SARFAESI ACT

SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002) was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest created in respect of Financial Assets to enable realization of such assets.

The Act stipulates four conditions for enforcing the rThe Act stipulates four conditions for enforcing the rights by a creditor. (a) The debt is secured (b) The debt has been classified as an NPA by the banks (c) The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest there on. (d) The security to be enforced is not an Agricultural land. (A) Securitisation Company or Reconstruction Company shall commence/undertake only the securitization and asset construction activities and the functions provided for in Section 10 of the SARFAESI Act. It cannot raise deposits.

 (B) Net worth is aggregate of paid up capital, paid up preference capital, reserves and surplus excluding revaluation reserve, as reduced by debit balance on P&L account, miscellaneous expenditure (to the extent not written off), intangible assets, diminution in value of investments/short provision against NPA and further reduced by shares acquired in SC/ARC and deductions due to auditor qualifications. This is also called Owned Fund. Every Securitisatin Company or Reconstruction Company seeking the RBIs registration under SARFAESI Act, shall have a minimum Owned Fund of Rs. 20 mn. Methods of Recovery of NPAs under

RULES:
The SARFAESI Act provides for the manner for enforcement of security interests by a secured creditor without the intervention of a court or tribunal. If any borrower fails to discharge his liability in repayment of any secured debt within 60 days of notice from the date of notice by the secured creditor, the secured creditor is conferred with powers under the SARFAESI Act to a) take possession of the secured assets of the borrower, including transfer by way of lease, assignment or sale, for realizing the secured assets

b) takeover of the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured assets, c) appoint any person to manage the secured assets possession of which is taken by the secured creditor, and d) require any person, who has acquired any of the secured assets from the borrower and from whom money is due to the borrower, to pay the secured creditor so much of the money as if sufficient to pay the secured debt.

The Central Government has prescribed Security Interest (Enforcement) Rules, 2002 pursuant to the powers conferred on it under the SARFAESI Act. The foregoing enforcement measures must be exercised by a secured creditor in accordance with the Enforcement Rules and are further subject to guidelines issued by the RBI. In exercise of powers conferred by SARFAESI Act, 2002, Reserve Bank of India has issued guidelines to registration, measures of asset reconstruction, prudential norms, acquisition of financial assets etc., namely 'The Securitization Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003'. The Guidelines are available at the Downloads segment.

Why is the SARFAESI Act of critical importance to lenders?

To speed up the process of recovery from NPAs, SARFAESI Act was enacted in 2002 for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors. The SARFAESI Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.

The Act provides three alternative methods for recovery of non-performing assets, namely: 1. Securitization 2. Asset Reconstruction 3. Enforcement of Security without intervention of the court

Secured creditors are given the power to take possession of the securities in the event of default and sell such securities for the purpose of recovery of the loan. The Act provides for enforcement of Security interest by a secured creditor without intervention of the court, in cases of default in repayment of installments and noncompliance with the notice period of 60 days after the declaration of the loan as a nonperforming asset.

Procedure for Enforcement of Rights

notice is to be issued to the borrower/co-borrowers/guarantors/surely giving 60 days time for setting the liability. After the expiry of 60 days, in case the amount due is not paid, the bank can take possession of the property and bring it for sale to realize the dues. After taking possession, the bank has to publish a possession notice in two newspapers for the information of the general public. Such publication is to be made within 7 days of taking possession of the property. The borrower/mortgagor can approach DRT for redressing grievances if any within 45 days from taking possession by the bank.

 The property of which possession is taken can be sold only after obtaining valuation through Government approved valuer and thereafter publishing the sale notice in two news papers (one in vernacular) giving 30 days notice. Thus the property can be sold for maximum price with wide publicity. Any excess amount realized is not sufficient to cover the dues, the secured creditor can approach the DRT to recover the balance amount.

ISSUES UNDER THE SARFAESI

(a) A securitization receipt (SR) gives its holder a right of title or interest in the financial assets included in securitization. The definition is not legally inadequate in case of Pay through Securities with different tranches. (b) The SARFAESI Act has been structured to enable security receipts (SR) to be issued and held by Qualified Institutional Buyers (QIBs). It does not include NBFC or other bodies unless specified by the Central Government as a financial institution (Fl). (c) Demand for securities is restricted to short tenor papers and highest ratings. (d) The various risks involved in securitization include Credit Risk, Sovereign Risk, Collateral deterioration Risk, Legal Risk, Prepayment Risk, Servicer Performance Risk, Swap counterparty Risk and Financial Guarantor Risk.

Problems faced by banks

1. Sale of security property 2. Priority of Government dues (a) The Government authorities should prove that the claim relates to a date prior to the mortgage in favor of the bank. (b) The authorities have taken all possible measures within a reasonable time to recover the dues. (c) The debtor has no other property/source for payment of Government dues other than the property mortgaged to the Bank. 3. Court interference

Conclusion
The SARFAESI Act has been largely perceived as facilitating asset recovery and reconstruction. Since Independence, the Government has adopted several ad-hoc measures to tackle sickness among financial institutions, foremost through nationalization of banks and relief measures. Over the course of time, the Government has put in place various mechanisms for cleaning the banking system from the menace of NPAs and revival of a healthy financial and banking sector. The Reserve Bank of India issued guidelines and directions relating to registration, measures of ARCs, functions of the company, prudential norms, acquisition of financial assets and related matters under the powers conferred by the SARFAESI Act, 2002.