ch 7 sarfaesi ( chap vii)

SARFAESI Act,2002SARFAESI Act,2002 ( Chap VII)( Chap VII)

PUTTU GURU PRASAD

INC GUNTUR

Meaning and ObjectiveMeaning and Objective

The Securitization and Reconstruction of Financial assets and The Securitization and Reconstruction of Financial assets and

Enforcement of Security Interest Act, 2002Enforcement of Security Interest Act, 2002..

One of most important steps for One of most important steps for economic growth is the recovery of economic growth is the recovery of

debts.debts.

In India the Government of India has taken several steps to In India the Government of India has taken several steps to recover recover

bad debtsbad debts of banks as well as the other financial institutions. of banks as well as the other financial institutions.

One such step was the Recovery of Debts due to Banks and One such step was the Recovery of Debts due to Banks and

Financial Institutions Act, 1993. Financial Institutions Act, 1993.

The main objective was to The main objective was to speed up the recovery process in order speed up the recovery process in order

to reduce the continuance of non-performing assets (NPA’s).to reduce the continuance of non-performing assets (NPA’s).

Recovery of DebtRecovery of Debt

The recovery of bad debts was to be executed by establishment of The recovery of bad debts was to be executed by establishment of Debt Recovery TribunalsDebt Recovery Tribunals ( 29 Tribunals). ( 29 Tribunals).

In order to provide opportunity for an appeal from the decision of the In order to provide opportunity for an appeal from the decision of the Tribunal the Government had established DRAT i.e. Tribunal the Government had established DRAT i.e. Debt Recovery Debt Recovery Appellant Tribunals (Appellant Tribunals (5 DRATs).5 DRATs).

The recovery performance was not encouraging and therefore the The recovery performance was not encouraging and therefore the Government wanted to enact an Act for controlling on the NPA’s Government wanted to enact an Act for controlling on the NPA’s and on the creditor’s right of enforcement of security interest.and on the creditor’s right of enforcement of security interest.

Therefore the Parliament enacted the Therefore the Parliament enacted the SARFAESI Act, 2002SARFAESI Act, 2002

Objectives of the ActObjectives of the Act

It has laid down the legal framework for It has laid down the legal framework for securitization of the Assetssecuritization of the Assets..

The transfer of The transfer of NPA’s to asset reconstruction companiesNPA’s to asset reconstruction companies for the for the

disposal of the assets and to realize the proceeds.disposal of the assets and to realize the proceeds.

To enforce the security interest without the Court intervention.To enforce the security interest without the Court intervention.

One of the provisions in the Act One of the provisions in the Act empowers the banks and financial empowers the banks and financial

institutions to take over the immovable propertyinstitutions to take over the immovable property that is hypothecated that is hypothecated

or charged to enforce the recovering of debt by directly seizing the or charged to enforce the recovering of debt by directly seizing the

property . property .

PurposePurpose The Act was made to help banks and other financial institutions in The Act was made to help banks and other financial institutions in

recovering the NPA’s. recovering the NPA’s.

It has been made with a combination of three conceptsIt has been made with a combination of three concepts

SecuritizationSecuritization

Asset Reconstruction andAsset Reconstruction and

Enforcement of security interest without theEnforcement of security interest without the

Court interventionCourt intervention

An amendment is brought to this Act for facilitating SARFAESI An amendment is brought to this Act for facilitating SARFAESI Act,2002, Debt Recovery law, 1993 and Companies Act by passing Act,2002, Debt Recovery law, 1993 and Companies Act by passing The The Enforcement of Security Interest and Recovery of Debts Laws Enforcement of Security Interest and Recovery of Debts Laws ( Amendment ) Act, 2004.( Amendment ) Act, 2004.

The Amendment was based on the ruling of the SC in The Amendment was based on the ruling of the SC in Mardia Chemicals Mardia Chemicals Vs. ICICI BankVs. ICICI Bank

What are the benefits of the Act?What are the benefits of the Act?

