What is SARFAESI Act?

  • Blog|Insolvency and Bankruptcy Code|
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  • By Taxmann
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  • Last Updated on 1 March, 2022

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SARFAESI Act 2002:

 
SARFAESI Act or Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 lets the banks as well as other financial institutions of India auction commercial or residential properties for the purpose of loan recovery. ARC, the first asset reconstruction company, was established under this act.  
 
The SARFAESI Act, 2002 was framed to allow the financial houses to assess the asset quality in different ways. In other words, the act was made to identify and rectify the problem of Non-Performing Assets (NPAs) through multiple mechanisms. 
The SARFAESI Act provides provisions in details for the formation and actions of Asset Securitization Companies as well as Reconstruction Companies. The act details the scope of capital requirements, funding and activities. Reserve Bank of India regulates the institutions established under the SARFAESI Act. 
 
The Act, to insulate assets in a legal way, addresses the financial assets of banks and other secured creditors. According to multiple provisions under the act, the financial institutions enjoy the rights and power to handle different types of bad asset issues. The prime objectives of the SARFAESI Act under Insolvency Law In India are as follows:
 
  • The Act details the procedures for NPAs’ transfer to the asset reconstruction companies for the purpose of asset reconstruction. 

 

  • The Act specifies the legal framework for scanning activities in India.

 

  • The Act confers powers to the financial institutions to take custody of the immovable property, which is charged or hypothecated, for debt recovery.

 

  • The Act imposes the security interest without any intervention from the court.   
Guide To Insolvency and Bankruptcy Code & Law Relating to SARFAESI/Debt Recovery & Winding up by V.S. Datey. This book elucidates chapter-wise commentary on the Insolvency and Bankruptcy Code, 2016.  It incorporates the bare act and regulations framed thereunder along with statutory and judicial happenings. It also covers laws relating to SARFAESI/Debt Recovery and Winding up. The present publication is the 9th edition incorporating all the amendments made up to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019.
The SARFAESI Act sanctions three processes to recover Non-Performing Assets as follows:
 
  • Securitization
 
  • Asset reconstruction 
 
  • Security Enforcement without court’s intervention
 
The Act employs three significant tools for asset management of financial institutions – asset securitization, asset reconstruction and powers for security interest enforcement. The readers should be aware of what these terms actually mean in order to understand the SARFAESI Act. 

Securitization:

It refers to the process of drawing and converting of loans and other financial assets into marketable securities worth selling to the investors. In other words, it involves repackaging of less liquid assets into saleable securities. The securitization company takes over the mortgaged assets of the borrower and is entitled to adopt the following steps:
  • Getting hold of financial assets from bank
 
  • Creating funds from eligible institutional buyers by dint of issuing security receipts to acquire the financial assets
 
  • Fund raising in any legal way
 
  • Financial asset acquisition along with taking over the mortgaged assets (such as building, land etc)

Asset Reconstruction:

It refers to conversion of non-performing assets into performing assets. There are multiple steps to reconstruct asset. The point to be noted in this context is reconstruction must be done in accordance with the SARFAESI Act and RBI regulations. 

Security Interest Enforcement:

As per the Act, the financial institutions are entitled to issue notice to the defaulting loan takers as well as guarantors, asking them to clear the sum in arrears within 60 days from the date of issuing the notice under Insolvency and bankruptcy board of India. If the defaulter fails to act in accordance with the notice, the bank is entitled to enforce security interest.  

The above information must have cleared your doubts about “what is sarfaesi act”.   

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