Skip to content

Insolvency and Bankruptcy - Law and Practice · Debt Recovery and Securitization

SARFAESI Act: Securitisation and Asset Reconstruction Explained

Updated 11 October 2026 · Fact-checked

Under the SARFAESI Act, 2002, an asset reconstruction company (ARC) buys financial assets, mainly bad loans, from banks and financial institutions and either securitises them or reconstructs them to recover value. An ARC needs RBI registration and a minimum net owned fund before it starts business. In exams, answer with provision, facts and conclusion.

Understand SARFAESI Act: Securitisation and Asset Reconstruction

A bank lends money. If the borrower stops paying, the loan turns into a bad asset. The bank wants cash and a clean balance sheet. Chasing recovery is slow and is not its core business. The SARFAESI Act, 2002 lets the bank sell that asset to a specialised buyer, the asset reconstruction company (ARC).

The Act deals with two business types. Securitisation means the ARC acquires financial assets and funds the purchase by raising money from qualified buyers, who get returns from the assets recovered. Asset reconstruction means the ARC acquires the assets and works on them to recover value, for example by managing the borrower's business or settling the dues. Keep the difference simple: securitisation is about how the purchase is funded and paid back, reconstruction is about how the asset is resolved.

An ARC cannot just start trading in loans. Under section 3, no ARC may commence or carry on the business of securitisation or asset reconstruction without a certificate of registration from the Reserve Bank and net owned fund of not less than two crore rupees, or a higher amount the RBI notifies. The RBI may notify different amounts for different classes of ARCs.

The RBI grants registration only after it is satisfied about the conditions in section 3(3). These look at past losses, arrangements for realising assets and paying investors, the directors' experience, their character, the sponsor's fitness and compliance with prudential norms. The RBI can impose conditions on the certificate, and it must give the applicant a reasonable opportunity of being heard before it rejects an application.

Once registered, an ARC has limited other functions under section 10. It may act as agent of a bank or financial institution to recover dues, act as manager under section 13(4)(c), or act as receiver if a court or tribunal appoints it. Anything beyond securitisation and asset reconstruction needs the RBI's prior approval.

Key rules to remember

Registration requirement (section 3(1))
No business of securitisation or asset reconstruction without (a) certificate of registration and (b) net owned fund ≥ ₹2 crore or higher amount notified by RBI
RBI may notify different amounts for different classes of ARCs.
Registration conditions (section 3(3))
No losses in 3 preceding financial years; adequate arrangements to realise assets and pay qualified buyers; directors with professional experience; no director convicted of moral turpitude offence; sponsor fit and proper; prudential norms; RBI guideline conditions
RBI checks these by inspecting records or books, or otherwise, before granting registration.
Grant and rejection (section 3(4) and (5))
Grant: after satisfaction, with conditions. Reject: if conditions not met, after reasonable opportunity of being heard
Hearing before rejection is mandatory.
Prior RBI approval (section 3(6))
Needed for: substantial change in management (including appointing any director, MD or CEO), change of registered office location, change of name
The RBI's decision on whether a change is substantial is final.
Other functions (section 10(1))
ARC may act as (a) agent for recovery of dues, (b) manager under section 13(4)(c), (c) receiver if appointed by a court or tribunal
It cannot act as manager if that creates pecuniary liability.
Other business (section 10(2))
Any business other than securitisation or asset reconstruction, apart from section 10(1) functions, needs prior RBI approval
The term ARC here does not include its subsidiary.

How to solve SARFAESI Act: Securitisation and Asset Reconstruction questions

Use this order for any case or theory question on ARCs under the SARFAESI Act.

  1. 1Identify what is being asked: registration, a function, a change needing approval, or the meaning of securitisation or reconstruction.
  2. 2State the rule first, citing section 3 or section 10 in plain words with the exact condition.
  3. 3List the facts from the question that matter, such as net owned fund, past losses, a director's conviction or the proposed activity.
  4. 4Test each fact against the rule. Do it one condition at a time.
  5. 5Say who decides: the Reserve Bank grants, rejects, approves or specifies.
  6. 6Check procedural points, such as the hearing before rejection and prior approval for changes.
  7. 7Write a clear conclusion in one or two lines, then add a practical compliance note.

Quickest way: Three-question check for ARC problems

When to use it: Use it when a case question gives many facts and little time.

  1. Registered or not? Check the certificate and net owned fund of at least ₹2 crore or the RBI's higher amount.
  2. Is the activity core or permitted? Securitisation, reconstruction, agent, manager or receiver is fine. Anything else needs prior RBI approval.
  3. Is there a change? A new director, MD or CEO, a new registered office location or a new name needs prior RBI approval.

Common mistakes in SARFAESI Act: Securitisation and Asset Reconstruction

  • Treating securitisation and asset reconstruction as the same thing.

