International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 1, January 2013
IMPLEMENTATION OF SARFAESI ACT - SOME ISSUES
V. Sekar, Research Scholar, School of management, Alagappa University
Dr. V. Balachandran, Professor of Corporate Secretaryship, School of Management, Alagappa University, Karaikudi
ABSTRACT
Banks are the backbone of any Country in so far as its
upward economic developments are concerned. A well
knit Banking System supported by proper regulatory
mechanism are inevitable for the economic development of
a Country. Banks are intermediaries between the
depositors and borrowers. The chain breaks when
borrowers fail to repay the principal and interest as per
the agreed terms. The civil laws of the country are too
cumbersome that it may take years to get a decree. The
need of the hour is such legislation, which check
irregularities on one side and safeguard public exchequer
on the other. As far as India concerned, prior to 2002,
there was no option for the banks to recover its dues by
enforcing the security other than through a
court/Tribunal. The SARFAESI Act has come into force
with effect from 17.12.02. By this enactment, banks and
financial institutions were empowered to take possession
of the secured assets of the borrower including the right to
transfer by way of lease, assignment or sale for realizing
the secured asset. Thus, the SARFAESI Act has been
largely perceived as facilitating asset recovery and
reconstruction.
Keywords: economic development, regulatory mechanism,
decree, public exchequer, secured assets, lease,
assignment, recovery and reconstruction
INTRODUCTION
Banks are the backbone of any Country in so far as its
upward economic developments are concerned. A well
knit Banking System supported by proper regulatory
mechanism are inevitable for the economic development
of a Country. Banks are intermediaries between the
depositors and borrowers. Banks give interest for deposits
and collects interest for loans to meet the commitments to
the depositors. The chain breaks when borrowers fail to
repay the principal and interest as per the agreed terms.
The importance of insisting for securities while granting
loans by banks is mainly is due to the above fact. Holding
the security is not sufficient to discharge the obligations
towards the depositors. The securities are to be liquidated
for the purpose. At this juncture the importance of
enforcement of securities become relevant. For a healthy
banking system, well knit recovery mechanism supported
by proper recovery laws are the key facto. Banks prefer
movable and immovable properties as security. Movable
are accepted as security by way of pledge/hypothecation
etc. Securities over immovable properties are created by
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way of mortgages. It is easy to dispose of pledged items
by giving notice to the Pawner as contemplated under the
Contract Act. Eg: Pledge of gold ornaments. With regard
to the enforcement of rights over the immovable properties
taken as security, banks faces lot of problems. Mainly, the
bottlenecks of the extant civil laws of the Country. The
civil laws of the country are too cumbersome that it may
take years to get a decree. As far as India concerned, prior
to 2002, there was no option for the banks to recover its
dues by enforcing the security other than through a
court/Tribunal. The need for a legislation giving right to
the creditor banks to enforce the rights over the secured
properties without the interferences of Court/Tribunal was
much felt as the NPA of the banks were mounting up day
by day.
The SARFAESI Act, 2002
The SECURITIZATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORECEMENT OF
SECURITY INTEREST ACT (SARFAESI) Act has come
into force with effect from 17.12.02. (First as ordinance
on 21.06.02 and later bill was introduced in both house of
the Parliament). By this enactment, banks and financial
institutions were empowered to take possession of the
secured asserts of the borrower including the right to
transfer by way of lease, assignment or sale for realizing
the secured asset. This is a Magnacarta as far as Indian
Jurisprudence is concerned. Without the interference of
court or tribunal it was so far not possible for the creditors
to do sell on enforce the security.
The Act is very important in the present economic
scenario as only when mobility of money takes place and
simultaneously development also takes place. When
money is held up in non-performing assets, the hand of
lending bankers were tied up resulting in crippling of
credit development and economic activities. The need of
the hour is such legislation, which check irregularities on
one side and safeguard public exchequer on the other.
Though the constitutional validity of the Act was
challenged in the case of Mardia Chemicals Vs. Union of
India (AIR 2004 SC 2371), the Supreme Court upheld the
validity of the Act, subject to slight modifications in
certain provisions on grounds of equity and natural justice.
The Act stipulates 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.
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 1, January 2013
(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.
(B) Net worth is aggregate of paid up capital, paid up
preference capital, reserves and surplus excluding
revaluation reserve, as reduced by debit balance on P&L
account, miscellaneous expenditure (to the extent not
written off), intangible assets, diminution in value of
investments/short provision against NPA and further
reduced by shares acquired in SC/ARC and deductions
due to auditor qualifications. This is also called Owned
Fund. Every Securitisatin Company or Reconstruction
Company seeking the RBIs registration under SARFAESI
Act, shall have a minimum Owned Fund of Rs. 20 mn.
Methods of Recovery of NPAs under the
SARFAESI Act
The Act has made provisions for registration and
regulation of securitization companies or reconstruction
companies by the RBI, facilitate securitization of financial
assets of banks, empower SCs/ARCs to raise funds by
issuing security receipts to qualified institutional buyers
(QIBs), empowering banks and Fls to take possession of
securities given for financial assistance and sell or lease
the same to take over management in the event of default.
The Act provides three alternative methods for recovery of
NPAs, namely Securitization, Asset Reconstruction and
Exemption from Registration of Security Receipt. They
are dealt below:
Securitisation: It means issue of security by
raising of receipts or funds by SCs/ARCs. A property and bring it for sale to realize the dues.
securitization company or reconstruction company may
raise funds from the QIB by forming schemes for
acquiring financial assets. The SC/ARC shall keep and
maintain separate and distinct accounts in respect of each
such scheme for every financial asset acquired, out of
investments made by a QIB and ensure that realizations of
such financial asset is held and applied towards
redemption of investments and payment of returns assured
on such investments under the relevant scheme.
Asset Reconstruction: The SCs/ARCs for the
