Securitisation and reconstruction of financial assets and enforcement of security interest act ,2002

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Securitisation and

Reconstruction of Financial Assets and

Enforcement of Security Interest

Act ,2002 Presented by: Shalu Saraf CS Trainee

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Object & Scope• An Act to regulate

securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.

• It extends to the whole of India.

• SARFAESI Act enables and empowers the secured creditors to take possession of their securities, to deal with them without the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act ,2002

intervention of the court and also alternatively to authorize any Securitization or Reconstruction Company to acquire financial assets of any Bank or Financial Institution (FI). The Act has been empowered with the overriding effect over the other legislation and it shall be in addition to and not in derogation of certain legislation.

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Definitions• "Appellate Tribunal" means a Debts

Recovery Appellate Tribunal established under sec. 8(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. (Sec. 2(a))

• “Asset reconstruction" means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance. (sec. 2(b))

• "Board" means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992. (sec. 2(e)) Securitisation and Reconstruction of Financial Assets and


• “Borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted byany bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequentupon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance. (sec. 2(f))

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Definitions • "financial institution" means--(i) a public financial institution within the

meaning of section 4A of the Companies Act, 1956;

(ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

(iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958;

(iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934, which the Central Government may, by notification, specify as financial institution for the purposes of this Act. (sec. 2(m))

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002

• "financial asset" means debt or receivables and includes--(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or(ii) any debt or receivables secured by, mortgage of, or charge on immovable property; or(iii) a mortgage, charge, hypothecation or pledge of movable property; or(iv) any right or interest in the security, whether full or part underlying such debt or receivables; or(v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or(vi) any financial assistance. (sec. 2(l))

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Definitions • "qualified institutional buyer" means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under section 3(4) or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 or regulations made there under, or any other body corporate as may be specified by the Board. (sec. 2(u))

• "sponsor" means any person holding not less than 10% of the paid-up equity capital of a securitisation company or reconstruction company. (sec. 2(zh))


• "non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,--(a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;(b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank. (sec. 2(o))

• "financial assistance" means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or FI. (sec. 2(k))

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Applicability

• The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac.

• NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

• NPA should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Securitisation and Reconstruction of Financial Assets and


•Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under Sec.60 of Civil Procedure Code, 1908 are not covered under this Act.•Non-performing Asset (NPA) means an asset for which Interest or principal (or installment) is overdue for a period of 90 days or more from the date of acquisition or the due date as per contract between the borrower and the lender, whichever is later.

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Non-Applicability in certain cases

• a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force;

• a pledge of movable within the meaning of Section 172 of the Indian Contract Act, 1872;

• creation of any security in any aircraft as defined in clause(1) of Section 2 of the Aircraft Act, 1934;

• creation of security interest in any vessel as defined in clause (55) of Section 3 of the Merchant Shipping Act, 1958;


•any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;•any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930;•any properties not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908;•any security interest for securing repayment of any financial asset not exceeding one lakh rupees;•any case in which the amount due is less than 20% of the principal amount and interest thereon.

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Constitutional Validity

• The Supreme Court in Mardia chemicals Ltd Vs Union of India case had decided that the SARFAESI Act had the constitution validity.


Methods of Recoveryunder the Act

- Securitization- Asset Reconstruction- Enforcement of Security without the intervention of the Court

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Securitization• It means acquisition of

financial assets by any Securitization Company or Reconstruction Company from any originator, whether by raising of funds by such Securitization Company or Reconstruction Company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.


Borrower (obligor)

Originato

r (lend

er)SPV (SCO/RCO

)

Investor

(QIB)

Financial Assistance

Securing Assets

CashTransferringSecured Assets

Cash

Security Receipt

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Asset Reconstruction

• It means acquisition by any Securitization Company or Reconstruction Company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance.


Enforcement of Security without the intervention of the Court • The Bank/ FI's can issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures without intervention of the court. - Take possession of the security - Sale or lease or assign the right over the security - Manage the same or appoint any person to manage the same.

