securitisation of financial assets[1]

SECURITISATION OF SECURITISATION OF FINANCIAL ASSETSFINANCIAL ASSETS

Securitisation is a process by which Securitisation is a process by which

(i)(i) intangible and illiquid assets are monetized into cash,intangible and illiquid assets are monetized into cash,

(ii)(ii) (ii) risks related to the specific assets are separated from the transferor's (i.e., the originator) own credit (ii) risks related to the specific assets are separated from the transferor's (i.e., the originator) own credit and operating risk, andand operating risk, and

(iii)(iii) (iii) securities are issued to investors which are designed for the specific risk tolerance profile of such (iii) securities are issued to investors which are designed for the specific risk tolerance profile of such investors. investors.

The above statements define the theme of securitisationThe above statements define the theme of securitisation

Simply stated, a securitization is the term used to describe the process of issuing securities backed by the Simply stated, a securitization is the term used to describe the process of issuing securities backed by the cash flows from a pool of underlying assets. Securitization has also been defined as "the sale of equity or cash flows from a pool of underlying assets. Securitization has also been defined as "the sale of equity or debt instruments, representing ownership interests in, or secured by, segregated, income-producing asset debt instruments, representing ownership interests in, or secured by, segregated, income-producing asset or pool of assets, in a transaction structured to reduce or reallocate certain risks inherent in owning or or pool of assets, in a transaction structured to reduce or reallocate certain risks inherent in owning or lending against the underlying assets and to ensure that such interests are more readily marketable and, lending against the underlying assets and to ensure that such interests are more readily marketable and, thus, more liquid than ownership interests in and loans against the underlying assets." The cash from the thus, more liquid than ownership interests in and loans against the underlying assets." The cash from the certificate holders goes to the originator, and the originator can then use that cash to originate more certificate holders goes to the originator, and the originator can then use that cash to originate more loans. The certificate holders receive monthly payments, constituting a paydown of their principal loans. The certificate holders receive monthly payments, constituting a paydown of their principal investment and interest on that investment." investment and interest on that investment."

RBI:RBI: Securitisation is a process by which assets are sold to a bankruptcy remote special purpose Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a two-stage process. In the is used to service the securities issued by the SPV. Securitisation thus follows a two-stage process. In the first stage there is sale of single asset or pooling and sale of pool of assets to a 'bankruptcy remote' first stage there is sale of single asset or pooling and sale of pool of assets to a 'bankruptcy remote' special purpose vehicle (SPV) in return for an immediate cash payment and in the second stage special purpose vehicle (SPV) in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securitiesor pool of assets to third party investors by issuance of tradable debt securities

Elements of SecuritisationElements of Securitisation

1.1. Conversion of existing illiquid assets like Conversion of existing illiquid assets like loans, advances and receivables into tradable loans, advances and receivables into tradable securitysecurity

2.2. Reconverting them into fresh assets through Reconverting them into fresh assets through capital market operationscapital market operations

Securitisation in IndiaSecuritisation in India

As of June 30, 2001, the outstanding securitized assets in the US were over As of June 30, 2001, the outstanding securitized assets in the US were over USD 5 trillion (ABS - USD 1.2 trillion, MBS - USD 3.8)[3], a staggering 25% USD 5 trillion (ABS - USD 1.2 trillion, MBS - USD 3.8)[3], a staggering 25% of all debt outstanding. For India, this figure is a paltry 1.6% with less than of all debt outstanding. For India, this figure is a paltry 1.6% with less than INR 100 billion of outstanding securitized debt. INR 100 billion of outstanding securitized debt.

While there has been a lot of discussion about the potential of securitization While there has been a lot of discussion about the potential of securitization in India, actual deal activity has not kept pace. While some early adopters in India, actual deal activity has not kept pace. While some early adopters like ICICI, TELCO and Citibank have been actively pursuing securitization, like ICICI, TELCO and Citibank have been actively pursuing securitization, almost all the transactions in the market so far have been privately placed almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals.with a majority of them being bilateral fully bought out deals.

Lack of appropriate legislation and legal clarity, unclear accounting Lack of appropriate legislation and legal clarity, unclear accounting treatment, high incidence of stamp duties making transactions unviable, lack treatment, high incidence of stamp duties making transactions unviable, lack of understanding of the instrument amongst investors, originators and, till of understanding of the instrument amongst investors, originators and, till recently, even rating agencies are some of the glaring reasons for the lack recently, even rating agencies are some of the glaring reasons for the lack of activity in the area of securitization in India.of activity in the area of securitization in India.

