Sei sulla pagina 1di 7

The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool
for bad loans (NPA) recovery. It is possible where non-performing assets are backed by
securities charged to the Bank by way of hypothecation or mortgage or assignment. Upon loan
default, banks can seize the securities (except agricultural land) without intervention of the court.
SARFAESI is effective only for secured loans where bank can enforce the underlying security
eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary,
unless the security is invalid or fraudulent. However, if the asset in question is an unsecured
Asset, the bank would have to move the court to file civil case against the defaulters.
How it works?
The SARFAESI Act, 2002 gives powers of "seize and desist "to banks. Banks can give a notice
in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the
borrower fails to comply with the notice, the Bank may take recourse to one or more of the
following measures:
Take possession of the security for the loan Sale or lease or assign the right over the security.
Manage the same or appoint any person to manage the same.
The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies
(ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act
provides for sale of financial assets by banks and financial institutions to asset reconstruction
companies (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of
financial assets to ARCs.
Background of the act
The previous legislation enacted- for recovery of the default loans was Recovery of Debts due
to Banks and Financial institutions Act , 1993. This act was passed after the recommendations
of the Narsimham Committee - I was submitted to the government. This act had created the
forums such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for
expeditious adjudication of disputes with regard to ever increasing non recovered dues.
However, there were several loopholes in the act and these loopholes were misused by the
borrowers as well as the lawyers. This led to the government introspect the act and this
committee under Mr.Andhyarujina was appointed to examine banking sector reforms and
consideration to changes in the legal system. This committee recommended to enact a new
legislation for the establishment of securitization and reconstruction companies and to empower
the banks and financial institutions to take possession of the Non-performing assets. Thus, via
the Sarfaesi act , for the first time, the secured creditors were empowered to recover their dues
without the intervention of the court . However, as soon as the act was passed, its
implementation was challenged in the court and this delayed its coming into force for 2 years.
In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the
SARFAESI act was upheld.
Rights of Borrowers
The above observations make it clear that the SAFAESI act was able to provide the effective
measures to the secured creditors to recover their long standing dues from the Non-performing
assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in
the law. The borrowers can at any time before the sale is concluded, remit the dues and avoid
losing the security. In case any unhealthy/illegal act is done by the authorized officer, he will be
liable for penal consequences.
The borrowers will be entitled to get compensation for such acts. For redressing the grievances,
the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation
period is 45 days and 30 days respectively.
Pre-conditions
The Act stipulates four conditions for enforcing the rights by a creditor. The debt is secured. The
debt has been classified as an NPA by the banks. The outstanding dues are one lakh and above
and more than 20% of the principal loan amount and interest there on. The security to be
enforced is not an Agricultural land.
Methods of Recovery
According to this act, the registration and regulation of securitization companies or
reconstruction companies is done by RBI. These companies are authorized to raise funds by
issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to
take possession of securities given for financial assistance and sell or lease the same to take over
management in the event of default. This act makes provisions for two main methods of recovery
of the NPAs as follows:
Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of
existing assets such as auto or home loans. After an asset is converted into a marketable security,
it is sold. A securitization company or reconstruction company may raise funds from only the
QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset Reconstruction
Companies in India. It can be done by either proper management of the business of the borrower,
or by taking over it or by selling a part or whole of the business or by rescheduling of payment of
debts payable by the borrower enforcement of security interest in accordance with the provisions
of this Act. Further, the act provides Exemption from the registration of security receipt. This
means that when the securitization company or reconstruction company issues receipts, the older
of the receipts is entitled to undivided interests in the financial assets and there is no need of
registration unless and otherwise it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is required in the following cases:
There is a transfer of receipt. The security receipt is creating, declaring, assigning, limiting, and
extinguishing any right title or interest in any immovable property.
Is Mortgaged House exempted?
The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of
mortgage, hypothecation or creation of a security interest. There are some exceptions in the act
such as personal belongings. However, only that property given as security can be proceeded
under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged
residential house, it is also NOT exempted from the Sarfaesi act.
Powers of Debt Recovery Tribunal
The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of
powers given to banks. Any person aggrieved, by any order made by the Debts Recovery
Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order
of Debt s Recovery Tribunal.
Role of Chief Metropolitan Magistrate or District Magistrate
The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured
credit or in taking possession of secured asset. These officers will make sure that once the credit
or has given him in writing that all other formalities of the act have been done, the CMM or DM
will take possession of such asset and documents relating thereto; and forward such assets and
documents to the secured creditor.
An act of the CMM or DM cannot be called in question in any court or before any authority.
Role of High Court:
The act allows taking the matter to high courts only in some matters related to the
implementation of the act in Jammu & Kashmir. However, High Courts have been entertaining
writ petitions under article 226 (Power to issue writs) of the constitution of India.
Proposed amendments to the Act
The government had approved bill to amend the act. The Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts Sarfaesi Act 2002, and
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these
amendments:
Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt
of the defaulting company into equity. Such a conversion would imply that lenders or ARCs
would tend to become an equity holder rather than being a credit or of the company. The
amendments also allow banks to bid for any immovable property they have put out for auction
themselves, if they do not receive any bids during the auction. In such a scenario, banks will be
able to adjust the debt with the amount paid for this property. This enables the bank to secure the
asset in part fulfillment of the defaulted loan. Banks can then sell this property t o a new bidder
at a later date to clear off the debt completely. However lenders will be able to carry this
property on their books only for seven years, as per the Banking Regulation Act, 1949.

























