The financial sector of India has always played a key role in developing economy. Hence, it is really important that the security rights of banks should be protected. SARFAESI Act 2002 privileges banks and financial institutions with powers to handle different types of bad asset issues. Sounds interesting? Let’s know more about SARFAESI Act.
What is SARFAESI Act 2002?
SARFAESI Act 2002 was passed on 17th December 2002 in order to help Indian lenders recover their outstanding dues as quickly as possible. SARFAESI Act 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act) empowers financial institutions of India to identify and rectify the problems related to NPAs (Non performing assets. It also lets the banks and other financial institutions of India to auction residential or commercial properties for the purpose of loan recovery.
What are the objectives of SARFAESI Act 2002?
The SARFAESI Act regulates the securitization and reconstruction of the financial assets. The Act provides a central database of security interests based on property rights or matters connected therewith or incidental thereto.
The objectives of SAFAESI Act 2002 are given below:
- Specifies the legal framework related to the scanning activities in India.
- Mentions the procedures for Non - performing assets transfer to the asset reconstruction companies for their reconstruction purpose. This allows rapid and efficient recovery of NPAs on the part of banks and FIs.
- Allows financial institutions and banks to auction properties (commercial or residential), in case the borrower fails to repay their loans.
- Confers powers to the financial institutions in order to take custody of the immovable property that is hypothecated or charged for debt recovery.
- Imposes the security interest without any intervention from the court.
What are the features of SARFAESI Act 2002?
SARFAESI Act protects banks and financial assets from losses. Let’s understand it’s features in detail:
1. Enforcement of security interests: The Act enforces security interest by the secured creditors without any intervention of the court. In the event of a default by a borrower, the act authorizes the bank or a financial institution to issue a demand notice to the borrower and induces him/her to pay off the dues within sixty days from the date of the notice.
2. Reconstruction of financial assets: SARFAESI Act allows the banker and financial institutions to take proper measures of management, sale, settlements, debt restruction or take any possession under SBI guidelines from time to time.
3. Securitization of financial assets and issue security receipts: The main aim of the securitization act is to make available the enforcement of security interest i.e. to take possessions of the assets that were given security for the loan.
4. Act as an agent of banks or financial institutions: The SARFAESI Act 2002 acts as the manager of the secured assets given by the financial institutions and ensures that the dues are recovered timely.
SARFAESI Amendment Act 2016:
The amendment to SARFAESI Act was passed to strengthen and expedite the recovery process from the defaulting borrowers. The major amendments of SARFAESI Act are given below:
1. Changes in definitions: The Clause (m) of Section 2 has been amended by including Asset Reconstruction Company and Debenture Trustee. The existing definition of Secured Creditor under Clause (zd) of Section 2 has been substituted to include Debenture Trustee, Asset Reconstruction Company and other Trustee holding securities on behalf of a bank or financial institution in whose favor security interest is created by the borrower for due repayment of any financial assistance.
2. Exemption from stamp: Any document executed by the financial institutions or a bank in favor of asset reconstruction company acquiring financial assets for securitization or asset reconstruction purpose shall be exempted from stamp duty.
3. A time limit has been mentioned: The District Magistrate or Chief Metropolitan Magistrate shall pass suitable orders in order to take possessions of the secured assets within a period of 30 days from the date of application.
4. Integration of registry: The Central Government provides a central database in respect of security interest in consultation with the State Government or other authorities recording rights over any property.
5. Fund raising by ARCs from Non - institutional investors: Right after the acquisition of any financial asset, ARCs may offer security receipts to the qualified buyer or any category of investors including non - institutional investors as specified of the Reserve Bank of India.
Procedure of SARFAESI Act 2002
1. Filing of e - Form CHG - 1 or e- Form CHG:
e - Form CHG - 1 or e- Form CHG - 9 is required to be filed for the application of a (a) Registration of creation (b) Modification of charge (except those which are related to debentures) including particulars of modification of charge by the Asset Reconstruction Company in terms of SARFAESI Act 2002.
2. Documents included:
Documents in this context are (a) Particulars of charge (b) Certificate of Registration
3. Instruments created for the charge:
Instruments created for the charge include:
(a) Hypothecation deed
(b) Sanction letter
(c ) Copy of the instrument - creation or modification of the charge
4. In case, e-Form to be digitally signed:
In this scenario, either of the following is required:
(a) DSC of the Charge Holder
(b) Permanent Account Number (PAN) of the manager, CEO, CFO
© Membership Number of the Company Secretary
(d) Director Identification Number (DIN) of the Director
Frequently Asked Questions:
Q1. What loans are not covered under SARFAESI Act?
Ans. The provisions of this act are applicable to outstanding loans above Rs. 1 lakh which is known as Non - performing assets (NPA). Loan accounts less than 20% of the principal and interest are not covered under this Act.
Q2. What is the minimum eligible amount under SARFAESI Act?
Ans. The current eligibility limit is Rs. 100 crore of asset size or Rs. 50 Lakhs of loan size.
Q3. What is the total time period given to a borrower as a notice before the sale of secured asset is done?
Ans. A secured creditor can file notice of security interest created by any borrower before the effective date with the Central registry within 6 months or any further period notified by the Central Government in the official Gazette.
Q4. Mention the banks on which SARFAESI Act 2002 is not applicable.
