This document provides an overview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). It discusses the background and objectives of the Act, key features such as enforcement of security, securitization, and asset reconstruction. It also examines related topics such as the constitutional validity of the Act, applicability to different entities, and interactions with other laws like the Recovery of Debts and Bankruptcy Act, 1993 and Insolvency and Bankruptcy Code, 2016. The document outlines the procedures for enforcement of security, sale of secured assets, appeals and penalties under the SARFAESI Act.

4. Contents
1
OVERVIEW OF SARFAESI ACT
1.1 Background 1
1.1-1 Historical background of the present SARFAESI Act 2
1.1-2 Constitutional Validity of SARFAESI Act 3
1.1-3 SARFAESI Act applies to Jammu and Kashmir 4
1.2 Salient features of SARFAESI Act 5
1.2-1 Enforcement of Security Interest 6
1.2-2 Securitisation 7
1.2-3 Asset Reconstruction 8
1.2-4 Registration of securitization, reconstruction and
creation of security interest 9
1.3 Some problems in SARFAESI Act 10
1.3-1 Lenders’ Liability and Fair Practices Code 12
1.4 Parallel proceedings under SARFAESI/RDBA, Civil Court
and Insolvency Code permissible 12
1.4-1 Corporate applicant can file application for insolvency
resolution even if Banks are contemplating invoking
SARFAESI 13
1.4-2 Proceedings against guarantor under SARFAESI
even if CIRP pending 14
1.4-3 RDB Act and SARFAESI Act are complimentary
to each other 14
1.4-4 Parallel proceedings under SARFAESI/RDBA and
Insolvency Code permissible 14
I-5
PAGE

5. 1.4-5 Action can be taken under SARFAESI Act even if
proceedings pending before DRT 15
1.4-6 Civil suit need not be withdrawn 15
1.5 SARFAESI Act overrides provisions of other laws and
instruments 16
1.5-1 Act overrides State Relief Undertakings Act 16
1.5-2 Secured creditor can stay outside liquidation
process and enforce his security under SARFAESI 17
1.6 Moratorium under Insolvency Code applies to actions under
SARFAESI Act 17
1.7 Central Government can grant exemptions or apply
provisions of Act 17
1.7-1 Application of SARFAESI Act to NBFC 18
1.7-2 Application of SARFAESI Act to housing finance
companies 18
1.7-3 Asian Development Bank is Financial Institution 19
1.7-4 SARFAESI Act extended to co-operative banks
and regional rural banks 19
1.8 Protection of Acts done in good faith 19
2
ENFORCEMENT OF SECURITY INTEREST
2.1 Bank can recover loans by enforcing security interest 20
2.1-1 When security can be enforced 20
2.1-2 Meaning of ‘debt’ 21
2.1-3 Financial lease 22
2.2 Meaning of ‘security interest’ 22
2.2-1 Meaning of ‘property’ 23
2.2-2 Hypothecation 23
2.2-3 Exclusions from ‘security interest’ 23
2.2-4 Meaning of ‘financial asset’ 26
2.2-5 Financial Assistance - Meaning 27
CONTENTS I-6
PAGE

6. 2.3 Who is ‘secured creditor’ 27
2.3-1 Meaning of ‘bank’ 28
2.3-2 Financial Institution 28
2.3-3 Public Financial Institution 29
2.4 When an action for enforcement of security can be initiated 29
2.4-1 Who is ‘Borrower’ 30
2.4-2 Security agreement 30
2.4-3 Meaning of ‘Default’ 30
2.4-4 Secured debt 31
2.4-5 Foreclosure of loan 31
2.4-6 Meaning of Non-Performing Asset 31
2.4-7 Guidelines of RBI in respect of NPA 32
2.5 How to enforce security interest 32
2.5-1 Requirements of notice 33
2.5-2 Mode of serving notice 33
2.5-3 Provision when joint financing is involved 34
2.5-4 Opportunity to borrower to reply 35
2.6 Measures that can be taken after non-payment within
60 days from notice 36
2.6-1 Can debtor of borrower be asked to make payment
directly to Bank/FI 37
2.6-2 Cost and expenses can be recovered from borrower 38
2.6-3 Excess amount to be refunded to borrower 39
2.6-4 Secured creditor can proceed against borrower
for balance amount 39
2.6-5 Secured creditor can directly proceed against
guarantor 40
2.7 How the secured creditor can exercise his right 41
2.7-1 Restrictions on borrower after receipt of notice 41
2.7-2 Secured Creditor gets only rights which borrower had 42
2.7-3 Mortgaged property can be given on lease and then
lessee cannot be disposed 42
I-7 CONTENTS
PAGE

