Financial Laws

PART-1
SARFAESI ACT,
2002
SARFAESI ACT 2002 :
“Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act”
2002-is an Indian law aimed at empowering banks and
financial institutions to recover non-performing assets
(NPAs) without the intervention of courts.
-Applicable for NPA of 1 Lakh and above & loan
amount of NPA remaining above 20%. -Act contains
41 sections.
The key objectives of the SARFAESI Act 2002 are:
1.Facilitate Quick Recovery: Enable banks and financial
institutions to swiftly recover non-performing assets
(NPAs) without court intervention. 2.Empower Financial
Institutions: Allow them to take possession and sell
secured assets in case of loan defaults. 3.Securitisation:
Convert NPAs into marketable securities to improve
liquidity. 4.Asset Reconstruction: Establish Asset
Reconstruction Companies (ARCs) for managing and
recovering bad loans. 5.Central Registry: Prevent fraud
and multiple lending against the same property through a
centralized registry (CERSAI).
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The need for the SARFAESI Act 2002 arises from the
following reasons:
1.Efficient NPA Recovery: Traditional judicial processes
for recovering non-performing assets (NPAs) were slow
and cumbersome, leading to delayed recoveries.
2.Financial Stability: Quick and effective recovery of bad
loans helps maintain the health and stability of the banking
system. 3.Encouraging Lending: By reducing the burden
of NPAs, banks are more willing to extend credit,
supporting economic growth. 4.Preventing Fraud: The
establishment of a centralized registry (CERSAI) helps
prevent fraudulent multiple lending against the same
property. 5.Improving Liquidity: Securitisation allows
banks to convert bad loans into marketable securities,
enhancing liquidity.
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Key features of the SARFAESI Act 2002,
including relevant sections:
1.Empowerment of Banks (Section 13): Allows banks and
financial institutions to take possession of secured assets and
sell them without court intervention in case of loan defaults.
2.Securitisation (Section 5): Enables the conversion of non-
performing assets (NPAs) into marketable securities to improve
liquidity. 3.Asset Reconstruction (Section 9): Facilitates the
creation of Asset Reconstruction Companies (ARCs) to manage
and recover bad loans. 4.Enforcement of Security Interest
(Section 13): Provides a mechanism for banks to issue a 60-
day notice to defaulting borrowers to repay dues, after which
they can seize and sell the assets. 5.Central Registry (Section
20): Establishes a centralized registry (CERSAI) to record
security interests, helping to prevent fraud and multiple lending
against the same asset. 6.Objection and Appeal (Section 17):
Borrowers have the right to file objections with the Debt
Recovery Tribunal (DRT) and appeal to the Appellate Tribunal
against actions taken by banks.
Methods Of Recovery in SARFAESI Act
1. Securitisation under the SARFAESI Act
(Section 5) : Securitisation in the context of the
SARFAESI Act 2002 refers to the process by which banks
and financial institutions convert their non- performing
assets (NPAs) into marketable securities for raising Cash.
This process is outlined in Section 5 of the Act.
Benefits :
1. Immediate liquidity infusion for banks. 2. Reduction of
non-performing assets
(NPAs). 3. Efficient recovery mechanism for bad
loans. Key Points:
4. Enhanced financial health of banks. 5. Increased
lending capacity. 1.Pooling of Assets: Banks bundle
various loans and financial assets
6. Transfer of credit risk to investors. that are
underperforming or non-performing. 2.Transfer to
Securitisation Companies: These pooled assets are sold
to a securitisation company (SC) or an asset
reconstruction company (ARC). 3.Issuance of Securities:
The SC or ARC issues securities backed by these assets.
Investors buy these securities, providing funds to the
banks. 4.Improved Liquidity: This process helps banks
turn illiquid assets (NPAs) into liquid funds, improving their
financial health and lending capacity.
2.Reconstruction under the SARFAESI
Act (Section 9):
Reconstruction in the context of the SARFAESI Act 2002
refers to the process of managing and recovering
distressed financial assets by asset reconstruction
companies (ARCs). This process is detailed in Section 9
of the Act.
Key Points:
1.Acquisition of Assets: ARCs acquire non- performing
assets (NPAs) from banks and financial institutions.
2.Management and Resolution: ARCs manage these
assets with the aim of restructuring them or recovering the
maximum possible value. 3.Resolution Strategies: ARCs
employ various strategies such as restructuring,
rescheduling, settlement, or enforcement of security
interests to recover dues. 4.Sale of Assets: If necessary,
ARCs may sell the assets to realise their value and
recover dues.
Benefits :
1. Improved recovery of distressed assets. 2. Efficient
NPA management. 3. Risk reduction for banks. 4.
Enhanced financial health. 5. Smoothen banking
operations. 6. Potentially higher recovery rates.
