Professional Documents
Culture Documents
Definitions
"Appellate Tribunal" means a Debts Recovery Appellate Tribunal established under sec. 8(1) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. (Sec. 2(a)) 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. (sec. 2(b)) 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. (sec. 2(f))
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 3
"Board" means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992. (sec. 2(e))
Definitions
"financial asset" 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. (sec. 2(l))
"financial institution" means-(i) a public financial institution within the meaning of section 4A of the Companies Act, 1956; (ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; (iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958; (iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934, which the Central Government may, by notification, specify as financial institution for the purposes of this Act. (sec. 2(m))
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 4
"non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,-(a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank. (sec. 2(o)) "financial assistance" means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or FI. (sec. 2(k))
Definitions
"qualified institutional buyer" means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under section 3(4) or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 or regulations made there under, or any other body corporate as may be specified by the Board. (sec. 2(u))
"sponsor" means any person holding not less than 10% of the paid-up equity capital of a securitisation company or reconstruction company. (sec. 2(zh))
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 5
Applicability
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. NPA 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 Civil Procedure Code, 1908 are not covered under this Act. Non-performing Asset (NPA) means an asset for which Interest or principal (or installment) is overdue for a period of 90 days or more from the date of acquisition or the due date as per contract between the borrower and the lender, whichever is later.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 6
any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created; any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930; any properties not liable to attachment or sale under Section 60 of the Code of Civil Procedure, 1908; any security interest for securing repayment of any financial asset not exceeding one lakh rupees; any case in which the amount due is less than 20% of the principal amount and interest thereon.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 7
Constitutional Validity
The Supreme Court in Mardia chemicals Ltd Vs Union of India case had decided that the SARFAESI Act had the constitution validity.
Methods of Recovery under the Act - Securitization - Asset Reconstruction - Enforcement of Security without the intervention of the Court
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 8
Securitization
It means acquisition of financial assets by any Securitization Company or Reconstruction Company from any originator, whether by raising of funds by such Securitization Company or Reconstruction Company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.
Financial Assistance
Borrower (obligor)
Originator
Securing Assets Cash
(lender)
Transferring Secured Assets
Investor (QIB)
Cash
SPV (SCO/RCO)
Security Receipt
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 9
Asset Reconstruction
It means acquisition by any Securitization Company or Reconstruction Company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance.
Contd
The Act also empowers the following Powers to Banks & FI's: 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 and only those property given as security can be proceeded but not the guarantors' personal property. 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 15 DAYS of receipt of such representation or objection.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 11
Limitation Act
Limitation Act, 1963 is applicable to the claims made under the Act.
DRAT
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 12
- Act as an agent for any bank or FI for the purpose of recovering their dues from the borrower on payment of such fees or charges. - Act as a manager between the parties, without raising a financial liability for itself - Act as receiver if appointed by any court or tribunal.
Examples: 1. ARCIL (Indias first and largest asset reconstruction company (ARC)) 2. Reliance Asset Reconstruction Company Limited by Anil Ambani
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 13
ARC =buy bad loans from banks. ARC =arrange money from QIBs to buy bad loans from banks. Problem= Indian QIBs do not invest much in ARCs. Therefore ARCs capacity to buy NPA= very low. And bank themselves dont have enough expertise or manpower to dispose those NPAs quickly. Previously Foreign investors could invest only upto 49% in ARC=minority shareholder=cannot influence company decisions. Now, Government also increased foreign investment limit in ARCs. This would attract more investment in ARCs and help in quicker purchase and disposal of NPAs. Foreign investment in ARC:-
49% 74%
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 14
Central Registry
Setting up of CR:
The Government of India, Ministry of Finance notified to set up the CR, to prevent frauds in loan cases involving multiple lending from different banks on the same immovable property. This Registry has become operational on March 31, 2011 and CR is a Government Company licensed under Section 25 of the Companies Act 1956 has been incorporated with the name of "Central Registry of Securitization Asset Reconstruction and Security Interest of India" (CIN No: U67100DL2011NPL215270) having its registered office at New Delhi for the purpose of operating and maintaining the Central Registry under the provisions of the SARFAESI.
