SARFAESI Act 2002

Sujay Somani (9152)

Amit Thakur (9157)
Pallawi Sawaitul (9149)
SARFAESI Act - 2002
 FLOW …

• Introduction
• SARFAESI Act
• Analysis
• Case Study
 Introduction
• Financial Sector, one of the key driver in
developing economy. Banking industry
complying with the banking and financial norms.
• Banking and Financial Sectors not in the same
playing fields.
• No legal provision facilitating securitization of
financial assets of banks.
• Slow pace of recovery of defaulting loans and
NPA of banks and financial institutions
prompted passing of Recovery of debts due to
Banks and financial institutions Act 1993.
Contd/-

• Special DRT (Debt Recovery Tribunal) was

set up.
• Even this was not a success because of
total disconnect between civil law and
economy.
• Every fifth borrower is a defaulter – Govt
under pressure to make adequate
provisions for recovery.
• Thus came SARFAESI Act 2002.
(Securitization and Reconstruction of Financial Assets and
Enforcements of Security Interest)
 SARFAESI ACT
• IT EXTENDS TO WHOLE OF INDIA.
• IT CAME INTO FORCE ON 21ST OF JUNE,2002.
• Proposes to securitize and reconstruct through Two special
purpose vehicles:
– SCO (Securitisation Company)
– RCO (Reconstruction Company)
• Features:
– Need to be incorporated under company act 1956.
– Compulsory registration
– Minimum financial stability of owned funds of 2 crore or up
to 15% of total assets acquired / to be acquired is required.
– RBI has powers to specify rate of owned funds. Rates could
be different for SCO & RCO.
Contd/-

• Deals with basic three aspects:

– Enforcement of security interest by secured creditor
(banks/financial institutions)
– Transfer of non performing assets (NPA’s) to asset
reconstruction company, which can then dispose off
the assets and realize the proceeds.
– To provide legal framework for securitization of asset.
 CONTENT
(41 sections in 6 chapters and a schedule)

• 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.
 Securitisation

• Acquisition of financial assets by any

securitisation or reconstruction from any
originator whether by raising of funds by
such reconstruction company from QIB 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 asset for the
purpose of realization of such financial asset. It includes:

– Proper management of the business of the borrower, by change in,

or take over of, the management of the business of the borrower
– Sale or lease of a part or whole of the business of the borrower
– Rescheduling of payment of debts payable by the borrower
– Enforcement of security interest in accordance with the provisions
of this Act
– Settlement of dues payable by the borrower
– Taking possession of secured assets in accordance with the
provisions of this Act.
 Enforcement of Security Interest

 Incase the borrower fails to discharge his liability

in full:
 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
 Takeover the management of the secured assets of the
borrower including the right to transfer by way of lease,
assignment or sale for realizing the secured asset
 Appoint any person(hereafter refer to as the manager) to
manage the secured assets the possession of which has been
taken by the secured creditor
 The Act Empowers the Bank
• To issue demand notice to the defaulting
borrower & guarantor, calling upon them to
discharge their dues in full within 60 days
from the date of 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
 Measures taken in case of non-
compliance
• The Act provides for four measures which
can be taken in case of non- compliance:
– 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
– The secured creditor may take over the
management of the secured assets including
right to transfer.
Contd/-

– A manager maybe appointed by the secured

creditor to manage the secured assets which
have been taken possession of by the secured
creditor.

– 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.
 Analysis in the light of Judicial
Pronouncement
• Act not necessary, DRT already exist.
• Act does not provide adequate and
efficacious mechanism to address, objections
of borrower on notice issued by lender.
• Requirement of depositing 75% of claim for
filing an appeal is unconstitutional.
• Enforcement of security interest is governed
by the contract signed between two parties.
• Provision of sale of property without
intervention of court is not legal.
Contd/-

• Various provisions under section 13

& 17(2) are unconstitutional.
• Principles of Lender’s liabilities
completely ignored.
• More than 50% of NPA’s are in priority
sector. Hence focus of the act against
industrial & corporate bodies does not
make sense.
Case Study
 CASE STUDY
MARDIA CHEMICALS Vs ICICI BANK
• Rs.1000 crore company.
• It is a flagship of Mardia group has facilities
to manufacturing a range of products incl
dyes , dye intermediates, basic chemicals
and caustic soda.
• It owed over Rs. 1450 crore (incl a principal
of Rs. 800 crores and unpaid interest
forming the balance) to 22 lenders incl.
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 its secured assets
 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
• The exposure of ICICI bank to the Ahmedabad based
dyes and dyes intermediary company is Rs. 110 cr
(Principal) and with interest works out to Rs. 293 cr

• In the year 1999 ICICI filed a suit before the HC at

Mumbai against MC ltd for recovery of amount
totalling 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

• The court said that the bank can

acquire the lender could not part with
the assets in any way
• 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
 Challenges to the Act

• SC disposed off the case filed by Mardia against

the consortium of bankers led by ICICI bank
• SC struck down the provision contained in
section 17(2) of the Act that required borrowers
to deposit 75% of the amount claimed by
lenders before they could file appeals with debt
recovery tribunals
• DRT, Ahmedabad issued an ex-parte order
against the sale of MC property by ICICI Bank.
However, the receiver appointed by the Mumbai
HC had already taken charge the of the property
 Amendments in 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.
Thanks…