Need for Securitisation in IndiaNeed for Securitisation in India

In the Indian context, securitization is the only ray of hope for funding In the Indian context, securitization is the only ray of hope for funding resource starved infrastructure sectors like Power *. For power utilities resource starved infrastructure sectors like Power *. For power utilities burdened with delinquent receivables from state electricity boards (SEBs), burdened with delinquent receivables from state electricity boards (SEBs), securitization seems to be the only hope of meeting resource requirements. securitization seems to be the only hope of meeting resource requirements.

As on December 31, 1998, overall SEB dues only to the central agencies As on December 31, 1998, overall SEB dues only to the central agencies were over Rs. 184 billionSecuritization can help Indian borrowers with were over Rs. 184 billionSecuritization can help Indian borrowers with international assets in piercing the sovereign rating and placing an international assets in piercing the sovereign rating and placing an investment grade structure. investment grade structure.

An example, albeit failed, is that of Air India’s aborted attempt to securitize An example, albeit failed, is that of Air India’s aborted attempt to securitize its North American ticket receivables. Such structured transactions can help its North American ticket receivables. Such structured transactions can help premier corporates to obtain a superior pricing than a borrowing based on premier corporates to obtain a superior pricing than a borrowing based on their non-investment grade corporate rating.their non-investment grade corporate rating.

A market for Mortgage backed Securities (MBS) in India can help large A market for Mortgage backed Securities (MBS) in India can help large Indian housing finance companies (HFCs) in churning their portfolios and Indian housing finance companies (HFCs) in churning their portfolios and focus on what they know best - fresh asset origination. Indian HFCs have focus on what they know best - fresh asset origination. Indian HFCs have traditionally relied on bond finance and loans from the National Housing traditionally relied on bond finance and loans from the National Housing Bank (NHB). MBS can provide a vital source of funds for the HFCs. Bank (NHB). MBS can provide a vital source of funds for the HFCs.

Why SecuritisationWhy Securitisation

1.1. A convenient mechanism to suit changing A convenient mechanism to suit changing needs of borrowers and lendersneeds of borrowers and lenders

2.2. Matches supply of funds with demand Matches supply of funds with demand demands for funds through floating demands for funds through floating negotiable securitiesnegotiable securities

3.3. Shifts the source of repayment from earning Shifts the source of repayment from earning to a pool of assetsto a pool of assets

Genesis and GrowthGenesis and Growth

1.1. Severe financial crisis faced by certain states Severe financial crisis faced by certain states in US during 1969-70in US during 1969-70

2.2. Federal government restriction on inter-state Federal government restriction on inter-state lending and borrowinglending and borrowing

3.3. Raised funds from surplus states by issuing Raised funds from surplus states by issuing instruments backed by mortgaged propertiesinstruments backed by mortgaged properties

PLAYERS AND THEIR ROLESPLAYERS AND THEIR ROLES

The Players and their Role:The Players and their Role:1.1. Originator: An entity making loans to borrowers or Originator: An entity making loans to borrowers or

having receivables from customershaving receivables from customers2.2. Special Purpose Vehicle: The entity which buys assets Special Purpose Vehicle: The entity which buys assets

from Originator and packages them into security for from Originator and packages them into security for further salefurther sale

a.a. Bankruptcy remoteBankruptcy remoteb.b. Separates the risk of assets from the credit risk of the sellerSeparates the risk of assets from the credit risk of the seller

3.3. Credit Enhancer: To reduce the overall credit risk of a Credit Enhancer: To reduce the overall credit risk of a security issue by providing senior subordinate structure, security issue by providing senior subordinate structure, over-collateralization or a cash collateralover-collateralization or a cash collateral

PLAYERS AND THEIR ROLES(CONT)PLAYERS AND THEIR ROLES(CONT)

4.4. Credit Rating Agency: To provide value Credit Rating Agency: To provide value addition to securityaddition to security

5.5. Insurance Company / Underwriters: To provide Insurance Company / Underwriters: To provide cover against redemption risk to investor and / cover against redemption risk to investor and / or under-subscriptionor under-subscription

