SARFAESI ACT, 2002: Jaiib/DBF Paper 3 (Module C) Unit-1 & 2

SARFAESI ACT, 2002: Jaiib/DBF Paper 3 (Module C) Unit-1 & 2

Dear bankers,

As we all know that is SARFAESI ACT, 2002 for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are SARFAESI ACT, 2002 (Unit-1&2), Banking Related Laws (Module C), Legal & Regulatory Aspects of Banking -Paper 3.

♦SARFAESI Act

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.

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.

Major feature of SARFAESI is that it promotes the setting up of asset reconstruction (RCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions. The Act provides three methods for recovery of NPAs, viz:

  • Securitization;
  • Asset Reconstruction; and
  • Enforcement of Security without the intervention of the Court.

♦Definition of SARFAESI Act, 2002

In SARFAESI Act, 2002, the definitions are given in Section 2 of the Act.

  1. 1. Preamble – An act to regulate Securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto.
  2. Appellate Tribunal – Any person aggrieved by the order passed by “Debt Recovery Tribunal” can file an appeal to the authority called as Appellate Tribunal.
  3. Asset Reconstruction – An asset reconstruction means acquisition by an ARC of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realisation of such financial assistance.
  4. Bank – SARFAESI Act, All the banking companies, Nationalised banks, Cooperative banks and RRBs.
  5. Board – The Word ’Board’ is used SEBI under SEBI Act 1992.
  6. Borrower Any person, who has been granted financial assistance, given guarantee.
  7. Central Registry – Under this Act, ‘Central Registry’ All the transactions of asset Securitisation, reconstruction as well as transactions of creating security interest will have to be registered with this authority.
  8. Debt Recovery Tribunal – SARFAESI Act, Debts Recovery Tribunal are those tribunals established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to deal with the cases of recovery of debts above Rs. 10lacs due to the banks and financial institutions.
  9. Default: Default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity.
  10. Financial Assistance: Whenever any bank or financial institution grants a loan or advance or makes subscription of debenture or bonds or gives guarantee or issues letters of credit or extends other credit facility, it is called financial assistance.
  11. Financial Asset – a claim to any debt or receivables and includes :
  • A claim to any debt or receivables or part thereof whether secured or unsecured, or
  • Any debt or receivable secured by mortgage of or charge on immovable property or
  • A mortgage, charge, hypothecation or pledge of moveable property, or
  • Any right of interest in the security, whether full or part, securing debt, or
  1. Financial Institution: Financial Institution means
  • A public financial institution within the meaning of the Companies Act, 1956 (now ICA 2013)
  • Any institution specified by the Central Government under the Recovery of Debts due to Bank and Financial Institutions Act, 1993.
  • The ‘International Finance Corporation’ established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958.
  1. Hypothecation: Hypothecation means
  • A change in or upon any moveable property
  • Existing or future
  • Created by a borrower
  • In favour of a secured creditor
  1. Non-Performing Asset: A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms.
  2. Originator: Originator is the owner of a financial asset that is acquired by a securitization company or reconstruction company for the purpose of securitization or asset reconstruction.
  3. Obligor – Borrower or any other person liable to pay to the bank
  4. Property: Property means
  • Immovable property;
  • Movable property;
  • Any debt or any right to receive payment of money, whether secured or unsecured;
  • Receivables, whether existing or future;
  • Intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature;
  1. Qualified Institutional Buyer: Means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, 4[trustee of securitisation company or reconstruction company which has been granted a certificate of registration under sub‑section (4) of section 3 or any asset management company making investment on behalf of mutual fund] or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder, or any other body corporate as may be specified by the Board.
  2. Reconstruction Company: Means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction;
  3. Scheme: Means a scheme inviting subscription to security receipts proposed to be issued by a securitisation company or reconstruction company under that scheme;
  4. Securitisation: Means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise;
  5. Securitisation Company : The minimum capital requirement is Rs.200 Crore at the time of registration, and these companies are required to maintain minimum capital adequacy ratio of 15% of total asset acquired or Rs.100 crore whichever is less. It is company registered under companies act 1956 for the purpose of securitisation. The company also needs registration with RBI.
  6. Security Agreement: Means an agreement, instrument or any other document under which security interest is created.
  7. Secured Asset means property on which security interest is created. The powers given by SARFAESI Act for enforcement of securities are against secured assets only.
  8. Secured Creditor: Means any bank or financial institution or any consortium or group of banks or financial institutions and includes—
  • debenture trustee appointed by any bank or financial institution; or 5[(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or]
  • any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;
  1. Secured Debt means a debt which is secured by any security interest.
  2. Secured Interest – Any right, title and interest of any kind whatsoever upon the property created in favour of any secured creditor is called as secured Interest.
  3. Security Receipt: Means a receipt or other security, issued by a securitisation company 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 or interest in the financial asset involved in securitization.
  4. Sponsor is a person holding not less than 10% of the paid up equity capital of securitisation company.
  • When any bank or financial institutions creates a charge against property, with which authority the transaction will have to be registered under the SARFAESI Act, 2002 – With the Central Registry
  • When the provisions of SARFAESI Act, 2002 can be invoked for proceeding against the charged property – When there is default in repayment and the bank declares the account as NPA.
  • Acquisition of financial asset from the originator is the main function of securitisation company.
  • If the borrower does not pay within 60 days after notice by the secured creditor the creditor can take possession of the security.
  • Enforcement of SARFAESI Act only if security is not in possession of the bank and financial institution.

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