SARFAESI Act, 2002 | Chapter II

Section 4 of the SARFAESI Act, 2002: Cancellation of Certificate of Registration

Section 4 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers the Reserve Bank of India (RBI) to cancel the certificate of registration of an asset reconstruction company (ARC) on specified statutory grounds. It also addresses opportunities to remedy certain defaults, appeals and protection of existing investors.

Meaning and scope of Section 4

An asset reconstruction company is a company registered with the RBI under Section 3 to undertake asset reconstruction or securitisation activities in accordance with the Act. A certificate of registration is the RBI authorisation required for that business. Section 4 concerns cancellation of this registration; it does not itself prescribe the procedure for a secured creditor to enforce a security interest under Section 13.

Section 4(1): Grounds on which RBI may cancel registration

The RBI may cancel the registration of an ARC if the company:

Section 4(1)(a): ceases to carry on the business of securitisation or asset reconstruction;
Section 4(1)(b): ceases to receive or hold any investment from a qualified buyer;
Section 4(1)(c): fails to comply with any condition subject to which registration was granted;
Section 4(1)(d): at any time fails to fulfil any of the conditions in clauses (a) to (g) of Section 3(3); or
Section 4(1)(e): fails to comply with an RBI direction under the Act, maintain legally required accounts, submit books or documents for RBI inspection when demanded, or obtain prior RBI approval required by Section 3(6).

Opportunity to remedy non-compliance: Proviso to Section 4(1)

Before cancellation on the grounds in Section 4(1)(c), Section 4(1)(d), or Section 4(1)(e)(iv), the RBI ordinarily must give the ARC an opportunity, on terms specified by the RBI, to take necessary steps to comply or fulfil the relevant conditions.

However, the RBI may dispense with that opportunity if it considers that delay in cancellation would be prejudicial to the public interest, investors' interests or the ARC's interests. The statutory opportunity to cure is expressly linked to the specified grounds and should not be assumed to apply identically to every ground of cancellation.

Section 4(2): Appeal against cancellation

An ARC aggrieved by an order cancelling its certificate of registration may appeal to the Central Government within 30 days from the date the cancellation order is communicated to it. Before an appeal is rejected, the ARC must be given a reasonable opportunity of being heard.

Section 4(3): Repayment and protection of qualified buyers

Where an ARC holds investments of qualified buyers and its application for registration has been rejected or its registration cancelled, the Act deems it to remain an ARC, despite such rejection or cancellation, until it repays the entire investments together with interest, if any, within the period directed by the RBI. This limited statutory continuation safeguards repayment obligations; it should not be treated as unrestricted permission to carry on new regulated business.

Important legal definitions and connected provisions

Qualified buyer: the category of eligible investors defined under Section 2(1)(u) of the Act, as amended.
Registration conditions: Section 3(3) lists conditions relevant to registration and continued eligibility.
RBI regulatory powers: Section 12 addresses RBI policy determination and directions; Section 12A and Section 12B concern information, audit and inspection.

Legislative amendments and interpretation

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act 44 of 2016), effective for the relevant substitutions from 1 September 2016, replaced references to securitisation or reconstruction companies with asset reconstruction company and replaced qualified institutional buyer with qualified buyer. The 2004 amendment omitted the words relating to rejection of an application from the appeal provision in Section 4(2); the repayment safeguard in Section 4(3) continues to address rejected applications.

Practical point: For an ARC facing cancellation, the relevant statutory ground, whether the proviso permits an opportunity to cure, the date of communication of the cancellation order and outstanding qualified-buyer investments should be examined separately.

Official legal and regulatory resources

Consult the India Code legislative database for the SARFAESI Act and amendments, the Reserve Bank of India for applicable ARC directions and regulatory updates, and the e-Gazette of India for notified legal changes. The applicable statutory text and RBI directions should be checked for the relevant date.

This explanatory article summarises Section 4 and is not a substitute for the authoritative statutory text or case-specific legal advice.