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SARFEASI ACT 2002 : SALIENT FEATURES

THE SECURITISATION & RECONSTRUCTION OF FINANCIAL ASSETS & ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFEASI ACT) -ALL YOU NEED TO KNOW

DEFINITIONS

As per section 2 of SARFEASI Act. Definitions.—(1) In this Act, unless the context otherwise requires,—

(a) “Appellate Tribunal” means a Debts Recovery Appellate Tribunal established under sub-section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);

(b) “asset reconstruction” means acquisition by any  2[asset 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;

3[(ba) “asset reconstruction company” means a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both;]

(c) “bank” means—

(i) a banking company; or

(ii) a corresponding new bank; or

(iii) the State Bank of India; or

(iv) a subsidiary bank; or 4[(iva) a multi-State co-operative bank; or]

(v) such other bank which the Central Government may, by notification, specify for the purposes of this Act;

(d) “banking company” shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(e) “Board” means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(f) “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  1[asset reconstruction company]consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance 2[or who has raised funds through issue of debt securities];

(g) “Central Registry” means the registry set up or cause to be set up under sub-section (1) of section 20; 2 [(ga) “company” means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013);]

(h) “corresponding new bank” shall have the meaning assigned to it in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

3[(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and includes—

(i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or conditional sale or under any other contract;

(ii) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable any borrower to acquire the intangible asset or obtain licence of such asset;]

(i) “Debts Recovery Tribunal” means the Tribunal established under sub-section (1) of section 3 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993);

2[(ia) “debt securities” means debt securities listed in accordance with the regulations made by the Board under the Securities and Exchange Board of India Act,1992 (15 of 1992);]

4[(j) “default” means—

(i) non-payment of any debt or any other amount payable by the borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor; or

(ii) non-payment of any debt or any other amount payable by the borrower with respect to debt securities after notice of ninety days demanding payment of dues served upon such borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of such debt securities;]

(k) “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 financial institution 2[including funds provided for the purpose of acquisition of any tangible asset on hire or financial lease or conditional sale or under any other contract or obtaining assignment or licence of any intangible asset or purchase of debt securities;]

(l) “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

1[(va) any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided

to enable the borrower to acquire such tangible asset; or

(vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or]

(vi) any financial assistance;

(m)“financial institution” means—

(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 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 (51 of 1993);

(iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges ) Act, 1958 (42 of 1958);

1 [(iiia) a debenture trustee registered with the Board and appointed for secured debt securities;

(iiib) asset reconstruction company, whether acting as such or managing a trust created for the purpose of securitisation or asset reconstruction, as the case may be;]

(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 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act;

1 [(ma) “financial lease” means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor’s right therein to the lessee for a

certain time in consideration of payment of agreed amount periodically and where the lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be;]

(n) “hypothecation” means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property;

1 [(na) “negotiable document” means a document, which embodies a right to delivery of tangible assets and satisfies the requirements for negotiability under any law for the time being in force including warehouse receipt and bill of lading;]

(o) “non-performing asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, 2[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];

(p) “notification” means a notification published in the Official Gazette;

(q) “obligor” means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower;

(r) “originator” means the owner of a financial asset which is acquired by a 3[asset reconstruction company]for the purpose of securitisation or asset reconstruction;

(s) “prescribed” means prescribed by rules made under this Act;

(t) “property” means—

(i) immovable property;

(ii) movable property;

(iii) any debt or any right to receive payment of money, whether secured or unsecured;

(iv) receivables, whether existing or future;

(v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature 1 [as may be prescribed by the Central Government in consultation with Reserve Bank];

(u) “4[qualified buyer]” means a financial institution, insurance company, bank, state

financial corporation, state industrial development corporation,  2[trustee or 3[asset reconstruction company]which has been granted a certificate of registration under sub-section (4) of section 3 or any asset management company making investment on behalf of mutual fund] or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992(15 of 1992) or regulations made thereunder, 1[any category of non-institutional investors as may be specified by the Reserve Bank under sub-section (1) of section 7] or any other body corporate as may be specified by the Board;

(w) “Registrar of Companies” means the Registrar defined in clause (40) of section 2 of the Companies Act, 1956 (1 of 1956);

(x) “Reserve Bank” means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);

(y) “scheme” means a scheme inviting subscription to security receipts proposed to be issued by a 2 [asset reconstruction company]under that scheme;

(z)“securitisation” means acquisition of financial assets by any 2[asset reconstruction company]from any originator, whether by raising of funds by such  2[asset reconstruction company]from 3[qualified buyers]by issue of security receipts representing undivided interest in such financial assets or otherwise;

(zb) “security agreement” means an agreement, instrument or any other document or arrangement Under  which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor;

(zc) “secured asset” means the property on which security interest is created;

4 [(zd) “secured creditor” means—

(i) any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l); (ii) debenture trustee appointed by any bank or financial institution; or

(iii) an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or

(iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or

(v) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.]

