securitisation- the indian perspective.ppt

8/12/2019 Securitisation- The Indian Perspective.ppt

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Securitisation The Indian

Perspective

Friday, 04 April 2014

Presented By : Amit Kumar -334Gowrishankar-NUMBAJagdish Agarwal-371Pritish Chaudhary-406Priyaranjan Singh-408Puneet Singh Bhatia-409Sujeet Kumar-461Tirthankar Ghosh 467


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2

Agenda

Introduction

Hindsight

Securitization issuance in emerging market

Parties Involved and different Cases

Issues and Prevention Strategies

Conclusion


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Securitisation is the process of pooling and repackaging ofhomogenous illiquid financial assets into marketablesecurities that can be sold to investors. Through it illiquid assets are converted into trade ablesecurity with a secondary market. It is measure of replenishing the funds by recourse to the

secondary market.Securitisation is a process by which the originators ofassets like loans which are illiquid are able to transfersuch assets to a special purpose vehicle ('SPV') which, inturn, issues tradable liquid securities to investors. In a typical securitisation transaction, the companyseeking to raise funds transfers certain of its assets to anSPV that is organized in such a way that minimizes thelikelihood of bankruptcy.

Introduction


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1991 saw a large number of reforms in the financial sideThe government ensued upon a policy for larger economicreforms allowing foreign direct and indirect investment .This needed for the legal framework on securitizationThe enactment of the SARFAESI Act, 2002 The Act encompasses the areas of:

securitization of financial assets;reconstruction of financial assets; recognition to any security interest created for duerepayment of a loan as security interest under theSecuritization Act, irrespective of its form;

banks and financial institutions have the power to enforcethe security without intervention of the courts;setting up the Central Registry for registration of thetransaction of securitization, reconstruction and creation ofsecurity interests.

Hindsight


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Securitisation of financial assets became a financial tool for the lendersto securitise their future cash flows thus releasing their funds blocked

in them. The secured assets become a market commodity having financialreturns on their realisation. This aspect brought in the much-needed expertise in adept handling inrealisation of the secured assets. The Act has made an attempt to streamline the legal impediments ofnormal civil law procedures to foreclose the mortgaged assets byempowering the enforcement of the secured assets by flexiblemechanism provided in the Act. The Act made provision for :

Incorporation of Special Purpose VehiclesSecuritisation of Financial Assets.

Establishment of Central Registry for regulating and registeringsecuritisation transactionsEnforcing security interest i.e. taking over the assets given as security forthe loan..Funding of securitisation.

Asset Reconstruction.

Offences & Penalties.

Hindsight
http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=c3361dbb-a103-424d-8450-0053470052eb&txtsearch=Subject:%20Finance/Bankinghttp://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=c3361dbb-a103-424d-8450-0053470052eb&txtsearch=Subject:%20Finance/Banking


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Total securitization of Emerging markets total was $ 53 billion in 2005.Securitization market in US alone was 5 times of this.

Securitization issuance in emergingmarkets

Country Issuance in $bn Country Issuance in $bn Country Issuance in $bn

Taiwan 1.9 Brazil 4.8 Turkey 4.5South Korea 26 Mexico 4.3 South Africa 2.2India 6.67 Argentina 1.5 Egypt 1.7Singapore 1.2 Chile 0.9 Russia 0

Malaysia 0.4 Peru 0.7 Others 0.2Indonesia 0.6 Columbia 0.5Japan 81 Others 1.3Asia 117.77 Latin America 14 EEMEA 8.6

Asia Latin America EEMEA


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Securitization issuance in emergingmarkets


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Timeline


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The initial owner of the asset (the originator or sponsor) who has a loanagreement with the borrowers (obligors).The issuer of debt instruments who also is the SPV. The structure keeps the

SPV away from bankruptcy of the originator, technically called 'bankruptcyremote. The investment bankers who assist in structuring the transaction and whounderwrite or place the securities for a fee.The rating agencies that assess credit quality of certain types of instruments andassign a credit rating. The credit enhancer, possibly a bank, surety company, or insurer, who providescredit support through a letter of credit, guarantee, or other assurance. The servicer, usually the originator, who collects payments due on theunderlying assets and, after retaining a servicing fee, pays them over to thesecurity holders.

The trustee, who deals with issuer, credit enhancer and servicer on behalf of thesecurity holders.The legal counsel, who participates in the structuring of the transaction.The swap counterparty who provides interest rate/currency swap, if needed

Major Parties Involved


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First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for Rs160 mnL&T raised Rs 4,090 mn through the securitisation of future lease rentals to raisecapital for its power plant in 1999.Indias first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn Indias first MBS of Rs 597 mn by NHB and HDFC in 2001. Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 throughoffshore SPV.Indias first sales tax deferrals securitisation by Govt of Maharashtra in 2001 for Rs

1,500 Million.Indias first deal in the power sector by Karnataka Electricity Board for receivablesworth Rs 1,940 mn and placed them with HUDCO.Indias first Collateralised Debt Obligation (CDO) deal by ICICI bank in 2002 Indias 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 securitisationIndias first securitisation of sovereign lease receivables by Indian Railway FinanceCorporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist of lease amountspayable by the ministry of railways to IRFCIndias largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. Theunderlying asset pool was auto loan receivables.

