What is the Sarfaesi Act?

Suppose, Mr.Paraajay has opened factory with Rs.100 crores. He financed this, via mixture of Debt + equity in following way.

Initially the company runs well and good.
But then Mr.Paraajay doesn’t revise his MBA books often, so he forgets the business concepts. His company starts making losses.
He fails to pay loan EMIs for many months.
SBI gives him notice to correct his behavior.
Still, he doesn’t start paying money.
SBI declares this Rs.40 crores loan NPA (Non-Performing Asset).
Once a loan is declared as non-performing asset, SBI can take actions under SARFAESI act, to recover the loan money.

Bank have following powers under SARFAESI Act

Take possession of Mr.Paraajay’s assets without requiring court order. (Commericial or residential, fixed or moving assets.)
Auction / Sale them.
Change the administration/ Management of those assets.
If Mr.Paraajay had sold away the mortgaged asset to third party Mr.X, bank can order Mr.X to surrender that Asset.
If Mr.X owes money to Mr.Paraajay, he can be ordered to pay money.

By the way SARFAESI applies only to those assets “mortgaged/secured” to get the loan.
E.g. if Mr.Paraajay had taken business-loan, SBI would have asked him to sign away his factory/machinary/vehicles/land etc. specific items as mortgage.
Hence SBI can attach only ^those assets.
But SBI cannot take away Paraajay’s personal home-furniture, expensive wrist-watch or his son’s bicycle in the name of SARFAESI.
Similarly, Agricultural land is exempted from SARFAESI attachment.

Appeal structure in SARFAESI ACt?

The borrower (loan taker) has following options:

Get a stay order from Debt Recoverty tribunal (DRT) against the auction/sale of his properties. (He cannot file case in Civil courts.)
Fight the case in DRT.
If unhappy with DRT verdict, he can appeal to Debt Recovery Appellate Tribunal (DRAT).
But before filing appeal with DRAT, he’ll have to deposit 50% of his pending loan money.

First SBI contacts the experts, gets valuation of Mr.Paraajay’s assets.
Expert says “those assets are worth Rs.50 crores according to present market value of land/ building/ machinary whatever.”
Then SBI will give advertisement in newspapers “we are auctioning xyz land/machinary/building. Minimum bidding amount is Rs.50 crores. Whoever wishes to bid, send us application along with Rs.50,000 as deposit, and their class 10, 12 mark-sheets and school leaving certificates, duly attested by a Gazetted officer.”
Problem: sometimes, bidders donot take interest in buying such properties, factories etc.
To fix this problem, Amendment bill of 2011, makes a new provision: if noone else comes to bid in the auction, Bank itself can buy that property.

Suppose SBI attached a warehouse of Mr.Paraajay.
If the land was in good urban area, SBI could open a new branch office there (or housing for its employees).
But if plot/factory/house is in some remote area= useless for SBI’s personal business.
Under the Banking regulation Act, a bank cannot keep such immovable property beyond 7 years, (max 12 years with RBI’s permission).
So ultimately SBI will have to auction it to someone. What if they don’t get better price? Critiques of the bill say, this is not clarified in the bill.