NBFCs With Assets Over ₹100 Crore Can Invoke SARFAESI Act: Allahabad High Court

On 24 March, the Allahabad High Court held that non-banking financial companies (NBFCs) with assets of Rs. 100 crore or more qualify as financial institutions under the SARFAESI Act, 2002 and can enforce security interest in secured debts.

A Bench comprising Justices Ajit Kumar and Swarupama Chaturvedi referring to the Ministry of Finance notification dated 24 February 2020, observed:

“With the plain reading of the notification, it is clear that through the above notification the Central Government specifies that all such nonbanking financial companies as defined in clause (f) of section 45-I of the RBI Act, 1934, having assets worth rupees one hundred crore and above, shall be entitled for enforcement of security interest in secured debts of rupees fifty lakh and above, as financial institutions for the purposes of the said Act…”

Rakesh Kumar and another took loans from Save Financial Services Private Limited. After they defaulted, the company classified the loan accounts as Non-Performing Assets. It then issued a notice under Section 13(2) of the SARFAESI Act claiming an outstanding amount of Rs. 22,33,573.73.

The notice stated that the company was a financial institution under the Government notification dated 21 February 2021. The company subsequently took symbolic possession of the secured asset.

The petitioners challenged the proceedings before the High Court, arguing that Save Financial Services Private Limited did not fall within the definition of a “financial institution” under Section 2(1)(m)(iv) of the SARFAESI Act and therefore could not initiate the proceedings.

The Court framed the primary question as:

“Whether Respondent No. 4 qualifies as a 'Financial Institution' within the meaning of Section 2(1)(m)(iv) of the SARFAESI Act, 2002 and is thereby competent to initiate proceedings thereunder, and whether the present writ petition is maintainable in view of the availability of an efficacious alternative statutory remedy under the provisions of the said Act.”

Section 2(1)(m)(iv) defines 'financial institution' as "any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act.”

Section 45-I of the Reserve Bank of India Act, 1934 defines a non-banking financial institution to include any “other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.”

The Court observed that the notification dated 5 August 2016 included non-banking financial companies registered with the Reserve Bank of India and having assets of Rs. 500 crore or more as financial institutions. A subsequent notification dated 24 February 2020 reduced the asset threshold to Rs. 100 crore. The Court held that the 2016 notification could not apply in view of the 2020 notification.

The Court concluded:

“After above-mentioned statutory provisions and notifications under SARFAESI Act, there is no iota of doubt that the respondent no.4 is a financial institution and therefore, it can invoke provisions of the SARFAESI Act within its statutory framework, rules and regulations. The arguments advanced by the petitioner on this issue find no legal base and therefore deserve to be rejected.”

Since the respondent company could initiate proceedings under the SARFAESI Act, the Court held that the writ petition was not maintainable in view of the alternate remedy available under the Act.

Accordingly, the High Court dismissed the writ petition.