SARFAESI has brought a legal framework for following

important activities in the credit market.

1. Securitisation of Financial Assets.

2. Reconstruction of Financial Assets.

3. Recognition of any ‘interest’ created in security created for

due repayment of a loan as ‘Security Interest’ irrespective

of its form & nature but it is not in possession of creditor.

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4. Power to enforce such security for realisation of money due

to Banks and Financial Institutions in the event of default

without intervention of Courts.

5. Enabling provisions for setting up Central Registry for the

purpose of registration of transactions of securitisation

reconstruction & creation of security interest.

6. Securitisation as a financial technique gained popularity in

the US, in the seventies.

7. Securitisation is best understood as “the repackaging of

receivables in tradable form.”

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Certain Important Definitions

1. Originator

When Bank/FI lend money, they are originator. Originator is the

owner of a financial asset that is acquired by a securitisation

company or reconstruction company for the purpose of

securitisation or asset reconstruction.

2. Obligor

A person liable

i. To pay to the originator, whether under a contract or otherwise

or

ii. To discharge any obligation in respect of a financial asset –

existing, future, conditional or contingent. Obligor includes a

borrower.

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Certain Important Definitions (Contd…)

3. PropertyProperty meansi. Immovable propertyii. Movable propertyiii. Any debt or any right to receive payment of money

whether secured or un secured.iv. Receivables whether existing or future.v. Intangible assets such as know-how, prize, copyright,

trademarks, license, franchise or any other business or commercial right of a similar nature.

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Certain Important Definitions (contd…)

4. Qualified Institutional Buyer

A FI or a Bank or an Insurance Co., or a state Financial Dev.

Corp. or Trustee or an Asset Management Co. making

investment on behalf of a mutual fund or provident fund or

pension fund or a FII (Foreign Institutional Investor) registered

under SEBI Act 1992 or any other body corporate as may be

specified by SEBI.

This definition does not include a company registered

under The Companies Act 1956 unless that Company is

registered with SEBI.

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Certain Important Definitions (Contd…)

5. Reconstruction Company

A company formed for the purpose of asset reconstruction

and registered under The Companies Act 1956.

6. Asset Reconstruction

The takeover of loans or advances from bank or FI for the

purpose of recovery.

7. Bank

Includes Nationalised Bank, SBI & its subsidiaries and co-

op banks but excludes RRBs.

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Certain Important Definitions (Contd…)

8. Financial Institution

i. Public Fin. Dist. – Companies Act 1956

ii. Under DRT 1993

iii. International Finance Corp. under Int. Fin. Corp. Act 1958.

iv. Any other institution or NBFC as defined in RBI Act 1934

which Central Govt. specifies as FI for the purpose of this

Act.

9. Financial Assets

Means debt or receivables.

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Certain Important Definitions (Contd…)

10. Financial Assistance

Any bank/FI grants loan or advance or makes subscription of

debenture or bonds or guarantee or issues L/C or any credit

facility – it is called financial assistance.

11. Security Receipt

Receipt by secuterisation Co. or Reconstruction Co. to any

qualified institutional buyer pursuant to a scheme evidencing

the purchase or acquisition by the holder thereof of an

undivided right, title or interest in the financial asset involved

in securitisation is called security receipt.

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Certain Important Definitions (Contd…)

12. Scheme

The secuterisation Co. or reconstruction Co. can raise funds

from qualified institutional buyers by formulating schemes.

Funds so raised are required to be maintained in, separate

distinct accounts schemewise. The scheme invites

subscription to security receipts proposed to be issued by such

company.

13. Asset Based Securities (ABs)

Assets are of uniform nature & character eg. Car loans or

housing loans. Housing loans are mortgage based securities

(MBS).10

Certain Important Definitions (Contd…)

14. Collecterised Debt Obligations (CDO)

Represent diversified pool of assets.

15. Secuterisation Company

Company registered under Companies Act 1956 for the

purpose of securitisation. It also needs registration from RBI

as per SARFAESI Act. The Co. can set up separate trusts –

schemewise – and act as a trustee for such schemes as

provided in “Securitisation Companies (Reserve Bank)

Guidelines and Discretions 2003”. The investors in the

secuterisation Co. are the beneficieries of such trusts.

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Certain Imp. Definitions(Cont.)

Securitisation

Means acquisition of financial asset by securitisation or

reconstruction Co. from the originator – by raising funds by

such company from qualified institutional buyers by issue of

security receipts representing undivided interest in the

financial asset or otherwise.

Now SARFAESI Act has made the loans secured by

mortgage or other charges transferable. RBI is the regulatory

authority for all securitisation or reconstruction company.

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Securitisation (Cont.)Securitisation is the process of converting

existing assets or future cash flows into tradable securities through a special purpose vehicle (SPV)

Securities issued by SPV are referred to as (PTC) Pass Through Certificates.

Investors are purchasers of Pass Through Certificates.

Servicer collects periodic installments due from individual borrowers in pool, makes payout to investors & follows up on delinquent A/cs. Furnishes information to rating agencies & trustees on pool performance. He gets service fees.

