THE SECURITIZATION AND

RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002

PRESENTED BY-
CHARU PUNDIR
JAYANTI KUMARI
APAR GUAR
SHOMIC GUPTA
ANIL VARMA
VANDANAA BHARTI
INTRODUCTION
GOI has taken several steps to improve the recovery
of bad debts of banks and financial institutions.

First step was the enactment of The Recovery Of

Debts due to Banks And Financial Institutions
Act,1993.

Establishment of 29 Debt Recovery Tribunals(DRTs)

and 5 DRATs , but failed.

Thus introduce Securitization And Reconstruction

Of Financial Assets And Enforcement Of Security
Interest Act,2002.
 SARFAESI ACT, 2002
Act extends to whole of India
Came into force on 21st June 2002
The SARFAESI Act allowed the banks and
financial institutions to take possession of the
collateral security given by the defaulting
borrowers and sell these assets without
having to go through protracted legal
procedures.
Deals with basic 3 aspects:
To provide legal framework for securitization
of asset.
Transfer of NPAs to asset reconstruction
company, which can then dispose off the
WHAT IS SECURITIZATION ???

Securitization is the process of conversion of existing

assets or future cash flows into marketable securities.
For the purpose of distinction, the conversion of
existing assets into marketable securities is known as
asset-backed securitization and the conversion of
future cash flows into marketable securities is known
as future-flows securitization.
 Act is divided into 6 chapters with 42 sections.
Chapter 1:- Applicability of SARFAESI act
definition of various terms
Chapter 2:- Regulations setting up of
securitization and reconstruction companies
Chapter 3:- Enforcement of security interest allied
and incidental matters
Chapter 4:- Establishment of central registry
registration of securitization reconstruction and
security interest transactions
Chapter 5:- Offences, penalties and punishments
Chapter 6:- Routine and legal issues.
Securitization and Asset
Reconstruction
Securitization is to sell the secured NPA
loans to investors through a special
purpose vehicle called securitization
company(SC).

SC formulate a separate scheme for each

set of assets and invites QIBS for
investment in the scheme.

SC realize the financial asset and pays the

proceedings to QIB
Securitizaton Company and Asset Reconstruction
company is to be registered with the RBI.

The purpose of asset reconstruction is

Registration of securitization or reconstruction
companies with RBI.
The effect of non-registration or rejection of
application of such companies.

ARC acquires NPA loan from banks and financial

institutions.

ARC formulates a scheme for each of financial assets

taken over .
 AR involves any one or more of following
measures
Rescheduling of payment of dues payable
by the borrower.
Enforcement of security interest in
accordance with the provisions of the Act.
Settlement of dues payable by the
borrower.
Taking possession of securities.
 ELIGLIBILITY
CRITERIA
FOR
SECURITIZATION COMPANY/
ASSET RECONSTRUCTION
COMPANY
(SECTION 3)
 Obtaining a certificate of registration granted under the
above act.

Owned funds- min 2 crore or max.15% of total financial

assets acquired or to be acquired.

Reserve Bank shall consider the application provided the

company has:
not incurred losses in any 3 preceding F.Ys.
Adequate arrangements for realization of financial assets.
Directors with adequate professional experience in
matters related with finance etc.
Nominee directors number should be equal to or less
than half of the total strength of the directors ,and
 Any of its directors should not been convicted of any
offence involving companys moral.

Sponsor(any person) of the company should not hold

any controlling interest in the company.

It should be compiled with one or more guidelines

issued by the Reserve Bank for the said purpose.

Prior approval of the RBI is necessary for any

substantial change in management or location of the
company.

RBI may reject the application if not satisfied.

Process Of Enforcement under the Act
Debt realization using the Provisions of
SARFAESI Act, 2002
Classify an account as NPA
Bank issues notice under section 13(2)
Borrower can reply to notice under section 13(2) &
place his objections. Bank to deal with these
objections & send a reply.
After this has been done Bank proceeds with
taking possession of the secured asset under
section 13(4).
Borrower can file an appeal against notice & DRT
can pass orders & ask the Bank not to proceed
further.
Debt realization using the Provisions of
SARFAESI Act, 2002
If no restraint from DRT, Bank can proceed
by taking physical possession of the
property & proceed with auctioning the
property
If Bank could auction the property it will
first realize the outstanding dues of the
borrower & then the remaining amount is
given to the borrower.
If the amount realized through auction is
not sufficient to meet the outstanding dues,
then Bank proceeds further against the
borrower.
 ENFORCEMENT OF SECURITY INTEREST
Secured NPA
> than 1 lakh Bank empowered Notice to Borrower
Default amt > than 20% of as secured Sec 60 days time
P&I creditor under the 13(2) Objections
Other than exempted act answered
categories under Sec 31

