Securitisation &

Reconstruction of
Financial Assets &
Enforcement of
Security Interest
(SARFAESI) Act, 2002
 Group Members
Ninad Pradhan 07347
Pankaj Rewatkar 07350
Mahendra Waghmare 07364
 Civil Courts Era
 Prior to 1993, the Banks had to approach Civil Courts for
recovery of dues.
 The process was
1. the Time consuming
2. Did not adapt to changing demands of the economy
– It resulted in pendency of about 15 lakhs cases filed
by the Banks and Financial Institutions till 30th
September 1990.
– The fund blocked in the litigation was about Rs.
5,622 crores of Public Sector Banks and about Rs.
391 crores of Financial Institutions.
– Civil Courts failed to deliver both in ascertainment
of dues & execution of decree.
Recovery of Debts Due to Banks
and Financial Institutions (RDDBFI)
Act,1993
 It brought down the time span for adjudication of dues.
 Of the two ills of the Civil Courts,
1. non ascertainment of dues in an speedy manner was
cured by the RDDBFI Act,
2. failed to cure the other ill, i.e. effectively executing the
decree.
This is evident from the fact that till about 30th September,
2001, 22 Debt Recovery Tribunals (DRTs) of the country had
adjudicated 9814 cases, thereby issuing the
Certificate/Decree for Rs.6265 crores, however, actual
recoveries could be made only of Rs.1864 crores.
The SARFAESI ACT
In late 2002, the Parliament passed the Act, which
extends to the whole of India, giving banks the power to
aggressively recover loans from defaulters by seizing
their assets. The 2002 Act provides a procedure by which
banks can serve notice to a borrower for payment of a
defaulted loan. In the event of non-compliance, the bank
may proceed with actions to take possession and dispose
of the securities.
The Act deals with three aspects :
• 1. Enforcement of Security Interest by secured creditor
(Banks/Financial Institutions)
• 2. Transfer of non- performing assets to asset
reconstruction company, which will then dispose of those
assets and realize the proceeds.
• 3. To provide a legal framework for securitization of
assets.
 This Act lays the emphasis on recovery of the money, even
without the intervention of Court.
 The Banks were empowered to take possession of Secured
Assets of the Borrower including the right to transfer by way
of lease, assignment or sale for realizing the Secured Asset.
 The role of the Court was limited to challenge the measures
by way of Appeal, that too on deposit of 75% of amount
claimed on the notice.
 In effect the Securitisation Act, 2002
1. Did away with the first aspect of recovery of dues i.e
ascertainment of dues
2. It concentrated only on the second aspect i.e. executing
the decrees.
PURPOSE

 Is to promote the setting up of asset reconstruction/

securatisation companies to take over & liquidate the 80000
crores of NPA accumulated with the commercial banks and
public financial institutions.
 It envisages ARC’s to undertake reconstruction functions.
 It lays emphasis on recovery of the money, even without the
intervention of Court. The Banks were empowered under
Section 13(4) of Securitization Act to take possession of
Secured Assets of the Borrower including the right to transfer
by way of lease, assignment or sale for realizing the Secured
Asset.
 The role of the Court was limited to challenge the measures
under Section 13(4), by way of Appeal, that too on deposit of
75% of amount claimed on the notice under Section 13(2) of
Securitization Act.
NEED

• Impact of ballooning non performing assets on the health of

the financial sector
 Urgent need for legal reforms to keep pace with the changing
industrial & financial scenario.
 Piling up of overload of cases with Debt Recovery Tribunals
& low courts resulting in slower process in the Debt recovery.
 Urgent measure in problem of NPAs for tackling willful
defaulters.
RDDBFI V/s SARFAESI
 The RDDB&FI Act is for expeditious adjudication at the
hands of Tribunals, while the SARFAESI Act bypasses
intervention of the courts for expeditious recovery of dues of
banks and financial institutions.
 SARFAESI shows that it is an act to regulate securitisation
and reconstruction of financial assets and enforcement of
security interest; whereas RDDB&FI is there to establish
Tribunals for expeditious adjudication and recovery of debts
due to banks and financial institutions.
 Moreover, only secured creditors can refer to SARFAESI,
whereas RDDB&FI is for all types of creditors whether or not
they are secured or unsecured.
Some Basic Definitions
SECURITISATION:
means acquisition of financial assets by any securitisation or
reconstruction company from any originator, whether by
raising of funds by such reconstruction company from
qualified institutional buyers by issue of security receipts
representing undivided interest in such financial assets or
otherwise;

