OVERVIEW OF SARFAESI

ACT, 2002

SUB: INVESTMENT AND COMPETION LAW

PRAGATI OJHA
BBA LLB ‘B’
ENROL NO - 05251103518
PRIOR TO SARFAESI ACT, 2002
In the year 2002 on 17th December, the SARFAESI ACT namely “Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”, was
approved. The sole motive of the act was to gives Banks and Financial Institution a platform
to recover their loaned money. It gives Bank and Financial Institution powers to mortgage,
auction or sell the assets in case of non-payment of dues. Not only this, the Banks also have
authority to declare the unpaid money as NPA in the books.
The RDDBFI Act namely ‘The Recovery of Debts due to Banks and Financial Institution
Act, 1993’ was the law under which Banks were having provisions to approach to the
tribunal, i.e., “DRT (Debt Recovery Tribunal)”. The provisions for the approach were same
as that of filing a suit in “Civil Court Proceedings”. Here the process is filing an application
called Original application before the DRT under the RDDBFI Act,1993.

IMPORTANCE AND NEED FOR “SARFAESI ACT, 2002”

 It was enacted after the recommendations of Narashiman Committee-I and
introspecting Committee under Andhyarujna

 The process of RDDBFI ACT, 1993 having loopholes in itself making it difficult to
achieve the objective of reducing the ‘NPA. Failing to which a new act came into
force called “Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002”

 Civil courts in itself having slow and time-consuming process creating hardship for
the Banks and Financial Institutions.

 “Under SARFAESI Act, 2002, the Bank can determine the outstanding due after
noting the objections from the borrower/guarantor if any proceed against the ‘secured
asset’ by taking physical possession of the same and initiating auction proceedings in
accordance with the provisions and the SARFAESI rules”

OBJECT OF THE ACT

 “An Act to regulate securitisation and reconstruction of the financial assets and
enforcement of the security interest and matter connected therewith or incidental
thereto”

 On the 21.06.2002 the SARFAESI ACT came into process/power, which also extends
to INDIA including J&K.

 The process here is simple, the securities are being sold to Bank and FI’s in exchange
of money loaned out. Whereas, in case of failure these securities act as protection as it
can be sold in case of financial crisis.
  The slow and delaying process of the earlier legal system, created hardship for the
Bank and Financial Institution for the recovery of lent money, considering these
aspects the “Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002” came into force.

 The SARFAESI ACT, 2002, highlights the: 

1) Asset Management of Banks or Financial Institutions.
2) Setting up of Asset Reconstruction & Asset securitization companies to
effectively deal with the NPA’s.
 For the recovery of Non-Performing assets, or lent money the SARFAESI Act, 2002,
gives powers to the lending “Banks and FI’s” for the process of recovery.

 Modes or channels of recovery under SARFAESI ACT, 2002

i. Securitization;
ii. Asset Reconstruction; and
iii. Enforcement of Security without the intervention of the court.

SALIENT FEATURES OF THE ACT

The “Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002”, the Banks and Financial Institutions were given ample powers to sell off
the asset in the name of recovery of dues, unlike the slow and loopholed legal process of
Civil Courts.
This procedural law and retrospective in effect, established the concept of Asset
Reconstruction Company (ARC), letting the banks to sell their Non- Performing Assets
(NPA) to the ARC. “The first Asset Reconstruction Company of India, ARCIL, was set up
under this Act. The Act is an effective tool for the recovery of NPA and is effective and
against the secured loans”
Mentioned below are the salient features of the Act, which tries to:
 securitise the financial assets (securitisation)
 Fund the securitisation
 Incorporate companies as SCO (Securitisation Company) and RCO (Reconstruction
Company)
 “Enforce Security interest by the secured creditor (without court intervention)”
 Reconstruct the financial assets
 Establish Central Registry
 Prescribe penalties for offences/ non- compliance of rules

Unlike many legislations, the SARFAESI Act, 2002 provides the bank the right to resort to
action under section 13(4) of the Act during the pendency of the civil suit. The Act further
renders remedy of appeal against the actions relating to recovery of loans dues.

CONSTITUIONAL VALIDTY OF SARFAESI ACT, 2002

This was presented in a known case namely;
“Mardia Chemicals vs Union of India1 , Since these already existed a RDBI, Act1993.
These was no need for draconian legislation like SARFESI. The mechanism provided for
recovery of the debt under S.13 does not provide for any adjudicatory forum.
That remedy of appeal under S.17 of the Act is also illusory since appeal is entertainable only
when 75% of amount claimed, is deposited by the borrower”

MODES OR CHANNELS OF RECOVERY UNDER SARFAESI ACT, 2002

a) SECURIZATION
“Under the Securitisation Act only banks and financial institutions can securitise their
financial assets pertaining to NPAs with a securitisation company. Securitisation
means, according to the Securitisation Act, acquisition of financial assets by any
securitisation company or reconstruction company from any financial institution or
banks. The necessary funds for such acquisition may be raised from 'qualified
institutional buyers ('QIB')'2, by issuing security receipts3 representing undivided
interest in such financial assets or otherwise”

Financial assets are as under:

 A statement of any active debt or account or any portion thereof, whether

secured or not.
 Any debt or credit secured by, mortgage or real estate charge.
 A mortgage, rent, mortgage, or personal property guarantee
 Any right or interest in the security, in whole or in part, underlying said debt
or credit.
 Any beneficial interest in property, movable or immovable, or in such debts,
credits, regardless of whether such interest is existing, future, accrued,
contingent or contingent or;
 Any Financial aid

