Basics SARFAESI Act

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OTS-1997/Corporate Debt
03 Recovery of
Restructuring Plan- 2001 Debts Due to
& Lok-Adalats Bank & Financial
Institutions Act

IBC 2016 02 1993

SARFAESI Act 2002

01
Before SARFAESI
Act
The RDDBFI Act
The RDDBFI Act

❑ The Recovery of Debts Due to Banks and Financial Institutions is

An Act to provide for the establishment of Tribunals for expeditious
adjudication and recovery of debts due to banks and financial
institutions and for matters connected therewith or incidental thereto.

❑ The amount due to banks and FIs should be Rs. 20 lakh or more.

❑ There are 39 DRTs and 5 DRATs(Allahbad, Chennai, Delhi,

Kolkata, Mumbai)
Composition of DRT

❑It consists of one person only who is referred as Presiding

officer. The Presiding officer:

❑Should be qualified to work as district judge

❑Can have term of 04 years
❑Can hold the office till he attains the age of 65 years
❑Note:- Earlier it was 05 years or 62 years

❑To assist the Presiding officer, the government can appoint the
recovery officers as deemed fit.
Composition of DRAT
❑It consists of one person only who is referred as Chairperson of Appellate
Tribunal. A person shall not be qualified for appointment as Chairperson of
DRAT, unless he-
a) is, or has been, a Judge of a High Court; or
b) has been a member of the Indian Legal Service with ten years of
experience in litigation and has held a post of Additional Secretary or any
equivalent or any higher post for two years; or
c) has held office as the Presiding Officer of a Debts Recovery Tribunal
for three years.
✓ The Chairperson of a DRAT shall hold office for a term of four years
or till he attains the age of seventy years, whichever is earlier. Provided
that a person who has not completed the age of fifty years shall not be
eligible for appointment as a Chairperson
 The Act
❑ The appeal against an order of Recovery Officer to DRT can be requested within 30
days from the date of order. The Tribunals have to resolve the claim within six months
❑ A person/entity aggrieved by orders of the DRT can appeal against its orders to Debt
Recovery Appellate Tribunal (DRAT) within 30 days of receiving orders from DRT.
(Under sub-section (3) of section 20)
❑ Appeal against order of DRT before DRAT with 50% pre deposit of due outstanding
determined by DRT. amount is mentioned in the notice under Section 13(2) of the
SARFAESI Act, in case steps taken under Section 13(2)/13(4) against the secured
assets are under challenge before the DRT will be the ‘debt due’ within the meaning of
proviso to Section 18 of the SARFAESI Act.
❑ Both DRT and DRAT have same powers as civil court.
❑ Presiding Officer of DRT Act proposed to function also as Adjudicating Authority
under Insolvency and Bankruptcy Code, 2016 & Chairperson of DRAT will also
function as Appellate Authority under Insolvency Code in Individual insolvency cases.
SARFAESI Act 2002
Basics With MCQ
 SARFAESI ACT

❑The SARFAESI Act was passed on December 17, 2002, in order to

lay down processes to help Indian lenders recover their dues quickly
without court intervention.

❑The SARFAESI Act essentially empowers banks and other financial

institutions to directly auction residential or commercial properties that
have been pledged with them to recover loans from borrowers.

❑Before this Act took effect, financial institutions had to file civil
suits in the courts to recover their dues, which is a lengthy and time-
consuming process.
Parts of the Act
Parts of the Act
Process Flow

60 days demand
notice given to repay Possession
dues(u/s-13(2)) Notice(u/s-13(4))

01 02 03 04 05
Secured Loan Objection if any filed
Borrower Right to file
Becomes NPA by borrower & Secured
case in DRT then
Creditors reply in 15
DRAT(u/s-17)
days.
 New Amendment:
• After receiving a notice under section 13(2), if the borrower objects
or makes a representation, the secured creditor must review it and,
if found untenable, must reply within fifteen days(Earlier A week).

Demand Notice Received Banker Has to Reply

10 Mar.

1 Mar. 25 Mar.

Customer raises Objection

Customer Against Demand
Notice

Section 17 allows borrowers

to appeal to the DRT against
bank actions within 45 days
of receiving the Section 13(2)
notice.
Ways of Recovery

01 Possession of Secured Assets

02 Take over of the management

03 Appoint any person to manage the secured

assets that is already taken over.

04
Notice to others who has dues to the borrower
in terms of the secured assets recovered by bank.

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 SARFAESI ACT

❑The SARFAESI Act is applicable to all banks including Co-operative

banks. (Co-operative banks established under a State law or multi-State
level societies come within the ambit of the (SARFAESI) Act of
2002,SC order on May 2020)

❑If a borrower defaults on a loan secured by a collateral, then the bank

can take possession of the pledged assets of the borrower, take over the
management of such assets, appoint any person to manage them or ask
debtors of the borrower to pay their dues too, with respect to the asset
after giving a notice period of 60 days.

