AAP Tax Law - Indian legal and tax information

SARFAESI Act, 2002 / Section 3

Section 3 SARFAESI Act - Registration of Asset Reconstruction Companies

Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) regulates the registration and eligibility of asset reconstruction companies (ARCs). An ARC seeking to conduct securitisation or asset reconstruction under the Act must obtain a certificate of registration from the Reserve Bank of India (RBI), maintain the prescribed net owned fund and meet the statutory fitness and prudential requirements.

Current regulatory position: Although Section 3(1)(b) refers to a statutory base of Rs. 2 crore or a higher amount specified by RBI, the applicable RBI requirement is Rs. 300 crore in net owned funds. The transition deadline for eligible existing ARCs was 31 March 2026. The statutory wording and the operative RBI direction must be read together.

Meaning of an asset reconstruction company

Under Section 2(1)(ba), an asset reconstruction company is a company registered with RBI under Section 3 to undertake asset reconstruction, securitisation or both. Asset reconstruction generally involves acquiring a bank's or financial institution's rights or interests in financial assistance with a view to realising the underlying financial assets. Securitisation concerns acquisition of financial assets from an originator, including through arrangements involving security receipts issued to qualified buyers.

Section 3(1): Certificate of registration and capital

An ARC cannot commence or carry on securitisation or asset reconstruction under the SARFAESI Act unless it (a) obtains a certificate of registration under Section 3 and (b) has net owned funds of at least the amount required by the Act and the RBI's applicable notification or directions. RBI may prescribe different owned-fund amounts for different classes of ARCs.

The further proviso concerning companies existing when the Act originally commenced allowed them six months to apply and to continue temporarily until registration was granted or rejection communicated. This was a historical transitional provision, not a general exemption for newly formed companies.

RBI net owned fund requirement

Under the RBI's ARC regulatory framework, an ARC must maintain Rs. 300 crore in net owned funds to commence and continue the regulated business. Existing ARCs as at 11 October 2022 were allowed a phased transition: Rs. 200 crore by 31 March 2024 and Rs. 300 crore by 31 March 2026. Failure to meet the applicable requirement may attract supervisory measures, including a restriction on new business. The definition and calculation of net owned funds are governed by the applicable RBI directions, not merely by paid-up share capital.

Section 3(2): Application to RBI

Every ARC seeking registration must apply to RBI in the prescribed form and manner, with supporting annexures and documents. The applicable RBI directions specify submission to the Department of Regulation, Central Office, RBI, Mumbai. An applicant should use the latest application form and instructions made available on RBI's official website.

Section 3(3): Conditions examined by RBI

Before granting registration, RBI may inspect the applicant's books and records or otherwise satisfy itself that the statutory conditions are fulfilled:

  1. Clause (a): The ARC has not incurred losses in any of the three preceding financial years.
  2. Clause (b): It has adequate arrangements to realise acquired financial assets and to meet periodic returns and redemption obligations to qualified buyers or other investors as they fall due.
  3. Clause (c): Its directors possess adequate professional experience in finance, securitisation and reconstruction.
  4. Clause (e): None of its directors has been convicted of an offence involving moral turpitude.
  5. Clause (f): Its sponsors satisfy RBI's fit and proper criteria.
  6. Clause (g): It complies with, or is capable of complying with, RBI's prudential norms.
  7. Clause (h): It satisfies other applicable conditions in RBI guidelines.

Amendment note: Clause (d) was omitted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act 44 of 2016), effective 1 September 2016. The references to asset reconstruction companies and qualified buyers reflect the amended statutory terminology.

Section 3(4): Grant of registration

Once RBI is satisfied that Section 3(3) is fulfilled, it may grant the ARC a certificate of registration, subject to such conditions as RBI considers appropriate. Registration does not remove the company's continuing obligation to comply with prudential, governance and operational directions. Under RBI's regulatory framework, an ARC ordinarily must begin business within six months of the certificate; RBI may allow an extension up to twelve months from the certificate date.

Section 3(5): Rejection and right to be heard

RBI may reject an application if the Section 3(3) conditions are not fulfilled. However, the proviso to Section 3(5) requires that the applicant be given a reasonable opportunity of being heard before rejection. This statutory safeguard is distinct from the continuing supervision of a company after registration.

Section 3(6): Prior approval for significant changes

An ARC must obtain RBI's prior approval for a substantial change in management, including appointment of a director, managing director or chief executive officer, and for a change in its registered-office location or name. The statutory explanation addresses changes involving transfer of shares affecting sponsorship, amalgamation or transfer of business. RBI's decision on whether a management change is substantial is final under the section, subject to applicable law.

Section 4 deals separately with cancellation of registration. Section 5 addresses acquisition of rights or interests in financial assets; Section 9 concerns reconstruction measures; Section 10 concerns other functions; and Section 12 authorises RBI policy and directions.

The registration regime is relevant when examining an ARC's authority to acquire financial assets, issue security receipts and undertake recovery measures. Registration alone does not determine whether an individual enforcement action is valid: the facts, assignment documents, applicable RBI directions and relevant SARFAESI provisions must also be considered.

Official law and regulatory references

Legal note: This article explains Section 3 as amended and the regulatory capital position applicable on 5 October 2026. The statutory Rs. 2 crore wording should not be confused with the higher operative RBI requirement. RBI directions, notifications and individual certificate conditions should be checked for a specific transaction.