Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions
Introduction
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, (SARFAESI Act) is
responsible for rules and guidelines for securitisation and
reconstruction companies to conduct their business.
Lefts look at the different aspects of the regulation of BALANCE
securitisation and reconstruction offinancial assets of banks
and financial institutions.
Learning Objectives
+ Recognise the features ofthe regulatory framework for
securitisation and reconstruction companies.
+ Identify the ways in which securitisation and
reconstruction companies raise funds and acquire
assets,Securitisation and Reconstruction Companies
A securitisation ar reconstruction company needs to obtain
certification of registration from the Reserve Bank of India (RBI) in
order to conduct its business
It should own atleast Rs. 2 crore or atthe maximum 15% of the
total financial assets acquired or to be acquired, as specified. The
RBI can vary the funds for different classes of securitisation or
reconstruction companies.
The SARFAESI Act and the RBI provide guidelines for these
companies and specify how'to raise money and carry out changes
in the management
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Securitisation and reconstruction companies can raise money by
issuing security receipts for formulating schemes. The
SARFAESI Act provides the legal framework for this
Raising Money
Changing Management
anging Managemen
Securitisation or reconstruction companies need approval of the
RBI to change its management, registered address or name.Business Activities
The SARFAESI Act and related RBI guidelines permit securitisation or
reconstruction companies to perform some business activities:
+ Creating separate schemes for each financial asset
* Creating separate trusts for each scheme, maintaining distinct
records and accounts andissuing security receipts to the
investors
* Acting as trustees for the trusts and managing the assets held
* Arranging for realisation of money from the assets. Non-
realisation of assets will impact investors! beneficiaries.
Companies do notinvest their own funds, but utilise the money
invested on risk assessment and acquire assets only after
careful consideration. Risk factors need to be analysed and
disclosed to investors.