6.6. Obligors: Whose debts and collateral constitute Obligors: Whose debts and collateral constitute the underlying assets of securitisationthe underlying assets of securitisation

7.7. Investor: The party to whom securities are soldInvestor: The party to whom securities are sold

SECURITISATION PROCESSSECURITISATION PROCESS

1.1. Selection of assets by the OriginatorSelection of assets by the Originator

2.2. Packaging of designated pool of loans and Packaging of designated pool of loans and advances (assets)advances (assets)

3.3. Underwriting by underwritersUnderwriting by underwriters

4.4. Assigning or selling to of assets to SPV in Assigning or selling to of assets to SPV in return for cash return for cash

5.5. Conversion of the assets into divisible Conversion of the assets into divisible securitiessecurities

SECURITISATION PROCESSSECURITISATION PROCESS

6.6. SPV sells them to investors through private SPV sells them to investors through private placement or stock market in return for cashplacement or stock market in return for cash

7.7. Investors receive income and return of capital Investors receive income and return of capital from the assets over the life time of the securitiesfrom the assets over the life time of the securities

8.8. The risk on the securities owned by investors is The risk on the securities owned by investors is minimized as the securities are collateralisied by minimized as the securities are collateralisied by assetsassets

9.9. The difference between the rate of the borrowers The difference between the rate of the borrowers and the return promised to investors is the and the return promised to investors is the servicing fee for originator and SPVservicing fee for originator and SPV

Securitisation -ProcessSecuritisation -Process

Features of securitisationFeatures of securitisation

A securitised instrument, as compared to a direct claim on the issuer, A securitised instrument, as compared to a direct claim on the issuer, will generally have the following featureswill generally have the following features

MarketabilityMarketability

Merchantable qualityMerchantable quality

Wide Distribution Wide Distribution

HomogeneityHomogeneity

Role of SPVRole of SPV

Plays the below rolesPlays the below roles

IntermediaryIntermediary Helps in the Pooling processHelps in the Pooling process Holding of pooled securities as a repositoryHolding of pooled securities as a repository Investor of securitiesInvestor of securities Bankruptcy remote transferBankruptcy remote transfer

What are the interlinked processesWhat are the interlinked processes??

Pooling and transfer Pooling and transfer Issuance Issuance Credit enhancement and tranching Credit enhancement and tranching Servicing Servicing Repayment structures Repayment structures

SECURITISATION OF FINANCIAL SECURITISATION OF FINANCIAL ASSETSASSETS

Requirements for Eligible Collaterals:Requirements for Eligible Collaterals:1.1. Assets to be securitised to be homogeneous in Assets to be securitised to be homogeneous in

terms of:terms of:

2.2. Underlying assetsUnderlying assets

3.3. Maturity periodMaturity period

4.4. Cash flow profileCash flow profile


Eligible Collaterals ( few examples)Eligible Collaterals ( few examples)

1.1. Housing financeHousing finance

2.2. Term loan financeTerm loan finance

3.3. Car loanCar loan

4.4. Credit card receivablesCredit card receivables

5.5. Export creditExport credit


Structure of Securitisation:Structure of Securitisation:1.1. Pass Through Certificates:Pass Through Certificates:

Sale of asset to SPVSale of asset to SPV Investors purchase interest in the assets of Investors purchase interest in the assets of

SPVSPV Cash flow (interest and principal) passed Cash flow (interest and principal) passed

through as and when occurred without any through as and when occurred without any reconfigurationreconfiguration

Payments made are most often on monthly Payments made are most often on monthly basisbasis

Reinvestment risk carried by investorReinvestment risk carried by investor


2.2. Pay Through Certificates:Pay Through Certificates: Sale of assets to SPVSale of assets to SPV SPV issues a debt security collateralized by SPV issues a debt security collateralized by

asset cash flowsasset cash flows Cash flows (interest and principal) reconfigured Cash flows (interest and principal) reconfigured

to suit the requirements of the investors i.e. to suit the requirements of the investors i.e. based on the maturity period of the securitybased on the maturity period of the security

Reinvestment risk carried by SPVReinvestment risk carried by SPV Each trench is redeemed one at a timeEach trench is redeemed one at a time Payments would be at different time intervals Payments would be at different time intervals

than the flows from the underlying assetsthan the flows from the underlying assets


Instruments:Instruments:Depending on the structure of securitisation, the Depending on the structure of securitisation, the instrument would be pass-through certificate instrument would be pass-through certificate (PTC), a promissory note, a bond or debenture.(PTC), a promissory note, a bond or debenture.

