RAYAT COLLEGE OF LAW

PROJECT OF BUSINESS LAW

TOPIC

IMPACT OF SARFASSI ACT 2002 IN RECOVERING THE

NPA IN PUBLIC SECTOR BANKS

SUBMITTED BY: - SUBMITTED TO: -

Neha MISS SAHIBJOT MAM
B.A. LLB (Hons) 8th Semester (Assistant Professor)
Roll No: - 13130

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 ACKNOWLEDGEMENTS

This is time to thank those, whose supports and help sailed me through these tough times of
my doctrinal research.
Firstly thanks to ‘Almighty’ for showering his blessing, the intelligent guidance, through
orientation, required analysis and proper supervision.
This intellectual work of mine is humbly dedicated to MISS SAHIBJOT MAM, Asst. Professor
of BUSINESS LAW, Rayat college of law , Ropar Campus , Railmajra for his dexterous
guidance , invaluable and untiring help , even encouraging attitude and supervision throughout
my study and who supervised this research project and gives me immense pleasure to express
my sincere and whole hearted sense of gratitude to my esteemed guide . My research would
not have been successful without his inspiration and timely guidance. He being my guide has
made this project.
I am also thankful to all my department and my classmate’s friends for their support and
invaluable assistance.
I am deeply grateful to the teaching staff of Department of Laws, Rayat College of Law, Ropar
Campus, Railmajra for their unconditional motivation and health throughout my research work.
I find no words to acknowledge in so formal these sacrifice, love, help and inspiration rendered
is my parents and sister –brother to take up the study.
Last but not the least, thanks are also extended to the non – teachings staff and the library staff
of department of laws, Ropar campus in helping me and provided me the subject as when
required .Finally but very importantly, “I am grateful to all those who love me, and those who
refuse to love me what I am now is strongly dependent on them”.

DATE: 20-03-2019 Name: Neha

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 DECLARATION

I hereby declare that the project work entitled “IMPACT OF SARFASSI ACT 2002 IN
RECOVERING THE NPA IN PUBLIC SECTOR BANKS” submitted to the Rayat
college of Law, is a record of an original work done by me under the guidance of MISS
SAHIBJOT MAM, professor of Business law, and this project work is submitted in the
partial fulfilment of the requirements for the award of the degree of law. The results
embodied in this thesis have not been submitted to any other University or Institute for
the award of any degree or diploma.

(SIGNATURE)
Neha

Date: 20 March 2019

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 TABLE OF INDEX

1. Introduction……………………………………………………………………………….6

2. The SARFAESI Act, 2002………………………………………………………………..6

3. Background of the act…………………………………………………………………….9

4. Rights of borrowers……………………………………………………………………...10

5. Methods of recovery of NPAS under the SARFAESI act………………………………10

6. Securitisation…………………………………………………………………………….12

7. Systematic benefits of securitization……………………………………………………12

8. Securitization act, 2002: remarkable provisions………………………………………...13

9. Asset reconstruction……………………………………………………………………..14

10. Exemption from registration of security receipt………………………………………...17

11. The salient features of the act relevant to banks and those relating to securitization and

reconstruction companies are summarized below……………………………………….17

12. Some recent cases on SARFAESI act…………………………………………………...19

13. Conclusion……………………………………………………………………………….21

14. Webliography……………………………………………………………………………22

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 TABLE OF CASES

1. M/s. Dr. P.B’s Health & Glow Clinic Ltd. & Ors vs. Oriental Bank Of Commerce, In

the High Court at Calcutta Civil Revisional Jurisdiction

2. Deepthi Trading Company vs. The Authorised Officer in the High Court of Madras

3. Sri Athmanathaswami Devasthanam v. K. Gopalaswami Aiyangar

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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 factor. 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 way of mortgages. It is easy to dispose of pledged items by giving notice to the
pawner as contemplated under the contract act. E.g. pledge of gold ornaments. With regard to
the enforcement of rights over the immovable properties taken as security, banks face 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

6
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.1
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 was 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
(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 Securitisation Company or Reconstruction Company seeking the
RBI’s registration under SARFAESI Act, shall have a minimum Owned Fund of Rs. 20
Mn.

SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002) was enacted to regulate securitization and reconstruction of

1
https://www.ibpsguide.com/sarfaesi-act

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financial assets and enforcement of security interest created in respect of Financial Assets to
enable realization of such assets.

The SARFAESI Act provides for the manner for enforcement of security 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 secured creditor, 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
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 whom money is due to the borrower, to pay the secured creditor so much of the
money as if sufficient to pay the secured debt.

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 Securitisation Companies and Reconstruction Companies
(Reserve Bank) Guidelines and Directions, 2003'. The Guidelines are available at the
Downloads segment.

The SARFAESI Act gives detailed provisions for the formation and activities of Asset
Securitization Companies (SCs)and Reconstruction Companies (RCs). Scope of their
activities, capital requirements, funding etc. are given by the Act. RBI is the regulator for these
institutions.

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As a legal mechanism to insulate assets, the Act addresses the interests of secured creditors
(like banks). Several provisions of the Act give directives and powers to various institutions
to manage the bad asset problem. Following are the main objectives of the SARFAESI Act.
 The Act provides the legal framework for securitization activities in India
 It gives the procedures for the transfer of NPAs to asset reconstruction companies for
the reconstruction of the assets.
 The Act enforces the security interest without Court’s intervention
 The Act give powers to banks and financial institutions to take over the immovable
property that is hypothecated or charged to enforce the recovery of debt.

BACKGROUND OF THE ACT:

The previous legislation enacted for recovery of the default loans was Recovery of Debts due
to Banks and Financial institutions Act ,1993. This act was passed after the recommendations
of the Narsimha Committee – I were submitted to the government. This act had created the
forum such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for
expeditious adjudication of disputes with regard to ever increasing non-recovered dues.
However, there were several loopholes in the act and these loopholes were mis-used by the

9
borrowers as well as the lawyers. This led to government introspect the act and this another
committee under Mr. Andhyarujina was appointed to examine banking sector reforms and
consideration to to changes in the legal system.
 This committee recommended to enact a new legislation for the establishment of
securitisation and reconstruction companies and to empower the banks and financial
institutions to take possession of the Non-performing assets. Thus, via the SARFAESI
act, for the first time, the secured creditors were empowered to recover their dues
without the intervention of the court.
 However, as soon as the act was passed, its implementation was challenged in the court
and this delayed its coming into force for 2 years. In the Mardia Chemicals v. Union of
India, the Supreme Court upheld the validity of the SARFAESI act was upheld.

RIGHTS OF BORROWERS:
The above observations make it clear that the SAFAESI act was able to provide the effective
measures to the secured creditors to recover their long-standing dues from the Non-performing
assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated
in the law.
 The borrowers can at any time before the sale is concluded, remit the dues and avoid
losing the security.
 In case any unhealthy/illegal act is done by the Authised Officer, he will be liable for
penal consequences.
 The borrowers will be entitled to get compensation for such acts.
 For redressing the grievances, he borrowers can approach firstly the DRT and thereafter
the DRAT in appeal. The limitation period is 45 days and 30 days respectively.

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:

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 SECURITISATION: It means issue of security by raising of receipts or funds by
SCs/ARCs. A 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.
Securitization is the process of pooling and repackaging of financial assets (like loans
given) into marketable securities that can be sold to investors.
In the context of bad asset management, securitization is the process of conversion of
existing fewer liquid assets (loans) into marketable securities. The securitization
company takes custody of the underlying mortgaged assets of the loan taker. It can
initiate the following steps:
1. Acquisition of financial assets from any originator (bank), and
2. Raising of funds from qualified institutional buyers by issue of security receipts
(for raising money) for acquiring the financial assets or
3. Raising of funds in any prescribed manner, and
4. acquisition of financial asset may be coupled with taking custody of the
mortgaged land, building etc.

