This document summarizes regulations surrounding the listing of securitized debt instruments in India. It discusses how 2007 amendments to the Securities Contracts Regulation Act allowed securitized debt instruments to be publicly traded by defining them as securities. In response, SEBI introduced regulations in 2008 governing public offerings and listings of securitized debt instruments. The regulations establish rules for special purpose entities issuing the instruments and require disclosures. SEBI also released a listing agreement for these instruments in 2011 to increase transparency and secondary market liquidity. Issues remaining include lack of effective foreclosure laws and ambiguity in the tax treatment of SPV trusts.

1. REGULATIONS
SURROUNDING THE
LISTING OF
SECURITIIZED DEBT
INSRUMENTS
Varun Vaish
NALSAR

2. 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.”

3. Amendment to SCRA in 2007

In section 2 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956) in clause (h), after subclause (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;"

4. 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.

5. 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.

6. 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.

7. 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.

8. 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/passthrough 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.

9. 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"

10. 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)

11. 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.

12. 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.

13. 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.

14. 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.



15. 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.

16. 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.

17. Conclusion and Issues affecting SDI
Market:

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.

18. 
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.

19. Thank You