18.11.2013

1. Presented by: Shalu Saraf
CS Trainee
1

2. Object & Scope
• An Act to regulate
securitisation and
reconstruction of financial
assets and enforcement of
security interest and for
matters connected
therewith or incidental
thereto.
• It extends to the whole of
India.
• SARFAESI Act enables and
empowers the secured
creditors to take possession
of their securities, to deal
with them without the
intervention of the court and
also alternatively to
authorize any Securitization
or Reconstruction Company
to acquire financial assets of
any Bank or Financial
Institution (FI). The Act has
been empowered with the
overriding effect over the
other legislation and it shall
be in addition to and not in
derogation of certain
legislation.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
2

3. Definitions
• "Appellate Tribunal" means a
Debts Recovery Appellate Tribunal
established under sec. 8(1) of the
Recovery of Debts Due to Banks
and Financial Institutions Act,
1993. (Sec. 2(a))
•
“Asset reconstruction" means
acquisition by any securitisation
company or reconstruction
company of any right or interest of
any bank or financial institution in
any financial assistance for the
purpose of realisation of such
financial assistance. (sec. 2(b))
• "Board" means the Securities and
Exchange Board of India
established under section 3 of the
Securities and Exchange Board of
India Act, 1992. (sec. 2(e))
• “Borrower" means any person
who has been granted financial
assistance by any bank or financial
institution or who has given any
guarantee or created any mortgage
or pledge as security for the
financial assistance granted by
any bank or financial institution and
includes a person who becomes
borrower of a securitisation
company or reconstruction
company consequent
upon acquisition by it of any rights
or interest of any bank or financial
institution in relation to such
financial assistance. (sec. 2(f))
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
3

4. Definitions
• "financial asset" means debt or
receivables and includes-(i) a claim to any debt or receivables or part
thereof, whether secured or unsecured; or
(ii) any debt or receivables secured by,
mortgage of, or charge on immovable
property; or
(iii) a mortgage, charge, hypothecation or
pledge of movable property; or
(iv) any right or interest in the security,
whether full or part underlying such debt or
receivables; or
(v) any beneficial interest in property,
whether movable or immovable, or in such
debt, receivables, whether such interest is
existing, future, accruing, conditional or
contingent; or
(vi) any financial assistance. (sec. 2(l))
• "financial institution" means-(i) a public financial institution within the
meaning of section 4A of the
Companies Act, 1956;
(ii) any institution specified by the Central
Government under sub-clause (ii) of
clause (h) of section 2 of the Recovery
of Debts Due to Banks and Financial
Institutions Act, 1993;
(iii) the International Finance Corporation
established under the International
Finance Corporation (Status,
Immunities and Privileges) Act, 1958;
(iv) any other institution or non-banking
financial company as defined in clause
(f) of section 45-I of the Reserve Bank
of India Act, 1934, which the Central
Government may, by notification,
specify as financial institution for the
purposes of this Act. (sec. 2(m))
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
4

5. Definitions
• "non-performing asset" means an asset or
account of a borrower, which has been
classified by a bank or financial institution as
sub-standard, doubtful or loss asset,-(a) in case such bank or financial institution is
administered or regulated by any authority
or body established, constituted or
appointed by any law for the time being in
force, in accordance with the directions or
guidelines relating to assets classifications
issued by such authority or body;
(b) in any other case, in accordance with the
directions or guidelines relating to assets
classifications issued by the Reserve Bank.
(sec. 2(o))
• "financial assistance" means any loan or
advance granted or any debentures or bonds
subscribed or any guarantees given or letters
of credit established or any other credit
facility extended by any bank or FI. (sec. 2(k))
•
"qualified institutional buyer" means a
financial institution, insurance company,
bank, state financial corporation, state
industrial development corporation,
trustee or securitisation company or
reconstruction company which has been
granted a certificate of registration under
section 3(4) or any asset management
company making investment on behalf of
mutual fund or pension fund or a foreign
institutional investor registered under the
Securities and Exchange Board of India
Act, 1992 or regulations made there
under, or any other body corporate as
may be specified by the Board. (sec. 2(u))
•
"sponsor" means any person holding not
less than 10% of the paid-up equity
capital of a securitisation company or
reconstruction company. (sec. 2(zh))
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
5

