SARFAESI Act, 2002Dr. Laila Memdani

Objectives of the ActBlend of three concepts viz., Securitisation, Asset Reconstruction and Enforcement of Security Interest. The Act deals with Legal Framework for securitisation of assetsTransfer of NPAs to asset Reconstruction Companies and realising the proceedsEnforcement 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 ProcessThe 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 summarizedClassification 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 PledgeSecurity in Aircraft/ Shipping VesselsUnpaid 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.