Compiled by CA Mridul Agarwal

THE SECURITIZATION AND RECONSTRUCTION OF

FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002

INTRODUCTION
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of
financial assets and enforcement of security interest and for matters connected therewith or
incidental thereto.

• It extended to the whole of India.

• The recovery problem faced by banks due to ever-growing non-performing assets (NPA) and

• The inadequate legal framework for enabling banks in recovering bad loans which are otherwise
based on valuable collateral. The failure of the Debt Recovery Tribunal (DRT) to speed up the
recovery process was also a reason for enacting the SARFAESI Act.
• Amendment in the Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (SARFAESI) vide the enforcement of the Security Interest and
Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
• Ministry of Law and Justice on 16th August, 2016 hereby published for general information in the
Official Gazette, the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016.
It is an Act further to amend four laws:
(i) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI),
(ii) Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI),
(iii) Indian Stamp Act, 1899 and
(iv) Depositories Act, 1996, and for matters connected therewith or incidental thereto.
Chapter II, of this amendment Act deals with the amendments to the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002.
This amendment Act is "an act to regulate securitisation and reconstruction of financial assets and
enforcement of security interest and to provide for a central database of security interests created on
property rights, and for matters connected therewith or incidental thereto."
The Act deals with the following:
 Registration and regulation of Asset Reconstruction Companies (ARCs) by the Reserve Bank

1
Compiled by CA Mridul Agarwal

of India;
 Facilitating securitisation of financial assets of banks and financial institutions with or without
the benefit of underlying securities;
 Facilitating easy transferability of financial assets by the ARC to acquire financial assets of
banks and financial institutions by issue of debentures or bonds or any other security in the
nature of a debenture;
 Empowering ARCs to raise funds by issue of security receipts to qualified buyers;
 Facilitating reconstruction of financial assets acquired by exercising powers of enforcement
of securities or change of management or other powers which are proposed to be conferred
on the banks and financial institutions;
 Declaration of any securitisation company or reconstruction company registered with the
Reserve Bank of India as a public financial institution for the purpose of section 4A of the
Companies Act, 1956;
 Defining 'security interest' as any type of security including mortgage and change on
immovable properties given for due repayment of any financial assistance given by any bank
or financial institution;
 Empowering banks and financial institutions to take possession of securities given for financial
assistance and sell or lease the same or take over management in the event of default, i.e.
classification of the borrower's account as non-performing asset in accordance with the directions
given or under guidelines issued by the Reserve Bank of India from time to time;
 The rights of a secured creditor to be exercised by one or more of its officers authorised in
this behalf in accordance with the rules made by the Central Government;
 An appeal against the action of any bank or financial institution to the concerned Debts
Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal;
 Setting up or causing to be set up a Central Registry by the Central Government for the
purpose of registration of transactions relating to securitisation, asset reconstruction and
creation of security interest;
 Application of the proposed legislation initially to banks and financial institutions and
empowerment of the Central Government to extend the application of the proposed legislation
to non-banking financial companies and other entities
 Non-application of the proposed legislation to security interests in agricultural lands, loans
not exceeding rupees one lakh and cases where eighty per cent, of the loans are repaid by
the borrower.

2
Compiled by CA Mridul Agarwal

STRUCTURE
The Act is divided into six chapters and 42 sections:

Chapter I- Preliminary (Section 1-2)

Chapter II- Regulation of securitisation and reconstruction of financial assets of banks and financial
institutions (Section 3- 12A)
Chapter III- Enforcement of security interest (Section 13- 19)

Chapter IV- Central registry (Section 20-26A)

Chapter IVA- Registration by secured creditors and other creditors (Section 26B-26E)

Chapter V- Offences and penalties (Section 27-30)

Chapter VI- Miscellaneous (Section 37-42)

IMPORTANT CONCEPTS
The Act introduced multiple new concepts and infrastructures to support ease of recovery actions such
as:
Formation of Securitisation or reconstruction companies
Recovery without interference of courts
Framework for revival or reconstruction of the borrowers’ business
Central registry
Qualified buyers
Security receipts

3
Compiled by CA Mridul Agarwal

FUNCTIONING OF ARC IN A NUT SHELL

Issue of security by Registration/Format

Acquisition of rights
raising of receipts or ion of Asset
or interest in financial
funds by ARC from Reconstruction
assets
QBs Company

Enter into an
agreement for
transfer of financial

Take measures of Enforcement of

asset reconstruction security interest Issue debentures or
bonds or security

1.Take possession
1. Proper management of 2.Take over
the borrower’s business management
2. Sale or lease of 3.Appoint a manager
business
4.Notice for payment
3. Rescheduling of debts
4. Enforcement of security of dues
interest
5. Settlement of dues
6. possession of secured
assets

Alternative presentation (simpler version):

