THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002

(SARFAESI ACT, 2002)

AN OVERVIEW OF THE ACT

BY
ANKIT GOEL
B. Com (H), LLB, FCA, DISA (ICAI), Registered Valuer (SFA), ID (IICA)
 Chapters
• Chapter 1 : Preliminary (Sec. 1-2)
• Chapter 2 : Regulation of Securitisation and
Reconstruction of Financial Assets of Banks
and Financial Institutions (Sec. 3 – 12A)
• Chapter 3 : Enforcement of Security
Interest (Sec. 13 – 19)
• Chapter 4 : Central Registry (Sec. 20 – 26)
• Chapter 5 : Offences and Penalties (Sec. 27
– 30)
• Chapter 6 : Miscellaneous (Sec. 31 – 42)
 THREE PARTS
• SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS
acquisition of a debt or financial asset by issue of security receipts
representing undivided interest in such financial assets or otherwise by any
securitisation or reconstruction company

By issue of debenture or bonds or any other security or cash or by entering

into an agreement to pay in future

The securitisation or reconstruction company will step in to the shoe of

lenders

Measures: Proper management; take over; change in management; sale or

lease; rescheduling; settlement; taking possession, etc. Section 3 to 12 deal
with registration, regulation and operation of reconstruction companies

• ENFORCEMENT OF SECURITY INTEREST

• CENTRAL REGISTRY Central Registry of Securitisation Asset Reconstruction

and Security Interest of India (CERSAI)
 ENFORCEMENT OF SECURITY INTEREST
• Sec 2(o): Non-performing asset: asset or account of a borrower,
which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset

• Sec 2(zc): Secured Asset: property on which security interest is

created
– Property (2(t)): immovable & movable property, Any Debt or
receivables, Intangible Assets
– Security Interest (2(zf)): right, title and interest of any kind
whatsoever upon property, created in favour of any secured creditor
and includes any mortgage, charge, hypothecation, assignment other
than those specified in section 31

• Sec 2(zd): Secured Creditor:

– Bank (Sec 2(c))
• Banking Company, SBI, SBI Subsidiary, Co-operative Banks,
Regional Rural Banks
– Financial Institution (Sec 2(m))
• Public Financial Institution as per Companies Act (52), RDDBFI
Act, IFC, 41 FIs notified on 18-12-15
– Consortium or group of banks or FI
– Debenture Trustees / Securitisation or Reconstruction Company
 ENFORCEMENT OF SECURITY INTEREST
• Sec 13(1): Security interest created in any secured asset in favour of a
secured creditor may be enforced, without the intervention of
the court

• Sec 13(2): Borrower under a liability to secured creditor under a security

agreement- makes a default-classified as non-performing asset
– notice to borrower to discharge full liabilities with in 60 days
from the date of notice- otherwise rights specified in 13(4)
would be exercised

• Sec 13(3): Notice to mention details – amount payable – secured assets

intended to be enforced

• Sec 13(3A) : If on receipts of this notice, borrower makes any objection/

representations, Bank SHALL consider such objection and is mandatory to
reply within 15 Days (w.e.f. 15-1-13) of receipt of such objection. This reply
does not give the borrower any right to APPEAL in DRT under section 17

