SARFAESI ACT, 2002- Applicability, Objectives, Process, Documentation

The financial sector has been one of the key handlers in India’s efforts to achieve success in rapidly developing its economy. Since our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This ensures the slow pace of recovery of defaulting loans and escalating levels of nonperforming assets of banks and financial institutions.

Narasimham Committee I and II and Andhyarujina Committee was constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas.

Amongst the other committees, these Committees have made suggestions to form new legislation for securitization and empowering banks and financial institutions to gain possession of the securities and to sell them without any intervention of the court here.

Applicability Of SARFAESI Act, 2002

The amendment to this Act is “an act to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected therewith or incidental thereto.” The Act deals with the following:

• Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank of India.
• Facilitating securitization of financial assets of banks and financial institutions with or without the benefit of underlying securities.
• Promotion of seamless transferability of financial assets by the ARC to acquire financial assets of banks and financial institutions through the issuance of debentures or bonds or any other security as a debenture.
• Entrusting the Asset Reconstruction Companies to raise funds by issue of security receipts to qualified buyers.
• Facilitating the reconstruction of financial assets which are acquired while exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions.
• Presentation of any securitization company or asset reconstruction company registered with the Reserve Bank of India as a public financial institution.
• Defining ‘security interest’ to be any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution.
• Classification of the borrower’s account as a non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time.
• The officers authorized will exercise the rights of a secured creditor in this behalf in accordance with the rules made by the Central Government.
• An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal.
• The Central Government may set up or cause to be set up a Central Registry for the purpose of registration of transactions relating to securitization, asset reconstruction and creation of the security interest.
• Application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities.
• Non-application of the proposed legislation to security interests in agricultural lands, loans less than rupees one lakh and cases where eighty per cent, of the loans, is repaid by the borrower

Role of SARFAESI Act, 2002

Objectives of SARFAESI Act, 2002

• Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
• Allows banks and financial institutions to auction properties (say, commercial/residential) when the borrower fails to repay their loans.

Documents Required

e-Form CHG-1 or e-Form CHG-9  is required to be filed for application of a.  Registration of creation b.  Modification of charge (other than those related to debentures) including particulars of modification of charge by Asset Reconstruction Company in terms of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 [SARFAESI] The documents in this context are as follows:

• Particulars of charge
• Certificate of registration
• An instrument created for the charge
• Copy of the instrument – creating or modifying the charge
• Hypothecation Deed
• Sanction Letter
  

In case of any e-Form to be digitally signed, either of the following is required:

• DSC of the charge holder
• Director Identification Number [DIN] of the Director
• Permanent Account Number [PAN] of the manager, CEO, CFO
  
• Membership Number of the Company Secretary

Formation of SARFAESI Act, 2002

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) were circulated:

• To regulate securitization and reconstruction of financial assets.
• Enforcement of the security interest for.
• Matters connected therewith or incidental thereto.

It extended to the whole of India. Amendment in the (SARFAESI) Act, 2002 vide the enforcement of the Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisional information in the Official Gazette, s (Amendment) Act, 2016 was published It is an Act further to amend four laws:

• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
• Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI).
• Indian Stamp Act, 1899.
• Depositories Act, 1996, and for matters connected therewith or incidental thereto.
  

Frequently Asked Questions

What assets are covered under the SARFAESI Act?

Any asset, i.e. movable or immovable, given as security by way of hypothecation, mortgage, or creation of a security interest in any other form except those excluded under Section 31 of the Act are covered under the SARFAESI Act.

Is SARFAESI Act applicable to NBFCs (Non-Banking Financial Companies)?

The Ministry of Finance, vide its notification dated 24th February 2020, notified that the NBFCs with asset size of Rs.100 crores or more are eligible NBFCs that are covered under the SARFAESI Act to enforce security interest on debts amounting to at least Rs.50 lacs.

Which loans are not covered under SARFAESI Act?

The provisions of this Act apply to outstanding loans above Rs.1 lakh, which are classified as NPAs. The SARFAESI Act isn’t applicable for:

• The NPA loan accounts amounting to less than 20% of the principal and interest.
• Money or security issued under the Indian Contract Act or the Sale of Goods Act, 1930.
• Any rights of the unpaid seller under Section 47 of the Sale of Goods Act, 1930.
• Any conditional hire-purchase, sale, lease or any other contract in which no security interest has been created.
• Any properties that are not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908.

What are the modes of recovery under the SARFAESI Act?

The Act provides for three methods of recovery of the NPAs, which includes:

• Securitisation
• Asset reconstruction
• Enforcement of security without the interruption of the court

Do cooperative banks come under the SARFAESI Act?

Yes. The Supreme Court held that cooperative banks established under State law or multi-State level societies come within the ambit of the SARFAESI Act, 2002.

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