❑The major drawbacks of the Act is that it is not applicable to

unsecured creditors.
BEFORE-SARFAESI

❑Prior to Sarfaesi the legislation called Recovery of Debts due to

Banks and Financial institutions Act ,1993(Creation of DRT/DRAT)
was enacted by the recommendations of the Narsimham Committee –
I.

❑ RBI notified One Time Settlement (OTS) Scheme introduced in

1997 & Corporate Debt Restructuring (CDR) scheme in 2001.

❑A committee under Mr. Andhyarujina was appointed to address the

loophole in previous acts which later recommended Sarfaesi Act.
Purview of the Act

❑The act is applicable to loan outstanding above Rs 1 lakh which are

classified as NPA.

❑NPA accounts amounting to less than 20% of the principal and

interest are not covered under this Act.

❑Applicable only to secured loans where security interest is created

on mortgaged/hypothecated property except in Agricultural Land*.

❑It is not applicable to any properties not liable to attachment or sale

under Section 60(1) of the Code of Civil Procedure, 1908.
Purview of the Act (Agricultural land)

❑If the said Agricultural land is not used for the purpose of agriculture and
is used for other purpose like constructing residential apartments, hence the
said land is not considered as agricultural land and SARFSESI Act is
applicable on such land.

❑The Karnataka High Court (FEB, 2021) has said that land on which
plantation crops such as coffee are grown is not agricultural land within the
meaning of Section 31 (i) of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act,
2002.
Benefits of SARFAESI is
Applicable to:

❑Scheduled Commercial Banks, International Finance Corporation,

Asian Development Bank and identified Housing Finance Companies.

❑NBFCs with an asset size of more than Rs. 500 crores, as

SARFAESI eligible lenders.

❑The benefits of the SARFAESI Act has been extended to the listed
bond market in India. They are included as 'secured creditors' under
the SARFAESI Act.
Securitisation

❑As per the act Securitisation means acquisition of financial

assets by any securitisation company or reconstruction company
from any originator, whether by raising of funds by such
securitisation company or reconstruction company from qualified
institutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise.

❑The conversion of an asset, especially a loan, into marketable

securities, typically for the purpose of raising cash by selling them
to other investors.

❑It is more often done through an SPV i.e. special purpose

vehicle.
Asset Reconstruction Company

❑Section 3 talks about the Registration of asset reconstruction

companies.

❑An Asset Reconstruction Company is a specialized financial

institution that buys the NPAs or bad assets from banks and financial
institutions so that the latter can clean up their balance sheets. Or in
other words, ARCs are in the business of buying bad loans from
banks.

❑Having Net owned fund of minimum 300cr.

❑ARCs to maintain a capital adequacy ratio of 15%.

RBI amends regulatory framework for
asset reconstruction companies.

The Reserve Bank of India has amended the extant regulatory framework for asset
reconstruction committees based on stakeholders' feedback and recommendations
from a committee to enable ARCs function in a more transparent and efficient
manner.
The Reserve Bank of India has now allowed asset reconstruction companies (ARCs) to
act as resolution applicants under the Insolvency and Bankruptcy Code (IBC). ARCs are
currently prohibited from engaging in any business other than securitisation, asset
reconstruction, or the activities listed in Section 10(1) of the SARFAESI Act, without the
RBI's prior clearance.

However, to qualify as resolution applicants, the companies –

✓ Are required to have a minimum net own fund of at least Rs 1,000 crore.
✓ They should have a board-approved policy for taking up the role of a resolution
applicant.
✓ In the case of a specific corporate insolvency process, ARCs cannot retain any
significant influence or control after five years from the date of approval of the
resolution plan.
✓ Make more disclosure with respect to the assets they have acquired under IBC among
other conditions.
ARCs will, by transferring funds, invest in the security receipts (SR) at a minimum of
either 15 percent of the transferor’s investment in the SR or 2.5 percent of the total SRs
that are issued, whichever is higher on an ongoing basis.

The management fee or incentives which are charged towards the reconstruction or
securitization activity can now only come from the recovery effected from the underlying
financial assets.

There are several changes with respect to governance where for instance –

❖ The chair of the board will have to be an independent director

❖ The tenure of the MD, CEO and Whole Time Directors cannot be more than five years
❖ They will, of course, be eligible for reappointment and they cannot continue beyond
the age of 70 years
The Reserve Bank also raised the minimum capital requirement for setting up an asset
reconstruction company (ARC) to Rs 300 crore from the existing Rs 100 crore with an aim to
strengthen the securitization sector which plays a vital role in the management of distressed
financial assets.

The existing ARCs have been given a glide path to meet the minimum net owned fund (NOF)
requirement till April 2026.