ASSET RECONSTRUCTION:
• means acquisition by any securitisation company or
reconstruction company of any right or interest of any bank
or financial institution in any financial assistance for the
purpose of realisation of such financial assistance
FINANCIAL ASSETS:
means debt or receivables and includes—
(i) A claim to any debt or receivables or part thereof, whether
secured or unsecured; or
(ii) Any debt or receivables secured by, mortgage of, or charge on,
immovable property; or
(iii) A mortgage, charge, hypothecation or pledge of movable
property; or
(iv) Any right or interest in the security, whether full or part
underlying such debt or receivables; or
(v) Any beneficial interest in property, whether movable or
immovable, or in such debt, receivables, whether such interest is
existing, future, accruing, conditional or contingent; or
(vi)Any financial assistance.
ENFORCEMENT OF SECURITY INTEREST:
In case the borrower fails to discharge his liability in full
within the period specified in sub-section (2), the secured
creditor may,
(a) take possession of the secured assets of the borrower
including the right to transfer by way of lease, assignment
or sale for realizing the secured asset;
(b) take over the management of the secured assets of the
borrower including the right to transfer by way of lease,
assignment or sale and realize the secured asset;
(c) appoint any person (hereafter referred to as the
manager), to manage the secured assets the possession of
which has been taken over by the secured creditor;
 Other Definitions:

SECURED ASSETS :
means the property on which security interest is created.

BORROWER :
means any person who has been granted financial assistance
by any bank or financial institution or who has given any
guarantee or created any mortgage or pledge as security for the
financial assistance granted by any bank or financial
institution and includes a person who becomes borrower of a
securitisation company or reconstruction company consequent
upon acquisition by it of any rights or interest of any bank or
financial institution in relation to such financial assistance.
SECURITY INTEREST:
means right, title and interest of any kind whatsoever upon
property, created in favour of any secured creditor and includes
any mortgage, charge, hypothecation, assignment other than
those specified in section 31.

WILLFUL DEFAULTERS:
means,
A) Default on debt obligation despite having the capacity to
honour repayment obligation
B) Funds deployed for reasons other than availed
C) Siphoning/ diversion of funds and thereby defaulting on
debt obligation
D) Funds not present with the unit in the form of other assets.
SECURED CREDITOR:
means any bank or financial institution or any consortium
or group of banks or financial institutions and includes—
(i) debenture trustee appointed by any bank or financial
institution; or
(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
(iii) 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
Provisions of the act

 The provisions of this Act are applicable only for NPA

loans with outstanding above Rs. 1.00 lac. NPA loan
accounts where the amount is less than 20% of the
principal and interest are not eligible to be dealt with
under this Act.
 Non-performing assets should be backed by securities
charged to the Bank by way of hypothecation or
mortgage or assignment. Security Interest by way of
Lien, pledge, hire purchase and lease not liable for
attachment under sec.60 of CPC, are not covered under
this Act
 The Act empowers the Bank
 To issue demand notice to the defaulting borrower and
guarantor, calling upon them to discharge their dues in
full within 60 days from the date of the notice.

 To give notice to any person who has acquired any of

the secured assets from the borrower to surrender the
same to the Bank.

 To ask any debtor of the borrower to pay any sum due or

becoming due to the borrower.

 Any Security Interest created over Agricultural Land

cannot be proceeded with.
Sec 13 (1)

Any security interest created in favour of any secured

creditor may be enforced, without the intervention of
court or tribunal, by such creditor in accordance with the
provisions of this Act
Sec 13 (2)

The borrower is a defaulter in repayment of the secured

debt or any installment of repayment and further the debt
standing against him has been classified as a non-
performing asset by the secured creditor.
It further provides that before taking any steps in direction
of realizing the dues, the secured creditor must serve a
notice in writing to the borrower requiring him to
discharge the liabilities within a period of 60 days failing
which the secured creditor would be entitled to take any
of the measures as provided in sub-section (4) of Section
13.
Sec 13 (3)

