This article is written by Jyoti Yadav of Army Institute of Law, an intern under Legal Vidhiya
INTRODUCTION
The Security Interest Act, 2002 which is known as, the “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” (hereinafter referred as the SARFAESI Act). It is applicable to every part of India and it came into force on 21st June, 2002.[1] The SARFAESI Act contains VI Chapters and 42 Sections.
BACKGROUND
- The financial sector has been one of the main drivers in India’s efforts to succeed in the rapid development of its economy.
- While the banking industry in India is increasingly compliant with international regulatory standards and accounting practices, there are certain areas where the banking and financial sector does not compare to other participants in the world’s financial markets on an equal footing.
- There is no statutory provision facilitating the securitization of financial assets held by banks and financial institutions. Also, unlike international banks, Indian banks and financial institutions do not have the authority to take possession and sell securities. Our existing legal framework relating to business transactions has not kept pace with changing business practices and financial sector reforms.
- All this has led to a slow recovery of bad loans and an increase in non-performing assets of the banks and financial institutions.
- The Narasimham I and II Committee and the Andhyarujina Committee, set up by the central government to review banking sector reforms, have examined the need for changes to the legal system in relation to these areas.
- Among other things, these committees have proposed passing a new legislation on securitization and empowering banks and financial institutions to take possession of the securities and sell them without judicial intervention.
- On the basis of these proposals, the Securitisation and Reconstruction of Financial Assets and Enforcement of Secured Transactions Regulations, 2002 were enacted on 21 June 2002 to regulate the securitization and reconstruction of financial assets and the realization of collateral and related or related matters to settle.
- The provisions of Regulation would allow banks and financial institutions to realize long-term assets, manage liquidity problems and asset-liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce assets. for recovery or recovery.
OBJECT OF THE ACT
The object of the Act is to:
- regulate the securitization and reconstruction of financial assets, and
- the exercise of security interests and to provide a central database of security interests created over property rights and related matters.
IMPORTANCE OF THE ACT
- It deals with the regulation and registration of the securitisation or reconstruction of companies by the Reserve Bank of India.
- It facilitates the securitization of financial assets held by banks and financial institutions, with or without the use of the underlying securities.
- It facilitates the simple transfer of financial assets by a securitization or restructuring entity to acquire financial assets from banks and financial institutions through the issuance of bonds or debentures or other bond guarantees.
- It allows securitization or restructuring firms to raise funds by issuing securities receipts to qualified institutional buyers.
- It facilitates the recovery of acquired financial assets through the exercise of executive or managerial powers or other powers to be conferred on banks and financial institutions.
- It provides for the 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 4-A of the Companies Act, 1956.
- It states the definition of “security bonds” of any kind, including mortgages and liens, intended to repay financial concessions granted by a bank or financial institution.
- It authorizes banks and financial institutions to take possession of the securities transferred to to the financial assistance and to sell or lease them or, in the event of default, to take over the administration thereof or to classify the debtor’s account as a risk asset according to instructions or guidelines issued from time to time by the Reserve Bank of India.
- The rights of the secured creditor must be exercised by one or more of its representatives in accordance with the rules laid down by the central administration.
- It provides for a complaint against a bank or financial institution’s claim with the Debt Collections Court and a second complaint with the Collections Court of Appeals.
- It deals with the establishment or establishment by the central government of a central registry to record securitization, asset replenishment and collateralization transactions.
- It applies the proposed rules to banks and financial institutions for the first time; and empowering the central government to extend the application of the proposed rules to non-bank financial firms and other entities.
- It does not the apply the proposed rules to guarantees for agricultural land, loans up to one lakh rupee and cases where eighty percent of the loans are repaid by the borrower.
MODES OF RECOVERY PROVIDED UNDER THE ACT, 2002
The main three methods provided under the SRFAESI, Act are as under:
- Securitisation
It is the process of issuing securities backed by a combination of existing real estate, such as a car loan or home loan. Once an asset has been converted into a security, it can be sold. Funds can only be raised from an asset recovery vehicle or a securitization vehicle through the creation of financial asset acquisition programs.