Committees
SARFAESI was based on recommendation of these two Committees:1. Committee on Banking Sector Reforms (Narasimham Committee II), 1998 2. Restructuring of weak Public Sector Banks Verma Committee The latest amendment (Debt to Equity), is based on recommendations of Alok Nigam Panel on ARCs, made by Finance Ministry.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 16
A formal procedure has been prescribed for taking into record the substitution of banks by asset reconstruction companies ("ARCs") and securitization companies in any proceedings pending before any tribunal/ court/ other authority ("Authority") in respect of the financial assets which the ARCs and securitization companies have acquired from such bank.
ARCs and securitization companies have been permitted to convert any portion of the debt due to them by the borrower into equity shares of the borrower company. The banks have been permitted to purchase the immovable property which has been furnished to them as security and which is being sold under an auction process provided the purchase price offered by other auctioneers in respect thereto, is below the reserve price set by the bank. The bank can hold such property for a maximum period of 12 (Twelve) years after which the bank is mandatorily required to dispose of such property in compliance with the BR Act.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 17
can buy for the NPA property if there are no other bidders. 1. Bank multi-state cooperative banks can also take actions under SARFAESI. cant get stay orders from DRT easily. Can make settlement / compromise with Bank/ARC. can convert their debt into equity (fully or partially)
2. Borrower
3. ARC
4. Govt.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 18
Miscellaneous Amendment
1.
2.
3.
In public interest, Union Government can issue notification that xyz provision of SARFAESI act may not apply or may apply with modifications to a class or classes of banks or financial institutions. Earlier a borrower could approach Debt Recovery tribunal (DRT) to get stay order against bank/ARC. New amendment says DRT cannot grant any stay order unless both parties (Borrower vs. lender bank) are heard. This will ensure the process of law is not misused by unscrupulous borrowers to get stay orders just to delay moneyrecovery. Bill proposes to enable banks and financial institutions to enter into settlement or compromise with the borrower. It also seeks to empower the Debts Recovery Tribunal to pass an order acknowledging any such settlement or compromise.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 19
Guidelines issued by RBI in relation to classifying NPA should be followed by the bank before issuing notice under Section 13(2) of SARFAESI Act. The judgment discussed at length the meaning of NPA its ambit scope. Writ petition dismissed.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 21
1.) Mrs. Sunanda Kumari and another Vs Standard Chartered Bank (Karnataka)
Pendency of Civil Suit or execution petition or obtaining a decree is no bar to proceed under SARFAESI Act - It was held in the following cases that a pending civil suit or execution petition is no bar to proceed under SARFAESI Act
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 22
Claim under SARFAESI can be only to the extent of decree/order passed by DRT - It has been held in the above case that the process under Securitisation Act can be confined to the extent of the decree/order passed by Debts Recovery Tribunal.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 23
Demand Notice to Guarantor Mandatory Notice to guarantor under SARFAESI Act is mandatory. Proceedings without such notice will be vitiated.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 24
Section 35 of the SARFAESI Act will over ride the provisions Arbitration and Conciliation Act 1996. It cannot be pleaded that the dispute with regard to auction should be resolved through Arbitration and Conciliation Act.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 25
EPF dues have priority over dues of Secured Creditor - Dues under EPF will have priority over the dues of the Secured Creditor. There is no specific provision in the SARFAESI Act which enable the Bank to claim statutory charge. It is not the intention of the SARFAESI ACT to disturb the social welfare policy embedded in Sec 11(2) of the E.P.F Act.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 26
Yuth Development Co-operative Bank Ltd Kolhapur Vs Balasaheb Dinakrrao Salokhe & Ors
Bar of Jurisdiction of Civil Court - Civil Court has no jurisdiction to entertain any suit filed in respect of action taken under SARFAESI Act.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ,2002 27
29