Structured finance and securitisation in India: overview

A Q&A guide to structured finance and securitisation law in India.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the special purpose vehicle (SPV) and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.

This Q&A is part of the Practical Law global guide to structured finance and securitisation. For a full list of contents, visit www.practicallaw.com/securitisation-mjg.

Harjeet Lall, Kajal Bhimani, Axon Partners LLP
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Securitisation transactions have been in practice since the early 1990s, especially in loan sales. Initially, securitisation was essentially a device of bilateral acquisitions of portfolios of finance companies. Securitisation volumes kept increasing every year until 2006, with various transaction structures evolving, such as:

  • Unstratified pass-throughs.

  • Multi-tranche paper.

The Reserve Bank of India (RBI) introduced guidelines on securitisation in February 2006. Since the introduction of the guidelines, securitisation transactions in India almost turned into bilateral assignment transactions, as the guidelines were not applicable to bilateral sales. In 2012, RBI revised the guidelines and imposed restrictions on direct assignment and ruled out credit enhancement in these transactions.

In the financial year ending 31 March 2014, asset-backed securitisation was dominated by:

  • Commercial vehicle loans.

  • Construction equipment loans.

  • Residential mortgage-backed securitisation. This was a mix of both home loans and loans against property contracts, and a major part of securitisation transactions in India.

There was also an increase in bilateral retail loan pool assignments and direct assignment transactions, which were mainly driven by a priority sector lending (PSL) motive.

There are no central bank programmes currently in India that could have an impact on securitisation in India.

In the financial year ending 31 March 2014, securitisation was particularly concentrated in the microfinance and commercial vehicle sectors.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

There is no specific legislative regime governing securitisations. The Reserve Board of India (RBI) and the Securities and Exchange Board of India (SEBI) are the main regulatory authorities charged with overseeing securitisation transactions. RBI is the central bank of India that regulates transactions of all:

  • Banks.

  • Non-banking financial institutions.

  • Financial institutions.

  • Transactions involving foreign exchange.

SEBI is the market regulator of India. The main laws issued by RBI governing securitisations in India are:

  • The Guidelines on Securitisation of Standard Assets issued by RBI on 1 February 2006.

  • The Guidelines on Securitisation Transactions dated 7 May 2012 (as applicable to all scheduled commercial banks and all-India term lending and refinancing institutions).

  • The revisions to the Guidelines on Securitisation Transactions dated 21 August 2012 (as applicable to non-banking financial companies) that cover the regulatory framework for securitisation of standard assets by banks, all-India term lending and refinancing institutions and to non-banking financial companies.

RBI also regularly issues guidelines on securitisation companies, which are all consolidated in the Master Circular on Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, dated 1 July 2014.

The SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008 provide for public issue and listing of instruments that are issued by a special purpose vehicle (SPV) that purchases securities through securitisation.

The following also govern aspects of securitisation transactions:

  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 (SARFAESI). SARFAESI was introduced in 2002 and has been recognised as facilitating asset recovery and reconstruction. It deals with three aspects:

    • providing a legal framework for the securitisation of assets;

    • enforcement of security interests by a secured creditor (banks or financial institutions); and

    • transfer of non-performing assets to asset reconstruction companies, which then dispose of those assets and realise proceeds.

    This law does very little for securitisation transactions and has generally been viewed as a law relating to enforcement of security interests.

  • The Companies Act 2013. This sets out the provisions on the incorporation of a company and the rules and regulations to be followed by a company incorporated in India.

  • Indian Trusts Act 1882. Since most securitisation transactions adopt the trust structure, the Indian Trusts Act 1882 sets out the laws in relation to incorporation and operation of trusts in India.

  • Other laws and regulations. There are other laws and regulations that require important consideration in a securitisation transaction, such as:

    • foreign exchange regulations; and

    • laws in relation to stamp duty, registration, tax and contracts.

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation

The main reasons for doing a securitisation transaction are:

  • Capital relief.

  • Profit stripping.

  • Liquidity.

In the financial year ending 31 March 2014:

  • Private sector banks and foreign banks mainly used securitisation and direct assignment transactions driven by the priority sector lending (PSL) motive.

