SARFAESI Act, 2002

Dr. Laila Memdani

Objectives of the Act

Blend of three concepts viz., Securitisation,
Asset Reconstruction and Enforcement of
Security Interest. The Act deals with
Legal Framework for securitisation of assets
Transfer of NPAs to asset Reconstruction
Companies and realising the proceeds
Enforcement of Security Interest without
court intervention.

Asset Reconstruction Companies(ARCs)/

Securitisation Companies(SCs):
Securitisation means acquisition of
financial asset by securitisation or
reconstruction company from the orignator
(bank/FI) without recourse to orignator.
SC/RC should register under the
companies Act, 1956 and should obtain
licence from RBI

Securitisation Process
The prime objective of securitization is to
sell the secured NPA loans to investors
through a special purpose vehicle called
Securitization Company.
Once the securitization company takes
over financial asset, the company will be
treated as secured creditor for all the
purposes (Section 5 (3)].

 Securitization Company will formulate a

separate scheme for each set of assets
and invites QIBs (Qualified Institutional
Buyers) for investment in the scheme.
The securitization company will issue
security receipts to QIBs. The security
receipt represents individual interest in
such financial assets (Section 2(1) (219)].
The securitization company will realize the
financial asset and redeem the investment
by paying the proceeds to QIB under each
scheme (Section 7).

Asset Reconstruction Process

. Asset Reconstruction Company will have to
be registered with the RBI [Section (3)(1)]
Once the Asset Reconstruction Company
(ARC) takes over assets, that company will
be treated as lender and secured creditor.
[Section (5) (3)] ARC acquires NPA loan from
banks and financial institutions by issuing
debentures, bonds or by entering into special
arrangements [Section 5(1)]

Enforcement of Security Interest

Security Interest means right, title and

interest upon property created in favor of
any secured creditor including mortgage,
charge, hypothecation and assignment
other than those exempted under Section
31.

 The requirements of Section 13 can be summarized

Classification of secured debts as non-performing asset
Issuing notice to borrower in writing with details of
amount due and the details of security interest to be
enforced in case dues are not recovered within 60 days
from the date of notice [Section 13(2) and Section 13(3)].
After the expiry of Sixty days period, Secured creditor
can select any or all the options to recover his dues
(Section 13(4, such as:
Possession/appoint a person to manage the assets
under possession.
Transfer by sale/lease/assignment.
Demand the payment from any person who has acquired
the secured assets

Process of Enforcement Under The Act

Secured Creditor can initiate the
enforcement once a secured debt is
classified as a non-performing asset as
per the guiding regulations of Reserve
Bank of India. Section 13 of the Act
provides the detailed process

Exemptions:
Lien
Conditional Sale / Hire Purchase / Lease
Pledge
Security in Aircraft/ Shipping Vessels
Unpaid Seller Rights (Section 47 of Sale of
Goods Act. 1930)
Security Interest in Agricultural Land
Any Financial Assets Not exceeding Rs.l.OO
lakh
Where amount due is less than 20% of Principal
Amount and Interest

4. Bank to sell the property/secured interest:

After taking physical possession of the
property under section 14,
- if there is no impediment to proceed
further through an order from the
Tribunal or the High Court,
- the Bank will proceed to sell the
property/ secured interest.
and - the Bank is supposed to strictly comply
with the provisions of the Act and the
SARFAESI Rules in this regard.

- Even after the confirmation of sale in

a public auction conducted by the
Bank, the auction can be set-aside if
the Debt Recovery Tribunal decides in
favour of the borrower.
- From and out of the sale proceedings,
the residue is to be returned to the
borrower.