    Both involve buying financial assets from banks.

    Fix: Link securitisation to funding the purchase through qualified buyers and returns, and reconstruction to resolving the asset to recover value.

  • Saying the net owned fund is fixed at ₹2 crore.

    Students remember only the figure.

    Fix: Write that it is not less than ₹2 crore or such higher amount as the RBI notifies, and the RBI may fix different amounts for different classes.

  • Saying the RBI can reject registration without hearing the applicant.

    Students skip the proviso to section 3(5).

    Fix: Always mention the reasonable opportunity of being heard before rejection.

  • Missing that appointing any director needs prior RBI approval.

    Students think only a change in ownership counts.

    Fix: Remember that section 3(6) covers substantial change in management, including appointing any director, MD or CEO, plus change of registered office location or name.

  • Letting an ARC run any business it likes alongside recovery work.

    Students confuse the section 10(1) functions with open-ended business.

    Fix: Only the section 10(1) functions are allowed freely. Any other business needs prior RBI approval.

  • Calling the Debts Recovery Tribunal the regulator of ARCs.

    The DRT is learnt in the same chapter.

    Fix: The Reserve Bank registers and regulates ARCs. The DRT hears recovery applications under the RDB Act.

Worked examples

Example 1

Navkar Asset Reconstruction Ltd. has net owned fund of ₹1.5 crore and has applied to the RBI for registration. The RBI has not notified any higher amount. Can it start acquiring bad loans from banks? Advise.

Show the solution
  1. Rule: under section 3(1), no ARC may start the business of securitisation or asset reconstruction without a certificate of registration and net owned fund of not less than ₹2 crore or any higher amount the RBI notifies.
  2. Facts: net owned fund is ₹1.5 crore and registration has only been applied for, not granted.
  3. Test: ₹1.5 crore is below ₹2 crore, so the fund requirement is not met. The certificate has also not been granted.
  4. Who decides: the RBI grants the certificate under section 3(4) only after it is satisfied about the section 3(3) conditions.
  5. Conclusion: the company cannot start the business.

Answer: No. It fails the minimum net owned fund of ₹2 crore and holds no certificate. It should raise its net owned fund to at least the required level, satisfy the section 3(3) conditions and obtain registration first.

Example 2

Kaveri ARC Ltd., a registered ARC, wants to appoint a new managing director and to shift its registered office to another city. It also wants to start a commodity trading business. State the legal position.

Show the solution
  1. Rule on changes: under section 3(6), prior RBI approval is needed for substantial change in management, including appointment of any director, MD or CEO, and for change of location of the registered office.
  2. Apply to the MD: appointing a new managing director needs prior RBI approval.
  3. Apply to the office: shifting the registered office location also needs prior RBI approval.
  4. Rule on other business: under section 10(2), apart from the section 10(1) functions, an ARC cannot carry on business other than securitisation or asset reconstruction without prior RBI approval.
  5. Apply to trading: commodity trading is neither a section 10(1) function nor core ARC business, so it needs prior RBI approval.
  6. Conclusion: all three steps need the RBI's prior approval.

Answer: Kaveri ARC must get the RBI's prior approval for the new MD, the shift of the registered office and the commodity trading business. It should not act before approval is received.

Exam tips

  • Quote the exact conditions of section 3(1) and section 3(3). Examiners reward precise listing.
  • In case questions, follow provision, analysis and conclusion. Do not stop at the section.
  • Keep a short contrast ready: securitisation versus asset reconstruction, in two lines each.
  • List the section 10(1) functions of an ARC by memory, and remember the proviso on pecuniary liability for the manager role.
  • Add a practical compliance line, such as seeking RBI approval before any change in management.

Practice questions from Debt Recovery and Securitization

SARFAESI Act: Securitisation and Asset Reconstruction: frequently asked questions

What is the difference between securitisation and asset reconstruction?

Securitisation is the acquisition of financial assets funded by raising money from qualified buyers who are paid from the assets. Asset reconstruction is the acquisition of financial assets to resolve them and recover value. An ARC can do either.

Who registers an asset reconstruction company?

The Reserve Bank of India grants the certificate of registration under section 3. It applies the conditions in section 3(3) and may impose conditions on the certificate.

What is the minimum net owned fund of an ARC?

It must be not less than ₹2 crore or such higher amount as the RBI specifies by notification. The RBI may set different amounts for different classes of ARCs.

What other functions can an ARC perform?

Under section 10(1), it can act as agent of a bank or financial institution for recovery, as manager under section 13(4)(c), or as receiver if appointed by a court or tribunal. It cannot act as manager if that creates pecuniary liability.

Does an ARC need approval to change its directors?

Yes. Section 3(6) requires prior RBI approval for substantial change in management, which includes appointing any director, MD or CEO. The RBI's decision on whether a change is substantial is final.