SARFAESI ACT 2002

For Reference purpose

1. Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002
(SARFAESI ACT 2002)
Introduction:
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002(SARFAESI ACT 2002) is an Indian law. It allows
banks and other financial institutions to auction residential and commercial
properties to recover loans when the borrower fails to repay their loans.
It enables banks to reduce their non-performing assets (NPA) by adopting
measures for recovery and reconstruction. Upon loan defaults banks can seize
the securities like land (except agricultural land) without the intervention of the
courts. But the intervention is necessary when the security is invalid or
fraudulent.
SARFAESI Act is effective only to secured loans but if assets in question is an
unsecured asset then the banks would have to move to courts to file civil case
against the defaulter.
Background:
The previous act works for recovery of defaults loans i.e. Recovery of Debts
Due to Banks and Financial Institutions Act, 1993.This act was passed after the
recommendation of Narasimham Committee. This act creates a forum such as
Debts Recovery Tribunal (DRTs) and Debts Recovery Appellate Tribunal
(DRATs) for adjudication of dispute with regard to ever increasing non-
recovered debts.
There were several loopholes in the Act and these loopholes were misused by
bankers and lawyers. This let the government to appoint another committee
under Mr. Andhyarujina to examine banking sector reforms and consideration
to changes in the legal system. Then this committee recommend enacting a new
legislation for establishment of securitisation and reconstruction Company and
empowers the banks and other financial institution to take possession of NPA.
Thus SARFAESI Act was made.
In Mardia Chemicals Ltd vs. Union of India – Supreme Court held that
SARFAESI ACT had the constitution validity.

2. Mode of Acquisition:
The act provides 3 alternative methods for recovery of non-performing asset.
1. Securitisation: This is a process where financial assets are converted into
marketable securities that can be sold in investors.
2. Assets Re-construction: 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.
3. Enforcement of security interest: The courts intervention is required for sale
of property and realisation of money due from defaulters. SARFAESI Act has
made provisions for banks and financial institution to take possession of
securities given for financial assistance and sell the same in the event of default.
Registration of Securitization Companies or Reconstruction companies
(Section-3):
No Securitisation company or reconstruction company can or carry out the
business of securitization or assets reconstruction without obtaining a certificate
of registration from RBI and adhering to the other norm like having owned
funds of not less than ₹2crore or such other amount not exceeding 15% of total
financial assets acquired or to be acquired by Securitization company and Re-
construction company and such other norms as may be notified from time to
time but not limited to-
1. Act as an agent for any bank or financial institution for the purpose of
recovering their dues from borrowers on payment of such fees or charge.
2. Act as a manager between the parties, without raising a financial liability for
itself.
3. Act as receiver if appointed by any court or tribunal.
Example, ARCIL, Reliance Asset Reconstruction Com Ltd.
Cancellation of certificate of Registration (Section-4):
Reserve Bank can cancel the certificate of Registration of Securitization
Company and Re-construction Company. If such company

3. 1. Cease to carry on business.
2. Cease to receive or hold any investment.
3. Fails to comply with any condition required for registration.
4. Fails to maintain account according to directions of Reserve Bank.
5. Fails to submit books of accounts demanded by Reserve Bank.
Enforcement of Security (Section-13):
If any borrowers fails to discharge his liability in repayment of any secured debt
within 60 days of notice, then the secured creditors has the power under the
SARFAESI Act to-
1. Take possession of/ sell/ auction/ seize the secured assets of the borrower.
2. Takeover of the management of business of borrower.
3. Appoint any person to manage the secured assets.
NOTE: Agricultural property is exempted from the provisions of the Act.
Right to Appeal (Section-17):
This Act provides that any borrower or any other person aggrieved by the action
of secured creditor can file an appeal to the concerned Debt recovery Tribunals.
Such appeal can also filed by any person aggrieved without being required to
deposit any amount with DRT.
Debt Recovery Tribunal (DRT)- It have been established by the government of
India under an Act of parliament (Act 51 of 1993) for adjudication and recovery
of debts due to banks and financial institution.
Appeal to appellate Tribunal (Section-18):
 Any person aggrieved by an order of DRT can appeal to Appellate
Tribunal within 30 days of receipt of order.
 The borrower has to deposit 50% of the amount claimed by secured
creditors before filing an appeal.
 The Appellate Tribunal can reduce this to 25% of the amount claimed,
after recording the reason for such a concession.

4. Central Registry (Section-20 to 26A):
 Setting up CR:
1. The government of India, ministry of finance are notified to set up the
CR, to prevent fraud in loan cases involving multiple lending from
different banks on the same immovable property.
2. This registry has become operational on March 31, 2011 and CR is a
government company licensed under Section-25 of the companies Act
1956. Its registration office is at New Delhi for the purpose of operating
and maintaining under the provision of the SAEFAESI Act.
 Register of Securitization:
A register called Central Register maintain both in electronic and non-
electronic form and will be kept at the head office of central registry for
entering the particular of the transaction including creation of security or
payment on any security interest related to securitization and
Reconstruction of financial assets and shall be open fir inspected by any
person during the business hours on payment of prescribe fee.
Cases:
1. Abdul Azeez v/s Punjab National Bank (kerala)
It was held that a pending case and execution petition is no bar to proceed under
SARFAESI Act.
2. Mahavir plantation Pvt Ltd v/s ICICI Bank Ltd & others
Notice to guarantor under SARFAESI Act is mandatory. Proceeding without
such notice will be vitiated.
3. Noble Aqua Pvt Ltd v/s SBI
Provisions of SARFAESI Act override Section-22 of SICA.