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Presented by: Shalu Saraf

CS Trainee

1
Object & Scope
intervention of the court and
• An Act to regulate
securitisation and also alternatively to
reconstruction of financial authorize any Securitization
assets and enforcement of or Reconstruction Company
security interest and for to acquire financial assets of
matters connected any Bank or Financial
therewith or incidental Institution (FI). The Act has
thereto. been empowered with the
• It extends to the whole of overriding effect over the
India. other legislation and it shall
• SARFAESI Act enables and be in addition to and not in
empowers the secured
creditors to take possession derogation of certain
of their securities, to deal legislation.
with them without the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 2
Definitions
• “Borrower" means any person
• "Appellate Tribunal" means a
Debts Recovery Appellate Tribunal who has been granted financial
established under sec. 8(1) of the assistance by any bank or financial
Recovery of Debts Due to Banks institution or who has given any
and Financial Institutions Act, guarantee or created any mortgage
1993. (Sec. 2(a))
or pledge as security for the
financial assistance granted by
• “Asset reconstruction" means
acquisition by any securitisation any bank or financial institution and
company or reconstruction includes a person who becomes
company of any right or interest of borrower of a securitisation
any bank or financial institution in company or reconstruction
any financial assistance for the
purpose of realisation of such company consequent
financial assistance. (sec. 2(b)) upon acquisition by it of any rights
or interest of any bank or financial
• "Board" means the Securities and institution in relation to such
Exchange Board of India financial assistance. (sec. 2(f))
established under section 3 of the
Securities and Exchange Board of
Securitisation and Reconstruction of Financial Assets and
India Act, 1992. (sec. 2(e)) Enforcement of Security Interest Act ,2002 3
Definitions • "financial institution" means--
(i) a public financial institution within the
• "financial asset" means debt or meaning of section 4A of the
receivables and includes-- Companies Act, 1956;
(i) a claim to any debt or receivables or part (ii) any institution specified by the Central
thereof, whether secured or unsecured; or Government under sub-clause (ii) of
(ii) any debt or receivables secured by, clause (h) of section 2 of the Recovery
mortgage of, or charge on immovable of Debts Due to Banks and Financial
property; or Institutions Act, 1993;
(iii) a mortgage, charge, hypothecation or (iii) the International Finance Corporation
pledge of movable property; or established under the International
(iv) any right or interest in the security, Finance Corporation (Status,
whether full or part underlying such debt or Immunities and Privileges) Act, 1958;
receivables; or (iv) any other institution or non-banking
(v) any beneficial interest in property, financial company as defined in clause
whether movable or immovable, or in such (f) of section 45-I of the Reserve Bank
debt, receivables, whether such interest is of India Act, 1934, which the Central
existing, future, accruing, conditional or Government may, by notification,
contingent; or specify as financial institution for the
(vi) any financial assistance. (sec. 2(l)) purposes of this Act. (sec. 2(m))
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 4
Definitions • "qualified institutional buyer" means a
financial institution, insurance company,
• "non-performing asset" means an asset or
bank, state financial corporation, state
account of a borrower, which has been
industrial development corporation,
classified by a bank or financial institution as
trustee or securitisation company or
sub-standard, doubtful or loss asset,--
reconstruction company which has been
(a) in case such bank or financial institution is
granted a certificate of registration under
administered or regulated by any authority
section 3(4) or any asset management
or body established, constituted or
company making investment on behalf of
appointed by any law for the time being in
mutual fund or pension fund or a foreign
force, in accordance with the directions or
institutional investor registered under the
guidelines relating to assets classifications
Securities and Exchange Board of India
issued by such authority or body;
Act, 1992 or regulations made there
(b) in any other case, in accordance with the
under, or any other body corporate as
directions or guidelines relating to assets
may be specified by the Board. (sec. 2(u))
classifications issued by the Reserve Bank.
(sec. 2(o))
• "sponsor" means any person holding not
• "financial assistance" means any loan or less than 10% of the paid-up equity
advance granted or any debentures or bonds capital of a securitisation company or
subscribed or any guarantees given or letters reconstruction company. (sec. 2(zh))