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Systematic Benefits Of Securitization:
1. Reduced Risk of Exposures and Augmented Fee Incomes: The most obvious
benefits of securitization is that the financial intermediary shifts all or some of its credit
risk to other market players. This reduction in credit risk also frees banks
simultaneously and more or less fully from liquidity risk, interest rate risk and signature
risk. Liquidity risk is reduced because there is not need to refinance the loan throughout
its life. This will have a beneficial impact on the duration of the asset portfolio and
hence on the interest rate risk. Signature risk is absent because the security issued
against the debt sold carries an external guarantee against default.
2. A New Deal for Risk Management: the most obvious benefit of securitization as
mentioned above on reduced risk exposure is, of course, credit risk reduction in the loan
portfolios of banks. Now, there is a new deal that securitization provides when it is
combined with credit derivatives which themselves are meant for hedging credit risk
3. A Better Way of Hedging Operational Risk: A New Basel proposal emphasize
capital to be earmarked for hedging operational risk is akin to catastrophe risk, risk
mitigation approaches cannot avoid it. No insurance will be able to cover operational
risk because in case of a catastrophe which cannot save the institution, the insurer
himself might default in paying out a large loss. Or even without default, payments
might get delayed due to litigation and due to inadequacy of the existing insurance
policies and their legal provisions. Capital prescription against operational risk is,
perhaps the most expensive in an environment of severity-of-loss events being highly
random.
4. Securitization for Insurance Risk Sharing: securitization can best serve as a viable
risk sharing technique for insurable losses. It can effectively reduce the costs of
financial distress to insurers. The insurers can pass off some of the systemic risk to the
insured by offering “variable participation policies”. Of course, this depends on the
reparability of the systematic and idiosyncratic risk components of insurable risks.
5. Securitization Strengthen the Financial System: with reduced loan losses and the
resultant need for making lower provisions, the bank revenue stability contributes to
greater competition in the banking system. This is because, new market players can
more easily compete as the advantages of economies of scale and the scope in
traditional lending will largely be reduced with securitization spreading fast. This
increased competition wills help borrowers with lower loan costs. Therefore,
securitization is an important step forward for financial system.

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Securitization Act, 2002: Remarkable Provisions2:
With effect from 23rd April, 2003; ‘The Securitization Companies and Reconstruction
Companies (Reserve Bank) Guidelines and Directions. 2003’ are operational in India.
These guidelines and directions apply to securitization companies or reconstruction
companies (SC/RC) registered with the Reserve Bank of India under section 3 of the
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002. The salient features of the Securitization Act are list below:
1. Incorporation of special purpose vehicles namely securitization company and
reconstruction company.
2. Securitization of financial assets.
3. Funding of securitization.
4. Asset reconstruction.
5. Enforcing security interest, i.e., taking over the assets given as security for the loan.
6. Establishment of a central registry for regulating and registering securitization
consortium/multiple transactions: One objective of the Securitization Act is to
provide for the enforcement of security interest i.e., taking possession of the asset
given as security for the loan. Section 13 of the Securitization Act contains
elaborate provisions for a lender (referred to as ‘secured creditor’) to take
possession of the security given by borrower.
7. Offence and penalties.
8. Boiler-plate provisions.
9. Dilution of provision of SICA
10. An NPA, including a non performing bond-debenture.
11. A standard asset is assets when
a) the asset is under consortium/multiple banking arrangements.
b) At least 75% by value of the asset is classified as non-performing asset in
the books of other banks /FIs; and
c) At least 75% (by value) of the banks/FIs who are under the
consortium/multiple banking arrangements agree to the sale of the asset to
SC/RC.

2
http://dheerajtyagiclasses.com/dtcadmin/uploads/1508754872pdfjoiner%20(4).pdf

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 ASSET RECONSTRUCTION3: 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
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.
Asset reconstruction is the activity of converting a bad or non-performing asset into
performing asset. The process of asset reconstruction involves several steps including
purchasing of bad asset by a dedicated asset reconstruction company (ARC) including
the underlying hypothecated asset, financing of the bad asset conversion into good asset
using bonds, debentures, securities and cash, realization of returns from the
hypothecated assets etc.
Reconstruction, is to be done with the RBI regulations and the SARFAESI Act gives
the following components for reconstruction of assets: –
a) taking over or changing the management of the business of the borrower,
b) the sale or lease of a part or whole of the business of the borrower;
c) rescheduling of payment of debts payable by the borrower;
d) enforcement of security interest in accordance with the provisions of this Act;
e) settlement of dues payable by the borrower;
f) taking possession of secured assets in accordance with the provisions of this Act.

