THE SECURITIZATION AND

RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002

PRESENTED BY-
CHARU PUNDIR
JAYANTI KUMARI
APAR GUAR
SHOMIC GUPTA
ANIL VARMA
VANDANAA BHARTI
INTRODUCTION
GOI has taken several steps to improve the recovery of
bad debts of banks and financial institutions.

First step was the enactment of “ The Recovery Of Debts

due to Banks And Financial Institutions Act,1993.”

Establishment of 29 Debt Recovery Tribunals(DRTs) and

5 DRATs , but failed.

Thus introduce “ Securitization And Reconstruction Of

Financial Assets And Enforcement Of Security Interest
Act,2002.”
 SARFAESI ACT, 2002
Act extends to whole of India
Came into force on 21st June 2002
The SARFAESI Act allowed the banks and financial
institutions to take possession of the collateral security
given by the defaulting borrowers and sell these assets
without having to go through protracted legal procedures.
Deals with basic 3 aspects:
 To provide legal framework for securitization of asset.
 Transfer of NPA’s to asset reconstruction company, which
can then dispose off the assets and realize the proceeds.
 Enforcement of security interest by secured creditor
(banks/financial institutions)
WHAT IS SECURITIZATION ???

Securitization is the process of conversion of existing assets

or future cash flows into marketable securities. For the
purpose of distinction, the conversion of existing assets into
marketable securities is known as asset-backed securitization
and the conversion of future cash flows into marketable
securities is known as future-flows securitization.
 Act is divided into 6 chapters with 42 sections.
 Chapter 1:- Applicability of SARFAESI act definition of
various terms
 Chapter 2:- Regulations setting up of securitization and
reconstruction companies
 Chapter 3:- Enforcement of security interest allied and
incidental matters
 Chapter 4:- Establishment of central registry registration of
securitization reconstruction and security interest
transactions
 Chapter 5:- Offences, penalties and punishments
 Chapter 6:- Routine and legal issues.
Securitization and Asset Reconstruction
Securitization is to sell the secured NPA loans to
investors through a special purpose vehicle called
securitization company(SC).

SC formulate a separate scheme for each set of assets

and invites QIB’S for investment in the scheme.

SC realize the financial asset and pays the proceedings

to QIB

Asset Reconstruction involves securitization and

enforcement of security interests.
Securitizaton Company and Asset Reconstruction company is
to be registered with the RBI.

The purpose of asset reconstruction is –

Registration of securitization or reconstruction companies with
RBI.
The effect of non-registration or rejection of application of
such companies.

ARC acquires NPA loan from banks and financial institutions.

ARC formulates a scheme for each of financial assets taken

over .
• AR involves any one or more of following measures –
 Rescheduling of payment of dues payable by the
borrower.
 Enforcement of security interest in accordance with the
provisions of the Act.
 Settlement of dues payable by the borrower.
 Taking possession of securities.
 ELIGLIBILITY CRITERIA
FOR
SECURITIZATION COMPANY/
ASSET RECONSTRUCTION
COMPANY
(SECTION 3)
• Obtaining a certificate of registration granted under the above act.

• Owned funds- min 2 crore or max.15% of total financial assets

acquired or to be acquired.

• Reserve Bank shall consider the application provided the

company has:
 not incurred losses in any 3 preceding F.Y’s.
 Adequate arrangements for realization of financial assets.
 Directors with adequate professional experience in matters related
with finance etc.
 Nominee directors’ number should be equal to or less than half of
the total strength of the directors ,and
 Any of its directors should not been convicted of any offence
involving company’s moral.

Sponsor(any person) of the company should not hold any

controlling interest in the company.

It should be compiled with one or more guidelines issued by the

Reserve Bank for the said purpose.

Prior approval of the RBI is necessary for any substantial change

in management or location of the company.

RBI may reject the application if not satisfied.

