My notes for promotion

SARFAESI Act, 2002

The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial
Assets and Enforcementof Security Interest Act, 2002. Banks utilie this act as an effecti!e tool
for "ad loans #$%A& reco!ery. It is 'ossi"lewhere non('erformin) assets are "acked "y securities
char)ed to the Bank "y way ofhy'othecation or mort)a)e or assi)nment.

Upon loan default, banks can seize the securities (except agricultural land)

without interventionof the court.

SARFAESI is eecti!e

only for secured loans

 "here bank can enforce theunderl#ingsecurit# egh#pothecation, pledge and $ortgages% In such
cases,

court intervention is not necessary

, unlessthe securit# is in!alid or fraudulent% &o"e!er, if the asset in 'uestion is an unsecured

asset, the bank"ould ha!e to $o!e the court to le ci!il case against the defaulters%

Contents

hide*

*ow it works+
The SARFAESI Act, 2002 )i!es 'owers of seie and desist- to "anks. Banks can )i!e a
notice in writin) to thedefaultin) "orrower reuirin) it to dischar)e itslia"ilities within /0 days. If
the "orrower fails to com'ly with the notice,the Bank may take recourse to one or more of
the followin) measures

 +ake possession of the securit# for the loan

Sale or lease or assign the right o!er the securit#

anage the sa$e or appoint an# person to $anage the sa$e

The SARFAESI Act also 'ro!ides for the esta"lishment of

Asset Reconstruction Companies (ARCs)

re)ulated "yRBI to acuire assets from "anks and financial institutions. The Act 'ro!ides for sale
of financial assets "y "anks andfinancial institutions to asset reconstruction com'anies #AR1s&.
RBI has issued )uidelines to "anks on the 'rocess to"e followed for sales of financial assets to
AR1s.

Back)round of the act

The 're!ious le)islation enacted for reco!ery of the default loans was

Recovery of Debts due to Banks andFinancial institutions Act ,199

. This act was 'assed after the recommendations of the

!arsim"am Committee #$

 were su"mitted to the )o!ernment. This act had created the forums such as

Debt Recovery %ribunals

 and

DebtRecovery Appellate %ribunals

 for e'editious ad3udication of dis'utes with re)ard to e!er increasin) non(reco!ereddues. *owe!
er, there were se!eral loo'holes in the act and these loo'holes were mis(used "y the "orrowers as
wellas the lawyers. This led to the )o!ernment intros'ect the act and this another committee under

&r' And"yaruina

 wasa''ointed to eamine "ankin) sector reforms and consideration to chan)es in the le)al
system .

 +his co$$ittee reco$$ended to enact a ne" legislation for the establish$ent of securitisationand

reconstruction co$panies and to e$po"er the banks and nancial institutions to take possessionof
the -on perfor$ing assets%

Thus, !ia the Sarfaesi act, for the first time, the secured creditors were em'owered to reco!er their
dues without theinter!ention of the court.

&o"e!er, as soon as the act "as passed, its i$ple$entation "as challenged in the court
and thisdela#ed its co$ing into force for . #ears% In the

Mardia Chemicals v. Union of India

, the Supre$e /ourtupheld the !alidit# of the SARFAESI act "as upheld%

Ri)hts of Borrowers

The a"o!e o"ser!ations make it clear that the SAFAESI act was a"le to 'ro!ide the effecti!e
measures to the securedcreditors to reco!er their lon) standin) dues from the $on 'erformin)
assets, yet the ri)hts of the "orrowers could not"e i)nored, and ha!e "een duly incor'orated in the
law.
 

 +he borro"ers can at an# ti$e before the sale is concluded, re$it the dues and a!oid loosing
thesecurit#%

In case an# unhealth#0illegal act is done b# the Authorised 12cer, he "ill be liable for
penalconse'uences%

 +he borro"ers "ill be entitled to get co$pensation for such acts%

For redressing the grie!ances, the borro"ers can approach rstl# the 3R+ and thereafter
the3RA+ in appeal% +he li$itation period is 45 da#s and 67 da#s respecti!el#

%re(conditions

The Act sti'ulates four conditions for enforcin) the ri)hts "y a creditor.

 +he debt is secured

 +he debt has been classied as an -8A b# the banks

 +he outstanding dues are one lakh and abo!e and $ore than .79 of the principal loan a$ountand
interest there on%

•
 +he securit# to be enforced is not an Agricultural land%

4ethods of Reco!ery

 Accordin) to this act, the re)istration and re)ulation ofsecuritiation com'anies or reconstruction

com'anies is done"y RBI. These com'anies are authoried to raise funds "y issuin) security
recei'ts to ualified institutional "uyers#5IBs&, em'owerin) "anks and Fls to take 'ossession of
securities )i!en for financial assistance and sell or lease thesame to take o!er mana)ement in the
e!ent of default.This act makes 'ro!isions for two main methods of reco!ery of the $%As as
follows

Securitisation:

 Securitisation is the process of issuing $arketable securities backed b# a pool of existing assets
such as auto or ho$e loans% After an asset is con!erted into a $arketable securit#, it issold% A
securitization co$pan# or reconstruction co$pan# $a# raise funds fro$ onl# the :I; (

QualiedInstitutional Buyers

) b# for$ing sche$es for ac'uiring nancial assets%

Asset Reconstruction:

 Enacting SARFAESI Act has gi!en birth to the Asset Reconstruction/o$panies in India% It can

be done b# either proper $anage$ent of the business of the borro"er, orb# taking o!er it or b#
selling a part or "hole of the business or b# rescheduling of pa#$ent of debtspa#able b# the
borro"er enforce$ent of securit# interest in accordance "ith the pro!isions of this Act%