  • Public sector banks used direct assignment transactions (PSL and non-PSL) in an aggressive attempt to grow their retail loan book.

Accounting practices

The accounting treatment of securitisation transactions is governed by various accounting standards (AS) and guidelines, including the following:

  • The Reserve Bank of India (RBI) Securitisation Guidelines 2006 state that banks can sell assets to an SPV only on a cash basis. The sale consideration should be received no later than the transfer of the asset to the SPV. Therefore, any loss arising on account of the sale should be accounted for accordingly and reflected in the profit and loss account for the period during which the sale is effected. Any profit or premium arising on account of sale should be amortised over the life of the securities issued (or to be issued) by the SPV. For securitised assets for derecognition from the books of the originator, the entire expenses incurred on the transaction (for example, legal fees) must be expensed at the time of the transaction and should not be postponed. Where the securitised assets do not meet the criteria for derecognition, the sale consideration received must be treated as borrowing. The 2006 Guidelines further state that the accounting treatment of the securitisation transactions, in the books of the originators, SPVs and the investors in securities, is covered by the guidance note issued by the Institute of Chartered Accountants of India (ICAI) with reference to those aspects that are not specifically covered in the 2006 Guidelines.

  • The Institute of Chartered Accountants India (ICAI) issued accounting standard AS 30 (regarding Financial Instruments: Recognition and Measurement). This came into effect for accounting periods commencing on or after 1 April 2009 and was recommendatory in nature. AS 30 (which corresponds to Indian AS 39, which is yet to be notified by the Ministry of Corporate Affairs) requires either transfer of risks and rewards or surrender of control by the seller to derecognise financial assets from the books of the seller. Even though AS 30 is only recommendatory in nature, the derecognition principles of AS 30 are in practice already.

Capital adequacy

RBI regulates the capital adequacy requirements for banks in India. The total exposures of banks to loans securitised in the following forms should not exceed 20% of the total securitised instruments issued (2012 Guidelines):

  • Investments in equity or subordinate or senior tranches of securities issued by the SPV, including through underwriting commitments.

  • Credit enhancements (including cash) and other forms of collaterals (including over-collateralisation), but excluding the credit enhancing interest-only strip.

  • Liquidity support.

Risk retention requirements

The 2006 Guidelines expect that the entire risks and rewards inherent in the securitised asset should be transferred in a securitisation transaction. In fact, generally in a securitisation transaction, all risks or rewards are never transferred because the process of securitisation is not a sell down, but a funding of an asset by way of securitisation.

Implementation of Basel III framework

The Basel III guidelines have been brought into effect from 1 July 2013 in a phased manner. The Basel III capital ratios will be fully implemented by 31 March 2018. The key features of the Basel III guidelines implemented in India include the minimum capital requirements, which state that:

  • The total capital must be at least 9% of risk-weighted assets (RWAs).

  • Tier 1 capital must be at least 7% of RWAs.

  • Common Equity Tier 1 (CET1) capital must be at least 5.5% of RWAs.

Banks may require additional liquidity to maintain the minimum capital requirements. This may result in an increase in the number of securitisation transactions.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

The most common securitisation structure is a securitisation company acting through one or more trusts that have been exclusively established to acquire and administer various financial assets. The securitisation company acts as the trustee of the trust that acts as the SPV.

The underlying assets are transferred by a sale to the trust. The Indian Trusts Act 1882 governs the formation of a trust. Although a trust is not a separate legal personality capable of holding assets in its own name, a trustee can hold property that is distinct from his personal property or any other property held by him on behalf of any other trust. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 (SARFAESI) requires a securitisation company to be established as a company under the laws of India, to have a minimum capital of INR20 million and to be registered with RBI. This company is the sponsor that sets up various SPVs for different schemes by forming various trusts, where the company acts as the trustee. The securitisation company can raise funds from qualified institutional buyers by formulating schemes for acquiring the assets that are transferred into the various SPVs set up by the company.

