The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)

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.

The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB & FI) by which the claims of the banks and FI's involving ten lakhs and above were brought within the fold of the RDDB & FI Act 1993 for adjudication by the Debts Recovery Tribunals established across the country. But there was no speedy recovery of debts by the Banks and FI's through the tribunals as adjudication process was consuming time and this situation had crippled the viability of strength of the Banks and FI's. Meanwhile the secured creditor used to take shelter of ‘Board for Industrial and Financial Reconstruction' (BIFR) created under Section 4 of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), where the Lender has no power to take over the possession of the secured property.

With an intention to speed up the process and convert the Non Performing Asset's (NPA) of Bank and FI,s the Government of India has enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) which empowers the Banks / FI's to recover their NPA without the intervention of the Court.

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. 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. 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.

1. 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;
2. a pledge of movable within the meaning of Section 172 of the Indian Contract Act, 1872;
3. creation of any security in any aircraft as defined in clause(1) of Section 2 of the Aircraft Act, 1934;
4. creation of security interest in any vessel as defined in clause (55) of Section 3 of the Merchant Shipping Act, 1958;
5. any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;
6. any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930;
7. any properties not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908;
8. any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
9. any case in which the amount due is less than 20% of the principal amount and interest thereon.

The Supreme Court in Mardia chemicals Ltd Vs Union of India case had decided that the SARFAESI Act had the constitution validity.

1. Securitization
2. Asset Reconstruction
3. Enforcement of Security without the intervention of the Court

1. "Securitization"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.
   
   SPV: Special Purpose Vehicle, QIB's: Qualified Institutional Buyer, SCO: Securitization Company & RCO: Reconstruction Company
2. "Asset Reconstruction" 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.
3. "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.
1. Take possession of the security
2. Sale or lease or assign the right over the security



For more details visit – www.foreclosureindia.com

3. Manage the same or appoint any person to manage the same

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 ONE WEEK of receipt of such representation or objection.

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.

• 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.

Limitation Act, 1963 is applicable to the claims made under the Act.