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SECURITISATION AND RECONSRUCTION OF FINANACIAL ASSETS AND ENFORCEMENT OF SECURITY ACT, 2002 INTEREST (SARFAESI ACT, 2002)
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely:

Securitisation Asset Reconstruction Enforcement of Security without the intervention of the Court

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. Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60 of CPC, are not covered under this Act DEFAULT When the borrower does not pay any principal debt or any interest on the principal debt or any other amount payable to secured creditor and due to such non-payment the account of such borrower is classified as NPA in the books of accounts of the secured creditor it is called default. The classification of an account as NPA is to be done strictly as per RBI guidelines. SECURITISATION Securitisation means acquisition of financial assets by Securitisation or Assets Reconstruction company from the originator. Such acquisition may be by raising funds by such securitisation or Reconstruction company from Qualified Institutional Buyers by issue of security receipt s representing undivided interest in the financial assets acquired. This is

2 a process where non liquidated financial assets are converted into marketable securities, i.e. security receipts that can be sold to the investors. It is also a process of converting receivables and other assets into securities, i.e. security receipt that can be placed in the market for trading In the Indian laws there was no provision for transfer of claims that are secured by any security. Now SARFAESI ACT has made loans secured by mortgage or other charge transferable. On acquisition of financial assets the Securitisation or Reconstruction company becomes the owner of the financial assets and steps into shoes of the lender bank. The acquisition can also be called as sale of assets without recourse to the bank. RBI is the regulator for Securitisation or Reconstruction company The minimum capital required by Securitisation or Reconstruction Company is Rs. 200 Crore at the time of registration and these Companies are required to maintain a capital adequacy ratio of 15% of total assets acquired or Rs. 100 Crore whichever is less. SECURITISATION COMPANY It is a Company Registered under the Companies Act, 1956 for the purpose of Securitisation. The securitisation Company also needs Registration from RBI as per SARFAESI ACT ASSET RECONSTRUCTION In simple wards it takeover of loans or advances from the Bank for the purpose of recovery. Functions of Asset Reconstruction Company The functions of Asset reconstruction company are as under: To change or takeover of the management of the business of the borrower for proper management of business of borrower. Up till now the recovery actions against defaulting borrowers were taken as a last stage and as a last resort when the unit is closed and has incurred losses. Such legal action at last stage when the unit is unable to function do not give desired recovery. With the new provisions under SARFAESI ACT, the borrower unit that has been classified as NPA can be differently treated by banks. If the cause of default in such unit is any mismanagement or lack of expertise on the part of the existing management the Reconstruction

3 company has the powers to take over the management or change the management. This power can be exercised even when there is no default. On realization of debt in full the management of the business is restored back to the borrowers. To sale or lease a part or whole of the business of the borrower. Reschedule of payments of debts payable by the borrower. Enforcement of security interest in accordance with the provision of the SARFAESI ACT.

QUALIFIED INSTITUTIONAL BUYERS The Securitisation or Reconstruction Company raises funds for acquisition of assets by issue of security receipts. The individual investors are not allowed to invest in such funds. The security receipt are not issued to the Public. Only qualified Institutional Buyers can buy these security receipts. Qualified Institutional Buyers means a Financial Institution or Insurance Company or Bank or State Financial Corporation or State Industrial Development Corporation or Trustee or any Asset Management Company making investment on behalf of mutual fund or Provident Fund or Gratuity Fund or Pension Fund or a Foreign Institutional Investor Registered under the SEBI ACT, 1992. If any company wants to become qualified institutional buyers then it will have to be get such registration from SEBI. SECURITY INTEREST Any right, title and interest of any kind of whatsoever upon the property created in favour of any secured creditor is called SECURITY INTEREST. It includes any mortgage, charge, hypothecation, assignment etc. Whenever lender takes any security from the borrower, the lender gets interest in that security. SECURITY RECEIPT A receipt issued by a Securitisation or Reconstruction Company to any Qualified Institutional Buyer pursuant to a scheme evidencing the purchase or acquisition by the holder thereof of an undivided right, title and interest in the financial asset involved in securitisation is called Security Receipt.

4 These receipts are transferable in the market. By this act a new type of transaction in the financial market is created for transfer of Security Interest. DEFINATION OF HYPOTHECATION Prior to this Act no Indian Law has defined the term Hypothecation though Hypothecation is a very common security type for Bank lending. Hypothecation means: A charge upon any movable property Existing or future Created by a borrower In favour of a secured creditor Without delivery of possession of the movable property to such creditor. as a security for financial assistance and includes floating charge and crystalisation of such charge into fixed charge on movable property.