Case Law Analysis on Agricultural land and its mortgage under the SARFAESI Act, 2002

Hari Sagar Educational Trust (Versus) Uttaranchal Gramin Bank
Date of judgment: 24/06/2011
Held By: HIGH COURT OF UTTARKHAND AT NANITAL

Facts :
Hari Sagar Educational Trust (the Trust) established an education institution on
agricultural land for starting an M.B.A. course and applied to the Respondent Bank
(the Bank) for loan for the purpose of establishing a college. The Bank sanctioned the
loan which was to be repaid by the Trust in installments. The Trust in order to secure
the said loan had mortgaged an agricultural land on which said educational institute
was established. The Trust committed a default in repayment. Consequently, the
Bank enforced and initiated recovery action under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act, 2002) for taking the possession of property mortgaged and further
sell the same. The Trust had challenged the said action of the bank on the ground
that land mortgaged was an agricultural land in revenue records and provisions of
SARFAESI Act, 2002 will not apply to said land as the agricultural land is outside the
purview of the Act. The Bank submitted that SARFAESI Act, 2002 was applicable and
that the land in question was no longer an agricultural land since it was not being
used for agricultural purposes and that an educational institution had come in
existence which has changed the nature of the land and application was already filed
by the Trust for change in nature of the property. Issue involved: Whether action
taken by Bank under SARFAESI Act, 2002 for taking physical possession of
agricultural land was valid? Courts Findings: The Honble Court observed that, the
land in question was not being used by the Trust for agricultural purposes and that
the land was used for an educational purpose, i.e., for running a college and hence it
is no longer an agricultural land. The words "agricultural land", as given in Section
31(i) of the Act has to be literally understood, i.e., land in which agricultural
operations are going on, i.e., where the land is being tilled and human labour is
involved with or without the aid of mechanical power. All these things are absent in
the present case. Consequently, the Court was of the opinion that recovery action
initiated by the Bank under SARFAESI Act, 2002 is valid and applicable on said
mortgaged land. Learning: Though bank was able to prove in the present case that
nature of agricultural land does not remain as agricultural in view of land being used
for educational purpose, it is advisable that bank shall while creating equitable
mortgage of agricultural land, shall also keep on record the land conversion order, if
any obtained by mortgagor.
The term agricultural land is not defined in the SARFAESI Act.Agriculture means the
science and art of cultivating the soil (S.P. Watel Vs. State of U.P. : AIR 1973 SC
1293=1973 SCR(3 783). Supreme Court in CIT Vs. Rja Benoy Kumar Saha Roy
[1952] 32 ITR 466 (SC)held that agriculture in its primary sense denotes cultivation of
the field and is restricted to cultivation of the land in the strict sense of the term, meaning
thereby tilling of the land, sowing of the seeds, planting and similar operations on the land.
In the judgment their Lordships also held that if the subsequent operations like weeding,
digging soil around the growth, removal of undesirable undergrowth, preservation of the
same from insects and pests, tending, pruning, cutting, harvesting and rendering the
produce fit for the market and all such operations which foster the growth are carried on in
conjunction with the basic operations, the same would constitute agriculture operations.
These basic operations and subsequent operations require expenditure of human skill and
labour upon the land Nature of the soil, its fertility, its suitability and adaptability for raising
cash crops, the irrigation facility and such similar factors have great bearing on the
valuation of an agricultural land : Gujarat High Court (in Commissioner of Income Tax
Gujarat-II Vs. Siddarth J. Desai (1983) ITR Vol. 139 Page 628)