Security
Originator
Borrower (Banks/Financial
institution)
Financial assistance

Secured asset Cash

transfer

Asset reconstruction
Qualified buyer companies
Security receipts

4
Compiled by CA Mridul Agarwal

DEFINITIONS
Some key definitions is explained as below:
"Asset reconstruction" means acquisition by any securitisation company (SC) or
reconstruction company (RC) of any right or interest of any bank or financial institution
in any financial assistance for the purpose of realisation of such financial assistance
[Section 2(b)]
The term "financial assistance" means any loan or advance granted or any debentures or
bonds subscribed or any guarantees given or letters of credit established or any other credit
facility extended by any bank or financial institution; [Section 2(k)]
The purpose of acquisition by securitisation company (SC) or reconstruction company (RC)
is to realise such assets and not to stay invested by becoming the shareholders of the
company. However it has the right to take over the management of the business, subject to
RBI’s guidelines from time to time. Such realised amount should be held and applied towards
redemption of investments and payment of returns assured to the QIBs
"Asset reconstruction company (ARC)" means a company registered with Reserve
Bank under section 3 for the purposes of carrying on the business of asset
reconstruction or securitisation, or both. [Section 2(ba)]
An ARC is not a banking company although it is regulated by RBI. Such company
cannot carry out any other business other than securitisation or reconstruction.
"Borrower" means any person who has been granted financial assistance by any bank or
financial institution or who has given any guarantee or created any mortgage or pledge as
security for the financial assistance granted by any bank or financial institution and includes
a person who becomes borrower of a securitisation company or reconstruction company
consequent upon acquisition by it of any rights or interest of any bank or financial institution
in relation to such financial assistance or who has raised funds through issue of debt
securities . [Section 2(f)]
"Default" means:
(a) non-payment of any debt or any other amount payable by the borrower to any secured
creditor consequent upon which the account of such borrower is classified as non-
performing asset in the books of account of the secured creditor; or
(b) non-payment of any debt or any other amount payable by the borrower with respect to
debt securities after notice of ninety days demanding payment of dues served upon
such borrower by the debenture trustee or any other authority in whose favour security
interest is created for the benefit of holders of such debt securities. [Section 2(j)]

5
Compiled by CA Mridul Agarwal

Conditions for calling default under this Act is:

➢ debt or any other amount- The amount due should be in the nature of debt.
➢ Secured creditor- An unsecured creditor doesn’t have recourse to this act
➢ Classification of NPA- A stressed asset which is yet to be classified as NPA cannot be
resolved through this Act.
➢ For non-payment of debenture or bonds to be called default, a notice of 90 days is a
pre-requisite by the debenture trustee or beneficiary of the security.
"Debt" shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 and includes—
(a) unpaid portion of the purchase price of any tangible asset given on hire or financial
lease or conditional sale or under any other contract;
(b) any right, title or interest on any intangible asset or licence or assignment of such
intangible asset, which secures the obligation to pay any unpaid portion of the
purchase price of such intangible asset or an obligation incurred or credit otherwise
extended to enable any borrower to acquire the intangible asset or obtain licence of
such asset; [Section 2(ha)]
"Financial asset" means debt or receivables and includes-
(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on, immovable property;
or
(iii) a mortgage, charge, hypothecation or pledge of movable property; or
(iv) any right or interest in the security, whether full or part underlying such debt or
receivables; or
(v) any beneficial interest in property, whether movable or immovable, or in such debt,
receivables, whether such interest is existing, future, accruing, conditional or
contingent; or
(va) any beneficial right, title or interest in any tangible asset given on hire or financial lease
or conditional sale or under any other contract which secures the obligation to pay any
unpaid portion of the purchase price of such asset or an obligation incurred or credit
otherwise provided to enable the borrower to acquire such tangible asset; or
(vb) any right, title or interest on any intangible asset or licence or assignment of such
intangible asset, which secures the obligation to pay any unpaid portion of the
purchase price of such intangible asset or an obligation incurred or credit otherwise

6
Compiled by CA Mridul Agarwal

extended to enable the borrower to acquire such intangible asset or obtain licence of the
intangible asset;
(vi) any financial assistance; [Section 2(l)]
An asset which is not a financial asset cannot be securitised, acquired or transferred under this
Act.
Example: Value of an unsecured land in the balance sheet of the borrower cannot be
acquired by an ARC by way of issuing security receipts.
"Non-performing asset (NPA)" means an asset or account of a borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or loss
asset,
(a) in case such bank or financial institution is administered or regulated by an
authority or body established, constituted or appointed by any law for the time
being in force, in accordance with the directions or guidelines relating to assets
classifications issued by such authority or body;
(b) in any other case, in accordance with the directions or guidelines relating to
assets classifications issued by the Reserve Bank. [Section 2(o)]
"Qualified buyer" means a financial institution, insurance company, bank, state financial
corporation, state industrial development corporation, trustee or asset reconstruction
company which has been granted a certificate of registration under sub-section (4) of section
3 or any asset management company making investment on behalf of mutual fund or pension
fund or a foreign institutional investor registered under the Securities and Exchange Board of
India Act, 1992 (15 of 1992) or regulations made thereunder, any category of non-institutional
investors as may be specified by the Reserve Bank under sub-section (1) of section 7 or any
other body corporate as may be specified by the Board; [Section 2(u)]
An ARC cannot raise funds from investors which is not a qualified buyer (QB) as defined above.
For example, a manufacturing company looking to invest surplus cash by investing in the ARC,
or a Public sector unit, or a strategic investor who wish to acquire the assets of the borrower
company etc.
"Securitisation" means acquisition of financial assets by any asset reconstruction company
from any originator, whether by raising of funds by such asset reconstruction company from
qualified buyers by issue of security receipts representing undivided interest in such financial
assets or otherwise [Section 2(z)];
The process of securitisation helps the ARC to acquire financial assets like Loans from banks
due to which the ARC shall be deemed to be the lender and all the rights of such bank or
financial institution shall vest in such company in relation to such financial assets.

