Securitization and Reconstruction of Financial Assets

The Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest (SARFAESI) Act, 2002, empowers banks and financial institutions in India to
effectively manage and recover non-performing assets (NPAs) without the lengthy court
processes. This legislation facilitates the conversion of defaulted loans into marketable
securities, which can then be sold to recover outstanding dues.
The act also provides lenders with the authority to reconstruct or manage the distressed
assets, including rescheduling payment terms or selling parts of the asset.

The SARFAESI ACT was formed in Dec.’ 2002 based on the recommendations of a) the
Committee on Banking Sector Reforms (Narasimham Committee Report II) and b) the
Restructuring of Weak Public Sector Banks (Verma Committee).

#Objectives of SARFAESI Act, 2002

The following are some of the main goals of the SARFAESI Act of 2002:

●​ Giving banks and financing companies a way to get their money back from

secured assets

●​ Enabling banks to sell off residential or business properties at auction in the

event that borrowers are unable to make their obligations

●​ Reducing the time and expense required to reclaim secured assets

●​ Defending the rights of borrowers and depositors

●​ Encouraging economic stability

#What is SARFAESI Act, 2002?

The SARFAESI Act stands for the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act. It is a legal framework enacted by

the Indian government to tackle non-performing assets (NPAs) and facilitate asset

reconstruction. The act empowers banks and financial institutions to take action

against defaulting borrowers and recover their dues. Under the SARFAESI Act,

banks can enforce their security interests by seizing and selling the collateral without
court intervention. The act provides a quicker and more efficient process for

resolving bad loans and reducing the burden on the banking system. It has played a

significant role in strengthening the financial sector and improving debt recovery in

India.

#Constitutional Validity of SARFAESI Act -

The Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest (SARFAESI) Act, 2002, despite its aim to streamline the recovery
of Non-Performing Assets (NPAs), has faced several challenges to its constitutional
validity. These challenges primarily revolved around allegations of violating
fundamental rights guaranteed under the Constitution of India. However, the
Supreme Court of India has largely upheld the Act's validity in various landmark
judgments.

The constitutional validity of the SARFAESI Act was challenged on several grounds,
including:

1.​ Violation of Article 14 (Equality before Law): Petitioners argued that the
Act created an unreasonable classification between secured and unsecured
creditors, granting excessive powers to the former without adequate
safeguards for borrowers. It was also contended that the Act treated different
types of borrowers and financial institutions unequally.
2.​ Violation of Article 19(1)(g) (Freedom to Practice any Profession, or to
Carry on any Occupation, Trade or Business): Borrowers contended that
the stringent provisions of the Act, allowing for the taking over and sale of
assets without court intervention, severely impacted their right to carry on their
business or profession.
3.​ Violation of Article 21 (Protection of Life and Personal Liberty): It was
argued that the Act's provisions could lead to the deprivation of property,
which is closely linked to the right to livelihood, without a fair and just
procedure, thus violating Article 21.
4.​ Encroachment on the Judicial Power: A significant challenge was that the
Act allowed secured creditors to take coercive actions without prior
adjudication by a court, thus allegedly encroaching upon the judicial powers
vested in the courts.

The Supreme Court has addressed these challenges in several key judgments,
firmly establishing the constitutional validity of the SARFAESI Act, albeit with some
clarifications and modifications. The most significant case in this regard is Mardia
Chemicals Ltd. & Ors. vs. Union of India & Ors. (2004) 4 SCC 311.
The Supreme Court upheld the constitutional validity of the SARFAESI Act,
recognizing its objective to provide a speedy recovery mechanism for
Non-Performing Assets (NPAs) and ensure the financial stability of the country.
However, the Court struck down Section 17(2) of the Act, which mandated a
pre-deposit of 75% of the claimed amount before an appeal could be filed with the
Debt Recovery Tribunal (DRT).

United Bank of India vs. Satyawati Tondon & Ors. (2010) 8 SCC 110: The Court
reiterated the object and purpose of the SARFAESI Act for speedy recovery and held
that High Courts should be circumspect in entertaining writ petitions against actions
taken under the Act, directing borrowers to avail the alternative remedy available
under Section 17 of the Act before the DRT.

Transcore vs. Union of India & Anr. (2008) 1 SCC 125: The Court held that the
SARFAESI Act and the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993 (RDDB Act) are complementary to each other and provide alternative
remedies for debt recovery.

