Firstly, we have to understand the full form the of said act Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest.
allows banks and other financial institutions to auction commercial
or residential property to recover loans which becomes NPA.
Before the Sarfaesi Act, of 2002, if the Bank or Financial institution wants to
recover the loan which become NPA. They can only file a civil suit to recover
the said loan. So, there was a need for reform in the banking sector so the 1ST
was constituted in 1991, which examined the banking
sector reforms and recommended several opinions. Thereafter 2nd Narasimham
was constituted in 1998, and it focused on banking reforms & challenges of the
1st Narashima Committee.
Finally, the central government constituted the ANDHYARUJINA COMMITTEE for the
purpose of examining banking reform and this committee has given recommendations
regarding new legislation for Securitization & empowering banks to gain
possession of securities and sell them.
Scope Of Sarfaesi Act, 2002:
The Act applies to all banks and financial institutions.
But there were cases that dealt with the same.
Whether Sarfaesi Act Regulate Co-Operative Societies Bank Or Not:
In the case of Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari
The Hon'ble Supreme Court held that although co-operative societies fall in the
state list. The co-operative bank's function is the same as of other banks so
the court held that the Act is applicable on co-operative banks.
Important Definition Under Sarfaesi Act, 2002:
Arc (Asset Reconstruction Company):
The term ARC is defined under section 2 (ba) of the Sarfaesi Act,2002. Under
section 2(ba) it means a company registered with a Reserve bank. Under section 3
of the Sarfaesi Act for the purpose of carrying on a business of asset
reconstruction or securitization or both.
Who Is Borrower:
Borrower means any person who has been granted financial assistance by any bank
or by any financial institution or created any kind of mortgage or pledge as
security for such financial assistance is called a borrower. The borrower is
defined under section 2 (f) of the Sarfaesi Act.
What Is Securitization:
The term securitization has been defined under section 2(z) of the Sarfaesi Act,
2002. It means the acquisition of financial assets by an ARC. Then the ARC
raises funds: from acquired financial assets from qualified buyers or by issuing
security receipts representing undivided interest in such financial assets.
What Is Financial Asset:
Financial assets mean Debt or receivable and also include:
- Any Debt by way of mortgage or charge on immovable property.
- Any right or interest in the security whether full or part underlying such debt.
- Any beneficial interest in the property moveable/immovable property.
- Any type of right, title, interest, intangible asset, or property.
Brief Explanation Of Section 13 And 17 Of Sarfaesi Act, 2002
Enforcement Of Security Interest Under Section 13 Sarfaesi Act, 2002:
The enforcement of security interest is dealt with under section 13. This Act
empowers banks and financial institutions to issue notice to individuals who
have obtained secured assets. For paying the due amount & claim to a borrower
(the debtor) to pay the sum due to bank and financial institutions.
According to the provision of section 13 of the Act. If the borrower fails to
discharge his liability within the period of 60 days from the date of Notice,
the secured creditor may take recourse namely:
- Take possession of such assets of the borrower.
- Take over management of the business of the borrower.
Section 17 Of The Sarfaesi Act:
Section 17 of the Sarfaesi Act deals with the Right to Appeal. Section 17 says
that any person including the borrower may file an application before the Debt
Recovery Tribunal (DRT). Aggrieved by any of the measures referred under section
13(4) of the Sarfaesi Act with the application fee of DRT within 45 (days) from
the date on which the measure was taken by the secured creditor.
Then the debt recovery tribunal examines the facts and circumstances of the case
and evidence produced by the parties. After that, the DRT concludes that the
secured creditor may restore or may not restore the assets to the dispute.
In the case of speedy disposal of the application which has not been disposed of
within 4 months then applicants may file an appeal in the Debt Recovery
Appellate Tribunal (DRAT). For speedy disposal of the said matter.
The DRT shall dispose of the case or application in accordance with the
provision of the Recovery of Debt Due to Banks and Financial Institution Act,
1993, and the rules made therein.
In the case of Bank Of Baroda v/s M/S Parasaadilal Tursiram Sheetgrah Pvt.
2022 SCC 671:
The Hon'ble Supreme Court observed that the time limit of 45 days for filing an
application under section 17 of the Sarfaesi Act, 2002 by any person including
the (borrower) Aggrieved by any of the measures referred under section 13(4) of
the Sarfaesi Act, is provided for quick enforcement of security interest.
- Elements Of Banking And Insurance By Jyotsna Sethi Nishwanbhatia.