ENFORCEMENT OF SECURITY INTEREST 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. The Act does not cover securities which are in possession of Bank like pledged goods, shares, gold ornaments etc. The Act is only applicable to those securities which are not in possession of Bank. In the following cases provisions of this Act are not applicable A lien on any goods A pledge of movable goods Creation of security interest in any vessel (Ship) Any rights of unpaid seller Any security interest created on agricultural land Any Financial asset not exceeding Rupees One Lakh. Any Loan account where the amount due is less than twenty per cent of the Principal and Interest

Process of Enforcement of Security

1. As per SARFAESI ACT Secured creditor can enforce the security interest without intervention of court. This power given to the secured creditor has overriding effect over the provisions related to mortgage in the transfer of property Act. 2. As per Section 13(2) of SARFAESI ACT Bank is required to give a notice of 60 days to the defaulting borrower whose account has been classified as NPA. 3. Notice should be asking the borrower to discharge in full his liabilities to the Bank within 60 days from the date of the notice. 4. The Notice should also include the following information a) details of defaults b) Overdue period c) Date from which the account is classified as NPA d) Facility wise securities provided for the loans e) particulars of security document executed by the borrower 5. The Notice is a statutory Notice having consequence that the borrower is prohibited from transferring the property mentioned in the notice in any way. 6. Any contravention of these legal consequences if made by the borrower is punishable under the SARFAESI ACT. So, the notice should mention the legal consequences and penal provision. 7. The Act does not contemplate a reply from the borrower to the Notice. The Supreme Court in Mardia Chemicals case has laid down following guidelines about what the bank should do if the borrower submits any reply a) The bank must apply his mind to the objection raised by the borrower. b) An internal mechanism must be particularly evolved to consider the reply of the borrower. c) The reasons overriding the objections of the borrower must be communicated to him by the bank. d) Supreme court has further clarified that the communication to the borrower giving the reasons for not accepting the objections of the borrower does not give an occasion to resort to any proceedings like stay application, injunction or any other type of suit to restrain banks action. 8. If the borrower does not pay in full as per Notice such non payment by the borrower, Bank can take any one or of the following measures a) Take possession of secured assets b) Takeover the management of the secured asset of the borrower including the right to sale.

6 c) Appoint any person as manager to manage the security of assets d) Issue Notice to any person who has acquired the secured asset of the borrower and from whom any money is due or may become due to the borrower, to pay to the Bank. 9. Any transfer of secured assets made by the bank will be treated as if transfer has been made by the owner of assets 10. When sale of the secured assets is made, the appropriation of sale proceeds should be in the following order. a) Firstly, towards costs, charges and expenses incidental towards preservation and protection of securities. b) Secondly, towards the due of the bank c) Thirdly, if there is any surplus it will be paid to the persons in entitled thereto. 11. The above stated order of payment thus gives right of the bank to realize their dues in preference to all other creditors including dues payable to the Government, labour etc. 12. If the borrower pays the entire dues, costs, charges and expenses incurred by the Bank at any time before the date fixed for sale , the bank shall not sale the secured assets. 13. In case of joint finance or consortium finance by two or more banks, no bank can take action of taking provision of secured assets unless exercise of such is agreed upon by banks representing 75% of the value of outstanding dues. 14. In case of a Company under winding up process, the dues payable to workmen have Parri-passu charge with the bank as provided in Section 529 and 529A of the Companies Act. This is an exception for the priorities of Bank. The dues of the workmen are required to be deposited from the realized amount with the liquidator. In case the dues are not ascertained or not ascertainable at such time, then the liquidator has to give estimated amount to be deposited. The balance amount due to workmen on finalization of amount due to workmen also have the pari passu charge and to be met from realized amount. 15. If after sale of the secured asset the entire dues are not recovered then the bank can file an application before DRT or a competent Civil Court depending on the amount to be recovered. 16. The rights of the Bank given under SARFAESI ACT can be exercised one or more Authorized Officers of Bank provided that such Authorized Officers should at least at level of Chief Manager or equivalent of a public sector bank. 17. The borrower on receiving Notice under the Act shall not transfer by way of sale, lease or other wise the secured assets mentioned in the Notice.

