LEGAL FRAMEWORK GOVERNING VALUATION IN SARFAESI PROCEEDINGS

Legal Framework Governing Valuation in SARFAESI Proceedings in India

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is a significant legislation in India aimed at facilitating the recovery of dues by banks and financial institutions. Valuation plays a crucial role in the SARFAESI proceedings, ensuring that the assets are appropriately valued and the interests of all stakeholders are protected. This article delves into the legal framework governing valuation in SARFAESI proceedings in India.

Introduction to the SARFAESI Act

The SARFAESI Act allows banks and financial institutions to enforce security interests without court intervention. It is designed to improve the recovery process of non-performing assets (NPAs), thus ensuring financial stability and discipline.

Role of Valuation in SARFAESI Proceedings

Valuation of assets under SARFAESI is critical for determining the correct market value of secured assets. This ensures fair recovery and prevents the undervaluation or overvaluation of assets, which can adversely affect both the lender and borrower.

Legal Provisions Related to Valuation

Section 13: Enforcement of Security Interest

Under Section 13 of the SARFAESI Act, if a borrower defaults, the secured creditor can enforce the security interest by taking possession of the secured assets and selling them. Accurate valuation is essential in this process to ensure the assets are sold at fair market value.

Rule 8(5) of the Security Interest (Enforcement) Rules, 2002

This rule mandates that the secured creditor should obtain the estimated value of the secured asset from an approved valuer. The valuation report should be obtained to ascertain the reserve price before the sale of immovable property.

Rule 9: Sale of Secured Assets

Rule 9 emphasizes that the sale should be conducted in a fair and transparent manner, with the reserve price being set based on the valuation report. This ensures that the assets are not sold at an undervalued price, protecting the borrower’s equity and the lender’s recovery.

Valuation Standards and Approved Valuers

Institutional Framework for Valuers

In India, the valuation profession is regulated by the Insolvency and Bankruptcy Board of India (IBBI), which registers and regulates valuers under the Companies (Registered Valuers and Valuation) Rules, 2017. Only registered valuers can provide valuation services for the purposes of SARFAESI proceedings.

Valuation Standards

Valuers must adhere to the valuation standards set by the IBBI, ensuring consistency, reliability, and transparency in the valuation process. These standards are aligned with international best practices, providing a robust framework for valuers.

Challenges in Valuation Under SARFAESI

Market Fluctuations

Fluctuations in the real estate market and other asset markets can pose challenges in determining accurate valuations. Valuers need to consider these dynamics to provide realistic valuations.

Quality and Integrity of Valuers

The accuracy of valuation reports significantly depends on the expertise and integrity of the valuer. Ensuring that only qualified and reputable valuers are engaged is crucial for the credibility of the valuation process.

Litigation Risks

Incorrect valuations can lead to litigation, with borrowers challenging the valuation and subsequent sale of assets. This can delay the recovery process and lead to additional costs for financial institutions.

The valuation of assets under the SARFAESI Act is a vital component of the recovery process for banks and financial institutions. A robust legal framework, adherence to valuation standards, and engagement of qualified valuers are essential to ensure fair and transparent enforcement of security interests. By addressing the challenges and maintaining the integrity of the valuation process, the objectives of the SARFAESI Act can be effectively achieved, safeguarding the interests of all stakeholders involved.