If on receipt of demand notice, the borrower makes any

representation or raises any objection, Authorised Officer
shall consider such representation or objection carefully
and if he comes to the conclusion that such
representation or objection is not acceptable or tenable,
he shall communicate the reasons for non acceptance
within 1 week of receipt of such representation or
objection.
 Sec 13 (4)

The Act provides for four measures which can be taken

by the secured creditor in case of non-compliance with
the notice served upon the borrower.
2. Under clause (a) of sub-section (4), the secured
creditor may take possession of the secured assets
including the right to transfer the secured assets by
way of lease, assignment or sale.
3. Under clause (b) of sub-section (4), the secured
creditor may take over the management of the secured
assets including right to transfer.
3. Under clause (c) of sub-section (4), a manager may be
appointed by the secured creditor to manage the
secured assets which have been taken possession of by
the secured creditor.

4. Under clause (d) of sub-section (4), the secured creditor

may require any person who has acquired any secured
assets from the borrower or from whom any money is
due to the borrower to pay the same to him as it may be
sufficient to pay the secured debt.
Sec 13 (10)
Where dues of the secured creditor are not fully satisfied
with the sale proceeds of the secured assets, the
secured creditor may file an application in the form and
manner as may be prescribed to the DRT having
jurisdiction or a competent court, as the case may be, for
recovery of the balance amount from the
borrower/guarantors.
Without prejudice to the rights conferred on the secured
creditor under or by this section, the secured creditor
shall be entitled to proceed against the guarantors or sell
the pledged assets without first taking any of the
measures specified in clauses (a) to (d) of sub-section
(4) in relation to the secured assets under this Act.
Sec 17

 The Secured Creditor will be able to take

possession of the secured assets only after
reasons for not accepting the objections of the
borrower have been communicated to him in
writing.
 After possession of the secured asset has been
taken, the borrower can file an application before
the DRT without any deposit.
 Earlier the borrower had to deposit 75% of the amount
claimed by the secured creditor before his appeal can be
entertained. But later on this condition was removed.
Sec 18

 If the DRT does not dispose off the petition within

4 months, the borrower or the Secured Creditor
can move the Debt Recovery Appellate Tribunal
(DRAT) for directing the DRT for expeditious
disposal of the application.
 After the disposal of the case by the DRT the
borrower, if aggrieved, can appeal to the DRAT
with a deposit of 50% of the decreed amount or
as determined by the DRT but not lower than
25%.
 Case: MARDIA CHEMICALS Vs ICICI
BANK

 Rs 1,000-crore company, Mardia Chemicals is the flagship

of the Mardia Group, has facilities to manufacture a range of
products including dyes, dye intermediates, basic chemicals
and caustic soda.

 It owed over Rs 1,450 crore (including a principal of Rs 800

crore and unpaid interest forming the balance) to 22 lenders,
including Bank of Baroda, Bank of India, Corporation Bank,
Union Bank, IDBI, Life Insurance Corporation, IFCI and
New India Assurance.
 Allegations against Mardia Chemicals
 Mardia Chemicals had bought property worth Rs 34 crore and
converted them into company guest-houses, but there is no
information available on the source of funds, there are
allegations of diversion of funds against the company.

 Also, the company has not been responding to the notices

severed by the Registrar of Companies, Ahmedabad

 A notice was issued to the petitioner – Mardia Chemicals

Ltd.(‘Mardia’) by the Bank, requiring it to pay the amount of
arrears indicated in the notice within 60 days, failing which
the Bank as a secured creditor would be entitled to enforce the
security interest without intervention of the court or Debt
Recovery Tribunal. Mardia was also required not to transfer
by way of sale, lease or otherwise any of its secured assets.
Mardia Group’s challenges to the Act
 It claimed that the banks and the financial institutions have
been vested with arbitrary powers, without any guidelines for
its exercise and also without providing any appropriate and
adequate mechanism to decide the disputes relating to the
correctness of the demand, its validity and the actual amount
of dues, sought to be recovered from the borrowers.

 The offending provisions as contained under the Act, are such

that, it all has been made one sided affair while enforcing
drastic measures of sale of the property or taking over the
management or the possession of the secured assets without
affording any opportunity to the borrower.
 The exposure of ICICI Bank to the Ahmedabad-based
dyes and dyes intermediaries company is Rs 110 crore
(principal) and with interest works out to Rs 293 crore.