#Regulation of Securitisation and Reconstruction

Chapter II (Sections 3 to 12A) of the SARFAESI Act deals with the regulation of
securitisation and reconstruction of financial assets. This chapter outlines the legal
framework for the establishment and operation of Asset Reconstruction Companies
(ARCs) and the rules governing their activities.

Section 3: Registration of Asset Reconstruction Companies:

Mandatory Registration: This is a cornerstone of the regulatory framework. No

entity can function as an ARC in India without obtaining a registration certificate from
the Reserve Bank of India (RBI). This requirement ensures that only entities meeting
certain standards can operate in this space, protecting the integrity of the financial
system.

RBI's Registration Criteria: The RBI's criteria for granting registration are designed
to ensure that ARCs are financially sound and professionally managed. These
criteria include:

●​ Adequate Capital Structure: ARCs must have a minimum level of capital to

ensure they can absorb potential losses and operate sustainably. The RBI
specifies the required Net Owned Funds (NOF).
●​ Sound Business Policies: The RBI assesses the applicant's proposed
business plan, including its policies for asset acquisition, valuation, and
resolution. This ensures that the ARC will operate in a prudent and
responsible manner.
 ●​ Arrangements for Asset Realization: The ARC must demonstrate that it has
the expertise and resources to effectively manage and dispose of acquired
assets. This includes having systems in place for valuation, marketing, and
sale of assets.
●​ Directors' Professional Experience: The directors of the ARC must have
relevant experience in finance, banking, or asset management. This ensures
that the ARC is managed by competent professionals.
●​ Absence of Convictions for Moral Turpitude: This is a standard
requirement to ensure the integrity of those managing ARCs.

RBI's Inspection Powers: To ensure ongoing compliance, the RBI is empowered to

inspect the books of accounts, records, and other documents of ARCs. This allows
the RBI to monitor their operations and take corrective action if necessary.

Section 4: Cancellation of Registration:

●​ Grounds for Cancellation: The RBI has the authority to cancel an ARC's
registration certificate under specific circumstances, including:
○​ Cessation of Business: If an ARC voluntarily ceases its operations,
the RBI can cancel its registration.
○​ Non-compliance: This covers a broad range of violations, including
failure to adhere to the conditions of registration, non-compliance with
RBI directives, and violations of the SARFAESI Act itself.
○​ Conduct Detrimental to Public Interest: This is a broad clause that
allows the RBI to take action against ARCs whose activities are
deemed harmful to the financial system or the interests of
stakeholders.
○​ Failure to Maintain Net Owned Funds (NOF): This is a critical
requirement. If an ARC's NOF falls below the minimum level prescribed
by the RBI, its registration can be cancelled.
●​ Opportunity to be Heard: A key principle of natural justice is enshrined in
this section. The RBI must give the ARC an opportunity to present its case
before cancelling its registration. This ensures fairness and prevents arbitrary
action.

Section 5: Acquisition of Rights or Interest in Financial Assets:

●​ Acquisition of NPAs: This section is crucial to the functioning of ARCs. It

empowers them to acquire non-performing assets (NPAs) from banks and
financial institutions. This acquisition is the first step in the asset
reconstruction process.
●​ Mechanism of Acquisition: The most common method of acquisition is
through assignment. This involves the bank or financial institution transferring
 its rights and interest in the NPA to the ARC. The terms of the assignment are
governed by a legal agreement between the parties.

Section 7: Issue of Security Receipts:

●​ Fund Raising: ARCs need funds to finance their acquisition of NPAs. This
section allows them to raise these funds by issuing security receipts (SRs) to
qualified institutional buyers (QIBs).
●​ Nature of Security Receipts: SRs are essentially financial instruments that
represent an undivided interest in the acquired financial assets. Investors who
subscribe to SRs share in the risks and rewards associated with the recovery
of those assets.
●​ Qualified Institutional Buyers (QIBs): SRs can only be issued to QIBs,
which are sophisticated investors such as mutual funds, pension funds, and
insurance companies. This restriction is intended to protect the interests of
less sophisticated investors.