3. Enforcement of Security Interest under the
SARFAESI Act (Section 13) :
Enforcement of Security Interest in the SARFAESI Act
2002 empowers banks and financial institutions to take
possession of secured assets and sell them to
recover outstanding dues from defaulting borrowers. This
process is governed by Section 13 of the Act.
Key Points:
1.Notice to Borrower: Banks issue a 60-day notice to
defaulting borrowers, demanding repayment of dues.
2.Possession of Assets: If the borrower fails to repay
within the notice period, banks can take possession of the
secured assets. 3.Sale of Assets: Banks have the
authority to sell or lease these assets to recover the
outstanding dues. 4.Appointment of Manager: Banks
may appoint a manager to oversee and manage the
secured assets during the recovery process.
Benefits :
1. Enables swift recovery of dues. 2. Efficient resolution of
bad loans. 3. Streamlined asset management. 4.
Enhances financial stability of banks.
CERSAI under the SARFAESI Act (Section
20)
CERSAI (Central Registry of Securitisation Asset
Reconstruction and Security Interest) is a centralized
online registry established under the SARFAESI Act 2002,
specifically mentioned in Section 20. It records details of
security interests created on property to prevent fraud and
ensure transparency. Key Points: 1.Purpose: Prevents
multiple lending against the same asset and reduces fraud
in loan transactions. 2.Registration of Security
Interests: Financial institutions must register details of
security interests, including mortgages and securitisation,
with CERSAI. 3.Accessible Information: Provides a
database accessible to financial institutions and the public
to verify existing security interests on assets. 4.Function:
CERSAI is an online platform that records all mortgages
and loans against properties to prevent multiple loans on
the same asset. 5.Benefit: Enhances transparency and
reduces the risk of fraud in lending.
Benefits: 1.Fraud Prevention: Reduces the risk of
multiple loans on the same asset. 2.Transparency:
Ensures clear records of secured interests. 3.Efficiency:
Streamlines the verification process for lenders. 4.Public
Access: Allows public and financial institutions to check
existing charges on properties.
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PYQs
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Q.1 Successful ltd. defaulted in the repayment of term loan taken from bank
against security created as first charge on same of its assets. The Bank
issued notice pursuant of section is of SARFAESI Act, 2002 to company to
discharge its liabilities within period of 60 days from date of notice. The
company failed to discharge its liabilities within time limit specified.
Identify and explain measures to be taken by the bank to enforce its
security interest under the act.
When a borrower defaults on repayment of a term loan secured by assets, and the
lender, in this case, the bank, has issued a notice under Section 13 of the SARFAESI
Act, 2002, and the borrower fails to discharge its liabilities within the specified time limit,
the bank can take various measures to enforce its security interest under the Act. Here
are some key steps the bank can take: 1.Take Possession of Secured Assets: The
bank can take possession of the secured assets mentioned in the security agreement.
These assets could include property, machinery, equipment, or any other assets
pledged as collateral for the loan. 2.Sell or Lease the Secured Assets: After taking
possession, the bank can proceed to sell or lease the secured assets to recover the
outstanding loan amount. The sale or lease must be conducted through a public auction
or private treaty as per the provisions of the Act. 3.Issue Demand Notice for
Repayment: The bank may issue a demand notice to the borrower, requiring
repayment of the outstanding loan amount along with any accrued interest and costs
incurred by the bank in enforcing its security interest. 4.Appoint Authorized Officer:
The bank can appoint an authorized officer who has the power to take possession of,
manage, and sell the secured assets on behalf of the bank. This officer must act in
accordance with the provisions of the SARFAESI Act and any guidelines issued by the
Reserve Bank of India (RBI). 5.Publish Public Notice: Before selling or leasing the
secured assets, the bank must publish a public notice in at least two newspapers,
including one in the vernacular language of the area where the secured assets are
located. This notice must provide details of the intended sale or lease, including the
time, date, and place of auction. 6.Transfer of Title: Upon the sale or lease of the
secured assets, the bank must transfer the title or leasehold rights to the purchaser or
lessee. The proceeds from the sale or lease should be utilized to repay the outstanding
loan amount, and any surplus should be returned to the borrower. 7.Legal Action: In
case the borrower disputes the enforcement of security interest or refuses to cooperate,
the bank may initiate legal proceedings to recover the outstanding dues through the
Debt Recovery Tribunal (DRT) or any other appropriate legal forum. These are some of
the measures that the bank can take to enforce its security interest under the
SARFAESI Act. It's essential for the bank to follow the procedures prescribed under the
Act and exercise its rights in a lawful and transparent manner.
Q.2 Is SARFAESI Act 2002 Applicable To All NBFCs ?
Which Assets Will Be Considered For Determining
Asset Of 100 Cr ?
