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The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover
loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...
s. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act. By virtue of the SARFAESI Act 2002, the Reserve Bank of India has the authority to register and regulate Asset Reconstruction Companies (ARCs). Under this act
secured creditors A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor. In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avo ...
(banks or financial institutions) have many rights for enforcement of
security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the '' collateral'') which enables the creditor to have recourse to the property if the debtor defaults in m ...
under section 13 of SARFAESI Act, 2002. If borrower of financial assistance defaults on repayment of a loan and their account is classified as Non performing Asset by secured creditor, then secured creditor may repossess the security asset before expiry of period of limitation by written notice.


Summary

The law does not apply to
unsecured loan In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the te ...
s, loans below or where remaining debt is below 20% of the original principal. This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their
non-performing asset A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as they reduce profitability. They are ofte ...
s to ARC's. Banks are allowed to take possession of the collateral property and sell it without the permission of a court.


Application of SARFAESI Act 2002

The SARFAESI act applies to the whole of India for the securitisation, reconstruction of financial assets and enforcement of the security interest. The act applies to all the financial institutions established as securitisation companies or asset reconstruction companies registered by the reserve bank of India.


Amendments

The act was amended by "Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016", passed by
Lok Sabha The Lok Sabha, also known as the House of the People, is the lower house of Parliament of India which is Bicameralism, bicameral, where the upper house is Rajya Sabha. Member of Parliament, Lok Sabha, Members of the Lok Sabha are elected by a ...
on 2 August 2016. Act passed by Rajya Sabha by voice vote on 10 August 2016.


Notable verdict


Mardia Chemicals Ltd. v. ICICI Bank

In ''Mardia Chemicals Ltd. v. ICICI Bank'', on 8 April 2004, the
Supreme Court of India The Supreme Court of India is the supreme judiciary of India, judicial authority and the supreme court, highest court of the Republic of India. It is the final Appellate court, court of appeal for all civil and criminal cases in India. It also ...
declared the Sarfaesi Act to be constitutionally valid. The Court said that a borrower may appeal against the lender in the debt recovery tribunal, without having to deposit 75% of the amount of the debt. If the tribunal does not stay the order, the lender may sell the assets. After this law passed, on 27 November 2002,
ICICI Bank ICICI Bank Limited is an Indian multinational bank and financial services company headquartered in Mumbai with a registered office in Vadodara. It offers a wide range of banking and financial services for corporate and retail customers throu ...
took possession of Mardia Chemical plant in Vatva,
Ahmedabad district Ahmedabad (Amdavad) district is a district comprises the city of Ahmedabad, in the central part of the state of Gujarat in western India. It is the seventh most populous district in India (out of 739). Ahmedabad District Surrounded By Kheda dis ...
,
Gujarat Gujarat () is a States of India, state along the Western India, western coast of India. Its coastline of about is the longest in the country, most of which lies on the Kathiawar peninsula. Gujarat is the List of states and union territories ...
. ICICI Bank was owed
crore Crore (; abbreviated cr) denotes the quantity ten million (107) and is equal to 100 lakh in the Indian numbering system. In many international contexts, the decimal quantity is formatted as 10,000,000, but when used in the context of the India ...
, in all it owed crore to 20 lenders.


See also

*
Central Registry of Securitisation Asset Reconstruction and Security Interest Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is a central online security interest registry of India. It was primarily created to check frauds in lending against equitable mortgages, in which p ...


References


Further reading

* {{cite web, title=Guidelines on declaration of Net Asset Value of Security Receipts issued by Securitisation Company/ Reconstruction Company, url=http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=631, publisher=
Reserve Bank of India Reserve Bank of India, abbreviated as RBI, is the central bank of the Republic of India, and regulatory body responsible for regulation of the Indian banking system and Indian rupee, Indian currency. Owned by the Ministry of Finance (India), Min ...
Banking in India Acts of the Parliament of India 2002 Financial history of India