Section 12B of the SARFAESI Act: Power of Reserve Bank to Carry Out Audit and Inspection
Section 12B empowers the Reserve Bank of India (RBI) to audit and inspect asset reconstruction companies (ARCs), require cooperation and records, and intervene in management where statutory conditions are met.
Meaning and scope of Section 12B
An asset reconstruction company is a company registered with the RBI under Section 3 to carry on the business of asset reconstruction or securitisation. A security receipt, defined under Section 2, evidences a qualified buyer's undivided right, title or interest in a financial asset involved in securitisation. Section 12B is a supervisory provision aimed at protecting public interest and investors in such receipts.
Section 12B: Provisions and explanation
Section 12B(1) - Audit and inspection
The Reserve Bank may, for the purposes of this Act, carry out or caused to be carried out audit and inspection of an asset reconstruction company from time to time.
Section 12B(2) - Duty to cooperate
It shall be the duty of an asset reconstruction company and its officers to provide assistance and cooperation to the Reserve Bank to carry out audit or inspection under sub-section (1).
Section 12B(3) - RBI intervention
Where on audit or inspection or otherwise, the Reserve Bank is satisfied that business of an asset reconstruction company is being conducted in a manner detrimental to public interest or to the interests of investors in security receipts issued by such asset reconstruction company, the Reserve Bank may, for securing proper management of an asset reconstruction company, by an order--
- Remove the Chairman or any director or appoint additional directors on the board of directors of the asset reconstruction company; or
- Appoint any of its officers as an observer to observe the working of the board of directors of such asset reconstruction company.
Proviso: No order for removal of Chairman or director under clause (a) shall be made except after giving him an opportunity of being heard.
Section 12B(4) - Production of records
It shall be the duty of every director or other officer or employee of the asset reconstruction company to produce before the person, conducting an audit or inspection under sub-section (1), all such books, accounts and other documents in his custody or control and to provide him such statements and information relating to the affairs of the asset reconstruction company as may be required by such person within the stipulated time specified by him.
Practical effect of RBI's powers
The RBI may undertake an audit or inspection periodically or cause one to be undertaken. The ARC and its personnel must assist the inspection, make relevant books and documents available, and supply information within the specified time. If the RBI is satisfied that the ARC's business is being conducted detrimentally to public interest or security-receipt investors, it may take the management-related measures expressly permitted by subsection (3).
Opportunity of hearing: Before removing a chairman or director under Section 12B(3)(a), the RBI must give that person an opportunity of being heard. This express safeguard should not be confused with a general requirement of prior hearing before every audit or inspection.
Related SARFAESI provisions
Section 12 concerns RBI policy directions; Section 12A concerns the RBI's power to call for statements and information; and Section 3 addresses registration of ARCs.
Official legal resources
For the statutory text and regulatory updates, refer to India Code (Government of India) and Reserve Bank of India. Verify applicable RBI directions and amendments for any specific compliance issue.
This article explains the statutory provision and is not a substitute for reviewing the current Act, RBI directions or case-specific legal advice.