The SARFAESI Act, 2002 is a cornerstone law empowering banks and financial institutions in India to recover non-performing assets swiftly, primarily by allowing the enforcement of security interests without prior court intervention. Indian courts have affirmed the constitutional validity of the Act, ensuring its mechanisms are both effective and just.
Preamble and Overview
The full title—Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002—signals its dual purpose: enabling securitisation and asset reconstruction, and providing a legal framework for lenders to enforce security interests in cases of repayment default. Its introduction addresses the growing challenge of non-performing assets (NPAs) and facilitates quicker asset recovery.
Constitutional Validity
The Supreme Court, notably in Mardia Chemicals v. Union of India, upheld the Act’s constitutional validity. It ruled that empowering banks to seize assets without court involvement serves greater public interest and does not violate fundamental rights—provided principles of natural justice, such as notice and appeal, are preserved.
Key Definitions Under SARFAESI Act, 2002
The Act’s Section 2 contains clear definitions critical for understanding its framework:
- Appellate Tribunal: Debts Recovery Appellate Tribunal under Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
- Asset Reconstruction: Acquisition by an asset reconstruction company of any bank or financial institution’s rights in a financial asset for the purpose of realisation.
- Bank: Includes scheduled banks, State Bank of India, subsidiary banks, multi-State cooperative banks, and banks specifically notified by the government.
- Board: Refers to the Securities and Exchange Board of India (SEBI).
- Borrower: Any person or pooled investment vehicle that has been granted financial assistance, given a guarantee, or created security for such assistance.
- Central Registry: The registry set up under Section 20 to record securitisation and security interest transactions.
- Debt Recovery Tribunal (DRT): Tribunal for adjudicating claims of banks and financial institutions against defaulting borrowers.
- Default: Non-payment of debt resulting in asset/account being classified as an NPA in lender’s books, or non-payment with notice period for debt securities.
- Financial Assistance: Loans, advances, debentures, bonds, guarantees, or other credit facilities extended by banks/FIs.
- Financial Asset: Debt or receivables, including secured and unsecured claims, mortgages, hypothecation, pledges, and beneficial interests in property.
- Financial Institution: Includes public financial institutions, notified institutions, NBFCs, and others as specified.
- Hypothecation: Charge on movable property created by a borrower in favour of a secured creditor without delivery of possession.
- Non-performing Asset (NPA): Asset classified as sub-standard, doubtful, or loss asset per RBI or relevant authority’s guidelines.
- Originator: Owner of a financial asset acquired by an asset reconstruction company for securitisation/reconstruction.
- Obligor: Person liable to the originator, under a contract or otherwise, to pay a financial asset or discharge an obligation in respect thereof.
- Property: Encompasses immovable and movable property, debts, receivables, and intangible assets (such as patents, trademarks).
- Qualified Institutional Buyer (QIB): Financial institution, insurance company, bank, ARC, mutual fund, or notified body corporate eligible to acquire security receipts.
- Scheme: Invites subscription to security receipts issued under an asset reconstruction scheme.
- Securitization: Acquisition of financial assets from originator by ARC, financed through security receipts representing undivided interest for qualified buyers.
- Security Agreement: Document or arrangement under which a security interest is created in favour of the secured creditor.
- Secured Asset: Property on which a security interest is created, forming collateral for a loan or financial assistance.
- Secured Creditor: Banks, financial institutions, debenture trustees, ARCs, or trustees holding a right/title/interest as security for financial assistance.
- Secured Debt: Debt secured by a security interest.
- Security Interest: Mortgage, charge, hypothecation, assignment, or any right/title/interest in property created in favour of the secured creditor.
- Security Receipt: Receipt issued by ARC to qualified buyers, evidencing their interest in securitised financial assets.
- Sponsor: Holds not less than 10% of the paid-up equity capital of an asset reconstruction company.
Preamble and Legislative Intent
The Act’s preamble affirms its intent to regulate securitisation and reconstruction of financial assets by banks/FIs, enforce security interests, and establish a central database of such interests—in addition to incidental and connected matters.
Institutional and Legal Framework
SARFAESI establishes ARCs and a Central Registry, lays out processes for asset recovery, and provides mechanisms for appeal and redressal, ensuring borrowers’ rights are not neglected. The Act’s framework has proven essential to modern banking and asset recovery practices in India.
This detailed overview equips banking professionals and blog readers with a structured understanding of the SARFAESI Act, 2002—its objectives, constitutional affirmation, and critical statutory definitions vital for compliance and operational clarity.