1.1. The PTC passes the cash flows from borrowers The PTC passes the cash flows from borrowers in the same form to investors. However, in the same form to investors. However, negotiability is restricted as the investor has to negotiability is restricted as the investor has to return the PTC to SPVreturn the PTC to SPV

2.2. Promissory note / bonds / debentures make Promissory note / bonds / debentures make available different tenor maturities and yield to available different tenor maturities and yield to different investorsdifferent investors

Benefits of Securitisation(issuer)Benefits of Securitisation(issuer) Reduces funding costsReduces funding costs: Through securitization, a company rated BB but with AAA worthy cash flow would : Through securitization, a company rated BB but with AAA worthy cash flow would

be able to borrow at possibly AAA rates. This is the number one reason to securitize a cash flow and can be able to borrow at possibly AAA rates. This is the number one reason to securitize a cash flow and can have tremendous impacts on borrowing costs. The difference between BB have tremendous impacts on borrowing costs. The difference between BB debtdebt and AAA debt can be multiple and AAA debt can be multiple hundreds of hundreds of basis pointsbasis points. .

Reduces Reduces asset-liability mismatchasset-liability mismatch: "Depending on the structure chosen, securitization can offer perfect : "Depending on the structure chosen, securitization can offer perfect matched funding by eliminating funding exposure in terms of both matched funding by eliminating funding exposure in terms of both durationduration and pricing basis. Securitization and pricing basis. Securitization allows such banks and finance companies to create a self-funded asset book.allows such banks and finance companies to create a self-funded asset book.

Lower Lower capitalcapital requirements requirements: Some firms, due to legal, : Some firms, due to legal, regulatoryregulatory, or other reasons, have a limit or range that , or other reasons, have a limit or range that their leverage is allowed to be. By securitizing some of their assets, which qualifies as a sale for accounting their leverage is allowed to be. By securitizing some of their assets, which qualifies as a sale for accounting purposes, these firms will be able to lessen the purposes, these firms will be able to lessen the equityequity on their balance sheets while maintaining the "earning on their balance sheets while maintaining the "earning power" of the asset.power" of the asset.

Locking in profitsLocking in profits: For a given block of business, the total profits have not yet emerged and thus remain : For a given block of business, the total profits have not yet emerged and thus remain uncertain. Once the block has been securitized, the level of profits has now been locked in for that company, uncertain. Once the block has been securitized, the level of profits has now been locked in for that company, thus the risk of profit not emerging, or the benefit of super-profits, has now been passed on.thus the risk of profit not emerging, or the benefit of super-profits, has now been passed on.

Transfer risksTransfer risks ( (creditcredit, , liquidityliquidity, , prepaymentprepayment, reinvestment, asset concentration): Securitization makes it , reinvestment, asset concentration): Securitization makes it possible to transfer risks from an entity that does not want to bear it, to one that does..possible to transfer risks from an entity that does not want to bear it, to one that does..

EarningsEarnings: Securitization makes it possible to record an earnings bounce without any real addition to the firm. : Securitization makes it possible to record an earnings bounce without any real addition to the firm. When a securitization takes place, there often is a "true sale" that takes place between the Originator (the When a securitization takes place, there often is a "true sale" that takes place between the Originator (the parent company) and the SPE. This sale has to be for the market value of the underlying assets for the "true parent company) and the SPE. This sale has to be for the market value of the underlying assets for the "true sale" to stick and thus this sale is reflected on the parent company's balance sheet, which will boost earnings sale" to stick and thus this sale is reflected on the parent company's balance sheet, which will boost earnings for that quarter by the amount of the sale. While not illegal in any respect, this does distort the true earnings of for that quarter by the amount of the sale. While not illegal in any respect, this does distort the true earnings of the parent company.the parent company.

AdmissibilityAdmissibility: Future cashflows may not get full credit in a company's accounts (life insurance companies, : Future cashflows may not get full credit in a company's accounts (life insurance companies, for example, may not always get full credit for future surpluses in their regulatory balance sheet), and a for example, may not always get full credit for future surpluses in their regulatory balance sheet), and a securitization effectively turns an admissible future surplus flow into an admissible immediate cash asset.securitization effectively turns an admissible future surplus flow into an admissible immediate cash asset.