Some Examples of Securitization


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Citibank assigned a cherry- picked auto loan portfolio to Peoples FinancialServices Ltd. (PFSL), an SPV floated for the purpose of securitisation by paying

the required amount of stamp duty (0.1%) to ensure true sale.This is a limited company and can act only as SPV for asset securitisation. ThisSPV is owned and managed by a group of distinguished legal counsels.PFSL then proceeded to issue Pass Through Certificates to investors. These certificates were rated by CRISIL and listed on the wholesale debt marketof the National Stock Exchange (NSE), with HG Asia and Birla Marlin as themarket makers. Global Trust Bank acted as the Investors Representative.Citibank played the role of servicer.The certificates are freely transferable and each of the transfer will have a stampcost of 0.10%.Besides Citibank, NBFCs like Ashok Leyland Finance, 20th Century Finance etc.

have securitized their auto loan portfolio, though, of course, these transactionsinvolved assignment of receivables only and not issuance of securities. Theasset portfolios were bought by one or two large institutions.TELCO has also reportedly sold over Rs 550 crore of its auto loan portfolio inmultiple tranches through this route.

Case I Citibank Case


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Another important asset class for the purpose of securitisation pertains tothe power sector. The Government is keen to securitise the outstandingdues of various State Electricity Boards (SEBs) and the total market ofsuch receivables is estimated at around Rs.10, 000 crore 4. However,securitisation of these receivables is feasible provided they are sufficientlycredit enhanced, preferably with Government guarantee.The initiative in this regard was taken by Karnataka Electricity Board(KEB) who,securitized around Rs 210 crore of their outstanding dues fromvarious State owned public enterprises. The outstanding dues of KEB arebeing assigned to another State owned subsidiary, Karnataka RenewableEnergy Development Ltd. (KREDL) which is acting as the SPV and in turnissuing securities. The securities are being credit enhanced by way of a guarantee from the

Karnataka Government with a structured payment mechanism. HUDCOhas agreed to be the investor and subscribe to the securities in full.

Case II Karnataka Electricity Boardcase
http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=161http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=161


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The recent case of a power plant construction being financed through thecapital markets is an example of future flow securitisation. AlthoughLarsen & Toubro bagged the Build, Lease and Operate contract for a 90-MW captive power plant for Indian Petrochemical Corporation Ltd. (IPCL),it preferred to transfer it to an SPV India Infrastructure Developers Ltd.(IIDL) which issued debentures in the private placement market.

The debentures would be serviced out of the lease rentals due to IIDLfrom IPCL. L&Ts guarantee was also available to a limited extent. The novelty of this transaction was that instead of a plain loan with say,3:1 debt equity ratio, the project was financed in the form of asecuritisation like structure through the capital market with a much highergearing ratio.

Case III L& T Case( FutureReceivable)


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This was the first attempt at issue of structured debt paper backed by the cashflows arising out of future receivables of a utility. Rajasthan State ElectricityBoard (RSEB) proposed to raise resources to the tune of Rs.250 crore, but, onaccount of its weak balance sheet, was not able to access the market directly. A structure was, therefore, devised whereby a pool of receivables comprisingRSEBs high value customers was selected based on their payment history.The pool was then rated and credit enhancements were built. While no SPVwas set up specifically for the purpose of the transaction, an existing profit-

making Government Company, viz. Rajasthan State Industrial Developmentand Investment Corporation Ltd. (RIICO), was selected as the borrowing entityand the future cash flows and underlying receivables were charged to RIICO.The bonds backed by cash flows were issued by RIICO to various investors bymeans of a privately placed issue. The investors continued to have recourse tothe issuer i.e. RIICO in the event of shortfall in cash flows.

The high stamp duties then prevalent, as also certain legal and market-relatedhurdles, delayed the introduction of full-fledged securitisation at that juncture.

