Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Definitions
1. Asset Reconstruction
Means Acquisition by Any Asset Reconstruction Company

Any Right or Interest

Of any Bank or financial institution

In any financial assistance

For the purpose of realisation
2.

Of such financial assistance
Asset Reconstruction Company
Means
company

Registered with

RBI

Securitisation / Reconstruction Or both
Not a Banking company and cannot carry on any other than the business of Asset
Reconstruction or securitisation.
3.
Borrower
Means

Any person who has been granted financial assistance from Bank or
Financial Institution.

Who has given guarantee.

Or created any mortgage or pledge as security for the financial
assistance granted by any Bank or FI.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.

Who become borrower of ARC
Acquisition by it of any night or interest of any

4.
(After selling FA from Bank to ARC) Bank or FI
Any person who has raised fund through Debt Securities.
Default
Means

Non payment of any Debt or any other amount payable by the Borrower to
any secured creditor consequent upon which account of such Borrower is
classified as Non Performing Assets in Books of Account of Secured Creditor.

Non Payment of any Debt or any other amount payable by Borrower with
respect to Debt Securities after notice of 90 days demanding payment
served upon such borrower by the Debenture Trustee or any other authority
in whose favour security interest is created for the beneth of holders of
such debt securities.
5.
Debt
Shall have same meaning as assigned in clause (g) of Section 2 of Recovery of
Debt due to Bank or Financial Institute Act 1993 and includes.

Unpaid portion of the purchase price any on purchase of Tangible Asset
given on nine or financial lease or under any other contract.

6.
Unpaid portion on purchase4 of intangible asset.
Financial Assets
Means
Debtor receivables and includes.
1.
A claim to any Debt or Receivable whether secured or unsecured.
2.
Any Debt or Receivable secured by immovable property.
3.
A Debt or Receivable secured by movable property.
4.
Any right or interest in security underlying such debt or receivable.
5.
Any beneficial interest in movable or immovable property.
(Future, existing, accrual, conditional contingent)
6.
Unpaid portion on purchase of Tangible Asset
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
7.
8.
7.
Unpaid portion on purchase of Intangible Asset
Any Financial Assistance
Non Performing Assets
Means
An asset or account of a Borrower which is classified by a Bank or a financial
institute as

Substandard Assets

Doubtful Assets

Loss Assets
As per authority administered if it is formed under any law i.e. Special Act
governing any authority (Eg. LIC, ICAI, etc.)
In any other case directions or guidelines of RBI.
8.
Securitisation
Means
Acquisition of Financial Assets by any Asset reconstruction company from any
originator whether by raising of funds by such Asset Reconstruction Company
from Qualified Buyers by issue of securities receipt representing undivided
interest in such financial assets or otherwise.
9.
Secured Creditors
Means
a.
Bank or Financial Institute or a group holding any right, title or interest
upon Tangible Asset or ITA.
b.
ARC for securitisation or reconstruction
c.
Debenture Trustee appointed by company registered with SEBI Board.
d.
Debenture Trustee appointed by Bank or Financial Institution.
e.
Trustee appointed by Bank or Financial Institution representing on their
behalf.
In whose favour security interest is created by any borrower for due repayment
of any financial assistance.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
10.
Security Interest
Means
Any right, title or interest of any kind other than those specified in section 31
created upon property in favour of any secured creditor and includes
11.

Unpaid portion on purchase of Tangible Asset

Unpaid portion on purchase of Intangible Asset
Financial Assistance
Means

Loans or Advances granted by Bank or Financial Institute.

Debenture subscribed by Debentureholders.

