However, certain provisions of Sarfesi seem to be a deterrent to foreign lenders providing finance to Indian borrowers, which in turn affects genuine Indian companies also from raising low-cost international finance.

The Sarfesi Act (or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, to give it its full name) partly allows for the enforcement of security by some secured creditors without the intervention of courts.

In an event of default committed by the borrower, such secured creditors would be entitled under Sarfesi to enforce their security without intervention of the court by following the prescribed procedure.

However, ‘secured creditor’ has been defined to include banks (including a foreign bank lending through its Indian branch), public financial institutions, certain other institutions specifically notified by the Central Government like the International Finance Corporation, debenture trustee or any other trustee holding securities on behalf of such entities (Sarfesi Act section 2 (1) (zd), read with Sections 2 (1) (c), (d), (h), (m), (v), (za) and (zj)).

Offshore lenders (except those specifically notified by the Central Government in this respect) would therefore not be a secured creditor for the purposes of the Sarfesi Act. The aforesaid self-help remedy under Sarfesi would, therefore, not be available to a foreign lender in an event of default by the borrower.

Furthermore, the provisions of Section 13 (7) of the Sarfesi Act may be interpreted in such manner that the Indian secured creditor shall, in the absence of any contract to the contrary, hold in trust the security enforcement proceeds to apply towards discharging the dues of the secured creditor, amongst others.

The issue would now arise of whether any pari-passu agreement – such as an inter-creditor agreement (ICA) - between such secured creditor and the foreign lender could have the force of creating a “contract to the contrary”, in the words of Sarfesi. This also raises the question of whether it was the intention of the legislature to allow Indian secured creditors to share the security enforcement proceeds with a foreign lender by means of the ICA.

It appears that, foreign lenders would not have been conspicuously excluded from the definition of a ‘secured creditor’ under Sarfesi, if the legislature had intended to allow a foreign lender to enforce its security without court intervention.

There are also no judicial pronouncements so far on this issue.

Therefore the provisions of Section 13 (7) of Sarfesi cannot be read to the effect that a secured creditor can share the security enforcement proceeds with a foreign lender in a manner, which is often used in practice.

Foreign lenders are therefore unable to take advantage of the relevant provisions of the Sarfesi Act that allow for enforcement of security without recourse to court. This places foreign lenders at a disadvantage against Indian banks. They are further left with no option but to enforce their Indian security by filing a suit in the relevant court (except in cases where the security created is a pledge).

Needless to say, such court procedures to enforce creditors’ right are lengthy and time-consuming.

This in turn places the Indian jurisdiction at a real disadvantage when raising finance in the international market place as the extant security enforcement laws including the relevant provisions of the Sarfesi Act doesn’t facilitate speedy recovery of loans by foreign lenders and in a cost-effective manner.

I therefore argue that these issues with the Sarfesi Act need to be appropriately addressed by the law-makers or otherwise provided for with specific enabling provisions.

Hitesh Sanghvi (pictured) is a senior associate at Dua Associates and specialises in banking and finance law. The views expressed are his own and not his firm’s.