7
Compiled by CA Mridul Agarwal

REGULATION OF SECURITISATION AND RECONSTRUCTION

OF FINANCIAL ASSETS OF BANKS AND FINANCIAL
INSTITUTIONS
This part of the Act is covered in chapter II of the Act, comprising of Sections 3 – 12.
(I) Registration of ARCs (Section 3)
Commencement of business of securitisation or asset reconstruction: Such a company
can commence or carry on the business of securitisation or asset reconstruction only after
obtaining a certificate of registration granted under this section and having the net owned
fund of not less than 1one hundred crore rupees or such other higher amount as the Reserve
Bank, may, by notification, specify.
However, the term “net owned fund” is not defined in the Act and hence we have to refer to
the definition of “net owned fund” as mentioned in the explanation to Section 45I of the
Reserve Bank of India Act.
Every asset reconstruction company shall make an application for registration to the Reserve
Bank.
Conditions: The Reserve Bank may be required to check in, by an inspection of records or
books of such asset reconstruction company or otherwise, compliance with the following
conditions, to grant its approval for registration of an ARC to commence or carry on the
business of securitisation or asset reconstruction.
(a) that the ARC has not incurred losses in any of the three preceding financial years;
(b) that such ARC has made adequate arrangements for realisation of the financial assets
acquired for the purpose of securitisation or asset reconstruction and shall be able to
pay periodical returns and redeem on respective due dates on the investments made
in the company by the qualified buyers or other persons;
(c) that the directors of ARC have adequate professional experience in matters related to
finance, securitisation and reconstruction;
(d) that any of its directors has not been convicted of any offence involving moral
turpitude;
(e) that a sponsor of an ARC is a fit and proper person in accordance with the criteria as
may be specified in the guidelines issued by the Reserve Bank for such persons;
(f) that ARC has complied with or is in a position to comply with prudential norms specified
by the Reserve Bank.
(g) that ARC has complied with one or more conditions specified in the guidelines issued
by the Reserve Bank for the said purpose.
Issue of certificate of registration to ARC: A certificate of registration is granted to the ARC
to commence or carry on business of securitisation or asset reconstruction, and it must be
noted that the Reserve Bank may also prescribe any other conditions, which it may consider,

8
Compiled by CA Mridul Agarwal

fit to impose. In case the Reserve Bank is of the opinion that the above conditions are not
satisfied then it may reject the application, after the applicant is given a reasonable
opportunity of being heard.
Requirement of prior approval of RBI: Once a company is registered as an ARC, it must
obtain prior approval of the Reserve Bank for the following purposes:-
(a) any substantial change in its management, including appointment of any director
managing director or chief executive officer
(b) change of location of its registered office
(c) change in its name
Decision of RBI shall be final & binding: The decision of the Reserve Bank, whether the
change in management of an ARC is a substantial change in its management or not, shall be
final and binding. The expression "substantial change in management" means the change in
the management by way of transfer of shares or change affecting the sponsorship in the
company by way of transfer of shares or amalgamation or transfer of the business of the
company.
(II) Cancellation of certificate of registration (Section 4)
The Reserve Bank may cancel a certificate of registration granted to an ARC, if such
company-
(i) ceases to carry on the business of securitisation or asset reconstruction; or
(ii) ceases to receive or hold any investment from a qualified buyer; or
(iii) has failed to comply with any conditions subject to which the certificate of registration
has been granted to it; or
(iv) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-
section (3) of section 3; or
(v) fails to-
(a) comply with any direction issued by the Reserve Bank under the provisions of
this Act; or
(b) maintain accounts in accordance with the requirements of any law or any
direction or order issued by the Reserve Bank under the provisions of this Act;
or
(c) submit or offer for inspection its books of account or other relevant documents
when so demanded by the Reserve Bank; or
(d) obtain prior approval of the Reserve Bank required under sub-section (6) of
section 3:
Before cancelling a certificate of registration on the ground that the ARC has failed to comply
with the provisions of clause (c) or has failed to fulfil any of the conditions referred to in clause
(d) or sub-clause (iv) of clause (e), the Reserve Bank, unless it is of the opinion that the delay

9
Compiled by CA Mridul Agarwal

in cancelling the certificate of registration granted under section 3(4) shall be prejudicial to
the public interest or the interests of the investors or the ARC, shall give an opportunity to
such company on such terms as the Reserve Bank may specify for taking necessary steps to
comply with such provisions or fulfilment of such conditions.
Appeal to an order of cancellation: In case the ARC is aggrieved by the order of
cancellation of certificate of registration by the Reserve Bank, then it may prefer an appeal,
within a period of thirty days from the date on which such order of cancellation is
communicated to it, to the Central Government (Secretary, Ministry of Finance, and
Government of India). The Central Government must also give such company a reasonable
opportunity of being heard before rejecting the appeal.
On cancellation of certificate of period of filing an appeal Appeal preferred to CG
regsitration

• aggrieved (ARC) may file a • within 30 days from the date • CG on reasonable
appeal of commuincation of order opportunty of being heard
of cancellation may reject appeal

It must be noted that an ARC, which is holding investments of qualified buyers and whose
application for grant of certificate of registration has been rejected or certificate of registration
has been cancelled shall, notwithstanding such rejection or cancellation be deemed to be an
ARC until it repays the entire investments held by it (together with interest, if any) within such
period as specified by the Reserve Bank.
(III) Acquisition of rights or interest in financial assets (Section 5)
Acquiring of financial assets of any bank or financial institution: Any ARC may acquire
financial assets of any bank or financial institution.

Through isssuing of
debenture/bond/ any other security
as consideration by an agreement
Acquiring of financial between company & Bank
assets of any Bank By ARC /Financial Institution
and FI through an agreement for transfer
of financial assets to company

(IV) Notice to obligor and discharge of obligation of such obligor (Section 6)

The bank or financial institution may give a notice of acquisition of financial assets by any
ARC to the concerned obligor and any other concerned person and to the concerned
registering authority.
The obligor shall make payment to the concerned ARC in discharge of any of the obligations
in relation to the financial asset specified in the notice.