A company registered with Reserve Bank under Section 3 of SARFAESI Act for the
purposes of carrying on the business of asset reconstruction or securitisation, or both.
The main objective of asset reconstruction company ('ARC’) is to act as agent for
any bank or financial institution for the purpose of recovering their dues from the
borrowers on payment of fees or charges, to act as manager of the borrowers‟ asset
taken over by banks, or financial institution, to act as the receiver of properties of
any bank or financial institution and to carry on such ancillary or incidental business
with the prior approval of Reserve Bank wherever necessary. If an ARC carries on
any business other than the business of asset reconstruction or securitisation or the

3
https://www.indianeconomy.net/splclassroom/what-are-asset-reconstruction-companies-arcs/

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business mentioned above, it shall cease to carry on any such business within one
year of doing such other business.

Capital needs for ARCs

As per amendment made on the SARFAESI Act in 2016, an ARC should have a
minimum net owned fund of Rs 2 crore. The RBI plans to raise this amount to Rs
100 crore by end March 2019. Similarly, the ARCs have to maintain a capital
adequacy ratio of 15% of its risk weighted assets.

How ARCs get funding to buy bad assets from banks?

Regarding funds, an ARC may issue bonds and debentures for meeting its funding
requirements. But the chief and perhaps the unique source of funds for the ARCs is
the issue of Security Receipts. As per the SARFAESI Act, Security Receipts is a
receipt or other security, issued by a reconstruction company (or a securitization
company in that case) to any Qualified Institutional Buyers (QIBs) for a particular
scheme. The Security Receipt gives the holder (QIB) a right, title or interest in the
financial asset that is bought by the ARC. These SRs issued by ARCs are backed by
impaired assets.

Rules for the acquisition of assets and its valuation by ARCs

NPAs shall be acquired at a ‘fair price’ in an arm’s length principle by the ARCs.
They have to value the acquired bad assets in an objective manner and use uniform
process for assets that have same features.

SARFAESI Act permits ARCs to acquire financial assets through an agreement

bank. Banks and FIs may receive bonds/ debentures in exchange for NPAs
transferred to the ARCs. A part of the value can be paid in the form of Security
Receipts (SRs). Latest regulations instruct that ARCs should give 15% of the value
of assets in cash.

Bond or debentures can have a maximum maturity of six years and should have a
rate of interest at least 1.5% above the RBI’s ‘bank rate’. While dealing with bad
assets, ARCs should follow CAR regulations.

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Resolution Strategies that can be followed by ARCs while restructuring the
assets
The guidelines on recovery of money from the resolution process by the ARCs say
that regaining the value through restructuring should be done within five years from
the date of acquisition of the assets. SARFAESI Act stipulates various measures that
can be undertaken by ARCs for asset reconstruction. These include:
a) taking over or changing the management of the business of the borrower,
b) the sale or lease of the business of the borrower
c) entering into settlements and
d) restructuring or rescheduling of debt.
e) enforcement of security interest

The last step of ‘enforcement of security interest’ means ARCs can take
possession/sell/lease the supported asset like land, building etc.
ARCs and the secured creditors cannot enforce the security interest under SRFAESI
unless at least 75% by value of the secured creditors agree to the exercise of this
right.
Besides restructuring, the ARCs can perform certain other functions as well. They
are permitted to act as a manager of collateral assets taken over by the lenders by
receiving a fee. Similarly, they can also function as a receiver, if appointed by any
Court or DRT.

Performance of ARCs
During the early period of 2008 – 13 where reconstruction business was in infancy
stage, the conversion of NPAs was slow. According to an ASSOCHAM report, the
average recovery rate for ARCs in India is around 30% of the principal and the
average time taken is between four to five years.
During 2013-14, because of multiple positive factors, the reconstruction
business was booming as ARCs bought large quantity of bad assets from banks.
But after 2014, the performance of ARCs in settling the NPAs became
below par. Especially in the recent periods, ARCs became underperformers in the
context of the present rising tide of bad assets. This has caused steep rise in NPAs in
the banking sector.