7. 2.8 Other related provisions 43
2.8-1 Effect of transfer of asset to third person 43
2.8-2 Significance of ‘as if transfer is made by owner of
Asset’ 43
2.8-3 Right of secured creditor subject to statutory right 43
2.8-4 Priority of other dues 46
2.9 Borrower can pay amount any time before sale or transfer
of asset and take back possession 49
2.9-1 Time limit for taking action after serving of notice 50
2.10 Jurisdiction of civil court barred 51
2.10-1 When Courts may interfere 51
2.11 Protection to secured creditor for acts in good faith 52
3
PROCEDURE FOR SALE OF ASSETS
3.1 Sale of asset directly or to ARC 53
3.1-1 Prudential norms for sale transactions 53
3.1-2 Assistance of Magistrate to take over position 53
3.2 Procedure in respect of movable secured asset 56
3.2-1 Valuation of movable secured asset 57
3.2-2 Sale of movable secured assets 58
3.2-3 Transfer of mortgage, hypothecation or pledge
of movable property or right or interest in security 59
3.2-4 Wide flexibility in sale of assets 59
3.2-5 Certificate of sale 59
3.3 Procedure in respect of sale of immovable secured asset 60
3.3-1 Valuation of immovable secured asset 61
3.3-2 Procedure for sale of immovable secured assets 61
3.3-3 Provision in respect of immovable property subject
to encumbrances 65
3.4 Appointment of manager for secured assets 66
3.5 Provisions if borrower company is under winding up 68
3.5-1 Provision in respect of workmen’s dues 69
CONTENTS I-8
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8. 3.5-2 Permission of Company Court required after
winding up order made? 69
3.6 Takeover of management of defaulting borrower 70
3.6-1 Change of directors/appointment of administrator 70
3.6-2 Effect of the notice 71
3.6-3 Effect of takeover of management 71
3.6-4 Guidelines for exercise of power 72
4
APPLICATION, APPEALS AND PENALTY UNDER SARFAESI ACT
4.1 Application against order of Bank/FI before DRT 74
4.1-1 Who can file application before DRT 74
4.1-2 Application only after action has been taken under
section 13(4) of SARFAESI Act 75
4.1-3 Any person can make application under section 17(1) 76
4.1-4 Application by lessee or tenant 77
4.1-5 No automatic stay if application is filed 77
4.2 Jurisdiction of DRT where application to be filed 77
4.2-1 Consideration of application by DRT 78
4.2-2 DRT can consider and decide tenancy or leasehold
rights 78
4.3 Appeal against order of DRT 79
4.3-1 Pre-deposit if appeal before DRAT 79
4.3-2 Procedure for appeal 80
4.3-3 Secured creditor or any person claiming right can
file a caveat 81
4.4 Compensation to borrower for wrongful action by secured
creditor 81
4.5 Punishment for offences 82
4.5-1 Offences by company 82
I-9 CONTENTS
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9. 5
SECURITISATION
5.1 What is ‘securitisation’ 84
5.1-1 RBI guidelines on securitization of standard assets 85
5.1-2 Assignment of debts/NPAs between banks inter se is
permissible 85
5.2 Purpose of securitisation 85
5.2-1 Securitisation with or without recourse 87
5.2-2 Definition of ‘Securitisation’ 87
5.2-3 Assets that can be securitised 87
5.2-4 Long dated assets and short dated funding sources 88
5.2-5 Mortgage securitisation or asset securitisation 88
5.3 How securitisation process works 88
5.3-1 Process of securitisation 89
5.3-2 Summary of process 90
5.3-3 Advantages of Securitisation 90
5.4 Credit rating is of assets securitised and not of the originator 92
5.5 Public issue and listing of securitised certificates or
instruments 92
5.6 Accounting for securitisation 93
5.7 Legal framework for securitisation 93
5.7-1 Qualified Buyer (QB) 93
5.7-2 Forming a scheme and issue of security receipt 95
5.7-3 If assets not realised as per scheme 96
5.7-4 Registration of security receipt under Registration
Act not required 96
6
ASSET RECONSTRUCTION COMPANIES
6.1 Role of ARC in SARFAESI Act 97
6.1-1 Registration of Asset Reconstruction Company 97
CONTENTS I-10
PAGE

10. 6.1-2 Requirements of Asset Reconstruction Company
for registration 98
6.2 Procedure for registration of ARC 99
6.2-1 Cancellation of registration 99
6.2-2 Business that can be carried out by ARC 100
6.2-3 Asset Reconstruction company exempt from
certain NBFC provisions 100
6.3 Powers of RBI over ARC 101
6.4 RBI guidelines for ARC 101
6.4-1 Policy of asset reconstruction 102
6.4-2 Securitisation and ARC 102
6.4-3 Other requirements in respect of ARC 102
6.5 Operational guidelines to ARC 103
6.6 Penalty on ARC for non-compliance 103
6.7 Acquiring financial assets by ARC from Bank/FI 104
6.7-1 Modes of acquiring financial asset 105
6.7-2 Is it transfer of actionable claim 106
6.7-3 Company enters into shoes of Bank/FI after
acquiring asset 106
6.7-4 Transfer of pending applications to one DRT 107
6.8 Notice to borrower/Registrar etc. 108
6.8-1 Effect of the notice 108
6.8-2 Arbitration Mandatory 109
6.9 Asset Reconstruction 109
6.9-1 Measures for asset reconstruction 110
7
REGISTRATION OF TRANSACTIONS UNDER SARFAESI ACT
7.1 Central Registry 111
7.1-1 Registration with Central Registry in addition to
other registration that may be required 112
7.1-2 Maintenance of Central Register 112
7.1-3 Integration of Central Registry with other
registering authorities 113
I-11 CONTENTS
PAGE

