Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI Act,2002)
IntroductionBanks and financial institutions lends money by obtainingsecurity, except for the category of clean loans. The securityobtained is to act as a protection for the money advanced andin case of need, the money can be realized by the sale ofsecurities.Lender’s right over the securities, both moveable andimmoveable, for the realization of the amount advanced,were limited and less effective since they were required totake help of the legal system which was taking unduly longtime to complete prior to passing of the sarfaesi act,2002.
The Act is a major step in financial sector reforms.Securitisation of financial assetsReconstruction of financial assetsRecognition of any ‘interest’ created in the securityfor due repayment of a loan as a ‘security interest’.Power to enforce such a security for the realization ofmoney due to banks and financial institutions in theevents of a default, without the intervention of thecourts.Central registry for the purpose of registration oftransaction of securitisation, reconstruction and thecreation of the security interest.
The acts extends to whole of India including the stateof Jammu & Kashmir. It is effective from 21 june, 2002.The act is applicable also to housing financecompanies.The provision of the act, relating to enforcement ofthe security interest, applies to cases in which securityinterests are created for due repayment of financialassistance.
DefinitionsAppellate tribunalany person aggrieved by the order passed by the ‘debt recoverytribunal’ can file an appeal to the authority called as the ‘appellatetribunal’.Constituted by the central government for the various states as perthe provision of the recovery of debts due to banks and financialinstitution act,1993.Asset reconstructionTakeover of loans or advances from the banks or financialinstitutions for the purpose of recovery is called asset reconstruction.
All the banking companies, Nationalised bank, the State Bank ofIndia as well as its subsidiary banks and cooperative banks are withinthe meaning of the word ‘bank’ for the purpose of this Act.The word ‘board’ is used in this act to mean the securities &exchange board of India.The borrower means, any person, who has been granted financial assistance by anybank, who has given any guarantee, who has created any mortgage or pledge as a security for thefinancial assistance granted by any bank, a person who becomes the borrower of a securitisation.
Central registryThe ‘registering office’, set up or caused to be set upby the central government.All the transaction of asset securitisation,reconstruction as well as transactions of creation ofsecurity interests, will have to be registered with theauthority.First come will be first served.Debt recovery tribunalTo deal with the cases of recovery of debts above `10lakhs due to the banks and financial institutions.
DefaultWhen the borrower does not pay any principal debt on the principledebt to the secured creditor(NPA).For security enforcement, there should be a default committed bythe borrower. The creditor must also be a secured creditor. Anyinsecured creditor has no right of any nature in this act.In mardia chemicals case, bank can classify the account as NPA asper its decision. the supreme court rejected this argument and statedthat it should be done as per RBI guidelines only. whenever a bank grants loan or advances or issues letter of credit ,it is called as financial assistance.
Financial assetClaim to any debt or receivables whether secured orinsecured,Any debt secured by mortgage of or change in immoveableproperty,Any right or interest in the security, whether full or part,securing debt,Any beneficial interest in any moveable or immoveableproperty or in debt, receivables, whether such an interest isexisting, future, accruing, conditional or contingent,Any financial assistance
Financial institutionA public financial institution within the meaning of Companies Act,1956.Any institution specified by central government under the recovery of debts dueto Bank Act,1958.The ‘international finance corporation’ established under the international financecorporation.Any other institution or NBF company as defined in the RBI Act,1934, which thecentral government may specify as a financial institution for the purpose of this Act.NPAAsset or a/c of borrower classified by bank as sub-standard, doubtful asset, inaccordance with the direction relating to asset classification issued by the reservebank.It should be done as per the RBI directives.
HypothecationA charge inExisting or futureCreated by a borrowerIn favour of a secured creditorBefore this act, hypothecation was not mentioned anywherealthough it is an very common type of charge on a security for a banklending.OriginatorOwner of the financial asset(i.e) acquired by securitisation companyfor the purpose of securitisation.When bank lends money against security, they are the originator.
ObligorPerson liableTo pay to the originator, whether under a contract orotherwiseTo discharge any obligation in respect of a financial asset,whether existing, future, conditional or contingent,Includes a borrowerReconstruction companyCompany formed for the purpose of asset reconstructionand registered under the Companies Act,1956.
PropertyImmoveable propertyMoveable propertyAny debt or rights to receive payment of moneyReceivables, whether existing or futureIntangible assets such as patents rights, trademarks, licence,franchise.Property has been much explained in this act. Due to this, nowsecurity interest can be created against these properties for raisingloans from the banks and financial institutions.Property has been priorly explained in acts such as transfer ofproperty act, registration act, etc…
Qualified institutional buyerSuch buyer means a financial institutions or an insurancecompany or a bank or a state financial corporation or stateindustrial development corporation, making an investment onbehalf of a mutual fund or provident fund or foreigninstitutional investor, registered under the SEBI Act,1992.Company registered under the companies act, 1956 can’t bea QIB.To be a QIB, then the company has to get such a registrationfrom SEBI.
SecuritisationMeans acquisition of financial asset by the securitisation orreconstruction company from the originator. Such an acquisition maybe by raising funds by such a securitisation from the QIB by issue ofsecurity receipts represents undivided interest in the financial assetsProcess where non-liquidated financial assets are converted intomarketable securities(sold to investors).Process of converting the receivables and other assets intosecurities(placed in market for trading).As per guidelines of 29 march,2004, the minimum capitalrequirement for securitisation is 2 crore at time of registration andthese companies are required to maintain capital adequacy of 15% oftotal asset acquired or 100 crores
SchemeThe company can raise funds from QIB by formulating schemes.Funds so raised are required to be maintained in, separate anddistinct accounts.Scheme invites subscription to security receipts proposed to beissued by such a company.Securitisation companyCompany registered under the companies act,1956 for the purposeof securitisation. The securitisation company also needs a registrationfrom the rbi.Can set up separate trusts scheme wise and act as trustee for suchschemes, as provided in securitisation companies and reconstructioncompanies guidelines and directions,2003.
Security agreementAn agreement, instrument or any other document or arrangement underwhich the security interest is created in favour of the secured creditor.Includes creation of mortgage by deposit of title deeds with the securedcreditors.Secured assetProperty on which a security interest is created.If the borrower has any property over which no security interest is created,such property is outside the purview of enforcement powers under the act.Security debtMeans debt which is secured by any security interest.
Secured creditorAny bank in whose favour the security interest is created bythe borrower for due repayment is called as secured creditor.Includes debenture trustee appointed by any bank orfinancial institution or reconstruction company.Also includes, any other trustee holding securities on behalfof a bank or financial institution.SponsorAn entity holding not less than 10% of the paid-up equitycapital of securitisation or reconstruction company.
Security interestAny right, title and interest of any kind whatsoeverupon the property created in favour of any securedcreditor is called as security interest.Whenever any lender takes any security from theborrower, the lender gets interest in that security.The type of interest depends on the nature of chargecreated over the security.Any type of charge has come under one wide scopeddefinition, called the security interest.
Security receiptReceipt security issued by a securitisation companyto any qualified institutional buyer pursuant to ascheme evidencing the purchase by the holder thereofan undivided right, in the financial asset involved insecuritisation is called as security receipts.It evidences the purchase’s undivided right, title andinterest in the security. These receipts are transferablein the market.