Post on 04-Jun-2018
8/13/2019 Sarfaesi Act (1)
1/14
SARFAESI ACT
SARFAESI Act (The Securitization and
Reconstruction of Financial Assets and
Enforcement of Securities Act, 2002) wasenacted to regulate securitization and
reconstruction of financial assets and
enforcement of security interest created inrespect of Financial Assets to enable realization
of such assets.
8/13/2019 Sarfaesi Act (1)
2/14
The Act stipulates four conditions for enforcing the rThe Actstipulates four conditions for enforcing the rights
by a creditor.
(a) The debt is secured
(b) The debt has been classified as an NPA by the banks
(c) The outstanding dues are one lakh and above and more
than 20% of the principal loan amount and interest there
on. (d) The security to be enforced is not an Agricultural land.
(A) Securitisation Company or Reconstruction Company
shall commence/undertake only the securitization and
asset construction activities and the functions provided for in Section 10 of the SARFAESI Act. It cannot raise
deposits.
8/13/2019 Sarfaesi Act (1)
3/14
8/13/2019 Sarfaesi Act (1)
4/14
RULES:
The SARFAESI Act provides for the manner for enforcement ofsecurity interests by a secured creditor without the
intervention of a court or tribunal. If any borrower fails to
discharge his liability in repayment of any secured debt within
60 days of notice from the date of notice by the securedcreditor, the secured creditor is conferred with powers under
the SARFAESI Act to
a) take possession of the secured assets of the borrower,
including transfer by way of lease, assignment or sale, for
realizing the secured assets
8/13/2019 Sarfaesi Act (1)
5/14
b) takeover of the management of the business of the
borrower including the right to transfer by way of lease,assignment or sale for realizing the secured assets,
c) appoint any person to manage the secured assets
possession of which is taken by the secured creditor,and
d) require any person, who has acquired any of the
secured assets from the borrower and from whommoney is due to the borrower, to pay the secured
creditor so much of the money as if sufficient to pay the
secured debt.
8/13/2019 Sarfaesi Act (1)
6/14
The Central Government has prescribed Security Interest
(Enforcement) Rules, 2002 pursuant to the powers
conferred on it under the SARFAESI Act. The foregoing
enforcement measures must be exercised by a secured
creditor in accordance with the Enforcement Rules and
are further subject to guidelines issued by the RBI.
In exercise of powers conferred by SARFAESI Act, 2002,
Reserve Bank of India has issued guidelines to
registration, measures of asset reconstruction, prudential
norms, acquisition of financial assets etc., namely 'The
Securitization Companies and Reconstruction Companies
(Reserve Bank) Guidelines and Directions, 2003'. The
Guidelines are available at the Downloads segment.
8/13/2019 Sarfaesi Act (1)
7/14
Why is the SARFAESI Act of critical
importance to lenders?
To speed up the process of recovery from
NPAs, SARFAESI Act was enacted in 2002 for
regulation of securitization and
reconstruction of financial assets and
enforcement of security interest by secured
creditors.
The SARFAESI Act empowers Banks / Financial
Institutions to recover their non-performing
assets without the intervention of the Court.
8/13/2019 Sarfaesi Act (1)
8/14
The Act provides three alternative methods forrecovery of non-performing assets, namely:
1. Securitization
2. Asset Reconstruction
3. Enforcement of Security without intervention
of the court
8/13/2019 Sarfaesi Act (1)
9/14
Secured creditors are given the power to take
possession of the securities in the event ofdefault and sell such securities for the purpose
of recovery of the loan.
The Act provides for enforcement of Security
interest by a secured creditor withoutintervention of the court, in cases of default in
repayment of installments and non-
compliance with the notice period of 60 daysafter the declaration of the loan as a non-
performing asset.
8/13/2019 Sarfaesi Act (1)
10/14
Procedure for Enforcement of Rights
notice is to be issued tothe borrower/co-borrowers/guarantors/surely giving 60
days time for setting the liability.
After the expiry of 60 days, in case the amount
due is not paid, the bank can take possession of the
property and bring it for sale to realize the dues.
After taking possession,
the bank has to publish a possession notice in two
newspapers for the information of the general public.
Such publication is to be made within 7 days oftaking possession of the property. The
borrower/mortgagor can approach DRT for redressing
grievances if any within 45 days from taking possession
by the bank.
8/13/2019 Sarfaesi Act (1)
11/14
The property of which possession is taken can be
sold only after obtaining valuation through Government
approved valuer and thereafter publishing the sale notice
in two news papers (one in vernacular) giving 30 daysnotice. Thus the property can be sold for maximum price
with wide publicity. Any excess amount realized is not
sufficient to cover the dues, the secured creditor can
approach the DRT to recover the balance amount.
8/13/2019 Sarfaesi Act (1)
12/14
ISSUES UNDER THE SARFAESI
(a) A securitization receipt (SR) gives its holder a right of title or
interest in the financial assets included in securitization. Thedefinition is not legally inadequate in case of Pay through
Securities with different tranches.
(b) The SARFAESI Act has been structured to enable security
receipts (SR) to be issued and held by Qualified InstitutionalBuyers (QIBs). It does not include NBFC or other bodies unless
specified by the Central Government as a financial institution
(Fl).
(c) Demand for securities is restricted to short tenor papers and
highest ratings.
(d) The various risks involved in securitization include Credit Risk,
Sovereign Risk, Collateral deterioration Risk, Legal Risk,
Prepayment Risk, Servicer Performance Risk, Swap counterparty
Risk and Financial Guarantor Risk.
8/13/2019 Sarfaesi Act (1)
13/14
Problems faced by banks
1. Sale of security property2. Priority of Government dues
(a) The Government authorities should prove that the
claim relates to a date prior to the mortgage in favor of the bank.
(b) The authorities have taken all possible measures withina reasonable time to recover the dues.
(c) The debtor has no other property/source for payment
of Government dues other than the property mortgaged to the
Bank.
3. Court interference
8/13/2019 Sarfaesi Act (1)
14/14
ConclusionThe SARFAESI Act has been largely perceived as facilitating asset
recovery and reconstruction. Since Independence, the
Government has adopted several ad-hoc measures to tackle
sickness among financial institutions, foremost through
nationalization of banks and relief
measures. Over the course of time, the Government has put in
place various mechanisms for cleaning the banking system from
the menace of NPAs and revival of a healthy financial and banking
sector. The Reserve Bank of India issued guidelines and directions
relating to registration, measures of ARCs, functions of thecompany, prudential
norms, acquisition of financial assets and related matters under
the powers conferred by the SARFAESI Act, 2002.