(ze) “secured debt” means a debt which is secured by any security interest;

5[(zf) “security interest” means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes—

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

(ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset;]

(zg) “security receipt” means a receipt or other security, issued by a 1 [asset reconstruction company]to any 2[qualified buyer]pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title orinterest in the financial asset involved in securitisation;

(zh) “sponsor” means any person holding not less than ten per cent. of the paid-up equity capital of a 1[asset reconstruction company];

(zi) “State Bank of India” means the State Bank of India constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);

(zj) “subsidiary bank” shall have the meaning assigned to it in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959).

(2) Words and expressions used and not defined in this Act but defined in the Indian Contract Act, 1872 (9 of 1872) or the transfer of Property Act, 1882 (4 of 1882) or the Companies Act, 1956

(1 of 1956) or the Securities and Exchange Board of  India Act 1992 (15 of 1992) shall have the same meanings respectively assigned to them in those Acts.

HISTORY OF SERFAESI ACT :

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law.

Enacted: 17th December, 2002

Commenced: 21st June, 2002

  • Before SARFAESI Act, recovery of debts due to Banks and financial institutions Act of 1993, was used for recovery of default
  • However, there were several loopholes that were misused by the borrowers as well as others.
  • The committee recommended various new legislations to empower Banks and other financial institutions to take possession of the NPAs.

NEED FOR THE LAW

  • The financial Indiscipline and the ever growing Nonperforming Assets (NPA) promoted in passing of Recoveries of Debts due to Banks & Financial Institutions Act, 1993, whereby Debt Recovery Tribunal was set up for recovery of NPA. However, this did not speed up the recovery process.
  • Every fifth borrower is a defaulter. Thus SARFAESI Act was enacted to recover the loans and also to foreclose the security.
  • SARFAESI ACT provides for Asset Securitisation & Asset Reconstruction.

SALIENT FEATURES

  • The Act provides for incorporation of special purpose vehicles viz., securitization company & Reconstruction company.
  • The high level of NPAs has led to lower interest income and loan loss provisioning requirements which reduced the profitability of banks.
  • The act is intended to strengthen banks to recover NPA’s faster
  • The act empowers banks to seize charged assets without court’s intervention and sell them off.
  • It promotes the setting up of asset reconstruction (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.

  • Securitization of Financial Assets.
  • Funding of Securitization.
  • Asset Reconstruction.
  • Enforcing Security interest i.e., Taking over of assets given as security for loan.
  • Establishment of Central registry & registering securitization transactions.
  • Offences & Penalties
  • Boiler plate provisions
  • Dilutions of Provisions of sick industrial companies 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).

 What is meant by 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. Reconstruction, is to be done with the RBI regulations and the SARFAESI Act gives the following components for reconstruction of assets: –

  1. Taking over or changing the management of the business of the borrower,
  2. The sale or lease of a part or whole of the business of the borrower;
  3. Rescheduling of payment of debts payable by the borrower;
  4. Enforcement of security interest in accordance with the provisions of this Act;
  5. Settlement of dues payable by the borrower;
  6. Taking possession of secured assets in accordance with the provisions of this act.

Section 13(2) in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

as per section 13(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub- section (4).

[Provided that— (i) the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and

(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee.]

Section 13(4) in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

As per section 13(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:—

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset; 2[(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset:

(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset\:” Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole, of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt;

(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;

(d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured

The law does not apply to unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principal.

This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their non-performing assets to ARCs.

Banks are allowed to take possession of the collateral property and sell it without the permission of a court.

Section 13(9) in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

As per section 13(9) 1[Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent. in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets shall be distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956): Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen’s dues with the liquidator in accordance with the provisions of section 529A of that Act:

Provided also that liquidator referred to in the second proviso shall intimate the secured creditor the workmen’s dues in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of 1956) and in case such workmen’s dues cannot be ascertained, the liquidator shall intimate the estimated amount of workmen’s dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimate dues with the liquidator:

Provided also that in case the secured creditor deposits the estimated amount of workmen’s dues, such creditor shall be liable to pay the balance of the workmen’s dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator:

Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen’s dues, if any.

Explanation.—For the purposes of this sub-section,—

(a) “record date” means the date agreed upon by the secured creditors representing not less than 2[sixty per cent.] in value of the amount outstanding on such date;

(b) “amount outstanding” shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.

As per section  31 in The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Provisions of this Act not to apply in certain cases.—

The provisions of this Act shall not apply to—

(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time being in force;

(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 (9 of 1872);

(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934 (24 of 1934);

(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the

Merchant Shipping Act, 1958 (44 of 1958);

(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930);

(g) 2[any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act)]or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908 (5 of 1908);

(h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;

(i) any security interest created in agricultural land;

(j) any case in which the amount due is less than twenty per cent. of the principal amount and interest thereon.

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