Further, the act 'ro!ides

Exemption from the registration of security receipt 

. This means that when the securitiationcom'any or reconstruction com'any issues recei'ts, the
holder of the recei'ts is entitled to undi!ided interests in thefinancial assets and there is not need
of re)istration unless and otherwise it is com'ulsory under the Re)istration Act6708.*owe!er, the
re)istration of the security recei't is reuired in the followin) cases

 +here is a transfer of receipt

 +he securit# receipt is creating, declaring, assigning, li$iting, extinguishing an# right title orinter
est in a i$$o!able propert#%

$s &ortaed *ouse e+empted

The Sarfaesi act co!ers any asset, mo!a"le or immo!a"le, )i!en as security whether "y way of
mort)a)e,hy'othecation or creation of a security interest. There are some ece'tions in the
act such as 'ersonal "elon)in)s.*owe!er, only that 'ro'erty )i!en as security can "e 'roceeded under
the 'ro!isions of SARFAESI Act. If the 'ro'ertyof the "orrower is his own mort)a)ed residential
house, it is also $9T eem'ted from the Sarfaesi act.

%owers of :e"t Reco!ery Tri"unal

The de"t Reco!ery Tri"unals ha!e "een em'owered to entertain a''eals a)ainst the misuse of
'owers )i!en to "anks. Any 'erson a))rie!ed, "y any order made "y the :e"ts Reco!ery Tri"unal may
)o to the A''ellate Tri"unal withinthirty days from the date of recei't of the order of :e"ts Reco!ery
Tri"unal.
 

Role of 1hief 4etro'olitan 4a)istrate or :istrict 4a)istrate

The 1hief 4etro'olitan 4a)istrate or :istrict 4a)istrate has "een mandated to assist secured creditor
in takin)'ossession of secured asset. These officers will make sure that once the creditor has )i!en
him in writin) that all otherformalities of the act ha!e "een done, the 144 or :4 will take 'ossession
of such asset and documents relatin)thereto; and forward such assets and documents to the
secured creditor.

Now, here, you have to note that such an actof the CMM or DM 

 can not be called in question in any court

or before any authority.

Role of *i)h 1ourt

The act allows takin) the matter to hi)h courts only in some matters related to the im'lementation
of the act in <ammu= >ashmir. *owe!er, *i)h 1ourts ha!e "een entertainin) writ 'etitions under
article 22/ #%ower to issue writs& of theconstitution of India.

%ro'osed amendments to the Act

The )o!ernment had a''ro!ed "ill to amend the act. The Enforcement of Security Interest and
Reco!ery of :e"ts?aws #Amendment& Bill, 2066, amends two Acts @ Sarfaesi Act 2002, and
Reco!ery of :e"ts :ue to Banks andFinancial Institutions Act, 677 #:RT Act&. ia these
amendments

;anks and asset reconstruction co$panies (AR/s) "ill be allo"ed to con!ert an# part of the debtof
the defaulting co$pan# intoe'uit#% Such a con!ersion "ould i$pl# that lenders or AR/s "ould
tendto beco$e an e'uit# holder rather than being a creditor of the co$pan#%

•
 +he a$end$ents also allo"s banks tobid for an# i$$o!able propert# the# ha!e put outforauction th
e$sel!es, if the# do not recei!e an# bids during the auction% In such a scenario, banks"ill be able
to ad<ust the debt "ith the a$ount paid for this propert#% +his enables the bank to securethe asset
in part fulll$ent of the defaulted loan%

;anks can then sell this propert# to a ne" bidder at a later date to clear o the debt co$pletel#%

*owe!er lenders will "e a"le to carry this 'ro'erty on their "ooks only for se!en years, as 'er the
Bankin) Re)ulation Act, 67C7.

Short notes on SARFASAI act, 2002

SARFAESI is eecti!e

only for secured loans

 "here bank can enforce theunderl#ingsecurit# egh#pothecation, pledge and $ortgages

without intervention of the court 

 +he SARFAESI Act, .77. gi!es po"ers of =seize and desist> to banks% ;anks can gi!e a notice in
"ritingto the defaulting borro"er re'uiring it to discharge itsliabilities "ithin ?7 da#s

Borroer fails to comply ith the notice, the Ban! may ta!e recourse to one or more of
thefolloin" measures:

 +ake possession of the securit# for the loan

Sale or lease or assign the right o!er the securit#

anage the sa$e or appoint an# person to $anage the sa$e

#he Act stipulates four conditions for enforcin" the ri"hts $y a creditor%

 +he debt is secured

 +he debt has been classied as an -8A b# the banks

 +he outstanding dues are one lakh and abo!e and $ore than .79 of the principal loan a$ountand
interest there on%
 

 +he securit# to be enforced is not an Agricultural land%

#his act ma!es provisions for to main methods of recovery of the &'As as follos:

Securitisation:

 Securitisation is the process of issuing $arketable securities backed b# a pool of existing assets
such as auto or ho$e loans% After an asset is con!erted into a $arketable securit#, it issold% A
securitization co$pan# or reconstruction co$pan# $a# raise funds fro$ onl# the :I; (

QualiedInstitutional Buyers

) b# for$ing sche$es for ac'uiring nancial assets%

Asset Reconstruction:

 Enacting SARFAESI Act has gi!en birth to the Asset Reconstruction/o$panies in India% It can

be done b# either proper $anage$ent of the business of the borro"er, orb# taking o!er it or b#
selling a part or "hole of the business or b# rescheduling of pa#$ent of debtspa#able b# the
borro"er enforce$ent of securit# interest in accordance "ith the pro!isions of this Act%