6. Applicability
• 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.
• NPA should be backed by
securities charged to the Bank
by way of hypothecation or
mortgage or assignment.
•Security Interest by way of
Lien, pledge, hire purchase and
lease not liable for attachment
under Sec.60 of Civil
Procedure Code, 1908 are not
covered under this Act.
•Non-performing Asset (NPA)
means an asset for which
Interest or principal (or
installment) is overdue for a
period of 90 days or more
from the date of acquisition or
the due date as per contract
between the borrower and the
lender, whichever is later.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
6

7. Non-Applicability
in certain cases
•
•
•
•
a lien on any goods, money or security
given by or under the Indian Contract
Act, 1872 or the Sale of Goods Act,
1930 or any other law for the time
being in force;
a pledge of movable within the
meaning of Section 172 of the Indian
Contract Act, 1872;
creation of any security in any aircraft
as defined in clause(1) of Section 2 of
the Aircraft Act, 1934;
creation of security interest in any
vessel as defined in clause (55) of
Section 3 of the Merchant Shipping
Act, 1958;
•any conditional sale, hire-purchase
or lease or any other contract in
which no security interest has been
created;
•any rights of unpaid seller under
Section 47 of the Sale of Goods Act,
1930;
•any properties not liable to
attachment or sale under Section 60
of the Code of Civil Procedure, 1908;
•any security interest for securing
repayment of any financial asset not
exceeding one lakh rupees;
•any case in which the amount due is
less than 20% of the principal amount
and interest thereon.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
7

8. Constitutional
Validity
Methods of Recovery
under the Act
• The Supreme Court
in Mardia
chemicals Ltd Vs
Union of India case
had decided that
the SARFAESI Act
had the
constitution
validity.
- Securitization
- Asset
Reconstruction
- Enforcement of
Security without the
intervention of the
Court
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
8

9. Securitization
• It means acquisition of
financial assets by any
Securitization Company or
Reconstruction Company
from any originator,
whether by raising of funds
by such Securitization
Company or Reconstruction
Company from qualified
institutional buyers by issue
of security receipts
representing undivided
interest in such financial
assets or otherwise.
Financial
Assistance
Borrower
(obligor)
Originator
Securing
Assets
Cash
Investor
(QIB)
Cash
(lender)
Transferring
Secured
Assets
SPV
(SCO/RCO)
Security
Receipt
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
9

10. Asset
Reconstruction
• It means acquisition by
any Securitization
Company or
Reconstruction
Company of any right or
interest of any bank or
financial institution in
any financial assistance
for the purpose of
realization of such
financial assistance.
Enforcement of Security
without the intervention
of the Court
• The Bank/ FI's can issue demand
notice to the defaulting borrower and
guarantor, calling upon them to
discharge their dues in full within 60
days from the date of the notice. If
the borrower fails to comply with the
notice, the Bank may take recourse to
one or more of the following
measures without intervention of the
court.
- Take possession of the security
- Sale or lease or assign the right
over the security
- Manage the same or appoint
any person to manage the same.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
10

11. Contd…
• The Act also empowers the
following Powers to Banks & FI's:
– To give notice to any person
who has acquired any of the
secured assets from the
borrower to surrender the
same to the Bank.
– To ask any debtor of the
borrower to pay any sum due
or becoming due to the
borrower.
– Any Security Interest created
over Agricultural Land cannot
be proceeded and only those
property given as security can
be proceeded but not the
guarantors' personal property.
• If on receipt of demand notice,
the borrower makes any
representation or raises any
objection, Authorised Officer shall
consider such representation or
objection carefully and if he
comes to the conclusion that such
representation or objection is not
acceptable or tenable, he shall
communicate the reasons for non
acceptance WITHIN 15 DAYS of
receipt of such representation or
objection.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
11

