Sarfaesi Act (1)

8/13/2019 Sarfaesi Act (1)

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SARFAESI ACT

SARFAESI Act (The Securitization and

Reconstruction of Financial Assets and

Enforcement of Securities Act, 2002) wasenacted to regulate securitization and

reconstruction of financial assets and

enforcement of security interest created inrespect of Financial Assets to enable realization

of such assets.


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The Act stipulates four conditions for enforcing the rThe Actstipulates four conditions for enforcing the rights

by a creditor.

(a) The debt is secured

(b) The debt has been classified as an NPA by the banks

(c) The outstanding dues are one lakh and above and more

than 20% of the principal loan amount and interest there

on. (d) The security to be enforced is not an Agricultural land.

(A) Securitisation Company or Reconstruction Company

shall commence/undertake only the securitization and

asset construction activities and the functions provided for in Section 10 of the SARFAESI Act. It cannot raise

deposits.


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RULES:

The SARFAESI Act provides for the manner for enforcement ofsecurity interests by a secured creditor without the

intervention of a court or tribunal. If any borrower fails to

discharge his liability in repayment of any secured debt within

60 days of notice from the date of notice by the securedcreditor, the secured creditor is conferred with powers under

the SARFAESI Act to

a) take possession of the secured assets of the borrower,

including transfer by way of lease, assignment or sale, for

realizing the secured assets


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b) takeover of the management of the business of the

borrower including the right to transfer by way of lease,assignment or sale for realizing the secured assets,

c) appoint any person to manage the secured assets

possession of which is taken by the secured creditor,and

d) require any person, who has acquired any of the

secured assets from the borrower and from whommoney is due to the borrower, to pay the secured

creditor so much of the money as if sufficient to pay the

secured debt.


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The Central Government has prescribed Security Interest

(Enforcement) Rules, 2002 pursuant to the powers

conferred on it under the SARFAESI Act. The foregoing

enforcement measures must be exercised by a secured

creditor in accordance with the Enforcement Rules and

are further subject to guidelines issued by the RBI.

In exercise of powers conferred by SARFAESI Act, 2002,

Reserve Bank of India has issued guidelines to

registration, measures of asset reconstruction, prudential

norms, acquisition of financial assets etc., namely 'The

Securitization Companies and Reconstruction Companies

(Reserve Bank) Guidelines and Directions, 2003'. The

Guidelines are available at the Downloads segment.


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Why is the SARFAESI Act of critical

importance to lenders?

To speed up the process of recovery from

NPAs, SARFAESI Act was enacted in 2002 for

regulation of securitization and

reconstruction of financial assets and

enforcement of security interest by secured

creditors.

The SARFAESI Act empowers Banks / Financial

Institutions to recover their non-performing

assets without the intervention of the Court.


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The Act provides three alternative methods forrecovery of non-performing assets, namely:

1. Securitization

2. Asset Reconstruction

3. Enforcement of Security without intervention

of the court


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Secured creditors are given the power to take

possession of the securities in the event ofdefault and sell such securities for the purpose

of recovery of the loan.

The Act provides for enforcement of Security

interest by a secured creditor withoutintervention of the court, in cases of default in

repayment of installments and non-

compliance with the notice period of 60 daysafter the declaration of the loan as a non-

performing asset.


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Procedure for Enforcement of Rights

notice is to be issued tothe borrower/co-borrowers/guarantors/surely giving 60

days time for setting the liability.

After the expiry of 60 days, in case the amount

due is not paid, the bank can take possession of the

property and bring it for sale to realize the dues.

After taking possession,

the bank has to publish a possession notice in two

newspapers for the information of the general public.

Such publication is to be made within 7 days oftaking possession of the property. The

borrower/mortgagor can approach DRT for redressing

grievances if any within 45 days from taking possession

by the bank.


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The property of which possession is taken can be

sold only after obtaining valuation through Government

approved valuer and thereafter publishing the sale notice

in two news papers (one in vernacular) giving 30 daysnotice. Thus the property can be sold for maximum price

with wide publicity. Any excess amount realized is not

sufficient to cover the dues, the secured creditor can

approach the DRT to recover the balance amount.


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ISSUES UNDER THE SARFAESI

(a) A securitization receipt (SR) gives its holder a right of title or

interest in the financial assets included in securitization. Thedefinition is not legally inadequate in case of Pay through

Securities with different tranches.

(b) The SARFAESI Act has been structured to enable security

receipts (SR) to be issued and held by Qualified InstitutionalBuyers (QIBs). It does not include NBFC or other bodies unless

specified by the Central Government as a financial institution

(Fl).

(c) Demand for securities is restricted to short tenor papers and

highest ratings.

(d) The various risks involved in securitization include Credit Risk,

Sovereign Risk, Collateral deterioration Risk, Legal Risk,

Prepayment Risk, Servicer Performance Risk, Swap counterparty

Risk and Financial Guarantor Risk.


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Problems faced by banks

1. Sale of security property2. Priority of Government dues

(a) The Government authorities should prove that the

claim relates to a date prior to the mortgage in favor of the bank.

(b) The authorities have taken all possible measures withina reasonable time to recover the dues.

(c) The debtor has no other property/source for payment

of Government dues other than the property mortgaged to the

Bank.

3. Court interference


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ConclusionThe SARFAESI Act has been largely perceived as facilitating asset

recovery and reconstruction. Since Independence, the

Government has adopted several ad-hoc measures to tackle

sickness among financial institutions, foremost through

nationalization of banks and relief

measures. Over the course of time, the Government has put in

place various mechanisms for cleaning the banking system from

the menace of NPAs and revival of a healthy financial and banking

sector. The Reserve Bank of India issued guidelines and directions

relating to registration, measures of ARCs, functions of thecompany, prudential

norms, acquisition of financial assets and related matters under

the powers conferred by the SARFAESI Act, 2002.

Documents

Sarfaesi Act (1)