INDUS G&D LAW, ADVOCATES.

Broad Overview of the SARFAESI Act

1. General. Broadly speaking the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (the Act) makes provisions, amongst other
things, for protection of lenders rights. Chapter III of the Act, which deals with enforcement
of Security Interests, provides Secured Creditors with the right to have direct recourse to
assets of borrowers, in relation to loans that have become non-performing assets, without
having to approach the courts or the Debt Recovery Tribunal for redress.
2. Categorisation. The provisions of the Act are available for the benefit of Secured Creditors
as defined under the Act i.e. it must be a bank, a financial institution (FI), a group of
banks/FIs, a debenture trustee appointed by a bank/FI or a Securitisation or Reconstruction
Company registered under the Act (Notified Entity). All Notified Entities are categorised as
Secured Creditors. In order to be recognised as a Notified Entity, the company must register
with the RBI. Under the Act, FIs are defined to mean
a. Public financial institutions in India as defined under S.4A of the Companies
Act.
b. Institutions notified as financial institutions for the purpose of the Recovery of
Debts due to Banks and Financial Institutions Act, 1993.
c. The International Finance Corporation;
d. Other institutions/NBFCs that may be notified by the Central Government as
financial institutions for the purpose of the Act.
3. Rights of Secured Creditors. All Secured Creditors have the following rights (Special
Rights) in relation to the borrower and / or its assets:
(a)
(b)
(c)
(d)

Taking over of the business of the Borrower.

Sale/Lease of business of the Borrower.
Enforce security interests
Take possession of secured assets.

4. Pre-conditions. The pre-conditions for the exercise of Special Rights are as follows:
(a) The borrower must have created a mortgage / security interest in respect of some or all of
their assets in favour of the lender. A security interest has been defined in broad, generic
terms to mean any right, title or interest of any kind, in property, created in favour of the
Secured Creditor, including any mortgage, charge, hypothecation or assignment. Property is
itself defined in broad terms to mean immoveable and moveable property, debt or a right to
receive payment, secured or unsecured, existing and future receivables and intangible assets
including know-how, patents, copyrights, trademarks, licenses, franchise, and other similar
business or commercial rights.

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(b) The borrower must default in paying the secured debt/instalment

(c) The loan must be classified as a non-performing asset. The lender must categorise it as a nonperforming asset in its books, in accordance with asset-classification guidelines issued by the
RBI or other appropriate governing body.
(d) The lender must issue a notice to the borrower/borrowers. The notice must specifically set
out the following:
i.
Amount payable by the borrower.
ii.
Details of the secured assets against which measures are to be sought.
iii.
It must call upon the borrower to discharge its liability in full, within 60 days
from the date of the notice, failing which the Company may enforce its rights
under the Act.
The notice may be sent by registered post acknowledgment due/courier/speed post/fax/email
to the address where the borrower or his agent authorised to accept notice and documents,
resides or carries on business or works. If the borrower is a company, it should be served on
the registered office or any branch. If there is more than one borrower, the notice should be
served on all the borrowers.
Following receipt of this notice, the borrower is not entitled to deal with the secured assets in
any manner without the consent of the lender.
5. Process. If the borrower wishes to resist the exercise of the rights by the lender under the
Act, the borrower must make a representation to the Secured Creditor, which must then be
considered by it. If the representation is to be rejected, the Secured Creditor must
communicate the reasons for the rejection within one week of the representation. If, on the
basis of the representation some amendment has to be made in the demand notice, the
Secured Creditor may modify the notice and issue a revised notice or pass other suitable
orders within one week from the receipt of the objection.
If the borrower fails to discharge its entire liability within sixty days the Secured Creditor
may take any of the following steps:
i.

Take possession of the secured assets, including the right to lease/ sell it, to realise the
amount. To this end, the assistance of the local Chief Metropolitan Magistrate/ District
Magistrate may be sought. Possession of moveables can be taken by drawing up a panchnama
in the prescribed format, presence of two witnesses. Moveables such as shares in a company
or a debt not secured by a negotiable instrument may be attached by issuing notice to the
person/company/authority holding the asset, not to pay any money to the borrower or to
transfer the asset in favour of any person apart from the secured creditor. Possession of
immoveable assets may be taken by drawing affixing a Possession Notice on the property and
having it published in two local newspapers. The assets may then be valued and sold in
accordance with the prescribed procedure

ii.

If a substantial part of the business of the Borrower is offered as security, take over
management of the business, including the right to lease/sell it, by publishing a notice to this
effect in newspapers. If a part of the business is offered as security and this is severable, this
part may be taken.
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iii.