Case IV RICCO Case


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This was the first attempt at issue of structured debt paper backed by the cashflows arising out of future receivables of a utility. Rajasthan State ElectricityBoard (RSEB) proposed to raise resources to the tune of Rs.250 crore, but, onaccount of its weak balance sheet, was not able to access the market directly. A structure was, therefore, devised whereby a pool of receivables comprisingRSEBs high value customers was selected based on their payment history.The pool was then rated and credit enhancements were built. While no SPVwas set up specifically for the purpose of the transaction, an existing profit-

making Government Company, viz. Rajasthan State Industrial Developmentand Investment Corporation Ltd. (RIICO), was selected as the borrowing entityand the future cash flows and underlying receivables were charged to RIICO.The bonds backed by cash flows were issued by RIICO to various investors bymeans of a privately placed issue. The investors continued to have recourse tothe issuer i.e. RIICO in the event of shortfall in cash flows.

The high stamp duties then prevalent, as also certain legal and market-relatedhurdles, delayed the introduction of full-fledged securitisation at that juncture.

Case IV RICCO Case


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Trends in Structured FinanceVolumes

Type 200102 200203 200304 200405 200506 200607 200708 200809 200910

ABS 12.9 36.4 80.9 222.9 178.5 234.2 313.2 135.8 209.7

MBS 0.8 14.8 29.6 33.4 50.1 16.1 5.9 32.9 62.5

CDO/LSO 19.1 24.3 28.3 25.8 21 119 318.2 364.4 145.8

OTHERS 4 2.3 0.5 26 13 11.6 7.9

TOTAL 36.8 77.8 139.3 308.1 249.6 369.3 650.3 544.7 425.9

Trends in structured finance volumes (Rs. Billion):

0

100

200

300

400

500

600

700

2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10

ABS

MBS

CDO/LSO

OTHERSTOTAL


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Asset Class-wise distribution of ABS Pools


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Though the securitisation market in India is marked by relatively simple structures andstable ratings, concerns over asset quality have affected investor appetite forsecuritisation in the post-crisis scenario.

Much of the securitisation activity is driven on the supply side by growth of retail loanportfolio in banks and NBFCs and the prevalent liquidity conditions. On the demand side, the key factors have been the requirements of mutual funds,particularly at the short end, insurance companies and banks to meet priority sectorlending targets. Most of the securities are acquired with the intention to hold to maturity.

As per the data compiled by major rating agencies, the year 2009 10 has witnessed anoverall moderation in the volumes in securitisation market. Total issuance volume saw adecline of 22% in 2009 10 over the previous fiscal. The dip in the overall securitisationvolumes owed mainly to the 60% reduction in loan sell-off (LSO) issuances, which weremostly short-term in nature. In the case of retail loan-backed transactions, with the overall growth in retail loanportfolios being subdued and the liquidity position of most financiers being comfortable,the need to securitise as a funding source was limited.

Nevertheless, securitisation of retail loans, both ABS and RMBS reported a 61% increasein volume in 2009 10. While the securitisation market has remained concentrated with ahandful of originators and limited investors, the asset classes have continued to diversify,the latest additions being gold loans, microfinance loan receivables and loan againstproperty.

Present Scenario


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Stamp Duty:One of the major hurdles facing the development of the securitisation

market is the stamp duty structure. In India, stamp duty is payable on anyinstrument which seeks to transfer rights or receivables. Therefore, theprocess of transfer of the receivables from the originator to the SPVinvolves an outlay on account of stamp duty, which can makesecuritisation commercially unviable in states that still have a high stampduty. Few states have reduced their stamp duty rates, though quite a few

still maintain very high rates ranging from 5-12 per cent. To the investor, if the securitised instrument is issued as evidencingindebtedness, it would be in the form of a debenture or bond subject tostamp duty, and if the instrument is structured as a Pass ThroughCertificate (PTC) that merely evidences title to the receivables, then suchan instrument would not attract stamp duty.SEBI has suggested to the government on the need for rationalisation ofstamp duty with a view to developing the corporate debt and securitisationmarkets in the country, which may going forward be made uniform acrossstates as also recommended by the Patil Committee.

Issues facing the Indian Securitisation Market:


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Issues facing the Indian Securitisation Market:Foreclosure Laws:

Lack of effective foreclosure laws also prohibits the growth of securitisation

in India. The existing foreclosure laws are not lender friendly and increasethe risks of MBS by making it difficult to transfer property in cases ofdefault.

Taxation related issues:

There is ambiguity in the tax treatment of mortgage-based securities, SPVtrusts, and NPL trusts. Presently, the investors or the buyers (PTC and SRholders) pay tax on the earnings from the SPV trust. As a result the trusteemakes income payouts to the investors without any payment of tax. TheIncome Tax law envisages the taxation of an unincorporated SPV either atthe trust SPV level or the investor level in order to avoid double taxation.

Therefore, any tax pass through regime merely represents a stance that theinvestors in the trust will bear the tax liability instead of the Trust being heldliable to tax the investors on their respective earnings.


