The Sarfaesi Framework and its Impact on Agricultural Land
The Sarfaesi framework provides a clear advantage to banks and financial institutions in dealing with non-performing assets (NPA). It allows for the reconstruction of NPAs, turning them into marketable assets. Banks and financial institutions are obligated to participate in asset reconstruction under this framework. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act) serves as the foundation for all asset reconstruction mechanisms in India.
Managing partner
Lex Favios
However, the Sarfaesi Act does not apply to certain assets, specifically agricultural land. Section 31 of the act states that it does not cover any security interest created over agricultural land. As a result, banks and financial institutions can attach all properties of a borrower, except agricultural land, if a loan becomes an NPA. The debt recovery mechanism for such land falls under the jurisdiction of the Debt Recovery Tribunal (DRT), which is known for its lengthy and complex process.
Supreme Court’s Interpretation
In a significant interpretation, the Supreme Court has ruled that agricultural land offered as security is not exempt from the provisions of the Sarfaesi Act if it is not being used for agricultural purposes or if agricultural activities are not being carried out on it. This ruling came in the case of K. Shreedhar v M/S Raus Constructions Pvt Ltd and Ors, where the borrower successfully appealed to the high court to reverse the DRT’s decision regarding the exemption of agricultural lands under section 31(i) of the Sarfaesi Act. The secured creditor and purchaser at auction then appealed to the Supreme Court.
Head of the corporate practice
Lex Favios
The Supreme Court found that the debtor had only presented revenue records as evidence, while the creditor had provided proof of the land’s actual use. The court determined that the burden of proof lies with the debtor to demonstrate that the land is exempted under the agricultural land exemption. Additionally, the Supreme Court concluded that the high court should not have accepted the application; instead, the debtor should have appealed to the Debt Recovery Appellate Tribunal (DRAT).
Section 18 of the Sarfaesi Act provides an appeal mechanism to the DRAT against DRT orders, with a requirement to file the appeal within 30 days and deposit at least 25% of the total debt. The Supreme Court found that the debtor’s application to the high court was an attempt to circumvent the appeal process to the DRAT, specifically avoiding the deposit requirement. As a result, the Supreme Court overturned the high court’s decision and reinstated the DRT’s verdict, stating that agricultural lands used as security for debt are not exempted if they are not being used for agricultural purposes.
Impact on Banks and Financial Institutions
This landmark judgment brings significant relief to banks and financial institutions. Attaching borrowers’ land and real property is the preferred method of property attachment for banks and financial institutions when providing loans due to the stability it offers. Previously, the exception in the Sarfaesi Act prevented banks and financial institutions from attaching agricultural lands, forcing them to rely on the DRT mechanism for relief. With this judgment, the burden of proving agricultural land’s agricultural use now falls on the debtor. If the borrower fails to provide such proof, banks and financial institutions are free to attach agricultural land under the Sarfaesi Act and obtain relief through this route.
It will be interesting to see whether this Supreme Court decision improves access to finance for individuals or entities that own agricultural land but are unable or unwilling to engage in traditional farming activities. With banks and financial institutions reassured about their ability to reconstruct assets in case of NPAs, they may be more willing to lend to those whose assets include agricultural land.
Sumes Dewan is the managing partner and Tanya Mishra is the head of the corporate practice at Lex Favios.
SDGs, Targets, and Indicators Analysis
1. Which SDGs are addressed or connected to the issues highlighted in the article?
- SDG 1: No Poverty
- SDG 8: Decent Work and Economic Growth
- SDG 10: Reduced Inequalities
- SDG 16: Peace, Justice and Strong Institutions
The issues highlighted in the article are related to poverty reduction, economic growth, reducing inequalities, and ensuring access to justice and strong institutions.
2. What specific targets under those SDGs can be identified based on the article’s content?
- SDG 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
- SDG 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all.
- SDG 10.3: Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies, and practices and promoting appropriate legislation, policies, and action in this regard.
- SDG 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all.
The article discusses issues related to equal rights to economic resources, access to financial services, reducing inequalities, and ensuring access to justice.
3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?
- Indicator for SDG 1.4: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and by type of tenure.
- Indicator for SDG 8.10: Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile money service provider.
- Indicator for SDG 10.3: Proportion of population reporting having personally felt discriminated against or harassed in the previous 12 months on the basis of a ground of discrimination prohibited under international human rights law.
- Indicator for SDG 16.3: Proportion of victims of violence in the previous 12 months who reported their victimization to competent authorities or other officially recognized mechanisms.
The article implies the need to measure the proportion of individuals with secure tenure rights to land, access to financial services, experiences of discrimination, and reporting of victimization to measure progress towards the identified targets.
4. Table: SDGs, Targets, and Indicators
| SDGs | Targets | Indicators |
|---|---|---|
| SDG 1: No Poverty | Target 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property. | Indicator: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and by type of tenure. |
| SDG 8: Decent Work and Economic Growth | Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all. | Indicator: Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile money service provider. |
| SDG 10: Reduced Inequalities | Target 10.3: Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies, and practices and promoting appropriate legislation, policies, and action in this regard. | Indicator: Proportion of population reporting having personally felt discriminated against or harassed in the previous 12 months on the basis of a ground of discrimination prohibited under international human rights law. |
| SDG 16: Peace, Justice and Strong Institutions | Target 16.3: Promote the rule of law at the national and international levels and ensure equal access to justice for all. | Indicator: Proportion of victims of violence in the previous 12 months who reported their victimization to competent authorities or other officially recognized mechanisms. |
Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.
Source: law.asia
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