11. 7.2 Registration of agreement 114
7.2-1 Rectification in matter of delay or omission
registration, modification and satisfaction 114
7.2-2 Registration under Registration Act required in case
of immovable property? 114
7.2-3 Satisfaction or payment of security interest 115
7.2-4 Inspection of Central Register 115
7.3 Registration of security interest by Secured and other
creditors 116
7.3-1 Creditors other than secured creditors can register
security interest 116
7.3-2 Registration of transactions will be deemed to
be public notice 117
7.3-3 No right of enforcement of securities unless security
interest is registered 118
7.3-4 Priority to secured creditors if debt registered 118
7.4 Penalty for default 119
8
RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993
8.1 Background of RDB Act 121
8.1-1 Purpose of RDB Act 121
8.1-2 Overall scheme of the Act 122
8.1-3 RDB Act is mainly a procedural Act 123
8.1-4 RDB Act and SARFAESI Act are complimentary
to each other, actions under both possible 123
8.1-5 Parallel proceedings under SARFAESI/RDBA and
Insolvency Code permissible 123
8.1-6 Priority to secured creditors 124
8.1-7 Overriding provisions of RDB Act 124
8.1-8 Insolvency Code and RDB Act 126
8.2 Jurisdiction of Civil Court is barred 127
8.2-1 Court decree can be executed by DRT 128
CONTENTS I-12
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12. 8.2-2 Decree of foreign Court should be executed
through DRT only 128
8.3 Application to DRT for recovery of debts 128
8.3-1 Who can apply to DRT for recovery of debt 129
8.3-2 Monetary limit for applicability of the RDB Act 130
8.3-3 Limitation Act applicable to DRT 131
8.3-4 Meaning of ‘debt’ 131
8.3-5 Wide definition of ‘debt’ 133
8.4 Debt Recovery Tribunal 133
8.4-1 Powers and jurisdiction of DRT 135
8.4-2 Counter-claims can be considered by DRT 135
8.4-3 Other Powers of DRT 137
8.4-4 DRT cannot adjudicate workmen’s claims 138
8.5 Application before Debt Recovery Tribunal 139
8.5-1 Procedure after filing of application 140
8.5-2 Final order, distribution of assets and recovery 142
8.5-3 Proceedings against guarantor before DRT 143
8.5-4 Procedure in office of DRT 144
8.5-5 Applications, documents and statements in
electronic form 145
8.6 Appeal against order of DRT 145
8.6-1 Procedures at DRAT 147
8.6-2 Pre-deposit for filing appeal 147
8.6-3 DRAT can review its interim and final orders 149
8.7 Common provisions relating to DRT and DRAT 149
8.8 Further appeals after order of DRAT 150
8.8-1 Banking Ombudsman can be approached 151
8.9 Recovery Powers after issue of certificate 151
8.9-1 Appeal against order of recovery officer 152
8.9-2 Recovery procedures 152
PAGE
I-13 CONTENTS

13. APPENDICES
APPENDIX 1 : SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002 157
APPENDIX 2 : SECURITY INTEREST (ENFORCEMENT) RULES,
2002 204
APPENDIX 3 : SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST (CENTRAL REGISTRY)
RULES, 2011 234
APPENDIX 4 : SECURITISATIONCOMPANIESANDRECONSTRUC-
TION COMPANIES (RESERVE BANK) GUIDELINES
AND DIRECTIONS, 2003 240
APPENDIX 5 : CHANGEINORTAKEOVEROFTHEMANAGEMENT
OF THE BUSINESS OF THE BORROWER BY SECU-
RITISATIONCOMPANIESANDRECONSTRUCTION
COMPANIES (RESERVE BANK) GUIDELINES, 2010 265
APPENDIX 6 : DIRECTIONS/INSTRUCTIONS ISSUED TO SECU-
RITISATION COMPANIES/RECONSTRUCTION
COMPANIES 270
APPENDIX 7 : RECOVERY OF DEBTS AND BANKRUPTCY ACT,
1993 292
APPENDIX 8 : DEBTS RECOVERY TRIBUNAL (FINANCIAL AND
ADMINISTRATIVE POWER) RULES, 1997 322
APPENDIX 9 : DEBTS RECOVERY TRIBUNAL (PROCEDURE)
RULES, 1993 323
APPENDIX 10 : DEBTS RECOVERY TRIBUNAL (PROCEDURE FOR
APPOINTMENT AS PRESIDING OFFICER OF THE
TRIBUNAL) RULES, 1998 341
APPENDIX 11 : DEBTS RECOVERY TRIBUNAL (PROCEDURE FOR
INVESTIGATION OF MISBEHAVIOUR OR INCAPA-
CITY OF PRESIDING OFFICER) RULES, 2010 344
APPENDIX 12 : DEBTS RECOVERY APPELLATE TRIBUNAL (PRO-
CEDURE) RULES, 1994 349
APPENDIX 13 : DEBTS RECOVERY APPELLATE TRIBUNAL (PRO-
CEDURE FOR APPOINTMENT AS CHAIRPERSON
OF THE APPELLATE TRIBUNAL) RULES, 1998 359
APPENDIX 14 : DEBTSRECOVERYAPPELLATETRIBUNAL(FINAN-
CIALANDADMINISTRATIVEPOWER)RULES,1997 362
PAGE
CONTENTS I-14

