SARFAESI Act

Legal Framework of the SARFAESI Act in India

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is a key legislation in India that addresses the issue of non-performing assets (NPAs) and expedites the recovery process for secured creditors. The Act allows the secured creditors (banks and financial institutions) governed by the Reserve Bank of India to enforce their security interests without court intervention. Its primary objectives include
  • Efficient recovery of non-performing loans/bad loans.
  • Empowering banks and financial institutions to take possession and sell securities without court intervention
  • Streamlining the process of enforcing a security interest
  • Protecting the interests of borrowers and promoting transparency in asset transactions
• Definitions of Key Terms: The Act clearly defines terms like 'borrower,' ‘financial asset,' 'secured creditor,' and 'security interest' to avoid confusion and ensure uniform understanding while applying the law. Simple meanings of the key terms are
  • Borrower: The person, organization, company, or any entity that has taken a loan from a bank or financial institution. It also includes the guarantor, who guarantees repayment of the loan. Section 2(1)(f) outlines the definition of the borrower. 
  • Financial Asset: The loan, debt, or interest that the bank or the financial institution has the right to recover from the borrower (includes money owed, unpaid dues, etc). Section 2(1)(l) defines the financial asset. 
  • Secured Creditor: A bank or financial institution or their representatives (such as debenture trustees appointed by them), that has given a loan and holds rights over the borrower's property (security) if the loan is not repaid. Section 2(1)(zd) outlines the definition. 
  • Security Interest: The legal right the lender has over the borrower's property (like land, building, machinery) to recover the loan if the borrower defaults. Section 2(1)(zf) defines the security interest. 

Key Features of the SARFAESI Act

• Enforcement of Security Interest: The Act empowers secured creditors to enforce their security interests by taking possession of the secured assets and selling them to recover dues. Section 13 of the Act deals with the enforcement of security interests. 
• Securitization and Asset Reconstruction: The Act provides a framework for securitizing financial assets and for the formation of asset reconstruction companies (ARCs) to acquire stressed assets. Chapter II of the Act outlines the regulations of the securitization and reconstruction of financial assets of banks and financial institutions. 
• Creation of a Central Registry: The Act mandates the establishment of a central registry for registering the security interests created on properties, thereby preventing multiple lending on the same property. The Act established the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) to maintain records of security interests created in favor of secured creditors. Chapter IV outlines the relevant provisions.  
• Recovery of Debts: The Act provides a mechanism for the speedy recovery of debts by empowering secured creditors to take possession of collateral and sell it without court intervention. Before initiating the recovery process, lenders are required to issue a 60-day notice to the borrower, providing them with an opportunity to rectify the default and repay the loan amount. Borrowers have the right to appeal against the lender's actions to the Debt Recovery Tribunal (DRT). The Debt Recovery Appellate Tribunal (DRAT) is the appellate body that hears appeals against DRT's orders.
• Non-Applicability to Certain Loans: The Act does not apply to agricultural land and certain small loans where the amount due is less than a specified limit of ₹1,00,000. It also does not apply to unsecured loans and security interests in Aircraft, ships, boats, and vessels. 

Enforcement Procedure

• Issue of Notice: The lender must issue a notice to the borrower demanding repayment of the loan. This notice must specify the amount due and provide the borrower with 60 days to repay the debt. Section 13(2) outlines the provision for such notice. 
• Possession of Assets: If the borrower fails to comply with the notice, the lender may take possession of the secured assets and appoint a manager to maintain and protect them. Section 13(4) outlines the provision for such possession. 
• Sale of Assets: The lender has the authority to sell the assets either by auction, private treaty (direct sale to a buyer with consent), or any other means. The proceeds from the sale are used to recover the outstanding dues. Section 13 of the Act contains the provisions regarding such sales. 
• Borrower's Right: If the borrower believes that the lender's actions are unjust, they can approach the DRT with an application within 45 days, as outlined under section 17. While the SARFAESI Act empowers lenders, it also provides several safeguards and rights to borrowers, such as
  • The right to receive a notice of demand and an opportunity to rectify the default.
  • The right to be heard by the DRT if they believe the lender's actions are arbitrary or unfair.
  • Protection against the dispossession from residential properties without following specific guidelines.

