Section 2(1): Definitions

(a) Appellate Tribunal

Meaning:

The Debts Recovery Appellate Tribunal (DRAT) hears appeals against the orders of the Debts Recovery Tribunal (DRT).

Key Point:

Higher authority than DRT.
Established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Example:
If a borrower is dissatisfied with a DRT order, they can appeal before the DRAT.

(b) Asset Reconstruction

Meaning:

Asset Reconstruction means the acquisition of a bank’s or financial institution’s rights or interests in a financial asset by an Asset Reconstruction Company (ARC) to recover the outstanding dues.

Key Point:

ARC purchases Non-Performing Assets (NPAs) from banks.
ARC then tries to recover the loan amount.

Example:
A bank sells a ₹20 crore bad loan (NPA) to an ARC. The ARC becomes responsible for recovering the money.

(ba) Asset Reconstruction Company (ARC)

Meaning:

An Asset Reconstruction Company (ARC) is a company registered with the Reserve Bank of India (RBI) under Section 3 of the SARFAESI Act to carry on the business of:

Asset Reconstruction, or
Securitisation, or
Both.

Key Point:

Must be registered with RBI.
Deals mainly with bad loans (NPAs).

Example:
An RBI-registered ARC purchases NPAs from banks and attempts to recover the dues from borrowers.

(c) Bank

Meaning:

For the purposes of the SARFAESI Act, the term “Bank” includes:

Banking Company
Corresponding New Bank (Public Sector Banks)
State Bank of India (SBI)
Subsidiary Bank of SBI
Multi-State Co-operative Bank
Any other bank notified by the Central Government

Key Point:

Only these notified banks can exercise powers under the SARFAESI Act.

(d) Banking Company

Meaning:

A Banking Company has the same meaning as given under Section 5(c) of the Banking Regulation Act, 1949.

Simple Meaning:

A company that carries on the business of banking, such as:

Accepting deposits from the public.
Lending money.
Providing banking services.

Examples:

HDFC Bank
ICICI Bank
Axis Bank
Kotak Mahindra Bank

(e) Board

Meaning:

The Board refers to the Securities and Exchange Board of India (SEBI), established under the SEBI Act, 1992.

Key Point:

SEBI regulates the securities market in India.
It protects the interests of investors and regulates listed companies.

(f) Borrower

Meaning:

A Borrower is:

A person or entity that has received financial assistance (loan) from a bank or financial institution.
A person who has given a guarantee for a loan.
A person who has created a mortgage or pledge as security for a loan.
A person whose loan is later acquired by an Asset Reconstruction Company (ARC).
A person or entity that has raised money by issuing debt securities (bonds/debentures).

Key Point:

The definition of “Borrower” is broad and includes:

Loan borrower
Guarantor
Mortgagor/Pledgor
Borrower of an ARC
Issuer of debt securities

Example:

Mr. A takes a home loan from a bank. He is a Borrower under the SARFAESI Act.

(g) Central Registry

Meaning:

The Central Registry is the registry established under Section 20 of the SARFAESI Act.

Purpose:

Maintains records of security interests created on properties.
Helps prevent multiple loans on the same property.
Increases transparency for lenders.

Key Point:

The Central Registry keeps a central record of charges and mortgages created in favour of secured creditors.

(ga) Company

Meaning:

A Company means a company as defined under Section 2(20) of the Companies Act, 2013.

Key Point:

Only companies incorporated under the Companies Act are covered by this definition.

(h) Corresponding New Bank

Meaning:

A Corresponding New Bank has the meaning assigned under the Banking Regulation Act, 1949.

Simple Meaning:

These are Public Sector Banks created after the nationalisation of banks.

Examples:

Punjab National Bank
Bank of Baroda
Canara Bank
Union Bank of India

(ha) Debt

Meaning:

Debt has the same meaning as under the Recovery of Debts and Bankruptcy Act, 1993, and also includes:

(i) Unpaid Amount for Tangible Assets

Money remaining unpaid for assets given on:

Hire Purchase
Financial Lease
Conditional Sale
Similar contracts

Example:
A company buys machinery on hire purchase but fails to pay the remaining amount.

(ii) Unpaid Amount for Intangible Assets

Debt also includes unpaid amounts relating to:

Patent
Trademark
Copyright
Software Licence
Other Intellectual Property Rights

where the asset or licence is used as security.

Example:
A company purchases a software licence using borrowed money but fails to repay the loan.

(i) Debts Recovery Tribunal (DRT)

Meaning:

The Debts Recovery Tribunal (DRT) is a tribunal established under the Recovery of Debts and Bankruptcy Act, 1993.

Functions:

Deals with recovery of debts due to banks and financial institutions.
Decides disputes arising under the SARFAESI Act.

Key Point:

The DRT is the first forum for resolving debt recovery disputes.

(ia) Debt Securities

Meaning:

Debt Securities are securities listed according to SEBI regulations.

Examples:

Bonds
Debentures
Non-Convertible Debentures (NCDs)

Key Point:

These instruments represent borrowed money that must be repaid with interest.

(j) Default

Meaning:

Default means failure to repay a debt.

It includes two situations:

(i) Default in Bank Loan

Borrower fails to repay a loan.
The loan account is classified as a Non-Performing Asset (NPA) by the secured creditor.

Example:
A borrower does not pay loan instalments, and the bank declares the account as an NPA.

(ii) Default in Debt Securities

Borrower fails to repay amounts due under debt securities.
A 90-day notice demanding payment is served by the Debenture Trustee or another authorised authority.
Even after the notice, payment is not made.

Example:
A company issues debentures but does not repay investors even after receiving a 90-day notice.

(k) Financial Assistance

Meaning:

Financial Assistance means any financial help provided by a bank or financial institution to a borrower.

It includes:

Loan
Advance
Subscription to debentures or bonds
Guarantee
Letter of Credit (LC)
Any other credit facility
Finance for purchase of tangible assets (hire purchase, financial lease, conditional sale)
Finance for acquiring intangible assets (patent, trademark, licence, etc.)
Funds for purchasing debt securities

Example:

A bank gives:

A home loan ✔
A car loan ✔
A Letter of Credit for import ✔
Finance to buy machinery ✔

All these are Financial Assistance.

Key Point

Financial Assistance includes every type of financial support provided by banks or financial institutions.

(l) Financial Asset

Meaning:

A Financial Asset means any debt, receivable, or security interest that has financial value and can be recovered or transferred.

It includes:

(i) Claim to Debt or Receivables

Right to recover money from a borrower.
Can be secured or unsecured.

Example: A bank’s right to recover a personal loan.

(ii) Debt Secured by Immovable Property

Debt secured by:

Mortgage
Charge

on immovable property.

Example: Home loan secured by a house.

(iii) Security on Movable Property

Debt secured by:

Mortgage
Charge
Hypothecation
Pledge

of movable assets.

Example: Car loan secured by the vehicle.

(iv) Right in Security

Any full or partial right over the security given for a loan.

Example: A bank’s right over mortgaged property.

(v) Beneficial Interest

Any present or future beneficial interest in:

Movable property
Immovable property
Debt
Receivables

Example: Future rental income assigned to a bank.

(va) Right in Tangible Asset

Rights in tangible assets given under:

Hire Purchase
Financial Lease
Conditional Sale

where the asset secures payment of the unpaid purchase price.

Example: Machinery purchased on finance.

(vb) Right in Intangible Asset

Rights in:

Patent
Trademark
Copyright
Software Licence
Other Intellectual Property

used as security for repayment.

Example: A software licence financed by a bank.

(vi) Financial Assistance

Financial Assistance itself is treated as a Financial Asset.

Key Point

A Financial Asset includes loans, receivables, mortgages, hypothecation, pledges, tangible assets, intangible assets, and financial assistance.

(m) Financial Institution

Meaning:

For the SARFAESI Act, Financial Institution includes:

Public Financial Institutions (PFIs)
Institutions notified by the Central Government
International Finance Corporation (IFC)
Debenture Trustees registered with SEBI
Asset Reconstruction Companies (ARCs)
Notified Non-Banking Financial Companies (NBFCs)

Examples:

SIDBI
NABARD
EXIM Bank
IFC
RBI-notified NBFCs
RBI-registered ARCs

Key Point

Only institutions covered under this definition can exercise rights under the SARFAESI Act where applicable.

(ma) Financial Lease

Meaning:

A Financial Lease is a lease in which:

The lessee uses a tangible asset for a specified period.
Periodic lease payments are made.
At the end of the lease, ownership usually transfers to the lessee after payment of the agreed residual amount (if applicable).

Example:

A company leases heavy machinery for five years, pays monthly instalments, and becomes the owner after the lease term ends.

Key Point

A Financial Lease is different from a normal rental because the ownership ultimately transfers to the lessee.

(n) Hypothecation

Meaning:

Hypothecation is a charge created on movable property by the borrower in favour of the bank as security for a loan, without giving possession of the property to the bank.

Key Features:

Applies only to movable assets.
Borrower keeps possession and continues using the asset.
Bank has a legal charge over the asset.
Includes floating charge and its conversion into a fixed charge.

Example:

A person takes a car loan. The borrower keeps and uses the car, but the bank has a hypothecation charge over it until the loan is repaid.

Key Point

Ownership & Possession: Borrower
Security Interest: Bank

(na) Negotiable Document

Meaning:

A Negotiable Document is a document that gives the holder the right to receive or take delivery of tangible goods and can be transferred to another person under law.

Examples:

Warehouse Receipt
Bill of Lading

Example:

A warehouse receipt allows its holder to claim goods stored in a warehouse.

Key Point

The document itself represents the right to obtain the goods.

(o) Non-Performing Asset (NPA)

Meaning:

A Non-Performing Asset (NPA) is a loan or account that has been classified by a bank or financial institution as:

Sub-standard Asset
Doubtful Asset
Loss Asset

according to the guidelines of:

RBI, or
Another competent regulatory authority.

Example:

A borrower fails to repay loan instalments for the prescribed period, and the bank classifies the account as an NPA.

Key Point

An NPA is a loan where the borrower has defaulted, and the bank classifies the account according to regulatory guidelines.

(p) Notification

Meaning:

A Notification means a notification published in the Official Gazette by the Government.

Example:

If the Central Government notifies a new bank under the SARFAESI Act, the notification is published in the Official Gazette.

Key Point

Official Gazette publication gives legal effect to government notifications.

(q) Obligor

Meaning:

An Obligor is a person who is legally responsible for:

Paying a financial asset, or
Performing an obligation related to a financial asset.

It also includes the Borrower.

Example:

A borrower who has taken a loan must repay it. He is the obligor.

Key Point

Every borrower is an obligor, but an obligor may also include other persons legally liable for payment.

(r) Originator

Meaning:

An Originator is the original owner of a financial asset that is later transferred to an Asset Reconstruction Company (ARC) for:

Securitisation, or
Asset Reconstruction.

Example:

A bank sells its NPA to an ARC. The bank is the Originator.

Key Point

The originator is usually the bank or financial institution that originally owned the loan.

(s) Prescribed

Meaning:

Prescribed means prescribed by the Rules made under the SARFAESI Act.

Example:

If the Act states that a procedure shall be “prescribed,” the detailed procedure will be found in the Rules framed under the Act.

(t) Property

Meaning:

For the SARFAESI Act, Property includes:

Immovable Property
- Land
- House
- Building
Movable Property
- Car
- Machinery
- Equipment
Debt or Right to Receive Money
- Secured or unsecured loans
- Money receivable
Receivables
- Existing receivables
- Future receivables
Intangible Assets
- Patent
- Copyright
- Trademark
- Licence
- Franchise
- Know-how
- Other commercial rights notified by the Central Government in consultation with RBI

Key Point

The definition of property is very broad and covers both tangible and intangible assets.

(u) Qualified Buyer (QB)

Meaning:

A Qualified Buyer is a person or institution permitted to purchase Security Receipts (SRs) issued by an Asset Reconstruction Company (ARC).

It includes:

Financial Institutions
Banks
Insurance Companies
State Financial Corporations
State Industrial Development Corporations
Trustees
Registered Asset Reconstruction Companies (ARCs)
Asset Management Companies (AMCs) investing on behalf of Mutual Funds
Foreign Institutional Investors (FIIs)
Other categories of investors notified by the Government

It includes:

Mortgage Deed
Hypothecation Agreement
Pledge Agreement
Mortgage by Deposit of Title Deeds (Equitable Mortgage)

Example:

A borrower signs a mortgage deed while taking a home loan.

Key Point

Without a Security Agreement, no Security Interest can be created.

(zc) Secured Asset

Meaning:

A Secured Asset is the property on which a Security Interest has been created.

Examples:

House
Land
Car
Machinery
Patent
Trademark

Key Point

The property given as security for a loan is called the Secured Asset.

(zd) Secured Creditor

Meaning:

A Secured Creditor is the person or institution in whose favour a Security Interest is created.

It includes:

Banks
Financial Institutions
Consortium of Banks
Debenture Trustees
Asset Reconstruction Companies (ARCs)
Trustees holding securities on behalf of banks

Example:

A bank that grants a home loan and takes a mortgage over the house is the Secured Creditor.

Key Point

The Secured Creditor has the legal right to enforce the Security Interest in case of default.

(ze) Secured Debt

Meaning:

A Secured Debt is a debt that is backed by a Security Interest.

Example:

A home loan secured by a mortgage over a house.

Key Point

No Security Interest = No Secured Debt.

(zf) Security Interest

Meaning:

A Security Interest means the legal right, title, or interest created in favour of a Secured Creditor over a borrower’s property as security for repayment of a debt.

It includes:

Mortgage
Charge
Hypothecation
Assignment
Rights over tangible assets
Rights over intangible assets

It covers:

(i) Tangible Assets

House
Land
Machinery
Vehicle

(ii) Intangible Assets

Patent
Trademark
Copyright
Licence
Franchise

Example:

A borrower mortgages a house to obtain a loan. The bank’s legal right over the house is the Security Interest.