10
Compiled by CA Mridul Agarwal

(V) Measures for assets reconstruction (Section 9)

An ARC may, provide for any one or more of the following measures, for the purposes of
asset reconstruction-
 the proper management of the business of the borrower, by change in, or takeover of,
the management of the business of the borrower;
 the 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;
 conversion of any portion of debt into shares of a borrower company:
Provided that conversion of any part of debt into shares of a borrower company shall be deemed
always to have been valid, as if the provisions of this clause were in force at all material times.
The Reserve Bank shall, for the purposes as given above, determine the policy and issue
necessary directions including the direction for regulation of management of the business of
the borrower and fees to be charged.
The asset reconstruction company shall take measures as stated above in accordance with
policies and directions of the Reserve Bank as determined.

Management
Change /take
over
conversion of
debt into Sale or lease
shares of business

Measures for
assets
possession of reconstruction rescheduling of
secured assets debts repayment

settlement of enforcement of
dues security interest

11
Compiled by CA Mridul Agarwal

(VI) Other functions of ARC (Section 10)

Role of ARC: Any ARC may perform the following roles:

As an agent for any bank

As a manager As a receiver
or financial institution
appoint any person to
manage the secured assets
the possession of which has
been taken over by the
for recovering their dues secured creditor;on fee as
from the borrower on may be mutually agreed upon if so appointed by any
payment of fees or charges between the parties;
as may be mutually agreed court or tribunal
upon between the parties; Exception: No ARC shall act
as a manager if acting as
such gives rise to any
pecuniary liability.

Commencement of any other business by ARC: No ARC which has been granted a
certificate of registration section 3(4), shall commence or carry on, without prior approval of
the Reserve Bank, any business other than that of securitisation or asset reconstruction.
In case of conduct of business (other than the business of securitisation or asset
reconstruction) on or before the commencement of this Act: an ARC which is carrying
on, on or before the commencement of this Act, any business other than the business of
securitisation or asset reconstruction or business (as referred in para first of this heading
mentioning “Role of ARC”), shall cease to carry on any such business within one year from
the date of commencement of this Act.
For the purposes of this section, ARC does not include its subsidiary.
(VII) Resolution of disputes (Section 11)

the bank, or

dispute relating to financial institution, or

securitisation or shall be settled by
reconstruction or non- conciliation or arbitration as
payment of any amount due provided in the Arbitration
including interest arises and Conciliation Act, 1996,
ARC or
amongst

qualified buyer,

12
Compiled by CA Mridul Agarwal

(VIII) Power of Reserve Bank to determine policy and issue directions (Section 12)
In the public interest, Reserve bank may determine the policy and give directions to any ARC
in matters relating to income recognition, accounting standards, making provisions for bad
and doubtful debts, capital adequacy based on risk weights for assets and also relating to
deployment of funds by the ARC.
Besides, the Reserve bank may give directions to any ARC in particular as to:
(a) the type of financial asset of a bank or Financial institution which can be acquired and
procedure for acquisition of such assets and valuation thereof;
(b) the aggregate value of financial assets which may be acquired by any securitisation
company or reconstruction company.
(c) the fee and other charges which may be charged or incurred for management of
financial assets acquired by any asset reconstruction company;
(d) transfer of security receipts issued to qualified buyers
(IX) Power of Reserve Bank to Call for Statements and information (Section 12 A)
The Reserve Bank may direct ARC to furnish it within such time as may be specified by the
Reserve Bank, with such statements and information relating to the business or affairs of
such securitisation company or reconstruction company (including any business or affairs
with which such company is concerned) as the Reserve Bank may consider necessary or
expedient to obtain for the purpose of this Act.
(X) Power of Reserve Bank to carry out audit and inspection (Section 12 B)
The Reserve Bank may, for the purposes of this Act, carry out or caused to be carried out
audit and inspection of an asset reconstruction company from time to time.
It shall be the duty of an asset reconstruction company and its officers to provide assistance
and cooperation to the Reserve Bank to carry out audit or inspection.
Where on audit or inspection or otherwise, the Reserve Bank is satisfied that business of an
asset reconstruction company is being conducted in a manner detrimental to public interest
or to the interests of investors in security receipts issued by such asset reconstruction
company, the Reserve Bank may, for securing proper management of an asset reconstruction
company, by an order—
(a) remove the Chairman or any director or appoint additional directors on the board of
directors of the asset reconstruction company; or
(b) appoint any of its officers as an observer to observe the working of the board of
directors of such asset reconstruction company: Provided that no order for removal of
Chairman or director under clause (a) shall be made except after giving him an
opportunity of being heard.

13
Compiled by CA Mridul Agarwal

It shall be the duty of every director or other officer or employee of the asset reconstruction
company to produce before the person, conducting an audit or inspection under sub-section
(1), all such books, accounts and other documents in his custody or control and to provide
him such statements and information relating to the affairs of the asset reconstruction
company as may be required by such person within the stipulated time specified by him.

