Thursday, 3 December 2015

SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS & ENFORCEMENT OF SECURITY INTEREST ACT 2002

  • The president of India, promulgated the Ordinance `Securitisation and Reconstruction of Finance Assets and Enforcement of Security Interest Ordinance 2002′ on August 23, 2002.
  • The Act was notified in the official Gazette during Dec 2002.
  • It was amended later on during 2004 on Supreme court suggestion in case of Mardia chemicals vs Union of Indian and others.
Provisions
If a borrower defaults , a secured creditor will have the following powers u/s 13 (4)
  • Take possession , sell or lease secured assets.
  • Take over the management of the business.
  • Appoint a manager (powers vested with scale IV officers in banks).
  • Recover any money payable by 3rd parties to the borrowers.
Consortium accounts:
In case of consortium financing or multiple lending arrangement, if 60% of the secured creditors in value, agree to initiate recovery action, the same shall be binding on all secured creditors.

DRT pending cases:
Action can be initiated under SARFAESI Act in DRT pending cases as per Supreme Court judgement in Transcore vs Union of India.
(DRT – Debt Recovery Tribunal)

Loans not eligible under SARFAESI Act
  1. loans with outstanding up to Rs.1 lac.
  2. Agriculture land cannot be sold
  3. The amount due is less than 20% of principal  & interest (i.e.80% or more already recovered)
  4. Loans secured by pledge, lien & by security of bank deposits.
  5. Limitation has expired as per limitation Act
  6. where security is not charged to bank
SALE OF CHARGED SECURITIES
  • Ministry of Finance notified the rules (during sep-2002) for taking possession and subsequent sale of assets defaulters called Securities Interest (Enforcement) Rules, 2002.
  • Under these rules lenders have been permitted to dispose off the assets which are charged to the bank and where possession of the asset has been taken by the bank.
  • The sale can be through private treaty and/or public auction or bids. prior to the sale of secured asset, an authorised officer of the lender would have to take possession of the same by service of a 60 days possession notice.[sec 13 (2)]
Receipt of notice by the borrower
  • If, on notice from the creditor (bank), the borrower makes any representation or raise any objection, bank shall consider such representation or objection.
  • If representation or objection is not acceptable or tenable, bank shall communicate the justification for possession within 15 days of receipt of such representation or objection.
Application by the borrower to DRT against possession :
The borrower may make an application along with such fee as may be prescribed, to DRT, without deposit of any amount, within a priod of 45 days, (Sec 17).

Action by DRT:
  • If DRT comes to the conclusion that any of the measures taken by the secured creditor are not i accordance with the provisions of the Act, it may be, order, declare the resource to any one or more measures taken by the secured assets as invalid and restore the possession of the secured assets to the borrower.
  • If DRT declares the resources taken by a secured creditor is in accordance with the provisions of this Act and the rules made there under, then , notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourses to one or more of the measures to recover his secured debt.
Appeal to DRAFT against DRT decision:
  • Appeal shall be entertained by Appellate Tribunal within 30 days, when the borrower has deposited with Appellate Tribunal 50% of the amount of debt due from him, as claimed by the secured creditors or determined by the DRT, whichever is less.
  • The Appellate  Tribunal may reduce the amount to not less than 25% of debt. (Sec 18)
  • (As per an earlier provision, the borrows aggrieved by an action of a bank were able to approach DRTs by depositing 75% of dues.
  • This condition of deposit was dispensed with by Supreme Court on April 09, 2004 while up-holding the constitutional validity of the Act in Mardia chemical VS union of India and others).
Sale of assets
  • Sale by way of public tenders or through public auction has to be backed by public notices in two newspapers.
  • Minimum notice period A minimum 30 day`s notice to be given to the owner after taking the possession by the authorised officer and the eventual sale of both movable and immovable properties.
  • Designated Official The authorised officer has to be an officer equivalent to a Chief Manager of a PSB of the Bank. Board can also appoint a manager who would manage the secured assets taken possession of by the lenders.
  • Reserve price- Both for the movable and immovable assets the lenders would have to make proper valuation, prior to sale. The reserve price would have to be arrived at only after the valuation exercise.
  • Valuation of securities In case of movable secured assets, authorised officer will simply obtain an estimated value, for immovable property valuation to be obtained from a valuer approved by the lender’s Board of Directors.
  • Offer price If a price equal to the reserve price cannot be obtained, the asset can be disposed off at a lower price with the consent of both the borrower and lender expect where the assets could have natural decay or where cost of possession might exceed the value of sale.
  • Sale will be confirmed after deposit of 25% by the highest bidder. Balance shall be payable within 15 days of confirmation of sale.
Summary of Time periods in SAFAERSI Act
Notice before possession 60 days
Reply to objection by borrower 15 days
Borrower can approach DRT against possession notice 45 days
Appeal to DRAT against decision of DRT 30 days
Notice before sale 30 days
Period of balance payment 75% by the buyer of assets 15 days

Important section in SAFAERSI Act
60 days notice before possession Sec 13 (2)
Assistance by chief metropolitan magistrate or Distt. Magistrate in taking possession Sec 14
Application to DRT against possession notice issued by the bank Sec 17
Appeal against DRT to DRAT by depositing 50% amount Sec 18

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