Key Point

Security Interest gives the lender the right to recover its dues from the secured property if the borrower defaults.

(zg) Security Receipt (SR)

Meaning:

A Security Receipt (SR) is a certificate issued by an Asset Reconstruction Company (ARC) to a Qualified Buyer under a Scheme.

It represents the investor’s undivided interest in the financial assets acquired by the ARC.

Example:

An ARC purchases NPAs and issues Security Receipts to investors who share in the recovery proceeds.

Key Point

Security Receipts are investment instruments issued only by ARCs.

(zh) Sponsor

Meaning:

A Sponsor is any person holding at least 10% of the paid-up equity capital of an Asset Reconstruction Company (ARC).

Example:

A company holding 15% shares in an ARC is its Sponsor.

Key Point

Minimum holding required = 10%.

(zi) State Bank of India (SBI)

Meaning:

State Bank of India (SBI) means the bank established under the State Bank of India Act, 1955.

Key Point

This clause gives the legal definition of SBI for the purposes of the SARFAESI Act.

(zj) Subsidiary Bank

Meaning:

A Subsidiary Bank has the meaning assigned under the State Bank of India (Subsidiary Banks) Act, 1959.

Example:

Historically, banks such as State Bank of Patiala and State Bank of Mysore were subsidiary banks before their merger with SBI.

Key Point

The definition remains in the Act even though most subsidiary banks have now merged with SBI.

Section 2(2)

Meaning:

If a word or expression is not defined in the SARFAESI Act, its meaning will be taken from the following Acts:

Indian Contract Act, 1872
Transfer of Property Act, 1882
Companies Act
SEBI Act, 1992

Example:

If the SARFAESI Act does not define a term such as “Contract” or “Mortgage”, its meaning will be taken from the relevant Act.

Key Point

Section 2(2) ensures that undefined terms are interpreted consistently by referring to other applicable laws.

CHAPTER II :
REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS AND
FINANCIAL INSTITUTIONS

Section 3 – Registration of Asset Reconstruction Companies (ARC)

Purpose

Section 3 provides the rules for registration of Asset Reconstruction Companies (ARCs) with the Reserve Bank of India (RBI).

👉 No company can carry on the business of securitisation or asset reconstruction without RBI registration.

Section 3(1) – Registration is Mandatory

Meaning:

No Asset Reconstruction Company (ARC) can start or continue the business of:

Securitisation, or
Asset Reconstruction

unless it:

Obtains a Certificate of Registration (CoR) from RBI, and
Has the minimum Net Owned Fund (NOF) prescribed by RBI.

Key Points:

Registration with RBI is compulsory.
RBI issues the Certificate of Registration (CoR).
RBI may prescribe a higher minimum Net Owned Fund through notification.
Different classes of ARCs may have different NOF requirements.

Existing ARCs:

Companies already operating when the Act came into force were allowed to continue temporarily after applying for registration until RBI approved or rejected their application.

Section 3(2) – Application for Registration

Meaning:

Every ARC must apply to RBI:

In the prescribed form.
In the prescribed manner.

Key Point:

Application must be made according to RBI’s rules and procedures.

Section 3(3) – Conditions for Registration

Before granting registration, RBI checks whether the ARC satisfies the following conditions.

(a) No Losses

The ARC should not have incurred losses during the previous three financial years.

(b) Proper Recovery Arrangements

The ARC should have:

Adequate arrangements for recovering financial assets (NPAs).
Ability to pay returns to Qualified Buyers (QBs).
Ability to redeem investments on time.

(c) Experienced Directors

The directors should have professional experience in:

Finance
Banking
Securitisation
Asset Reconstruction

(d) (Omitted from the Act)

No longer applicable.

(e) Directors of Good Character

No director should have been convicted of an offence involving moral turpitude (dishonesty or immoral conduct).

(f) Sponsor Must Be Fit and Proper

The Sponsor of the ARC must satisfy RBI’s “Fit and Proper” criteria.

Examples:

Good financial standing
Good reputation
No serious criminal record

(g) Compliance with RBI Prudential Norms

The ARC must comply with RBI’s prudential norms, such as:

Capital adequacy
Risk management
Accounting standards

(h) Compliance with RBI Guidelines

The ARC must comply with any additional conditions or guidelines issued by RBI.

Section 3(4) – Grant of Registration

Change in management
Appointment of a Director
Appointment of the Managing Director (MD)
Appointment of the Chief Executive Officer (CEO)
Change of registered office
Change of company name

Key Point:

Major organisational changes cannot be made without RBI’s approval.

Explanation – Meaning of “Substantial Change in Management”

A substantial change includes:

Transfer of shares resulting in change of control.
Change in sponsorship due to transfer of shares.
Amalgamation (Merger).
Transfer of the company’s business.

Key Point:

RBI has the final authority to decide whether a change amounts to a “substantial change in management.”

Section 4: Cancellation of Certificate of Registration

Purpose of Section 4

Section 4 gives the Reserve Bank of India (RBI) the power to cancel the Certificate of Registration (CoR) of an Asset Reconstruction Company (ARC) if it violates the provisions of the Act or RBI directions.

Section 4(1) – When can RBI cancel the Registration of an ARC?

The RBI may cancel the Certificate of Registration if the ARC:

(a) Stops doing business

If the ARC stops carrying on the business of:

Securitisation, or
Asset Reconstruction.

Example: An ARC closes its operations and no longer purchases or manages NPAs.

(b) Stops receiving or holding investments from Qualified Buyers (QBs)

If the ARC no longer has investments from Qualified Buyers, RBI may cancel its registration.

Example: All Qualified Buyers withdraw their investments, and the ARC is no longer functioning as required.

(c) Violates the conditions of registration

If the ARC fails to comply with any condition on which RBI granted its Certificate of Registration.

Example: RBI granted registration subject to certain conditions, but the ARC later fails to follow them.

(d) No longer satisfies the registration requirements

If the ARC no longer fulfils the conditions mentioned in Section 3(3), such as:

Financial soundness
Experienced directors
Fit and proper sponsor
Compliance with RBI norms

RBI may cancel its registration.

(e) Fails to comply with RBI requirements

RBI may cancel the registration if the ARC:

(i) Does not follow RBI directions

Fails to comply with any direction issued by RBI under the SARFAESI Act.

(ii) Does not maintain proper accounts

Fails to maintain books of accounts according to law or RBI directions.

(iii) Refuses inspection

Fails to produce books of accounts or relevant documents when RBI asks for inspection.

(iv) Makes major changes without RBI approval

Fails to obtain prior RBI approval before:

Changing management
Appointing Directors
Appointing the MD or CEO
Changing the registered office
Changing the company’s name

Opportunity to Correct Mistakes (Proviso)

Before cancelling the registration under:

Clause (c)
Clause (d)
Clause (e)(iv)

RBI will normally give the ARC an opportunity to correct the default.

However, RBI may cancel the registration immediately without giving this opportunity if delaying the cancellation would harm:

Public interest,
Investors, or
The ARC itself.

Section 4(2) – Right to Appeal

If an ARC is unhappy with RBI’s order cancelling its registration, it can file an appeal to the Central Government.

Time Limit:

The appeal must be filed within 30 days from the date the cancellation order is communicated.

Right to be Heard:

Before rejecting the appeal, the Central Government must give the ARC a reasonable opportunity of being heard.

Section 4(3) – Existing Investments after Cancellation

If:

RBI rejects the ARC’s application for registration, or
RBI cancels its registration,

and the ARC is still holding investments made by Qualified Buyers (QBs),

then the ARC is deemed to continue as an ARC only for the limited purpose of repaying those investments.

The ARC must:

Repay the entire investment,
Along with interest (if applicable),
Within the period specified by RBI.

Important Points for Exams

RBI has the power to cancel the registration of an ARC.
Registration may be cancelled if the ARC:
- Stops its business,
- Violates RBI conditions,
- Fails to maintain accounts,
- Ignores RBI directions,
- Refuses inspection, or
- Makes major changes without RBI’s prior approval.
Before cancellation in certain cases, RBI generally gives the ARC a chance to rectify the default, unless immediate cancellation is necessary in the public or investors’ interest.
An ARC can appeal to the Central Government within 30 days against the cancellation order.
Even after cancellation or rejection of registration, an ARC must continue only to repay the investments of Qualified Buyers as directed by RBI.

Section 5: Acquisition of Rights or Interest in Financial Assets

Purpose of Section 5

Section 5 explains how an Asset Reconstruction Company (ARC) acquires financial assets (mainly NPAs) from banks or financial institutions and what legal rights it gets after the acquisition.

Section 5(1) – How does an ARC acquire financial assets?

An ARC can acquire (purchase) financial assets of a bank or financial institution in two ways:

(a) By issuing Debentures, Bonds or Other Securities

The ARC may issue:

Debentures
Bonds
Other similar securities

to the bank or financial institution as consideration (payment) for the financial assets.

Example:
Instead of paying cash, an ARC gives bonds to a bank in exchange for its NPAs.

(b) By Entering into an Agreement

The ARC and the bank may sign an agreement for the transfer of financial assets on mutually agreed terms and conditions.

Example:
A bank agrees to sell ₹100 crore worth of NPAs to an ARC through a transfer agreement.

Section 5(1A) – Exemption from Stamp Duty

Documents executed by a bank or financial institution in favour of an ARC for the purpose of:

Asset Reconstruction, or
Securitisation

are exempt from stamp duty under the Indian Stamp Act.

Exception:

This exemption does not apply if the acquisition is for any purpose other than securitisation or asset reconstruction.

Section 5(2) – ARC Becomes the New Lender

Once the ARC acquires the financial asset:

The ARC is treated as the new lender.
All the rights of the bank or financial institution automatically transfer to the ARC.

Example:

A bank sells a loan to an ARC.

After the transfer:

The borrower must repay the ARC.
The ARC can recover the loan just like the bank could.

Section 5(2A) – Transfer of Security Rights

If the bank had any security rights over:

Tangible Assets

House
Land
Vehicle
Machinery

Intangible Assets

Patent
Trademark
Copyright
Licence

those rights also automatically transfer to the ARC.

Example:

If a house was mortgaged to the bank, after the transfer, the mortgage will belong to the ARC.

Section 5(3) – Existing Contracts Continue

After the transfer of the financial asset:

All existing documents continue to remain valid, such as:

Loan Agreements
Mortgage Deeds
Guarantees
Powers of Attorney
Approvals
Permissions
Consents
Other legal documents

The ARC simply takes the place of the bank.

Example:

A loan agreement signed between the borrower and the bank remains valid even after the loan is transferred to the ARC.

Section 5(4) – Pending Cases Continue

If any:

Suit
Appeal
Legal proceeding

is already pending before a court or tribunal when the financial asset is transferred,

the case does not end because of the transfer.

Instead, the ARC continues the case in place of the bank.

Example:

A bank has filed a recovery case before the DRT. During the case, the bank sells the loan to an ARC. The ARC will continue the same case.

Section 5(5) – Substitution of ARC in Pending Cases

After purchasing the financial asset, the ARC may, with the consent of the original lender (originator), apply before:

Debts Recovery Tribunal (DRT)
Debts Recovery Appellate Tribunal (DRAT)
Court
Any other authority

to replace the bank’s name with the ARC’s name in pending proceedings.

The concerned authority may then substitute the ARC as the new party.

Example:

The bank’s name in a pending DRT case is replaced with the ARC’s name.

Section 5A – Transfer of Pending Cases to One DRT

Section 5A(1)

Sometimes:

One borrower has taken loans from more than one bank.
Different banks have filed recovery cases in different Debts Recovery Tribunals (DRTs).
Later, one ARC acquires all those loans.

In such a situation, the ARC may apply to the Debts Recovery Appellate Tribunal (DRAT) to transfer all pending cases to one DRT.

Purpose:

To avoid multiple proceedings in different tribunals.

Section 5A(2)

The DRAT:

Gives all parties an opportunity to be heard.
May order that all cases be transferred to one DRT.

Section 5A(3)

The transfer order passed by the DRAT is binding on all concerned DRTs, even if they are under different jurisdictions.

Section 5A(4)

After all cases are transferred:

The selected DRT will decide the matter.
Any Recovery Certificate issued by that DRT will be executed according to the Recovery of Debts and Bankruptcy Act, 1993.

Important Points for Exams

An ARC can acquire financial assets by issuing bonds/debentures or by entering into a transfer agreement with a bank or financial institution.
Documents executed for asset reconstruction or securitisation are exempt from stamp duty.
Once the financial asset is transferred, the ARC becomes the new lender, and all the rights of the bank automatically vest in the ARC.
Security interests over both tangible and intangible assets also transfer to the ARC.
Existing loan agreements, mortgages, guarantees, and other legal documents remain valid after the transfer.
Pending suits, appeals, and recovery proceedings continue, with the ARC replacing the bank where necessary.
If multiple recovery cases relating to the same borrower are pending before different DRTs, the DRAT can transfer them to one DRT for efficient and uniform adjudication.

Section 6: Notice to Obligor and Discharge of Obligation

Purpose of Section 6

Section 6 explains what happens after an Asset Reconstruction Company (ARC) acquires a financial asset from a bank or financial institution. It deals with:

Notice to the borrower (obligor),
Payment to the ARC, and
Handling of payments received by the bank after the transfer.

Section 6(1) – Notice to the Obligor

After a financial asset is transferred to an ARC, the bank or financial institution may issue a notice informing:

The Obligor (Borrower),
Any other concerned person, and
The concerned registering authority (such as the Registrar of Companies (ROC) or any authority where the mortgage, charge, hypothecation, or assignment is registered).

The notice states that the financial asset has now been acquired by the ARC.

Example:

A bank sells a borrower’s loan to an ARC. The bank sends a notice to the borrower informing that future payments should be made to the ARC.

Key Point:
The notice informs everyone that the ARC is now the new owner of the financial asset.

