SARFAESI ACT

Vironika Reddy-06
Varshitha Duggana-10
Tejaswini Reddy-23
 What is
SARFAESI - The Securitisation and Reconstruction of Financial
ACT? Assets and Enforcement of Securities Interest Act, 2002
(also known as the SARFAESI Act) is an Indian law. It
allows banks and other financial institution to auction
residential or commercial properties (of Defaulter) to
recover loans.
-SARFAESI Act 2002 was passed on 17th December 2002
in order to help Indian lenders recover their outstanding
dues as quickly as possible.
-It shall be deemed to have come into force on the 21st
day of June, 2002.

2
 HISTORY OF SARFAESI ACT
- Before SARFAESI Act , recovery of debts due
to Banks and financial institutions Act of
1993, was used for recovery of default loans .
- However there were several loopholes , that
were misused by the borrowers as well as the
lawyers .
- This led to the Govt to introspect the act and
to reform it. Hence another committee led by
Mr. Andhyarujina was appointed.
- The committee recommended various new
legislations to empower Banks and other
financial institutions to take possession of the
NPA s .

3
- The SARFAESI Act, 2002 gives powers of
"seize and desist" to banks.
- Banks can give a notice in writing to the
defaulting borrower requiring it to
discharge its liabilities within 60 days.
- If the borrower fails to comply with the
notice, the Bank may take recourse to one
or more of the following measures:
- Take possession of the security for the
loan.
- Sale or lease or assign the right over the
security.
- Manage the same or appoint any person to
manage the same.

4
- The SARFAESI Act also provides for the
establishment of Asset Reconstruction Companies
(ARCs) regulated by RBI to acquire assets from
banks and financial institutions.
- The Act provides for sale of financial assets by banks
and financial institutions to asset reconstruction
companies (ARCs). RBI has issued guidelines to
banks on the process to be followed for sales of
financial assets to ARCs.

5
 SARFAESI Act protects banks and financial assets from
losses. Let’s understand it’s features in detail:
FEATURES
1. Enforcement of security interests: The Act enforces
security interest by the secured creditors without any
intervention of the court.

2. Reconstruction of financial assets: SARFAESI Act

allows the banker and financial institutions to take proper
measures of management, sale, settlements, debt
reconstruction or take any possession under SBI guidelines
from time to time.

6
3.Securitization of financial assets and issue security
receipts: The main aim of the securitization act is to make
available the enforcement of security interest i.e. to take
possessions of the assets that were given security for the
loan.

4. Act as an agent of banks or financial institutions: The

SARFAESI Act 2002 acts as the manager of the secured
assets given by the financial institutions and ensures that the
dues are recovered timely.

7
 WHEN DO PROPERTIES FALL UNDER THIS ACT ?WHEN

- When a loan is defaulted and certain conditions are not met, banks
declare the loan as NPA and AUCTION it.

- The provisions of this Act are applicable only for NPA loans with
outstanding above Rs 1.00 lac.

- NPA loan accounts where the amount is less than 20% of the
principal and interest are not eligible to be dealt with under this Act.

8
 PRE CONDITIONS

The Act stipulates four conditions for enforcing the rights by a

creditor:
• The debt is secured
• The debt has been classified as an NPA by the banks
• The outstanding dues are one lakh and above and more than 20%
of the principal loan amount and interest there on.
• The security to be enforced is not an Agricultural land.

9
- The borrowers can at any time before
the sale is concluded, remit the dues
and avoid losing the security.
- In case any unhealthy/illegal act is done
by the Authorised Officer, he will be
liable for penal consequences.
- The borrowers will be entitled to get
compensation for such acts.
1. For redressing the grievances, the
borrowers can approach firstly the DRT
and thereafter the DRAT in appeal.
2. The limitation period is 45 days and 30
days respectively

10
 PROCEDURE OF SARFAESI ACT 2002:

Filing of e - Form CHG - 1 or e- Form CHG:

e - Form CHG - 1 or e- Form CHG - 9 is required to be filed for the
application of a (a) Registration of creation (b) Modification of charge
(except those which are related to debentures) including particulars of
modification of charge by the Asset Reconstruction Company in terms of
SARFAESI Act 2002.