Classification of lands is one thing and utility of lands is some other thing. If the lands are
not utilised for agricultural purpose even if they are classified as such cannot be treated as
agricultural lands (Krishna Rao Vs. 3
rd
. Wealth Tax Officer : AIR 1965 Mysore III =
ILR 1962 Kar. 926=1963 48 ITR 472 Kar.). Madras High Court in
N.K.S.Rengeswaran Vs. Commissioner of Income Tax & Ors. (1998 ITR Vol.242
Pg.344) held that, the reference to the lands being classified as tope in the revenue
records and the direction by the Commissioner of Agricultural Income-tax on the said basis,
had no material to support it, except the classification of the lands as tope. In the absence
of any evidence to show that the lands were actually cultivated, the income could not have
been treated as agricultural income without supporting evidence, classification of lands in
revenue records is not conclusive proof to treat the lands as agricultural lands where there
are no basic operations like tilling, sowing, planting carried out on the land or subsequent
operations like tending, pruning, cutting, harvesting and rendering the produce fit for
market.

In Commissioner of Wealth Tax Andhra Pradesh Vs. Officer-in-charge (Court of Wards)
Paigh (1976) 3 SCC 864 =[1957] 32 ITR 466(SC) Supreme Court held that entries in the
revenue records without evidence of intended user are not sufficient grounds to draw
conclusion that the subject lands are agricultural lands. Agricultural lands are exempted
from wealth tax. In the instant case no agricultural operations are carried on the lands
though the lands were capable of being so used. Hence the W.T.Officer treated the lands as
non-agricultural lands and the Appellate Assistant Commissioner confirmed it. Setting aside
the order of the Appellate Assistant Commissioner, the Full Bench of A.P. High Court held
that the subject lands were agricultural lands based on 8 conclusions on question of law as
under:

(1)The words agricultural land occurring in Sec 2(e)(1)(i) of Wealth Tax ACT should be
given the same meaning as the said expression bears in entry 86 of List I and given the
widest meaning;

(2) The said expression not having been defined in the Constitution, it must be given the
meaning which it ordinarily bears in the English language and as understood in ordinary
parlance;

(3) The actual user of the land for agriculture is one of the indicia for determining the
character of the land as agricultural land;

(4) Land which is left barren but which is capable of being cultivated can also be
agricultural land unless such land is actually put to some other non-agricultural purpose,
like construction of buildings or an aerodrome, runway etc. thereon, which alters the
physical character of the land rending it unfit for immediate cultivation;

(5) If the land is assessed to land revenue as agricultural land under the state revenue law,
it is a strong piece of evidence of its character as agricultural land;

(6) Mere enclosure of the land does not by itself render it a non-agricultural land;

(7)The character of the land is not determined by the nature of the products raised, so long
as the land is used or can be used for rising valuable plants or crops or trees or for any
other purpose of husbandry;

(8) The situation of the land in a village or in an urban area is not by itself determinative of
its character.