LiquidityLiquidity: Future cashflows may simply be balance sheet items which currently are not available for : Future cashflows may simply be balance sheet items which currently are not available for spending, whereas once the book has been securitized, the cash would be available for immediate spending spending, whereas once the book has been securitized, the cash would be available for immediate spending or investment. This also creates a reinvestment book which may well be at better rates.or investment. This also creates a reinvestment book which may well be at better rates.

Disadvantages to issuerDisadvantages to issuer

May reduce portfolio qualityMay reduce portfolio quality: If the AAA risks, for example, are : If the AAA risks, for example, are being securitized out, this would leave a materially worse quality of being securitized out, this would leave a materially worse quality of residual risk.residual risk.

CostsCosts: Securitizations are expensive due to management and : Securitizations are expensive due to management and system costs, legal fees, underwriting fees, rating fees and ongoing system costs, legal fees, underwriting fees, rating fees and ongoing administration. An allowance for unforeseen costs is usually administration. An allowance for unforeseen costs is usually essential in securitizations, especially if it is an atypical essential in securitizations, especially if it is an atypical securitization.securitization.

Size limitationsSize limitations: Securitizations often require large scale : Securitizations often require large scale structuring, and thus may not be cost-efficient for small and medium structuring, and thus may not be cost-efficient for small and medium transactions.transactions.

RisksRisks: Since securitization is a structured transaction, it may include : Since securitization is a structured transaction, it may include par structures as well as credit enhancements that are subject to par structures as well as credit enhancements that are subject to risks of impairment, such as prepayment, as well as credit loss, risks of impairment, such as prepayment, as well as credit loss, especially for structures where there are some retained strips.especially for structures where there are some retained strips.

Advantages to investors Advantages to investors Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)

Opportunity to invest in a specific pool of high quality credit-enhanced assetsOpportunity to invest in a specific pool of high quality credit-enhanced assets: : Due to the stringent requirements for corporations (for example) to attain high ratings, Due to the stringent requirements for corporations (for example) to attain high ratings, there is a dearth of highly rated entities that exist. Securitizations, however, allow for there is a dearth of highly rated entities that exist. Securitizations, however, allow for the creation of large quantities of AAA, AA or A rated bonds, and risk averse the creation of large quantities of AAA, AA or A rated bonds, and risk averse institutional investors, or investors that are required to invest in only highly rated institutional investors, or investors that are required to invest in only highly rated assets, have access to a larger pool of investment options.assets, have access to a larger pool of investment options.

Portfolio diversificationPortfolio diversification: Depending on the securitization, hedge funds as well as : Depending on the securitization, hedge funds as well as other institutional investors tend to like investing in bonds created through other institutional investors tend to like investing in bonds created through Securitizations because they may be uncorrelated to their other bonds and securities.Securitizations because they may be uncorrelated to their other bonds and securities.

Isolation of credit risk from the parent entityIsolation of credit risk from the parent entity: Since the assets that are securitized : Since the assets that are securitized are isolated (at least in theory) from the assets of the originating entity, under are isolated (at least in theory) from the assets of the originating entity, under securitization it may be possible for the securitization to receive a higher credit rating securitization it may be possible for the securitization to receive a higher credit rating than the "parent," because the underlying risks are different. For example, a small than the "parent," because the underlying risks are different. For example, a small bank may be considered more risky than the mortgage loans it makes to its bank may be considered more risky than the mortgage loans it makes to its customers; were the mortgage loans to remain with the bank, the borrowers may customers; were the mortgage loans to remain with the bank, the borrowers may effectively be paying higher interest (or, just as likely, the bank would be paying effectively be paying higher interest (or, just as likely, the bank would be paying higher interest to its creditors, and hence less profitable).higher interest to its creditors, and hence less profitable).

Risks to investorsRisks to investors Liquidity riskLiquidity risk

Credit/defaultCredit/default: Default risk is generally accepted as a borrower’s inability to meet interest : Default risk is generally accepted as a borrower’s inability to meet interest payment obligations on time. For ABS, default may occur when maintenance obligations on the payment obligations on time. For ABS, default may occur when maintenance obligations on the underlying collateral are not sufficiently met as detailed in its prospectus. A key indicator of a underlying collateral are not sufficiently met as detailed in its prospectus. A key indicator of a particular security’s default risk is its credit rating.particular security’s default risk is its credit rating.