Section 6(2) – Payment to the ARC

After receiving the notice, the Obligor (Borrower) must make all future payments directly to the ARC.

Any payment made to the ARC will be treated as a valid and complete discharge of the borrower’s liability for that payment.

Example:

After receiving the notice, the borrower pays the monthly instalment to the ARC instead of the bank. The borrower is considered to have legally fulfilled that payment obligation.

Key Point:
Once notice is received, the borrower should pay only the ARC.

Section 6(3) – If No Notice is Given

Sometimes the bank may not issue a notice immediately after transferring the financial asset.

In such a case:

If the borrower continues to make payments to the bank,
The bank cannot keep the money.
The bank holds the money in trust for the ARC.
The bank must immediately transfer the money or property received to the ARC or its authorised agent.

Example:

A borrower, unaware of the transfer, pays ₹1 lakh to the bank. Since no notice was given, the bank must forward the ₹1 lakh to the ARC.

Key Point:
Even if the borrower pays the bank because no notice was received, the money ultimately belongs to the ARC.

Important Points for Exams

After acquiring a financial asset, the bank may notify the borrower, other concerned persons, and the relevant registering authority about the transfer.
Once the borrower receives the notice, all future payments must be made to the ARC.
Payment made to the ARC after receiving the notice is treated as a full discharge of the borrower’s liability for that payment.
If no notice is given and the borrower pays the bank, the bank holds the money in trust for the ARC and must transfer it to the ARC without delay.
The purpose of Section 6 is to ensure that payments reach the rightful owner of the financial asset after its transfer to the ARC.

Section 7: Issue of Security Receipts and Raising of Funds by Asset Reconstruction Company

Purpose of Section 7

Section 7 explains how an Asset Reconstruction Company (ARC) raises money after purchasing financial assets (NPAs). It mainly deals with the issue of Security Receipts (SRs) and the management of investors’ funds.

Section 7(1) – Issue of Security Receipts (SRs)

After acquiring a financial asset under Section 5, an ARC may issue Security Receipts (SRs) to raise funds.

These Security Receipts may be offered to:

Qualified Buyers (QBs), and
Other categories of investors (including non-institutional investors) as specified by the RBI in consultation with SEBI.

The issue of Security Receipts must comply with:

Companies Act
Securities Contracts (Regulation) Act, 1956
SEBI Act, 1992

Example:

An ARC purchases ₹100 crore of NPAs from a bank. To finance the purchase, it issues Security Receipts to eligible investors.

Key Point:
Security Receipts are issued only after the ARC acquires the financial assets.

Section 7(2) – Raising Funds Through Schemes

An ARC raises money by creating Schemes for acquiring financial assets.

For every scheme, the ARC must:

Maintain separate accounts.
Keep records separately for each financial asset acquired.
Use the money recovered from that financial asset only for:
- Repayment (redemption) of Security Receipts.
- Payment of returns to investors under that scheme.

Example:

If an ARC has Scheme A and Scheme B, the money recovered under Scheme A cannot be used for Scheme B.

Key Point:
Each scheme must have separate accounts and separate utilisation of funds.

Section 7(2A) – Scheme May Be a Trust

An ARC may structure its scheme as a Trust.

In such a case:

The ARC acts as the Trust Manager.
The financial assets and funds are held in trust for the benefit of investors holding Security Receipts.

The Indian Trusts Act, 1882 applies to such trusts, unless it is inconsistent with the SARFAESI Act.

Example:

An ARC creates a trust to hold acquired NPAs. Investors purchase Security Receipts, and the ARC manages the trust on their behalf.

Key Point:
The ARC holds the assets for the benefit of investors, not for its own benefit.

Section 7(3) – Meeting of Qualified Buyers

If the ARC is unable to recover the financial assets, the investors have certain rights.

When Qualified Buyers holding at least 75% of the total value of the Security Receipts issued under a scheme agree, they can call a meeting of all Qualified Buyers.

Any resolution passed in that meeting is binding on the ARC.

Example:

Recovery from NPAs is very poor. Investors holding 80% of the Security Receipts call a meeting and decide to change the recovery strategy. The ARC must follow that decision.

Key Point:
Investors holding 75% or more of the value of the Security Receipts can control important decisions regarding the scheme.

Section 7(4) – Procedure for the Meeting

The meeting of Qualified Buyers should follow, as far as possible, the same procedure that is followed for meetings of the Board of Directors of the ARC.

Example:

The meeting should have proper notice, discussion, voting, and passing of resolutions in a manner similar to board meetings.

Key Point:
The meeting must be conducted in an organised and legally recognised manner.

Important Points for Exams

An ARC can issue Security Receipts (SRs) only after acquiring financial assets under Section 5.
Security Receipts may be issued to Qualified Buyers and other categories of investors notified by RBI in consultation with SEBI.
An ARC raises funds by creating separate schemes, and each scheme must have separate accounts.
The money recovered under a particular scheme must be used only for that scheme, including redemption of Security Receipts and payment of returns.
A scheme may be established as a Trust, with the ARC acting as the Trust Manager for the benefit of investors.
If recovery is unsatisfactory, Qualified Buyers holding at least 75% of the value of the Security Receipts may call a meeting, and the decisions taken in that meeting are binding on the ARC.
Meetings of Qualified Buyers should follow procedures similar to Board of Directors’ meetings.

Section 8: Exemption from Registration of Security Receipts

Purpose of Section 8

Section 8 provides that Security Receipts (SRs) issued by an Asset Reconstruction Company (ARC) and their transfer do not require compulsory registration under the Registration Act, 1908.

Section 8(a) – Security Receipts Need Not Be Registered

A Security Receipt (SR) issued by an ARC under Section 7 does not require compulsory registration, provided it does not itself create, declare, assign, limit, or extinguish any right, title, or interest in immovable property.

The Security Receipt only gives the holder an undivided interest in the financial asset through a registered instrument.

Example:

An ARC issues Security Receipts to investors after purchasing NPAs. These Security Receipts do not need to be registered under the Registration Act.

Key Point:
Issuing a Security Receipt does not require registration.

Section 8(b) – Transfer of Security Receipts

The transfer of Security Receipts from one investor to another also does not require compulsory registration.

Example:

An investor sells his Security Receipt to another eligible investor. No registration under the Registration Act is required.

Key Point:
Both the issue and transfer of Security Receipts are exempt from compulsory registration.

Section 9: Measures for Asset Reconstruction

Purpose of Section 9

Section 9 explains the methods (measures) that an Asset Reconstruction Company (ARC) can adopt to recover bad loans (NPAs) and reconstruct financial assets.

Section 9(1) – Measures Available to an ARC

An ARC may adopt one or more of the following measures:

(a) Change or Takeover of Management

The ARC may:

Change the existing management of the borrower, or
Take over the management of the borrower’s business.

Example:

A company repeatedly defaults on loan repayment. The ARC replaces the management to improve the company’s performance.

(b) Sale or Lease of the Business

The ARC may:

Sell the whole or part of the borrower’s business, or
Lease the whole or part of the business.

Example:

The ARC sells one factory of the borrower to recover outstanding dues.

(c) Rescheduling of Debt

The ARC may revise the repayment terms by:

Extending the repayment period,
Changing instalments, or
Granting additional time for repayment.

This makes the ARC a shareholder in the borrower company instead of only being a lender.

Example:

Instead of recovering ₹50 lakh in cash, the ARC converts that amount into equity shares of the borrower company.

Important Note:
The Act specifically states that such conversion is legally valid.

Section 9(2) – RBI’s Power

The Reserve Bank of India (RBI) determines the policy and issues directions regarding:

How ARCs should carry out asset reconstruction,
Regulation of the borrower’s management,
Fees to be charged by ARCs, and
Other related matters.

Key Point:

RBI supervises and regulates the asset reconstruction process.

Section 9(3) – ARC Must Follow RBI Directions

While taking any measure under Section 9(1), the ARC must act according to the policies and directions issued by RBI.

Example:

If RBI issues guidelines on debt restructuring, every ARC must follow those guidelines.

Important Points for Exams

Section 8 exempts the issue and transfer of Security Receipts (SRs) from compulsory registration under the Registration Act, 1908.
Under Section 9, an ARC has several options for recovering NPAs, including:
- Changing or taking over the borrower’s management,
- Selling or leasing the business,
- Rescheduling loan repayments,
- Enforcing the security interest,
- Settling the borrower’s dues,
- Taking possession of secured assets, and
- Converting debt into shares of the borrower company.
RBI has the authority to frame policies and issue directions regarding asset reconstruction, and every ARC must comply with those directions.

Section 10: Other Functions of Asset Reconstruction Company

Purpose of Section 10

Section 10 explains the additional functions that an Asset Reconstruction Company (ARC) can perform besides asset reconstruction and securitisation.

Section 10(1) – Other Functions of an ARC

An ARC registered under Section 3 may perform the following functions:

(a) Act as an Agent for Banks or Financial Institutions

An ARC may act as an agent for a bank or financial institution to recover loans from borrowers.

For this service, the ARC receives a fee or charges as agreed between the parties.

Example:

A bank hires an ARC to recover a defaulted loan. The ARC recovers the money and receives a service fee from the bank.

(b) Act as a Manager

An ARC may act as a Manager under Section 13(4)(c) of the SARFAESI Act.

As a manager, the ARC manages the secured assets or business of the borrower on behalf of the secured creditor.

The ARC is paid a mutually agreed fee for this service.

Example:

After taking possession of a factory under the SARFAESI Act, the bank appoints the ARC to manage the factory until it is sold.

(c) Act as a Receiver

An ARC may act as a Receiver if it is appointed by a Court or Tribunal.

Section 11: Resolution of Disputes

Purpose of Section 11

Section 11 provides the method for resolving disputes relating to:

Securitisation,
Asset Reconstruction, or
Non-payment of any amount due (including interest).

How are disputes resolved?

If a dispute arises between:

A Bank,
A Financial Institution,
An Asset Reconstruction Company (ARC), or
A Qualified Buyer (QB),

the dispute shall be resolved through:

Conciliation, or
Arbitration

under the Arbitration and Conciliation Act, 1996.

Meaning of Conciliation

Conciliation is a process where a neutral conciliator helps the parties reach a mutually acceptable settlement.

Example:

A bank and an ARC disagree over the terms of a financial asset transfer. They appoint a conciliator to help them settle the dispute.

Meaning of Arbitration

Arbitration is a process where an independent arbitrator hears both sides and gives a binding decision.

Example:

An ARC and a Qualified Buyer disagree over the payment of returns under a Security Receipt scheme. The dispute is referred to arbitration.

Deemed Consent

The Act provides that the parties are deemed to have given written consent for resolving such disputes through conciliation or arbitration.

This means a separate arbitration agreement is not required for disputes covered under Section 11.

Important Points for Exams

An ARC may act as:
- An Agent for banks or financial institutions to recover dues,
- A Manager under Section 13(4)(c), or
- A Receiver appointed by a court or tribunal.
An ARC cannot act as a Manager if doing so would create pecuniary (financial) liability for it.
Without prior RBI approval, an ARC cannot carry on any business other than:
- Securitisation,
- Asset Reconstruction, or
- The functions specifically permitted under Section 10(1).
Disputes between banks, financial institutions, ARCs, and Qualified Buyers relating to securitisation, asset reconstruction, or non-payment are resolved through conciliation or arbitration under the Arbitration and Conciliation Act, 1996.
Under Section 11, the parties are treated as if they have already agreed in writing to resolve such disputes through arbitration or conciliation.

Section 12: Power of RBI to Determine Policy and Issue Directions

Purpose of Section 12

Section 12 gives the Reserve Bank of India (RBI) the power to regulate and supervise Asset Reconstruction Companies (ARCs) by issuing policies and directions.

The main objective is to:

Protect investors,
Maintain financial stability, and
Ensure that ARCs are managed properly.

Section 12(1) – RBI Can Issue Policies and Directions

If RBI believes that it is necessary:

In the public interest,
To regulate the financial system,
To protect the interests of investors, or
To prevent an ARC from being managed in a harmful manner,

it may issue policies and directions to one or more ARCs.

The ARC must follow those directions.

RBI may issue directions on:

Income Recognition
Accounting Standards
Provision for Bad and Doubtful Debts
Capital Adequacy
Risk-based Capital Requirements
Deployment (Use) of Funds

Example:

RBI directs all ARCs to maintain a minimum capital adequacy ratio. Every ARC must comply with this direction.

Section 12(2) – Specific Matters on Which RBI Can Give Directions

Apart from its general powers, RBI may issue directions regarding:

(a) Acquisition of Financial Assets

RBI may decide:

Which types of financial assets an ARC can acquire.
The procedure for acquiring those assets.
How those assets should be valued.

Example:

RBI may prescribe the method for valuing NPAs before an ARC purchases them.

(b) Limit on Acquisition

RBI may prescribe the maximum value of financial assets that an ARC can acquire.

Example:

RBI may restrict an ARC from purchasing NPAs beyond a specified financial limit.

(c) Fees and Charges

RBI may regulate:

Fees charged by ARCs.
Expenses incurred in managing financial assets.

Example:

RBI may issue guidelines regarding management fees charged by an ARC.

(d) Transfer of Security Receipts

RBI may issue rules regarding the transfer of Security Receipts (SRs) issued to Qualified Buyers.

Example:

RBI may prescribe who can buy or transfer Security Receipts.

Important Points for Exams

RBI is the main regulator of ARCs.
ARCs are legally bound to follow RBI’s policies and directions.
RBI may regulate:
- Accounting standards,
- Income recognition,
- Provisioning,
- Capital adequacy,
- Asset acquisition,
- Fees,
- Transfer of Security Receipts.

SARFAESI Act, 2002 – Section 12A: Power of RBI to Call for Statements and Information

Purpose of Section 12A

Section 12A allows RBI to obtain information from an ARC whenever required.

Power of RBI

RBI may direct an ARC to submit:

Statements,
Reports,
Records,
Any information relating to its business or affairs,

within the time specified by RBI.