Process Of Enforcement under the Act
Debt realization using the Provisions of
SARFAESI Act, 2002
 Classify an account as NPA
 Bank issues notice under section 13(2)
 Borrower can reply to notice under section 13(2) &
place his objections. Bank to deal with these objections
& send a reply.
 After this has been done Bank proceeds with taking
possession of the “secured asset” under section 13(4).
 Borrower can file an appeal against notice & DRT can
pass orders & ask the Bank not to proceed further.
Debt realization using the Provisions of
SARFAESI Act, 2002
 If no restraint from DRT, Bank can proceed by taking
physical possession of the property & proceed with
auctioning the property
 If Bank could auction the property it will first realize
the outstanding dues of the borrower & then the
remaining amount is given to the borrower.
 If the amount realized through auction is not sufficient
to meet the outstanding dues, then Bank proceeds
further against the borrower.
 ENFORCEMENT OF SECURITY INTEREST
Secured NPA
• > than 1 lakh Bank empowered Notice to Borrower
• Default amt > than 20% of as secured Sec 13(2) • 60 days time
P&I creditor under the • Objections
•Other than exempted act answered
categories under Sec 31

Rights of BORROWER Sec 13(4)

Appeal to DRAT Right to Appeal DRT
• Deposit 50% of debt • Within 45 days Enforcement Proceedings
determined by DRT • DRT to dispose of Bor • Authorized officer
Se ro • District Magistrate
• Within 30 days of DRT within 60 days c 1 we
order • Max 4 months 7 r • Sec 34 bars civil
proceedings

Sale
Possession Demand on
• Notice of 30 days Management
• Lease Holder of
• Reserve Price • Takeover
• Assignment Security
fixation
Exemptions from Enforcement
Lien
Pledge
Security in Air crafts / Shipping Vessels
Conditional Sale / Lease
Security interest in Agricultural land
Any financial asset:
o Not exceeding Rs. 1 Lakh
o Where amt due is < 20% of Principal Amount & Interst
Outcome of SARFAESI Act

NPA recovery was through SARFAESI Act

Source: RBI, D&B Research
 New Amendments in SARFAESI
Allow banks to have priority over tax authorities for
proceeds from sale of assets.

To set up central registry, which will have all the

information regarding mortgages in the current year,
thereby avoiding duplication of mortgages.
 CASE STUDY
ON
MARDIA CHEMICALS VS. ICICI
BANK
 Introduction
Rs. 1000 crore company

It is a flagship of Mardia group has facilities to

manufacturing a range of products like dyes, dye
intermediates, basic chemicals and caustic soda.

It owed over Rs. 1450 crore (including a principle of

Rs. 800 crores and unpaid interest forming the
balance) to 22 lenders which were BOI, BOB,
Corporation Bank, UBI ,IDBI ,LIC ,IFCI ……
 Allegations
MC had bought property worth Rs.34cr and converted
them into Co. guesthouse, but there was no information
available on source of funds, there are allegations of
diversion of funds against the co.

Also the Co. has not been responding to the notices

severed by the Registrar of Companies, Ahmedabad

A notice was issued to MC by the bank requiring to pay

the amount due indicated in the notice within 60 days
failing which the bank as a secured creditor would be
entitled to enforce the security interest w/o intervention
of court or DRT by way of sale, lease or otherwise any of
 Challenges To The Act
It claimed that any of the banks and FI’s have been vested
with arbitrary powers, without any guidelines for its exercise
and also providing any appropriate and adequate mechanism
to decide the disputes relating to the correctness of the
demand, its validity and actual amount of dues, sought to be
recovered from the borrower

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 of the
management or the possession of the secured assets without
affording any opportunity to the borrower
Challenges To The Act
In the year 1999 ICICI filed a suit before the HC at
Mumbai against MC ltd for recovery of amount
totaling Rs 140 cr due from MC

ICICI bank issued a notice under securitisation act for

recoveries of Rs. 293 cr within 60 days of the notice
been delivered and then acquired some assets from
Mardia after which the latter filed a case against ICICI
 Challenges To The Act
MC appealed to the SC that while the law permitted
the bank to attach assets ,they may not sell them

DRT of Mumbai issued an order to MC to pay up 25%

of the outstanding amount to ICICI bank by Oct 21
2003
 Amendments To The Act
Under 2004 Act, a borrower may appeal a banks action
before the DRT w/o 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.
FURTURE OUTLOOK
Securitization is expected to become more popular in
the near future in the banking sector.
Since, blocking too much capital in NPAs can reduce
the capital adequacy of banks that is why banks go for
two options –
 raise more capital or
 to free capital tied up in NPAs and other loans through
securitization.
 Banks are expected to sell off a greater amount of
NPAs to ARC 
Thank you