Saturday, September 5, 2009

SARFAESI Act, 2002 and its Interface with BIFR

(5th September 2009)

-Surenderrao Komera

In India, Industrial sickness has been dealt with various legislations and there have been a series of changes from time to time in the legislations to efficiently deal with industrial sickness. These legislations continued to protect the debtors at the cost of the creditors by imposing the sanctions on the later. Over time such legislations caused inefficiencies in the functioning of banking and financial institutions (creditors). For instance SICA, 1985 (Sick Industrial Companies Act), by institutionalizing the Board of Industrial and Financial Reconstruction (BIFR) aimed at protecting the sick (potentially viable) industrial units by suspending all the legal and contractual proceedings against them. Given the prevailing legal framework in restructuring and liquidation of the sick units, the claims of the creditors on the sick industrial units continued to accumulate and thereby created hurdles in their efficient functioning. Particularly, these mounting non-performing assets created roadblocks in the functioning of the banking and financial institutions and undermined their competitiveness in the global financial markets.

By considering the recommendations of Narasimham Committee II and Andhyarujina Committee to address the concerns over the mounting NPAs of the financial institutions and to provide the necessary leap for the FIs to keep pace with international institutions, GoI enacted the SARFAESI act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) in 2002. This act largely facilitates the asset recovery and reconstruction.

Interface with BIFR: SARFAESI act allows the banks and financial institutions to take possession of securities, sell them and reduce non performing assets without the intervention of courts, regardless of the reference of the firms to the BIFR. In a way SARFAESI act restricts the BIFR jurisdiction and allows the secured creditors to possess the corresponding assets without its discrimination. Thus SARFAESI act may be viewed as the legislative action that undermines the efficiency and relevance of BIFR in its pursuit of protecting the potentially viable industrial units. Hence, the note calls for the reexamination of the provisions of SICA in the light of changed institutional and legislative framework.

(Views expressed above are personal and comments and suggestions are encouraged)


indrani said...

a good write up indeed, but would have been even better if supported by judgements.

Surender Komera said...

Thanks for the comment. I would certainly like to look into it if you can clarify what do you mean by 'judgements'?