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SARFAESI ACT, 2002 | JAIIB LRAB FREE NOTES | JAIIB EXAM STUDY MATERIAL 2022

FREE NOTES ON JAIIB LRAB SARFAESI ACT, 2002 | JAIIB STUDY MATERIAL FOR EXAM 2022

Read the definitions of terms used in SARFAESI ACT 2002 from the LRAB Syllabus prescribed for the JAIIB EXAM 2022 for Law paper.

The article defines the various terms that have been used in the SARFAESI Act 2022 – part of the syllabus of LRAB paper from the JAIIB Exam 2022. These definitions are important for the exam point of view as SARFAESI Act is an important topic from the prescribed syllabus of JAIIB EXAM 2022

So, we have tried to define the below terms while trying to ensure their easy understandability of them so that their meaning would not be lost to readers after one read. 

DEFINITION UNDER SARFAESI ACT 2002

Well, before we move forward with the definitions which come under the act, we first need to know the full form of SARFAESI Act 2022. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

In SARFAESI Act 2002, the definitions are given in Section 2 of the Act.

No. Term Meaning
1. Preamble This has been enacted to regulate the securitisation and reconstruction of financial assets and to enforce the security interest and other related matters.
2. Appellate Tribunal A person who has been aggrieved by the DRT (Debt Recovery tribunal) order, can file and appeal against the order to DRAT (Debt Recovery Appellate tribunal).
3. Asset Reconstruction When an asset reconstruction company acquires any right or interest of any Bank or Financial Institution in any financial assistance so that it can realize such financial assistance, the process is known as asset reconstruction.
4. Bank Under this act, bank will include all the banking companies, nationalised banks, cooperative banks as well as regional rural banks (RRBs).
5. Board The term board will be used in this act, it would mean ‘the board’ under securities exchange Board of India Act, 1992.
6. Borrower It would mean a person who is getting the benefit of financial assistance against guarantee.
7. Central Registry It is the authority to which all the transactions related to asset securitization, their reconstruction including the transactions by which security interest is created, are required to be registered with.
8. Debt Recovery Tribunal DRTs, here, are the tribunals which have been established to deal with the cases of recovery of debts > Rs. 10,00,000.00 due to the banks and financial institutions. under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
9. Default It means the failure to meet legal obligations under a loan. Example: If a car buyer has failed to make the EMI payments or in case of government or corporations, they fail to repay the bond on their maturity, it would be referred to as default.
10. Financial Assistance It refers to any grant of loan for advance, or even subscription of bonds on debentures or provides guarantee or issues letters of credit or extend any other credit facility.
11. Financial Asset It could be explained as a claim to any debt or receivable & includes:

  1. debt or receivable which has been secured by mortgage or charge on immovable property
  2. Charge, mortgage, hypothecation or pledge of movable property
  3. a claim to any receivable or debt or a part of them (both secured or unsecured)
  4. a write only interest in the security which secures a debt, whether full or part.
12. Financial Institution It could be a public financial institution within the meaning of Companies Act, 2013

or

Institution which has been specified by the central government under Recovery of Debts due to Bank and Financial Institutions Act, 1993.

Or

International Finance Corporation which has been established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958.

13. Hypothecation It means a charge in favour of a creditor in an immovable property, whether existing or future, created by the borrower.
14. Non-Performing Asset NPA is a loan account which is the default or is close to being defaulted. A number of categories of loans turn to be non-performing when they remain long due for more than 90 days, depending on the contractual terms.
15. Originator It is the owner of a financial asset that has been acquired by the reconstruction company or asset securitization company for the purpose of reconstruction of securitization of asset.
16. Obligor It could be any person who is liable to pay to a bank or financial institution.
17. Property Property may include movable property, immovable property, intangible assets such as knowhow, patents, trademarks, licences, franchises, any other business or commercial right which has the similar nature, any debt or any right to receive payment of money (secured or unsecured).
18. Qualified Institutional Buyer A financial institution/an insurance company/bank, or a state-owned corporation/a foreign institutional investor registered under the SEBI Act, 1992 or regulations made thereunder, or any other organization the Board may specify.
19. Reconstruction Company It is a company formed and registered under the Companies Act, 2013 for the purpose of asset reconstruction
20. Scheme A scheme that invites participation in the imposition of securities by a reconstruction company or a securitisation company
21. Securitisation Securitization companies or reconstruction companies can acquire financial assets from any original source by raising funds from qualified institutional buyers by issuing security receipts representing undivided interest in those assets or by any other means. This process is known as Securitisation.
22. Securitisation Company Securitisation Companies are required to have a minimum capital requirement of Rs.200 Crore at time of registration, as well as a minimum capital adequacy ratio of 15% of total assets or Rs.100 Crore, whichever is less. The companies are incorporated under the Companies Act 2013 for the purpose of securitization along with registration with RBI.
23. Security Agreement Security agreement is an agreement under which security interest is created. It could be an agreement, instrument or any other document.
24. Secured Asset It is the property on which security interest has been created. SARFAESI Act empowers the enforcement of securities against secured assets.
25. Secured Creditor It could be a bank or financial institution or any Consortium or group of banks or Financial Institutions. It may also include:

Debenture trustees who are appointed by Financial Institutions or any bank;

Other trustees who hold securities on behalf of financial institutions or banks (in whose favour security interest has been created).

26. Secured Debt A debt when secured by any security interest is known as secured debt.
27. Secured Interest A secured interest refers to any right, title, or interest created by a secured creditor on any property.
28. Security Receipt Upon purchase by a qualified institutional buyer pursuant to a scheme, a receipt or other security is issued by a company or entity involved in the securitization process as evidence of the right, title or interest the holder has in the financial asset involved which is called as security receipt.
29. Sponsor a person holding a minimum of 10% of the paid up equity capital of securitisation company, is called sponsor.

 

SOME OTHER PROVISIONS

  • Banks and financial institutions that create a charge against property need to register the transaction with the Central Registry under the SARFAESI Act, 2002
  • There are two situations where the provisions of SARFAESI Act, 2002 can be invoked – When the bank declares an account as NPA due to default in repayment.
  • The main function of a securitisation company is to acquire financial assets from the originator.
  • The secured creditor has the right to take possession of the security if the borrower fails to pay within 60 days following notice.

  • SARFAESI Act can only be enforced if banks and financial institutions do not possess security.

We do hope that you would have found this article easy to understand. We can also read our other articles on the short notes from the syllabus of legal and regulatory aspects of the banking paper of JAIIB Exam 2022.

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