Reserve Price

Security Interest (Enforcement) Rules, 2002 — Rule 9

The minimum price set for the auction sale of secured assets by a secured creditor under SARFAESI or by the Recovery Officer under the DRT. The reserve price must be fixed based on a valuation report. If no bid is received at or above the reserve price, the auction fails and must be re-conducted.

In practice, the reserve price is the floor at a SARFAESI or DRT auction — the minimum below which the secured asset will not be sold, fixed under Rule 9 of the Security Interest (Enforcement) Rules, 2002 on the basis of a valuation report. It is one of the most litigated steps in enforcement, because an under-valued reserve price lets an asset be sold cheap to the borrower's prejudice, while an over-valued one means no bids and a failed, re-advertised auction. The secured creditor must base the reserve price on a proper, recent valuation and, where required, the lower of independent valuations, and disclose it in the sale notice. Borrowers routinely challenge sales under Section 17 alleging that the reserve price was arbitrarily low or unsupported by valuation, and courts have set aside sales on that ground. A failed auction at the fixed reserve must be re-conducted rather than sold privately at a whim. Well-advised creditors document the valuation underpinning every reserve price before publishing the sale notice.