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Measures of Asset Reconstruction under the SARFAESI Act

This article is written by Sarika Kumari 3RD YEAR BA LL.B student of Mewar Law Institute, Ghaziabad during her internship at Le Droit India.


Asset, reconstruction, securitization, borrower, ARCIL, SARFAESI act


SARFAESI Act or Securitisation And Reconstruction of Financial Assets and the Enforcement of Security Interest is one of the primary acts for security interest, enforced on 21st June 2002 this is an act to regulate securitization and reconstruction of financial assets and enforcement of security interests and to provide for a central database of security interests created on property rights, and for matters connected therewith or incidental thereto. By ‘Securitization’, we understand the “conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors. while ‘Asset Reconstruction’ means acquisition by any asset reconstruction company of any right or interests of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance (Section-2b). Thus, the SARFAESI act of 2002 authorizes the bank to decrease their non-performing assets by way of reconstructions and recovery. It basically requires that the banks are authorized to seize the borrower’s property except for the agricultural land without moving to court. This redefined the idea of Asset Reconstruction Company (ARC), letting the banks promote their Non- Performing Assets (NPA) to the ARC. The first Asset Reconstruction Company of India, ARCIL, turned into the regulation of this Act.

Application of act

For applying the SARFAESI Act, the borrower’s account must be classified as a Defaulted Asset by the secured creditor and have an outstanding balance of INR 100,000 or more. They are not applicable in certain situations as set out in Section 31 of the SARFAESI Act including an account where the residual debt is less than 20% of the original principal and interest amount.

When the right of an acquisition arises?

The secured obligee’s right to enforce the security interests under the SARFAESI Act does not arise unless the borrower’s account has been entered into the account books of the secured obligee (banks or financial institutions) following the guidelines of the Reserve Bank of India (RBI). The secured party must give the borrower 60 days’ notice to repay the amount owed and indicate the borrower’s assets for which the secured party intends to enforce collateral. If the borrower fails to meet his liability to the secured creditors after the 60-day notice period has expired, the secured creditor can obtain the collateral for the secured assets:

  1. by taking possession of the secured assets;
  2. take over the management of the guaranteed assets along with the right to transfer through lease, assignment, or sale of the secured assets;
  3. appoint a person to manage the guaranteed assets; and
  4. Requires each person who has acquired the borrower’s guaranteed assets to pay the amounts necessary to settle the debt.

Notable verdict

Asset vs M, 8 September 2011

 In this case, the court held that Section 9 of the SARFAESI Act provides for measures for assets reconstruction that a securitization company or reconstruction company may, without prejudice to the provisions contained in any other law for the time being in force, for the purpose of asset reconstruction and having regard to the guidelines framed by the Reserve Bank of India in this behalf, provide for any one or more of the measures specified therein. Thus Section 9 empowers a securitization company or Reconstruction Company to carry out the reconstruction of assets, including as provided in clauses (d) and (f). Any securitization company or reconstruction company can acquire financial assets of any bank or a financial institution under Section 5 of the SARFAESI Act.

Measures of asset reconstruction under the SARFAESI Act

Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. Provided in section 9 of SARFAESI act according to which-

  • an asset reconstruction company may, for the purposes of asset reconstruction, provide for any one or more of the following measures, namely :—
  • the proper managing in, or takeover of, the management of the business of the borrower;
  • the sale or lease of a part or whole of the business of the borrower;
  • rescheduling of payment of debts payable by the borrower;
  • enforcement of security interest in accordance with the provisions of this Act;
  • settlement of dues payable by the borrower;
  • Taking possession of secured assets in accordance with the provisions of this Act; (g) conversion of any portion of debt into shares of a borrower company.

Provided that conversion of any part of debt into shares of a borrower company shall be deemed always to have been valid as if the provisions of this clause were in force at all material times.

Asset vs M on 8 September, 2011 (

  • The Reserve Bank shall, for the purposes of sub-section (1), determine the policy and issue necessary directions including the direction for regulation of the management of the business of the borrower and fees to be charged.
  • The asset reconstruction company shall take measures under sub-section (1) in accordance with policies and directions of the Reserve Bank determined under sub-section (2).

The SARFAESI Act also provides an exception under the registration of security receipts. It means that when a reconstruction company or securitization company issues receipts then the holder of the receipt is enabled to undivided interests in the financial assets and there is no requirement of registration unless and otherwise, it is required under the Registration Act 1908. However, in the following cases the registration of the security receipt is required which are as under:

  • When there is a transfer of receipt;
  • The security receipt is limiting, declaring, creating, assigning, and extinguishing any title, right, or interest in immovable property.

Notable Verdict

Mardia Chemicals Ltd. v. ICICI Bank :

In this case, the Supreme Court of India stated the SARFAESI Act to be constitutionally valid. The Court said that a borrower may make an appeal against the lender in the DRT, without having to deposit 75% of the sum of the debt. If the tribunal does not stay the order, the lender may sell the assets. After this law was passed on 27 November 2002, ICICI Bank took possession of the Mardia Chemical plant in Vatva, Ahmedabad district, Gujarat. ICICI Bank was owed Rs. 300 crores, in all it owed Rs. 1,450 crores to 20 lenders.


An Asset Reconstruction Company are specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. Or in other words, ARCs are in the business of buying bad loans from banks. It can be done by either proper management of the borrower’s business, by taking over its business or by making the sale of a part or whole of the business, or by the rescheduling of payment of debts that is payable by the borrower according to the provisions of this Act. Several steps were taken by the RBI and the government to bring life into the asset reconstruction activities. In one such step, the Government raised FDI in the sector to 100%. Similarly, the ARCs may get a vital role in asset restructuring under the new Insolvency and Bankruptcy Code. In 2016, the RBI has amended the SARFAESI Act to give make the ARCs more efficient.


Asset vs M on 8 September, 2011 ( (full document)

ICICI Bank Takes over Mardia Chemicals Unit under NPA Act ( Chem Files Rs 5,600 Crore Suit Against Icici Bank | Business Standard News (

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