Section 5 SARFAESI Act: Acquisition of Rights or Interest in Financial Assets
Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 governs how an asset reconstruction company acquires financial assets from banks and financial institutions, and the legal consequences of that acquisition.
It provides a statutory mechanism for assignment or transfer of financial assets, including associated rights, contracts and pending proceedings. An acquisition does not, merely by itself, extinguish the borrower's underlying obligations or dispense with applicable statutory safeguards.
- Section 5(1) - Modes of acquisition
- Section 5(1A) - Stamp duty exemption
- Section 5(2) - Vesting of lender rights
- Section 5(2A) - Rights in tangible and intangible assets
- Section 5(3) - Continuity of contracts and instruments
- Section 5(4) - Pending litigation does not abate
- Section 5(5) - Substitution in pending proceedings
Meaning of important terms
Asset reconstruction company (ARC): A company registered with the Reserve Bank of India under section 3 to carry on asset reconstruction or securitisation. Financial asset: Broadly, debt or receivables and associated rights, including secured claims, as defined in section 2. Originator: The bank or financial institution transferring its financial asset, as understood under the statutory definitions.
Section 5(1): Modes of acquisition
An asset reconstruction company (ARC) may acquire financial assets from a bank or financial institution notwithstanding any agreement or other law. It may issue debentures, bonds or similar securities on mutually agreed consideration and terms, or enter into a transfer agreement with the originating lender.
Section 5(1A): Stamp duty exemption
A document executed by a bank or financial institution in favour of an ARC acquiring financial assets for asset reconstruction or securitisation is exempt from stamp duty in accordance with section 8F of the Indian Stamp Act, 1899. This exemption does not apply where the acquisition is for another purpose.
Section 5(2): Vesting of lender rights
Where the transferring bank or financial institution was a lender in relation to the acquired financial assets, the ARC is deemed to be the lender, and the lender's rights in those financial assets vest in the ARC.
Section 5(2A): Rights in tangible and intangible assets
Security rights, title or interest held by the originating lender in tangible or intangible assets to secure unpaid purchase consideration or acquisition finance also vest in the ARC on acquisition under section 5(1).
Section 5(3): Continuity of contracts and instruments
Existing contracts, deeds, bonds, powers of attorney, permissions, approvals, consents and related instruments continue to have effect in favour of or against the ARC as if it had replaced the original bank or financial institution, unless the Act provides otherwise.
Section 5(4): Pending litigation does not abate
Acquisition of a financial asset does not by itself terminate or prejudice pending suits, appeals or other proceedings concerning that asset. They may be continued by or against the ARC. The historical reference in the statutory wording to the Sick Industrial Companies (Special Provisions) Act, 1985 must be read in light of that Act's repeal.
Section 5(5): Substitution in pending proceedings
With the consent of the originator, the ARC may apply for substitution of its name in proceedings before a Debts Recovery Tribunal, Appellate Tribunal, court or other authority; the forum is required by this provision to order substitution on receiving the application.
Practical effect of section 5
After a valid acquisition, the ARC may generally exercise the transferred lender rights, enforce related documents and continue proceedings, subject to the SARFAESI Act and other applicable law. Enforcement of a security interest is separately governed by section 13 and related provisions; acquisition under section 5 is not itself a possession or sale order.
Amendment history and official resources
The 2016 amendments substituted the term "asset reconstruction company" for earlier terminology and inserted subsections (1A) and (2A), effective 1 September 2016. Subsection (5) was inserted by Act 1 of 2013, effective 15 January 2013. The older reference to the Sick Industrial Companies (Special Provisions) Act, 1985 appears in historical statutory texts; that legislation was repealed with effect from 1 December 2016.
Consult the India Code official legislation portal, the Reserve Bank of India for ARC directions, and the Gazette of India for amendments and notifications. In case of any difference, the applicable statutory text and notifications prevail.