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 The declining asset reconstruction activity was started from the second half of
2014, when the RBI has raised certain norms for securitization business. RBI
released a comprehensive ‘Framework for Revitalizing Distressed Assets in the
Economy’. It suggested a corrective action plan to fight NPAs. Later, the RBI raised
the cash payment to banks from 5% to 15%. Similarly, the it removed special asset
classification benefits to asset restructuring from April 1, 2015 to align with
international norms. As a result of these, the asset reconstruction business witnessed
a slow-down.
At present, there are 19 ARCs in India. But collectively, their capital base
is also insufficient to tackle the country’s nearly Rs 8 lakh crores NPAs. The main
problems in the sector are: low capital base of ARCs, low funds with the ARCS,
valuation mismatch of bad assets between banks and ARCs etc.
Several steps were taken by the RBI and the government to bring life into the
asset reconstruction activities. In one such step, the Government raised FDI in the
sector to 100%. Similarly, the ARCs may get a vital role for asset restructuring under
the new Insolvency and Bankruptcy Code. In 2016, the RBI has amended the
SARFAESI Act to give make the ARCs more efficient

 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.

THE SALIENT FEATURES OF THE ACT RELEVANT TO BANKS AND THOSE

RELATING TO SECURITIZATION AND RECONSTRUCTION COMPANIES ARE
SUMMARIZED BELOW4:
1. The sale of financial assets can be ‘without resource’, i.e., the entire credit risk
associated with the financial assets to be transferred to SC/RC, or ‘with resource’, i.e.,

4
http://shodhganga.inflibnet.ac.in/bitstream/10603/113909/13/13_chapter%204.pdf

17
 subject to unrealized part of the assets reverting to the seller bank/FI. However, the net
effect of the sale of assets should be the removal of the assets from the bank’s books.
2. Each bank will make its own assessment of the value offered by the SC/RC for the
financial assets and decide whether to accept or reject the offer. In the case of
consortium/multiple banking arrangements, if 75 per cent (by value) of the banks/FIs
decide to accept the offer, the remaining banks/FIs will be obliged to accept the offer.
3. Under no circumstances can a transfer to the SC/RC be made at a contingent price
whereby in the event of shortfall in the realization by the SC/RC, the banks/FIs would
have to bear a part of the shortfall.
4. Banks/FIs may receive cash or bonds or debentures as sale consideration for the
financial assets sold to SC/RC.
5. Bonds/debentures received by banks/FIs as sale consideration towards sale of financial
assets to SC/RC will be classified as investments in the books of banks/FIs. Banks may
also invest in security receipts, pass-through certificates (PTC2), or another
bonds/debentures issue to SC/RC. These securities will also be classified as investments
in the books of banks/FIs.
6. When bank/FIs sell its financial assets to SC/RC, the assets will be removed from its
books. If the sale is at a price below the net book value, the short fall should be debited
to the profit and loss account of that year. If the sale is for a value higher than the NBV
(Net Bank Value), the excess provision will not be reversed but will be utilized to meet
the shortfall/loss on account of sale of other financial assets.
7. When banks/FIs invest in the security receipts/pass through certificates issued by
SC/RC in respect of the financial assets sold by them to the SC/RC, the sale will be
recognized in books of the banks/FIs at the lower of (a) the redemption value of the
security receipts/pass-through certificates; or (b) the NBV of the financial assets. The
investment should be carried in the books of the bank/FIs at the price as determined
above until its sale or realization, and the loss or gain must be dealt with in the same
manner. The securities offered by SC/RC should satisfy conditions such as (a) having
a term of less than six years; (b) carrying an interest rate not lower than 1.5 per cent
above the prevailing bank rate; (c) being secured by the charge on transferred assets;
(d) providing for part/full prepayment of the SC/RC sells the underlying assets before
the maturity date of the security; (e) unconditional redemption of securities by SC/RC
without linking to asset realization.

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 8. For the purpose of capital adequacy, banks/FIs should assign appropriate risk weights
to the investments in debentures/bonds/security receipts/PTCs issued by SC/RC and
held by banks/FIs as investment. • Banks/FIs, which sell their financial assets to an
SC/RC, shall be required to make the prescribed additional disclosures in the ‘Notes on
Accounts’ in their balance sheets.
9. Sometimes, when financial assets cannot be revived, the SC/RC will act as an agent for
recovery for which it will charge a fee. Such assets will not be removed from the books
of the bank/FI but realization as and when received will be credited to the asset account.
Provisioning for the asset will continue to be made by the bank/FI in the normal course.