purpose of asset reconstruction should provide for any one
or more of the following measures: the proper
management of the business of the borrower, by change in,
or take over, of, the management of the business of the
borrower the sale or lease of a part or whole of the
business of the borrower rescheduling of payment of debts
payable by the borrower enforcement of security interest
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in accordance with the provisions of this Act settlement of
dues payable by the borrower taking possession of secured
assets in accordance with the provisions of this Act.
Exemption from Registration of Security
Receipt: The Act provides, notwithstanding anything
contained in the Registration Act, 1908 for enforcement of
security without Court intervention: (a) any security
receipt issued by the SC or ARC, as the case may be,
under section 7 of the Act, and not creating, declaring,
assigning, limiting or extinguishing any right, title or
interest to or in immovable property except in so far as it
entitles the holder of the security receipt to an undivided
interest afforded by a registered instrument; or (b) any
transfer of security receipts, shall not require compulsory
registration.
Registration
Every SC or ARC shall apply for registration and
obtain a certificate of registration from the RBI as
provided in SARFAESI Act;
A Securitisation Company or Reconstruction
Company, which has obtained a certificate of registration
issued by RBI can undertake both securitization and asset
reconstruction activities.
Any entity not registered with RBI under
SARFAESI Act may conduct the business of securitization
or asset reconstruction outside the purview of the Act
Procedure for Enforcement of Rights
(i) Under Section 13 (2), a notice is to be issued to
the borrower/co-borrowers/guarantors/surely giving 60
days time for setting the liability and also informing the
intention of the secured creditor to take action under
section 13(4) by taking possession of the assets.
(ii) After the expiry of 60 days, in case the amount
due is not paid, the bank can take possession of the
(iii) The borrower can seek any clarification and the
bank is legally bound to answer the queries within 7 days
of such request.
(iv) As such the Act gives opportunity to a debtor to
get whatever details he requires from the creditor thereby
avoiding any arbitrary decision by the creditors as to the
amount due, interest claimed etc. if there are mistakes or
irregularity in the notice, the creditor can issue a fresh
notice. However, the reasons so communicated or the
likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon
the borrower to prefer an application to the DRT.
(v) The notice under the Act can be issued only by an
Authorised Officer of the bank who will be an official in
the rank of Scale IV and above. After taking possession,
the bank has to publish a possession notice in two
newspapers for the information of the general public.
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 1, January 2013
(vi) Such publication is to be made within 7 days of
taking possession of the property. The
borrower/mortgagor can approach DRT for redressing
grievances if any within 45 days from taking possession
by the bank. Any party aggrieved by the decision of the
DRT can again approach the DRAT by filing appeal
within the stipulated time of 30 days.
(vii) 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 days
notice. 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.
Protection of Borrowers' rights
The borrowers can at any time before the sale is
concluded, remit the dues and avoid loosing the security.
In case any unhealthy/illegal act is done by the Authorised
Officer, he will be liable for penal consequences. The
borrowers will be entitled to get compensation for such
acts. For redressing the grievances, the borrowers can
approach firstly the DRT and thereafter the DRAT in
appeal. The limitation period is 45 days and 30 days
respectively.
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. The definition 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
Institutional Buyers (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
Problems faced by banks
1. Sale of security property
After taking possession of the property, the banks in
general find it an arduous task to initiate steps for sale of
the properties. As there is no specific provision to acquire
the property for its own, the bank can hold possession
without recourse to wipe of the liability from its books. In
Civil Courts, with the permission of the court, the creditor
can also participate in the auction and acquire the secured
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property. The Act has not made any specific provision in
the SARFAESI Act and Rules, in this regard.
2. Priority of Government dues
Though the SARFAESI Act has got overriding effect on
other legislations, the claim of government will prevail
and often the amount realized though sale is claimed by
the Government authorities. Due to the amendment in the
Sale Tax Act of various States and decisions of Higher
Courts, Banks are bound to honour sales tax claims etc.
even after the mortgage created in favour of the Bank.
However, if the following points are made as condition
precedent for exercising such rights, it may give a lot of
relief to the bankers/creditors.
(a) The Government authorities should prove that the
claim relates to a date prior to the mortgage in favour of
the bank
(b) The authorities have taken all possible measures within
a 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
Often High Courts are interfering in the SARFAESI Act
proceedings by entertaining Writs filed by the aggrieved
parties. Though Supreme Court decisions are there to the
effect that only after exhausting the remedies prescribed in
the respective statute one can opt for other modes. Writ
Petitions are filed in many matters. (DRT and DRAT are
the forums prescribed under the Act for this purpose).
This causes lot of delay as far a recovery is concerned.
The Registry of the High Courts may be able to restrain
such Writ Petitions and the backlog of pending matters can
be avoided to certain extend. As per the decision of
Supreme Court in Transcore Vs. Union of India (AIR
2007 SC 712) simultaneous proceedings is possible under
SARFAESI Act though recovery proceedings are initiated
under RDDB&FI Act/Civil Laws etc. against a
borrower/mortgagor.
Conclusion
The 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 the company, prudential
norms, acquisition of financial assets and related matters
under the powers conferred by the SARFAESI Act, 2002.
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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 73
Volume 2, No. 1, January 2013

REFERENCES

[1] Pashwa,H.P.S.(2009), Sick Industries and BIFR,

Bharat Law House, New Delhi
[2] Ramamurthy,T.R.(2008),How to borrow from Banks
and Financial Institutions, Bharat Law House, New
Delhi
[3] SECURITIZATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORECEMENT OF
SECURITY INTEREST ACT.

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