ENFORCEMENT OF SECURITY INTEREST (13-19)

Enforcement of security interest (Section 13): Any security interest created in favour of any
secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in
accordance with the provisions of this Act.
Where borrower makes a default in payment of debt: Where any borrower, who is under
a liability to a secured creditor under a security agreement, makes any default in repayment
of secured debt or any instalment thereof, and his account in respect of such debt is classified
by the secured creditor as non-performing asset(NPA), then, the secured creditor may require
the borrower by notice in writing to discharge in full his liabilities to the secured creditor within
sixty days from the date of notice failing which the secured creditor shall be entitled to
exercise all or any of the rights under Section 13(4).
Exceptions:
(i) the requirement of classification of secured debt as non-performing asset ,shall not apply
to a borrower who has raised funds through issue of debt securities; and
(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest
in the same manner as provided under this section with such modifications as may be
necessary and in accordance with the terms and conditions of security documents
executed in favour of the debenture trustee;
Serving of Notice: The notice served shall give details of the amount payable by the borrower and
the secured assets intended to be enforced by the secured creditor in the event of non-payment of
secured debts by the borrower.
Objection or rejection to the borrower on the notice: If, on receipt of the notice, the
borrower makes any representation or raises any objection, the secured creditor on
consideration of the representation/ objection concludes that such representation or objection
is not acceptable or tenable, he shall communicate within 15 days of receipt of such
representation or objection the reasons for non-acceptance of the representation or objection
to the borrower.
The reasons so communicated or the likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon the borrower to prefer an
application to the Debts Recovery Tribunal under section 17 or the Court of District Judge
under section 17A.

14
Compiled by CA Mridul Agarwal

In case of failure to discharge the liability: if the borrower fails to discharge his liability in full within
the above specified period, the secured creditor may take recourse to one or more of the following
measures to recover his secured debt:-
 take possession of the secured assets of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset;
 take over the management of the business of the borrower including the right to transfer
by way of lease, assignment or sale for realising the secured asset;
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only
where the substantial part of the business of the borrower is held as security for the debt:
Provided further that where the management of whole of the business or part of the business is
severable, the secured creditor shall take over the management of such business of the
borrower which is relatable to the security for the debt;
 appoint any person (hereafter referred to as the manager), to manage the secured assets
the possession of which has been taken over by the secured creditor;
 require at any time by notice in writing, any person who has acquired any of the secured
assets from the borrower and from whom any money is due or may become due to the
borrower, to pay the secured creditor, so much of the money as is sufficient to pay the
secured debt.

take possession of the secured assets

take over the management (which is relatable to

secured debt)

appoint any person as the manager, to manage the

secured assets

Demand notice to the person who has acquired the

secured assets to make payment

Discharge from payment: Any payment made by any person referred to in section 5(4)(d) to the
secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

15
Compiled by CA Mridul Agarwal

Chief Metropolitan Magistrate or District Magistrate to assist secured creditor in taking

possession of secured asset (Section 14)
The secured creditor may, for the purpose of taking possession or control of secured asset, request, in
writing, the Chief Metropolitan Magistrate (CMM) or the District Magistrate (DM) within whose
jurisdiction any such secured asset or other documents relating thereto may be situated or found, to
take possession thereof, and the CMM or, as the case may be, the DM shall, on such request being
made to him--
 take possession of such asset and documents relating thereto; and
 forward such asset and documents to the secured creditor
within a period of thirty days from the date of application.
Condonation of Delay: In case of no order within the said period of thirty days for reasons beyond the
control of CMM or DM, he may, after recording reasons in writing , pass the order within such further
period but not exceeding in aggregate sixty days.
Manner and effect of takeover of management (Section 15)
Appointment of persons by secured creditors: When the management of business of a
borrower is taken over by an ARC under section 9(a) or, by a secured creditor under section
13(4)(b) as the case may be, the secured creditor may, by publishing a notice in a newspaper
published in English language and in a newspaper published in an Indian language in
circulation in the place where the principal office of the borrower is situated, appoint as many
persons as it thinks fit-
 in a case in which the borrower is a company under the Companies Act, 1956, to be
the directors of that borrower in accordance with the provisions of that Act; or
 in any other case, to be the administrator of the business of the borrower

Manner and effect of takeover of management

In case where borrower is a : Appoint persons as:

Company under Companies

Act, 1956(i.e, the Directors of the borrower
Companies Act, 2013)

Administrator of the
Any other cases
business of the borrower

Effect of publishing a notice: All persons holding office as directors of the company (if the
borrower is a company) and in any other case, all persons holding any office having power
of superintendence, direction and control of the business of the borrower immediately before
the publication of the above notice, shall be deemed to have vacated their offices.
Effect on any contract of management entered before publishing of a notice: : Any

16
Compiled by CA Mridul Agarwal

contract of management between the borrower and any director or manager thereof holding
office as such immediately before publication of the above notice, shall be deemed to be
terminated. The directors or the administrators appointed under this section shall take such
steps as may be necessary to take into their custody or under their control all the property,
effects and actionable claims to which the business of the borrower is, or appears to be,
entitled and all the property and effects of the business of the borrower shall be deemed to
be in the custody of the directors or administrators, as the case may be, as from the date of
the publication of the above notice.
Exercise of the powers of the person so appointed for the borrowers: All directors
appointed in accordance with the above notice shall, for all purposes, be the directors of the
company of the borrower and such directors or the administrators (if the borrower is other
than a company) appointed under section 15, shall only be entitled to exercise all the powers
of the directors or as the case may be, of the persons exercising powers of superintendence,
direction and control, of the business of the borrower whether such powers are derived from
the memorandum or articles of association of the company of the borrower or from any other
source.

