403 Financial Laws

By
Dr. Shriprakash Soni
Features of the SARFAESI Act

Major feature of SARFAESI is that it promotes the setting up of

asset reconstruction companies (RCs) and asset securitization
companies (SCs) to deal with NPAs accumulated with the banks
and financial institutions. The Act provides three methods for
recovery of NPAs, viz:
(i) Securitization;
(ii) Asset Reconstruction; and
(iii) Enforcement of Security without the intervention of the Court.
Features of the SARFAESI Act

The Act, thus brings three important tools/powers into asset

management of financial banks and institutions – securitization of
assets, reconstruction of assets and powers for enforcement of
security interests (means asset security interests).
To understand the SARFAESI Act, we should know the meaning
of these terms as well.
What is Securitization?

Securitization is the process of pooling and repackaging of financial assets (like loans
given) into marketable securities that can be sold to investors.
In the context of bad asset management, securitization is the process of conversion of
existing less liquid assets (loans) into marketable securities. The securitization
company takes custody of the underlying mortgaged assets of the loan taker. It can
initiate the following steps:
i. Acquisition of financial assets from any originator (bank), and
ii. Raising of funds from qualified institutional buyers by issue of security receipts
(for raising money) for acquiring the financial assets or
iii. Raising of funds in any prescribed manner, and
iv. Acquisition of financial asset may be coupled with taking custody of the
mortgaged land, building etc.
What is Asset Reconstruction?

Asset reconstruction is the activity of converting a bad or non-

performing asset into performing asset. The process of asset
reconstruction involves several steps including purchasing of bad
asset by a dedicated Asset Reconstruction Company (ARC)
including the underlying hypothecated asset, financing of the bad
asset conversion into good asset using bonds, debentures,
securities and cash, realization of returns from the hypothecated
assets etc.
What is Asset Reconstruction?

Reconstruction, is to be done with the RBI regulations and the SARFAESI

Act gives the following components for reconstruction of assets: –
a) taking over or changing the management of the business of the borrower,
b) the sale or lease of a part or whole of the business of the borrower;
c) rescheduling of payment of debts payable by the borrower;
d) enforcement of security interest in accordance with the provisions of this
Act;
e) settlement of dues payable by the borrower;
f) taking possession of secured assets in accordance with the provisions of
this Act.
Features of the Amendment to the SARFAESI Act
in 2016
➢Government has amended the SARFAESI Act in August 2016 to empower
the ARCs (Asset Reconstruction Companies), to rejuvenate Debt
Recovery Tribunals (DRTs) and to enhance the effectiveness of asset
reconstruction under the new bankruptcy law.
➢The amendment has given more regulatory powers to the RBI on the
working of ARCs. It was also aimed to empower asset reconstruction and
the functioning of DRTs in the context of the newly enacted bankruptcy
law.
➢As per the amendment, the scope of the registry that contains the central
database of all loans against properties given by all lenders has been
widened to include more information.
Features of the Amendment to the SARFAESI Act
in 2016
➢ RBI will get more powers to audit and inspect ARCs and will get the
freedom to remove the chairman or any director. It can also appoint
central bank officials into the boards of ARCs.
➢ RBI will get the power to impose penalties on ARCs when the latter
doesn’t follow the central bank’s directives. Similarly, it can regulate the
fees charged by ARCs from banks while dealing with NPAs. The penalty
amount has been increased from Rs 5 lakh to Rs 1 crore.
➢ The amendment has brought hire purchase and financial lease under the
coverage of the SARFAESI Act.
Features of the Amendment to the SARFAESI Act
in 2016
➢ Regarding DRTs, the amendment aims to speed up the DRT procedures.
Online procedures including electronic filing of recovery applications,
documents and written statements will be initiated.
➢ The amendments are important for DRTs as they can play an important
role under the new Bankruptcy law. DRTs will be the backbone of the
bankruptcy code and deal with all insolvency proceedings involving
individuals. The defaulter has to deposit 50 per cent of the debt due
before filing an appeal at a DRT.