14. APPENDIX 15 : DEBTS RECOVERY TRIBUNALS (REFUND OF
COURT FEE) RULES, 2013 364
APPENDIX 16 : ENFORCEMENT OF SECURITY INTEREST AND
RECOVERY OF DEBTS LAWS AND MISCELLA-
NEOUS PROVISIONS (AMENDMENT) ACT, 2016 366
APPENDIX 17 : DATE OF ENFORCEMENT OF PROVISIONS OF
ENFORCEMENT OF SECURITY INTEREST AND
RECOVERY OF DEBTS LAWS AND MISCELLA-
NEOUS PROVISIONS (AMENDMENT) ACT, 2016 390
SUBJECT INDEX 393
PAGE
I-15 CONTENTS

15. 5.1 What is ‘securitisation’
Securitisation as a technique gained popularity in the US in the
1970.UKisthesecondlargestmarketforsecuritisationaftertheUS.
In layman’s simple terms, ‘securitisation’ means sale and
purchase of pooled (bundled) secured assets.
Securitisation started in US in 1970 with the issue of residential
mortgagesbypublichousingfinancecorporations.Theinstitutions
found that they had to pay higher interest to attract short-term
deposits, while rates earned on long-term mortgage loans was less.
This created mismatch between assets and liabilities. The solution
was found in securitisation.
Now,securitisationisusedinmorecomplicatedfinancialstructures
also.Thereisadefinitemovetowardssecuritisationincapitalmarket
in various assets such as insurance receivables, commercial bank
loans, obligations of purchases to natural gas producers, future
rights to royalty payments etc.
Major buyers of such debt instruments in USA are mutual funds,
insurance companies, trusts and corporates with excess liquidity.
In India, presently, only mutual funds and to a lesser extent Banks
with surplus funds can be the buyers. Insurance companies may
also be buyers.
Securitisation is sale and purchase of debts and receivables,
normally through Asset Reconstruction Company.
AssetReconstructionCompany(ARC)meansacompanyregistered
withRBIforpurposeofcarryingonbusinessofassetreconstruction
orsecuritizationorboth–section2(1)(ba)ofSARFAESIActinserted
w.e.f. 1-9-2016.
Securitisation
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84

16. Even if the provisions of securitisation are contained in the Act
relating to reconstruction of financial assets and enforcement of
security interest, practically, the provisions are independent and
in fact, assets with good credit rating can also be securitised.
5.1-1 RBI guidelines on securitization of standard assets
RBI had issued guidelines for securitisation of standard assets
videDBOD.NO.BP.BC.60/21.04/048/2005-06dated1-2-2006.Later,
guidelineswereissuedvideDBOD.No.BP.BC.103/21.04.177/2001-
12 dated 7-5-2012 to Banks.
The guidelines have been extended to NBFC also vide RBI circular
DNBS.PD.No. 301/3.10.01/2012-13 dated 21-8-2012.
5.1-2 Assignment of debts/NPAs between banks inter se is
permissible
Assignment of debts or NPA (Non-Performing Assets) between
banks inter se is permissible. Scope of ‘banking business’ is not
limited to core baking of accepting deposits and lending. RBI can
formulate policy enabling banking companies to enlarge in such
other activities and in that process it can define what constitutes
‘banking business’.
RBI guidelines dated 13-7-2005 authorising Banks to deal inter se
in NPAs have statutory force and are not ultra vires the Banking
Regulation Act, 1949 – ICICI Bank Ltd. v. Official Liquidator of APS
Star Industries Ltd. (2010) 10 SCC 1 = 104 SCL 37 = 7 taxmann.
com 72 (SC).
Assigneeofdebtcanfilepetitionforwindingup-Assigneeofdebt
under Securitisation Act can file petition for winding up – Horizon
Flora India Ltd. v. Asset Reconstruction Co. India Ltd. (2011) 105
SCL 20 (Bom HC DB).
5.2 Purpose of securitisation
Normally,alender(financier)financesloanstoborrowersandgets
repaymentwithinterestoveraperiod.Thelenderwouldcollectthe
periodic instalments and use them to finance new loans. This limits
his capacity to give fresh loans, as he has to wait till he recovers
85 PURPOSE OF SECURITISATION Para 5.2

17. the instalments along with interest. Instead of waiting for a long
time, he can pool the loans together and sell his right to receive
future payments from the borrowers of these loans.
This is termed as securitisation of loans. The original lender will
receive consideration for the same upfront, i.e. immediately, by
securitising his loan portfolio. Of course, he will get the amount
at a discounted value. He can then use the proceeds to further
develop his business, which is of giving loans.
Securitisation is a form of financing involving pooling of financial
assets and the issuance of securities that are repaid from the cash
flows generated by the assets. This is generally accomplished by
actual sale of the assets to a bankruptcy remove vehicle, i.e. a
special purpose vehicle (like Asset Reconstruction Company),
which finances the purchase through issue of bonds.
These bonds are backed by future cash flow of the asset pool. The
mostcommonassetsforsecuritisationaremortgages,creditcards,
auto and consumer loans, student loans, corporate debt, export
receivables, off shore remittances etc.
These ‘securitised loans’ will be purchased by mutual funds,
provident funds and insurance companies, which have funds
but do not have mechanism to assess, grant and recover loans.
Thus, corporate bodies like finance companies having expertise
in assessing, granting and recovering loans get the funds from
corporate bodies like mutual funds, provident funds, insurance
companies etc. which have funds but do not have expertise in loan
assessment and disbursal, through process of securitisation. Thus,
securitisation helps both.
Securitisation is done through Special Purpose Vehicles (SPVs).
ThesearetermedasAssetReconstructionCompaniesinthepresent
SARFAESI Act.
Thus, securitisation is a process through which illiquid assets are
transferred into a more liquid form of assets and distributed to
a broad range of investors through capital markets. The lending
institution’s assets are removed from its balance sheet and
are instead funded by investors through a negotiable financial
instrument. The security is backed by the expected cash flows
from the assets.
Para 5.2 SECURITISATION 86