Consequently, any ARC obtaining the certificate of registration on or after the date of this
circular shall not commence the business of securitisation or asset reconstruction without
having minimum NOF of Rs 300 crore.

Audit Committee: ARCs shall constitute an Audit Committee of the Board, which shall
comprise of non-executive directors only. The Chair of the Board shall not be a member of the
Audit Committee. The Audit Committee shall meet at least once in a quarter with a quorum of
three members.

Transition Period: ARCs that currently do not comply with the RBI guidelines, are required to
comply with these guidelines within six months from the date of announcement.
Acquisition of interest in
financial assets:

❑ARC may acquire financial assets of any bank:

•By issuing debt & debenture.
•By entering into an agreement with the financial institution.

❑NPA shall be acquired at a reasonable price.

❑Banks and FIs may receive bonds/ debentures in exchange for NPAs
transferred to the ARCs. A part of the value can be paid in the form of
Security Receipts (SRs). Latest regulations instruct that ARCs should
give 15% of the value of assets in cash.

❑The first ARC in India is ARCIL(ARC India Ltd)

ARCIL
Asset Reconstruction Company (India) Limited (ARCIL) is a company established in 2002 under the
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002 in India. The company is registered with the Reserve Bank of India (RBI) as a securitization and
reconstruction company.

The primary objective of ARCIL is to acquire non-performing assets (NPAs) from banks and financial
institutions and resolve them through various methods such as restructuring, rehabilitation, asset sale, or
enforcement of security interest. The company also provides advisory and consultancy services to banks
and financial institutions in relation to resolution of stressed assets.

ARCIL operates as a public limited company and its shares are listed on the Bombay Stock Exchange
(BSE) and the National Stock Exchange (NSE). The company is headquartered in Mumbai, India and has
regional offices in Delhi, Chennai, Kolkata, and Bangalore.
ARCIL

The key stakeholders of ARCIL include its In recent years, ARCIL has been actively
shareholders, which include banks, involved in the resolution of stressed
financial institutions, and private equity assets in the Indian banking system,
investors, as well as the borrowers whose particularly in the infrastructure and real
NPAs have been acquired by the company. estate sectors. The company has also
The company has a board of directors that played a significant role in the resolution
oversees its operations and a management of large corporate NPAs, including some
team that is responsible for day-to-day high-profile cases such as Kingfisher
operations. Airlines and Bhushan Steel.
Important Section:

❑13(2)- Demand notice to borrower to repay the dues within 60

days.

❑13(4)- Possession notice to the borrower if he has not cleared his

dues within 60 days.

❑17- Borrower’s Right to appeal against the secured creditor in

DRT.

❑18- Appeal to DRAT against DRT order.

❑19- Right of borrower to receive compensation and costs in

certain cases
Demand Notice u/s 13(2)

❑If a borrower who is under a liability to a secured creditor, makes

any default in repayment of secured debt and his account in respect of
such debt is classified as non-performing asset, then secured creditor
may require the borrower by notice in writing to discharge his
liability within sixty days from the date of notice with an indication
that if he fails to do so, the secured creditor shall be entitled to
exercise all or any of its rights in terms of section 13(4) of the Act.

❑Section 13(13) shows that the notice u/s. 13(2) in effect operates as
an attachment/ injunction restraining the borrower from disposing of
the secure asset.
Borrowers Right

❑Borrower may make a representation in response to the notice

issued under section 13(2) and challenge the classification of his
account as an NPA also the quantum of amount specified in the
notice.

❑If the banks or FIs come to the conclusion that the

representation/objection of the borrower is not acceptable, then
the reasons for non-acceptance are required to be
communicated within 15 days.

❑The reason so communicated shall not confer any right upon

the borrower to file an application to the Debt Recovery Tribunal
(DRT) u/s. 17 of Act.
Borrowers Right

❑The borrower can challenge the notice u/s. 13(2) of Act in the
Civil Court as well as in the High Courts by way of writ petition.

❑n the case of D. Ravichandran V/s Indian Overseas Bank it was

held that the notice u/s. 13(2) of Act is really a show cause notice
and ordinarily this court does not interfere with show cause
notice.

❑In case any illegal act is done by creditor during the process
then the borrower is entitled to get compensation.
Borrowers Right

❑On receipt of possession notice u/s. 13(4) the borrower can prefer
appeal before DRT u/s. 17, seeking stay of proceedings.

❑The limitation period of 45 days from the date of the receipt of the
notice u/s. 13(4).

❑A person can appeal to DRAT within 45 day from the date of the receipt
of DRT order.