SOME RECENT CASES ON SARFAESI ACT5:

 M/s. Dr. P.B’s Health & Glow Clinic Ltd. & Ors vs. Oriental Bank Of Commerce, In the
High Court at Calcutta Civil Revisional Jurisdiction:
FACTS OF THE CASE:

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 permit them to repay the dues in small weekly installments 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.

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 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

 Deepthi Trading Company vs. The Authorised Officer in the High Court of Madras:
FACTS OF THE CASE:

The first petitioner is the borrower. The second and third petitioners are husband and wife. The
second petitioner is running the business of the first petitioner/trading company. The third
petitioner is doing some other business. According to the first respondent/bank, the amount
that has been borrowed from the bank was declared as a non-performing asset and consequent
to the same notice under Section 13(2) of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 was issued calling upon the petitioners
to pay certain amount and since the said notice has not been properly responded and no amount
was paid, possession notice under Section 13(4) of the SARFAESI Act was issued and that was
challenged by the petitioners before the Debts Recovery Tribunal-III, Chennai. Thereafter, the
SARFAESI Application was taken up for final disposal and following issues was formulated
for consideration:

(i) Whether the applicant in the above SARFAESI Application is entitled to get the relief as
prayed for?
(ii) Relief and costs?
The Tribunal came to the conclusion that it had no jurisdiction over the subject matter of the
case placing reliance on decision of the Delhi High Court in Amish Jain and another v. ICICI
Bank Limited, 2012 (6) CTC 369, wherein it was held that where Tribunal has no jurisdiction

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over a case, it is legally bound to dismiss the application. The Tribunal also in paragraph (7) of
the order decided on merits of the case and came to the conclusion on the validity of the notice
issued under Section 13(4) of the SARFAESI Act.

JUDGEMENT:

The court held that once the Tribunal found that it had no jurisdiction to entertain the
SARFAESI Application, it is bound to return the papers and as such is not empowered to pass
any order touching upon the merits of the case. The court placed reliance on decision of the
Supreme Court in Sri Athmanathaswami Devasthanam v. K. Gopalaswami Aiyangar, AIR
1965 SC 338 and held that when the Tribunal had no jurisdiction over the subject matter of the
suit it cannot decide any question on merits. It can simply decide on the question of jurisdiction
and once concluded that it has no jurisdiction over the matter has to return the plaint.

Thus, in view of the above, the law on the issue can be summarized to the effect that if the
court where the suit is instituted, is of the view that it has no jurisdiction, the plaint is to be
returned in view of the provisions of Order VII Rule 10 CPC and the plaintiff can present it
before the court having competent jurisdiction.

In light of the same the court further held that the period during which the case was Before the
Tribunal having no jurisdiction shall be excluded in view of Section 14 of the Limitation Act
and also the Petitioner may seek adjustment of court fee paid in that Tribunal.

CONCLUSION:
Though the enactment of SARFAESI Act sought to mobilise blocked funds of the banks in the
non-performing assets, the various provisions of the acts have created deep sorrows for the
genuine buyers. The various provisions meant to balance the requirements of the borrowers
and the banks, have their balance of favour tilted towards the banks. These powers are, at
majority of the times, mis-utilised by the banks to appropriate their interests against the
interests of the buyers. In such a situation it is pertinent for the civil courts to assume a more
social responsibility for the larger interest of the borrowers on one hand and to share the
responsibilities of the banks to mobilise their funds from the numerous non-performing assets.

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 WEBLIOGRAPHY

1. https://www.ibpsguide.com/sarfaesi-act

2. http://dheerajtyagiclasses.com/dtcadmin/uploads/1508754872pdfjoiner%20(4).pdf

3. https://www.indianeconomy.net/splclassroom/what-are-asset-reconstruction-

companies-arcs/

4. http://shodhganga.inflibnet.ac.in/bitstream/10603/113909/13/13_chapter%204.pdf

5. https://taxguru.in/corporate-law/highlights-of-sarfaesi-act-2002.html

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