Securitization and Asset ReconstructionSecuritization and Asset Reconstruction::

The main objective is to sell the secured NPA loans to investors The main objective is to sell the secured NPA loans to investors

through a special purpose vehicle called Securitization Company.through a special purpose vehicle called Securitization Company.

Such Company will take over the financial assets and the company Such Company will take over the financial assets and the company

which takes over will be treated as a which takes over will be treated as a secured creditorsecured creditor for all for all

purpose.purpose.

What will the Securitization Company Do?What will the Securitization Company Do?

The Securitization Company will formulate a separate scheme for The Securitization Company will formulate a separate scheme for each assets or set of assets.each assets or set of assets.

Then it will invite Then it will invite Qualified Institutional Buyers (QIB’s)Qualified Institutional Buyers (QIB’s) for investing for investing in such a scheme.in such a scheme.

Then such company will issue security receipts to QIB’s.Then such company will issue security receipts to QIB’s.

Such receipts will represent the individual interest in such financial Such receipts will represent the individual interest in such financial assets.assets.

The company will The company will realize the financial assets and redeem the realize the financial assets and redeem the investmentinvestment by paying the proceeds to QIB’s under each scheme. by paying the proceeds to QIB’s under each scheme.

Asset Reconstruction (AR)Asset Reconstruction (AR)

It involves securitization and enforcement of the security interest. It involves securitization and enforcement of the security interest. Such company has to register with the RBI. Such company has to register with the RBI.

It will be considered to be a Public Financial Institution under the It will be considered to be a Public Financial Institution under the Companies Act.Companies Act.

The Purpose of the AR isThe Purpose of the AR is : :

Registration of SecuritizationRegistration of Securitization or Reconstructions of Companies with or Reconstructions of Companies with the RBI and to comply with the formalities for their registration and the RBI and to comply with the formalities for their registration and

The effect of non -registration or rejection of such application of The effect of non -registration or rejection of such application of such companies.such companies.

Once the Once the Asset Reconstruction Company (ARC)Asset Reconstruction Company (ARC) takes over the takes over the assets, the company will be treated as a lender or secured creditor.assets, the company will be treated as a lender or secured creditor.

ARC will acquire NPA loan from banks and Financial Institutions by ARC will acquire NPA loan from banks and Financial Institutions by issuing debentures, bonds or by entering into special arrangements.issuing debentures, bonds or by entering into special arrangements.

What does ARC do?What does ARC do?

ARC formulates a scheme for each of financial assets taken over ARC formulates a scheme for each of financial assets taken over and invites investment from QIB’sand invites investment from QIB’s in such schemes. in such schemes.

ARC issues security receipts to ARC issues security receipts to QIB’sQIB’s..

ARC realizes the financial assets and redeems the investment and ARC realizes the financial assets and redeems the investment and pays returns to QIB’s under each scheme.pays returns to QIB’s under each scheme.

AR involves any one or more of the following measuresAR involves any one or more of the following measures::

Rescheduling of payment of dues payable by the borrowerRescheduling of payment of dues payable by the borrower

Enforcement of security interest in accordance with the provisions Enforcement of security interest in accordance with the provisions of the Actof the Act

Settlement of dues payable by the borrowerSettlement of dues payable by the borrower

Taking possession of securitiesTaking possession of securities

Eligibility Criteria for Securitization Eligibility Criteria for Securitization Company/ AR CompanyCompany/ AR Company

To obtain To obtain certification of registrationcertification of registration

Owning funds ( Min Rs 2 Crores or Max 15% of the total financial Owning funds ( Min Rs 2 Crores or Max 15% of the total financial assets acquired or to be acquired)assets acquired or to be acquired)

Reserve Bank to consider certain requirements for the company to Reserve Bank to consider certain requirements for the company to be registeredbe registered

Sponsor of the company ( any person) to hold not less than Sponsor of the company ( any person) to hold not less than 10% of 10% of the paid up equity capitalthe paid up equity capital of company or do not hold any control in of company or do not hold any control in the interest of the company.the interest of the company.