The financial assets can be acquired either by the securitisation company, which are then transferred to the books of the trust, or by the trust directly. The trust issues security receipts to hold and administer the financial assets for the benefit of qualified institutional buyers. These security receipts are a certification of the beneficial interest in the financial assets held by the trust. They can be transferred only in favour of other qualified institutional buyers.

The Reserve Bank of India (RBI) Securitisation Guidelines 2006 also set out certain criteria that must be met by a SPV such as that the SPV:

  • Should be entirely independent of the originator and neither the SPV nor the trustee should resemble in name or imply any relation with the originator.

  • Should be insolvency remote.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

SPVs are usually established in India.

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

The Reserve Bank of India (RBI) Securitisation Guidelines 2006 requires the SPV to be bankruptcy remote and non-discretionary, in order to fulfil the criteria of a "true sale". Some of the common ways to achieve bankruptcy remoteness are as follows:

  • The SPV cannot be consolidated with any other entity, since it should not be either a subsidiary of any company nor have any subsidiary of its own.

  • The SPV should be restricted from incurring additional indebtedness.

  • The SPV should be a new entity with limited operating history.

  • The objects and powers of the SPV should be limited to the bare activities it is required to perform to hold and administer the assets.

  • Transactions between the SPV and the originator should be at arm's length.

  • The originator should not have any economic interest in the assets after the sale to the SPV, and the SPV should not have any recourse to the originator for any losses.

  • The trustee should only perform trusteeship functions in relation to the SPV and should not undertake any other business with the SPV.

The ability to achieve insolvency remoteness has been eroded to some extent. There have been instances where the courts have pierced the corporate veil and disregarded transfers of assets that they believed were done only in anticipation of insolvency.

The courts can give effect to limited recourse. However, non-petition clauses may not be given effect to by the courts as these clauses may be considered as restricting a person's right to litigate.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

India does recognise the principle of corporate veil. However, there may be a risk that the courts may pierce the corporate veil and give an order to merge the assets of the SPV with those of the originator, if the originator becomes subject to insolvency proceedings. To avoid or minimise these risks, the SPV has to ensure that the assets are transferred on an arm's length basis, meeting all the criteria of a true sale (see Question 6), and the sale is perfected (see Question 19). SPVs can also consider taking the following further steps, essentially to reflect their independence:

  • The name of the SPV should be completely different from the originator.

  • The SPV's office address should be different from that of the originator.

  • The originator should not hold a substantial equity stake in either the SPV or the trustee (if the SPV is formed as a trust with a company acting as its trustee).

  • They should ensure that the constitutional documents provide for a majority of independent directors and set out a mechanism allowing the independent directors to take independent decisions.

However, where there is a fraudulent transaction, or if the transaction is not on an arm's length basis, the courts can order that the assets of the SPV are merged with those of the originator.

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

The Securities and Exchange Board of India (SEBI) has laid down regulations for issuance and listing of securitised debt instruments. Any public issuance or listing of securitised debt instruments has to adhere to certain disclosure requirements in the offer document, such as:

  • Details of the public offer.

  • Risks involved.

  • Description of the asset pool.

  • Details of the principle parties, being the:

    • originator;

    • issuer;

    • trustee;

    • credit enhancement provider;

    • liquidity facility provider;

    • any swap counterparty;

    • servicer;

    • depository;

    • principal underwriter; and

    • collection and payment account bank.

The costs associated with these disclosures and public issuance can have a bearing on whether the SPV's securities are to be issued privately or publicly.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

The securitised debt instruments are typically listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) as they have a better market reach. The listing and trading of securitised debt instruments are governed by the Securities and Exchange Board of India (SEBI) regulations on the issuance and listing of securitised debt instruments.

An SPV can only make a public offer or seek a listing of securitised debt instruments if it:

  • Is constituted as a special purpose entity (that is, a trust that acquires debt or receivables out of funds mobilised by it through the issuance of securitised debt instruments via one or more schemes).

  • Has its trustees registered with SEBI.

The main documents required to make an application to list securitised debt instruments are:

  • A trust deed or other constitutional documents.