Reversing the above views of the High Court, the Supreme Court has held that, the first 4
conclusions are based on absence of any user for non-agricultural purposes. Hence they are
inconclusive. Conclusion 5 seems to be real and positive test adopted by the Full Bench for
determining the nature of the land. But mere revenue records alone are not deciding factors
on usage of the land. The conclusions 6,7 and 8 are negative in character as they merely
indicated what could not be conclusive in deciding whether the land was agricultural. But
these conclusions do not formulate a test of what is agricultural land. They are only
presumptions. The last future does not seem to provide some evidence of the character of
the land from the point of view of its purpose. No evidence on usage of the land was called
for in the cited case by the Wealth Tax department. Hence the matter was remanded to the
Wealth Tax department for permitting the parties to adduce evidence of agricultural
operations. Further the Supreme Court observed as follows:

We think that it is not correct to give as wide a meaning as possible to terms used in the
statute simply because the statute does not define an expression. The correct Rule is that
we have to endeavour to find out the exact sense in which the words have been used in a
particular context. We are entitled to look at the statute as a whole and give an
interpretation in consonance with the purpose of the statute and what logically follows from
the terms used. We are to avoid absurd results. If we were to give widest possible
connotation to the words agricultural land as Full Bench of A.P. High Court seemed inclined
to give to the term agricultural land we would reach the conclusion that practically all the
land, even that covered by building is agricultural land inasmuch as its potential or possible
use could be agricultural. The object of the Wealth Tax is to tax surplus wealth. It is clear
that all land is not excluded from the definition of assets. It is only the agricultural land
which could be exempted. Therefore it is imperative to give reasonable limits to the scope of
the agricultural land or in other words, this exemption had to be necessarily given a more
restricted meaning than the very wide ambit given to it by Full Bench of AP.

The High Court of A.P. (following the judgments of Supreme Court in Commissioner of
Wealth Tax Andhra Pradesh Vs. Officer-in-charge (Court of Wards) Paigh (1976) 3 SCC
864 andCommissioner of Income Tax Vs. Rja Benoy Kumar Saha Roy [1952] 32 ITR 466)
held that patta & revenue receipts are of no help to claim exemption under Sec. 31(i) of the
SARFAESI Act(Gajula Exim Vs. Andhra Bank : AIR 2008 AP 184).

Poultry farm also cannot be given such liberal and wide interpretation: In D. Ravichandran
Vs. Indian Overseas Bank: (2006 2 M.L.J. 134) Madras High Court, following the above
ruling of the Supreme Court and rejecting the contention of the borrower held that the
credit facility availed for establishing poultry farm (ancillary to agricultural operations) by
mortgage of agricultural lands cannot be given such liberal and wide interpretation (as
relied on A.I.R. 1969 A.P.345), and held that, it is evident by taking stock of statement of
object and reasons for enacting SARFAESI Act, such a wide interpretation cannot be given
as the Act was enacted to enable the banks and financial institutions to realise the long-
term assets, manage problems of liquidity, asset liability mismatches and improve recovery
by exercising powers to take possession of securities, sell them and reduce the non-
performing assets by adopting measures for recovery or reconstruction.

Kerala High Court in K.P. Muhammed Basheerr Vs Kannur Dist. Cooperative Bank Ltd
& Anr. : AIR 2010 Kerala 118 held that, nature of the products cultivated is not criterion
to determine if the land is agricultural land or not and any product derived out of land in
agricultural operation and fit for market is sufficient to construe the land as agricultural
land.Thus the land on which the rubber plants are grown is agricultural land exempted from
enforcement under the Act.

Agriculture is State subject finding place in the State List/List II of
Seventh Schedule (Art.246) of Indian Constitution. It is clear from the Entry
no.14 (Agriculture, including agricultural education and research, protection against pests
and prevention of plant diseases) of List-II. Further, agriculture is excluded in Entries
No.86, 87 and 88 (i.e. it is clear from the words Taxes on the capital value of assets
exclusive of agricultural land, of individuals and companies; taxes on capital of companies;
Estate Duty in respect of property other than agricultural land; and Duties in respect of
succession to the property other than agricultural land) in the Union List/List-I of
Seventh Schedule of Constitution of India).

The Act being Central Legislation, the Parliament would have considered it fit to exclude
security interest created in agricultural land as Center cannot make law in respect of the
subjects which are enumerated in the State List-II.

Potrebbero piacerti anche