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SARFAESI ACT on Mon Feb 08, 2010 5:05 pm
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SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITIES INTEREST ACT, 2002
Important definitions
Asset reconstruction means -
• acquisition by any securitization company or reconstruction company
• of any right or interest of any bank or financial institution in any financial assistance
• for the purpose of realization of such financial assistance (Section 2(1)(b)]
Financial Asset means debt or receivables and includes –
• a claim to any debt or receivables or part thereof, whether secured or unsecured or
• any debt or receivables secured by, mortgage of, or charge on, immovable property or
• a mortgage, charge, hypothecation or pledge of movable property or
• any right or interest in the security, whether in full or part underlying such debt or
receivables or
• any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent or
• any financial assistance. [Section 2(1)(l)]
Non-Performing Assets [Section 2(1)(o)] means –
an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset –
a) in case where such bank or FI is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force – in accordance with the directions or guidelines relating to assets classifications issued by such authority or body
b) in any other case – in accordance with the directions or guidelines relating to assets classifications issued by the RBI.
ASSET RECONSTRUCTION COMPANIES
Features and objectives
• ARCs are companies incorporated under the provisions of Companies Act, 1956.
• Their main purpose is reconstruction of assets – mix both the good and bad assets in such a manner as to make them saleable.
• They act as an agent for the bank/FI for the purpose of recovering their dues from the borrowers.
• They act as the receiver of properties of any bank / FI.
• They act as the manager of the borrowers’ assets taken over by the banks/FIs.
• They also carry on such other incidental or ancillary business with prior approval of the Reserve Bank of India.
CLASSIFICATION OF NPAS
NPAs are classified into 3 categories –
Sub-standard assets
Doubtful assets
Loss assets
Registration (Section 3)
1. Every securitization or reconstruction company is required to make an application in the prescribed form and manner to the Reserve Bank of India
2. Securitization or Reconstruction Company cannot commence or carry on securitization or reconstruction business without –
a) obtaining a certificate of registration and
b) having a net owned fund of not less than Rs.2 Crores or such other amount not exceeding 15% of the total financial assets acquired or to be acquired by such company
3. The RBI may notify, from time to time, different amounts of net owned fund for different class or classes of securitization / reconstruction companies.
4. Existing SRCs are required to make an application to the RBI within 6 months from the commencement of business as such and carry on such business until a certificate of registration is granted or until application for grant of registration is rejected, as the case may be.
5. The following conditions must be fulfilled or satisfied for issue of registration certificate by the RBI:
a) The SRC should not have incurred losses in any of the 3 preceding financial years
b) It has made adequate financial arrangements for realization of financial assets acquired for securitization / reconstruction and shall be able to pay periodical returns and redeem on the respective due dates the investments made by the QIBs or any other persons in the company.
c) The directors of the SRC have adequate professional experience in matters relating to finance, securitization and reconstruction.
d) The BoD is not comprised of more than half of its total strength, directors who are either nominees of any sponsor or associated in any manner with the sponsor or any of its subsidiaries.
e) None of its directors should be convicted of any offence involving moral turpitude.
f) The sponsor is neither a holding company of the SRC nor does it have any controlling interest in the SRC
g) The SRC has complied with or is in a position to comply with the prudential norms specified by the RBI.
h) The SRC has complied with one or more conditions specified in the RBI guidelines for the said purpose.
6. On being satisfied of fulfillment of prescribed conditions, the RBI may grant a certificate of registration to such SRC. Additional conditions may also be imposed by the RBI, if it deems fit.
7. Before rejecting an application, the applicant shall be given a reasonable opportunity to be heard and the reasons for rejection shall be communicated to the applicant.
SECURITISATION
“Securitisation” means
• Acquisition of financial assets by any securitisation company or reconstruction company from any originator
• Whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers, by issue of security receipts representing undivided interest in such financial assets or otherwise.
[Section 2(1)(z)]
It is the process by which the originators of assets transfer the assets to a special purpose vehicle (SPV) which, in turn, issue tradeable liquid securities to the investors.