17
Compiled by CA Mridul Agarwal

Management of borrower taken by the secured creditor: Where the management of the
business of a borrower, being a company as defined in the Companies Act, 1956 (i.e., the
Companies Act, 2013), is taken over by the secured creditor, then, notwithstanding anything
contained, such borrower- in the said Act or in the memorandum or articles of association of
such company -
 it shall not be lawful for the shareholders of such company or any other person to
nominate or appoint any person to be a director of the company;
 no resolution passed at any meeting of the shareholders of such company shall be
given effect to unless approved by the secured creditor;
 no proceeding for the winding up of such company or for the appointment of a receiver
in respect thereof shall lie in any court, except with the consent of the secured creditor.
Obligation of secured creditor: The secured creditor is under an obligation to restore the
management of the business of the borrower, on realisation of his debt in full, in case of
takeover of the management of the business of a borrower by such secured creditor.
Provided that if any secured creditor jointly with other secured creditors or any asset
reconstruction company or financial institution or any other assignee has converted part of its
debt into shares of a borrower company and thereby acquired controlling interest in the
borrower company, such secured creditors shall not be liable to restore the management of
the business to such borrower.
(II) No compensation to directors for loss of office (Section 16)
Irrespective of anything contained in any contract or in any other law for the time being in
force, no managing director or any other director or a manager or any person in charge of
management of the business of the borrower shall be entitled to any compensation for the loss
of office or for the premature termination under this Act. However any such managing director
or any other director or manager or any such person in charge of management has the right to
recover from the business of the borrower, moneys recoverable otherwise than by way of such
compensation.
Application against measures to recover secured debts (Section 17)
Filing of an application: Any person (including borrower), aggrieved by any of the measures
given in section 13(4) taken by the secured creditor or his authorised officer under this
Chapter, may make an application along with such fee, as may be prescribed to the Debts
Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on
which such measure had been taken.
Provided that different fees may be prescribed for making the application by the borrower and
the person other than the borrower.

18
Compiled by CA Mridul Agarwal

Explanation: For the removal of doubts, it is hereby declared that the communication of the
reasons to the borrower by the secured creditor for not having accepted his representation or
objection or the likely action of the secured creditor at the stage of communication of reasons
to the borrower shall not entitle the person (including borrower) to make an application to the
Debts Recovery Tribunal under this sub-section.
Jurisdiction : An application shall be filed before the Debts Recovery Tribunal within the
local limits of whose jurisdiction—
(a) the cause of action, wholly or in part, arises;
(b) where the secured asset is located; or
(c ) the branch or any other office of a bank or financial institution is maintaining an account
in which debt claimed is outstanding for the time being.
Measures taken shall be in compliance: The Debts Recovery Tribunal shall consider
whether any of the measures referred to in section 13(4) taken by the secured creditor for
enforcement of security are in accordance with the provisions of this Act and the rules made
thereunder.
If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and
evidence produced by the parties, comes to the conclusion that any of the measures referred
to in section 13(4), taken by the secured creditor are not in accordance with the provisions of
this Act and the rules made thereunder, and require restoration of the management or
restoration of possession, of the secured assets to the borrower or other aggrieved person,
it may, by order,—
 declare the recourse to any one or more measures referred to in section 13(4) taken
by the secured creditor as invalid; and
 restore the possession of secured assets or management of secured assets to the
borrower or such other aggrieved person, who has made an application under sub-
section (1), as the case may be; and
 pass such other direction as it may consider appropriate and necessary in relation to
any of the recourse taken by the secured creditor under sub-section (4) of section 13.
Remedies opted by the securities creditor: If, the Debts Recovery Tribunal declares the
recourse taken by a secured creditor under sub-section (4) of section 13, is in accordance
with the provisions of this Act and the rules made thereunder, the secured creditor shall be
entitled to take recourse to one or more of the measures specified under sub-section (4) of
section 13 to recover his secured debt.
Where—
(i) any person, in an application, claims any tenancy or leasehold rights upon the secured
asset, the Debt Recovery Tribunal, after examining the facts of the case and evidence

19
Compiled by CA Mridul Agarwal

produced by the parties in relation to such claims shall, for the purposes of
enforcement of security interest, have the jurisdiction to examine whether lease or
tenancy,—
(a) has expired or stood determined; or
(b) is contrary to section 65A of the Transfer of Property Act, 1882; or
(c ) is contrary to terms of mortgage; or
(d) is created after the issuance of notice of default and demand by the Bank under sub-
section (2) of section 13 of the Act; and
(ii) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed
in secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or
sub-clause (d) of given in above clause (i), then, the Debt Recovery Tribunal may pass
such order as it deems fit in accordance with the provisions of this Act.
Time limit for disposal of an application: Any application made shall be dealt with by the
Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from
the date of such application.
Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for
reasons to be recorded in writing, so, however, that the total period of pendency of the
application with the Debts Recovery Tribunal, shall not exceed four months from the date of
making of such application.
Order by the appellate tribunal for expeditious disposal of the pending application: If
the application is not disposed of by the Debts Recovery Tribunal within the period of four
months as specified above, any party to the application may make an application, in such
form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery
Tribunal for expeditious disposal of the application pending before the Debts Recovery
Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious
disposal of the pending application by the Debts Recovery Tribunal.
The Debts Recovery Tribunal shall, as far as may be, dispose of the application in accordance
with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (RDDBFI Act) and the rules made thereunder.
Making of application to Court of District Judge in certain cases (Section 17A)
In the case of a borrower residing in the State of Jammu and Kashmir, the application
under section 17 shall be made to the Court of District Judge in that State having jurisdiction
over the borrower which shall pass an order on such application.
Explanation: It is hereby declared that the communication of the reasons to the borrower by the
secured creditor for not having accepted his representation or objection or the likely action