12. Legal remedies to
Borrower / Banks/FI's
DRT
DRAT
Limitation Act
• Limitation Act, 1963
is applicable to the
claims made under the
Act.
High Court (writ
petition)
Supreme Court
(Special Leave
Petition)
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
12

13. Registration of Securitization
Companies or Reconstruction
Companies (sec. 3)
• No Securitization Company or
Reconstruction Company shall
commence or carry on the
business of Securitization or Asset
Reconstruction without obtaining
a Certificate of Registration form
RBI and adhering to the other
norms like having the owned fund
of not less than two crore rupees
or such other amount not
exceeding fifteen percent of total
financial assets acquired or to be
acquired by the Securitization
Company or Reconstruction
Company and such other norms as
may be notified from time to time
but not limited to:
- Act as an agent for any
bank or FI for the purpose of
recovering their dues from
the borrower on payment of
such fees or charges.
- Act as a manager between
the parties, without raising a
financial liability for itself
- Act as receiver if
appointed by any court or
tribunal.
Examples:
1. ARCIL (India’s first and largest asset
reconstruction company (ARC))
2. Reliance Asset Reconstruction
Company Limited by Anil Ambani
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
13

14. Foreign
investment
in ARC
•
•
•
•
•
•
•
•
ARC =buy bad loans from banks.
ARC =arrange money from QIBs to buy
bad loans from banks.
Problem= Indian QIBs do not invest much
in ARCs.
Therefore ARC’s capacity to buy NPA= very
low.
And bank themselves don’t have enough
expertise or manpower to dispose those
NPAs quickly.
Previously Foreign investors could invest
only upto 49% in ARC=minority
shareholder=cannot influence company
decisions.
Now, Government also increased foreign
investment limit in ARCs. This would
attract more investment in ARCs and help
in quicker purchase and disposal of NPAs.
Foreign investment in ARC:-
Earlier
49%
Now (December-24-2012)
74%
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
14

15. Central Registry
• Setting up of CR:
The Government of India, Ministry of
Finance notified to set up the CR, to
prevent frauds in loan cases involving
multiple lending from different banks
on the same immovable property. This
Registry has become operational on
March 31, 2011 and CR is a Government
Company licensed under Section 25 of
the Companies Act 1956 has been
incorporated with the name of "Central
Registry of Securitization Asset
Reconstruction and Security Interest of
India"
(CIN No: U67100DL2011NPL215270)
having its registered office at New Delhi
for the purpose of operating and
maintaining the Central Registry under
the provisions of the SARFAESI.
•
Register of
Securitization, reconstruction
and security interest
transactions:
A register called the Central Register
maintained both in electronic and
non-electronic form will be kept at
the head office of the Central
registry for entering the particulars
of the transactions including
creation of security/satisfaction or
payment on any security interest
relating to securitization and
Reconstruction of financial assets
and shall be open for inspection by
any person during the business
hours on payment of prescribed fee.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
15

16. Committees
• SARFAESI was based on
recommendation of these two
Committees:1. Committee on Banking Sector
Reforms (Narasimham
Committee II), 1998
2. Restructuring of weak Public
Sector Banks Verma Committee
• The latest amendment (Debt to
Equity), is based on
recommendations of Alok
Nigam Panel on ARCs, made by
Finance Ministry.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
16

17. Amendment
in
sarfaesi act,
2002
•
A formal procedure has been prescribed for
taking into record the substitution of banks
by asset reconstruction
companies ("ARCs") and securitization
companies in any proceedings pending
before any tribunal/ court/ other
authority ("Authority") in respect of the
financial assets which the ARCs and
securitization companies have acquired from
such bank.
•
ARCs and securitization companies have
been permitted to convert any portion of the
debt due to them by the borrower into
equity shares of the borrower company.
•
The banks have been permitted to purchase
the immovable property which has been
furnished to them as security and which is
being sold under an auction process
provided the purchase price offered by other
auctioneers in respect thereto, is below the
reserve price set by the bank. The bank can
hold such property for a maximum period of
12 (Twelve) years after which the bank is
mandatorily required to dispose of such
property in compliance with the BR Act.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
17