7 18. Procedure of taking possession of secured assets a) Inventory of the assets taken into possession is to be made and the property must be entrusted to any person authorized or appointed by bank b) The Bank shall take care of the property under the under his possession as an owner of ordinary prudence, preserve and protect the secured assets and insure the same if necessary till they are sold c) For taking possession and then sale of immovable property, the Bank is required to serve a possession Notice as nearly as possible As given in Appendix IV on the borrower and by affixing the possession Notice on the outdoor or at the conspicuous place at the property. d) The authorized officer is required to obtain Valuation of immovable property before sale, fix the reserve price after consulting the borrower and sell it by methods permitted under Rule 8 of the Act. e) The Authorized Officer is required to publish the possession notice in two leading news papers, one of which should be vernacular language. f) Before 30 days of the sale of immovable property the borrower should be given notice about the sale. If the sale is by public auction or inviting tenders from public, notice is required to be published in two leading newspapers, one of which should be in vernacular language g) If the price of the secured assets is coming less than reserved price, the Authorized officer can sell the asset at a lower price with the consent of the bank and borrower. h) When the offer of the sale of property is accepted by the purchaser and the Bank, accepting the offer confirms the sale, purchaser has to pay 25% of the offer price. i) The purchase has to deposit total amount as agreed to clear the encumbrances. j) The Authorized officer is authorized to issue sale certificate. Such certificate is conveyance of immovable property and requires stamp duty as may be required under the relevant state laws. k) Bank can take help of Chief Metropolitan Magistrate or District Magistrate for taking possession of secured assets and for sale thereafter. For seeking such help Bank has make request to the concerned authority within whose jurisdiction such property is situated.

8 19. When the Bank takes over the management of the borrower, he is required to publish in a newspaper in English and one in local language which are in circulation at the place where the principal office of the borrower is situated for appointment of Director in case of a Company or Administrator in case of other business. 20. On publication of such notice it is deemed that controlling authority of such business vacated their office. 21. When the management of the business of a company is taken over by Bank, the following effect effects apply: a) The share holders of the company can lawfully appoint any person to be a Director of the company. b) No resolution passed by the shareholders of the company shall be given effect unless approved by the bank. c) No proceedings for for the winding up of such company or appointment of receiver shall lie in any court except with the consent of the Bank. 22. Any person including borrower can make an appeal along with prescribed fees to The DEBT RECOVER TRIBUNAL within 45 days for the action of the Bank. 23. At the time of making such appeal borrower should deposit 50% of the amount claimed in the Notice (reduced from 75%) 24. DRT has to dispose of such application as per the provisions of the recovery of Debts due to Banks and Financial Institution Act, 1993 25. Normally the appeal must be disposed off within 60 days, in case reasonable ground for delay it may be extended to 4 months. In case the appeal is not disposed off within 4 months, aggrieved party may a prefer appeal before Appellate Tribunal for early disposal of Appeal. 26. Any person aggrieved by the decision of DRT may appeal before Appellate Tribunal within 30 days from the date of receipt of the order of DRT. 27. No pecuniary limit is fixed by the Act for the appellate jurisdiction. The jurisdiction of DRT is Rs. 10 lakhs and above under DRT Act, 1993. However, the SARFAESI ACT dose not provides any pecuniary limit. Therefore, appeal before against action initiated by the Bank in cases even below Rs. 10 laks will lie. 28. No Civil Court shall have jurisdiction to entertain any suit or proceedings. Similarly, any court or authority can not grant injunction in such matters and actions taken or to be taken under this Act.

9 29. Overriding effects on other laws The provision of Act has overriding effect on any other laws if the provisions of these laws are inconsistent with this Act. Mainly such inconsistencies are in the transfer of property Act and Registration Act 30. LIMITATIONS The actions that Bank can take against security the SARFAESI ACT are required to be taken within the limitation period as per section 36 of Limitation Act. If after sale of securities the claim is not fully satisfied and still there are any dues to be recovered from the borrower, the creditor is required to file suit before Civil Court or DRT within the limitation period. 31. Central Registry He central government has set up Central registry for recording the following transactions. a) Securitisation of Financial Assets b) Reconstruction of Financial Assets c) Creation of Security Interest 32. The period of filing such information is 30 days after the date of transactions or creation of security. 33. Whenever any security interest registered with the Central Registry is modified, such modification has to be reported within 30 days. 34. Satisfaction of security Interest The duty to report satisfaction of security interest by Securitisation Company / Reconstruction Company / Bank within 30 days o satisfaction of the charge. 35. PENALTIES Section 23 of the Act provided for filing of the particulars of charge created ans Section 24 has provided for modification of charge filed and Section 26 has provided for satisfaction of charge has to be intimated to Central Registry. If the securitisation Company / Reconstruction Company or Bank fails to perform any of the duties as mentioned the Company and its Officers concerned punishable with fine up to Rs. 5000 per day for period during which default continues. 36. Penalties for violation of RBI provisions For any violation of RBI directives, Securitisation / Reconstruction Company is punishable with fine not exceeding Rs. 5.00 Lakhs for the default In case of further continuance of default additional fine up to Rs. 10,000 per for the period of default continuing.