SARFAESI Act 2002

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) is an Indian law that allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover loans. This law led to the establishment of India’s first asset reconstruction company (ARC), ARCIL.

Key Provisions

  • Authority and Regulation: Under the SARFAESI Act, the Reserve Bank of India (RBI) has the authority to register and regulate Asset Reconstruction Companies (ARCs).
  • Enforcement Rights: Secured creditors, such as banks or financial institutions, have the right to enforce security interest under section 13 of the SARFAESI Act. If a borrower defaults on loan repayment and their account is classified as a Non-Performing Asset (NPA), the secured creditor can repossess the secured asset through written notice without court intervention.
  • Limitations: The act does not apply to unsecured loans, loans below ₹100,000, or cases where the remaining debt is below 20% of the original principal.

Implementation

  • Asset Reconstruction Companies (ARCs): The SARFAESI Act facilitated the creation of ARCs and allowed banks to sell their NPAs to these companies.
  • Repossession and Sale: Banks are empowered to take possession of collateral property and sell it without requiring court permission.

Geographic and Institutional Scope

  • The SARFAESI Act applies to the entire country and covers all financial institutions established as securitisation companies or ARCs registered by the RBI.

Amendments

  • 2016 Amendment: The act was amended by the “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016.” This amendment was passed by the Lok Sabha on August 2, 2016, and by the Rajya Sabha by voice vote on August 10, 2016.

Landmark Case: Mardia Chemicals Ltd. v. ICICI Bank

  • Supreme Court Ruling: On April 8, 2004, the Supreme Court of India declared the SARFAESI Act to be constitutionally valid in the case of Mardia Chemicals Ltd. v. ICICI Bank. The court ruled that borrowers could appeal against lenders in the debt recovery tribunal without having to deposit 75% of the debt amount.
  • ICICI Bank Case: Following the enactment of this law, ICICI Bank took possession of the Mardia Chemical plant in Vatva, Ahmedabad district, Gujarat, on November 27, 2002. ICICI Bank was owed ₹300 crore out of a total debt of ₹1,450 crore to 20 lenders.

Impact

The SARFAESI Act has significantly strengthened the ability of financial institutions to recover loans and manage NPAs by enabling quicker and more efficient enforcement of security interests.