Sarfaesi Act
Sarfaesi Act
Sarfaesi Act
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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002
The SARFAESI Act was enacted on 21st June 2002 keeping in mind the following issues faced by the Banking and Financial Sectors.
The recovery problem faced by banks due to ever-growing non-performing assets (NPA) The inadequate legal framework for enabling banks in recovering bad loans which are otherwise based on valuable collateral. The failure of the Debt Recovery Tribunal (DRT) to speed up the recovery process was also a reason for enacting the SARFAESI Act.
The SARFAESI Act aims to achieve these twin objectives besides providing for a broad legal framework for asset securitisation and asset reconstruction.
Salient features.
The salient features of the Securitisation Act are as under:
Incorporation of Special Purpose Vehicles viz. Securitisation Company and Reconstruction company. Securitisation of Financial Assets. Funding of securitisation. Asset Reconstruction. Enforcing security interest i.e. taking over the assets given as security for the loan. Establishment of Central Registry for regulating and registering securitisation
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transactions. Offences & Penalties. Boiler - plate provisions. Dilution of provisions of SICA. Exempted transactions
Acting as recovery agent on behalf of any bank or financial institution. Acting as manager1 to manage the secured assets the possession of which has been taken over by the secured creditor. Acting as receiver if appointed by any Court or Debt Recovery Tribunal.
A SCOO or RCOO, which is carrying on any other business other than that of securitisation or asset reconstruction before commencement of the Securitisation Act, has to discontinue such other business within one year from the commencement of the Securitisation Act.
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reconstruction company from any financial institution or banks. The necessary funds for such acquisition may be raised from 'qualified institutional buyers ('QIB')'2, by issuing security receipts3 representing undivided interest in such financial assets or other wise. Financial assets are as under:
A claim to any debt or receivables or part thereof, whether secured or unsecured. Any debt or receivables secured by, mortgage of, or charge on, immovable property. A mortgage, charge, hypothecation or pledge of movable property. Any right or interest in the security whether full or part underlying such debt or receivables. Any beneficial interest in property, whether movable or immovable, or in such debts, receivables, whether such interest is existing, future, accruing, conditional or contingent. Any financial assistance.
The word "future" used in the above definition would indicate that debts which exist today and repayable in future can also be securitized. The much-needed legal framework for the securitisation of financial assets has been made by the enactment of the Securitisation Act. Securitisation of financial assets is a financial tool for the lenders to securitise their future cash flows from the secured assets and thus to release their funds blocked in them. In the hands of the SCO and RCO the secured assets become "merchandise", realisation of which gives them their return. This aspect brings in the much-needed expertise in adept handling in realisation of the secured assets. The legal impediments of normal civil law procedure to foreclose the mortgaged assets have thus been effectively removed by empowering the enforcement of the secured assets. Securitisation of financial assets may take some time to fructify as it requires sound accounting principles also for which standards to be prescribed. In other words there should be accounting framework, as well, besides legal framework.
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Entering into an agreement with bank/financial institution for the transfer of such financial assets on such terms and conditions as may be agreed upon.
Upon acquiring the financial assets from the bank/financial institution, the SCO/RCO steps into the shoes of the lender qua the borrower. The Securitisation Act has provided for all necessary rights and powers for SCO/RCO to realize the financial assets from the borrower.
Funding of Securitisation.
The SCO/RCO may raise the necessary funds, for the acquisition of financial assets, from the QIB by issuing a security receipt. Security receipt is exempted from compulsory registration under the Registration Act. Security receipts issued by any SCO or RCO shall be "securities" within the meaning of Section 2(h)(ic) of the Securities Contracts (Regulation) Act, 1956. A Scheme of acquisition has to be formulated for every acquisition detailing therein the description of financial assets under acquisition, the quantum of investment, rate of return assured etc. Further separate and distinct accounts have to be maintained in respect of each scheme of acquisition. Realizations made from the financial assets have to be held and applied towards the redemption of investments and payment of assured returns. In the event of non-realization of financial assets, the QIB holding not less than 75% of the total value of the security receipts issued, are entitled to call a meeting of all QIB and pass resolution and every such resolution is binding on the SCO/RCO.
Assets Reconstruction
A SCO or RCO may, according to the guidelines prescribed by RBI, carry out asset reconstruction in any one of the following manners: Taking over the management of the business of the borrower. Changing the management of the business of the borrower. Selling or leasing of a part or whole of the business of the borrower. Rescheduling of the payment schedule of the debt. Enforcing the security interest. Entering into settlement with the borrower for the payment of debt. However, the above measures are subject to the provisions contained in any other law for the time being in force.
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The Lender has to send a notice of demand, giving details of the amount payable and the secured assets5 intended to be enforced in the event of non payment, to the defaulting borrower to discharge his liabilities. No borrower, after the receipt of the demand notice, shall transfer the secured assets in whatsoever manner without prior written consent from the lender. The Borrower has to discharge the liabilities within 60 days from the date of receipt of notice of demand. In the event of non payment of demand by the borrower, the lender may take any one or more of the following measures: o Taking possession and / or management of the secured assets of the borrower with a right to transfer the same by way of lease, assignment or sale for realising the secured asset. Appointing any person as manager to manage the secured assets the possession of which has been taken over. Asking any person, who has acquired any of the secured assets from the borrower and owes money to the borrower, to pay so much of the money which is sufficient to pay the secured debt.