Securitisation has two objectives:-
1) The securitized assets go off the originators’ balance sheet and the assets base is brought down to that extent – This reduces the regulatory capital requirements to support the assets.
2) The asset portfolio is liquidated, releasing cash – this reduces the need for demand and time liabilities that are subject to statutory reserves.
Measures for asset reconstruction (Section 9)
1. Proper management of the business of the borrower, either by takeover of, or by a change in, the management of the business of the borrower.
2. The sale or lease of whole or part of the borrower’s business
3. Rescheduling of payment of debts payable by the borrower.
4. Enforcement of security interest in accordance with the provisions of this Act.
5. Settlement of dues payable by the borrower.
6. Taking possession of secured assets in accordance with the provisions of this Act.
Enforcement of security interest by a creditor (Section 13)
A creditor can enforce his interest in a security under the provisions of Section 13 on default in repayment of installments -
a) without intervention of the court and
b) non-compliance with the notice of 60 days after the declaration of the loan as a non-performing asset.
The classification of an asset as a NPA should be in accordance with the guidelines and prudential norms issued by the RBI.
The secured creditor has two options –
a) Transfer the assets to a securitisation or reconstruction company or
b) Exercise powers under the provisions of SARFAESI Act, 2002.
The following measures are available, after giving proper notice, for the recovery of the secured debts viz.-
a) Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.
b) Take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.
c) Appoint any person to manage the secured assets which are taken in possession by the secured creditor,
d) Require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom money is due or may become due to the borrower, to pay the secured creditor, such sum as may be sufficient to satisfy the secured debt.
In case of joint financing under consortium or multiple lending arrangements, if 75% of the secured creditors in value agree to the recovery action, the same is binding on all secured creditors.
In case of a company under liquidation, the secured creditors’ claims shall be satisfied in accordance with the provisions of Section 529A of the Companies Act, 1956.
The secured creditor, who opts to realize his security instead of relinquishing the security and proving the debt in accordance with S.529 of the Companies Act, 1956, can retain the sale proceeds of the secured assets after depositing the workmen’s dues with the liquidator in accordance with the provisions of Section 529A of the Companies act, 1956.
Important definitions
Asset reconstruction means -
• acquisition by any securitization company or reconstruction company
• of any right or interest of any bank or financial institution in any financial assistance
• for the purpose of realization of such financial assistance (Section 2(1)(b)]
Financial Asset means debt or receivables and includes –
• a claim to any debt or receivables or part thereof, whether secured or unsecured or
• any debt or receivables secured by, mortgage of, or charge on, immovable property or
• a mortgage, charge, hypothecation or pledge of movable property or
• any right or interest in the security, whether in full or part underlying such debt or
receivables or
• any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent or
• any financial assistance. [Section 2(1)(l)]
Non-Performing Assets [Section 2(1)(o)] means –
an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset –
a) in case where such bank or FI is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force – in accordance with the directions or guidelines relating to assets classifications issued by such authority or body
b) in any other case – in accordance with the directions or guidelines relating to assets classifications issued by the RBI.
ASSET RECONSTRUCTION COMPANIES
Features and objectives
• ARCs are companies incorporated under the provisions of Companies Act, 1956.
• Their main purpose is reconstruction of assets – mix both the good and bad assets in such a manner as to make them saleable.
• They act as an agent for the bank/FI for the purpose of recovering their dues from the borrowers.
• They act as the receiver of properties of any bank / FI.
• They act as the manager of the borrowers’ assets taken over by the banks/FIs.
• They also carry on such other incidental or ancillary business with prior approval of the Reserve Bank of India.
CLASSIFICATION OF NPAS
NPAs are classified into 3 categories –
Sub-standard assets
Doubtful assets
Loss assets
Registration (Section 3)
1. Every securitization or reconstruction company is required to make an application in the prescribed form and manner to the Reserve Bank of India
2. Securitization or Reconstruction Company cannot commence or carry on securitization or reconstruction business without –
a) obtaining a certificate of registration and
b) having a net owned fund of not less than Rs.2 Crores or such other amount not exceeding 15% of the total financial assets acquired or to be acquired by such company
3. The RBI may notify, from time to time, different amounts of net owned fund for different class or classes of securitization / reconstruction companies.
