Section 12 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- (1)If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any 1[asset reconstruction company] from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such 1[asset reconstruction company], it is necessary or expedient so to do, it may determine the policy and give directions to all or any 1[asset reconstruction company]in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment of funds by the 1[asset reconstruction company], as the case may be, and such company shall be bound to follow the policy so determined and the directions so issued.
- (2)Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give directions to any 1 [asset reconstruction company] generally or to a class of 2 [asset reconstruction companies] or to any 1 [asset reconstruction company] in particular as to--
- (a)the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof;
- (b)the aggregate value of financial assets which may be acquired by any 1[asset reconstruction company]. 3 [(c) the fee and other charges which may be charged or incurred for management of financial assets acquired by any asset reconstruction company;
- (d)transfer of security receipts issued to qualified buyers.]
Summary
- The Reserve Bank has the power to set policies and give orders to asset reconstruction companies to protect the public and the financial system.
- These companies must follow Reserve Bank rules on how they record income and follow accounting standards.
- The Reserve Bank can set rules for how much money these companies must keep in reserve and how they handle bad debts.
- The Reserve Bank can decide what types of bank assets these companies are allowed to buy and how they should determine the value of those assets.
- The Reserve Bank can also set limits on management fees and rules for transferring security receipts, which are documents showing an interest in a loan.
Practical examples
FAQ
1. Why does the Reserve Bank issue directions under Section 12 of the SARFAESI Act?
Directions are issued in the public interest, to regulate the country's financial system, or to prevent companies from acting in a way that hurts investors.
2. Are reconstruction companies required to follow Reserve Bank accounting standards under Section 12?
Yes, under Section 12 of the Act, companies are bound to follow the policies and directions determined by the Reserve Bank regarding accounting standards.
3. Can the Reserve Bank control the fees these companies charge under Section 12 of the Act?
Yes, Section 12 specifically allows the Reserve Bank to give directions regarding the fee and other charges for managing acquired financial assets.
Test yourself
Q1.Under Section 12 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, who is empowered to determine policy for ARCs?
Q2.Under Section 12 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which area can the RBI give directions on?
Q3.According to Section 12 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the RBI can issue directions to which of these?
Q4.Under Section 12 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, can the RBI decide how much total debt a company can buy?