Corporate Restructuring, Valuation and Insolvency · Debt Recovery and SARFAESI

SARFAESI Act: Securitisation and Asset Reconstruction Companies

Updated 11 October 2026 · Fact-checked

The SARFAESI Act, 2002 lets banks and financial institutions sell their financial assets, mainly bad loans, to asset reconstruction companies (ARCs). An ARC must be registered with the RBI under section 3, hold the prescribed net owned fund, and carry on only securitisation or asset reconstruction, apart from the functions allowed by section 10.

Understand SARFAESI Act: Securitisation and Asset Reconstruction Companies

Banks lend money and sometimes the borrower does not repay. These bad loans block the bank's capital. The SARFAESI Act, 2002 gives a route to clean the balance sheet: the bank transfers the financial asset to a specialised company, and that company takes up recovery or reconstruction.

That specialised company is an asset reconstruction company (ARC). Since the 2016 amendment, the Act uses one term, asset reconstruction company, in place of the older terms securitisation company and reconstruction company. The two activities still differ. Securitisation means raising funds from investors by issuing security receipts or similar instruments against the acquired financial assets. Asset reconstruction means acquiring a bank's or financial institution's rights in a financial asset and working it out, for example by taking over management or restructuring the loan, so that the dues are realised.

Because an ARC handles other people's bad debt and takes money from investors, the law controls who can run one. Under section 3, no ARC can commence or carry on the business of securitisation or asset reconstruction without a certificate of registration from the Reserve Bank and the required net owned fund. The RBI checks the applicant against stated conditions before granting registration.

Once registered, an ARC is also limited in what it can do. Section 10 lists the extra functions it may perform: acting as an agent of a bank or financial institution for recovery, acting as a manager under section 13(4)(c), and acting as a receiver if a court or tribunal appoints it. Any other business needs prior RBI approval.

The link with the RDB Act, 1993 matters too. That Act treats a registered ARC as a financial institution, so it can claim dues as a creditor before the Debts Recovery Tribunal. This ties the two laws together in this chapter.

Key rules to remember

Registration requirement: No ARC may commence or carry on securitisation or asset reconstruction without (a) a certificate of registration and (b) net owned fund of at least ₹2 crore; Section 3(1). The RBI may notify a higher amount, and may specify different amounts for different classes of ARCs.
Application: Application to the RBI in the form and manner it specifies; Section 3(2). The RBI may inspect records or books to satisfy itself on the conditions.
Conditions the RBI checks (section 3(3)): No losses in any of the three preceding financial years; adequate arrangements for realising assets and paying returns and redeeming investments of qualified buyers; directors with adequate professional experience in finance, securitisation and reconstruction; no director convicted of an offence involving moral turpitude; sponsor a fit and proper person; compliance with RBI prudential norms; compliance with conditions in RBI guidelines; These are the clauses (a), (b), (c), (e), (f), (g) and (h). Clause (d) has been omitted.
Grant and rejection: RBI grants certificate under s.3(4), subject to conditions it thinks fit; may reject under s.3(5) after a reasonable opportunity of being heard; Rejection is allowed only if the conditions in s.3(3) are not fulfilled.
Prior RBI approval for changes: Substantial change in management (including appointment of any director, MD or CEO), change of registered office location, or change of name needs prior RBI approval; Section 3(6). RBI's decision on whether a change is substantial is final.
Other functions (section 10(1)): Agent for recovery of dues; manager under s.13(4)(c); receiver if appointed by a court or tribunal; An ARC cannot act as manager if that gives rise to any pecuniary liability.
Other business (section 10(2)): Any business other than securitisation or asset reconstruction needs prior RBI approval; Section 10(1) functions are the exception. The word ARC here does not include its subsidiary.
ARC under the RDB Act: ARC with a certificate of registration under s.3(4) of SARFAESI = financial institution under s.2(h)(ia) of RDB Act; Its claims can therefore be a 'debt' recoverable before the DRT.

How to solve SARFAESI Act: Securitisation and Asset Reconstruction Companies questions

Most questions give you facts about an ARC or a bank and ask whether something is allowed. Use the same provision, facts, conclusion pattern.

1Identify the issue: is it registration, a change in the ARC, a function the ARC wants to perform, or the status of the ARC under the RDB Act?
2Name the provision: section 3 for registration and changes, section 10 for other functions, section 2(h)(ia) of the RDB Act for financial institution status.
3State the rule in plain words with its exact condition, such as net owned fund of not less than ₹2 crore or such higher amount as the RBI notifies.
4Apply it to the facts. Tick off each section 3(3) condition, or check whether prior RBI approval was taken.
5Check who decides. The RBI grants, rejects, approves changes and gives approval for other business.
6Conclude clearly in one line, then add the practical compliance point, such as applying to the RBI before the change.

Quickest way: Three-question check for ARC problems

When to use it: Use when a short case asks if an ARC action is permitted and you have little time.

Is the ARC registered with the RBI and meeting the net owned fund requirement? If not, it cannot carry on the business.
Is the action a section 10(1) function (agent, manager, receiver)? If yes, it is allowed, but not as manager if it creates pecuniary liability.
If it is anything else, or a change in management, registered office or name, has prior RBI approval been taken? If not, it is a breach.