Event riskEvent risk

Prepayment/reinvestment/early amortizationPrepayment/reinvestment/early amortization: The majority of revolving ABS are subject to : The majority of revolving ABS are subject to some degree of early amortization risk. The risk stems from specific early amortization events or some degree of early amortization risk. The risk stems from specific early amortization events or payout events that cause the security to be paid off prematurely. payout events that cause the security to be paid off prematurely.

Currency interest rate fluctuationsCurrency interest rate fluctuations: Like all fixed income securities, the prices of fixed rate ABS : Like all fixed income securities, the prices of fixed rate ABS move in response to changes in interest rates.. Furthermore, interest rate changes may affect the move in response to changes in interest rates.. Furthermore, interest rate changes may affect the prepayment rates on underlying loans that back some types of ABS, which can affect yields. prepayment rates on underlying loans that back some types of ABS, which can affect yields.

Contractual agreementsContractual agreements

Moral hazardMoral hazard: Investors usually rely on the deal manager to price the securitizations’ underlying : Investors usually rely on the deal manager to price the securitizations’ underlying assets. If the manager earns fees based on performance, there may be a temptation to mark up assets. If the manager earns fees based on performance, there may be a temptation to mark up the prices of the portfolio assets. Conflicts of interest can also arise with senior note holders the prices of the portfolio assets. Conflicts of interest can also arise with senior note holders when the manager has a claim on the deal's excess spreadwhen the manager has a claim on the deal's excess spread

Servicer riskServicer risk: The transfer or collection of payments may be delayed or reduced if the servicer : The transfer or collection of payments may be delayed or reduced if the servicer becomes insolvent. This risk is mitigated by having a backup servicer involved in the transaction.becomes insolvent. This risk is mitigated by having a backup servicer involved in the transaction.

Hurdles to securitisation in IndiaHurdles to securitisation in India Stamp DutyStamp Duty: In India, stamp duty is payable on any instrument which seeks to transfer rights or receivables. : In India, stamp duty is payable on any instrument which seeks to transfer rights or receivables.

Therefore, the process of transfer of the receivables from the originator to the SPV involves an outlay on account Therefore, the process of transfer of the receivables from the originator to the SPV involves an outlay on account of stamp duty, which can make securitisation commercially unviable in states that still have a high stamp duty. of stamp duty, which can make securitisation commercially unviable in states that still have a high stamp duty. Pass Through Certificate (PTC) that merely evidences title to the receivables, then such an instrument should not Pass Through Certificate (PTC) that merely evidences title to the receivables, then such an instrument should not attract stamp duty,but state governments take a different view. SEBI has suggested to the government on the attract stamp duty,but state governments take a different view. SEBI has suggested to the government on the need for rationalisation of stamp duty with a view to developing the corporate debt and securitisation markets in need for rationalisation of stamp duty with a view to developing the corporate debt and securitisation markets in the country, which may going forward be made uniform across states as also recommended by the Patil the country, which may going forward be made uniform across states as also recommended by the Patil Committee Committee

Foreclosure LawsForeclosure Laws: Lack of effective foreclosure laws also prohibits the growth of securitisation in India. The : 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 existing foreclosure laws are not lender friendly and increase the risks of MBS by making it difficult to transfer property in cases of default property in cases of default

Taxation related issuesTaxation related issues: The tax laws have no specific provision dealing with securitisation. Hence, the market : The tax laws have no specific provision dealing with securitisation. Hence, the market practice is entirely based on generic tax principles, and since these were never crafted for securitisations, experts’ practice is entirely based on generic tax principles, and since these were never crafted for securitisations, experts’ opinions differ. The generic tax rule is that a trustee is liable to tax in a representative capacity on behalf of the opinions differ. The generic tax rule is that a trustee is liable to tax in a representative capacity on behalf of the beneficiaries – therefore, there is a prima facie taxation of the SPV as a representative of all end investors. beneficiaries – therefore, there is a prima facie taxation of the SPV as a representative of all end investors. However, the representative tax is not applicable in case of non-discretionary trusts where the share of the However, the representative tax is not applicable in case of non-discretionary trusts where the share of the beneficiaries is ascertainable. The share of the beneficiaries is ascertainable in all securitisations – through the beneficiaries is ascertainable. The share of the beneficiaries is ascertainable in all securitisations – through the amount of PTCs held by the investors. Though the PTCs might be multi-class, and a large part might be residual amount of PTCs held by the investors. Though the PTCs might be multi-class, and a large part might be residual income certificates in effect, the market believes, though with no reliable precedent, that there will be no tax at the income certificates in effect, the market believes, though with no reliable precedent, that there will be no tax at the SPV level and the investors will be taxed on their share of income.SPV level and the investors will be taxed on their share of income.