Significant Amendments

• SARFAESI (Amendment) Act, 2004: Section 5A and 12A were introduced regarding the transfer of specific applications to the DRT and regarding the powers of the Reserve Bank to call for statements and information. Section 18A was added regarding the validation of fees levied. Section 19 was amended, providing borrowers with the right to receive costs and compensation. Amendments were made to enhance the scope of jurisdiction of appeal and to enhance the scope of DRT.
• SARFAESI (Amendment) Act, 2013: This amendment included cooperative banks within the ambit of the Act under section 2(1)(c)(iva). Section 18C was introduced to provide the right to file a caveat. Enhanced the power of the Central Government under section 26A to make rectifications in matters of registration, modification, etc., Provisions introduced for faster recovery of debts. 
• SARFAESI (Amendment) Act, 2016: This amendment strengthened the recovery process for banks by allowing secured creditors to take possession of assets within 30 days, as outlined under section 14 of the Act. It empowered District Magistrates to assist banks in asset recovery within a stipulated period. A few definitions were also added under Section 2 of the Act, including "company," "financial lease," and "negotiable document," among others. Sections 20A and 20B were added regarding the integration of the registration system with the Central Registry. A new Chapter IV-A was added, entirely, regarding registration by secured and other creditors. Additionally, Section 30A, 30B, 30C, and 30D were added, which outline the powers of the Adjudicating Authorities to impose penalties. A few more amendments were made to strengthen the scope of the Act.

Penalties for Violating the SARFAESI Act

• Monetary Fines: Financial institutions and individuals may face fines for non-compliance with the provisions of the Act, such as failing to register security interests or misusing the powers granted under the Act. Section 27 outlines the monetary fines. 
• Imprisonment: The contravention or any such attempts to contravene or any such abatement of the provisions of this Act can lead to the imprisonment of the responsible person. Under Section 29, an imprisonment of up to one year can be imposed, along with or without a fine.  
• Attachment of Assets: The assets of individuals or entities that default on repaying secured debt can be attached and sold to recover the outstanding amount. Under Section 13, the provision for enforcement is defined.  
• Disqualification: Insolvency professionals and other stakeholders may face disqualification for misconduct or non-compliance with the provisions of the Act (Note that the disqualification is related to guidelines not explicitly under the SARFAESI ACT). 

How to Report a SARFAESI Act Violation?

• Reserve Bank of India: Although it is not explicitly covered under the SARFAESI Act, any violations of the rules and regulations by banks or financial institutions can be reported to the Ombudsman of the Reserve Bank of India (RBI).
• Debt Recovery Tribunals (DRTs): Complaints and grievances related to the enforcement of security interests can be filed with the DRTs, which are the adjudicating authorities under the Act. The aggrieved party can approach the DRT as prescribed under Section 17.  
• Central Registry: Complaints regarding the registration of security interests can be reported to the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).

How Can Seasoned Advocates Help You?

• Legal Advice: Offering expert legal counsel on issues related to securitization, asset reconstruction, and enforcement of security interests.
• Representation: Representing clients in legal proceedings before adjudicating authorities such as DRTs, Debt Recovery Appellate Tribunals (DRATs), and other authorities (High Court and Supreme Court).
• Drafting and Reviewing: Assisting in the drafting and review of necessary documents, such as loan agreements, security agreements, and notices under the SARFAESI Act.
• Negotiation and Mediation: Facilitating negotiation and mediation between creditors and debtors to achieve amicable resolutions and avoid litigation.
• Compliance Audits: Conduct compliance audits to ensure adherence to the provisions of the SARFAESI Act and mitigate legal risks.
• Training and Awareness: Providing training and awareness programs on the provisions of the SARFAESI Act, best practices in asset recovery, and compliance requirements.

Conclusion

The SARFAESI Act has emerged as a crucial piece of legislation in India's financial landscape. It facilitates the efficient recovery of non-performing loans while ensuring that borrowers' rights are protected through established legal procedures. Understanding the intricacies of this Act is essential for both lenders and borrowers to navigate the complex terrain of financial transactions and asset recovery. To know more, contact us.