Common mistakes in SARFAESI Act: Securitisation and Asset Reconstruction Companies

Treating securitisation and asset reconstruction as the same thing.
Both are done by the same company and the 2016 amendment merged the two company names.
Fix: Securitisation is raising funds by issuing instruments against acquired financial assets. Asset reconstruction is acquiring the rights in a financial asset and working it out for recovery. State the difference in one line.
Saying the minimum net owned fund is a fixed ₹2 crore for every ARC.
Students remember only the headline figure.
Fix: Write: not less than ₹2 crore or such higher amount as the RBI may notify, and the RBI may specify different amounts for different classes.
Quoting the old terms securitisation company or reconstruction company as current law.
Older notes still use them.
Fix: Use asset reconstruction company. Mention the old terms only to show the change made in 2016.
Forgetting that appointing a new director also needs prior RBI approval.
Students think only a change of control counts.
Fix: Section 3(6) covers substantial change in management including appointment of any director, MD or CEO. The RBI's decision on whether a change is substantial is final.
Saying an ARC can freely take up any business that suits it.
Students overlook section 10(2).
Fix: Beyond securitisation, asset reconstruction and the section 10(1) functions, prior RBI approval is required.
Rejecting an application without hearing in the answer.
Students stop at the grounds for rejection.
Fix: Add the proviso to section 3(5): the applicant must be given a reasonable opportunity of being heard before rejection.

Worked examples

Example 1

Nirmaan Assets Reconstruction Ltd. has net owned fund of ₹1.5 crore and applies to the RBI to start asset reconstruction. It has made a loss in one of the last three financial years. Advise whether it can commence business.

Show the solution

Issue: can the company commence asset reconstruction business under section 3?
Rule: under section 3(1), an ARC needs a certificate of registration and net owned fund of not less than ₹2 crore or such higher amount as the RBI notifies.
Fact check on fund: ₹1.5 crore is below ₹2 crore, so the minimum is not met.
Fact check on losses: section 3(3)(a) requires that the company has not incurred losses in any of the three preceding financial years. One year of loss means this condition fails.
Under section 3(5) the RBI may reject the application if the conditions are not fulfilled, after giving the applicant a reasonable opportunity of being heard.

Answer: Nirmaan cannot commence the business. It does not meet the net owned fund requirement and the no-loss condition. It should raise its net owned fund to at least the required amount, wait until the loss condition is satisfied, and reapply. If the RBI rejects the application, it must first hear the company.

Example 2

Surya ARC Ltd., a registered ARC, wants to (a) act as a recovery agent for a bank for a fee, and (b) start a chit fund business. It also plans to replace its managing director. Advise.

Show the solution

Part (a): section 10(1)(a) allows a registered ARC to act as an agent for any bank or financial institution to recover dues on mutually agreed fees. This is permitted without separate approval.
Part (b): section 10(2) says an ARC with a registration certificate cannot carry on any business other than securitisation or asset reconstruction without prior RBI approval, apart from the section 10(1) functions. A chit fund business is not in section 10(1).
So (b) needs prior RBI approval and cannot start before it.
Replacing the MD: section 3(6) requires prior RBI approval for substantial change in management, including appointment of a managing director or chief executive officer.

Answer: Surya ARC may act as recovery agent under section 10(1)(a). It may start the chit fund business only after prior RBI approval under section 10(2). It must also get prior RBI approval before appointing the new managing director under section 3(6).

Exam tips

Write the section numbers 3 and 10 of SARFAESI and 2(h)(ia) of the RDB Act. Examiners reward the correct provision.
For registration questions, list the section 3(3) conditions in a short bullet list and apply each one to the facts.
Always add who has the power: the RBI. Most answers lose marks by not naming it.
Keep a one-line distinction between securitisation and asset reconstruction ready for short-note questions.
End case answers with a compliance point, such as applying for prior RBI approval before the change.

Practice questions from Debt Recovery and SARFAESI

SARFAESI Act: Securitisation and Asset Reconstruction Companies: frequently asked questions

What is the difference between securitisation and asset reconstruction?

Securitisation means raising funds from investors against acquired financial assets by issuing instruments such as security receipts. Asset reconstruction means acquiring the rights of banks or financial institutions in a financial asset and working it out so that dues are realised. An ARC may do both.

Who registers asset reconstruction companies?

The Reserve Bank of India. Under section 3 of the SARFAESI Act, an ARC applies to the RBI in the form and manner it specifies. The RBI may inspect records and grants the certificate if the section 3(3) conditions are met.

What is the minimum net owned fund for an ARC?

Section 3(1)(b) requires net owned fund of not less than two crore rupees, or such higher amount as the RBI may notify. The RBI can set different amounts for different classes of ARCs.

Can an ARC do business other than asset reconstruction?

Only the functions in section 10(1) are allowed, namely agent for recovery, manager and receiver. For any other business the ARC needs prior RBI approval under section 10(2).

Is an ARC a financial institution under the RDB Act?

Yes, if it holds a certificate of registration under section 3(4) of the SARFAESI Act. Section 2(h)(ia) of the RDB Act includes such a company in the definition of financial institution.