Legal IssuesLegal Issues: Investments in PTCs are typically held-to-maturity. As there is no trading activity in these : Investments in PTCs are typically held-to-maturity. As there is no trading activity in these instruments, the yield on PTCs and the demand for longer tenures especially from mutual funds is dampened. Till instruments, the yield on PTCs and the demand for longer tenures especially from mutual funds is dampened. Till recently, Pass through Certificates (PTC) were not explicitly covered under the Securities Contracts (Regulation) recently, Pass through Certificates (PTC) were not explicitly covered under the Securities Contracts (Regulation) Act, definition of securities. This was however ammended with the Securities Contracts (Regulation) Amendment Act, definition of securities. This was however ammended with the Securities Contracts (Regulation) Amendment Act, 2007 passed with a view to providing a legal framework for enabling listing and trading of securitised debt Act, 2007 passed with a view to providing a legal framework for enabling listing and trading of securitised debt instruments. This will bring about listing of PTCs which in turn will support market growth.instruments. This will bring about listing of PTCs which in turn will support market growth.

Eligiblity:Eligiblity: Very few investors are made eligible to invest in PTC. A broader aspect in this will pave way for further Very few investors are made eligible to invest in PTC. A broader aspect in this will pave way for further liquidity and trading oppurtunities liquidity and trading oppurtunities

Some examplesSome examples

First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 mn Rs 160 mn

L&T raised Rs 4,090 mn through the securitisation of future lease rentals to raise L&T raised Rs 4,090 mn through the securitisation of future lease rentals to raise capital for its power plant in 1999. capital for its power plant in 1999.

India’s first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn. India’s first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn. India’s first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and India’s first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and

HDFC in 2001. HDFC in 2001. Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through

offshore SPV. offshore SPV. India’s first sales tax deferrals securitisation by Govt of Maharashtra in 2001 for Rs India’s first sales tax deferrals securitisation by Govt of Maharashtra in 2001 for Rs

1,500 mn. 1,500 mn. India’s first deal in the power sector by Karnataka Electricity Board for receivables India’s first deal in the power sector by Karnataka Electricity Board for receivables

worth Rs 1,940 mn and placed them with HUDCO. worth Rs 1,940 mn and placed them with HUDCO. India’s first Collateralised Debt Obligation (CDO) deal by ICICI bank in 2002 India’s first Collateralised Debt Obligation (CDO) deal by ICICI bank in 2002 India’s first floating rate securitisation issuance by Citigroup of Rs 2,810 mn in 2003. India’s first floating rate securitisation issuance by Citigroup of Rs 2,810 mn in 2003.

The fixed rate auto loan receivables of Citibank and Citicorp Finance India included in The fixed rate auto loan receivables of Citibank and Citicorp Finance India included in the securitisation the securitisation

India’s first securitisation of sovereign lease receivables by Indian Railway Finance India’s first securitisation of sovereign lease receivables by Indian Railway Finance Corporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist of lease Corporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist of lease amounts payable by the ministry of railways to IRFC amounts payable by the ministry of railways to IRFC

India’s largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. The India’s largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables underlying asset pool was auto loan receivables

http://www.financialexpress.com/news/Indian-securitisation/191022/0http://www.financialexpress.com/news/Indian-securitisation/191022/0

How to Invest in Securitized ProductHow to Invest in Securitized Product

Investor should familiar with the following issuesInvestor should familiar with the following issues AssetAsset Historical performanceHistorical performance StructureStructure Credit enhancement Credit enhancement Creditability of parties involvedCreditability of parties involved Risk & Risk mitigationRisk & Risk mitigation Credit RatingCredit Rating Other benefits or disadvantagesOther benefits or disadvantages ReturnReturn Secondary marketSecondary market

securitisation of financial assets[1]

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