18. Salient
features of
Amendment
in
sarfaesi act,
2002
• can buy for the NPA
property if there are no
other bidders.
1. Bank
• multi-state
cooperative banks can also
take actions under SARFAESI.
2.
Borrower
3. ARC
4. Govt.
• can’t get stay orders from
DRT easily.
• Can make settlement /
compromise with Bank/ARC.
can convert their debt into
equity (fully or partially)
can prohibit or modify
SARFAESI’s applicability in
public interest.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
18

19. Miscellaneous
Amendment
1.
2.
3.
In public interest, Union
Government can issue notification
that xyz provision of SARFAESI act
may not apply or may apply with
modifications to a class or classes
of banks or financial institutions.
Earlier a borrower could approach
Debt Recovery tribunal (DRT) to get
stay order against bank/ARC. New
amendment says DRT cannot grant
any stay order unless both parties
(Borrower vs. lender bank) are
heard. This will ensure the process
of law is not misused by
unscrupulous borrowers to get stay
orders just to delay moneyrecovery.
Bill proposes to enable banks and
financial institutions to enter into
settlement or compromise with the
borrower. It also seeks to empower
the Debts Recovery Tribunal to pass
an order acknowledging any such
settlement or compromise.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
19

20. Important
Case
Laws &
Judgments
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
20

21. Signal
Apparels
Pvt. Ltd
Vs
Canara
Bank
• Guidelines issued by
RBI in relation to
classifying NPA
should be followed
by the bank before
issuing notice under
Section 13(2) of
SARFAESI Act. The
judgment discussed
at length the
meaning of NPA its
ambit scope. Writ
petition dismissed.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
21

22. 1.) Mrs. Sunanda
Kumari and another
Vs
Standard Chartered
Bank (Karnataka)
2.) Abdul Azeez
Vs
Punjab National
Bank (Kerala)
• Pendency of Civil
Suit or execution
petition or obtaining
a decree is no bar to
proceed under
SARFAESI Act - It was
held in the following
cases that a pending
civil suit or execution
petition is no bar to
proceed under
SARFAESI Act
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
22

23. Ace Media
Advertisers
Pvt. Ltd.
Vs.
Bank of
Baroda
• Claim under
SARFAESI can be
only to the extent
of decree/order
passed by DRT - It
has been held in the
above case that the
process under
Securitisation Act
can be confined to
the extent of the
decree/order passed
by Debts Recovery
Tribunal.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
23

24. Mahavir
Plantations Pvt.
Ltd.
Vs
K.K.Steel
Enterprises
Vs
ICICI Bank Ltd.
• Demand Notice to
Guarantor
Mandatory Notice to
guarantor under
SARFAESI Act is
mandatory.
Proceedings
without such
notice will be
vitiated.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
24

25. SBI
Vs
Heera Laxmi
Contractors
Pvt. Ltd.
• Section 35 of the
SARFAESI Act will over
ride the provisions
Arbitration and
Conciliation Act 1996.
It cannot be pleaded
that the dispute with
regard to auction
should be resolved
through Arbitration
and Conciliation Act.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
25

26. Bank of India
Vs
Assistant
Provident
Commissioner
• EPF dues have priority
over dues of Secured
Creditor - Dues under
EPF will have priority over
the dues of the Secured
Creditor. There is no
specific provision in the
SARFAESI Act which
enable the Bank to claim
statutory charge. It is not
the intention of the
SARFAESI ACT to disturb
the social welfare policy
embedded in Sec 11(2) of
the E.P.F Act.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
26

27. Yuth
Development
Co-operative
Bank Ltd
Kolhapur
Vs
Balasaheb
Dinakrrao
Salokhe & Ors
• Bar of Jurisdiction of
Civil Court - Civil Court
has no jurisdiction to
entertain any suit filed
in respect of action
taken under SARFAESI
Act.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
27

28. Noble
Aqua Pvt.
Ltd.
Vs
SBI
• SARFAESI Vs.
SICA Provisions of
SARFAESI Act
override
Section 22 of
SICA.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002
28

29. 29