20
Compiled by CA Mridul Agarwal

of the secured creditor at the stage of communication of reasons shall not entitle the person
(including borrower) to make an application to the Court of District Judge under this section.
Appeal to Appellate Tribunal (Section 18)
• Appeal to an order of DRT: Any person aggrieved, by any order made by the Debts Recovery
Tribunal under section 17, may prefer an appeal along with fee, to the Appellate Tribunal
within thirty days from the date of receipt of the order of Debts Recovery Tribunal.
Provided that different fees may be prescribed for filing an appeal by the borrower or by the
person other than the borrower;
• Condition for the appeal: Provided further that no appeal shall be entertained unless the
borrower has deposited with the Appellate Tribunal fifty per cent. of the amount of debt due
from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal,
whichever is less. Provided also that the Appellate Tribunal may, for the reasons to be
recorded in writing, reduce the amount to not less than twenty-five per cent of debt referred
above.
• Dispose of appeal as per the RDDBFI Act, 1993: the Debts Recovery Tribunal under
section 17 or the Appellate Tribunal under section 18 shall, as far as may be, dispose of the
appeal in accordance with the provisions of the Recovery of Debts Due to Banks and
Financial Institutions Act(RDDBFI), 1993 and rules made thereunder.
Appeal to High Court in certain cases (Section 18B)
Any borrower residing in the State of Jammu and Kashmir and aggrieved by any order
made by the Court of District Judge under section 17A-
✓ may prefer an appeal, to the High Court having jurisdiction over such Court, within
thirty days from the date of receipt of the order of the Court of District Judge.
Requirement for preferring an appeal: No appeal shall be preferred unless the borrower
has deposited, with the Jammu and Kashmir High Court, fifty per cent. of the amount of the
debt due from him as claimed by the secured creditor or determined by the Court of District
Judge, whichever is less. Provided further that the High Court may, for the reasons to be
recorded in writing, reduce the amount to not less than twenty-five per cent. of the debt
referred here.
Right to lodge a caveat (Section 18C)
Filing of a caveat: Where an application or an appeal is expected to be made or has been
made under section 17(1) or section 17A or section 18(1) or section 18B,
 the secured creditor, or

21
Compiled by CA Mridul Agarwal

 any person claiming a right to appear before the Tribunal or the Court of District Judge
or the Appellate Tribunal or the High Court, as the case may be, on the hearing of
such application or appeal,
may lodge a caveat in respect thereof.
Notice of caveat: Where a caveat has been lodged -
 the secured creditor by whom the caveat has been lodged (hereafter in this section
referred to as the caveator) shall serve notice of the caveat by registered post,
acknowledgement due, on the person by whom the application has been or is expected
to be made .
 any person by whom the caveat has been lodged (hereafter in this section referred to
as the caveator) shall serve notice of the caveat by registered post, acknowledgement
due, on the person by whom the application has been or is expected to be made.
Notice on the caveator by adjudicating authority: Where after a caveat has been lodged,
any application or appeal is filed before the Tribunal or the court of District Judge or the
Appellate Tribunal or the High Court, as the case may be, the Tribunal or the District Judge
or the Appellate Tribunal or the High Court, as the case may be, shall serve a notice of
application or appeal filed by the applicant or the appellant on the caveator.
Furnishing of copy of application and documents: Where a notice of any caveat has
been served on the applicant or the Appellant, he shall periodically furnish the caveator with
a copy of the application or the appeal made by him and also with copies of any paper or
document which has been or may be filed by him in support of the application or the appeal.
Validity of period of caveat : Where a caveat has been lodged, such caveat shall not remain
in force after the expiry of the period of ninety days from the date on which it was lodged
unless the application or appeal has been made before the expiry of the period.
(III) Right of borrower to receive compensation and costs in certain cases (Section 19)
If the Debts Recovery Tribunal or the Court of District Judge, on an application made under
section 17 or section 17A or the Appellate Tribunal or the High Court on an appeal preferred
under section 18 or section 18A, holds that the possession of secured assets by the secured
creditor is not in accordance with the provisions of this Act and rules made thereunder, and
directs the secured creditors to return such secured assets to concerned borrowers or any
other aggrieved person, who has filed the application under section 17 or section 17A or
appeal under section 18 or section 18A, as the case may be,
the borrower or such other person shall be entitled to the payment of such compensation and
costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal
or the High Court referred to in section 18B.

Setting up of Central Registry (Section 20)

The Central Government may, by notification, set-up or cause to be set-up from such date as it may specify
in such notification, a registry to be known as the Central Registry with its own seal for the purposes of
22
Compiled by CA Mridul Agarwal

registration of transaction of securitisation and reconstruction of financial assets and creation of security
interest under this Act.

The Central Government may, by notification, define the territorial limits within which an office of the Central
Registry may exercise its functions.

The Central Government may, in consultation with State Governments or other authorities, integrate the
registration records of such registration systems with the records of Central Registry.

Delegation of powers (Section 21)

Central Government may, by notification, delegate its powers and functions, in relation to establishment,
operations and regulation of the Central Registry to the Reserve Bank, subject to such terms and conditions.

Satisfaction of Security interest (Section 22)

• The asset reconstruction company or the secured creditor as the case may be, shall give intimation to
the Central Registrar of the payment or satisfaction in full, of any security interest relating to the asset
reconstruction company or the secured creditor within thirty days from the date of such payment or
satisfaction.

• On receipt of the Central Registrar shall order that a memorandum of satisfaction shall be entered in the
Central Register.

Priority to secured creditors

Notwithstanding anything contained in any other law for the time being in force, after the registration of
security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all
revenues, taxes, cesses and other rates payable to the Central Government or State Government or local
authority.

Non-Applicability in certain cases (Section 31)

The provisions of this Act shall not apply to—

• a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of
Goods Act, 1930;
• a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872
• creation of any security in any aircraft of the Aircraft Act, 1934
• creation of security interest in any vessel of the Merchant Shipping Act, 1958
• any properties not liable to attachment
• any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
23
Compiled by CA Mridul Agarwal

• any security interest created in agricultural land;

• any case in which the amount due is less than twenty per cent of the principal amount and interest
thereon

Protection of action taken in good faith (Section 32)

No suit, prosecution or other legal proceedings shall lie against any secured creditor or any of his officers or
manager exercising any of the rights of the secured creditor or borrower for anything done or omitted to be done
in good faith under this Act.