Example:

RBI asks an ARC to submit details of all NPAs acquired during the previous financial year.

The ARC must submit the information within the prescribed time.

Important Point

The ARC cannot refuse to provide the information requested by RBI.

SARFAESI Act, 2002 – Section 12B: Power of RBI to Conduct Audit and Inspection

Purpose of Section 12B

Section 12B empowers RBI to:

Audit,
Inspect, and
Supervise

the functioning of Asset Reconstruction Companies.

Section 12B(1) – Audit and Inspection

RBI may itself, or through authorised persons:

Conduct an audit, or
Inspect an ARC

whenever necessary.

Example:

RBI inspects an ARC to verify whether it is complying with RBI guidelines.

Section 12B(2) – Duty of the ARC

The ARC and all its officers must:

Cooperate with RBI.
Provide assistance during the audit or inspection.

Example:

The ARC must allow RBI officials to examine its records and documents.

Section 12B(3) – RBI’s Powers After Inspection

If RBI finds that the ARC is functioning in a manner harmful to:

Public interest, or
Investors holding Security Receipts,

RBI may issue orders to ensure proper management.

RBI may:

(a) Remove or Appoint Directors

Remove the Chairman.
Remove any Director.
Appoint Additional Directors.

Important:

Before removing the Chairman or any Director, RBI must give them an opportunity of being heard.

(b) Appoint an Observer

RBI may appoint one of its officers as an Observer to monitor the meetings and functioning of the ARC’s Board of Directors.

Example:

If RBI notices weak governance in an ARC, it may appoint an Observer to supervise the Board.

Section 12B(4) – Duty to Produce Records

Every:

Director,
Officer, and
Employee

of the ARC must:

Produce books of accounts,
Financial records,
Documents,
Information,
Statements,

whenever required by the person conducting the audit or inspection.

The information must be provided within the time specified.

Example:

During an inspection, RBI asks for loan files and accounting records. The ARC must produce them without delay.

Important Points for Exams

Section 12 gives RBI the power to issue binding policies and directions to ARCs.
Section 12A allows RBI to demand any statement or information relating to the business of an ARC.
Section 12B empowers RBI to conduct audits and inspections of ARCs at any time.
Every ARC, its directors, officers, and employees must fully cooperate during an RBI inspection.
If RBI finds that an ARC is being managed in a manner harmful to the public or investors, it may:
- Remove the Chairman or Directors,
- Appoint Additional Directors, or
- Appoint an RBI Observer to supervise the Board.
Before removing a Chairman or Director, RBI must follow the principle of natural justice by giving them an opportunity to be heard.

SARFAESI Act, 2002 – Chapter II (Sections 3–12B) Quick Revision Table

Section	Topic	Quick Revision
Section 3	Registration of Asset Reconstruction Companies (ARCs)	ARC must obtain RBI Registration Certificate (CoR) and satisfy prescribed conditions before starting securitisation or asset reconstruction business.
Section 4	Cancellation of Registration	RBI may cancel an ARC’s registration for non-compliance, violation of RBI directions, or failure to meet statutory conditions.
Section 5	Acquisition of Financial Assets	ARC acquires financial assets (NPAs) from banks/FIs by agreement or securities and becomes the new lender with all legal rights.
Section 5A	Transfer of Pending DRT Cases	DRAT may transfer multiple recovery cases relating to the same borrower to one Debts Recovery Tribunal (DRT).
Section 6	Notice to Obligor	Borrower (obligor) must pay the ARC after receiving notice. If no notice is given, the bank must transfer any received payment to the ARC.
Section 7	Issue of Security Receipts (SRs)	ARC raises funds by issuing Security Receipts (SRs) to Qualified Buyers through separate schemes.
Section 8	Exemption from Registration	Issue and transfer of Security Receipts do not require compulsory registration under the Registration Act, 1908.
Section 9	Measures for Asset Reconstruction	ARC may change management, sell/lease business, reschedule debt, enforce security interest, settle dues, take possession of secured assets, or convert debt into shares.
Section 10	Other Functions of ARC	ARC may act as an agent, manager, or receiver, but needs RBI approval for any other business.
Section 11	Resolution of Disputes	Disputes among banks, ARCs, and Qualified Buyers are resolved through conciliation or arbitration under the Arbitration and Conciliation Act, 1996.
Section 12	RBI’s Regulatory Powers	RBI may issue binding policies and directions regarding accounting, provisioning, capital adequacy, asset acquisition, fees, and Security Receipts.
Section 12A	Power to Call for Information	RBI may require an ARC to furnish statements, reports, or any information relating to its business.
Section 12B	Audit and Inspection	RBI may inspect or audit ARCs, remove directors, appoint additional directors or observers, and require production of records.

CHAPTER III
ENFORCEMENT OF SECURITY INTEREST

Section 13: Enforcement of Security Interest

Purpose of Section 13

Section 13 is the most important provision of the SARFAESI Act. It gives secured creditors (banks and financial institutions) the power to recover their dues without the intervention of any court or tribunal, by enforcing the security interest created over the borrower’s secured assets.

Section 13(1) – Enforcement Without Court Intervention

A secured creditor may enforce its security interest without approaching a court or tribunal.

This power overrides Sections 69 and 69A of the Transfer of Property Act, 1882.

Example:

A borrower defaults on a home loan. The bank can enforce the mortgage and recover its dues without first filing a civil suit.

Key Point:
The SARFAESI Act allows banks to recover secured loans quickly without lengthy court proceedings.

Section 13(2) – Demand Notice (60 Days)

When:

The borrower defaults in repayment of the secured debt or any instalment, and
The loan account is classified as a Non-Performing Asset (NPA),

the secured creditor may issue a written demand notice.

The borrower is given 60 days to repay the entire outstanding amount.

If the borrower fails to pay within 60 days, the secured creditor may take action under Section 13(4).

Important Exception

The requirement that the account must first become an NPA does not apply where funds have been raised through debt securities.

In such cases, the Debenture Trustee may also enforce the security interest.

Example:

A borrower receives a 60-day notice demanding repayment of ₹50 lakh. If the borrower fails to pay within 60 days, the bank can proceed under Section 13(4).

Section 13(3) – Contents of the Demand Notice

The notice issued under Section 13(2) must clearly mention:

The amount payable by the borrower.
The secured assets that the creditor intends to enforce if payment is not made.

Example:

The notice specifies that ₹30 lakh is outstanding and that the mortgaged house will be enforced in case of non-payment.

Section 13(3A) – Borrower’s Representation or Objection

After receiving the demand notice, the borrower may:

Make a representation, or
Raise objections.

The secured creditor must consider them.

If the objections are rejected, the secured creditor must communicate the reasons within 15 days.

Important Point

Receiving reasons for rejection does not give the borrower an immediate right to approach the Debts Recovery Tribunal (DRT) under Section 17.

Example:

The borrower argues that the outstanding amount has been wrongly calculated. The bank examines the objection and rejects it, giving written reasons within 15 days.

Section 13(4) – Measures Available to the Secured Creditor

If the borrower fails to repay within 60 days, the secured creditor may adopt one or more of the following measures:

(a) Take Possession of Secured Assets

The secured creditor may take possession of the secured assets and may:

Lease them,
Assign them, or
Sell them

to recover the outstanding debt.

Example:

The bank takes possession of a mortgaged house and auctions it.

(b) Take Over Management of the Borrower’s Business

The secured creditor may take over the management of the borrower’s business.

However:

This power can be exercised only if a substantial part of the business has been given as security.
If only one part of the business is secured and can be separated, only that part may be taken over.

Example:

A factory has been mortgaged to the bank. The bank may take over the management of that factory.

(c) Appoint a Manager

The secured creditor may appoint a Manager to manage the secured assets after taking possession.

Example:

After taking possession of a commercial building, the bank appoints a manager to maintain and operate it.

(d) Recover Money from Third Parties

The secured creditor may direct any person:

Who has acquired secured assets from the borrower, or
Who owes money to the borrower,

to pay that money directly to the secured creditor.

Example:

A tenant paying rent to the borrower is instructed to pay the rent directly to the bank.

Section 13(5) – Valid Discharge

If a third person pays the secured creditor under Section 13(4)(d), the payment is treated as if it had been made to the borrower.

The payer has no further liability regarding that payment.

Section 13(5A), 13(5B) and 13(5C) – Secured Creditor May Purchase the Property

If:

An auction fails because no bidder offers at least the reserve price,

the secured creditor may authorise its officer to bid for the property in a subsequent auction.

If the secured creditor purchases the property:

The purchase price is adjusted against the outstanding debt.

The provisions of the Banking Regulation Act, 1949 apply to such acquired property.

Example:

No buyer offers the reserve price. The bank itself purchases the property and adjusts its value against the loan.

Section 13(6) – Rights of the Purchaser

When the secured asset is sold after possession:

The purchaser receives the property with all legal rights as if it had been transferred directly by the owner.

Example:

A person who purchases a property in a SARFAESI auction becomes its lawful owner.

Section 13(7) – Application of Sale Proceeds

The money realised from the sale of secured assets is applied in the following order:

Costs, charges and expenses incurred in recovery.
Outstanding dues of the secured creditor.
Remaining balance (if any) is paid to the person legally entitled to receive it.

Example:

Sale Price = ₹80 lakh

Recovery expenses = ₹5 lakh
Loan dues = ₹70 lakh
Remaining ₹5 lakh is returned to the borrower or the person entitled to it.

Section 13(8) – Borrower’s Right to Redeem

The borrower may stop the sale by paying:

Entire outstanding dues,
Costs,
Charges, and
Expenses,

before publication of the auction notice or invitation for quotations/tenders/private treaty.

If payment is made:

The secured asset cannot be sold.
Any further sale proceedings must stop.

Example:

The borrower pays all dues before the auction notice is published. The bank cannot sell the property.

Section 13(9) – Multiple Secured Creditors

Where more than one secured creditor has financed the same borrower:

The rights under Section 13(4) can be exercised only if creditors representing at least 60% of the outstanding debt (by value) agree.

The decision is binding on all secured creditors.

Example:

Three banks jointly finance a company.

If banks holding 60% or more of the outstanding loan agree to enforce security, all banks are bound by that decision.

Section 13(10) – Recovery of Balance Amount

If the sale proceeds are insufficient to recover the entire debt:

The secured creditor may file an application before:

The Debts Recovery Tribunal (DRT), or
The competent court,

to recover the remaining balance from the borrower.

Example:

Outstanding loan = ₹1 crore

Sale proceeds = ₹80 lakh

The bank may recover the remaining ₹20 lakh through the DRT.

Section 13(11) – Action Against Guarantor or Pledged Assets

The secured creditor may:

Proceed directly against the guarantor, or
Sell pledged assets,

without first taking possession of the secured assets under Section 13(4).

Example:

The bank may initiate recovery against the guarantor even before auctioning the borrower’s mortgaged property.

Section 13(12) – Authorised Officers

The powers under Section 13 may be exercised only by officers authorised by the secured creditor.

Example:

The bank authorises its Chief Manager to issue notices and take possession of secured assets.

Section 13(13) – Restriction on Borrower

After receiving the 60-day notice under Section 13(2), the borrower cannot:

Sell,
Lease,
Transfer, or
Otherwise dispose of

the secured assets (except in the ordinary course of business)

without the prior written consent of the secured creditor.

Example:

After receiving the SARFAESI notice, the borrower cannot sell the mortgaged land without the bank’s written permission.

Important Points for Exams

Section 13 is the heart of the SARFAESI Act, as it allows enforcement of security interest without court intervention.
Before taking action, the secured creditor must issue a 60-day demand notice under Section 13(2).
The notice must specify the amount due and the secured assets proposed to be enforced.
The borrower may raise objections, and the secured creditor must reply within 15 days if the objections are rejected.
If the borrower does not repay within 60 days, the secured creditor may:
- Take possession of secured assets,
- Take over the borrower’s management,
- Appoint a manager,
- Recover money from third parties owing money to the borrower.
The borrower can redeem the secured asset by paying all dues before the publication of the auction notice.
Where there are multiple secured creditors, creditors representing at least 60% of the outstanding debt (by value) must agree before enforcing security.
If the sale proceeds are insufficient, the secured creditor may recover the balance through the Debts Recovery Tribunal (DRT) or the competent court.
After receiving the demand notice, the borrower cannot transfer the secured assets without the secured creditor’s written consent.

Section 14: Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) to Assist Secured Creditor in Taking Possession of Secured Assets

Purpose of Section 14

Section 14 empowers the Chief Metropolitan Magistrate (CMM) or the District Magistrate (DM) to assist a secured creditor in taking possession of secured assets when the borrower fails to hand over possession voluntarily.

This section ensures that banks and financial institutions can obtain administrative assistance for enforcing security interest under the SARFAESI Act.

Section 14(1) – Application to CMM or DM

If a secured creditor is required to:

Take possession of a secured asset, or
Sell or transfer a secured asset under the SARFAESI Act,

the secured creditor may submit a written application to:

The Chief Metropolitan Magistrate (CMM), or
The District Magistrate (DM),

within whose jurisdiction the secured asset or related documents are situated.

After receiving the application, the CMM or DM shall:

Take possession of the secured asset and related documents; and
Hand them over to the secured creditor.

Example:

A borrower refuses to vacate a mortgaged house even after the bank has completed the SARFAESI procedure. The bank applies to the District Magistrate under Section 14, who assists in taking possession of the property and handing it over to the bank.

Affidavit to be Filed by the Authorised Officer

The application under Section 14 must be accompanied by an affidavit sworn by the Authorised Officer of the secured creditor.

The affidavit must state the following:

(i) Amount of Financial Assistance

The total financial assistance granted and the total amount due to the bank or financial institution on the date of the application.

(ii) Existence of Valid Security Interest

The borrower has created a valid and subsisting security interest over the secured property, and the claim is within the limitation period.

(iii) Details of Secured Properties

Complete details of the properties over which the security interest has been created.