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Any transfer of secured assets made by the lender shall be deemed to be made by the owner of such secured asset. If the borrower pays all the dues together with all costs, charges and expenses incurred by the lender before the date fixed for the sale of the secured assets, the lender shall not transfer or sell the secured assets. When the are more than one lender or joint financing, the approval of lender(s) representing not less than 75% of the amount due is required to take any steps to enforce the security interest and such approval is binding on all the lenders. In the case of a corporate borrower under liquidation the sale proceeds from the secured assets shall be distributed as per Section 529A of the companies Act, 1956. In the event of lender opts to realise his security instead of relinquishing his security and proving his debt, may retain the sale proceeds of his secured assets after depositing the workmen's dues with the Liquidator. If the sale proceeds of the secured assets are not fully satisfying the debt due, the lender may file a claim before the DRT or before a competent court for the recovery of the shortfall. The lender also has an option to proceed against any of the guarantors or sell the pledged assets without taking any measures against the borrower.
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The lender can take the assistance of the Chief Metropoliton Magistrate or District Magistrate, as the case may be, in taking possession of the secured assets from the borrower. If any person, including the borrower, is aggrieved by any of the measures adopted by the lender, he may prefer an appeal to the DRT within 45 days by depositing atleast 75% of the claim of the lender. The decision of the DRT is further appealable to an Appellate Tribunal. The lender can initiate any proceedings to enforce the security interest unless his claim of the financial asset is made within the period prescribed under the Limitation Act, 1963.
Enforcement of security interest has taken a flying start. It is pertinent to mention here that ICCI (having NPA of Rs.6918 Crore) and IDBI (having NPA of Rs.13297 Crore) has already taken measures under the Securitisation Act, against 20 corporate houses, to enforce their security interest6. Many banks and financial institutions may follow suit.
Particulars relating to securitisation of assets, reconstruction of financial assets and creation of security interest are entered in a record called Central Register. The records can be kept in electronic form also i.e. in floppies, diskettes etc. The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed within 30 days of the transaction by SCO, RCO or the lender as the case may be. Modifications made in the security interest registered with the Registry are to be filed within 30 days of such modification. Satisfaction of security interest is required to be filed with the Registry within 30 days of satisfaction. Records maintained at the Central Registry are open to inspection for any person on payment of the prescribed fee.
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reconstruction and creation of security interest. Default in filing particulars of modification. Default in giving intimation of particulars satisfaction. Non-compliance of RBI directives by SCO and RCO. Contravention, including attempt to contravene and abetting in contravention, of any of the provisions of the Securitisation Act or any rules made thereunder.
For default in filing particulars of transactions mentioned above, every company and every officer of the company or every lender or officer of the lender shall be punished with a fine which may extend to Rs.5000/- for every day during which the default continues. For non-compliance of RBI directives every company and every officer of the company shall be punished with a fine which may extend to Rs.5, 00,000/-; and for continuing offence an additional fine of Rs.10, 000/- for every day during which the default continues. For contravention of any provisions of the Securitisation Act, the punishment is imprisonment for a term which may extend to one year, or with a fine, or with both.
Only a Metropolitan Magistrate or Judicial magistrate of the First Class has powers to take cognizance and try an offence under the Securitisation Act.
Boiler-plate Provisions
The following are the general provisions of the Securitisation Act: The matters, over which DRT or Appellate Tribunal has jurisdiction under this Securitisation Act, shall not be tried by any Civil Court. The provisions of the Securitisation Act shall override the provisions of other laws or any instruments. However the provisions of the Securitisation Act are in addition to and not in derogation of the following enactments: o o o o The Companies Act, 1956. The Securities Contracts (Regulation) Act, 1956. The Securities and Exchange Board of India Act, 1992. The Recovery of Debts due to Banks and Financial Institutions Act, 1993.
The Central Government has powers to make rules for carrying out the provisions of the Securitisation Act.
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Since the Central Registry is not yet established, the provisions relating to the Central Registry shall be applicable after the setting up of the Central Registry.
After the commencement of the Securitisation Act, where any SCO or RCO has acquired financial assets, no reference shall be made to BIFR. After the commencement of the Securitisation Act, any pending reference before BIFR shall come to an end where secured creditors, representing not less than 75% of the value of the amount outstanding, have taken any measures to recover their secured debts under the provisions of the Securitisation Act.
Exempted transactions
The following transactions are exempted from the provisions of the Securitisation Act: Lien on any goods, money or securities given under the Contract Act,1872. Pledge of movables under the Contract Act,1872. Creation of security on aircraft. Creation of security interest on vessel. Conditional sale, hire-purchase or lease in which no security interest is created. Rights of unpaid seller under the Sale of Goods Act,1930. Non attachable properties under the civil Procedure Code. Security interest on an amount less than or equal to Rs.1 lakh. Security interest created on agricultural land. Amount due is less than 20% of the principal sum and interest thereon.