SARFAESI ACT, 2002

Introduction

It stands for Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

The SARFAESI Act, 2002 empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court

Objective of SARFAESI act 2002 Expeditious recovery of non-performing

assets (NPAs) of the banks and FIs.

To allow banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. 

When do properties fall under this Act?

When a loan is defaulted and certain conditions are not met, banks declare the loan as NPA and AUCTION it.

The provisions of this Act are applicable only for NPA loans with outstanding above Rs 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

What the act says:

The Act empowers the Bank

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

Example

Kotak Mahindra Bank has served a possession notice under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 on Deccan Chronicle Holdings Ltd, publisher of English daily Deccan Chronicle, seeking payment of dues.

Alternative mechanisms to recover Non – Performing Assets [NPA]

The Act provides three alternative methods for recovery of non-performing assets, namely: -

1. Securitization 2. Asset Reconstruction 3. Enforcement of Security without the

intervention of the Court

SARFAESI in the NEWS,….

The budget proposal to include non-financial companies (NBFCs) under the SARFAESI is credit positive for the lenders of loans against property, a leading rating agency, Moody’s.

Securitization

Acquisition of financial asset by securitization company

Process where non-liquidated financial assets are converted into marketable securities and are sold to investors

Process of converting the receivables and other assets into securities (placed in market for trading)

Meaning:

Scheme

The company can raise funds from QIB by formulating schemes.

Scheme invites subscription to security receipts proposed to be issued by such a company.

Company needs to be registered under the companies act, 1956. Registration from RBI is also needed.

A Qualified Institutional Buyer (QIB) is one that owns and invests, on a discretionary basis, at least $100 million in securities; for a broker-dealer the threshold is $10 million.