(iv) Default by the Borrower

The borrower has committed default in repaying the loan.

(v) Classification as NPA

Due to the default, the loan account has been classified as a Non-Performing Asset (NPA).

(vi) Service of 60-Day Notice

A 60-day demand notice under Section 13(2) has been served upon the borrower.

(vii) Borrower’s Objections Considered

If the borrower submitted any representation or objection, it was considered by the secured creditor, and the reasons for rejecting it were communicated to the borrower.

(viii) Borrower Failed to Repay

Even after receiving the notice, the borrower failed to repay the outstanding amount, and therefore the secured creditor is entitled to take possession under Sections 13(4) and 14.

(ix) Compliance with the Act

The secured creditor has complied with all provisions of the SARFAESI Act and the Rules made under it.

Time Limit for Passing the Order

After receiving the affidavit, the CMM or DM must satisfy himself about its contents and pass an order:

Within 30 days from the date of the application.

If the order cannot be passed within 30 days due to reasons beyond his control:

The reasons must be recorded in writing.
The order may be passed within a further period.
The total period cannot exceed 60 days from the date of the application.

Example:

The bank files an application on 1st July. Normally, the DM should pass the order by 31st July. If there is a genuine delay, the order may be passed later, but not beyond 60 days from the date of the application.

Pending Proceedings

The requirement of filing an affidavit does not apply to proceedings that were already pending before the CMM or DM on the date when this amendment came into force.

Section 14(1A) – Authorisation of a Subordinate Officer

The CMM or DM may authorise a subordinate officer to:

Take possession of the secured assets and related documents; and
Hand them over to the secured creditor.

Example:

The District Magistrate authorises the Sub-Divisional Magistrate (SDM) or another competent officer to execute the possession order.

Section 14(2) – Use of Force

To ensure compliance with the possession order, the CMM, DM, or the authorised officer may:

Take necessary steps; and
Use reasonable force, if required,

to obtain possession of the secured asset.

Example:

If the borrower refuses to vacate the property, the authorised officer may seek police assistance to take lawful possession.

Section 14(3) – Protection of Actions Taken

Any action taken by:

The Chief Metropolitan Magistrate,
The District Magistrate, or
An officer authorised by them,

under Section 14 cannot be challenged in any court or before any other authority.

This protection applies only to actions taken in accordance with the provisions of Section 14.

Example:

If the District Magistrate lawfully assists the bank in taking possession under Section 14, that action cannot be questioned in another court merely because possession was taken.

Important Points for Exams

Section 14 enables a secured creditor to seek assistance from the Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) for taking possession of secured assets.
The application must be supported by an affidavit of the authorised officer containing the required declarations, including:
- Details of the loan,
- Valid security interest,
- Borrower’s default,
- Classification of the account as an NPA,
- Service of the 60-day notice under Section 13(2),
- Consideration of the borrower’s objections,
- Failure of the borrower to repay, and
- Compliance with the SARFAESI Act and Rules.
The CMM or DM should pass the possession order within 30 days of the application. In exceptional cases, this period may be extended, but the total period cannot exceed 60 days, with reasons recorded in writing.
The CMM or DM may authorise a subordinate officer to take possession and deliver the secured assets to the secured creditor.
The CMM, DM, or authorised officer may use reasonable force if necessary to take possession.
Actions lawfully taken under Section 14 by the CMM, DM, or authorised officer are protected from challenge before any court or authority under Section 14(3).

Section 15: Manner and Effect of Takeover of Management

Purpose of Section 15

Section 15 explains how the management of a borrower’s business is taken over by a secured creditor or an Asset Reconstruction Company (ARC) and what legal effects follow after the takeover.

Section 15(1) – Appointment of Directors or Administrator

When:

An Asset Reconstruction Company (ARC) takes over the management under Section 9, or
A secured creditor takes over the management under Section 13(4)(b),

it must publish a public notice in:

One English newspaper, and
One regional (Indian language) newspaper,

circulating in the area where the borrower’s principal office is located.

After publishing the notice:

If the borrower is a company, the secured creditor may appoint new directors.
If the borrower is not a company, the secured creditor may appoint an administrator to manage the business.

Example:

A company defaults on a loan and the bank takes over its management. The bank publishes a notice in newspapers and appoints new directors to manage the company.

Section 15(2) – Effect of the Public Notice

Once the notice is published, the following legal consequences arise:

(a) Existing Management Vacates Office

All existing directors (if it is a company), or
All persons controlling the business (if it is not a company),

are deemed to have vacated their offices immediately.

(b) Management Contracts End

Any agreement appointing a person as a director or manager automatically comes to an end.

(c) New Directors or Administrator Take Control

The newly appointed directors or administrator take custody and control of:

Business property,
Assets,
Documents,
Actionable claims, and
Other business effects.

All business property is treated as being under their control from the date the notice is published.

(d) Full Management Powers

The newly appointed directors or administrator become the lawful management of the borrower.

They alone can exercise all powers relating to the management of the business, whether those powers arise from:

Memorandum of Association,
Articles of Association, or
Any other legal source.

Section 15(3) – Special Rules for Borrower Companies

When the borrower is a company and its management has been taken over:

(a) Shareholders Cannot Appoint Directors

The shareholders or any other person cannot appoint or nominate new directors.

(b) Shareholders’ Resolutions Need Approval

Any resolution passed by shareholders becomes effective only after approval by the secured creditor.

(c) Winding-up Proceedings Need Consent

No court can:

Order winding up of the company, or
Appoint a receiver,

without the consent of the secured creditor.

Example:

Even if shareholders pass a resolution to appoint a new director, it has no legal effect unless the secured creditor approves it.

Section 15(4) – Restoration of Management

Once the secured creditor fully recovers its outstanding debt, it must restore the management of the borrower’s business.

Example:

After recovering the entire loan amount, the bank hands back the management of the company to the borrower.

Exception to Restoration

Management need not be restored if:

The secured creditor,
Other secured creditors,
An Asset Reconstruction Company (ARC),
A financial institution, or
Any assignee,

has converted part of its debt into shares of the borrower company and, as a result, has obtained controlling interest in that company.

In such a case, the secured creditors are not required to return the management to the borrower.

Example:

A bank converts a large part of its unpaid loan into company shares and becomes the controlling shareholder. Since it now controls the company, it is not required to hand back the management to the original borrower.

Important Points for Exams

Section 15 explains the procedure and legal effect of taking over the management of a borrower’s business.
A public notice must be published in one English newspaper and one regional language newspaper.
The secured creditor may appoint directors (for companies) or an administrator (for other borrowers).
Existing directors or persons managing the business automatically vacate their offices after publication of the notice.
All management contracts are terminated.
The newly appointed directors or administrator obtain full control over the borrower’s business and assets.
Shareholders cannot appoint directors or implement resolutions without the approval of the secured creditor.
Winding-up proceedings or appointment of a receiver require the consent of the secured creditor.
After full recovery of the debt, the management should ordinarily be restored to the borrower.
Exception: If the secured creditor acquires controlling interest in the borrower company by converting debt into shares, it is not required to restore the management.

Section 16: No Compensation to Directors for Loss of Office

Purpose of Section 16

Section 16 provides that when the management of a borrower’s business is taken over under the SARFAESI Act, the existing directors or managers cannot claim compensation merely because they lose their position.

Section 16(1) – No Right to Compensation

When the management of the borrower’s business is taken over under the SARFAESI Act:

The Managing Director,
Any Director,
Manager, or
Any person in charge of management,

is not entitled to receive any compensation for:

Loss of office, or
Early termination of the management contract.

This rule applies even if:

A contract provides for compensation, or
Any other law provides such a right.

Example:

A company’s Managing Director loses his position after the bank takes over the company’s management under SARFAESI. He cannot claim compensation from the company simply because he lost his office.

Section 16(2) – Other Legal Rights Remain

Although compensation for loss of office is not allowed, the person can still recover any money that is legally payable to him for other reasons.

Examples include:

Unpaid salary,
Bonus,
Reimbursement of expenses,
Any other lawful dues.

However, he cannot claim compensation for losing his position.

Example:

If a director is owed six months’ unpaid salary, he can recover that salary. But he cannot demand compensation because his appointment ended early.

Important Points for Exams

Directors and managers cannot claim compensation for loss of office when management is taken over under the SARFAESI Act.
This rule overrides any contract or any other law.
They can still recover other lawful dues such as unpaid salary or other legitimate payments.
Only compensation for loss of office or premature termination is barred.

Section 17: Application Against Measures to Recover Secured Debts

Purpose of Section 17

Section 17 gives a legal remedy to any person, including the borrower, who is aggrieved by the action taken by a secured creditor under Section 13(4).

Such a person can approach the Debts Recovery Tribunal (DRT) for relief.

Section 17(1) – Right to File an Application

Any person (including the borrower) who is aggrieved by the measures taken under Section 13(4) may file an application before the Debts Recovery Tribunal (DRT).

The application must be filed:

Within 45 days from the date on which the measure was taken.
Along with the prescribed fee.

Different fees may be prescribed for:

Borrowers, and
Persons other than borrowers.

Example:

A bank takes possession of a borrower’s property under Section 13(4). The borrower may challenge this action before the DRT within 45 days.

Borrower Cannot Approach DRT After Reply to Objection

If the bank rejects the borrower’s objection under Section 13(3A) and communicates the reasons, that alone does not give the borrower the right to file an application before the DRT.

The right to approach the DRT arises only after the bank takes action under Section 13(4).

Example:

The bank rejects the borrower’s reply to the demand notice. The borrower cannot immediately file an application before the DRT. He must wait until the bank actually takes measures under Section 13(4).

Section 17(1A) – Jurisdiction of DRT

The application may be filed before the DRT within whose jurisdiction:

The cause of action arises (wholly or partly),
The secured asset is situated, or
The bank branch or office maintaining the loan account is located.

Section 17(2) – Duty of DRT

The DRT examines whether the secured creditor has followed:

The provisions of the SARFAESI Act, and
The Rules made under the Act.

The Tribunal checks whether the creditor’s action is lawful.

Section 17(3) – If the Bank’s Action is Illegal

If the DRT finds that the secured creditor has violated the Act or Rules, it may:

Declare the bank’s action invalid.
Restore possession of the secured asset to the borrower or any other aggrieved person.
Restore the management of the business, if management was taken over.
Pass any other appropriate order.

Example:

If the bank takes possession without following the mandatory legal procedure, the DRT may order the property to be returned to the borrower.

Section 17(4) – If the Bank’s Action is Valid

If the DRT finds that the bank has acted according to the SARFAESI Act and Rules, the secured creditor may continue using the recovery measures under Section 13(4).

Section 17(4A) – Disputes About Tenancy or Lease

If any person claims tenancy or lease rights over the secured asset, the DRT can examine whether:

The lease has expired.
The lease violates Section 65A of the Transfer of Property Act.
The lease violates the mortgage conditions.
The lease was created after the bank issued the demand notice under Section 13(2).

If any of these conditions are satisfied, the DRT may pass appropriate orders under the SARFAESI Act.

Example:

A borrower creates a new tenancy after receiving the bank’s demand notice to prevent the auction of the property. The DRT can declare such tenancy invalid.

Section 17(5) – Time Limit for Disposal

The DRT should dispose of the application:

As quickly as possible, and
Preferably within 60 days.

If necessary, the DRT may extend the time by recording reasons.

However, the total period should not exceed four months from the date of filing.

Section 17(6) – Delay Beyond Four Months

If the DRT does not decide the application within four months:

Any party may approach the Debts Recovery Appellate Tribunal (DRAT).
The DRAT may direct the DRT to dispose of the case quickly.

Example:

The borrower files an application before the DRT, but no decision is given for more than four months. The borrower may approach the DRAT for an order directing the DRT to decide the case promptly.

Section 17(7) – Procedure Followed by DRT

Except where the SARFAESI Act provides otherwise, the DRT follows the procedure prescribed under the:

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now the Recovery of Debts and Bankruptcy Act, 1993), and
The Rules made under that Act.

Important Points for Exams

Section 17 provides the right to challenge measures taken under Section 13(4) before the DRT.
The application must be filed within 45 days.
Mere rejection of the borrower’s representation under Section 13(3A) does not give the right to approach the DRT.
The DRT has jurisdiction where:
- the cause of action arises,
- the secured asset is located, or
- the concerned bank branch maintains the loan account.
The DRT examines whether the secured creditor has complied with the SARFAESI Act and Rules.
If the bank’s action is illegal, the DRT may:
- declare the action invalid,
- restore possession or management, and
- issue other appropriate directions.
If the bank’s action is valid, the secured creditor may continue recovery under Section 13(4).
The DRT can examine disputes relating to tenancy or lease over the secured asset.
Applications should normally be decided within 60 days, and in any case within four months.
If the DRT delays beyond four months, any party may approach the DRAT for expeditious disposal.

Section 18: Appeal to the Appellate Tribunal

Purpose of Section 18

Section 18 gives a person the right to appeal against the order of the Debts Recovery Tribunal (DRT) before the Debts Recovery Appellate Tribunal (DRAT).

Section 18(1) – Right to Appeal

Any person who is aggrieved by an order passed by the Debts Recovery Tribunal (DRT) under Section 17 may file an appeal before the Debts Recovery Appellate Tribunal (DRAT).

The appeal must:

Be filed within 30 days from the date of receiving the DRT’s order.
Be accompanied by the prescribed fee.

Different fees may be prescribed for:

Borrowers, and
Persons other than borrowers.

Example:

The DRT upholds the bank’s action of taking possession of the borrower’s property. If the borrower is dissatisfied, he may file an appeal before the DRAT within 30 days.

Deposit Requirement for Borrower

A borrower cannot file an appeal unless he first deposits 50% of the debt amount.

The amount is calculated based on whichever is lower:

The amount claimed by the secured creditor, or
The amount determined by the DRT.

However, the DRAT has the power to reduce this deposit.

The reduced amount cannot be less than 25% of the debt.

