The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)
The SARFAESI Act is an Indian law that empowers banks and financial institutions to auction residential or commercial properties of loan defaulters in order to recover loans. The first Asset Reconstruction Company (ARC) in India, ARCIL, was established under this act. The Reserve Bank of India (RBI) has the authority to register and regulate ARCs under the provisions of the SARFAESI Act, 2002.
Key Provisions:
- Rights of Secured Creditors: Under Section 13 of the SARFAESI Act, 2002, secured creditors (banks or financial institutions) have the right to enforce security interests. If a borrower defaults on loan repayment and their account is classified as a Non-Performing Asset (NPA), the secured creditor can repossess the security asset through a written notice, without court intervention.
- Exemptions: The law does not apply to:
- Unsecured loans.
- Loans below ₹100,000.
- Cases where the remaining debt is less than 20% of the original principal.
- Asset Reconstruction Companies (ARCs): The act facilitated the creation of ARCs, enabling banks to sell their NPAs to these companies. Banks can also take possession of collateral properties and sell them without court approval.
- Applicability: The SARFAESI Act applies to the entire country and is used for the securitisation, reconstruction of financial assets, and enforcement of security interests by all financial institutions registered as securitisation or asset reconstruction companies under the RBI.
Notable Verdict:
- Mardia Chemicals Ltd. v. ICICI Bank:
In the landmark case Mardia Chemicals Ltd. v. ICICI Bank, the Supreme Court of India upheld the constitutionality of the SARFAESI Act on 8 April 2004. The Court ruled that borrowers could appeal to the Debt Recovery Tribunal (DRT) against the lender without having to deposit 75% of the debt amount upfront. If the tribunal does not stay the lender’s action, the lender is permitted to sell the assets.- After the act’s enactment, on 27 November 2002, ICICI Bank took possession of Mardia Chemicals’ plant in Vatva, Ahmedabad district, Gujarat. ICICI Bank was owed ₹300 crore, out of a total debt of ₹1,450 crore owed to 20 lenders.