of credit established or any other credit
Securitisation and Reconstruction of Financial Assets and
facility extended by any bank or FI. (sec. 2(k)) Enforcement of Security Interest Act ,2002 5
Applicability •Security Interest by way of
Lien, pledge, hire purchase and
lease not liable for attachment
• The provisions of this Act are under Sec.60 of Civil
applicable only for NPA loans Procedure Code, 1908 are not
with outstanding above Rs. covered under this Act.
1.00 lac. •Non-performing Asset (NPA)
• NPA loan accounts where the means an asset for which
amount is less than 20% of the Interest or principal (or
principal and interest are not installment) is overdue for a
eligible to be dealt with under period of 90 days or more
this Act. from the date of acquisition or
• NPA should be backed by the due date as per contract
securities charged to the Bank between the borrower and the
by way of hypothecation or lender, whichever is later.
Securitisation and Reconstruction of Financial Assets and
mortgage or assignment. Enforcement of Security Interest Act ,2002 6
Non-Applicability
in certain cases •any conditional sale, hire-purchase
or lease or any other contract in
• a lien on any goods, money or security
given by or under the Indian Contract which no security interest has been
Act, 1872 or the Sale of Goods Act, created;
1930 or any other law for the time •any rights of unpaid seller under
being in force; Section 47 of the Sale of Goods Act,
• a pledge of movable within the 1930;
meaning of Section 172 of the Indian •any properties not liable to
Contract Act, 1872; attachment or sale under Section 60
• creation of any security in any aircraft of the Code of Civil Procedure, 1908;
as defined in clause(1) of Section 2 of •any security interest for securing
the Aircraft Act, 1934; repayment of any financial asset not
• creation of security interest in any exceeding one lakh rupees;
vessel as defined in clause (55) of •any case in which the amount due is
Section 3 of the Merchant Shipping less than 20% of the principal amount
Act, 1958;
and interest thereon.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 7
Constitutional Methods of Recovery
Validity under the Act
• The Supreme Court
in Mardia - Securitization
chemicals Ltd Vs - Asset
Union of India case Reconstruction
had decided that - Enforcement of
the SARFAESI Act Security without the
had the intervention of the
constitution Court
validity.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 8
Securitization
Financial
Assistance
• It means acquisition of Originator
financial assets by any Borrower
Securitization Company or (obligor) (lender)
Securing
Reconstruction Company Assets
from any originator, Transferring
whether by raising of funds Cash Secured
by such Securitization Assets
Company or Reconstruction
Company from qualified Cash
institutional buyers by issue Investor SPV
of security receipts (QIB) (SCO/RCO)
representing undivided Security
interest in such financial Receipt
assets or otherwise.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 9
Asset Enforcement of Security
without the intervention
Reconstruction of the Court
• The Bank/ FI's can issue demand
• It means acquisition by notice to the defaulting borrower and
any Securitization guarantor, calling upon them to
Company or discharge their dues in full within 60
days from the date of the notice. If
Reconstruction the borrower fails to comply with the
Company of any right or notice, the Bank may take recourse to
interest of any bank or one or more of the following
measures without intervention of the
financial institution in court.
any financial assistance - Take possession of the security
for the purpose of - Sale or lease or assign the right
over the security
realization of such - Manage the same or appoint
financial assistance. any person to manage the same.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 10
Contd…
• The Act also empowers the • If on receipt of demand notice,
following Powers to Banks & FI's: the borrower makes any
– To give notice to any person representation or raises any
who has acquired any of the objection, Authorised Officer shall
secured assets from the consider such representation or
borrower to surrender the objection carefully and if he
same to the Bank. comes to the conclusion that such
– To ask any debtor of the representation or objection is not
borrower to pay any sum due acceptable or tenable, he shall
or becoming due to the communicate the reasons for non
borrower. acceptance WITHIN 15 DAYS of
– Any Security Interest created receipt of such representation or
over Agricultural Land cannot objection.
be proceeded and only those
property given as security can
be proceeded but not the
Securitisation and Reconstruction of Financial Assets and
guarantors' personal property. Enforcement of Security Interest Act ,2002 11
Legal remedies to
Borrower / Banks/FI's Limitation Act

