Christian Debt Recovery

Debt Offering Prospectus

January 30th, 2008 |

Author: Gavin

Have the loop-holes for securitisation of debt been plugged?

‘Securitisation’ is defined as pooling of financial assets and the issuance of securities that are repaid from the cash flows generated by these assets. Common assets for securitisation include credit cards, mortgages, auto and consumer loans, student loans, corporate debt, export receivable and offshore remittances.

However, it was the securitization of the sub-prime mortgages that led to the 2007-208 financial crises. The securitisation of these sub-prime mortgages created a series of new problems in information asymmetries wherein the mortgages were bought by investment banks, repackaged, with parts sold of to other investment banks and to pension funds and others; part retained to generate cashflows. Thus, this led to great financial turmoil, which had a great impact worldwide and is still being battled. However, after a lesson being learnt from this we have more transparent reforms coming in.

The Indian market regulator, the Securities and Exchange Board of India (SEBI) has allowed the listing of securitised debt instruments in order to develop the primary market for securitized debt instruments in India. Also, the listing of securitized debt instruments would help improve the secondary market liquidity for such instruments.

But the question arises is: Have the loop-holes been plugged or at least enough ground work has been done to prevent another Financial Crises

Yes! The Indian regulator has taken up various steps to plug in the loop holes. Earlier in the year 2007, The Securities Contracts (Regulation) Act, 1956 was amended to include any certificate or instrument, issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case maybe; under the definition of securities.

The regulations provide for a framework for issuance and listing of securitized debt instruments by a special purpose distinct entity (SPDE). The listing of securitized debt instruments would help improve the secondary market liquidity for such instruments.

With a view to enhance information available in the public domain on performance of asset pools on which securitized debt instruments are issued, it has been decided to put in place a Listing Agreement for securitized debt instruments.

The Listing Agreement provides for disclosure of pool level, tranche level and select loan level information. In respect of listed securitized debt instruments, it is clarified that SPDEs which make frequent issues of securitized debt instruments are permitted to file umbrella offer documents on the lines of a ‘shelf prospectus’.

In order to ensure uniform market convention for secondary market trades of securitized debt instruments, Actual/ Actual day count convention, shall be mandatory for all listed securitized debt instruments. The listing agreement for securitised debt instruments shall come into force with immediate effect.

Thus, SEBI has stepped up to boost the primary market and the secondary market liquidity for such instruments.

About the Author