Securitisation (contd…)

As per guidelines of 29/03/2004, the minimum capital

requirement for secuterised company is -2- crores at the time

of registration – Capital Adequacy of 15% of total asset

acquires or Rs.100 crores whichever is less.

Secuterisation is the process of converting existing

assets or future cash flows into tradable securities through a

special purpose vehicle ( secuterised company) which may

then be sold in the market.

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Securitisation & Housing Finance

Mortgage based securities – long maturity & create asset –

liability gaps in lender’s books. Lenders securitise & sell to

Investors. In housing loans credit risk is low but for investor,

major risk is interest rate risk particularly on fixed rate in

falling interest rate – prepayment possibilities – alters cash

flows upsets investment decisions.

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The steps to a Securitisation Transaction

Step 1:- Origination :- Lender (FI, Banks, NBFC etc.) makes

a loan to a borrower for purpose of an asset ( car, property

etc.)

Step 2 :- Pooling :- Large no. of homogeneous loans are

aggregated or packaged into a pool. The maturities & int. rates

of pooled loans – generally same.

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The steps to a Securitisation Transaction (contd…)

Step 3:- Sale / Transfer :- of assets from originator to an

entity – SPV “ Special Purpose Vehicle” – SPV may be a trust,

a public sector entity.

Step 4:- Issue of ABS (Asset Based Securities) :- SPV

issues securities to investors and the proceeds from the

issuance are used to pay the originator for the pool of loans

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Advantages to Investor

1. Liquidity:- Instruments are freely tradable in market.

2. Safety:- Rated instruments & backed by assets.

3. Securities:- fetch 50 to 100 basis points above the yields

for similar rated debt paper.

4. Diversification:- Different types of instrument in diff. cash

flow requirements.

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Advantages to Seller (Originator)

1. Securitisation mitigates risk arising on account of liquidity

& interest rates.

2. Exposure norms i.e. Borrowerwise (single/group) &

industry can be taken care.

3. Diversification of funding services whenever seller wants

to fund new projects.

4. Capital adequacy requirement can be addressed. If CAR is

inadequate, by securitisation, CAR can be fixed as per

regulatory requirement.

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Advantages to Market

1. It creates more depth in the market by adding more

diversified instruments with different maturities.

2. More fee based income for financial institutions, since they

may act as administrations.

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Legal & Regulatory Issues In Securitisation

1. Stamp duty – Transfer of mortgaged debt – instrument in

writing – attracts ad valorem stamp duty – from 0.5% to 4 to

8% of the value of transaction – hence expensive.

2. Transfer requires compulsory registration – Additional cost.

3. T.P. Act – Assignment of debt should be in whole & not part

assignment.

4. T.P. Act & Sales of Goods Act – only a property currently in

existence is capable of being transfer – Impede

development of securitisation in future receivables as future

property does not fall under the definition of debt.

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Legal & Regulatory Issues In Securitisation (contd…)

5. I.T. Act – Sec.60 contemplates transfer of income without

transfer of assets (which are source of income). The income so

transferred is chargeable to income tax as income of the

transferor & is included in his total income.

6. Foreclosure Laws – Sec. 67 of T.P.Act – on default by

mortgager – mortgagee has right to obtain a decree that

mortgager be deferred forever to get back the property. This

makes it difficult to transfer property in cases of default.

7. SPV structured as a Company under companies Act may come

under definition of NBFC – hence subject to prudential norms.

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Central RegistryCentral Govt. – Set up Central Registry-

Registration of following transaction.(i) Securitisation & Reconstruction of Fin.

Assets.(ii) Creation of security interest under

SARFAESIA Act.Filing of details of transaction – within 30

daysDelay- For next 30 days- on payment of 10

times of prescribed fees.

Modification & Satisfaction Of ChargeWithin 30 days- Modification-additional 30

days- fees- 10 times of feesSatisfaction- Notice to secured creditor- to

show cause within 14 das why satisfaction be not recorded as initialled.

Penalties: (Sec.23)Rs. 5000 for each day of delay for reg./mod./satisfaction.

Penalties: Non-compliance of RBI directives- Fine of Rs. 5 lacs- then Rs. 10000 per day.

The New Draft Guidelines

(Issued in April 2010) A minimum holding period (MHP) and a minimum retention requirement (MRR) by the originator.MHP – A) 9 months for loans with maturity of less than 24

months.B) 12 months for loans with maturity of more than 24

months.MRR – A) Loans with maturity of less than -24- months – proposed as 5%.

B) Loans with maturity of more than -24- months – proposed as 10%.

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The New Draft Guidelines (contd…)

Banks will not be permitted to hedge the credit risks in the

retained exposures (MRR). The total exposure of Banks to

SPV should not exceed 20%

Complex securitisation structures viz.re-securitisation

synthetic securitisation and securities with revolving structures

are specifically prohibited

Loan Restructuring

Not possible for borrower since the banker – customer

relationship is snapped when the loans are secuterised.

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