18. Securitisation is a process under which a pool of individual
homogeneous loans are packaged and distributed to various
investorshavingliquidfundsintheformofcoupons/passthroughor
pay through certificates; through SPVs (Special Purpose Vehicles),
with the provision that the inflow of cash in the shape of recoveries
will be distributed pro-rata to coupon holders.
In securitisation, the lending institution’s assets are removed from
balance sheet of that lending institution and are instead, funded
by investors. These investors purchase a negotiable financial
instrument evidencing this indebtedness.
By securitisation, long-term illiquid assets of original lender get
converted into current assets.
5.2-1 Securitisation with or without recourse
Securitisationcanbewithorwithoutrecoursetotheoriginallender.
‘Without recourse’ means that if the borrower does not pay, the
loser is Asset Reconstruction Company and/or investors, as the
amount cannot be recovered from original lender. If the lending is
with recourse, the Asset Reconstruction Company/investors can
recover the principal and interest from original lending institution,
if the borrower does not pay.
Even if securitisation is without recourse, in some cases, limited
recoursemaybeprovided,e.g.iffraud,forgery,suppressionoffacts,
misstatements etc. by the original lender is alleged and established.
5.2-2 Definition of ‘Securitisation’
Asperlegaldefinition,‘Securitisation’meansacquisitionoffinancial
asset by any Asset Reconstruction Company from any originator,
whether by raising funds by such Asset Reconstruction Company
from qualified buyers by issue of security receipts representing
undivided interest in such interest or otherwise. [section 2(1)(z) of
SARFAESI Act as amended w.e.f. 1-9-2016].
5.2-3 Assets that can be securitised
Basically, all assets which generate cash flow can be securitised
e.g. mortgage loans, housing loans, automobile loans, credit card
receivables, trade receivables, consumer loans, lease finance etc. A
87 PURPOSE OF SECURITISATION Para 5.2

19. perfectlyhealthyandnormalfinancialassetisnormallysecuritised.
It is not necessary that it should be non-performing asset.
Securitisation and factoring – distinction- Difference between
factoring and securitisation is that in case of factoring, the assets
are debts which have crystallized but are not due.
5.2-4 Long dated assets and short dated funding sources
Traditionally, banks have short dated deposits. If advances are on
long-term basis, these will be long dates assets, where credit risks
are high. Securitisation is a way to convert the potential risks of
long dated assets into viable sources of capital. Thus, mismatch
between funding of assets and liabilities can be reduced.
5.2-5 Mortgage securitisation or asset securitisation
Securitisationcanbemortgagesecuritisationorassetsecuritisation.
In mortgage securitisation, pools of mortgage backed loans are
converted into tradable debt securities called mortgage-backed
securities. This is common in housing loans.
In Asset securitisation, assets which have an income stream are
pooledandrepackagedintheformofmarketablesecuritiesforsale
to investors. The securities are secured by the assets themselves
or by income derived from them. The underlying asset generally
backs the loan or security.
In case of industrial loans, the instrument may be termed as
‘collateralized loan obligations’.
5.3 How securitisation process works
Briefly, securitisation is a process whereby loans, receivables and
other financial assets are pooled together, with their cash flows
or economic values redirected to support payments on related
securities.
Theoriginator(originallender)transfersorsellsloansofaparticular
portfolio to SPV (Special Purpose Vehicle). The SPV breaks the
loansintoconvenientamountsandraisesmoneyfrominvestorsby
selling instruments which represent loans. These debt instruments
issued by SPV will be listed on stock exchange, providing liquidity.
The debt instruments must have credit rating.
Para 5.3 SECURITISATION 88