Section 12: Power of Reserve Bank to Determine Policy and Issue Directions:

●​ RBI's Broad Powers: This section grants the RBI extensive powers to
regulate the functioning of ARCs. These powers are essential for ensuring the
stability and soundness of the asset reconstruction industry.
●​ Specific Powers: The RBI can:
○​ Determine the policies governing the acquisition, reconstruction, and
management of financial assets by ARCs.
○​ Issue directions to ARCs on various matters, including the fees they
can charge, the expenses they can incur, and the interest rates they
can offer on SRs.
○​ Specify the manner in which ARCs should disclose information to
investors and the public

Sections 12A and 12B:

●​ Enhanced Supervision: These sections further strengthen the RBI's

supervisory powers by enabling it to:
○​ Call for statements and information from ARCs.
○​ Conduct audits and inspections of ARCs.
○​ These powers enable the RBI to proactively monitor the activities of
ARCs and take timely action to address any concerns.
○​

Measures for Asset Reconstruction

Section 9 of the SARFAESI Act outlines the various measures that an ARC can take
for the purpose of asset reconstruction. These measures provide ARCs with a range
of options for dealing with distressed assets, allowing them to choose the most
appropriate strategy depending on the specific circumstances of each case.

Measures

Section 9(a): Proper management of the borrower's business, including changes in

or takeover of management.

Section 9(b): Sale or lease of part or whole of the borrower's business. This allows
ARCs to dispose of the borrower's assets to generate funds for repayment of the
debt.

Section 9(c): Rescheduling of debt payments. This involves restructuring the loan
terms to make them more manageable for the borrower.

Section 9(d): Enforcement of security interest (as per the Act). This is a key remedy
that allows ARCs to take possession and sell the secured assets.

Section 9(e): Settlement of dues. This enables ARCs to negotiate settlements with
borrowers, often involving a reduction in the total amount owed.

Section 9(f): Taking possession of secured assets.

Section 9(g): Conversion of debt into shares of the borrower company. This allows
ARCs to become equity holders in the borrower company.

ENFORCEMENT OF SECURITY INTEREST

SARFAESI empowers the banks to confiscate the property of the defaulting

borrowers by issuing notice to the defaulters. Section 13 of the SARFAESI act deals
with the regulations of the enforcement of security interests.

Section 13(1) clearly states to give secured creditors the power to enforce security
interests and recover dues from borrowers who default without court intervention.

Demand Notice (Section 13(2)) - A prior notice has to be issued to the borrower to
discharge his function within the period of sixty days.The notice must specify the
amount due, the secured assets involved, and the intention of the secured creditor to
exercise their rights under Section 13(4) if the borrower fails to repay.

Section 13(3) - pursuant to the case of Mardia Chemicals v. Union of India sec.
13(3)A) was added, which states, If, on receipt of the notice under sub-section (2),
the borrower makes any representation or raises any objection, the secured creditor
shall consider such representation or objection, and if the secured creditor comes to
the conclusion that such representation or objection is not acceptable or tenable, he
shall communicate [within fifteen days] .

Measures after Failure to Repay (Section 13(4) - If the borrower fails to

discharge their liability within the 60-day notice period, the secured creditor can take
one or more of the following measures:

Take Possession of Secured Assets (Section 13(4)(a)): The secured creditor can
take physical or symbolic possession of the secured assets.

Manage the Secured Assets (Section 13(4)(b)): This includes the right to lease,
assign, or sell the secured assets.

Appoint a Manager (Section 13(4)(c)): The secured creditor can appoint a manager
to manage the secured assets.

Issue Notice to Debtors of the Borrower (Section 13(4)(d)): The secured creditor can
require any person who has acquired secured assets from the borrower or owes
money to the borrower to pay the secured creditor directly.

Assistance of Chief Metropolitan Magistrate or District Magistrate (Section 14):

●​ If the secured creditor faces resistance in taking possession of the secured

assets, they can apply to the Chief Metropolitan Magistrate (CMM) or the
District Magistrate (DM) within whose jurisdiction the secured asset is
situated.
●​ The CMM or DM, after being satisfied with the application and the documents
furnished, may take possession of the secured asset and forward it to the
secured creditor. They can also use necessary force for this purpose.
●​ Case Law: Harshad Govardhan Sondagar v. International Assets
Reconstruction Co. Ltd. [(2014) 6 SCC 1]: This case clarified that the role of
the CMM/DM under Section 14 is ministerial and not adjudicatory. They are
required to assist the secured creditor in obtaining possession, and cannot
delve into the merits of the borrower's case or the legality of the secured
creditor's actions (which is the domain of the DRT under Section 17).

Manner and Effect of Take Over of Management (Section 15):

●​ When the secured creditor takes over the management of the business of the
borrower under Section 13(4)(b), they have the power to carry on the
business or appoint a manager to do so.
●​ The secured creditor is not liable for any contracts entered into by the
borrower before the date of taking over management.
 ●​ This provision outlines the operational aspects when the secured creditor
chooses to manage the borrower's business as a means of recovering dues.