  • Copies of all offer documents and advertisements in connection with the offer of securitised debt instruments made by the trust or its trustee at any time.

  • A certified copy of every material document or proposed document that is referred to in any offer document.

  • Certified copies of agreements or memoranda of understanding relating to acquisition (or proposed acquisition) of debt or receivables from a financial institution or other person.

  • A specimen of any other securitised debt instruments issued by the trust that are listed (or proposed to be listed).

In addition, a public issue of securitised debt instruments requires:

  • A credit rating by at least two registered credit rating agencies that must be disclosed in the offer documents.

  • Dematerialisation of securitised debt instruments for which an agreement must be executed with the depository before submitting the draft offer document to SEBI.

  • The execution of the listing agreement for securitised debt instruments in the prescribed form with the concerned stock exchange.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

The trust concept is recognised in India (see Question 4).

The SPV issues security receipts or pass-through certificates. These are a certification of the beneficial interest in the financial asset held by the SPV.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

The classes of receivables that are usually securitised are:

  • Loans.

  • Residential mortgages.

  • Commercial vehicle loans.

  • Construction equipment loans.

  • Car loans.

Recently, there has been an increase in securitisation transactions in microfinance loans and gold loans.

Rental assets, real estate assets and infrastructure assets are expected to emerge as asset classes in the future.

 

Transferring receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

Receivables are usually transferred by a sale or assignment from the originator to the SPV. The perfection of a transfer is subject to giving notice of the sale to the obligor (where there are any contractual restrictions or if the originator is a bank and is required to obtain the prior consent of its customer) before disclosing the details of the customer to the SPV (see Question 15).

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

Although the law treats future debt as a financial asset, future debt can only be transferred when it actually arises. However, an agreement can be entered into for the transfer of future debt when it arises. The following is not permitted:

  • Synthetic securitisation.

  • Re-securitisation of assets.

  • Securitisation with revolving structures.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

The security is transferred by assignment, together with the assignment of the receivables to the SPV. The perfection requirements depend on the nature of the security. The perfection requirements for some common classes of security that are transferred with the receivables are:

  • Mortgages and charges. Mortgages of immovable assets and charges by way of a deed of hypothecation over movable property (including charges over receivables) created by companies have to be filed with the Registrar of Companies under the prescribed Form CHG-1 or Form CHG-9 within 30 days of creation or modification for the charge or mortgage to secure debentures. This filing has to be made by the obligor. A legal mortgage deed also needs to be registered with the appropriate registry and signed by the obligor and the SPV in the presence of witnesses before the registry officer.

  • Pledge of shares. There are no filing requirements for pledged shares. However, if the shares are in dematerialised form, the depository must be informed of the assignment of the pledge.

The deed of assignment for assigning the security has to be stamped and must be registered to be perfected.

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

There may be contractual restrictions or conditions on the transfer or assignment of rights in the underlying documents. Generally, a contract can expressly provide that an assignment of any right or obligation under the contract by a party requires the written consent of the other party. There can also be other terms in the underlying documents, such as confidentiality, that may also require approval of the other party before the transfer of any receivables.

Legislative restrictions

There are no general legal restrictions on the transfer of receivables. Under law, the consent of the obligor may not be required except if required in lieu of the contractual obligations. However, bankers must maintain confidentiality for their customers and may need to inform the obligor before disclosing any information about the obligor. The Reserve Bank of India (RBI has periodically issued guidelines, regulations and circulars that require banks to maintain the confidentiality and privacy of customers. The Master Circular on Credit Card, Debit Card and Rupee Denominated Cobranded Prepaid Card operations of banks issued by RBI in July 2014 contains an elaborate set of provisions on "right to privacy" and "customer confidentiality" under a section titled "Protection of customer rights". The provisions also forbid banks from disclosing customer information to any third party without specific consent. Similarly, the Master Circular on Customer Service in banks issued in July 2014 contains a detailed clause on customer confidentiality obligations. The clause reaffirms the customary banking obligation of secrecy. However, banks can disclose customer information without the customer's express consent, if it is required by law or is beneficial to the bank's interest (such as to prevent fraud).