Example:

The bank claims ₹20 lakh, but the DRT determines the debt as ₹18 lakh. The borrower normally has to deposit 50% of ₹18 lakh (₹9 lakh). If justified, the DRAT may reduce the deposit, but not below 25% (₹4.5 lakh).

Section 18(2) – Procedure Followed by DRAT

Unless the SARFAESI Act provides otherwise, the DRAT follows the procedure laid down under the:

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now the Recovery of Debts and Bankruptcy Act, 1993), and
Rules made under that Act.

Important Points for Exams

Appeal lies from the DRT to the DRAT.
Appeal must be filed within 30 days.
Prescribed appeal fee must be paid.
A borrower must deposit 50% of the debt before the appeal is entertained.
The DRAT may reduce the deposit to not less than 25% for recorded reasons.
The DRAT follows the procedure under the Recovery of Debts and Bankruptcy Act, unless the SARFAESI Act provides otherwise.

Section 18A: Validation of Fees Levied

Purpose of Section 18A

Section 18A validates the fees collected for filing appeals before the amendment made by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004.

Meaning

Any fee collected for filing:

An application before the DRT, or
An appeal before the DRAT,

before the 2004 Amendment Act came into force is deemed to have been legally valid.

This means such fees cannot be challenged merely because the amendment came later.

Example:

If a person paid an appeal fee before the 2004 amendment, that fee is treated as legally collected.

Important Points for Exams

Section 18A validates fees collected before the 2004 amendment.
Earlier fee collections are treated as legally valid.

Section 18C: Right to Lodge a Caveat

Purpose of Section 18C

Section 18C gives a person the right to file a caveat.

A caveat is a request made to the court or tribunal asking that no order should be passed without first giving the caveator an opportunity of being heard.

Section 18C(1) – Who Can Lodge a Caveat?

A caveat may be filed when:

An application or appeal is expected to be filed, or
An application or appeal has already been filed

under:

Section 17,
Section 17A,
Section 18, or
Section 18B.

The following persons may lodge a caveat:

The secured creditor, or
Any person claiming a right to appear before the DRT, District Judge, DRAT, or High Court.

Example:

A bank expects the borrower to file an appeal before the DRAT. The bank files a caveat so that no order is passed without hearing it.

Section 18C(2) – Duty of the Caveator

After filing the caveat, the caveator must send a notice of the caveat by registered post with acknowledgment due to the person who has filed or is expected to file the application or appeal.

Example:

The bank files a caveat and sends a copy of it to the borrower by registered post.

Section 18C(3) – Duty of the Court or Tribunal

If an application or appeal is filed after a caveat has been lodged, the concerned Tribunal, District Judge, Appellate Tribunal, or High Court must serve notice of the application or appeal on the caveator.

This ensures that the caveator gets an opportunity to be heard before any order is passed.

Section 18C(4) – Duty of the Applicant or Appellant

Once the applicant or appellant receives notice of the caveat, he must provide the caveator with:

A copy of the application or appeal, and
Copies of all supporting documents filed before the court or tribunal.

Section 18C(5) – Validity of Caveat

A caveat remains valid for 90 days from the date it is filed.

If no application or appeal is filed within those 90 days, the caveat automatically expires.

Example:

A caveat is filed on 1st January. If no application or appeal is filed by 31st March, the caveat ceases to have effect.

Important Points for Exams

A caveat ensures that no order is passed without giving the caveator an opportunity to be heard.
It may be filed by a secured creditor or any person having a right to appear.
The caveator must send notice of the caveat to the expected applicant or appellant by registered post.
The court or tribunal must notify the caveator if an application or appeal is filed.
The applicant or appellant must supply copies of the application and supporting documents to the caveator.
A caveat remains effective for 90 days unless an application or appeal is filed within that period.

Section 19: Right of Borrower to Receive Compensation and Costs

Purpose of Section 19

Section 19 protects the borrower or any other aggrieved person from wrongful action taken by a secured creditor.

If the secured creditor takes possession of a secured asset without following the SARFAESI Act or the Rules, the affected person may receive compensation and legal costs.

When Can Compensation Be Claimed?

Compensation may be awarded when:

The Debts Recovery Tribunal (DRT),
The Court of the District Judge,
The Debts Recovery Appellate Tribunal (DRAT), or
The High Court,

holds that the possession taken by the secured creditor was not in accordance with the SARFAESI Act and the Rules made under it.

The authority must also direct the secured creditor to return the secured asset.

Who Can Receive Compensation?

The following persons may receive compensation:

The borrower, or
Any other aggrieved person who has filed:
- an application under Section 17 or Section 17A, or
- an appeal under Section 18 or Section 18A.

What Can Be Awarded?

The concerned authority may award:

Compensation for the wrongful action of the secured creditor.
Costs, such as legal expenses or litigation costs.

The amount of compensation and costs is decided by the Tribunal, Court, Appellate Tribunal, or High Court based on the facts of the case.

Example

A bank takes possession of a borrower’s house without following the mandatory procedure under the SARFAESI Act.

The borrower files an application before the DRT under Section 17.

The DRT finds that the bank acted illegally and orders the bank to return the house.

The DRT may also direct the bank to pay compensation and the legal costs incurred by the borrower.

Important Points for Exams

Section 19 provides a remedy against illegal possession taken by a secured creditor.
Compensation is available only if the competent authority finds that the secured creditor violated the SARFAESI Act or the Rules.
The authority must also order the return of the secured asset.
The benefit is available to:
- the borrower, or
- any other aggrieved person who has filed an application or appeal under the relevant provisions.
The amount of compensation and costs is determined by the concerned Tribunal, Court, Appellate Tribunal, or High Court.

Chapter III: Enforcement of Security Interest

Section	Topic	Quick Revision
13	Enforcement of Security Interest	Secured creditor can enforce security interest without court intervention after borrower defaults and fails to repay within 60 days of notice.
14	Assistance by CMM/DM	Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) helps the secured creditor take possession of secured assets.
15	Takeover of Management	Explains the procedure and legal effects when the management of the borrower’s business is taken over.
16	No Compensation to Directors	Directors or managers removed after takeover cannot claim compensation for loss of office, but can recover other lawful dues.
17	Application to DRT	Aggrieved person (including borrower) may apply to the Debts Recovery Tribunal (DRT) within 45 days against measures taken under Section 13(4).
17A	Omitted	This section has been omitted from the Act.
18	Appeal to DRAT	Appeal against DRT’s order can be filed before the Debts Recovery Appellate Tribunal (DRAT) within 30 days. Borrower generally must deposit 50% of the debt (reducible to 25%).
18A	Validation of Fees	Validates fees collected for applications and appeals before the 2004 amendment.
18B	Omitted	This section has been omitted from the Act.
18C	Right to Lodge a Caveat	A secured creditor or other interested person may file a caveat to ensure no order is passed without giving them an opportunity to be heard. A caveat remains valid for 90 days.
19	Compensation and Costs	If possession by the secured creditor is found illegal, the borrower or other aggrieved person may receive compensation and legal costs, and the secured asset may be restored.

CHAPTER IV
CENTRAL REGISTRY

Section 20 – Central Registry

Meaning

The Central Government can establish a Central Registry to maintain records of:

Securitisation transactions.
Asset reconstruction transactions.
Creation of security interest (mortgage, hypothecation, charge, etc.).

The purpose is to maintain a central database of secured assets and security interests.

Important Points

The Central Registry is established by the Central Government through a notification.
It has its own official seal.
The Head Office is located at a place decided by the Central Government.
Branch offices may also be established wherever required.
The Government may define the territorial jurisdiction of each office.

Relation with Other Laws

The Central Registry works in addition to existing registration laws. It does not replace registrations required under laws such as:

Registration Act, 1908
Companies Act
Motor Vehicles Act
Patents Act
Merchant Shipping Act
Designs Act

It also does not affect the priority or validity of charges already registered under those laws.

Section 20A – Integration of Registration Systems with Central Registry

Meaning

The Central Government may integrate different registration systems with the Central Registry to create one central database.

Purpose

To make information regarding security interests available at one place.

Registration Systems that may be Integrated

Records under:

Companies Act
Registration Act
Motor Vehicles Act
Merchant Shipping Act
Patents Act
Designs Act
Any other law relating to registration of security interests

After Integration

The Central Government will notify the date of integration.
From that date, security interests already registered under those laws will be deemed to be registered with the Central Registry for the purposes of the SARFAESI Act.

Section 20B – Delegation of Powers

Meaning

The Central Government may delegate its powers relating to:

Establishment
Operation
Regulation

of the Central Registry to the Reserve Bank of India (RBI).

Important Point

Delegation is done through a Government notification.
RBI exercises these powers subject to conditions prescribed by the Government.

Section 21 – Central Registrar

Meaning

The Central Government appoints a Central Registrar to manage the Central Registry.

Functions of the Central Registrar

The Central Registrar is responsible for:

Registering securitisation transactions.
Registering asset reconstruction transactions.
Registering security interests created over properties.

Appointment of Other Officers

The Central Government may also appoint:

Additional officers
Assistant officers
Other designated officers

These officers work:

Under the supervision and control of the Central Registrar.
Perform duties assigned by the Central Registrar.

Section 22 – Register of Securitisation, Reconstruction and Security Interest Transactions

Meaning

A Central Register is maintained at the Head Office of the Central Registry to record important transactions under the SARFAESI Act.

The Central Register records:

Securitisation of financial assets.
Reconstruction of financial assets.
Creation of security interest.

Important Points

The register is maintained by the Central Registrar.
Records may be kept:
- In physical form, or
- In electronic form (computer, digital records, etc.).
Electronic records are treated as valid entries in the Central Register.

Section 23 – Filing of Transactions

Meaning

Every transaction relating to:

Securitisation,
Asset reconstruction, or
Creation of security interest

must be filed with the Central Registrar.

Important Points

Registration must be done in the prescribed form.
Prescribed registration fee must be paid.
The Central Government may require registration of:
- Existing (old) transactions, and
- Different types of security interests over different properties.
The Government also prescribes:
- Registration forms.
- Registration fees.

Section 24 – Modification of Security Interest

Meaning

Whenever any registered security interest is changed, the modification must also be registered.

Examples of Modification

Increase or decrease in loan amount.
Change in mortgage terms.
Change in secured property.
Change in conditions of security.

Important Points

The Asset Reconstruction Company (ARC) or secured creditor must inform the Central Registrar.
The modified details are entered in the Central Register.
The same registration procedure applies to modifications.

Section 25 – Reporting Satisfaction of Security Interest

Meaning

When the borrower has fully repaid the loan or the security interest has been completely satisfied, the secured creditor or ARC must inform the Central Registrar.

Important Points

Intimation must be given within 30 days from full payment or satisfaction.
The Central Registrar records a Memorandum of Satisfaction in the Central Register.

If the Borrower Objects

If the borrower informs the Central Registrar that satisfaction has not been recorded properly, the Registrar:
- Issues a notice to the secured creditor or ARC.
- Gives up to 14 days to explain.
If no valid reason is given:
- Satisfaction is recorded.
If a valid reason is given:
- The Registrar records the objection in the register.
- The borrower is informed.

Section 26 – Right to Inspect the Central Register

Meaning

The Central Register is open for public inspection.

Important Points

Any person may inspect the registered details during business hours.
Prescribed inspection fee must be paid.
Inspection is available:
- Physically, and
- Electronically (online), where records are maintained digitally.

Section 26A – Rectification by Central Government

Meaning

The Central Government has the power to correct mistakes or allow delayed registration in appropriate cases.

When can Rectification be Allowed?

The Government may grant relief if:

Registration was accidentally omitted.
Wrong information was filed.
There was an unintentional mistake.
Delay occurred due to sufficient cause.
Rectification will not prejudice the rights of creditors.
It is otherwise fair and just to allow correction.

Who can Apply?

Application may be made by:

Secured creditor.
Asset Reconstruction Company (ARC).
Any interested person.

Important Point

The Government may:

Extend the time for registration.
Correct mistakes.
Correct modification entries.
Correct satisfaction entries.

However, the order cannot affect the rights of third parties that arose before the actual registration was completed.

CHAPTER IVA
REGISTRATION BY SECURED CREDITORS AND OTHER CREDITORS

Section 26B

Registration by Secured Creditors and Other Creditors (Simple Notes in English)

Meaning

Section 26B allows the Central Government to extend the Central Registry system to other creditors, not just secured creditors, for recording security interests.

Section 26B(1) – Extension of Central Registry

The Central Government may issue a notification extending the provisions of Chapter IV (Central Registry) to all creditors, including those who are not secured creditors.

These creditors can register:

Creation of security interest.
Modification of security interest.
Satisfaction (discharge) of security interest.

The purpose is to secure repayment of financial assistance given to the borrower.

Section 26B(2) – Registration of Transactions

After the Government issues the notification:

Any creditor (including secured creditors and other creditors) may file details of:
- Creation of security interest.
- Modification of security interest.
- Satisfaction of security interest.

The filing must be:

In the prescribed form.
In the prescribed manner.

Section 26B(3) – Limitation on Other Creditors

A creditor who is not a secured creditor may register its security interest with the Central Registry.

However:

Such registration does not give that creditor the right to enforce security under the SARFAESI Act.
Only secured creditors as defined under the Act can use SARFAESI enforcement powers.

Section 26B(4) – Registration of Government Attachments

Government authorities responsible for recovering:

Taxes, or
Other Government dues,

must file details of any attachment order with the Central Registry.

The filing should include:

Details of the assessee (debtor).
Amount of tax or Government dues.
Details of the attached property.

This must be done from the date notified by the Central Government.

Section 26B(5) – Registration of Court Attachment Orders

If any person obtains an attachment order against a borrower’s property from a court or other competent authority:

That person may file the attachment order with the Central Registry.
The filing must be:
- In the prescribed form.
- In the prescribed manner.
- Along with the prescribed fee.