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Contd…

• The Act also empowers the following Powers to Banks & FI's:– To give notice to any person

who has acquired any of the secured assets from the borrower to surrender the same to the Bank.

– To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.

– Any Security Interest created over Agricultural Land cannot be proceeded and only those property given as security can be proceeded but not the guarantors' personal property. Securitisation and Reconstruction of Financial Assets and


• If on receipt of demand notice, the borrower makes any representation or raises any objection, Authorised Officer shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN 15 DAYS of receipt of such representation or objection.

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Legal remedies to Borrower / Banks/FI's

DRT

DRAT

High Court (writ petition)

Supreme Court (Special Leave Petition) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002

Limitation Act

• Limitation Act, 1963 is applicable to the claims made under the Act.

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Registration of Securitization Companies or Reconstruction

Companies (sec. 3)• No Securitization Company or

Reconstruction Company shall commence or carry on the business of Securitization or Asset Reconstruction without obtaining a Certificate of Registration form RBI and adhering to the other norms like having the owned fund of not less than two crore rupees or such other amount not exceeding fifteen percent of total financial assets acquired or to be acquired by the Securitization Company or Reconstruction Company and such other norms as may be notified from time to time but not limited to:


- Act as an agent for any bank or FI for the purpose of recovering their dues from the borrower on payment of such fees or charges.- Act as a manager between the parties, without raising a financial liability for itself- Act as receiver if appointed by any court or tribunal.

Examples:1. ARCIL (India’s first and largest asset

reconstruction company (ARC))

2. Reliance Asset Reconstruction Company Limited by Anil Ambani

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Foreign investment in ARC

• ARC =buy bad loans from banks.• ARC =arrange money from QIBs to buy

bad loans from banks.• Problem= Indian QIBs do not invest much

in ARCs.• Therefore ARC’s capacity to buy NPA= very

low.• And bank themselves don’t have enough

expertise or manpower to dispose those NPAs quickly.

• Previously Foreign investors could invest only upto 49% in ARC=minority shareholder=cannot influence company decisions.

• Now, Government also increased foreign investment limit in ARCs. This would attract more investment in ARCs and help in quicker purchase and disposal of NPAs.

• Foreign investment in ARC:-


Earlier 49%Now (December-24-2012) 74%

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Central Registry • Setting up of CR: The Government of India, Ministry of

Finance notified to set up the CR, to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property. This Registry has become operational on March 31, 2011 and CR is a Government Company licensed under Section 25 of the Companies Act 1956 has been incorporated with the name of "Central Registry of Securitization Asset Reconstruction and Security Interest of India"

(CIN No: U67100DL2011NPL215270) having its registered office at New Delhi

for the purpose of operating and maintaining the Central Registry under the provisions of the SARFAESI. Securitisation and Reconstruction of Financial Assets and


• Register of Securitization, reconstruction and security interest transactions:A register called the Central Register maintained both in electronic and non-electronic form will be kept at the head office of the Central registry for entering the particulars of the transactions including creation of security/satisfaction or payment on any security interest relating to securitization and Reconstruction of financial assets and shall be open for inspection by any person during the business hours on payment of prescribed fee.

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Committees• SARFAESI was based on

recommendation of these two Committees:-

1. Committee on Banking Sector Reforms (Narasimham Committee II), 1998

2. Restructuring of weak Public Sector Banks -Verma Committee

• The latest amendment (Debt to Equity), is based on recommendations of Alok Nigam Panel on ARCs, made by Finance Ministry.


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Amendment in

sarfaesi act, 2002

• A formal procedure has been prescribed for taking into record the substitution of banks by asset reconstruction companies ("ARCs") and securitization companies in any proceedings pending before any tribunal/ court/ other authority ("Authority") in respect of the financial assets which the ARCs and securitization companies have acquired from such bank.

• ARCs and securitization companies have been permitted to convert any portion of the debt due to them by the borrower into equity shares of the borrower company.