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Issues facing the Indian Securitisation Market:Issues under the SARFAESI Act:

A security receipt (SR) gives its holder a right of title or interest in thefinancial assets included in securitisation.This definition holds good for securitisation structures where the securitiesissued are referred to as pass through certificates. However, the rationalefails in the case of pay through certificates with different classes of primaryand secondary rights to the cash flow.

Also, the SARFAESI Act has been structured such that SRs can be issuedand held only to Qualified Institutional Buyers (QIBs).There is a need to expand the investor base by including NBFCs, non-NBFCs, private equity funds, etc.


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Issues facing the Indian Securitisation Market:

Legal Issues: Investments in PTCs are typically held-to-maturity.

As there is no trading activity in these instruments, the yield on PTCs andthe demand for longer tenures especially from mutual funds is dampened.Till recently, Pass through Certificates (PTC) were not explicitly coveredunder the Securities Contracts (Regulation) Act, definition of securities.This was however ammended with the Securities Contracts (Regulation)

Amendment Act, 2007 passed with a view to providing a legal frameworkfor enabling listing and trading of securitised debt instruments.This will bring about listing of PTCs which in turn will support marketgrowth.


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Issues facing the Indian Securitisation Market:Foreclosure Laws:

Lack of effective foreclosure laws also prohibits the growth of securitisation

in India. The existing foreclosure laws are not lender friendly and increasethe risks of MBS by making it difficult to transfer property in cases ofdefault.

Taxation related issues:

There is ambiguity in the tax treatment of mortgage-based securities, SPVtrusts, and NPL trusts. Presently, the investors or the buyers (PTC and SRholders) pay tax on the earnings from the SPV trust. As a result the trusteemakes income payouts to the investors without any payment of tax. TheIncome Tax law envisages the taxation of an unincorporated SPV either atthe trust SPV level or the investor level in order to avoid double taxation.

Therefore, any tax pass through regime merely represents a stance that theinvestors in the trust will bear the tax liability instead of the Trust being heldliable to tax the investors on their respective earnings.


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Areas for ImprovementPresently, SPVs are not eligible as counter-parties in an interest rate swap andderivative contract with a bank. In a transaction with significant interest rate risk,

like a long tenure MBS, there is critical need to mitigate it through tools such asinterest rate swap. It is recommended that RBI many consider amendments tothe General Guidelines on Derivatives and Swap, allowing SPVs to be includedas counter-party.RBI should converge with SEBI to prescribe a more comprehensive standardset of disclosures, similar to the guidelines for listed PTC as recommended by

SEBI. This could be benchmarked against what is required internationally, thatare required to be made by the seller/originator to all the parties involved in thetransaction, both at origination and post-issuance. This will go a long way inenhancing the transparency and build investors confidence.Presently, SPVs are not eligible to enter into interest rate swap. In a transactionwith significant interest rate risk, like a long tenure MBS, there is critical need to

mitigate it through tools such as interest rate swap.Long term investors like Insurers, Pension Funds, Provident Funds etc arerequired to play a key role in the market. The Ministry of Finance shouldformulate a policy to allow these players to invest in long-term PTC/Securitized

Assets.


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Case StudySay banks A and B originated and securitized their assets. Further, bank Ainvested in the securitized assets of bank B while bank B invested in thesecuritized assets of bank A. So, clearly, neither bank A nor bank B has acomparative advantage in the origination of assets (loans).Further, bank A was taking a view on bank Bs securitized assets relative toits own securitized assets. Why else would bank A go short (securitize itsown assets) and go long (invest directly or through an SIV) in the

securitized assets of bank B. Bank B, too, was doing something similar. Sowere banks C, D, E... This began a race to the bottom. And the race was rewarded perversely because to short ones assets andto long on the others made sense if you are worse at originating assets!

And that is something securitization should never reward.The rating agencies played the role of a catalyst in the originators race tothe bottom. The rating agencies did so by attracting gullible investors on thebasis of their spurious ratings.


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Prevention Strategies

No relationship between a originator/sponsor and SPV/ SIV should be

allowed- not even temporary liquidity support. An originator should not invest (or service) the securitized assets ofanother originator.The rating agencies should be nationalized.Worldwide, rating agencies paid less than 2% of the $687 billion in

taxes paid by the commercial banks and savings institutions in the USalone during 1992-2007 (source: US Federal Deposit Insurance Corp.).Surely, the rating agencies caused more than just 2% of the damage.They are perhaps the most extreme manifestation of privatizing profitsand socializing losses .


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Conclusion

The dramatic growth in the use of securitization to fund corporate loan

assets suggests that this is a form of financing that is here to stay.However, the process of securitizing complex and non-homogenousassets gives rise to a number of legal and structural complexities.There is a requirement to strengthen & regularize the securitizationmarket because it is still in the blooming stage and if went awry, it couldlead to catastrophic financial implications.


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securitisation- the indian perspective.ppt

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