4. Existing SRCs are required to make an application to the RBI within 6 months from the commencement of business as such and carry on such business until a certificate of registration is granted or until application for grant of registration is rejected, as the case may be.
5. The following conditions must be fulfilled or satisfied for issue of registration certificate by the RBI:
a) The SRC should not have incurred losses in any of the 3 preceding financial years
b) It has made adequate financial arrangements for realization of financial assets acquired for securitization / reconstruction and shall be able to pay periodical returns and redeem on the respective due dates the investments made by the QIBs or any other persons in the company.
c) The directors of the SRC have adequate professional experience in matters relating to finance, securitization and reconstruction.
d) The BoD is not comprised of more than half of its total strength, directors who are either nominees of any sponsor or associated in any manner with the sponsor or any of its subsidiaries.
e) None of its directors should be convicted of any offence involving moral turpitude.
f) The sponsor is neither a holding company of the SRC nor does it have any controlling interest in the SRC
g) The SRC has complied with or is in a position to comply with the prudential norms specified by the RBI.
h) The SRC has complied with one or more conditions specified in the RBI guidelines for the said purpose.
6. On being satisfied of fulfillment of prescribed conditions, the RBI may grant a certificate of registration to such SRC. Additional conditions may also be imposed by the RBI, if it deems fit.
7. Before rejecting an application, the applicant shall be given a reasonable opportunity to be heard and the reasons for rejection shall be communicated to the applicant.
SECURITISATION
“Securitisation” means
• Acquisition of financial assets by any securitisation company or reconstruction company from any originator
• Whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers, by issue of security receipts representing undivided interest in such financial assets or otherwise.
[Section 2(1)(z)]
It is the process by which the originators of assets transfer the assets to a special purpose vehicle (SPV) which, in turn, issue tradeable liquid securities to the investors.
Securitisation has two objectives:-
1) The securitized assets go off the originators’ balance sheet and the assets base is brought down to that extent – This reduces the regulatory capital requirements to support the assets.
2) The asset portfolio is liquidated, releasing cash – this reduces the need for demand and time liabilities that are subject to statutory reserves.
Measures for asset reconstruction (Section 9)
1. Proper management of the business of the borrower, either by takeover of, or by a change in, the management of the business of the borrower.
2. The sale or lease of whole or part of the borrower’s business
3. Rescheduling of payment of debts payable by the borrower.
4. Enforcement of security interest in accordance with the provisions of this Act.
5. Settlement of dues payable by the borrower.
6. Taking possession of secured assets in accordance with the provisions of this Act.
Enforcement of security interest by a creditor (Section 13)
A creditor can enforce his interest in a security under the provisions of Section 13 on default in repayment of installments -
a) without intervention of the court and
b) non-compliance with the notice of 60 days after the declaration of the loan as a non-performing asset.
The classification of an asset as a NPA should be in accordance with the guidelines and prudential norms issued by the RBI.
The secured creditor has two options –
a) Transfer the assets to a securitisation or reconstruction company or
b) Exercise powers under the provisions of SARFAESI Act, 2002.
The following measures are available, after giving proper notice, for the recovery of the secured debts viz.-
a) Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.
b) Take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.
c) Appoint any person to manage the secured assets which are taken in possession by the secured creditor,
d) Require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom money is due or may become due to the borrower, to pay the secured creditor, such sum as may be sufficient to satisfy the secured debt.
In case of joint financing under consortium or multiple lending arrangements, if 75% of the secured creditors in value agree to the recovery action, the same is binding on all secured creditors.
In case of a company under liquidation, the secured creditors’ claims shall be satisfied in accordance with the provisions of Section 529A of the Companies Act, 1956.
The secured creditor, who opts to realize his security instead of relinquishing the security and proving the debt in accordance with S.529 of the Companies Act, 1956, can retain the sale proceeds of the secured assets after depositing the workmen’s dues with the liquidator in accordance with the provisions of Section 529A of the Companies act, 1956.