• The banks have been permitted to purchase the immovable property which has been furnished to them as security and which is being sold under an auction process provided the purchase price offered by other auctioneers in respect thereto, is below the reserve price set by the bank. The bank can hold such property for a maximum period of 12 (Twelve) years after which the bank is mandatorily required to dispose of such property in compliance with the BR Act.


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Salient features of

Amendment in

sarfaesi act, 2002

1. Bank

• can buy for the NPA property if there are no other bidders.

• multi-state co-operative banks can also take actions under SARFAESI.

2. Borrower

• can’t get stay orders from DRT easily.

• Can make settlement / compromise with Bank/ARC.

3. ARC

can convert their debt into equity (fully or partially)

4. Govt.

can prohibit or modify SARFAESI’s applicability in public interest.


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MiscellaneousAmendment

1. In public interest, Union Government can issue notification that xyz provision of SARFAESI act may not apply or may apply with modifications to a class or classes of banks or financial institutions.

2. Earlier a borrower could approach Debt Recovery tribunal (DRT) to get stay order against bank/ARC. New amendment says DRT cannot grant any stay order unless both parties (Borrower vs. lender bank) are heard. This will ensure the process of law is not misused by unscrupulous borrowers to get stay orders just to delay money-recovery.

3. Bill proposes to enable banks and financial institutions to enter into settlement or compromise with the borrower. It also seeks to empower the Debts Recovery Tribunal to pass an order acknowledging any such settlement or compromise.


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Important Case

Laws &Judgments


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• Guidelines issued by RBI in relation to classifying NPA should be followed by the bank before issuing notice under Section 13(2) of SARFAESI Act. The judgment discussed at length the meaning of NPA its ambit scope. Writ petition dismissed.


Signal Apparels Pvt. Ltd

Vs Canara Bank

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1.) Mrs. Sunanda Kumari and another

Vs Standard Chartered Bank (Karnataka)

2.) Abdul Azeez Vs

Punjab National Bank (Kerala)

• Pendency of Civil Suit or execution petition or obtaining a decree is no bar to proceed under SARFAESI Act - It was held in the following cases that a pending civil suit or execution petition is no bar to proceed under SARFAESI Act


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Ace Media Advertisers

Pvt. Ltd. Vs.

Bank of Baroda

• Claim under SARFAESI can be only to the extent of decree/order passed by DRT - It has been held in the above case that the process under Securitisation Act can be confined to the extent of the decree/order passed by Debts Recovery Tribunal.


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Mahavir Plantations Pvt.

Ltd. Vs

K.K.Steel Enterprises

Vs ICICI Bank Ltd.

• Demand Notice to Guarantor Mandatory - Notice to guarantor under SARFAESI Act is mandatory. Proceedings without such notice will be vitiated.


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SBI Vs

Heera Laxmi Contractors

Pvt. Ltd.

• Section 35 of the SARFAESI Act will over ride the provisions Arbitration and Conciliation Act 1996. It cannot be pleaded that the dispute with regard to auction should be resolved through Arbitration and Conciliation Act.


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Bank of India Vs

Assistant Provident

Commissioner

• EPF dues have priority over dues of Secured Creditor - Dues under EPF will have priority over the dues of the Secured Creditor. There is no specific provision in the SARFAESI Act which enable the Bank to claim statutory charge. It is not the intention of the SARFAESI ACT to disturb the social welfare policy embedded in Sec 11(2) of the E.P.F Act.


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Yuth Development Co-operative

Bank Ltd Kolhapur

Vs Balasaheb Dinakrrao

Salokhe & Ors

• Bar of Jurisdiction of Civil Court - Civil Court has no jurisdiction to entertain any suit filed in respect of action taken under SARFAESI Act.


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Noble Aqua Pvt.

Ltd. Vs SBI

• SARFAESI Vs. SICA - Provisions of SARFAESI Act override Section 22 of SICA.


Securitisation and reconstruction of financial assets and enforcement of security interest act ,2002

Economy & Finance

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