Offences by companies (Section 33)

1) Where an offence under this Act has been committed by a company, every person who at the time the
offence was committed was in charge of, and was responsible to, the company, for the conduct of the
business of the company, as well as the company, shall be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished accordingly:

PROVIDED that nothing contained in this sub-section shall render any such person liable to any
punishment provided in this Act, if he proves that the offence was committed without his knowledge or that
he had exercised all due dilligence to prevent the commission of such offence.
2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been
committed by a company and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation : For the purposes of this section,--

(a) "company" means any body corporate and includes a firm or other association of individuals; and
(b) "director", in relation to a firm, means a partner in the firm

Civil Court not to have jurisdiction (Section 34)

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts
Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction
shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any
power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (51 of 1993).

The provisions of this Act to override other laws (Section 35)

The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other
law for the time being in force or any instrument having effect by virtue of any such law.

24
Compiled by CA Mridul Agarwal

Limitation (Section 36)

No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless
his claim in respect of financial asset is made within the period of limitation prescribed under the Limitation Act,
1963 (36 of 1963).

Application of other laws not barred (Section 37)

The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the
Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities
and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.
Examples
1. Facts
XYZ Finance Ltd. is an NBFC company with total assets of 550 crore, and an NPA of 50 crore
in its balance sheet.
The 50 crore loan consists of 9 cases of 5 crore each and 10 cases of 50 lakhs each.
The management of the company wants to sell bad loans worth 50 crore to an ARC. Of the
` 50 crore, 45 crore is secured against various properties, while one case of 5 crore is unsecured.
During detailed discussion with the in-house legal counsel, it came to light that 2 crore of the
secured bad loan has not been registered with the central registry CERSAI, however this was
not informed to the buyer in the preliminary discussion.
Please analyse and advise the CEO of XYZ finance Ltd. how much bad loan can he sell to
the ARC?
Analysis:
SARFAESI is applicable to only those notified NBFC which has an asset base of 500 crore or
above, hence in this case the XYZ finance Ltd. shall be able to sell the bad loans to ARCs
through SARFAESI.
Further SARFAESI is applicable to secured loans only, therefore only 45 crore of bad loans
can be sold to ARC under SARFAESI.
As per section 26D no secured creditor shall be entitled to exercise the rights of enforcement
of securities under Chapter III unless the security interest created in its favour by the borrower
has been registered with the Central Registry, therefore the buyer may not be keen to take
over the unregistered loan of 5 crore.
Further NBFCs can invoke SARFAESI for only those cases which are over 1 crore, therefore
the 10 cases of 50 lacs each cannot be sold to ARC under SARFAESI.
Therefore, we are left with 8 cases of 5 crore each which can be sold to ARC subject to
meeting all other conditions of the law.
2. Facts

25
Compiled by CA Mridul Agarwal

A newly formed ARC has acquired secured interest on few assets in steel sector. The sector
is undergoing cyclical recession due to global meltdown and increase in raw material price.
The management is now contemplating various options through which it can realise its assets.
What are the measures with the ARC management under the SARFAESI law?

Analysis:
Section 9 deals with measures for asset reconstruction which provides for the following
measures:
o the proper management of the business of the borrower, by change in, or take over
of, the management of the business of the borrower;
o the sale or lease of a part or whole of the business of the borrower;
o rescheduling of payment of debts payable by the borrower;
o enforcement of security interest in accordance with the provisions of this Act;
o settlement of dues payable by the borrower;
o taking possession of secured assets in accordance with the provisions of this Act;
o conversion of any portion of debt into shares of a borrower company: Provided that
conversion of any part of debt into shares of a borrower company shall be deemed
always to have been valid, as if the provisions of this clause were in force at all material
times.
Further Chapter III deals with the enforcement of security interest, which provides for the
following modes of security enforcement:
o take possession of the secured assets of the borrower including the right to transfer
by way of lease, assignment or sale for realising the secured asset;
o take over the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset:
o Provided that the right to transfer by way of lease, assignment or sale shall be
exercised only where the substantial part of the business of the borrower is held as
security for the debt:
o Provided further that where the management of whole of the business or part of the
business is severable, the secured creditor shall take over the management of such
business of the borrower which is relatable to the security for the debt;
o appoint any person (hereafter referred to as the manager), to manage the secured
assets the possession of which has been taken over by the secured creditor;
o require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may become
due to the borrower, to pay the secured creditor, so much of the money as is sufficient
to pay the secured debt.

26
Compiled by CA Mridul Agarwal

4. Facts
ABC limited has issued listed bonds five years ago, which is due to be redeemed in the
current year worth 50 crore. Market analyst feels that the projected cash flows and profitability
seems inadequate to repay the bond value.
The single largest bond holder BH Ltd. holds bonds worth 20 crore, and wants to explore its
options under SARFAESI law, in case ABC limited fails to repay the debt.
Please advise whether BH Ltd. can have recourse to the SARFAESI Act.
Analysis:
The definition of secured creditor under section 2(zd) of SARFAESI Act has been amended
so as to include debenture trustee appointed in respect of debt securities, and corresponding
changes have also been made in SARFAESI Act and RDDBFI Act. Hence it shall have
recourse to all options available to any secured creditor under the law such as enforcement
of security, sale of loans to ARC etc. Unlike NBFC for which a threshold of assets of 500
crore is put for applicability -of the SARFAESI Act, there is no such limit for debenture
holders.

27