SARFAESI ACT Objective:
1. To provide a structured platform to the Banking sector for managing its mounting NPA and keep pace with international
financial institutions
2. To enable banks and Fls to realise long-term assets, manage problems of _liquidity, asset -liability mismatches and improve
recovery by taking possession of securities, sell them and reduce non performing assets (NPAs) by adopting measures for
recovery or reconstruction."
Provisions of the Act
The remedy was suggested by Committees like the Narasirnham Committee II and Andhyarujina Committee, which considered the need for
changes in the legal system to address the issue of NPAs.
The SARFAESI Act was passed in 2002 to legalise securitisation and reconstruction of financial assets and enforcement of security interest. The
act envisaged the formation of asset reconstruction companies (ARCs) /Securitisation Companies (SCs).
The Act has made provisions for registration and regulation of securitisation companies or_reconstruction companies by the RBI, facilitate
securitisation of financial assets of banks, empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers
(QIBs), empowering banks and Fis to take possession of securities given for financial assistance and sell or lease the same or to take over
management in the event of default.
The Act provides alternative methods for recovery of NPAs, namely securitization and asset reconstruction.
Securitisation
Securitisation means issue of security by raising of receipts or funds by SCs/ARCs.
A securitisation company or reconstruction company may raise funds from the QIBs by forming schemes for acquiring
financial assets.
The SCl/ ARC shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired,
out of investments made by a QIB and ensure that realisations of such financial asset are held and applied towards redemption of
investments and payment of returns assured on such investments under the relevant scheme.
Asset Reconstruction
The SCs/ ARCs for the purpose of asset reconstruction should provide for anyone or more of the following measures:
the proper management of the business of the borrower, by change in, or take over of, the management of the business of
the borrower.
the sale or lease of a part or whole of the business of the borrower.
rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the
provisions of this Act.
settlement of dues payable by the borrower
taking possession of secured assets in accordance with the provisions of this Act.
Securitisation, and Reconstruction of Financial Assets and Enforcement of Security Interest Act
1. The Act was passed in 2002 with the objective of helping banks / Hs in recovery of their dues without intervention of the court. The Act is
applicable throughout India including Jammu & Kashmir.
2. The Act empowers the secured creditor to (i) take possession of the security (ii) sale or lease or assign the right over the same (iii) Manage
the same and/or appoint any person to manage the same (iv) Recover money receivable from 3rd parties. The competent authority to enforce
rights under SARFAESI is Chief Manager and above. However, Board of the bank can also delegate authority to an officer below the rank of
Chief Manager.
3. A bank can exercise rights under the Act provided following conditions are satisfied. (a) The asset to be acquired should be
charged to the bank. The recoverable dues should be more than Rs 1,00,000. The Act is not applicable if 80% of the due amount has been'paid.
A notice of 60 days is required to be given to the borrower and guarantor under section 13(2) of the Act calling upon them to discharge the liabilities
failing which bank can acquire the assets. If loan has been raised from more than one bank/FI, consent of 75% of lenders by value is
required before initiating action under the Act. The Act does not cover agricultural land mortgaged to the credit institution.
(However, other assets charged to bank can be acquired). The account should be NPA. The documents are within the limitation period
The security is not charged by pledge or lien.
4. The Act was challenged before Supreme Court in the case of Mardia Chemicals Limited versus Union of India and others (ICICI). While
upholding the constitutional validity of the Act, the Court struck down a clause that required borrower to deposit 75% of the claim amount
before making an appeal before DRT against action of the bank. Accordingly, the Act was revised in 2004 and the revised provisions are given in
the subsequent paragraphs.
5. If borrower has objection against the action of the bank, he can object to the bank and bank has to reply within one week. If borrower is still
not satisfied he can file application with the DRT within 45 days of the taking over of possession by the bank and is not required to deposit any
amount with DRT at this stage. If bank or borrower is not satisfied with the decision of DRT, either party can make appeal to DRAT within 30
days of receiving the copy of judgement. However, if the borrower prefers an appeal with DRAT, he is
required to deposit 50% of the bank's claim which can be reduced to 25% by the Chairperson. •
6. If the bank wants to sell the acquired assets, 30 days notice is to be given to the borrower/guarantor. The sale can be made by obtaining
quotations or inviting tenders from public or by holding public auction. In case of auctions or tenders, 30 days notice will be published in the
newspaper, reserve price will be fixed by the bank and sale at below reserve price will require consent of the borrower. Sale will be confirmed by
_bank on receipt of 25% of the amount immediately and balance in 15 days.