Recourse to Debts Recovery Tribunal (DRT) (Section 17):

●​ Any person (including the borrower) aggrieved by any of the measures taken
by the secured creditor under Section 13(4) can make an application to the
Debts Recovery Tribunal (DRT) having jurisdiction within 45 days from the
date on which such measure was taken.
●​
●​ The DRT examines whether the measures taken by the secured creditor are
in accordance with the provisions of the SARFAESI Act and the rules made
thereunder.

Jurisdiction of Civil Courts:

Section 34 of the SARFAESI Act specifically bars civil courts from entertaining any
suit or proceeding in respect of matters which a Debts Recovery Tribunal or an
Appellate Tribunal is empowered to determine. However, the bar is not absolute. As
clarified in Central Bank of India v. Smt. Prabha Jain & Ors. [2025 INSC 95], civil
courts retain jurisdiction to examine the validity of the underlying documents or
determine questions of title, which fall outside the purview of the DRT under Section
17

CENTRAL REGISTRY
CH – 4 {sec 20–26(A)}

The Central Registry under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act, 2002, is a pivotal institution
established to bring transparency and prevent fraudulent practices in secured
lending.

Objectives and Functions:

●​ Preventing Fraud: The primary goal of CERSAI is to curb fraudulent

activities in lending, particularly those involving equitable mortgages where
borrowers would take multiple loans against the same property from different
banks. Before CERSAI, the details of a property's encumbrances were mainly
 with the borrower and the individual lenders, leading to instances of multiple
financing on the same asset using counterfeit or duplicated title deeds.
●​ Centralized Database: CERSAI maintains a central registry of mortgages
and other security interests, providing a consolidated view of encumbrances
on a property. This allows lenders to verify if a security interest has already
been created on a property before sanctioning a loan.
●​ Transparency for Buyers: Genuine property buyers can also access
CERSAI to check if the property they are interested in has any existing
liabilities.
●​ Information Repository: The registry contains crucial information about the
loan or mortgage, the lender, and the borrower.
●​ Facilitating Enforcement: Registration with CERSAI is essential for secured
creditors to exercise their right to enforce security interests under the
SARFAESI Act.

Section 20: Central Registry

(1) Establishment by Central Government: Section 20(1) empowers the Central

Government to establish or cause the establishment of a registry known as the
Central Registry through an official notification. This registry is mandated to have its
own seal and is created for the purpose of registering transactions related to:

* Securitization of financial assets.

* Reconstruction of financial assets.
* Creation of security interests on property rights.

(2) Head Office and Branch Offices: Section 20(2) states that the head office of the
Central Registry will be at a location specified by the Central Government. To
facilitate the registration of transactions, the central government is also authorized to
establish branch offices at other locations as deemed necessary. Currently, the head
office of CERSAI is in New Delhi.

(3) Territorial Limits: As per Section 20(3), the Central Government can, through
notification, define the territorial limits within which an office of the Central Registry
can exercise its functions. This allows for a structured and geographically defined
operational scope for the registry's offices, although the online nature of the registry
allows for nationwide access.

(4) Non-derogation of Other Laws: A crucial aspect highlighted in Section 20(4) is

that the provisions pertaining to the Central Registry under the SARFAESI Act are in
addition to and not in derogation of any provisions contained in other laws such as: *
The Registration Act, 1908.
 * The Companies Act, 1956 (now the Companies Act, 2013).
* The Merchant Shipping Act, 1958.
* The Patents Act, 1970.
* The Motor Vehicles Act, 1988.
* Any other law for the time being in force regarding the registration of charges.

Registration Process (in relation to the Central Registry):

While Section 20 outlines the establishment of the registry, the specifics of the
registration process are detailed in the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (Central Registry) Rules, 2011, and the
operational guidelines issued by CERSAI. Key aspects include:

●​ Mandatory Registration: Lenders (banks, financial institutions, etc.) are

required to register the creation, modification, and satisfaction of security
interests with CERSAI within 30 days of the transaction.
●​ Online Platform: The registration process is primarily conducted online
through CERSAI's official web portal.
●​ Digital Signature Certificate (DSC): Entities need a valid Class III Digital
Signature Certificate (DSC) to access the CERSAI portal and perform
registration activities.
●​ Form Submission: Prescribed electronic forms need to be filled with details
of the security interest, the parties involved (lender, borrower), and the
property. These forms often require uploading supporting documents. For
instance, Form I is used for the creation or modification of a charge on
immovable property, and Form II is for the satisfaction of a security interest.
●​ Fee Payment: Fees are applicable for the registration of security interests
and for searching the records maintained by CERSAI. The fee structure varies
based on the loan amount and the type of transaction. There is usually no fee
for the satisfaction of a registered security interest.
●​ Unique Registration Number: Upon successful registration, a unique
registration number is generated, which serves as a reference for future
transactions or searches related to that security interest.

