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Section 7: Issue of security by asset reconstruction company

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 • Official Statutory Text & Practice Guide

Statutory Regulation
Legal Standard
Competent Court / Tribunal
Act 2002
Section 6 All 42 Sections of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 Section 8

Legal Commentary & Landmark Judgments: Section 7

Section 7 of the SARFAESI Act, 2002 regulates the issuance of Security Receipts by Asset Reconstruction Companies to Qualified Buyers, establishing scheme-specific trust structures and realization timelines for acquired non-performing assets.

  • Issuance of Security Receipts to Qualified Buyers: Asset Reconstruction Companies may raise funds by issuing Security Receipts (SRs) exclusively to Qualified Buyers (QBs) to finance the acquisition of financial assets.
  • Trust Architecture & Asset Segregation: Financial assets acquired for each scheme must be held in an independent trust managed by the ARC for the exclusive beneficial ownership of the Security Receipt holders.
  • Statutory Realization Timelines: Mandates that underlying financial assets must be resolved and realized within timelines prescribed by RBI directions (maximum 5 years, extendable up to an aggregate of 8 years).
Key Landmark Precedents:
  • Pegasus Assets Reconstruction P. Ltd. v. Haryana Concast Ltd. (2016) 4 SCC 47: The Supreme Court held that ARCs act as trustees of the securitisation trust under Section 7, holding financial assets and enforcement proceeds for the benefit of institutional security receipt holders.
  • Asset Reconstruction Company (India) Ltd. v. Commissioner of Income Tax (2014) 367 ITR 193 (Bom): The Bombay High Court held that securitisation trusts constituted by ARCs under Section 7 are passthrough entities where income generated from asset resolution belongs beneficially to the Qualified Buyers holding security receipts.
Courtroom Practice & Strategic Litigation Guidance:

When representing borrowers or third-party claimants in DRT, investigate whether the ARC's statutory resolution timeline (maximum 8 years under RBI circulars) has lapsed. If the resolution period expired without realization, question the ARC's continuing statutory authority over the charged asset.

Section 6 All 42 Sections of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 Section 8