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

Any decision by a court regarding transfer of titles to the receivables being re-characterised as a secured loan would be subjective and dependent on the transaction structure.

This risk can be avoided by meeting the true sale criteria as set out in the Reserve Bank of India (RBI) Securitisation Guidelines 2006, such as:

  • The sale or transfer should result in an immediate legal separation of risks and rewards for the asset from the originator.

  • The SPV should have no recourse against the originator for any loss arising out of the sale of receivables.

  • The sale should be at arm's length and with cash being received by the originator at the time of the transfer of assets.

True sale opinions are required from the originating bank's legal counsel, stating that (2006 Guidelines):

  • All rights, titles, interests and benefits in the assets have been transferred to the SPV.

  • The originator is not liable to investors in any way for these assets, other than for certain permitted contractual obligations, for example credit enhancement or liquidity facility.

  • Creditors of the originator do not have any rights over the assets, even on the bankruptcy of the originator.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

Any transaction relating to property that is entered into by a company within six months before the start of the winding up can be considered invalid if the transaction gives a fraudulent preference over its creditors. Also, any transfer of goods or property is void against a liquidator if it is made one year before the filing of the winding up petition or the resolution passed by the company for voluntary winding up, unless these transactions are in the ordinary course of business. In all these cases, the burden of proof lies with the liquidator to prove that the transactions need to be set aside. The risk of these transactions being set aside can be minimised by meeting all the true sale criteria set out in the Reserve Bank of India (RBI) Securitisation Guidelines 2006.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

The courts have upheld the freedom of the contracting parties to select the governing law of a transaction, especially in international commercial transactions. The choice of law made by the parties must be:

  • Express.

  • Legal.

  • Not contrary to public policy.

However, if the chosen law is a foreign law and the contract is to be enforced in India, the courts can refuse to enforce any obligation of the contract that contravenes Indian law or is against public policy. For contracts for immovable property in India (such as mortgage deeds), it is also advisable to have the governing law as Indian law.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

Immovable property

A mortgage is the most common way of granting security over immovable property. A legal mortgage is taken over immovable property (usually land), but can also include movable property, such as plant and machinery and other tangible property excluding shares. A legal mortgage is created by way of a duly stamped registered deed. The mortgage deed can only apply to existing immovable property. Immovable property can also be mortgaged by deposit of title deeds. This type of equitable mortgage is created by the mortgagor delivering the title deeds to the mortgagee. Typically, the mortgagee takes a written declaration from either the mortgagor or an authorised person (preferably a director, trustee or other senior official) of the mortgagor, confirming the mortgagor's intention to mortgage the property. The mortgagee can make an internal recording of the acceptance of the title deeds (memorandum of entry).

Charge (whether fixed or floating) over movable property

A charge is usually created under a duly stamped and registered deed of hypothecation. It can be taken over:

  • Present and future movable assets.

  • Assignment of rights under contracts.

  • Any other movable property (whether tangible or intangible).

A charge over assets (such as shares or other securities) is usually taken in the form of a pledge under a pledge deed or pledge agreement. The assets are delivered to the pledgee. The pledgor executes an irrevocable power of attorney in favour of the pledgee. This allows the pledgee to deal with the securities and exercise the same rights the pledgor would have had over the pledged assets on the occurrence of a specified event of default. The power of attorney can be used by the pledgee on the occurrence of a specified event, such as an event of default. However, under law, the pledgee must duly notify the pledgor before effecting any sale of the pledged assets. The power of attorney needs to be notarised. Where the power of attorney is executed outside India, then it should be apostilled to be valid under Indian law. If the shares are in dematerialised form, the depository has to be informed about the pledge and the electronic record must be updated to reflect the pledge.

Mortgages on immovable assets and charges over movable property created by companies have to be filed with the Registrar of Companies under the prescribed Form CHG-1 or Form CHG-9 within 30 days of creation or modification for the charge or mortgage to secure debentures. A legal mortgage deed also needs to be registered with the appropriate land registry and signed by the obligor and the SPV in the presence of witnesses before the registry officer. Foreign trusts can also appoint a security trustee in India, since there are restrictions on foreign persons holding any immovable assets in India.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

The most common securitisation structure is the securitisation company acting through one or more trusts that have been exclusively established to acquire and administer financial assets. The securitisation company acts as the trustee of the trust that acts as the SPV. The trust issues security receipts or pass-through certificates to qualified institutional buyers by a scheme.

