NPA’s.
 It has been made with a combination of three concepts
 Securitization
 Asset Reconstruction and
 Enforcement of security interest without the
Court intervention
An amendment is brought to this Act for facilitating SARFAESI
Act,2002, Debt Recovery law, 1993 and Companies Act by passing The
Enforcement of Security Interest and Recovery of Debts Laws
( Amendment ) Act, 2004.
The Amendment was based on the ruling of the SC in Mardia Chemicals
Vs. ICICI Bank
 What are the benefits of the Act?

Securitization and Asset Reconstruction:

 The main objective is to sell the secured NPA loans to investors
through a special purpose vehicle called Securitization Company.
 Such Company will take over the financial assets and the company
which takes over will be treated as a secured creditor for all
purpose.
What will the Securitization Company Do?

 The Securitization Company will formulate a separate scheme for

each assets or set of assets.
 Then it will invite Qualified Institutional Buyers (QIB’s) for investing
in such a scheme.
 Then such company will issue security receipts to QIB’s.
 Such receipts will represent the individual interest in such financial
assets.
 The company will realize the financial assets and redeem the
investment by paying the proceeds to QIB’s under each scheme.
 Asset Reconstruction (AR)
 It involves securitization and enforcement of the security interest.
Such company has to register with the RBI.
 It will be considered to be a Public Financial Institution under the
Companies Act.
The Purpose of the AR is :
 Registration of Securitization or Reconstructions of Companies with
the RBI and to comply with the formalities for their registration and
 The effect of non -registration or rejection of such application of
such companies.
 Once the Asset Reconstruction Company (ARC) takes over the
assets, the company will be treated as a lender or secured creditor.
 ARC will acquire NPA loan from banks and Financial Institutions by
issuing debentures, bonds or by entering into special arrangements.
 What does ARC do?

 ARC formulates a scheme for each of financial assets taken over

and invites investment from QIB’s in such schemes.
 ARC issues security receipts to QIB’s.
 ARC realizes the financial assets and redeems the investment and
pays returns to QIB’s under each scheme.
 AR involves any one or more of the following measures:
 Rescheduling of payment of dues payable by the borrower
 Enforcement of security interest in accordance with the provisions
of the Act
 Settlement of dues payable by the borrower
 Taking possession of securities
 Eligibility Criteria for Securitization
Company/ AR Company
 To obtain certification of registration
 Owning funds ( Min Rs 2 Crores or Max 15% of the total financial
assets acquired or to be acquired)
 Reserve Bank to consider certain requirements for the company to
be registered
 Sponsor of the company ( any person) to hold not less than 10% of
the paid up equity capital of company or do not hold any control in
the interest of the company.
 To comply with the conditions as specified in the guidelines issued
by the RBI.
 The RBI is empowered to reject the application/ Cancellation of
Certification of Registration, and the applicant can file an Appeal to
the Central Government.
 Enforcement of Security Interest

 Security Interest means a right, title and an interest upon the

property created in favour of any secured creditor including a
mortgage, charge, hypothecation and assignment other than those
exempted.
 Property means any immovable, movable property any debt
(Secured or unsecured) or right to receive property. It may be an
existing, future or intangible assets including any licenses and
franchises or any other business or commercial right.
 Process of enforcement under the Act
 A secured creditor can initiate the enforcement once the secured
debt is classified as an NFA as per the guidelines issued by the
RBI
 Once the asset is classified as NFA:
 A notice will have to be given to the borrower, and
 After 60 days from the date of issue of notice, secured creditor can
take any of the actions like taking over the possession, or take over
the management,
 Transfer the property either by lease or sale or assignment.
 Demand for the payment.
 Exemptions from Enforcement

 Lien
 Pledge
 Security in Air Crafts/ Shipping Vessels
 Conditional Sale/ Hire Purchase/ Lease
 Unpaid Sellers Rights
 Security Interest in Agricultural Land
 Properties not liable for Attachment (Civil Procedure Code)
 Any Financial asset: not exceeding Rs 1.00 lakh or where the
amount due is less than 20% of the Principal amount and Interest.
 Other Provisions
 The Act operates as a non-obstante clause and allows the secured
creditor to enforce a mortgage also without the intervention of the
Court.
 The borrower is provided with an opportunity to raise any objections
to the enforcement rights of secured creditor within the days of grace
period of sixty days.
 Secured creditor to give reasons for enforcement.
 Judicial scrutiny is envisaged in the Act, so that the aggrieved
borrower can approach the DRT within 45 days from the date of
measures taken under the Act.
 There is also a provision of second Appeal.
 While enforcing the security, the officers have to obtain the valuation
of the immovable property and give a notice of 30 days before the
date of the proposed date.