Rights of BORROWER Sec

13(4)
Appeal to DRAT Right to Appeal DRT
Deposit 50% of debt Within 45 days Enforcement Proceedings
determined by DRT DRT to dispose of Bo Authorized officer
Se rr District Magistrate
Within 30 days of DRT within 60 days c ow
order Max 4 months 17 er Sec 34 bars civil
proceedings

Sale
Possession Demand on
Notice of 30 days Management
Lease Holder of
Reserve Price Takeover
Assignment Security
fixation
Exemptions from Enforcement
Lien
Pledge
Security in Air crafts / Shipping Vessels
Conditional Sale / Lease
Security interest in Agricultural land
Any financial asset:
o Not exceeding Rs. 1 Lakh
o Where amt due is < 20% of Principal Amount & Interst
Outcome of SARFAESI Act

NPA recovery was through

SARFAESI Act
Source: RBI, D&B
Research
 New Amendments in SARFAESI
Allow banks to have priority over tax
authorities for proceeds from sale of assets.

To set up central registry, which will have

all the information regarding mortgages in
the current year, thereby avoiding
duplication of mortgages.
 CASE STUDY
ON
MARDIA CHEMICALS VS. ICICI
BANK
 Introduction
Rs. 1000 crore company

It is a flagship of Mardia group has facilities to

manufacturing a range of products like dyes, dye
intermediates, basic chemicals and caustic soda.

It owed over Rs. 1450 crore (including a principle

of Rs. 800 crores and unpaid interest forming the
balance) to 22 lenders which were BOI, BOB,
Corporation Bank, UBI ,IDBI ,LIC ,IFCI
 Allegations
MC had bought property worth Rs.34cr and
converted them into Co. guesthouse, but
there was no information available on source
of funds, there are allegations of diversion of
funds against the co.

Also the Co. has not been responding to the

notices severed by the Registrar of
Companies, Ahmedabad

A notice was issued to MC by the bank

requiring to pay the amount due indicated in
the notice within 60 days failing which the
 Challenges To The Act
It claimed that any of the banks and FIs have been
vested with arbitrary powers, without any guidelines for
its exercise and also providing any appropriate and
adequate mechanism to decide the disputes relating to
the correctness of the demand, its validity and actual
amount of dues, sought to be recovered from the
borrower

The offending provisions as contained under the act are

such that, it all has been made one sided affair while
enforcing drastic measures of sale of the property or
taking over of the management or the possession of the
secured assets without affording any opportunity to the
borrower
Challenges To The Act
In the year 1999 ICICI filed a suit before the
HC at Mumbai against MC ltd for recovery
of amount totaling Rs 140 cr due from MC

ICICI bank issued a notice under

securitisation act for recoveries of Rs. 293
cr within 60 days of the notice been
delivered and then acquired some assets
from Mardia after which the latter filed a
case against ICICI
 Challenges To The Act
MC appealed to the SC that while the law
permitted the bank to attach assets ,they
may not sell them

DRT of Mumbai issued an order to MC to

pay up 25% of the outstanding amount to
ICICI bank by Oct 21 2003
 Amendments To The Act
Under 2004 Act, a borrower may appeal a
banks action before the DRT w/o making a
75% deposit of the amount claimed. The DRT
is required to dispose of such an application
within 4 months

Any person aggrieved by a DRT order can file

an appeal to the Debt Recovery appellate
Tribunal after depositing 50% of the debt due
from it as claimed by the secured creditor or
determined by the DRT, whichever is less.
FURTURE OUTLOOK
Securitization is expected to become more
popular in the near future in the banking
sector.
Since, blocking too much capital in NPAs
can reduce the capital adequacy of banks
that is why banks go for two options
raise more capital or
to free capital tied up in NPAs and other
loans through securitization.
Banks are expected to sell off a greater
amount of NPAs toARC
Thank you