❑The Supreme Court has clearly held in the case of Mardia Chemical
Ltd. that the proceeding u/s. 17 is in the nature of original proceeding and
that even the amount which is claimed to be due to a bank as stated in the
notice u/s. 13(2) can be challenged by the borrower.
Power of DRT

❑High Court of Madras has ordered in the case of M/s Lakshmi Mills
Private Ltd. v/s Indian Bank as under :-
•The right of the bank is not automatically suspended upon filing an
application by the borrower u/s. 17 and secured creditor can proceed
further, where no stay is granted by the Tribunal.
•The Tribunal has power to impose the condition relating to deposit for
grant of stay of auction.
•The Tribunal has no power to pass any Interim mandatory order relating
to restoration of possession before finalization of the proceeding u/s. 17
of the Act.
•The Tribunal has no power to pass any Interim mandatory order relating
to restoration of possession before finalization of the proceeding u/s. 17
of the Act.
Mandatory CERSAI Registration

❑As per latest amendments in SARFAESI Act Section 23:

All transactions of securitisation and asset reconstruction and
creation of security interest are required to be registered with the
Central Registry of Securitisation Asset Reconstruction and
Security Interest of India (CERSAI).
Note:-No penalties for time line

❑Secured Creditors who have not duly registered the security

interest with the CERSAI shall not be entitled to exercise the right
of enforcement of securities
Top MCQs
Sarfaesi Act 2002
In case of consortium or Multiple lending arrangements consent of at
least _______% of lenders is required for initiating action under
SARFAESI.

A. 60 percent by value
B. 60 percent by value and 75 percent by
number Ans: A
C. 75 percent by value
D. None of these
Section 26D provides that no secured creditor shall be entitled to
exercise the rights of enforcement of securities under SARFAESI Act
unless the security interest has been registered with:

A. CERSAI
B. Central Database
C. ROC Ans: A
D. None of these
In which of the following cases recovery under SARFAESI is
permissible

A. Documents became time barred

B. Assets charged by way of hypothecation
C. Pledge of Warehouse receipts Ans: B
D. None of these
After issue of demand notice U/s 13(2) of SARFAESI, if the borrower
makes any representation or raises any objection to the notice, the
Authorized Officer shall reply within ____period of receipt of such
representation or objection

A. 30 days
B. 60 days
C. 15 days Ans: C
D. 7 days
For initiation of action under SARFAESI, a notice of 60 days is required
to be served to the borrower and guarantors following which section
of the act Act calling upon them to discharge the liabilities, failing
which, Bank can acquire the assets.

A. 13(4)
B. 14(1)
C. 12 Ans: D
D. 13(2)
Procedure for the secured creditor to be adopted for taking
posession of the secured assets is given in which section of SARFAESI
Act?

A. 13(4)
B. 14(1)
C. 12 Ans: A
D. 13(3)
Section 26D of SARFAESI Act mandates:

A. Demand Notice to be signed by Chief

Manager or Above Cadre.
B. Mandatory CERSAI Registration to enforce
securities interest Ans: B
C. The Term Hypothication is Defined
D. The Process of Securitization
As per Rule 8(2) of SARFAESI Act, the possession notice should be
published in 2 leading newspapers (one in vernacular language)
having wide circulation within how much period of taking
possession?

A. 15 days
B. 30 days
C. 7 days Ans: C
D. 3 days
After taking possession of secured asset u/s 13(4) of the SARFAESI
act, the authorized officer shall serve to the borrower a notice of
______ days for sale of the secured assets?

A. 60 days
B. 30 days
C. 15 days Ans: B
D. 7 days
If auction for sale of the property under SARFAESI fails and the sale is
required to be conducted again, the authorized officer shall serve,
notice of sale of not less than ________ days to the borrower for any
subsequent sale.

A. 60 days
B. 7 days
C. 15 days Ans: C
D. 30 days
Which section of SARFAESI, describes about DM permission /
assistance in taking possession of secured asset?

A. 13(6)
B. 13(4)
C. 14 Ans: C
D. 16
What is the amount of deposit a Borrower have to make with DRT if
he approaches DRT against the action of Bank of taking posession of
immovable property under SARFAESI?

A. 50 percent
B. NIL
C. 50 percent but can be reduced to 25 Ans: B
percent by chairperson
D. 25 percent
ARC should have minimum Net owned fund of ____________

A. Rs.100.00 crore
B. Rs.1000.00 crore
C. Rs.200.00 crore Ans: A
D. Rs.50.00 crore
NBFCs entitled for enforcement of security interest in secured debts
under SARFAESI with outstanding dues of __________

A. Rs.1.00 cr and above

B. Rs.10.00 cr and above
C. Rs.1.00 Lakhs and above Ans: D
D. Rs.50.00 Lakhs and above
Which of the following is not correct with respect to CERSAI?

A. Filing of security interest with CERSAI shall be

deemed to constitute a Public notice from the
date & time of filing with CERSAI.
B. There is no penalty for default in filing,
modifying and satisfaction of security interest
Ans: C
C. Filing the transactions of creation/ modification
of security interest with CERSAI to be done
within 30 days of its creation.
D. All of these
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