REGULATIONSSURROUNDING THE LISTING OFSECURITIIZED DEBT INSRUMENTS Varun Vaish NALSAR
Securitized Debt Instruments? In layman’s terms securitization involves pooling of financial assets and the issuance of securities that are re-paid from the cash flows generated by these assets. Sandeep Parekh says-“While the process is a little complicated, in simple terms securitisation is a process of converting assets/cash flows into marketable securities, which can be bought and sold in the securities markets.”
Amendment to SCRA in 2007 In section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) in clause (h), after sub- clause (id), the following sub-clause shall be inserted, namely:- "(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case maybe;"
Listing of SDI’s and Public Offer SEBI promptly notified the Securities And Exchange Board Of India (Public Offer And Listing Of Securitised Debt Instruments) Regulations, 2008 on the 16th of May, 2008. This was done following the 2007 amendment of the Securities Contract Regulation Act, 1956 (SCRA) which altered the definition of ‘Securities’ to include Securitised Debt Instruments allowing for them to publicly traded as opposed to being available for purchase only by Qualified Institutional Buyers (QIB’s). The pre 2007 definition of ‘Securities’ contained in the SCRA excluded the securitised instruments such as Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) making them ineligible for listing and trading on on recognised stock exchanges. Therefore the purchase of such securitised instruments was made possible only through private placements.
Listing of SDI’s and Public Offer These instruments were mostly sold to institutional investors. However in light SEBI’s 2008 guidelines, issuers will be able to float public issues of such instruments and sell them to retail investors as well. This is because all disclosures will be publicly available under SEBI’s standard listing norms.
SDI Listing Agreement The last phase of regulatory action required of SEBI dealt with the prescribing of a standard ‘Listing Agreement’ for such securitised Debt Instruments which would inter alia mandate disclosure norms for entities floating such instruments for public trading. The Securities and Exchange Board of Indian on the March 16, 2011 released the Listing agreement for securitised debt instruments and in the hope that such a move would help improve the secondary market liquidity for such instruments. This act marks a conscious attempt on the part of SEBI, acting under the aegis of the Ministry of Finance to enhance significantly the growth of India’s Debt Market.
Securities And Exchange Board Of India (Public Offer And Listing Of Securitised Debt Instruments) Regulations, 2008 The regulations apply only to public offers or listing of securitised debt instruments. The new regulatory environment creates a market which has the following players: originator/obligor/sponsor, special purpose distinct entity (SPDE), trustee, service provider, and of course, investors.
Cont: The special purpose distinct entity i.e. issuer shall be in the form of a trust; the trustees thereof will require registration from SEBI. Key permissible structures are provided for special purpose entities, in addition to flexibility being provided in terms of pay-through/pass- through structures. The securitized debt instruments issued to public or listed on recognized stock exchange shall acknowledge the beneficial interest of the investors in underlying debt or receivables assigned to the issuer.
Cont: The assignment of assets to the issuer shall be a true sale, and the SEBI regulations require that the "debt or receivables assigned to the issuer should be able to generate identifiable cash flows for the purpose of servicing the instrument and the originator should have valid enforceable interests in the assets and in cash flow of assets prior to securitization"
Cont: If the Securitised Debt Instruments in question were issued and listed in accordance with the regulations, they will be freely transferable. Originator shall be an independent entity from the issuer and its trustees and the originator and its associates shall not exercise any control over the issuer. The issuer cannot acquire any debt from any originator who is part of the same group or under the same management as the trustee. (Bankruptcy Remote)
Cont: However, the originator may be appointed as a servicer. The Regulations require strict segregation of assets of each scheme of issue of a Securitised Debt Instrument.
Cont: The issuer may offer securitised debt instruments to public for subscription through an offer document containing disclosures of all relevant material facts including: financials of the issuer and originator, quality of the asset pool, disclosure of various kinds of risks, credit ratings including unaccepted ratings, liquidity facilities, Underwriting of the issue etc. apart from the routine disclosures relating to issue, offer period, application, etc.
Cont: The SDI must receive a rating from at least two credit rating agencies is mandatory and all ratings including unaccepted ratings shall be disclosed in the offer documents. The draft offer document shall be filed with SEBI at least 15 days before opening of the issue. The terms of issue of the securitized debt instrument shall not be varied adversely without the consent of the investor.
SEBI LISTING AGREEMENT FOR THE SECURITIZED DEBT INSTRUMENTS The SPDE is required to enter into listing agreement with the recognised stock exchanges where the securitised debt instruments are proposed to be listed. It will help bring in transparency in listing of securitised debt instruments as the issuers will now need to disclose information of three levels: tranche level pool level and select loan level information.
Cont: Servicing Agreement between the SPDE and the ‘Servicer’ (an entity that agrees to undertake coordination with the obligors, management and collection of the asset pool) is required to be filed. SPDE is required designate a Compliance Officer. This will also require the establishment of a grievance redresssal mechanism. Prior approval of the Exchange for material modification of the structure of the securitised debt instrument needs to be undertaken.
Cont: SPDE is required to make the payment of the prescribed Exchange Fees. SPDE must furnish statements on a monthly basis. SPDE must agree to fix a record date for purposes of payment. SPDE must notify the exchange upon occurrence of certain events including: attachment or prohibitory orders restraining transfer of instruments, any change in the form or nature of instruments, any default in the payment of interest or principal amount.
Conclusion and Issues affecting SDIMarket: It is premature to speculate about the efficacy of these regulations and the listing agreement. Time will determine that or identify loopholes. Foreclosure Laws: Lack of effective foreclosure laws also prohibits the growth of securitisation in India. The existing foreclosure laws are not lender friendly and increase the risks of MBS by making it difficult to transfer property in cases of default.
There is ambiguity in the tax treatment of SPV trusts. The Income Tax law envisages the taxation of an unincorporated SPV either at the trust SPV level or the investor level in order to avoid double taxation.