A valid trust is formed only when the settlor indicates, with reasonable certainty, by any words or acts:

  • An intention on his part to create a trust.

  • The purpose of the trust.

  • The beneficiary.

  • The trust property.

The settlor must transfer the trust property to the trustee (unless the trust is declared by will or the settlor of the trust is himself to be the trustee). 

There are no requirements on a security trustee to provide any form of consideration.

A trust for immovable property or movable property only becomes valid if:

  • It is so declared by a non-testamentary instrument in writing, signed by the settlor of the trust or the trustee.

  • It is registered with the local registrar or by the will of the settlor or the trustee.

Offshore trusts are recognised. However, transactions by these trusts are subject to the prevailing foreign exchange control regulations.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?

The methods of credit enhancements that are usually used are:

  • Cash collateral.

  • Staggered payment structure.

  • Guarantees.

  • Principal subordination.

  • Corporate undertakings.

These credit enhancement facilities are subject to various conditions laid down by the Reserve Bank of India (RBI). Some of those conditions are that:

  • Credit enhancement can be provided by both the originator or a third party.

  • The facility should be provided at arm's length.

  • The facility should be separate and kept distinct from any other facility provided by the bank.

  • The facility should be limited to a specified amount and for a specified duration.

Risk management and liquidity support

 
22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

The methods of liquidity support that are commonly used are:

  • An overdraft facility from a bank.

  • A cash credit facility from a bank or a third party.

However, an SPV can also build a cash reserve by pooling excess profit that may provide a form of liquidity support.

The liquidity support facility is also subject to conditions laid down by the Reserve Bank of India (RBI). Some of these conditions are:

  • The documents for the liquidity support facility should clearly define when the facility can or cannot be drawn.

  • The facility should not be drawn for credit enhancement or covering the losses of the SPV.

  • The facility should not serve as permanent revolving funding.

  • The facility should be provided directly to the SPV and not to the investors.

The SPV can enter into swap arrangements for the facility to minimise any currency risk.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

The cash flow index specified in the Guide broadly applies to securitisation transactions. The cash flow index in the Guide also discusses the extraction of profit, including the fees for deferred consideration. However, to meet the criteria of a "true sale" as laid down in the Reserve Bank of India (RBI) Securitisation Guidelines 2006, deferred consideration to the originator may not be possible, as the complete consideration has to be paid to the originator in cash on the day the assets are transferred to the SPV. Also, while providing any additional facility such as credit enhancement, the originator must ensure that it does not assume any residual credit risk on the assets being securitised.

With "flip clauses", since India is a common law country, generally the courts give consideration to the judgments of the UK courts. India is also formulating a Comprehensive Bankruptcy Code that is proposed to be effective within the financial year ending 31 March 2016. The committee formulated for drafting the code is giving weight to the position of the UK courts in relation to repayments. Therefore, the courts may uphold the views taken by the UK Supreme Court in relation to "flip clauses".

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

The usual methods by which an originator can extract profit from an SPV are by receiving:

  • A service fee for management of assets or collection of receivables.

  • Fees for providing a credit enhancement facility.

  • Fees for providing liquidity support.

However, the Reserve Bank of India (RBI) Securitisation Guidelines 2006 require these transactions between the SPV and the originator to take place at arm's length.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

Standard & Poor's credit rating for India stands at BBB, Moody's credit rating is Baa3 and Fitch's credit rating is BBB.

The factors that affect these ratings are:

  • Institutional effectiveness and political risks.

  • Economic structure and growth prospects.

  • External liquidity and international investment position.

  • Fiscal performance and flexibility, as well as debt burden.