To comply with the conditions as specified in the guidelines issued To comply with the conditions as specified in the guidelines issued by the RBI.by the RBI.

The The RBI is empowered to reject the application/ Cancellation of RBI is empowered to reject the application/ Cancellation of Certification of RegistrationCertification of Registration, and the applicant can file an Appeal to , and the applicant can file an Appeal to the Central Government. the Central Government.

Enforcement of Security InterestEnforcement of Security Interest

Security InterestSecurity Interest means a right, title and an interest upon the means a right, title and an interest upon the property created in favour of any secured creditor including a property created in favour of any secured creditor including a mortgage, charge, hypothecation and assignmentmortgage, charge, hypothecation and assignment other than those other than those exempted.exempted.

PropertyProperty means any immovable, movable property any debt means any immovable, movable property any debt (Secured or unsecured) or right to receive property. It may be an (Secured or unsecured) or right to receive property. It may be an existing, future or intangible assetsexisting, future or intangible assets including any including any licenses and licenses and franchisesfranchises or any other business or commercial right. or any other business or commercial right.

Process of enforcement under the ActProcess of enforcement under the Act

A secured creditor can A secured creditor can initiate the enforcementinitiate the enforcement once the secured once the secured debt is classified as an NFA as per the guidelines issued by the debt is classified as an NFA as per the guidelines issued by the RBIRBI

Once the asset is classified as NFAOnce the asset is classified as NFA: : A notice will have to be given to the borrower, andA notice will have to be given to the borrower, and After After 60 days from the date of issue of notice, secured creditor60 days from the date of issue of notice, secured creditor can can

take any of the actions like taking over the possession, or take over take any of the actions like taking over the possession, or take over the management,the management,

Transfer the property either by Transfer the property either by lease or sale or assignmentlease or sale or assignment.. Demand for the payment.Demand for the payment.

Exemptions from EnforcementExemptions from Enforcement

LienLien

PledgePledge

Security in Air Crafts/ Shipping VesselsSecurity in Air Crafts/ Shipping Vessels

Conditional Sale/ Hire Purchase/ LeaseConditional Sale/ Hire Purchase/ Lease

Unpaid Sellers RightsUnpaid Sellers Rights

Security Interest in Agricultural LandSecurity Interest in Agricultural Land

Properties not liable for Attachment Properties not liable for Attachment (Civil Procedure Code)(Civil Procedure Code)

Any Financial asset: not exceeding Rs 1.00 lakh or where the Any Financial asset: not exceeding Rs 1.00 lakh or where the

amount due is less than 20% of the Principal amount and Interest.amount due is less than 20% of the Principal amount and Interest.

Other ProvisionsOther Provisions

The Act operates as a The Act operates as a non-obstantenon-obstante clause and clause and allows the secured allows the secured creditor to enforce a mortgage also without the intervention of the creditor to enforce a mortgage also without the intervention of the Court.Court.

The borrower is provided with an The borrower is provided with an opportunity to raiseopportunity to raise any objections any objections to the enforcement rights of secured creditor within the days of grace to the enforcement rights of secured creditor within the days of grace period of sixty days.period of sixty days.

Secured creditor to give reasons for enforcement.Secured creditor to give reasons for enforcement. Judicial scrutiny is envisaged in the ActJudicial scrutiny is envisaged in the Act, so that the , so that the aggrieved aggrieved

borrower can approach the DRT within 45 days from the date of borrower can approach the DRT within 45 days from the date of measuresmeasures taken under the Act. taken under the Act.

There is also a provision of There is also a provision of second Appealsecond Appeal.. While enforcing the security, the officers have to obtain the While enforcing the security, the officers have to obtain the valuation valuation

of the immovable propertyof the immovable property and give a notice of 30 days before the and give a notice of 30 days before the date of the proposed date.date of the proposed date.