Appoint a manager to manage the assets taken over.

iv.

Direct any person who has acquired the assets of the Borrower and from whom money is/will
become due, to pay those monies to the Company.

v.

Where the secured assets are insufficient to cover the dues, the Company can apply to the
Debt Recovery Tribunal (DRT) for recovery of the balance amount.
The costs of these recovery measures must be borne by the borrower and funds realised
from the enforcement of the interests under the Act may be applied first to costs and then
towards the recovery dues. In addition to proceeding against the assets of the borrower, the
guarantor may also proceed against the assets of the guarantors.

6. Process in the event of multiple lenders:

a. Where the secured assets comprise security of more than one bank/FI and
these lenders have initiated debt recovery proceedings in various DRTs, a
Notified Entity may file an application with the DRAT having jurisdiction
over any one such DRT, seeking transfer of all pending applications to any one
of the DRTs. A recovery certificate issued by the DRT on the transferred
applications is to be enforced in terms of the DRT Act.
b. In the event of financing of a financial asset by more than one Secured
Creditor, or joint financing of the asset by several Secured Creditors, the
Secured Creditors representing three fourth in value of the amount outstanding
(including principal, interest and other dues) as on an agreed upon date, must
agree to exercise the Special Rights. Such an action will be binding on all the
Secured Creditors. In the absence of such an agreement, the Special Rights
cannot be enforced.
7. Exceptions. Secured Creditors are not entitled to exercise the rights under the Act in the
following circumstances:
(a) Where the security is given for a debt not exceeding Rs. 1,00,000/- (Rupees one lakh only).
(b) Where the amount due is less than 20% of the principal and interest thereon.1
(c) In case the secured asset is any one of the following:
i.
Lien on goods/money;
ii.
A pledge of moveables;
iii.
An aircraft or vessel used in navigation;
iv. Agricultural land;
v. Property exempt under the provisions of the first proviso to S.60(1) of the Code of
Civil Procedure, 1908 [CPC], except in cases where the property is itself
specifically chargeable with the debt to be recovered i.e., for instance, by a
1 The exemption condition in the Act is worded in these terms. There doesnt seem to be any
case law on the interpretation of this provision, as yet.

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mortgage. Therefore, the following items of property, amongst others, are exempt
from action under the Act unless they are specifically charged with the debt:
a. Necessary wearing-apparel, cooking vessels, beds and bedding of the
borrower, his wife and children, and personal ornaments that cannot be parted
with by a woman for religious regions.
b. An artisans tools and an agriculturists implements of husbandry and such
cattle and seed-grain as are necessary to enable him to earn his livelihood.
c. Houses and buildings, along with the sites and lands belonging to an
agriculturist and occupied by him.
d. A right to sue for damages or a right of personal service.
e. Stipends to pensioners, wages of labourers and servants, the first thousand
rupees and 2/3rd of the remainder of a persons salary.
f. Compulsory deposits and sums in/derived from a Provident Fund/PPF.
g. Money payable under a policy of insurance of the life of the borrower.
h. A lessees interest in a residential premises governed by Rent Control
Legislation.
8. Avenues for the Borrower. The borrower or any other person aggrieved by measures taken by
a Secured Creditor can make an application before the Debt Recovery Tribunal, by paying a
prescribed fee. In these cases, the Debt Recovery Tribunal will consider when the Secured
Creditor has acted in accordance with the Act and applicable Rules. The Debt Recovery
Tribunal may declare that the measures taken by the Notified Entity are in accordance with
law, in which event the Notified Entity may proceed to realise the secured assets. If the Debt
Recovery Tribunal finds that measures taken by the Notified Entity are not in accordance
with the Act/Rules, it will order restoration of the asset to the borrower and may also award
compensation. The law requires that applications made to the Debt Recovery Tribunal must
be decided if possible within 60 days, and at most, within a period of 4 months. If this is not
done, either party may approach the DRAT seeking directions for early disposal. There is no
provision making the mere filing of the application by the borrower operate as an automatic
stay on further proceedings by the Secured Creditor. Therefore, unless the DRT grants a stay,
the Secured Creditor can proceed with the measures undertaken for recovery.
From an order of the Debt Recovery Tribunal as set out above, an appeal may be preferred to
the Debt Recovery Appellate Tribunal (DRAT) by paying the prescribed fee. If the borrower
seeks to file the appeal, he must deposit 50% of the amount claimed by the creditors or 50%
of the amount due as determined by the DRT, whichever is less, with the Appellate Tribunal.
However, for reasons to be recorded, this deposit amount could be reduced by the Appellate
Tribunal to not less than 25%.

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