1. Securitisation and Reconstruction of Financial Assets
and
Enforcement of Security Interests
(SARFAESI Act,2002)

2. Introduction
Banks and financial institutions lends money by obtaining
security, except for the category of clean loans. The security
obtained is to act as a protection for the money advanced and
in case of need, the money can be realized by the sale of
securities.
Lender’s right over the securities, both moveable and
immoveable, for the realization of the amount advanced,
were limited and less effective since they were required to
take help of the legal system which was taking unduly long
time to complete prior to passing of the sarfaesi act,2002.

3. The Act is a major step in financial sector reforms.
Securitisation of financial assets
Reconstruction of financial assets
Recognition of any ‘interest’ created in the security
for due repayment of a loan as a ‘security interest’.
Power to enforce such a security for the realization of
money due to banks and financial institutions in the
events of a default, without the intervention of the
courts.
Central registry for the purpose of registration of
transaction of securitisation, reconstruction and the
creation of the security interest.

4. The acts extends to whole of India including the state
of Jammu & Kashmir. It is effective from 21 june, 2002.
The act is applicable also to housing finance
companies.
The provision of the act, relating to enforcement of
the security interest, applies to cases in which security
interests are created for due repayment of financial
assistance.

5. Definitions
Appellate tribunal
any person aggrieved by the order passed by the ‘debt recovery
tribunal’ can file an appeal to the authority called as the ‘appellate
tribunal’.
Constituted by the central government for the various states as per
the provision of the recovery of debts due to banks and financial
institution act,1993.
Asset reconstruction
Takeover of loans or advances from the banks or financial
institutions for the purpose of recovery is called asset reconstruction.

6. All the banking companies, Nationalised bank, the State Bank of
India as well as its subsidiary banks and cooperative banks are within
the meaning of the word ‘bank’ for the purpose of this Act.
The word ‘board’ is used in this act to mean the securities &
exchange board of India.
The borrower means,
 any person, who has been granted financial assistance by any
bank,
 who has given any guarantee,
 who has created any mortgage or pledge as a security for the
financial assistance granted by any bank,
 a person who becomes the borrower of a securitisation.

7. Central registry
The ‘registering office’, set up or caused to be set up
by the central government.
All the transaction of asset securitisation,
reconstruction as well as transactions of creation of
security interests, will have to be registered with the
authority.
First come will be first served.
Debt recovery tribunal
To deal with the cases of recovery of debts above `10
lakhs due to the banks and financial institutions.

8. Default
When the borrower does not pay any principal debt on the principle
debt to the secured creditor(NPA).
For security enforcement, there should be a default committed by
the borrower. The creditor must also be a secured creditor. Any
insecured creditor has no right of any nature in this act.
In mardia chemicals case, bank can classify the account as NPA as
per its decision. the supreme court rejected this argument and stated
that it should be done as per RBI guidelines only.
 whenever a bank grants loan or advances or issues letter of credit ,
it is called as financial assistance.

9. Financial asset
Claim to any debt or receivables whether secured or
insecured,
Any debt secured by mortgage of or change in immoveable
property,
Any right or interest in the security, whether full or part,
securing debt,
Any beneficial interest in any moveable or immoveable
property or in debt, receivables, whether such an interest is
existing, future, accruing, conditional or contingent,
Any financial assistance

10. Financial institution
A public financial institution within the meaning of Companies Act,1956.
Any institution specified by central government under the recovery of debts due
to Bank Act,1958.
The ‘international finance corporation’ established under the international finance
corporation.
Any other institution or NBF company as defined in the RBI Act,1934, which the
central government may specify as a financial institution for the purpose of this Act.
NPA
Asset or a/c of borrower classified by bank as sub-standard, doubtful asset, in
accordance with the direction relating to asset classification issued by the reserve
bank.
It should be done as per the RBI directives.

11. Hypothecation
A charge in
Existing or future
Created by a borrower
In favour of a secured creditor
Before this act, hypothecation was not mentioned anywhere
although it is an very common type of charge on a security for a bank
lending.
Originator
Owner of the financial asset(i.e) acquired by securitisation company
for the purpose of securitisation.
When bank lends money against security, they are the originator.

12. Obligor
Person liable
To pay to the originator, whether under a contract or
otherwise
To discharge any obligation in respect of a financial asset,
whether existing, future, conditional or contingent,
Includes a borrower
Reconstruction company
Company formed for the purpose of asset reconstruction
and registered under the Companies Act,1956.

13. Property
Immoveable property
Moveable property
Any debt or rights to receive payment of money
Receivables, whether existing or future
Intangible assets such as patents rights, trademarks, licence,
franchise.
Property has been much explained in this act. Due to this, now
security interest can be created against these properties for raising
loans from the banks and financial institutions.
Property has been priorly explained in acts such as transfer of
property act, registration act, etc…

14. Qualified institutional buyer
Such buyer means a financial institutions or an insurance
company or a bank or a state financial corporation or state
industrial development corporation, making an investment on
behalf of a mutual fund or provident fund or foreign
institutional investor, registered under the SEBI Act,1992.
Company registered under the companies act, 1956 can’t be
a QIB.
To be a QIB, then the company has to get such a registration
from SEBI.

15. Securitisation
Means acquisition of financial asset by the securitisation or
reconstruction company from the originator. Such an acquisition may
be by raising funds by such a securitisation from the QIB by issue of
security receipts represents undivided interest in the financial assets
Process where non-liquidated financial assets are converted into
marketable securities(sold to investors).
Process of converting the receivables and other assets into
securities(placed in market for trading).
As per guidelines of 29 march,2004, the minimum capital
requirement for securitisation is 2 crore at time of registration and
these companies are required to maintain capital adequacy of 15% of
total asset acquired or 100 crores

16. Scheme
The company can raise funds from QIB by formulating schemes.
Funds so raised are required to be maintained in, separate and
distinct accounts.
Scheme invites subscription to security receipts proposed to be
issued by such a company.
Securitisation company
Company registered under the companies act,1956 for the purpose
of securitisation. The securitisation company also needs a registration
from the rbi.
Can set up separate trusts scheme wise and act as trustee for such
schemes, as provided in securitisation companies and reconstruction
companies guidelines and directions,2003.

17. Security agreement
An agreement, instrument or any other document or arrangement under
which the security interest is created in favour of the secured creditor.
Includes creation of mortgage by deposit of title deeds with the secured
creditors.
Secured asset
Property on which a security interest is created.
If the borrower has any property over which no security interest is created,
such property is outside the purview of enforcement powers under the act.
Security debt
Means debt which is secured by any security interest.

18. Secured creditor
Any bank in whose favour the security interest is created by
the borrower for due repayment is called as secured creditor.
Includes debenture trustee appointed by any bank or
financial institution or reconstruction company.
Also includes, any other trustee holding securities on behalf
of a bank or financial institution.
Sponsor
An entity holding not less than 10% of the paid-up equity
capital of securitisation or reconstruction company.

19. Security interest
Any right, title and interest of any kind whatsoever
upon the property created in favour of any secured
creditor is called as security interest.
Whenever any lender takes any security from the
borrower, the lender gets interest in that security.
The type of interest depends on the nature of charge
created over the security.
Any type of charge has come under one wide scoped
definition, called the security interest.

20. Security receipt
Receipt security issued by a securitisation company
to any qualified institutional buyer pursuant to a
scheme evidencing the purchase by the holder thereof
an undivided right, in the financial asset involved in
securitisation is called as security receipts.
It evidences the purchase’s undivided right, title and
interest in the security. These receipts are transferable
in the market.