20. The original lender utilises securitisation to finance and enhance
his business activities. The lending institution’s assets are removed
from its balance sheet.
TransfertoSPV-Thefinancialassetsaretransferredtoanewentity
[referredtoas‘SpecialPurposeVehicle’ (SPV)].Theoretically,such
SPVcanbeacompanyoratrust.However,intheSARFAESIAct,the
assets will be transferred to an independent Asset Reconstruction
Company. [Thus, formation of SPV as a trust is not envisaged].
5.3-1 Process of securitisation
Theprocessofsecuritisationbeginswhenthelender(ororiginator)
segregates loans/lease/receivables into pools which are relatively
homogenous in regard to types of credit, maturity and interest
rate risk. The pools of assets are then transferred to a Special
Purpose Vehicle (SPV) [In the present Act, an independent Asset
Reconstruction Company is envisaged].
The SPV issues asset backed securities in the form of debt,
certificates of beneficial ownership and other instruments.
These securities will be rated by Credit Rating Agencies.
Presently, it is envisaged that such securities will be offered to
QBs (Qualified Buyers) only. Public participation is not envisaged.
The SPV acts as intermediary. It buys financial assets from seller
or transferor and issues securities to the investors. Money received
from investors is paid to the transferor. The investors are serviced
and repaid out of the assets realised over a period of time.
Pass through certificates– In pass through certificates, a direct
participation in the cash flow is sold. Receipt of asset cash flow is
deposited in designated accounts. The funds are then passed on to
Certificate Holders. Receivables are directly assigned to investors
through SPV. Thus, the cash is collected by the original lender
which is then passed on to SPV (Asset Reconstruction Company)
Pay through certificates– This involves a specific assignment/sale
of asset cash flow to the SPV. The SPV then issues pay through
certificates to the investors. In this case, normally, the cash is
collected by the SPV from the borrower and then distributed to
the certificate holders.
89 HOW SECURITISATION PROCESS WORKS Para 5.3

21. 5.3-2 Summary of process
The process can be summarised as follows –
u Lender sells various types of loans to borrowers
u Out of these loans, he packs certain loans together and sells
these to Asset Reconstruction Company
u The Asset Reconstruction Company makes payment to
original lender for loans purchased
u These loans are converted into a pool of securities by the
Asset Reconstruction Company for purpose of issuing Pass
Through or Pay Through Certificates (PTC).
u These PTCs are sold to individual investors [QBs].
u The recoveries from original borrower are obtained by
original lender (in case of Pass Through Certificates) and
by Asset Reconstruction Company (in case of Pay Through
Certificates).
u If collection is made by original borrower, he is under
obligation to pass on the money to Asset Reconstruction
Company.
u The ARC passes on these amounts to individual investors.
5.3-3 Advantages of Securitisation
Securitisation is designed to offer a number of advantages to the
seller, investor and debt markets. Advantages of securitisation can
be summarised as follows –
u Banks can keep loans off their balance sheet, thus reducing
need for additional capital
u Alternativeformtobanksandfinancialinstitutionsoffunding
risk transfer and capital market development
u Reduce lending concentration and improve liquidity
u Attainment of funds at lower costs since these are isolated
from potential bankruptcy risk of originator
u Better matching of assets and liabilities and development of
long-term debt market
u Provides diversified pool of uniform assets to banks and
financial institutions
Para 5.3 SECURITISATION 90

22. u Converting non-liquid loans or assets into liquid assets or
marketable securities.
u Transfer of funds from less efficient debt market to more
efficient capital market through securitisation.
For seller or originator, securitisation mainly results in receivables
being replaced by cash thereby improving the liquidity position. It
removes the assets from the balance sheet of the originator, thus
liberating capital for other uses, and enabling restructuring of the
balancesheetbyreducinglargeexposuresorsectoralconcentration.
It facilitates better asset liability management by reducing market
risks resulting from interest rate mismatches. The process also
enables the issuer to recycle assets more frequently and thereby
improve earning. Finally, transparency may be improved since
securitisation results in identifiable assets in the balance sheet.
Since securitised assets go off the balance sheet of originator,
asset base is pruned down, thereby reducing the regulatory capital
requirements to support the assets. Moreover, asset portfolio is
liquidated releasing cash, which, in turn, reduces the need for
demand and time liabilities that are subject to statutory reserves.
Inbrief,originallendertransformshisilliquidassetslikemortgages,
lease rentals etc. into liquidity by raising money on them. The
additional funds raised can be used to increase business. Cost of
raising funds will be lower as there will be wider investment base
and liquidity. Further, credit risk will be diversified.
Securitisation helps in recycling and roll over of assets.
For investor, securitisation essentially provides an avenue for
relatively risk-free investment. The credit enhancement provides
an opportunity to investors to acquire good quality assets and to
diversify their portfolios.
From the point of view of the financial system as a whole,
securitisation increases the number of debt instruments in the
market, and provides additional liquidity in the market. It also
facilitates unbundling, better allocation and management of
project risks. It could widen the market by attracting new players
on account of superior quality assets being available.
91 HOW SECURITISATION PROCESS WORKS Para 5.3

23. 5.4 Credit rating is of assets securitised and not of the
originator
The credit rating is of the transaction of the assets securitised and
not of the originator or issuer. Thus, it is possible that credit rating
ofthesecuritisedassetswillbequitedifferentfromthecreditrating
of the originator. In extreme case, even if the originator company
is liquidated, the asset securitised will still be good and the investor
investing in the securitised asset will be protected.
Similarly, the Asset Reconstruction Company does not own the
assets and hence even if it goes into liquidation, security of investor
does not get affected. This ensures ‘bankruptcy remoteness’. Thus,
securitisation transaction may have higher credit rating that the
credit rating of the originator/issuer himself.
5.5 Public issue and listing of securitised certificates or
instruments
Section 17A of Securities Contracts (Regulation) Act makes
provision for public issue and listing of the securitised certificates
or instruments.
Security Receipt issued by Securitisation Company, as defined in
section 2(1)(zg) of ‘Securitisation Reconstruction of Financial
Assets Enforcement of Security Interest Act, 2002’ has been
included in definition of ‘securities’ in section 2(h) of Securities
Contracts (Regulation) Act, 1956.
SEBI (Public Offer and Listing of Securitised Debt Instruments)
Regulations, 2008 make provisions for public offer and listing of
Securitised debt instruments.
Securitised certificate or instrument – Securitised certificate or
instrument is any certificate or instrument (by whatever name
called), issued to an investor by any issuer being a special purpose
distinct entity, which possesses any debt or receivable, including
mortgage debt, assigned to such entity, and acknowledging
beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be [section 2(h)(ie) of
SCRA].
Listing and issue of securities – Only those securities which fulfil
eligibilitycriteriaspecifiedbySEBIandcomplieswithrequirements
Para 5.5 SECURITISATION 92