  • Monetary flexibility.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

Transfer tax

Transfer of receivables is subject to stamp duty and registration charges. The stamp duty and registration charge vary from state to state. The applicable rate depends on the instrument of transfer and the state in which the transfer occurs. Stamp duty is generally calculated as a percentage of the value of the underlying property, which at times is high enough to make the securitisation transaction unviable. However, some states in India have amended their stamp duty for securitisation transactions by providing a lower rate of stamp duty and a cap on the overall amount for these transactions.

Withholding tax

The deduction of tax at source is dependent on:

  • The nature of the entities involved.

  • The underlying assets.

  • The transaction structure.

There is no tax deduction at source of any income distributed by a trust whose beneficiaries are Securities and Exchange Board of India (SEBI) registered mutual funds, as the income is exempt in the hands of such beneficiaries.

Tax issues

The income tax authorities have issued claims on certain SPVs stating that they cannot claim pass-through status and that their gross income is liable to tax. The income tax authorities served tax notices in 2011 on various SPVs operating with the trust structure, claiming that the interest income should be charged as business income of the trust and that these trusts should be treated as an "association of persons", where the beneficiary should be jointly and severally liable for the tax demand. A judicial outcome in these matters is still awaited.

India has not yet signed the intergovernmental agreement with the US to implement FATCA in India.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

Securities and Exchange Board of India (SEBI) has introduced the SEBI (Real Estate Investment Trusts) Regulations 2014 and SEBI (Infrastructure Investment Trusts) Regulations 2014, which may encourage the development of the following as new asset classes for securitisation transactions in India:

  • Real estate.

  • Rental income.

  • Infrastructure.

Under these regulations, foreign investors would also be permitted to invest in real estate assets, whereas these investments were previously highly restricted.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

Securitisation transactions are generally pass-through structures. Even though trust structure is recognised, the master trust structure is not prevalent. However, there are securitisation transactions that happen by way of direct assignment and bilateral retail loan pool assignments.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

India is proposing a pass-through be allowed for any income upstreamed by real estate investment trusts and infrastructure investment trusts. This proposal was made in the Union budget of 2015. However, it is yet to become effective. If it is made effective, this may result in an increase in securitisation transactions in real estate and infrastructure.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

Moody's Investors Service, in its report released in February 2015, stated that India's securitisation market can provide funds needed to finance housing, infrastructure and urbanisation projects as the country's economy grows. However, the securitisation market has been more affected by internal issues than by global or regional reform.

 

Online resources

Reserve Bank of India

W www.rbi.org.in

Description. This is the official website of the central bank in India and is updated with all laws and regulations in relation to securitisation, banking and foreign exchange. The information is all in English.

Securities Exchange Board of India

W www.sebi.gov.in

Description. This is the official website of the market regulator in India and is updated with all laws and regulations in relation to securitisation, capital markets, primary markets and secondary markets. The information is all in English.

ICRA Research Services (for all information on market trends regarding securitisation transactions in India)

W www.icra.in

Description. ICRA is a rating agency and its research services release a report on the securitisation transactions in India every financial year.



Contributor profiles

Harjeet Lall, Partner

Axon Partners LLP

T +91 11 43320003
F +91 11 43320015
M +91 9540571444
E harjeet.lall@axonpartners.in
W www.axonpartners.in

Professional qualifications. Solicitor, admitted in 2006, England and Wales; Advocate, admitted in India in 2010

Areas of practice. Banking and finance; structured finance; capital markets; private equity; project finance; general corporate advisory; restructuring; arbitration

Non-professional qualifications. LLB (Law), 2002, the London School of Economics; MA, 2003, University of Bristol; legal diploma, 2004, the Oxford Institute of Legal Practice.

Kajal Bhimani, Associate Partner

Axon Partners LLP

T +91 11 43320008
F +91 11 43320015
M +91 8800355113
E kajal.bhimani@axonpartners.in
W www.axonpartners.in

Professional qualifications. Lawyer, since 2007, India

Areas of practice. Mergers and acquisitions; private equity; project finance; restructuring; general corporate advisory; capital markets

Non-professional qualifications. LLB, 2007, Symbiosis Law School, Pune, India


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