2. Documents included:
Documents in this context are (a) Particulars of charge (b) Certificate of
Registration

11
3. Instruments created for the charge:
Instruments created for the charge include:
(a) Hypothecation deed
(b) Sanction letter
(c ) Copy of the instrument - creation or modification of the charge

4. In case, e-Form to be digitally signed:

In this scenario, either of the following is required:
(a) DSC of the Charge Holder
(b) Permanent Account Number (PAN) of the manager, CEO, CFO
(C)Membership Number of the Company Secretary
(d) Director Identification Number (DIN) of the Director

12
 The SARFAESI Act regulates the securitization and
reconstruction of the financial assets. The Act provides a
OBJECTIVES central database of security interests based on property rights
or matters connected therewith or incidental thereto.
- Specifies the legal framework related to the scanning activities
in India.
- Mentions the procedures for Non- performing assets transfer
to the asset reconstruction companies for their reconstruction
purpose.
-enables banks and other financial institutions to recover their
non-performing assets (NPAs) efficiently and in a timely
manner.

13
-Confers powers to the financial institutions in order
to take custody of the immovable property that is
hypothecated or charged for debt recovery.
-Imposes the security interest without any
intervention from the court.
-Allows financial institutions and banks to auction
properties, in case the borrower fails to repay their
loans. t

14
15
 METHODS OF RECOVERY

This act makes provisions for two main methods of recovery of the NPAs as follows:
- Securitisation: the process of issuing marketable securities, backed by a pool of
existing assets such as auto or home loans. After an asset is converted into a
marketable security, it is sold. A securitization company or reconstruction company
may raise funds from only the QIB (Qualified Institutional Buyers) by forming
schemes for acquiring financial assets.

- Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset
Reconstruction Companies in India. It can be done by either proper management of
the business of the borrower, or by taking over it or by selling a part or whole of the
business or by rescheduling of payment of debts payable by the borrower
enforcement of security interest in accordance with the provisions of this Act.
16
 SPECIAL CASES WHERE THIS ACT IS NOT APPLICABLE

- Any security interest for securing repayment of any

financial asset not exceeding one lakh rupees.
- Any security interest created in agricultural land.
- Any case in which the amount due is less than twenty
percent of the principal amount.
- The SARFAESI Act is not applicable to NBFCs, however it
is applicable to PFIs

17
 1.Changes in 2. Exemption from
SARFAESI 3. A time limit has
stamp:
definitions: been mentioned:
AMENDMENT Any document executed
The Clause (m) The District
ACT 2016: by the financial
of Section 2 has Magistrate or Chief
institutions or a bank in
Metropolitan
been amended by favor of asset
Magistrate shall pass
including Asset reconstruction company
suitable orders in
Reconstruction acquiring financial
order to take
Company and assets for securitization
possessions of the
or asset reconstruction
Debenture secured assets within
purpose shall be
Trustee. a period of 30 days
exempted from stamp
from the date of
duty.
application.

18
4.Integration of registry: ​5. Fund raising by ARCs
The Central Government from Non - institutional
investors: Right after the
provides a central
acquisition of any financial
database in respect of asset, ARCs may offer
security interest in security receipts to the
consultation with the qualified buyer or any
State Government or category of investors
other authorities including non - institutional
recording rights over any investors as specified of the
property. Reserve Bank of India.

19
- The high level of NPAs has led to
lower interest income and loan
loss provisioning requirements
which reduced the profitability of
the banks.
- The Act is intended to strengthen
Banks and FIs to recover NPAs
faster.
- The Act empowers banks and FIs
to seize charged assets without
Court’s intervention and sell them
off.

20
THANK YOU

21