Letter of credit or credit guarantee extended by Bank or

Financial Institution.
Section 3 Conditions for Registration of ARC
1.
Net owned fund should be atleast 100 crores.
2.
There should be no loss in last 3 financial year.
3.
There should be proper arrangement for realisation of Financial Asset and
periodical repayment to qualified buyers.
4.
Director shall have professional experience in matters related to Finance,
Reconstruction and Securitisation.
5.
Director shall not be convicted from moral turpitude.
6.
Sponsors should be fit and proper person by RBI as may be specified.
7.
ARC should comply with prudential norms specified by RBI.
8.
ARC should comply with RBI conditions and guidelines.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Certain Transaction require prior approval of RBI.
a.
Substantial change in the management including appointment of any director
/ MD/CEO.
b.
Change in location of its registered office.
c.
Change in name.
Section 4 : Cancellation of Certificate of Registration.
1.
Ceases to carry business of Seecuritisation or Asset reconstruction.
2.
Ceases to receive or hold any investment from Qualified Buyer.
3.
Fail to comply with conditions of Registration of ARC.
Section 3 conditions at any time fails to fulfil.
4.
Fail to comply with Directions of RBI.
5.
Fail to maintain proper appropriate Accounts as per any law or order issued by
RBI
6.
Fail to submit information during investigation BOA and other documents.
7.
Fail to obtain approval of RBI where it is otherwise required (prior approval)
(cases where prior approval of RBI is required).
8.
Before cancellation of registration opportunity of being heard should be given
to ARC.
Appeal against such cancellation can be filed to CG within 30 days from the date
such order is communicated to ARC. CG will also give opportunity of being heard
before rejecting the appeal.
Cancellation will not be effective until investment is repaid to Qualified Buyers.
However, during such period no new investment can be taken.
Shall be deemed to be an ARC until it repays the entire investments held by it.
On Acquisition of Financial Asset application to DRT for substitution of name.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Section 5 Acquisition of Rights or Interest in Financial Asset
1.
ARC may acquire financial asset by issuing Debentures, Bonds or such other
terms as may be specified between the Bank/FI or the ARC. (Eg Cash).
Any transaction or documentation which is related to securitisation or Asset
Reconstruction is exempt from “Stamp Duty”.
2.
After acquisition of Financial Asset all the rights, interest contract, deeds,
bonds, agreements, power of attorney, related to Financial Asset shall vest in
ARC.
3.
Any legal dispute will not be (cancel) abated. However ARC may continue
with a consent of originator and application to the same should be filed to DRT
(Direct Recovery)
Section 5A Transfer of pending Application in certain to any one of Debts
Recovery Tribunal Cases
If any dispute is pending with multiple DRTs then in that case ARC may proceed to
DRAT and if satisfied DRAT may transfer all dispute to single DRT.
1.
ARC may file an application to the appellate tribunal having jurisdiction over
any such DRT’s before which cases are pending.
2.
The Appellate Tribunal passes an order for transfer of the pending applications
to anyone of the Debt Recovery Tribunals.
3.
Order passed shall be binding on all Debt Recovery Tribunal.
4.
Any recovery certificate shall be executed.
Section 6 : Notice to obligor and Discharge of obligation of such obligor
Notice to obligor may (discretionary) be sent by Bank or Financial Institute after
transfer of FA to ARC. Along with this it may also be intimated to concerned person
(guarantor) and concerned authority (ROC) Registrar.
The obligor shall (mandatory) make payment to ARC related to Financial Asset.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Section 7 : Issue of Security by raising of Funds or Receipt by ARC.
ARC may raise fund to acquire Financial Asset by issuing security receipt to Qualified
Buyers. Money raised from Qualified Buyers will be kept in a separate scheme and
any Financial Asset acquired from such scheme will be paid to that particular
Qualified Buyer only.
Section 8 : Registration Fees Exempt (like stamp duty)
Section 9 : Measures for Asset Reconstruction
1.
Rescheduling of Debt.
2.
Settlement of Debt with Borrower.
3.
Enforcement of Security Interest.
4.
Takeover of the Asset (possession) Borrower.
5.
Sale or lease of the Asset.
6.
Takeover of Business of Borrower i.e. Management.
7.
8.
Running Management of the Borrower.
Conversion of Debt into Shares – If any conversion has already taken place
then it will be treated as valid conversion.
RBI may give any directions to ARC and it will be binding on it.
Section 10 : Other Functions of ARC :
a.
Act as an Agent.
For any Bank of FI for recovering of their dues from ___ for fees or charges
mutually decided.
b.
Act as an Manager – Fees mutually agreed upon. Appoint any person to manage
the secured assets the possession of _____ has been takenover by the secured
creditor.
c.
Act as an Receiver – Appointed by court or Tribunal selling of asset only.
Without prior approval of RBI ARC cannot carry on any other business other
than Asset Reconstruction or Securitisation.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
If prior to commencement of Act any other business is carried on by ARC
company than such ARC company shall cease to carry on business within one
year from the date of commencement of the Act.
ARC does not include its subsidiary.
Section 11 : Resolution of Disputes