“Securitisation of financial assets may take some time to fructify as it requires

sound accounting principles also for which standards to be prescribed. In other
words, there should be accounting framework, as well, besides legal framework”

b) RECONSTRUCTURING ASSETS
The SCO (Subcontractor Change Order) or RCO (Request for Change Order) may

1
(AIR 2004 SC 2371)
 restructure assets in accordance with the guidelines set out in the RBI in one of the
following ways:
 Take over the whole business of Borrower.
 Switching the Borrower’s job.
 Sell or lease part or all of the Borrower's business.
 Re-establish the debt repayment schedule.
 Guarantee interest rate.
 Agree with the borrower to repay the debts

It is to be noted that the above procedures are subject to the provisions of another
law currently in force.

c) ENFORCEMENT OF SECURITY.
The law allows the credit provider (bank) to give a warning to the borrower and the
guarantor in case of default, and asks the debtor to repay the debt within 60 days from
the date of notice. If the borrower does not comply with the warning, the bank or
financial institution can comply with the provisions of the law and he can pursue
security interests (interest of the bank or lender):
A) care about the value
B) Apply for the sale or lease or grant security rights;
C) Ask the borrower to pay the debtor the amount due.

“Certified lender, SARFEASI provisions apply only if you agree to 75% of these”

RIGHTS OF DEBTOR OR BORROWER UNDER SARFAESI ACT, 2002

The above remarks make it clear that the SAFAESI Act could provide effective measures for
insured creditors to recover their long-term liabilities from defaulting assets, however, the
rights of borrowers cannot be ignored and are properly regulated in the Act.

 Borrowers can transfer receivables at any time before the sale is completed and avoid
losing collateral;
 In the event of any unhealthy / illegal behaviour by an authorized employee, he / she
will be responsible for the consequences of the punishment;
 “Borrowers will be entitled to compensation for such actions”
 For the resolution of complaints, the debtor/borrower can approach to Debt Recovery
Tribunal and Debt Recovery Appellate Tribunal within a period of 45 days and 30
days as per The Limitations Act.
PREREQUISITES
Various condition for the right of lender’s are as follows;

i. The expected payment is one lakh and more than 20% of the principal and interest.
ii. The collateral to be applied is not agricultural land. Prerequisites The law sets out
four conditions for the exercise of a creditor's rights:
iii. The debt has been approved; Banks
iv. “Unpaid debts are more than 20 percent of the initial loan amount, and the
collateral to be applied is not agricultural land”

DRT POWERS
Debt courts have had the power to deal with allegations of abuse of power by banks. Any
person affected by any order of the Court of Appeal may go within thirty days of receiving
the order of the Court of Appeal. Abuse of powers conferred on banks. The aggrieved party
can reach to the DRAT within a period of 30 days from the date of DRT order.

CASE LAW

1) “M/s. Dr. P. B’s Health & Glow Clinic Ltd. & Ors vs. Oriental Bank of
Commerce, In the High Court Calcutta Civil Revisional Jurisdiction”
2
Facts: The Petitioners are the debtors and had availed the credit facilities from the
Respondents. “Petitioners made repayment of loan to some extent but not entirely,
and accordingly the Respondent took recourse under the provisions of Section 13(2)
of the SARFAESI Act, 2002. Consequently, possession of the mortgaged property
was taken up and it was duly advertised”. “Petitioners also filed an application under
Section 17(1) of the SARFAESI Act, 2002 before the Debts Recovery Tribunal,
which was dismissed by the impugned order. Being aggrieved, the Petitioners
approached this court”
“The Petitioners contended that the Reserve Bank of India has provided guidelines for
one time settlement of the loan and accordingly, one time settlement should have been
duly considered by the Respondent. The Respondent without following that
settlement formula had taken possession of the property. The Respondent provided
the statement of accounts to show the quantum of dues from the Petitioner to the
Respondent. Also, in reply to the notice under Section 13(2) of the SARFAESI Act,
2002, the Petitioners had sent a letter dated December 18, 2012 requesting the bank to

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 permit them to repay the dues in small weekly instalments and had also deposited 10
cheques amounting to Rs.25.50 lakhs. The Petitioners did not point out any
irregularities against the steps under Section 13(2) of the 2002 Act”

Judgment:
“The court held that notice issued under Section 13(2) of the 2002 Act was duly
tendered to the Petitioners. When the persons under occupation of the
premises/property refused the notice, the same was affixed on the conspicuous part of
the said premises. Therefore, the notice was duly served in presence of the occupiers
of the secured assets. With regard to settlement of loans, the court held that some
post-dated cheques were issued but, all the cheques were not honoured and some of
them had been bounced for non-availability of the fund.
The loan amount had been described as NPA on June 30, 2012 and as such, steps had
been taken for recovery of the loan under the provisions of the SARFAESI Act, 2002”
According to the provisions of Section 18 of 2002 Act, an appeal lies to the Appellate
Tribunal, within the specified time, form the date of receipt of the order of the Debts
Recovery Tribunal under certain terms and conditions. Accordingly, the court found
the application devoid of merits and thus dismissed the same

CONCLUSION
Various developments in SARFAESI Act, 2002 is witnessed in the recent years to fulfil the
criteria of the legislation. The Judiciary has always helped to keep the doubts away from
interpretation of legislative provisions. Thus, the new development in the scope SARFAESI
Act, 2002 is the necessity that has been rightly upheld by the Supreme Court. The
SARFAESI Act, 2002 being an important Act for the betterment of country’s economy,
widening its scope is felt to be an essential step to strengthen the financial institutions of the
country.
BIBLIOGRAPHY
 Mondaq.com
 ICSI.COM
 Blog.ipleaders.in
 Taxguru.in