SARFAESI Act and its ramifications

SARFAESI Act and its ramifications

By Shahid Lone

The SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act 2002, is a Union of India law, which financial companies invoke whenever they face the problems related of recovery of defaulted loans. In other words, it’s a tool for bad loans, performing or non-performing assets (NPA) recovery. “It’s possible where non-performing assets are backed by securities charged to the bank or any financial institution by way of pledge or hypothecation or mortgage or assignment”. To develop trust, secure and boost the financial sector, it’s a good financial tool for any economy to have. However, in case of Union of India’s relation to Jammu and Kashmir, a conflict zone and a disputed territory and which has its own constitution, this tool if enforced will be the worst nightmare for the state subjects.
The recent judgement of the Supreme Court of India rejects the J&K high court ruling pertaining to ‘sovereign’ nature and powers of the state and explicitly stated that “J-K has no vestige of sovereignty outside constitution of India” and termed the Constitution of J&K as subordinate to the Constitution of India. It also stated that the citizens of the state first fall under the laws of union of India and then state laws of J&K.
The SARFAESI Act 2002 is in direct collision with section 140 of the Transfer of Property Act of J&K. The law warrants and gives powers to banks and financial institutions to “seize and desist” by heading to a tribunal and this tribunal will fall outside the purview and jurisdiction of any civil court of J&K, i.e, no interference whatsoever in the proceedings of the tribunal. Upon loan defaults, banks can seize the securities and take recourse to either “possession of the security, sale or lease or assign the right over security or appoint any person to manage the same”. The law allows financial institutions to auction the properties to non-state financial institution or entity.
The bank or Financial Institutions sell these financial assets including Non-Performing Assets to Asset Reconstruction companies (ARC) which are regulated by RBI, and all this process is expeditiously adjudicated by a debt recovery tribunal. Therefore, secured creditors are empowered to recover their dues without the intervention of the court.
The SARFAESI Act was challenged in JK High court on the grounds that “because Article 370 gives special status to J&K sate, Indian government has no authority to make laws regarding immovable property” within the state. Further saying “enactment of the law by the parliament regarding state land and other immovable property is in violation of the Indian constitution and constitution of J&K’. Advocate General (AG) M I Qadri headed a 3-member committee and took up the matter with New Delhi in 2009, wherein AG expressed serious reservations about SARAFESI Act and sought exemption amendment to section 13(4) and exemption from the purview of this particular section. An agreement was made and considered binding on the Government of India to amend ARFAESI Act. All this was done to ensure that “under any circumstance, if sale of immovable property takes place in J&K, the J&K transfer of property act, will take precedence over SARFAESI act”, but in reality section 13(4) was not amended.
In a letter (D NO. 39/21/2009-BO.11-DRT) to chief secretary of J&K state in May 2012 by D K Mittal, then secretary Union Finance Ministry, says that “J&K right to property act should be amended in accordance with decisions taken in 2009”. When it was not heeded, Mittal again approached and informed chief secretary that GOI has amended the SARFAESI Act 2002 and it provides “in case of sale of immovable property in J&K, the provisions of J&K transfer of property act 1977, will be applicable upon any person who acquires property in state”.
An amendment proposed by state revenue ministry earlier this year reads “no person shall take possession of or commence to build or build on any land in province of Kashmir which has been transferred or has been contracted to be transferred to him unless and until such transfer becomes valid under the provisions of sub section (1), sub section (3) of section 138 of transfer of property act”. Pertinently the proposed amendment sought to overcome an aberration and substitute words “province of Kashmir” with “state”. “The restriction created under sub-section (3) of section 138 of act, regarding taking possession of and transfer of immovable property for commencing any construction activity is limited to Kashmir province only. However, no such restriction has been imposed in the law of the aforesaid purpose in respect of Jammu division, with the result the land is being transferred to the non-permanent residents of the state.”
In 2003-04, PDP government added words “any financial institution or corporation managed and owned by the government of India” in the Transfer of Property act, in clause (h) of section 140, giving green signal to non-state residents to acquire property in the state. The order was only rescinded when land was allotted to financial institutions in Gulmarg and people protested against it. On August 7, 2009, a private members bill on “transfer of property (amendment)” was admitted in J-K assembly and it was introduced by MLA Kupwara Saifullah Mir. He sought the amendment in proviso to clause(h) of section 140 and asked for substituting “a permanent resident of state or any financial institution or corporation managed and owned by the government of India” by the words “a permanent resident of the state”.
With Hindutva forces calling the shots in India and BJP’s aggressive position on Article 370, this precedence created by the Supreme Court judgement over J&K high court must be looked keenly through legal and socio-historical antecedents available in Kashmir. If this law finds implementation in the state, it will not only reduce the sanctity of already hollowed out Article 370 and will remain a mere Article like all other laws, but it may well lead to a series of changes in various other laws, hence making the already “disorderly ordered situation” worse, which certain right wing vested groups and fascist elements desperately want.
As an economics and financial management student with hindsight knowledge of sub-prime lending, Euro-Zone crisis, Greek crisis and BREXIT I can foresee how these financial companies will trade these acquired assets or properties in a sophisticated but ugly manner irrespective of the legal restrictions, and all this will be “not in the interest of J&K” and it will bring new non-state players in this conflict and then they will milk this land. This is a direct interference and challenge to the discrete powers of J&K high court, implying that the court has now remained a mere symbol that fails to dispense justice to those whose rights it must protect. In its wider ramification and extension, the judgement is a concrete evidence and visible threat to the demography of the state and hence its citizens.

—Shahid Lone is Doctoral candidate in Political Economy at Jamia Millia Islamia, New Delhi. He can be reached at

2 Responses to "SARFAESI Act and its ramifications"

  1. Bal   December 28, 2016 at 2:16 pm

    This is a canard in favour of loan defaulters. Plus against the people of J&K themselves. If a borrower defaults and the lender cannot sell the collateral and incurs a loss, why will he finance a new borrower by taking a collateral which cannot be solf in case of default.

    The ARCs if they have to sell will do so as per the laws of land that ids state of J&K.
    The author is bringing in extraneous issues in a political manner just to create unavoidable controversy in a purely banking and finance matter.

  2. SKChadha   December 28, 2016 at 5:40 am

    “As an economics and financial management student with hindsight knowledge of sub-prime lending, Euro-Zone crisis, Greek crisis and BREXIT I can foresee how these financial companies will trade these acquired assets or properties in a sophisticated but ugly manner irrespective of the legal restrictions”

    The writer is incorrect in his presentation. The financial companies trade in mortgages backed by properties and not in properties per se. Once the mortgagee pays his dues, no action can be taken against his property. THE ISSUE INVOLVED IS ONLY ABOUT PAYMENT OF DUES AND PROTECTING RIGHTS OF LENDERS. For attracting capital the State has to ensure it.

    Further, if one lands money to someone lawfully, it is his right to recover it through Courts or any other remedial and legal way devised by the State? In commerce it is COMMERCIAL AND FINANCIAL RIGHT of the lender and a lender also has RIGHT TO ASSIGN his commercial and business rights to any third person for business gains? We observed such assignments in many ways i.e. copyrights, designs, assignment of insurance policies, transfer of pledged goods etc.