24. specified by SEBI can be issued to public [section 17A(1) of SCRA].
Issuerofsecuritisedcertificateorinstrumentwillmakeapplication
forlistingtooneormorerecognisedstockexchanges,beforeissuing
offer document to public [section 17A(2) of SCRA].
Ifpermissionforlistingisrefusedbyanystockexchange,theissuer
shall repay all moneys to applicants with eight working days. If not
so repaid, interest @ 15% is payable [section 17A(3)]. All provisions
relating to listing shall apply to listing of such securities [section
17A(4) of SCRA].
Listing agreement for Securitised Debt Instruments has been
prescribedvideSEBICircularNo.IMD/DF/5/2011dated16-3-2011.
5.6 Accounting for securitisation
ICAI has issued guidance note on Accounting for Securitisation. –
see Chartered Accountant – March 2003 also available on website
of ICAI. The guidance note is similar to IAS-39 [International
Accounting Standard 39]
5.7 Legal framework for securitisation
AspertheSARFAESIAct,thefinancialassetwillbefirstacquiredby
Asset Reconstruction Company from bank or financial institution.
‘Securitisation’ means acquisition of financial asset by any Asset
Reconstruction Company from any originator, whether by raising
fundsbysuchAssetReconstructionCompanyfromqualifiedbuyers
(QB) by issue of security receipts representing undivided interest
in such interest or otherwise. [section 2(1)(z) of SARFAESI Act as
amended w.e.f. 1-9-2016].
The words ‘or otherwise’ means that the funds can also be raised
by means other than issue of security receipts to QB.
Originator– ‘Originator’ means the owner of a financial asset
which is acquired by Asset Reconstruction company, for the
purpose of securitisation or asset reconstruction. [section 2(1)(r)
of SARFAESI Act]
5.7-1 Qualified Buyer (QB)
Qualified Buyer (QB) means a * Financial Institution * Insurance
Company * Bank * State Financial Corporation * State Industrial
93 LEGAL FRAMEWORK FOR SECURITISATION Para 5.7

25. Development corporation * Trustee or Asset Reconstruction
companymakinginvestmentonbehalfofmutualfund`*Anyother
body corporate as may be specified by SEBI * Any category of non-
financial investors as may be specified by RBI under section 7(1) of
SARFAESI Act * Any other body corporate as may be specified by
SEBI [section 2(1)(u) of SARFAESI Act as amended on 4-11-2016.
[They were earlier termed as ‘Qualified Institutional Buyers’ (QIB)
till 1-9-2016]
Systemically important Non-deposit taking NBFC with asset size
of 100 crores Rupees or more and other non-deposit taking NBFC
with asset size exceeding Rs 50 crores or more and CRAR of 10%
are qualified buyers (QB – that time QIB) for purpose of SARFAESI
Act–SEBINotificationNo.11/LC/GN/2008/21670dated31-3-2008.
‘Financial Institution’ means * Public Financial Institution within
meaning of section 4A of Companies Act (now section 2(72) of
Companies Act, 2013) * International Finance Corporation * Any
Institution notified under section 2(h)(ii) of Recovery of Debts due
to Banks and Financial Institutions Act, 1993 * Debenture trustee
registered with SEBI and appointed for secured debt securities *
AssetReconstructionCompanywhetheractingassuchormanaging
a trust for purpose of securitization or asset reconstruction * Any
other institution or NBFC as defined in section 45-I(f) of RBI Act,
as may be notified by Central Government [section 2(1)(m) of
SARFAESI Act - words in italics inserted w.e.f. 1-9-2016].
Public Financial Institution - “Public financial institution”
means— (i) the Life Insurance Corporation of India, established
under section 3 of the Life Insurance Corporation Act, 1956 (ii) the
Infrastructure Development Finance Company Limited, referred
to in of section 4A(1)(vi) of the 1956 Act (which is repealed under
section 461 of the 2013 Act) (iii) specified company referred to in
the Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002 (iv) institutions notified by the Central Government under
section 4A(2) of the 1956 Act (which is now repealed under section
465 of the 2013 Act) (v) such other institution as may be notified
by the Central Government in consultation with the Reserve Bank
of India [section 2(72) of Companies Act, 2013].
Para 5.7 SECURITISATION 94