Disputes relating securitisation or reconstruction or any amount duely arising
between “Bank or FI or ARC or Qualified Buyer such disputes shall be settled in
Arbitration or Conciliation.
Section 12 : Power of Reserve Bank to determine policy and issue direction.
1
Reserve Bank may determine the policy and give directions to the ARC.
(Income Recog, AS, RDD, capital adequacy etc.)
2.
3.
4.
May give directions for
a.
Acquisition and its procedure for any financial asset.
b.
Aggregate value of Financial Asset to acquire.
c.
Fees and charges to be incurred for management of financial asset
d.
Transfer of Security Receipts to qualified buyers.
The Reserve Bank of India has the power to call for statements and information
relating to the Business and affairs of the company (Section 12A).
The Reserve Bank of India (Section 12B) may carry out Audit and Inspection
from time to time. It shall be the duty of ARC and its officer to provide assistance
and cooperation to RBI.
Business carried on by ARC detrimental to public interest.
a.
Remove the Chairman or any Director or appoint Additional Director on the
Board after giving QOBH.
b.
Appoint any officer as an observer to observe the working of BOD.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Section 13 : Enforcement of Security Interest
1.
Secured Creditor shall give notice of 60 days in writing to the Borrower clearly
indicating that in case of non payment asset is subject to forfeit.
2.
Once notice is served asset cannot be sold out without prior permission of
secured creditor.
3.
Borrower may make objection after receipt of notice. However if secured creditor
(SC) is rejecting then it shall not be communicated within 15 days along with
reason. However such reason cannot be the grounds for approval.
4.
In case of non payment after expiry of service period SC may exercise following
points.
5.
i.
Can take possession of Assets.
ii.
Can takeover management (which is relatable to Secured Debt).
iii.
Can appoint Manager to manage the business of Secured Assets.
iv.
Can Demand from the person who owe to the borrower.
In case of joint financing decision will taken by 60% of value of the secured
creditor.
6.
SC may relinquish the Asset, in that case asset will be sold by company and
if does not relinquish the asset it will be sold by SC itself.
7.
If the company is in liquidation any excess amount recovered by SC after
adjusting dues and expense and amount will be given to the company. In case
of insufficient fund amount will be proportionately shared with workmen.
In case of resistance for realising the asset by secured creditor it may apply
to NCLT and NCLT may give such order as required.
8.
If the company is in liquidation, payment will be made in priority waterfall.
9.
If the Asset is an immovable property and asset not sold at Reserved Price
then SC may acquire it at Reserve Price which will be adjusted from the Debt
Amount.
10.
If borrower makes the payment after 60 days but before sale of Asset then
such asset shall not be sold before giving notice of public auction.
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Section 15 : Manner and Effect of Takeover of Management
The secured creditor may by publishing in English Newspaper and vernacular
newspaper appoint as many person as it think fits.
(i) Director or (ii) Administrator of Borrower
Companies – Director, Administrator – Any other Case
It shall not be lawful by the shareholder to nominate any Director or to pass any
resolution without the approval of secured creditor.
(1) Nominate or appoint any person to be Director.
(2) No resolution to be passed at the meeting.
(3) No proceeding for winding up
Section 16 : Any Director who is removed is not eligible for compensation.
However, will get remuneration for services discharged.
Management of borrower is under an obligation to render all reasonable assistance
to the secured creditor (Administrator) or the Director as the case may be).
The Secured Creditor is under an obligation to restructure management of the
Business of the Borrower after realisation of Debt in Full.
However Debt gets converted into share and however here is control on management
due to such conversion the management need not be restored.
Section 17 and Section 18 (18 B and 18A)
Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.
Section 18C ; Right to Lodge a Caveat
1. Filing of a Caveat :
Application has been filed
a.
Secured creditor
b.
Any person claiming a right.
2.
Notice of Caveat : Shall serve notice of the caveat by registered post
acknowledgement due on the person by whom the application has been made
or expected to be made by a and b.
3.
Notice on the caveator by adjusting authority. After caveat has been lodged
any application or appeal is filed with Tribunal / Court / Appellate Tribunal /
High Court may be shall serve a notice of application or appeal filed by the
4.
applicant or the appellant on the caveator.
Furnishing copy of Application and Document.
Notice of caved on the appellant or applicant he shall furnish the caveator with
a copy of application or the appeal made by him.
5.
Validity – Till the period of ninety days from the date it is lodged.
Section 19 : Right of Borrower to Receive Compensation and Cost in certain cases
1.
Possession of secured asset by secured creditor not in accordance with the
provision of the Act.
2.
Direct the SC to return such asset to concerned borrower.
3.
The borrower shall be entitled to the payment of such compensation and cost
as may be determined by such Tribunal, High Court, Appellate Tribunal.

Securitzation and Reconstruction of Financial Asset and
Enforcement of Security Interest Act, 2002.