Govt plans to amend SARFAESI Act to include special situation funds

Centre is considering amending SARFAESI to include special situation funds as financial institutions and to require borrowers to file representations within 30 days of a demand notice, sources said

The Union government is considering amending the SARFAESI Act, 2002, to expand the definition of a financial institution by including special situation funds (SSFs), a senior government official said on condition of anonymity.

 

The SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 provides an enabling legal framework for banks and financial institutions to recover dues exceeding ₹1 lakh by enforcing security interests against the borrower’s or guarantor’s secured assets without court or tribunal intervention.

 

An SSF, as defined by the Securities and Exchange Board of India (Sebi), is a category I alternative investment fund (AIF) that focuses on distressed assets, stressed loans, and companies requiring restructuring. SSFs seek to profit from corporate turnarounds, financial distress, or special situations such as mergers and bankruptcies.

 

According to the official, the government is also planning to prescribe a definite time limit for borrowers to make representations against demand notices, fixing it at 30 days from the date of receipt.

 

“The proposal follows a request from the Department of Economic Affairs (DEA) to the Department of Financial Services (DFS) to include SSFs within the ambit of the Act,” the official said.

 

Under the proposed amendment, SSFs would be brought under Section 2(1)(m) of the SARFAESI Act, allowing them to directly initiate enforcement actions for recovery of dues.

 

“The rationale behind the move is to broaden the scope of the Act, as SSFs are already registered with Sebi and are actively involved in the resolution of stressed assets. The Reserve Bank of India (RBI) has also supported the proposal,” the source added.

 

Emails sent to the Ministry of Finance and the RBI remained unanswered at the time of going to press.

 

Regulated by Sebi, SSFs acquire undervalued debt or equity and often take an active role in reviving stressed companies, making them a key instrument in resolving non-performing assets (NPAs) in India.

 

The objective of the proposed amendment is to facilitate faster and more efficient recovery of stressed assets by enabling a wider class of investors and lenders to invoke SARFAESI provisions. This is expected to strengthen enforcement mechanisms and contribute to an improved business environment.

 

The source further said the government is planning to amend Section 13(3A) of the SARFAESI Act to introduce a fixed timeline for borrowers to make representations in response to a demand notice issued under Section 13(2). At present, the law does not prescribe any time limit for borrowers to raise such representations.

 

“The proposed amendment seeks to mandate that borrowers must submit their objections within 30 days of receiving the demand notice. In the absence of a defined timeline, borrowers often use representations as a delaying tactic, sometimes filing objections as late as the 60th day, just before the enforcement process begins,” the official said.

 

The source added that the objective is to expedite the security enforcement process, reduce avoidable delays, and improve the ease of doing business by ensuring quicker recovery of dues under the SARFAESI framework.

 

The source also noted that a significant backlog of cases before debt recovery fora shows a substantial backlog amount of public money. According to data, a total of 248,458 cases are pending, with the amount involved estimated at ₹16.13 trillion. Original application cases account for the largest share, with 180,469 cases involving about ₹12.08 trillion. Securitisation application cases stood at 67,989, with an amount of roughly ₹4.05 trillion involved. In addition, there are 6,684 appeal cases involving about ₹3.42 trillion.

 

The data underscores the scale of pendency across categories and the substantial funds locked in prolonged recovery and appellate proceedings.