 In year 1999 ICICI filed a suit before the High Court of

Judicature at Bombay against Mardia Chemicals Limited
for recovery of amounts totaling Rs. 1.4 billion (US$ 33
million) due from Mardia Chemicals.

 ICICI Bank issued a notice under Securitisation act for

recoveries of Rs.293 crore within 60 days of the notice
being delivered & then acquired some assets from
Mardia, after which the latter filed a case against ICICI
Bank.
 The court said that bank can acquire the lender
could not part with the assets in any way.
 Mardia Chemicals appealed to the Supreme Court
that while the law permitted banks to attach assets,
they may not sell them.
 The Debt Recovery Tribunal of Mumbai issued an
order to Mardia Chemicals to pay up 25 per cent of
the outstanding amount to ICICI Bank by October
21, 2003.
 India’s Supreme Court disposed off the case filed by
Mardia Chemicals against a consortium of bankers
led by ICICI Bank.
 However, the Supreme Court struck down the provision
contained in section 17(2) of the Act that required
borrowers to deposit 75 per cent of the amount claimed
by lenders before they could file appeals with debt
recovery tribunals.
 The Debt Recovery Tribunal (DRT), Ahmedabad, issued
an ex-parte order against the sale of Mardia Chemicals
property by ICICI Bank. However, the receiver appointed
by the Mumbai High Court had already taken charge the
of the property.
Amendments in the 2002 Act

Under the 2004 Act, a borrower may appeal a bank's

actions before the Debt Recovery Tribunal (DRT) without
making a 75% deposit of the amount claimed. The DRT
is required to dispose of such an application within 4
months.
Any person aggrieved by a DRT order can file an appeal to
the Debt Recovery Appellate Tribunal after depositing
50% of the debt due from it as claimed by the secured
creditor or determined by the DRT, whichever is less.
Amendments in 1993 Act
The 2004 Act also enables banks or financial institutions to
withdraw, with the permission of the DRT, the application
made to it and thereafter take action under the 2002 Act.
This amendment refers to the situation where a bank or
financial institution which may have initially applied to the
DRT for recovery of its debt later decides to enforce its
security interest under the 2002 Act.
Amendments in Companies Act, 1956

The 2004 Act proposes that any reference made to the National
Company Law Tribunal to revive and rehabilitate sick
industrial companies under section 424A of the Companies
Act will abate if the secured creditors representing three-
quarters in value of the amount outstanding have taken
recourse to obtain recovery under the 2002 Act.
Current Problems

• Difficulty in taking possession of the properties of the

defaulters;
• The properties are in the possession of third parties, who are
not the defaulters;
• Inability to fetch the market price as against the White
declared price in auction sale;
• Failure to attract bidders at the auction sale;
• Disposal of objections takes eternity; and
• Recovery officers are not trained in law, hence unable to deal
with difficult questions of law.
• Striking down of provision of deposit of 75% of amount
before entertaining the appeal has led to greater confusion &
complication in the legal proceedings. The appeal has become
cheaper to prefer
• The legislature's failure to include the aspect of ascertainment
of dues, ahead of aspect of execution of ascertained figure may
be single most important factor for failure of the Secrutisation
Act
 Transaction Structure

 Arcil sets up a trust (The Trust) for the purpose of

acquiring Non-Performing Assets on the books of the Bank
(Assets)

 The Assets would be acquired at fair value based on

assessment of realizable amount and time to resolution

 The Trust raises resources through formulation of

schemes by issuing SRs to the eligible investors under
SARFAESI (banks/ FIs etc.).
 Such monies received from QIBs are utilized towards
payment of purchase consideration for the FAs to the
sellers

 The Trust is the legal owner of the Assets and the SR

holders are beneficial owners of the same. Security
Receipt represents undivided right, title and interest in
the Trust Fund, including the Initial Trust Fund, the
Contributions received by the Trustee, the Assets
proposed to be acquired by the Trustee .
• Arcil acts as a trustee and the asset manager of the
Special Purpose Vehicle (SPV) trusts to fully leverage
empowerments to ARCs under the SARFAESI for
resolution of the Assets. The SR holders have no
recourse against Arcil
Factors critical to the success of ARCs

• Ability to aggregate debt

• Ability to attract funding – both domestic and foreign
investors
• Credibility of the sponsors