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

High Court (writ


petition)

Supreme Court
(Special Leave
Petition) Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 12
Registration of Securitization
Companies or Reconstruction - Act as an agent for any
Companies (sec. 3) bank or FI for the purpose of
recovering their dues from
• No Securitization Company or
Reconstruction Company shall the borrower on payment of
commence or carry on the such fees or charges.
business of Securitization or Asset - Act as a manager between
Reconstruction without obtaining
a Certificate of Registration form the parties, without raising a
RBI and adhering to the other financial liability for itself
norms like having the owned fund
of not less than two crore rupees - Act as receiver if
or such other amount not appointed by any court or
exceeding fifteen percent of total tribunal.
financial assets acquired or to be
acquired by the Securitization Examples:
Company or Reconstruction 1. ARCIL (India’s first and largest asset
Company and such other norms as reconstruction company (ARC))
may be notified from time to time
but not limited to: 2. Reliance Asset Reconstruction
Company Limited by Anil Ambani
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 13
• ARC =buy bad loans from banks.

Foreign •


ARC =arrange money from QIBs to buy
bad loans from banks.
Problem= Indian QIBs do not invest much

investment
in ARCs.
• Therefore ARC’s capacity to buy NPA= very
low.

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

Amendment taking into record the substitution of banks


by asset reconstruction
companies ("ARCs") and securitization
companies in any proceedings pending

in
before any tribunal/ court/ other
authority ("Authority") in respect of the
financial assets which the ARCs and
securitization companies have acquired from
such bank.

sarfaesi act, • ARCs and securitization companies have


been permitted to convert any portion of the
debt due to them by the borrower into

2002 •
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
• can buy for the NPA
property if there are no

Salient 1. Bank
other bidders.

• multi-state co-
operative banks can also

features of take actions under SARFAESI.


• can’t get stay orders from
DRT easily.

Amendment 2.
Borrower • Can make settlement /
compromise with Bank/ARC.

in 3. ARC
can convert their debt into
equity (fully or partially)

sarfaesi act, can prohibit or modify


SARFAESI’s applicability in
2002 4. Govt.
public interest.

Securitisation and Reconstruction of Financial Assets and


Enforcement of Security Interest Act ,2002 18
1. In public interest, Union
Government can issue notification
Miscellaneous that xyz provision of SARFAESI act
may not apply or may apply with
modifications to a class or classes

Amendment 2.
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 money-
recovery.
3. 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
Important
Case
Laws &
Judgments
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 20
• Guidelines issued by
Signal RBI in relation to
classifying NPA
Apparels should be followed
by the bank before
issuing notice under
Pvt. Ltd Section 13(2) of
SARFAESI Act. The
Vs judgment discussed
at length the
Canara meaning of NPA its
ambit scope. Writ
Bank petition dismissed.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 21
• Pendency of Civil
1.) Mrs. Sunanda Suit or execution
Kumari and another petition or obtaining
Vs a decree is no bar to
Standard Chartered proceed under
SARFAESI Act - It was
Bank (Karnataka)
held in the following
cases that a pending
2.) Abdul Azeez civil suit or execution
Vs petition is no bar to
Punjab National proceed under
Bank (Kerala) SARFAESI Act
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 22
• Claim under
SARFAESI can be
Ace Media only to the extent
of decree/order
Advertisers passed by DRT - It
has been held in the
Pvt. Ltd. above case that the
process under
Securitisation Act
Vs. can be confined to
the extent of the
Bank of decree/order passed
by Debts Recovery
Baroda Tribunal.

Securitisation and Reconstruction of Financial Assets and


Enforcement of Security Interest Act ,2002 23
• Demand Notice to
Mahavir Guarantor
Plantations Pvt. Mandatory -
Notice to
Ltd. guarantor under
Vs SARFAESI Act is
K.K.Steel mandatory.
Enterprises Proceedings
without such
Vs notice will be
ICICI Bank Ltd. vitiated.
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 24
• Section 35 of the
SARFAESI Act will over
SBI ride the provisions
Arbitration and
Vs Conciliation Act 1996.
It cannot be pleaded
Heera Laxmi that the dispute with
regard to auction
Contractors should be resolved
Pvt. Ltd. through Arbitration
and Conciliation Act.

Securitisation and Reconstruction of Financial Assets and


Enforcement of Security Interest Act ,2002 25
• EPF dues have priority
over dues of Secured
Creditor - Dues under
Bank of India EPF will have priority over
Vs the dues of the Secured
Creditor. There is no
Assistant specific provision in the
SARFAESI Act which
Provident enable the Bank to claim
statutory charge. It is not
Commissioner 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
Yuth • Bar of Jurisdiction of
Civil Court - Civil Court
Development has no jurisdiction to
Co-operative entertain any suit filed
Bank Ltd in respect of action
taken under SARFAESI
Kolhapur Act.
Vs
Balasaheb
Dinakrrao
Salokhe & Ors
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act ,2002 27
• SARFAESI Vs.
Noble SICA -
Aqua Pvt. Provisions of
SARFAESI Act
Ltd. override
Vs Section 22 of
SBI SICA.

Securitisation and Reconstruction of Financial Assets and


Enforcement of Security Interest Act ,2002 28
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