SARFAESI Act 2002: Applicability, Features, Role and Procedure

The SARFAESI Act is a law that "regulates the securitisation and reconstruction of financial assets, enforcement of security interests, and establishment of a central database of security interests based on property rights, as well as things incidental or connected to it." 

This Act gives lenders the authority to collect their loans without the need for judicial involvement. Continue reading to know more about the same!

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The full form of this Act is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

The Central Government established the Narasimham Committees I and II and Andhyarujina Committee to examine banking sector reforms, and these committees have taken into account the requirement for changes in the legal system in these sectors.

These committees, among others, have proposed new legislation for securitisation that would allow banks and financial institutions to acquire securities and sell them without the need for court intervention.

The applicability of the SARFAESI Act, 2002 are stated below:

• The Reserve Bank of India registers and oversees Asset Reconstruction Companies (ARCs).
• Assisting in securitising the assets of a bank and financial institution, with or without the use of underlying securities.
• By issuing bonds, debentures, or any other security in the form of a debenture, the ARC encourages the seamless transferability of financial assets in order to purchase financial assets from banks and financial organisations.
• Entrusting Asset Reconstruction Companies to sell security receipts to approved customers to raise money.
• Introducing any asset reconstruction or securitisation firm that is registered as a public financial institution with the Reserve Bank of India.
• Assisting in securitisation and reconstruction of financial assets acquired using the additional capacity to enforce securities, change management, and other powers suggested for banks and financial institutions.
• Any sort of security, including a mortgage and a change of ownership on real estate, is defined as "security interest". It is given in exchange for a timely return of financial aid provided by a bank or other financial institution.
• Designation of the borrower's account as a non-performing asset in accordance with the guidelines or instructions published from time to time by the Reserve Bank of India.
• In this situation, the authorised officers shall act as secured creditors in accordance with rules established by the Central Government.
• A second appeal to the Appellate Debts Recovery Tribunal, as well as an appeal against any move made by a bank or other financial institution to the applicable Debts Recovery Tribunal.
• The Central Government may create or compel the development of a Central Registry to record securitisation, asset reconstruction, and security interest creation transactions.
• The proposed legislation would initially only apply to banks and other financial institutions, but the Central Government would have the power to extend its reach to other businesses and non-banking financial institutions.

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Here are the features of the Securitisation Act 2002:

• Securitisation of financial assets
• Assets reconstruction
• Securitisation funding
• Provisions of SICA dilution
• Plate provisions for the boiler
• Formation of Special Purpose Vehicles, namely a Reconstruction Company, a Securitisation Company
• Enforcing security interests, that is, keeping the assets pledged as the loan’s collateral
• The creation of a Central Registry to control and record securitisation transactions

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The following are the roles of the SARFAESI Act.

1. Issuing Security Receipts and Securitising Financial Assets: Purchase financial assets through the issuance of bonds, debentures, or an agreement. It will also collect the security receipts given to the Qualified Buyers.
2. Rebuilding Financial Assets: Undertake actions for proper sale, management, settlement, debt restructuring, or taking control in accordance with changing RBI requirements.
3. Security Interest Enforcement: Without the assistance of the court, the secured creditor may enforce its security interest.

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Here are the objectives of the Securitisation and Reconstruction of Financial Assets Act. 

• Recovery of non-performing assets held by banks and FIs efficiently and quickly (NPAs).
• Enables financial institutions and banks to auction off property, such as commercial or residential premises, when a borrower is unable to pay their debts.

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The main reasons behind the formation of the SARFAESI Act, 2002 are -

• Regulation of securitisation and reconstruction of financial assets

• Enforcement of the security interests for matters which are incidental thereto or connected therewith

Moreover, this Act is active and works in the entire country. The SARFAESI rules came into the presence for amending these laws.

• Reconstruction and securitisation of Financial Assets and Enforcement of Security Interest Act, 2002
• Depositories Act of 1996 and for those matters which are incidental thereto or connected therewith
• Indian Stamp Act of 1899
• Recovery of debts caused due to the Banks and Financial Institutions Act, 1993

Before they may seize property and use it to recoup their debt, banks must follow a set of procedures. In this regard, they follow the procedure stated in the SARFAESI Act for the same. 

The SARFAESI Act gives banks the legal right to send borrowers notices asking them to pay off their debts within 60 days if they are unable to make loan repayments for a period of six months (this includes home loans).

The financial institution has the power to sell the property at a distress sale if the borrower is unable to pay this obligation. A person in default who feels wronged by the bank’s decision can appeal to the concerned authority within 30 days of passing the order. 

The bank can sell or lease the property once it takes possession of it. The bank might also provide another entity with the authority to use the property. Before paying off the bank's past due debts, the sale's revenues are utilised. Moreover, if there is any additional money left after it, the defaulting borrower receives it.

In accordance with the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 [SARFAESI], e-Form CHG-1 or e-Form CHG-9 must be filed in order to apply for: 

• Registration of creation
• Modification of charge (other than those related to debentures), including particulars of modification of charge by Asset Reconstruction Company

 The following are the necessary documents:

• Details of the fee
• Registration certificate
• A device designed for the charge
• Making a copy of the instrument and altering the charge
• Deed of hypothecation
• Suspension letter

Any e-Form that requires a digital signature must be one of the following:

• The charge holder's DSC
• Director's Director Identification Number (DIN)
• Manager, CEO, and CFO's Permanent Account Numbers
• Company secretary’s membership number

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Initially, the cooperative banks were not included in the list of banks to which the SARFAESI Act applied. A major notification was released in 2003 to include cooperative banks in the group of banks eligible to use the SARFAESI Act.

The Indian government revised this Act in 2013 to legally include cooperative banks in the category of institutions that may employ this Act.

Following that, petitions were filed to challenge the notification's legitimacy and the Parliament's jurisdiction to modify the SARFAESI Act, 2002. The Supreme Court decided this specific case on May 5, 2002, siding with the operational cooperative banks who had invoked the SARFAESI Act.

This action has greatly aided cooperative banks in avoiding excessive delays while recovering problematic debts subject to civil court and cooperative tribunal proceedings.

Rapid recovery of the default loans is essential for the smooth operation of the cooperative banks.

To sum it up, that is all for SARFAESI Act, 2002. It is a vital act for developing the country's economy, and broadening its scope is a necessary step to further strengthen the financial conditions of our country.

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