• Sec 13(4): Borrower fails to pay in full after notice – creditor may:
» Take possession; right to transfer, lease, sale & realise
» Take over the management; right to transfer, lease, sale & realise
» Appoint manager after possession
» Notice to a person, who have acquired any secured asset from the
borrower or money is due, to make payment to the creditor
 ENFORCEMENT OF SECURITY INTEREST
• Sec 13(5): payment made to creditor by any person as per sec 13(4)(d)
is a full discharge of his liability
• Sec 13(5A): If any sale is postponed due to want of bid as specified
Reserve Price, any officer (if authorized by Bank) of the Bank can bid for
this immovable property (on behalf of Bank) at any subsequent Sale.
• Sec 13(5B): If banker becomes purchaser, the purchase price shall be
adjusted towards amount of the claim of the Bank
• Sec 13(6): Any transfer of secured asset after taking possession would be
valid as if made by the owner
• Sec 13(7): All cost, charges, expenses etc to be recovered from
borrower. Recoveries first to apply to cost, then to dues and balance to
be returned to person entitled in accordance with his rights and interests
• Sec 13(8): if dues paid in full before the date fixed for sale or transfer,
asset shall not be sold.
• Sec 13(9): in case of more than one bank, 60% (earlier it was 75%) of
value of outstanding can take action and action shall be binding on all
• Sec 13(10): If dues are not recovered in full out of sale proceeds of
assets, balance can be recovered thru DRTs
 ENFORCEMENT OF SECURITY INTEREST
• Sec 13(11): bank can proceed against guarantors or sell the
pledged assets without taking measures under Sec 13(4)
• Sec 13(12): bank can take action thru one or more officers
authorised
• Sec 13(13): Borrower not to sell, lease or otherwise transfer any
asset after the 60 days notice
• Sec 14(1): Chief Metropolitan Magistrate or District
Magistrate to assist bank in taking possession of the asset:
• Bank will request in writing to CMM or DM to take possession of asset
• Application to be accompanied by affidavit. To include Financial Assistance
granted, Total Claim of bank, creation of security interest, limitation period,
details of properties, Borrower has committed default and NPA, 60 days,
Objection or representation, no repayment.
• DM shall take possession of such assets
• DM shall forward such asset to the bank
• Sec 14(1A): DM may authorize any officer subordinate to him
• Sec 14(2): DM may use force, if necessary
• Sec 14(3): DM action can not be questioned in any court
 ENFORCEMENT OF SECURITY INTEREST

• Sec 15: Manner and effect of takeover of management: -

– After the management is taken over, bank can appoint directors in
the company after publishing notice in newspaper

– Bank can appoint administrator of the business in case of non-

corporate borrowers

– All existing directors shall be deemed to have vacated the office

before the publication of notice

– The newly appointed directors shall have all normal business powers

– No powers of the shareholders, no resolution to be made effective

– After realisation of the dues, the management shall be handed back

to the borrower

• Sec 16 : No compensation to the directors or managers or Managing Directors

on account of loss of office or as per any existing agreement. Only right to recover
existing dues
 ENFORCEMENT OF SECURITY INTEREST

• Sec 17: Right to Appeal:

» Borrower or any person effected can prefer an appeal
before DRT with in 45 days of the action taken by the
bank

• Sec 18: Appeal to Appellate Tribunal

» Right to appeal with in 30 days of DRT order

» AT shall not entertain the appeal unless 50% of amount
claimed is deposited by the borrower
» AT can reduce the deposit by order to upto 25%

• Sec 17A & 18B: State of J & K : Appeal to District Judge & HC
• Section 18C : Right to lodge a caveat
• Sec 19: Borrower can claim compensation, by way of a petition to DRT
or Appellate Tribunal in case of any wrong action of the bank for any
losses.
 MISC. PROVISIONS
• Sec 31: SARFAESI Act not applicable in following cases:
– Contracts under Indian Contract Act, Sales of Goods Act,
Conditional Sales such as Hire Purchase and Leasing
Transactions, Aircraft, Ship
– In case loan amount does not exceed Rs. 1.00 Lac.
– In case security is Agricultural Land
– In case amount outstanding is less than 20% of Principal
amount and interest applied.
• Sec 32: Provides a protection to Bank and its officers for
any action taken in good faith, no suite, prosecution etc.
can be started for any action done or omitted to be done.
• Sec 34: Provides that no Civil Court have jurisdiction to
entertain any suite, no injunction can be granted: only
DRTs or Appellate Tribunal have powers.
• Sec 36: Period of limitation is applicable