Section 26C – Effect of Registration of Transactions

Meaning

Registration of a security interest or attachment order with the Central Registry acts as a public notice to everyone.

Section 26C(1) – Public Notice

Once the details of:
- Creation of security interest,
- Modification of security interest,
- Satisfaction of security interest, or
- Attachment order
are filed with the Central Registry, they are treated as public notice.
The public notice becomes effective from the date and time of registration.

Purpose

Everyone is considered to have notice of the registered security interest.
This prevents future disputes regarding ownership or priority of claims.

Section 26C(2) – Priority of Registered Claims

If a security interest or attachment order is registered with the Central Registry:

The registered secured creditor or creditor gets priority over:
- Any later security interest,
- Any later sale,
- Lease,
- Assignment,
- Licence, or
- Attachment order relating to the same property.

This means later transactions remain subject to the earlier registered claim.

Exception

This rule does not apply to transactions made by the borrower in the ordinary course of business.

Section 26D – Right of Enforcement of Securities

Meaning

A secured creditor can use the enforcement powers under Chapter III of the SARFAESI Act only if its security interest has been registered with the Central Registry.

Important Points

Registration of the security interest is mandatory.
Without registration, the secured creditor cannot enforce the security under the SARFAESI Act.
This provision overrides any inconsistent law.

Section 26E – Priority to Secured Creditors

Meaning

After the security interest has been registered, the secured creditor has the first right to receive payment from the secured asset.

Priority of Payment

The secured creditor’s dues will be paid before:

Other debts.
Government taxes.
Cesses.
Government rates.
Local authority dues.

This gives the secured creditor priority over all other creditors.

Exception – Insolvency and Bankruptcy Code (IBC)

If insolvency or bankruptcy proceedings are pending under the Insolvency and Bankruptcy Code, 2016 (IBC):

The priority of payment will be governed by the IBC.
In such cases, the provisions of the IBC override Section 26E.

Chapter IV – Central Registry & Chapter IVA – Registration by Secured Creditors and Other Creditors

Section	Topic	Quick Revision
20	Central Registry	Central Government establishes the Central Registry to record securitisation, asset reconstruction, and security interests.
20A	Integration of Registration Systems	Different registration systems (Companies Act, Registration Act, MV Act, etc.) can be integrated with the Central Registry.
20B	Delegation of Powers	Central Government may delegate powers relating to the Central Registry to the RBI.
21	Central Registrar	Central Government appoints the Central Registrar and supporting officers to manage the Central Registry.
22	Central Register	Maintains records of securitisation, asset reconstruction, and security interests in physical or electronic form.
23	Filing of Transactions	Every securitisation, asset reconstruction, and security interest transaction must be registered with the Central Registrar in the prescribed form and fee.
24	Modification of Security Interest	Any change in a registered security interest must also be reported and registered.
25	Satisfaction of Security Interest	ARC or secured creditor must report full repayment/satisfaction within 30 days for recording in the Central Register.
26	Inspection of Records	Any person can inspect the Central Register by paying the prescribed fee (physical or electronic inspection).
26A	Rectification	Central Government may allow delayed registration or correct accidental mistakes and omissions in registration.

Chapter IVA – Registration by Secured Creditors and Other Creditors

Section	Topic	Quick Revision
26B	Registration by Creditors	Government may allow both secured and other creditors to register creation, modification, and satisfaction of security interests. However, only secured creditors can enforce security under SARFAESI.
26C	Effect of Registration	Registration acts as public notice and gives priority over any later security interest, sale, lease, assignment, licence, or attachment.
26D	Right of Enforcement	A secured creditor can enforce security under SARFAESI only after registering the security interest with the Central Registry.
26E	Priority to Secured Creditors	After registration, secured creditors have first priority over other debts, taxes, cesses, and Government dues, subject to the Insolvency and Bankruptcy Code, 2016 (IBC).

CHAPTER V
OFFENCES AND PENALTIES

Section 27 – Penalties

Meaning

This section provided penalties for failure to comply with registration-related requirements under the Act.

Penalty was applicable for:

Failure to register transactions under Section 23.
Failure to report modification of security interest under Section 24.
Failure to report satisfaction (full repayment) under Section 25.

Punishment

Fine up to ₹5,000 per day for every day the default continued.

Important Note

The provisions of Section 27 were omitted after the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
Therefore, this section is no longer in force from the date the amended Chapter came into effect.

Section 28 – Penalties for Non-Compliance with RBI Directions

Meaning

Earlier, this section dealt with punishment for not following directions issued by the Reserve Bank of India (RBI).

Important Note

Section 28 has been omitted by the 2016 Amendment Act.
It is no longer applicable.

Section 29 – Offences

Meaning

Any person who violates the provisions of the SARFAESI Act or the rules made under it commits an offence.

Offence Includes

Contravening any provision of the Act.
Attempting to violate the Act.
Assisting or encouraging another person to violate the Act (abetment).

Punishment

The offender may be punished with:

Imprisonment up to 1 year, or
Fine, or
Both imprisonment and fine.

Section 30 – Cognizance of Offences

Meaning

This section explains who can file a complaint and which court can try offences under the SARFAESI Act.

Section 30(1) – Filing of Complaint

A court can take cognizance of an offence under the Act only if a written complaint is made by:

An officer of the Central Registry, authorised by the Central Registrar; or
An officer of the Reserve Bank of India (RBI), authorised by the RBI.

Private persons cannot directly initiate criminal prosecution under these provisions.

Section 30(2) – Competent Court

Only the following courts can try offences under the SARFAESI Act:

Metropolitan Magistrate, or
Judicial Magistrate First Class (JMFC).

A lower court has no jurisdiction to try offences under this Act.

Section 30A – Power of Adjudicating Authority to Impose Penalty (Simple Notes)

Purpose of Section 30A

This section gives the Adjudicating Authority (appointed by the Reserve Bank of India) the power to impose financial penalties on an Asset Reconstruction Company (ARC) or any person who fails to comply with directions issued by the RBI under the SARFAESI Act.

Sub-section (1): Power to Impose Penalty

If an ARC or any person does not follow an RBI direction issued under the Act, the Adjudicating Authority may impose a penalty.

The penalty can be:

Up to ₹1 crore, or
Twice the amount involved in the violation (if that amount can be calculated),
Whichever is higher.

Continuing default

If the violation continues after the first day, an additional penalty of up to ₹1 lakh per day may be imposed until the default is corrected.

Example:
If an ARC ignores an RBI direction for several days, it may face:

A heavy initial penalty, and
An additional daily penalty until compliance is achieved.

Sub-section (2): Show Cause Notice and Hearing

Before imposing any penalty:

The Adjudicating Authority must issue a Show Cause Notice to the ARC or person.
The notice asks them to explain why the penalty should not be imposed.
The person or company must be given a reasonable opportunity of being heard.

Key Point:
No penalty should be imposed without following the principles of natural justice.

Sub-section (3): Time to Pay Penalty

Once the penalty is imposed:

It must be paid within 30 days from the date of issue of the notice.

Sub-section (4): Cancellation of Registration

If an Asset Reconstruction Company fails to pay the penalty within the prescribed period:

The Adjudicating Authority may cancel the ARC’s registration.

However,

The ARC must first be given an opportunity to be heard before its registration is cancelled.

Sub-section (5): No Double Proceedings

If:

The RBI has already imposed and recovered a penalty under Section 30A,

then

No criminal complaint can be filed in any court for the same default.

Purpose: Prevents double punishment for the same violation.

Sub-section (6): Court Proceedings Already Started

If a criminal complaint regarding the same default has already been filed in a court, then:

No penalty proceedings under Section 30A can be started.

Meaning:
Only one legal route (either court prosecution or penalty proceedings) can continue for the same default.

Explanation

1. Adjudicating Authority

An Adjudicating Authority means:

An officer or a committee of officers of the Reserve Bank of India (RBI),
Officially designated by the RBI’s Central Board through a notification,
Responsible for imposing penalties under Sections 30A, 30B, 30C and 30D.

2. Person in Default

A Person in Default includes:

An Asset Reconstruction Company (ARC),
Any individual or entity that commits a failure, contravention, or default under the Act,
Any person in charge of the company (such as responsible officers or directors), where applicable.

Such persons may also be proceeded against and punished under Section 33 for the violation committed.

Section 30B – Appeal Against Penalties

Purpose of Section 30B

This section gives a person in default the right to challenge an order passed under Section 30A(4) (such as cancellation of registration for non-payment of penalty).

Who can file an appeal?

A person in default who is aggrieved by an order passed under Section 30A(4) can file an appeal before the Appellate Authority.

Time Limit for Filing Appeal

The appeal must be filed within 30 days from the date of the order.

Delayed Appeal

The Appellate Authority may accept an appeal even after 30 days if:

The appellant shows sufficient cause for the delay.

Example:
If the delay occurred due to illness or another genuine reason, the Appellate Authority may allow the appeal.

Section 30C – Appellate Authority

Purpose of Section 30C

This section provides for the appointment, powers and functions of the Appellate Authority, which hears appeals against orders passed under Section 30A.

Sub-section (1): Appointment of Appellate Authority

The Central Board of the Reserve Bank of India (RBI) may designate:
- An officer, or
- A committee of officers,
to act as the Appellate Authority.

Sub-section (2): Hearing of Appeal

Before passing any order, the Appellate Authority must:

Give the person in default a reasonable opportunity of being heard.
After hearing both sides, it may pass any order it considers appropriate.

Sub-section (3): Power to Stay the Order

The Appellate Authority may:

Temporarily stay (suspend) the operation of the order passed under Section 30A,
Subject to any conditions it considers appropriate.

Example:
If the registration of an ARC has been cancelled, the Appellate Authority may temporarily stop the cancellation while the appeal is pending.

Sub-section (4): Dismissal of Appeal

If the person filing the appeal:

Does not comply with the conditions imposed while granting the stay, and
Has no reasonable excuse,

the Appellate Authority may dismiss the appeal.

Important Points

Appeal lies against an order passed under Section 30A(4).
Appeal should normally be filed within 30 days.
Delay may be condoned if there is a valid reason.
The Appellate Authority is appointed by the RBI.
The appellant must be given a fair hearing.
The Appellate Authority can grant a temporary stay on the penalty order.
Failure to follow the stay conditions may result in dismissal of the appeal.

Section 30D – Recovery of Penalties

Purpose of Section 30D

This section explains how the Reserve Bank of India (RBI) recovers penalties imposed under Section 30A if the person in default fails to pay.

Sub-section (1): Recovery of Penalty

A penalty imposed under Section 30A is treated as a recoverable sum.
It must be paid within 30 days from the date the RBI serves a demand notice.

If payment is not made within this period, the RBI may recover the amount by:

(a) Recovering directly from RBI accounts

The RBI may:

Debit the current account of the person maintained with the RBI, or
Sell (liquidate) securities held by that person with the RBI.

(b) Recovery through Third Parties

The RBI may issue a notice to any person who owes money to the defaulter, directing that person to:

Deduct the required amount, and
Pay it directly to the RBI instead of paying the defaulter.

Sub-section (2): Binding Nature of Notice

A recovery notice issued by the RBI is legally binding.

Where the notice is sent to:

A bank,
A post office, or
An insurance company,

payment can be made without requiring passbooks, deposit receipts, policies, or similar documents.

Sub-section (3): Claims After Notice

Any claim created after the RBI issues the recovery notice is invalid against the RBI’s recovery claim.

Sub-section (4): Right to Object

A person receiving the RBI notice may object by filing a statement on oath stating that:

No money is due to the defaulter, or
He does not hold any money belonging to the defaulter.

If this statement is true, he is not required to make payment to the RBI.

Sub-section (5): False Statement

If the objection is found to be false, the person becomes personally liable to the RBI.

His liability will be limited to:

The amount he actually owed the defaulter, or
The recoverable sum,

whichever is less.

Sub-section (6): Amendment or Withdrawal of Notice

The RBI may:

Amend the recovery notice,
Cancel (revoke) the notice, or
Extend the time allowed for payment.

Sub-section (7): Receipt of Payment

After receiving payment:

The RBI will issue a receipt.
The person making the payment is fully discharged from liability to the defaulter to the extent of the amount paid.

Sub-section (8): Payment to Defaulter After Notice

If a person pays the defaulter after receiving the RBI notice, instead of paying the RBI, that person becomes personally liable to the RBI.

The liability is limited to:

The amount paid to the defaulter, or
The recoverable sum,

whichever is less.

Sub-section (9): Failure to Comply with RBI Notice

If a person receiving the RBI notice fails to pay the required amount:

He is treated as a person in default, and
Recovery proceedings may also be initiated against him.

Sub-section (10): Court Recovery

The RBI may recover the amount through the Principal Civil Court having jurisdiction over:

The registered office,
Head office,
Principal place of business, or
Usual residence of the person in default.

The RBI’s notice is treated like a court decree for recovery.

Sub-section (11): Court Application

Recovery through the civil court can begin only when:

An authorised RBI officer files an application before the court, and
Certifies that the person in default has failed to pay the recoverable sum.

Chapter V: Offences and Penalties (Quick Revision Table)

Section	Topic	Quick Revision
27	Penalties	Penalty for failure to file, modify, or report security interest transactions under Sections 23–25. (Provision omitted after the 2016 amendment.)
28	Penalties for non-compliance of RBI directions	Omitted by the 2016 Amendment Act.
29	Offences	Contravention, attempt to contravene, or abetment of the Act or Rules is punishable with imprisonment up to 1 year, or fine, or both.
30	Cognizance of offences	Court can take cognizance only on a written complaint by an authorised officer of the Central Registry or RBI. Trial only by a Metropolitan Magistrate or Judicial Magistrate First Class.
30A	Power of Adjudicating Authority to impose penalty	RBI’s Adjudicating Authority may impose penalty up to ₹1 crore or twice the amount involved (whichever is higher), plus up to ₹1 lakh per day for continuing default. Non-payment may lead to cancellation of ARC registration.
30B	Appeal against penalties	Appeal against an order under Section 30A(4) can be filed before the Appellate Authority within 30 days (delay may be condoned for sufficient cause).
30C	Appellate Authority	RBI appoints the Appellate Authority. It may hear appeals, grant stay on the penalty order, impose conditions, or dismiss the appeal for non-compliance with those conditions.
30D	Recovery of penalties	RBI recovers unpaid penalties as recoverable sums by debiting accounts, selling securities, directing third parties to pay, or through the Principal Civil Court if necessary.