7. In the case of Transcore versus Union of India & Others, Supreme Court has decided that bank take action simultaneously under
SARFAESI and RDB Act (DRT Act)
1. To provide a structured platform to the Banking sector for managing its mounting NPA and keep pace with international
financial institutions
2. To enable banks and Fls to realise long-term assets, manage problems of _liquidity, asset -liability mismatches and improve
recovery by taking possession of securities, sell them and reduce non performing assets (NPAs) by adopting measures for
recovery or reconstruction."
Provisions of the Act
The remedy was suggested by Committees like the Narasirnham Committee II and Andhyarujina Committee, which considered the need for
changes in the legal system to address the issue of NPAs.
The SARFAESI Act was passed in 2002 to legalise securitisation and reconstruction of financial assets and enforcement of security interest. The
act envisaged the formation of asset reconstruction companies (ARCs) /Securitisation Companies (SCs).
The Act has made provisions for registration and regulation of securitisation companies or_reconstruction companies by the RBI, facilitate
securitisation of financial assets of banks, empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers
(QIBs), empowering banks and Fis to take possession of securities given for financial assistance and sell or lease the same or to take over
management in the event of default.
The Act provides alternative methods for recovery of NPAs, namely securitization and asset reconstruction.
Securitisation
Securitisation means issue of security by raising of receipts or funds by SCs/ARCs.
A securitisation company or reconstruction company may raise funds from the QIBs by forming schemes for acquiring
financial assets.
The SCl/ ARC shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired,
out of investments made by a QIB and ensure that realisations of such financial asset are held and applied towards redemption of
investments and payment of returns assured on such investments under the relevant scheme.
Asset Reconstruction
The SCs/ ARCs for the purpose of asset reconstruction should provide for anyone or more of the following measures:
the proper management of the business of the borrower, by change in, or take over of, the management of the business of
the borrower.
the sale or lease of a part or whole of the business of the borrower.
rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the
provisions of this Act.
settlement of dues payable by the borrower
taking possession of secured assets in accordance with the provisions of this Act.
Securitisation, and Reconstruction of Financial Assets and Enforcement of Security Interest Act
1. The Act was passed in 2002 with the objective of helping banks / Hs in recovery of their dues without intervention of the court. The Act is
applicable throughout India including Jammu & Kashmir.
2. The Act empowers the secured creditor to (i) take possession of the security (ii) sale or lease or assign the right over the same (iii) Manage
the same and/or appoint any person to manage the same (iv) Recover money receivable from 3rd parties. The competent authority to enforce
rights under SARFAESI is Chief Manager and above. However, Board of the bank can also delegate authority to an officer below the rank of
Chief Manager.
3. A bank can exercise rights under the Act provided following conditions are satisfied. (a) The asset to be acquired should be
charged to the bank. The recoverable dues should be more than Rs 1,00,000. The Act is not applicable if 80% of the due amount has been'paid.
A notice of 60 days is required to be given to the borrower and guarantor under section 13(2) of the Act calling upon them to discharge the liabilities
failing which bank can acquire the assets. If loan has been raised from more than one bank/FI, consent of 75% of lenders by value is
required before initiating action under the Act. The Act does not cover agricultural land mortgaged to the credit institution.
(However, other assets charged to bank can be acquired). The account should be NPA. The documents are within the limitation period
The security is not charged by pledge or lien.
4. The Act was challenged before Supreme Court in the case of Mardia Chemicals Limited versus Union of India and others (ICICI). While
upholding the constitutional validity of the Act, the Court struck down a clause that required borrower to deposit 75% of the claim amount
before making an appeal before DRT against action of the bank. Accordingly, the Act was revised in 2004 and the revised provisions are given in
the subsequent paragraphs.
5. If borrower has objection against the action of the bank, he can object to the bank and bank has to reply within one week. If borrower is still
not satisfied he can file application with the DRT within 45 days of the taking over of possession by the bank and is not required to deposit any
amount with DRT at this stage. If bank or borrower is not satisfied with the decision of DRT, either party can make appeal to DRAT within 30
days of receiving the copy of judgement. However, if the borrower prefers an appeal with DRAT, he is
required to deposit 50% of the bank's claim which can be reduced to 25% by the Chairperson. •
6. If the bank wants to sell the acquired assets, 30 days notice is to be given to the borrower/guarantor. The sale can be made by obtaining
quotations or inviting tenders from public or by holding public auction. In case of auctions or tenders, 30 days notice will be published in the
newspaper, reserve price will be fixed by the bank and sale at below reserve price will require consent of the borrower. Sale will be confirmed by
_bank on receipt of 25% of the amount immediately and balance in 15 days.
7. In the case of Transcore versus Union of India & Others, Supreme Court has decided that bank take action simultaneously under
SARFAESI and RDB Act (DRT Act)
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