Section 12 of the SARFAESI Act, 2002: Power of Reserve Bank to Determine Policy and Issue Directions
Section 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers the Reserve Bank of India (RBI) to set regulatory policy and issue binding directions to asset reconstruction companies (ARCs). It addresses prudential regulation, acquisition and valuation of financial assets, management fees and transfers of security receipts.
Purpose and scope of Section 12
The provision forms part of Chapter II, concerning the regulation of securitisation and reconstruction of financial assets of banks and financial institutions. It permits RBI intervention when necessary or expedient in the public interest, for the sound regulation of the financial system, to protect investors or to prevent an ARC from conducting its affairs in a manner prejudicial to its interests.
Section 12(1): Policy and binding directions
Under sub-section (1), RBI may determine policy and give directions to all or any asset reconstruction company concerning:
- Income recognition: when and how an ARC recognises income from its financial assets and operations.
- Accounting standards: principles for recording and reporting financial transactions.
- Bad and doubtful debts: provisioning against possible impairment or non-recovery.
- Capital adequacy: maintenance of capital in relation to risk-weighted assets.
- Deployment of funds: how funds of an ARC may be used or invested.
An ARC is legally bound to follow the policy determined and directions issued under this sub-section.
Section 12(2): Directions on asset acquisition and security receipts
Without limiting the general powers in Section 12(1), RBI may issue directions to ARCs generally, to a class of ARCs, or to an individual ARC on the following subjects:
- Acquisition and valuation: the types of financial assets of banks or financial institutions that may be acquired, the acquisition procedure and their valuation.
- Aggregate acquisition value: the total value of financial assets that an ARC may acquire.
- Management fees and charges: fees and other charges levied or incurred for managing acquired financial assets.
- Security receipts: transfer of security receipts issued to qualified buyers.
Important statutory definitions
Asset reconstruction company: An entity registered with RBI under Section 3 of the SARFAESI Act for asset reconstruction activities, subject to the definition in Section 2.
Financial asset: A debt or receivable and other rights or interests specified by Section 2, including eligible claims and underlying security interests.
Security receipt: A receipt or other security issued by an ARC evidencing the holder's undivided right, title or interest in a financial asset involved in securitisation, as defined by the Act.
Qualified buyer: A person or entity falling within the statutory categories and applicable RBI specifications under Section 2.
2016 amendments to Section 12
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act 44 of 2016), effective for these changes from 1 September 2016, replaced references to "securitisation company or reconstruction company" with "asset reconstruction company". It also inserted clauses (c) and (d) in sub-section (2), dealing with management fees and charges and transfers of security receipts to qualified buyers.
How RBI directions operate in practice
Section 12 is an enabling provision: the Act states the scope of RBI's authority, while RBI directions prescribe operational requirements. An ARC should therefore read Section 12 alongside the directions applicable to its activities, including the RBI's regulatory framework for ARCs and relevant supervisory-return directions. RBI issued the Asset Reconstruction Companies - Supervisory Returns Directions, 2026 on 31 July 2026, invoking Sections 12 and 12A.
Relationship with other SARFAESI provisions
Section 3 governs ARC registration; Section 9 deals with asset reconstruction measures; Section 12A empowers RBI to call for statements and information; and Section 12B provides for audit and inspection. These provisions work together to establish RBI oversight of ARCs.
Official legal and regulatory resources
- India Code - Central legislation and amended Acts (search for Act 54 of 2002)
- Reserve Bank of India - Official regulatory directions and notifications
- e-Gazette of India - Acts and commencement notifications
Editorial note: This is an explanatory guide to Section 12, not a substitute for the Act, amendments or binding RBI directions applicable on a particular date.