The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
s.
The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.
By virtue of the SARFAESI Act 2002, the Reserve Bank of India has the authority to register and regulate Asset Reconstruction Companies (ARCs).
Under this act
secured creditors (banks or financial institutions) have many rights for enforcement of
security interest
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...
under section 13 of SARFAESI Act, 2002. If borrower of financial assistance defaults on repayment of a loan and their account is classified as
Non performing Asset by secured creditor, then secured creditor may repossess the security asset before expiry of
period of limitation by written notice.
Summary
The law does not apply to
unsecured loans, loans below or where remaining debt is below 20% of the original
principal. This law allowed the creation of
asset reconstruction companies (ARC) and allowed banks to sell their
non-performing asset A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as it reduces the profitability of banks, and ...
s to ARC's. Banks are allowed to take possession of the collateral property and sell it without the permission of a court.
Application of SARFAESI Act 2002
The SARFAESI act applies to the whole of India for the securitisation, reconstruction of financial assets and enforcement of the security interest.
The act applies to all the financial institutions established as securitisation companies or asset reconstruction companies registered by the reserve bank of India.
Amendments
The act was amended by "Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016", passed by
Lok Sabha
The Lok Sabha, constitutionally the House of the People, is the lower house of India's bicameral Parliament, with the upper house being the Rajya Sabha. Members of the Lok Sabha are elected by an adult universal suffrage and a first-p ...
on 2 August 2016.
Act passed by Rajya Sabha by voice vote on 10 August 2016.
Notable verdict
Mardia Chemicals Ltd. v. ICICI Bank
In ''Mardia Chemicals Ltd. v. ICICI Bank'', on 8 April 2004, the
Supreme Court of India declared the Sarfaesi Act to be constitutionally valid. The Court said that a borrower may appeal against the lender in the debt recovery tribunal, without having to deposit 75% of the amount of the debt. If the tribunal does not stay the order, the lender may sell the assets.
After this law passed, on 27 November 2002,
ICICI Bank
ICICI Bank Limited is an Indian Private bank. It is headquartered at Mumbai. It offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiari ...
took possession of Mardia Chemical plant in Vatva,
Ahmedabad district,
Gujarat
Gujarat (, ) is a state along the western coast of India. Its coastline of about is the longest in the country, most of which lies on the Kathiawar peninsula. Gujarat is the fifth-largest Indian state by area, covering some ; and the ninth ...
.
ICICI Bank was owed
crore, in all it owed crore to 20 lenders.
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See also
* Central Registry of Securitisation Asset Reconstruction and Security Interest
References
Further reading
* {{cite web, title=Guidelines on declaration of Net Asset Value of Security Receipts issued by Securitisation Company/ Reconstruction Company, url=http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=631, publisher=Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
Banking in India
Acts of the Parliament of India 2002
Financial history of India