CHAPTER VI
MISCELLANEOUS

Section 31 – Provisions of this Act Not to Apply in Certain Cases (Simple Notes)

Purpose of Section 31

Section 31 lists the situations where the SARFAESI Act does not apply. In these cases, secured creditors cannot use the powers available under the Act for enforcement of security interest.

(a) Lien on Goods, Money or Securities

The Act does not apply to a lien created under:

The Indian Contract Act, 1872,
The Sale of Goods Act, 1930, or
Any other applicable law.

Meaning:
A lien is the legal right to retain possession of goods or property until a debt is paid. Such rights are governed by other laws, not by the SARFAESI Act.

(b) Pledge of Movable Property

The Act does not apply to a pledge of movable property under Section 172 of the Indian Contract Act, 1872.

Meaning:
If movable goods (such as jewellery or shares) are pledged as security, SARFAESI cannot be used to enforce that pledge.

(c) Security Created in Aircraft

The Act does not apply to any security interest created over an aircraft as defined under the Aircraft Act, 1934.

(d) Security Created in Vessels (Ships)

The Act does not apply to any security interest created over a vessel (ship) as defined under the Merchant Shipping Act, 1958.

(e) Omitted

Clause (e) has been omitted by amendment.

(f) Rights of an Unpaid Seller

The Act does not apply to the rights of an unpaid seller under Section 47 of the Sale of Goods Act, 1930.

Meaning:
An unpaid seller can exercise his legal rights under the Sale of Goods Act without relying on the SARFAESI Act.

(g) Property Not Liable to Attachment or Sale

The Act does not apply to property that cannot be attached or sold under the Code of Civil Procedure, 1908, except where the property has been specifically charged for the debt.

Examples of generally protected property include:

Necessary wearing apparel,
Basic household utensils,
Certain pensions,
Other exempt property under the CPC.

(h) Small Financial Assets

The Act does not apply where the secured debt is not more than ₹1 lakh.

Meaning:
SARFAESI cannot be used for recovery of very small loans up to ₹1 lakh.

(i) Agricultural Land

The Act does not apply to any security interest created over agricultural land.

Meaning:
Agricultural land cannot be enforced under the SARFAESI Act.

(j) Amount Due Less Than 20%

The Act does not apply where:

The amount due is less than 20% of the principal amount and the interest payable.

Meaning:
If only a small balance (less than 20% of the total principal plus interest) remains unpaid, SARFAESI proceedings cannot be initiated.

Section 31A – Power to Exempt a Class or Classes of Banks or Financial Institutions (Simple Notes)

Purpose of Section 31A

This section gives the Central Government the power to exempt certain banks or financial institutions from the provisions of the SARFAESI Act, if it is in the public interest.

Sub-section (1): Power of the Central Government

The Central Government may issue a notification stating that:

(a) Complete Exemption

Certain classes of banks or financial institutions will not be covered by one or more provisions of the SARFAESI Act.

(b) Partial Exemption

The Act may apply to certain classes of banks or financial institutions:

With specific exceptions,
Modifications, or
Adaptations,

as mentioned in the notification.

Meaning:
The Government can fully exempt or partially modify the application of the Act for particular categories of banks or financial institutions.

Sub-section (2): Parliamentary Approval

Before issuing such a notification:

A draft notification must be placed before both Houses of Parliament for a total period of 30 days while Parliament is in session.

If both Houses:

Disapprove the notification, it cannot be issued.
Suggest modifications, it can be issued only in the modified form approved by both Houses.

Sub-section (3): Calculation of 30 Days

While calculating the 30-day period:

Any period during which Parliament is prorogued or adjourned for more than four consecutive days is not counted.

Sub-section (4): Final Notification

After the notification is issued:

A copy must be placed before both Houses of Parliament as soon as possible.

Important Points

The Central Government can exempt certain banks or financial institutions from the Act.
Exemptions can be full or partial.
Such power can be exercised only in the public interest.
Parliament supervises the process through the draft notification procedure.

Section 32 – Protection of Action Taken in Good Faith (Simple Notes)

Purpose of Section 32

This section protects persons and authorities who perform their duties honestly and in good faith under the SARFAESI Act.

Protection Available

No legal action can be taken against:

The Reserve Bank of India (RBI),
The Central Registry,
Any secured creditor, or
Any officer of the above,

for anything done or omitted to be done in good faith under the Act.

Meaning of “Good Faith”

Good faith means:

Acting honestly,
Following the law,
Without any dishonest intention or fraud.

If an action is taken honestly while performing official duties, legal protection is available.

Important Point

This protection is available only for actions taken in good faith. It does not protect acts done dishonestly, fraudulently, or with mala fide intention.

Section 33 – Offences by Companies (Simple Notes)

Purpose of Section 33

This section explains who will be held responsible when a company commits an offence under the SARFAESI Act.

Sub-section (1): Liability of Company and Responsible Persons

If a company commits an offence:

The following are considered guilty:

The company itself, and
Every person who was:
- In charge of the company, and
- Responsible for conducting its business when the offence occurred.

Such persons can be prosecuted and punished.

Defence Available

A responsible person can avoid punishment if he proves that:

The offence was committed without his knowledge, or
He had exercised all due diligence to prevent the offence.

Sub-section (2): Liability for Consent, Connivance or Negligence

Even if a person was not directly responsible for the company’s overall business, he will also be guilty if the offence occurred because of:

His consent,
His connivance (active involvement), or
His negligence.

This includes:

Directors,
Managers,
Secretaries,
Other officers of the company.

Explanation

Company

For this section, “company” includes:

A body corporate,
A partnership firm,
Any association of individuals.

Director in a Firm

For a partnership firm:

A partner is treated as a director.

Important Points

Both the company and responsible officers may be punished.
Officers can defend themselves by proving lack of knowledge or due diligence.
Directors and managers are personally liable if the offence occurred because of their consent, connivance, or negligence.
Partnership firms are also covered under this section.

Section 34 – Civil Court Not to Have Jurisdiction (Simple Notes)

Purpose of Section 34

This section bars civil courts from interfering in matters that are to be decided under the SARFAESI Act.

No Jurisdiction of Civil Courts

Civil courts cannot hear or decide matters that fall within the jurisdiction of:

The Debts Recovery Tribunal (DRT), or
The Debts Recovery Appellate Tribunal (DRAT).

Such matters must be decided only by the authorities provided under the Act.

No Injunction by Civil Courts

No court or other authority can grant an injunction (stay order) against:

Any action already taken, or
Any action proposed to be taken,

under:

The SARFAESI Act, or
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Meaning:
Borrowers generally cannot stop SARFAESI recovery proceedings by filing a civil suit.

Section 36 – Limitation

Simple Notes

A secured creditor cannot take action under Section 13(4) (such as taking possession, selling the secured asset, or taking over management) if the claim has become time-barred.
The action must be started within the limitation period prescribed under the Limitation Act, 1963.
If the limitation period has expired, the secured creditor loses the right to enforce the security under the SARFAESI Act.

Key Point

SARFAESI cannot be used for a time-barred debt.
The creditor must act within the legal time limit.

Section 37 – Application of Other Laws Not Barred

Simple Notes

The SARFAESI Act does not replace other laws.
It works in addition to other applicable laws.
Therefore, banks and financial institutions can also rely on other laws wherever applicable.

Important Laws Mentioned

The SARFAESI Act operates along with:

Companies Act
Securities Contracts (Regulation) Act, 1956
SEBI Act, 1992
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now Recovery of Debts and Bankruptcy Act)
Any other applicable law in force

Key Point

SARFAESI is an additional remedy, not a substitute for other laws.

Section 38 – Power of Central Government to Make Rules

Simple Notes

1. Power to Make Rules

The Central Government can make rules to implement the provisions of the SARFAESI Act.
These rules are issued through a notification published in the Electronic Gazette.

2. Matters for Which Rules Can Be Made

The Central Government may make rules regarding:

Commercial rights covered under the Act.
Procedure and form for filing applications before the Debts Recovery Tribunal (DRT).
How authorised officers of secured creditors can exercise their powers.
Fees for applications before the DRT.
Form and fees for appeals before the Debts Recovery Appellate Tribunal (DRAT).
Integration of different registration systems with the Central Registry.
Conditions for delegation of powers to the Reserve Bank of India (RBI).
Safeguards for maintaining electronic records.
Procedure and fees for registration of securitisation and security interests.
Forms and fees for registration of different types of security interests.
Fees for inspection of the Central Register.
Procedure for filing attachment orders with the Central Registry.
Any other matter that the Act requires to be prescribed by rules.

3. Parliamentary Control

Every rule made by the Central Government must be placed before both Houses of Parliament.
Parliament may:
- approve the rule,
- modify it, or
- reject it.
Any modification or cancellation does not affect actions already taken under the rule before the change.

Section 39 – Certain Provisions Apply After Central Registry is Established

Simple Notes

Some provisions of the SARFAESI Act become effective only after the Central Registry has been established by the Central Government under Section 20(1).
These provisions mainly deal with:
- functioning of the Central Registry,
- appointment of the Central Registrar,
- maintenance of the Central Register,
- registration of securitisation, asset reconstruction and security interests,
- modification and satisfaction of security interests,
- inspection of records, and
- penalties related to registration (where applicable).

Key Point

The provisions relating to the Central Registry operate only after the Central Registry is officially set up.

Section 40 – Power to Remove Difficulties

Simple Notes

1. Power of Central Government

If any difficulty arises while implementing the SARFAESI Act, the Central Government may issue an order to remove that difficulty.
Such an order must:
- be published in the Official Gazette, and
- be consistent with the provisions of the Act (it cannot change or override the Act).

2. Time Limit

This power can be exercised only within two years from the commencement of the SARFAESI Act.
After two years, the Central Government cannot issue any order under this section.

3. Parliamentary Oversight

Every order made under this section must be placed before both Houses of Parliament.

Key Point

Section 40 gives the Central Government a temporary power to remove practical difficulties during the initial implementation of the Act.

Section 41 – Amendments to Certain Enactments

Simple Notes

The SARFAESI Act also amends certain existing laws listed in its Schedule.
These amendments are made to ensure that those laws are consistent with the provisions of the SARFAESI Act.

Key Point

Section 41 updates related laws to support the effective implementation of the SARFAESI Act.

Section 42 – Repeal and Saving

Simple Notes

1. Repeal of Ordinance

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Second) Ordinance, 2002 was repealed after the SARFAESI Act came into force.

2. Saving Clause

Even though the Ordinance was repealed:
- all actions taken, decisions made, notices issued, or proceedings started under the Ordinance remain valid.
- They are treated as if they were done under the corresponding provisions of the SARFAESI Act.

Key Point

Repeal of the Ordinance does not invalidate previous actions taken under it. Those actions continue to have legal effect under the SARFAESI Act.

SARFAESI Act – Chapter VI (Miscellaneous) | Quick Revision Table

Section	Topic	Quick Revision
31	Provisions not applicable	Lists cases where SARFAESI Act does not apply (e.g., pledge, agricultural land, aircraft, vessel, dues below ₹1 lakh, etc.).
31A	Power to exempt banks/FIs	Central Government may exempt certain classes of banks or financial institutions or apply the Act with modifications in public interest.
32	Protection in good faith	No legal action against RBI, Central Registry, secured creditors, or their officers for actions done in good faith under the Act.
33	Offences by companies	If a company commits an offence, the company and responsible officers may be held liable unless they prove lack of knowledge or due diligence.
34	Civil court jurisdiction barred	Civil courts cannot hear matters that fall within the jurisdiction of the DRT/DRAT. Courts cannot grant injunctions against SARFAESI actions.
35	Act overrides other laws	SARFAESI Act has overriding effect over inconsistent provisions of any other law.
36	Limitation	Secured creditor can enforce security only within the limitation period under the Limitation Act, 1963.
37	Other laws not barred	SARFAESI works in addition to other laws like the Companies Act, SEBI Act, and Recovery of Debts Act.
38	Power to make rules	Central Government may make rules to implement the Act. Such rules are placed before Parliament.
39	Central Registry provisions	Provisions relating to the Central Registry become applicable after the Central Registry is established.
40	Power to remove difficulties	Central Government may issue orders to remove implementation difficulties (within 2 years of commencement of the Act).
41	Amendments to enactments	Amends certain laws listed in the Schedule to align them with the SARFAESI Act.

SARFAESI Act, 2002 – Section 41 (Amendments to Certain Enactments)

Simple Revision Table

Year	Act Amended	Amendment Made by Section 41 of SARFAESI Act	Simple Meaning
1956	Companies Act, 1956	Asset Reconstruction Companies (ARCs) registered under Section 3(4) of the SARFAESI Act were included in the list of recognised financial institutions.	A registered ARC is legally recognised under the Companies Act.
1956	Securities Contracts (Regulation) Act, 1956	The definition of “Security Receipt (SR)” issued by an Asset Reconstruction Company was added to the Act.	Security Receipts issued by ARCs became legally recognised securities.
1985 (effective 1986)	Sick Industrial Companies (Special Provisions) Act (SICA), 1985	If an ARC acquires a company’s financial assets under Section 5(1) of SARFAESI, no fresh reference can be made to BIFR. Also, if secured creditors holding at least 75% (three-fourths) of the outstanding debt take action under Section 13(4) of SARFAESI, any pending BIFR proceedings will automatically end (abate).	SARFAESI proceedings get priority over BIFR proceedings, preventing delay in recovery by banks and ARCs.