The SARFAESI Act (Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act), 2002
applies to certain categories of non-banking financial companies
(NBFCs), but not all NBFCs. Generally, NBFCs engaged in the
business of financing or providing loans, advances, or other
financial services are covered under the Act. However, NBFCs
primarily engaged in activities such as infrastructure finance,
stock-broking, merchant banking, leasing, etc., are not typically
covered. Regarding the determination of assets for the purpose of
the SARFAESI Act, the threshold is Rs. 100 crores. Here's how it
works: The Act specifies that it applies to banks and financial
institutions (FIs) as well as to any other company engaged in the
business of financial activities as defined under Section 45-I(c) of
the RBI Act, 1934. For these entities, the Act applies when the
amount due is at least Rs. 1 lakh or any higher amount specified
by the Central Government. For the determination of the asset
threshold of Rs. 100 crores, it typically refers to the aggregate
amount of the financial assets in the balance sheet of the NBFC.
Financial assets can include loans, advances, investments, and
any other assets held by the NBFC in the course of its business. If
the total value of these financial assets exceeds Rs. 100 crores,
the NBFC falls under the purview of the SARFAESI Act, and its
provisions become applicable to the recovery of dues. It's
important to note that the specific determination of assets and
applicability of the SARFAESI Act can also be influenced by
notifications and guidelines issued by regulatory authorities such
as the Reserve Bank of India (RBI) from time to time. Therefore,
NBFCs should closely monitor regulatory updates to ensure
compliance with the Act and related regulations.
Q.3 Analyse the following scenarios with respect to registration under
SAR FAESI Act: i) Eligible NBFC with debt amounting to less than Rs. 50
Lacs. ii) Eligible NBFC with debt amounting to more than Rs. 50 Lacs. iii)
NBFC not falling under the definition of Financial Institutions, but the
debt amounts to more than Rs. 50 Lacs. iv) The creditor is an
operational secured creditor. v) The borrower is not a corporate body
Under the SARFAESI Act (Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act), 2002, registration is
mandatory for certain entities involved in financial activities. Let's analyze the
given scenarios: i) Eligible NBFC with debt amounting to less than Rs. 50
Lakhs:
•In this scenario, since the debt amount is less than Rs. 50 lakhs, the NBFC
may not be required to register under SARFAESI Act. However, it's crucial for
the NBFC to comply with all other relevant regulations and guidelines
applicable to it. ii) Eligible NBFC with debt amounting to more than Rs. 50
Lakhs:
•If an NBFC has debt exceeding Rs. 50 lakhs, it falls under the purview of the
SARFAESI Act, and registration becomes mandatory. The NBFC needs to
register with the appropriate authority as per the requirements laid down in the
Act. iii) NBFC not falling under the definition of Financial Institutions, but
the debt amounts to more than Rs. 50 Lakhs:
•Even if the NBFC doesn't fall under the definition of financial institutions, if its
debt crosses the threshold of Rs. 50 lakhs, it would still need to register under
SARFAESI Act. The Act primarily focuses on the nature of the debt and the
amount outstanding, rather than the specific classification of the creditor. iv)
The creditor is an operational secured creditor:
•The SARFAESI Act applies not only to financial institutions but also to
operational secured creditors. Operational creditors who have security
interests over the assets of the borrower can take recourse under this Act for
the enforcement of their rights. v) The borrower is not a corporate body:
•SARFAESI Act primarily deals with the enforcement of security interests by
financial institutions and other creditors over assets held as collateral for
loans. While the Act doesn't specifically exclude non-corporate borrowers, its
application might differ based on the nature of the borrower and the assets
involved. However, the Act generally applies to both corporate and non-
corporate borrowers, as long as the conditions for enforcement of security
interests are met. In summary, registration under the SARFAESI Act depends
on factors such as the nature of the creditor, the amount of debt, and the type
of borrower. It's essential for NBFCs and other creditors to understand their
obligations under the Act and comply with its provisions accordingly.
Nikhil Swami Sir, MBA – Contact 9315043816
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Practice Multiple Choice Questions
1.SARFAESI stands for a) Securitization and Restructuring of
Financial Assets and Enforcement of Security Interest b)
Secularization and Reconstruction of Financial Assets and Ensure
of Security Interest c) Securitization and Reconstruction of
Financial of Financial Assets and Enforcement of Security Interest
d) Secularization and Restructuring of Financial Assets and
Ensure of Security Interest
2.What is the primary aim of enacting SARFAESI Act a)
Recovering Loan b) Increasing Deposits c) Transparent
appointment of Directors d) Reducing Corruptions and Scams
3.Provisions regarding the establishment of Central Registry
are provided In which of the following chapters of SARFAESI
Act, 2002? a) Chapter 2 b) Chapter 3 c) Chapter 4 d) Chapter 5
4.Under the provisions of SARFAESI Act, 2002, where
transaction of securitization is registered? a) Registrar of
Companies b) Registrar of Firms c) Registrar of Central Registry
d) Registrar of Assurances
Nikhil Swami Sir, MBA – Contact 9315043816
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