26. Broadly,‘PublicFinancialInstitution’[PFI]meansIDBI,ICICI,IFCI,
LIC, UTI IRBI, GICI, SCICI, SIDBI, State Financial Corporations,
NABARD, NCDC etc.
AsianDevelopmentBankhasbeennotifiedas‘FinancialInstitution’
vide notification No. SO 1275(E) dated 30-10-2003.
Category I Alternative Investment Funds (AIFs) set up as trust
and registered with SEBI are specified as ‘qualified buyers’,
subject to the conditions specified in Notification DoR. FIN. No.
08/26.03.001/2020-2021 dated March 10, 2021 issued by RBI.
5.7-2 Forming a scheme and issue of security receipt
The Asset Reconstruction Company will devise a separate scheme
for each of the financial asset taken over. QB (Qualified Buyers)
will invest in such ‘scheme’.
The Asset Reconstruction Company will issue ‘security receipts’ to
QB or such other category of investors including non-institutional
investors as specified by RBI from time to time – section 7(1) of
SARFAESIAct.Wordsinitalicsinsertedvide2016AmendmentAct.
The Asset Reconstruction Company will realise the assets and
redeem the investment and payment of returns to QB under each
scheme. Account of each scheme of every financial asset will be
kept separately by Asset Reconstruction Company and funds
realised from that asset will be utilised only for redemption of
investments and payment of returns under that scheme. [section
7(2) of SARFAESI Act].
The scheme may be in nature of trust for QB to be managed by
Asset Reconstruction Company. Provisions of Indian Trust Act
will apply to the extent they are not inconsistent with provisions
of SARFAESI Act. [section 7(2A) of SARFAESI Act].
‘Scheme’meansaschemeinvitingsubscriptiontosecurityreceipts
proposed to be issued by Asset Reconstruction Company under
that scheme. [section 2(1)(y) of SARFAESI Act].
‘Security receipt’ means a receipt or other security, issued by
Asset Reconstruction Company to any QB, pursuant to a scheme,
evidencing the purchase or acquisition by the holder thereof, of
an undivided interest in such financial assets. [section 2(1)(zg) of
SARFAESI Act].
95 LEGAL FRAMEWORK FOR SECURITISATION Para 5.7

27. Thesecurityreceiptrepresentsundividedinterestinfinancialasset.
It does not create, declare, assign, limit or extinguish any right,
title or interest to or in immovable property except to the extent
of undivided interest afforded by the security receipt. It does not
require registration under Registration Act, 1908. [section 8(a) of
SARFAESI Act].
The ‘security receipt’ will be a ‘security’ under section 2(h)(ic) of
Securities Contracts (Regulation) Act, 1956.
Provisions of Other Acts should be followed – The security
receipts are required to be issued without prejudice to provisions
in Companies Act, SEBI Act and SCRA. [section 7(1) of SARFAESI
Act].
Thus, provisions of those Acts in respect of issue, listing, trading
etc. will have to be followed.
5.7-3 If assets not realised as per scheme
Iffinancialassetsarenotrealisedbysecuritisationorreconstruction
companyasperthescheme,theQualifiedBuyers(QBs),representing
at least 75% of total value of security receipts issued under that
scheme will be entitled to call a meeting of all QBs. Resolutions
passed at the meeting will be binding on reconstruction company.
[section 7(3) of SARFAESI Act].
QBs will follow procedure at the meeting similar to meeting of
BoardofDirectorsofthecompany.[section7(4)ofSARFAESIAct].
5.7-4 Registration of security receipt under Registration Act not
required
Registrationofthesecurityreceiptrepresentingundivideddivided
interestinthefinancialassetisnotrequiredunderRegistrationAct,
1908,evenifthefinancialassetisanimmovableproperty.Similarly,
transfer of such security receipt will not require registration under
Registration Act, 1908. [section 8 of SARFAESI Act].
Para 5.7 SECURITISATION 96

28. Rs. 995
AUTHOR : TAXMANN
PUBLISHER : TAXMANN
DATE OF PUBLICATION : AUGUST 2021
EDITION : 2021
ISBN NO : 9789391596224
NO. OF PAGES : 412
ORDER NOW
Guide To SARFAESI Act 2002
Recovery of Debts and
Bankruptcy Act 1993
DESCRIPTION
Guide to SARFAESI Act 2002 Recovery of Debts and Bankruptcy Act 1993 is a comprehensive book
on Securitisation Debt Recovery Laws. It contains ‘chapter-wise commentary on provisions of the
following laws:
u Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act)
u Recovery of Debt and Bankruptcy Act, 1993 (RDB Act)
It also contains the Bare Act, Directions, Rules Regulations, etc., on Securitisation and Debt Recovery
Laws.
The Present Publication is the Latest Edition, authored by Taxmann’s Editorial Board, amended up to
July 2021, with the following contents:
u Overview of SARFAESI Act
u Enforcement of Security Interest
u Procedure for Sale of Assets
u Application, Appeals, And Penalty under SARFAESI Act
u Securitisation
u Asset Reconstruction Companies
u Registration of Transactions under SARFAESI Act
u Recovery of Debts And Bankruptcy Act, 1993
u Appendices:
n SARFAESI Act, 2002
n Rules, Regulations, and Directions under SARFAESI
n Recovery of Debts and Bankruptcy Act, 1993
n Rules under the Recovery of Debts And Bankruptcy Act, 1993