SARFAESI Act 2002

Sujay Somani (9152)Amit Thakur (9157)

Pallawi Sawaitul (9149)

SARFAESI Act - 2002

FLOW …

• Introduction• SARFAESI Act• Analysis• Case Study

Introduction

• Financial Sector, one of the key driver in developing economy. Banking industry complying with the banking and financial norms.

• Banking and Financial Sectors not in the same playing fields.

• No legal provision facilitating securitization of financial assets of banks.

• Slow pace of recovery of defaulting loans and NPA of banks and financial institutions prompted passing of Recovery of debts due to Banks and financial institutions Act 1993.

Contd/-

• Special DRT (Debt Recovery Tribunal) was set up.

• Even this was not a success because of total disconnect between civil law and economy.

• Every fifth borrower is a defaulter – Govt under pressure to make adequate provisions for recovery.

• Thus came SARFAESI Act 2002. (Securitization and Reconstruction of Financial Assets and

Enforcements of Security Interest)

SARFAESI ACT• IT EXTENDS TO WHOLE OF INDIA.• IT CAME INTO FORCE ON 21ST OF JUNE,2002.• Proposes to securitize and reconstruct through Two

special purpose vehicles:– SCO (Securitisation Company)– RCO (Reconstruction Company)

• Features:– Need to be incorporated under company act 1956.– Compulsory registration– Minimum financial stability of owned funds of 2 crore

or up to 15% of total assets acquired / to be acquired is required.

– RBI has powers to specify rate of owned funds. Rates could be different for SCO & RCO.

Contd/-

• Deals with basic three aspects:– Enforcement of security interest by secured creditor

(banks/financial institutions)– Transfer of non performing assets (NPA’s) to asset

reconstruction company, which can then dispose off the assets and realize the proceeds.

– To provide legal framework for securitization of asset.

CONTENT(41 sections in 6 chapters and a schedule)

• Chapter 1:- Applicability of SARFAESI act definition of various terms• Chapter 2:- Regulations setting up of securitization and

reconstruction companies• Chapter 3:- Enforcement of security interest allied and incidental

matters• Chapter 4:- Establishment of central registry registration of

securitization reconstruction and security interest transactions

• Chapter 5:- Offences, penalties and punishments• Chapter 6:- Routine and legal issues.

Securitisation

• Acquisition of financial assets by any securitisation or reconstruction from any originator whether by raising of funds by such reconstruction company from QIB by issue of security receipts representing undivided interest in such financial assets or otherwise

Asset Reconstruction

• Means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial asset for the purpose of realization of such financial asset. It includes:

– Proper management of the business of the borrower, by change in, or take over of, the management of the business of the borrower

– Sale or lease of a part or whole of the business of the borrower– Rescheduling of payment of debts payable by the borrower– Enforcement of security interest in accordance with the

provisions of this Act– Settlement of dues payable by the borrower– Taking possession of secured assets in accordance with the

provisions of this Act.

Enforcement of Security Interest

Incase the borrower fails to discharge his liability in full:

Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset Takeover the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset Appoint any person(hereafter refer to as the manager) to manage the secured assets the possession of which has been taken by the secured creditor

The Act Empowers the Bank

• To issue demand notice to the defaulting borrower & guarantor, calling upon them to discharge their dues in full within 60 days from the date of notice

• To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the bank

• To ask any debtor of the borrower to pay any sum due or becoming due to the borrower

• Any security interest created over Agricultural Land cannot be proceeded with

Measures taken in case of non- compliance

• The Act provides for four measures which can be taken in case of non- compliance:– The secured creditor may take possession of

the secured assets including the right to transfer the secured assets by way of lease, assignment or sale

– The secured creditor may take over the management of the secured assets including right to transfer.

Contd/-

– A manager maybe appointed by the secured creditor to manage the secured assets which have been taken possession of by the secured creditor.

– The secured creditor may require any person who has acquired any secured assets from the borrower or from whom any money is due to the borrower to pay the same to him as it may be sufficient to pay the secured debt.

Analysis in the light of Judicial Pronouncement

• Act not necessary, DRT already exist.• Act does not provide adequate and

efficacious mechanism to address, objections of borrower on notice issued by lender.

• Requirement of depositing 75% of claim for filing an appeal is unconstitutional.

• Enforcement of security interest is governed by the contract signed between two parties.

• Provision of sale of property without intervention of court is not legal.

Contd/-

• Various provisions under section 13 & 17(2) are unconstitutional.

• Principles of Lender’s liabilities completely ignored.

• More than 50% of NPA’s are in priority sector. Hence focus of the act against industrial & corporate bodies does not make sense.

Case Study

CASE STUDY MARDIA CHEMICALS Vs ICICI BANK

• Rs.1000 crore company. • It is a flagship of Mardia group has

facilities to manufacturing a range of products incl dyes , dye intermediates, basic chemicals and caustic soda.

• It owed over Rs. 1450 crore (incl a principal of Rs. 800 crores and unpaid interest forming the balance) to 22 lenders incl. BOI, BOB, corporation bank, UBI, IDBI,LIC,IFCI,…

Allegations • MC had bought property worth Rs.34cr and converted them

into Co. guesthouse, but there was no information available on source of funds, there are allegations of diversion of funds against the co.

• Also the Co. has not been responding to the notices severed by the Registrar of Companies, Ahmedabad

• A notice was issued to MC by the bank requiring to pay the amount due indicated in the notice within 60 days failing which the bank as a secured creditor would be entitled to enforce the security interest w/o intervention of court or DRT by way of sale, lease or otherwise any of its secured assets

Challenges to the Act

• It claimed that any of the banks and FI’s have been vested with arbitrary powers, without any guidelines for its exercise and also providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and actual amount of dues, sought to be recovered from the borrower

• The offending provisions as contained under the act are such that, it all has been made one sided affair while enforcing drastic measures of sale of the property or taking over of the management or the possession of the secured assets without affording any opportunity to the borrower

Challenges to the Act

• The exposure of ICICI bank to the Ahmedabad based dyes and dyes intermediary company is Rs. 110 cr (Principal) and with interest works out to Rs. 293 cr

• In the year 1999 ICICI filed a suit before the HC at Mumbai against MC ltd for recovery of amount totalling Rs 140 cr due from MC

• ICICI bank issued a notice under securitisation act for recoveries of Rs. 293 cr within 60 days of the notice been delivered and then acquired some assets from Mardia after which the latter filed a case against ICICI

Challenges to the Act

• The court said that the bank can acquire the lender could not part with the assets in any way

• MC appealed to the SC that while the law permitted the bank to attach assets ,they may not sell them

• DRT of Mumbai issued an order to MC to pay up 25% of the outstanding amount to ICICI bank by Oct 21 2003

• SC disposed off the case filed by Mardia against the consortium of bankers led by ICICI bank

• SC struck down the provision contained in section 17(2) of the Act that required borrowers to deposit 75% of the amount claimed by lenders before they could file appeals with debt recovery tribunals

• DRT, Ahmedabad issued an ex-parte order against the sale of MC property by ICICI Bank. However, the receiver appointed by the Mumbai HC had already taken charge the of the property

Challenges to the Act

Amendments in the Act

• Under 2004 Act, a borrower may appeal a banks action before the DRT w/o making a 75% deposit of the amount claimed. The DRT is required to dispose of such an application within 4 months

• Any person aggrieved by a DRT order can file an appeal to the Debt Recovery appellate Tribunal after depositing 50% of the debt due from it as claimed by the secured creditor or determined by the DRT, whichever is less.

Thanks…