- Reconstruction of Assets
This aspect of the law authorizes home renovation companies. This can be done by managing the borrower’s business by buying or selling it, or by changing the debt service plan as required by law.
- Enforcement of Security without court interference
The law authorizes financial institutions to subpoena anyone who has received interest from a defaulting borrower to pay the amount owed and to require the borrower to repay the amount owed to the borrower.
LANDMARK JUDGMENTS
- Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd[2]
The Supreme court in this case provided for the scope of the term ‘Bank’ or ‘Banking Company’ which is mentioned in SARFAESI Act, 2002. It includes in it all kinds of cooperative banks and they can be registered under any legislations.[3]
- Central Bank of India v. State of Kerela[4]
The hon’ble court observed that the law is designed to ensure that secured creditors, including banks and financial institutions, have their rates collected from defaulting borrowers without any hindrance and without any court or tribunal intervention.[5]
- Pegasus Assets Reconstruction (P) Ltd. v. Haryana Concast Ltd.[6]
In the instant case the court observed that for the purposes of its promulgation, the SARFAESI Act is a complete code and the preceding clauses enacted in connection with the State Financial Corporations Act, 1951 or the Recovery of Debts Due to Banks and Financial Instituitions Act, 1993. Also the Company Law cannot be considered as fully applicable to the SARFAESI Act.[7]
- SBI v. Santosh Gupta[8]
Essentially, the SARFAESI Act does not deal with “transfer of ownership” [Schedule III, Schedule 6 of the Constitution], but with the recovery of claims from banks and financial institutions and certain actions that can be enforced out of court procedures for enforcing recovery. Entries 45 and 95 of List I of Schedule VII of the Constitution of India give Parliament the exclusive power to legislate in relation to banking and it can be said that the whole of SARFAESI Act refers to such statutes.[9]
- Axis Bank v. SBS Organics (P) Ltd.[10]
The hon’ble court held that the prominent agenda of the present Act is to provide for the fast and simple process of recovery of loans given by various financial institutions including Banks. [11]The court also stated the essence and requirement of the SARFAESI Act in the present world.[12]
- Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd.[13]
The original financer is not subject to the SARFAESI Act when transferring loans, securities, etc., but the transferee is subject to the SARFAESI Act. The SARFAESI Act applies to all debts owed and outstanding at the time the SARFAESI Act became effective and not just to debts incurred after the SARFAESI Act came into effect.[14]
CONCLUSION
The cooperative banks were initially not included in the list of banks to which the SARFAESI law applies. In 2003, an important announcement was made that the People’s Banks were added to the list of banks eligible to apply the SARFAESI Law. Later the Government of India revised this law in 2013 to legally include cooperative banks in the category of institutions that can apply this law.
Subsequently, appeals were filed to challenge the validity of the Opinion and Parliament’s jurisdiction to amend the SARFAESI Act of 2002. Also the Supreme Court ruled on May 5, 2002 in this particular case, siding with the credit unions who had invoked the SARFAESI law.
This provision has significantly helped credit unions to avoid undue delays in recovering problem loans, which are the subject of proceedings before the civil judge and credit union courts. With large deposits from retail investors, the Indian banking system now has 96,248 rural credit unions and 1,544 urban credit unions. Given their size, speedy recovery of outstanding amounts is essential for the proper functioning of cooperative banks.
Therefore, it is a law necessary for the development of the country’s economy, and expanding its scope is a necessary step to further strengthen the financial situation of our country.
REFERENCES
- SCC Online
- Live Law
- Manupatra
[1] S. 1, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
[2] Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd , (2020) 9 SCC 215.
[3] Ibid.
[4] Central Bank of India v. State of Kerela , (2009) 2 SCC (Civ) 17.
[5] Ibid.
[6] Pegasus Assets Reconstruction (P) Ltd. v. Haryana Concast Ltd., (2016) 4 SCC 47.
[7] Ibid.
[8] SBI v. Santosh Gupta , (2017) 2 SCC 538.
[9] Ibid.
[10] Axis Bank v. SBS Organics (P) Ltd ., (2016) 12 SCC 18.
[11] Ibid.
[12] Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311.
[13] Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., (2018) 14 SCC 783.
[14] Ibid.
