CERSAI and Equitable Mortgage Registration

CERSAI – The Central Registry of Securitization, Asset Reconstruction and Security Interest of India – is a company set up under the provisions of SARFAESI Act, 2002.  It was incorporated in March 2011 as a Section 25 company under the Companies Act, 1956 by the Central Government. It became operational from March 31, 2011. It Acts as a central Registration System as envisaged under Chapter IV of the SARFAESI Act. 

Shareholders of CERSAI

Ten public sector banks, National Housing Bank and the Central Government are the shareholders of the company. 51% of shares is held by the Central Government

Why was CERSAI formed? 

With the nationalization of Banks in India in 1969, extending formal banking network even to the remote parts of the country gained momentum. As a result banks began to establish branches even in small villages.  The spread of banking and awareness of banking created opportunities for borrowers to avail credit from banks at reasonable terms.  Banks in the initial periods had been adopting collateral based lending.  For securing the loans from banks, borrowers started creating equitable mortgages. 

The registration system regarding the transactions in landed properties in India is highly fragmented. The charges on the property have never been in the public domain.  Even today, equitable mortgage is the most preferred method among banks to create security interest (charge) in an immovable property. Simplicity of the process has made equitable mortgage the most favored charge creation among borrowers as well. Equitable mortgage can be created by a borrower just by delivery of original documents in a branch situated in a notified area. No additional documents are required to be created.  Other types of charges are created through execution of documents. 

Creation of equitable mortgage carries an inherent drawback.  The information of creation of charge through equitable mortgage is confined to the lender and borrower as no document is executed. No information is passed on to the revenue records.   This provided an opportunity to unscrupulous borrowers to defraud banks and other financial institutions by creating forged documents and obtaining multiple loans against the security of the same property. Coloured photocopies or certified copies of title deeds were used for creation of subsequent mortgages. Over a period, many such frauds were unearthed.  In some parts of the country, builders also cheated buyers by selling developed properties without disclosing the charge on the property.  The root cause of such frauds was the lack of a central data base to identify charges on landed properties created by way of equitable mortgages. 

CERSAI was the outcome of attempts to create a central data base of equitable mortgages on landed properties to bring an end to such fraudulent activities by providing online information to banks, financial institutions and also the general public.

Evolution of CERSAI over a period    

The original mandate to CERSAI was “to create a public data base of encumbrances created on properties to secure loans and advances given by banks and financial institutions, as also transactions of securitization or asset reconstruction, undertaken pursuant to the provisions of the SARFAESI Act.”  This meant that security interest created through mortgage by deposit of title deeds (Equitable Mortgage – EM) only could be registered with CERSAI. As the registration of charge with CERSAI was identified as an effective tool to minimize the instances of fraud, SARFAESI (Central Registry) Rules were amended in the year 2016. BY this amendment all kinds of mortgages,  charges by way of hypothecation of Plant & Machinery, Book debts and Receivables, Intellectual property etc. were also notified as eligible charges for registration with CERSAI. 

Importance of CERSAI

•    It is now mandatory for banks and financial institutions to register the charges created in their favour on all assets covered by CERSAI within a specified period after creation of the security interest. Non creation of such charge in a timely manner can affect the recoverability. 
•    The records of CERSAI can be accessed by lenders or persons, interested in dealing with  a property against payment of specified fee.
•    The registration with CERSAI alone will not be sufficient for lenders to protect their interest. Registration with CERSAI primarily acts as a notification to general protection.  In order to create a valid charge on a security, lenders will have to comply with the registration requirements under various laws like the Registration Act, Companies Act, Motor Vehicles Act, etc. The legal validity of a charge /mortgage will be decided solely as per the law under which the security interest was created.  
•    Security interest created by a lender who comes under the purview of SARFAESI Act only can  be registered with CERSAI    What is a security in banking terms?