(EXTRA CONTENT )

Section 21: Central Registrar

(1) Appointment: Section 21(1) empowers the Central Government to appoint a

Central Registrar for the Central Registry. This individual is responsible for the
overall control and management of the registry's operations.
(2) Functions and Powers: Section 21(2) states that the Central Registrar will
perform the functions and exercise the powers conferred upon them by or under the
SARFAESI Act. This includes overseeing the registration process, maintaining the
records, allowing for inspection of records, and other administrative duties necessary
for the efficient operation of the Central Registry.

(3) Officers and Servants: Section 21(3) allows the Central Registrar to appoint
such number of officers and other employees as deemed necessary for the
discharge of their functions under the Act, with the approval of the Central
Government. These personnel assist the Central Registrar in managing the
day-to-day activities of the registry.

Section 22: Register of Securitisation, Reconstruction and Security

Interest Transactions

(1) Maintenance of Central Register: Section 22(1) mandates that a record called
the Central Register shall be kept at the head office of the Central Registry. This
register will contain the particulars of transactions relating to: * Securitisation of
financial assets. * Reconstruction of financial assets. * Creation of security interest.

(2) Electronic Maintenance: Section 22(2) allows the Central Registrar to maintain
the records wholly or partly in computer, floppies, diskettes, or any other electronic
form, subject to prescribed safeguards. This provision acknowledges the need for a
modern, digitalized system for efficient record-keeping.

(3) Electronic Record as Reference: Section 22(3) clarifies that where the register
is maintained electronically, any reference in the SARFAESI Act to an entry in the
Central Register shall be construed as a reference to the entry as maintained in the
electronic form. This ensures the legal validity of electronic records.

(4) Control and Management: Section 22(4) reiterates that the Central Register
shall be kept under the control and management of the Central Registrar.

Section 23: Filing of Transactions of Securitisation, Reconstruction and

Creation of Security Interest

(1) Obligation to File: Section 23(1) states that the particulars of every transaction
of securitisation, asset reconstruction, or creation of security interest shall be filed
with the Central Registrar in the prescribed manner and on payment of the specified
fee. The timeline for filing, initially 30 days, was removed by the Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Act, 2016, giving the
Central Government the power to prescribe the period by notification.

(2) Registration of Different Security Interests: Section 23(2), inserted by the

2016 Amendment Act, empowers the Central Government to require the registration
of transactions relating to different types of security interest created on different kinds
of property with the Central Registry through notification. This allows for a phased
expansion of the registry's scope.

(3) Prescribing Forms and Fees: Section 23(3), also inserted by the 2016
Amendment Act, authorizes the Central Government to prescribe forms for
registration for different types of security interest and the fees to be charged for such
registration through rules. This provides the framework for the operational aspects of
registration.

Section 24: Duty to Furnish Information

Section 24 imposes a duty on any securitisation company, reconstruction company,

or secured creditor to furnish to the Central Registrar such particulars or information
as the Central Registrar may, by notice in writing, require for the purpose of enabling
them to discharge their functions under the Act. This ensures that the Central
Registry has access to all necessary information.

Section 26: Right to Inspect Records

(1) Public Inspection: Section 26(1) grants any person the right to inspect the
particulars of transactions kept in the Central Register upon payment of the
prescribed fee. This ensures public access to information about security interests.

(2) Inspection of Electronic Register: Section 26(2) specifies that the Central
Register maintained in electronic form shall be open for inspection to any person in
the manner and on payment of such fee as may be prescribed. This acknowledges
the digital nature of the registry.

Section 26A: Rectification by Central Government in Matters of Registration,

Modification and Satisfaction, etc.

This section, inserted by the 2016 Amendment Act, empowers the Central
Government to order the Central Registrar to rectify any omission or defect in the
register or in any document filed with the registry, or to extend the time for filing
particulars or for intimating satisfaction. This provides a mechanism for correcting
errors and addressing procedural issues.

OFFENCES AND PENALITIES