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SECURITISATION
SARFAESI has brought a legal framework for following
important activities in the credit market.
1.Securitisation of Financial Assets.
2.Reconstruction of Financial Assets.
3.Recognition of any ‘interest’ created in security created for
due repayment of a loan as ‘Security Interest’ irrespective
of its form & nature but it is not in possession of creditor.
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4. Power to enforce such security for realisation of money due
to Banks and Financial Institutions in the event of default
without intervention of Courts.
5. Enabling provisions for setting up Central Registry for the
purpose of registration of transactions of securitisation
reconstruction & creation of security interest.
6. Securitisation as a financial technique gained popularity in
the US, in the seventies.
7. Securitisation is best understood as “the repackaging of
receivables in tradable form.”
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Certain Important Definitions
1. Originator
When Bank/FI lend money, they are originator. Originator is the
owner of a financial asset that is acquired by a securitisation
company or reconstruction company for the purpose of
securitisation or asset reconstruction.
2. Obligor
A person liable
i. To pay to the originator, whether under a contract or otherwise
or
ii. To discharge any obligation in respect of a financial asset –
existing, future, conditional or contingent. Obligor includes a
borrower.
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Certain Important Definitions (Contd…)
3. Property
Property means
i. Immovable property
ii. Movable property
iii. Any debt or any right to receive payment of money
whether secured or un secured.
iv. Receivables whether existing or future.
v. Intangible assets such as know-how, prize, copyright,
trademarks, license, franchise or any other business or
commercial right of a similar nature.
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Certain Important Definitions (contd…)
4. Qualified Institutional Buyer
A FI or a Bank or an Insurance Co., or a state Financial Dev.
Corp. or Trustee or an Asset Management Co. making
investment on behalf of a mutual fund or provident fund or
pension fund or a FII (Foreign Institutional Investor)
registered under SEBI Act 1992 or any other body corporate
as may be specified by SEBI.
This definition does not include a company registered
under The Companies Act 1956 unless that Company is
registered with SEBI.
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5. Reconstruction Company
A company formed for the purpose of asset reconstruction
and registered under The Companies Act 1956.
6. Asset Reconstruction
The takeover of loans or advances from bank or FI for the
purpose of recovery.
7. Bank
Includes Nationalised Bank, SBI & its subsidiaries and co-
op banks but excludes RRBs.
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8. Financial Institution
i. Public Fin. Dist. – Companies Act 1956
ii. Under DRT 1993
iii. International Finance Corp. under Int. Fin. Corp. Act 1958.
iv. Any other institution or NBFC as defined in RBI Act 1934
which Central Govt. specifies as FI for the purpose of this
Act.
9. Financial Assets
Means debt or receivables.
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10. Financial Assistance
Any bank/FI grants loan or advance or makes subscription of
debenture or bonds or guarantee or issues L/C or any credit
facility – it is called financial assistance.
11. Security Receipt
Receipt by secuterisation Co. or Reconstruction Co. to any
qualified institutional buyer pursuant to a scheme evidencing
the purchase or acquisition by the holder thereof of an
undivided right, title or interest in the financial asset involved
in securitisation is called security receipt.
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12. Scheme
The secuterisation Co. or reconstruction Co. can raise funds
from qualified institutional buyers by formulating schemes.
Funds so raised are required to be maintained in, separate
distinct accounts schemewise. The scheme invites subscription
to security receipts proposed to be issued by such company.
13. Asset Based Securities (ABs)
Assets are of uniform nature & character eg. Car loans or
housing loans. Housing loans are mortgage based securities
(MBS).
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14. Collecterised Debt Obligations (CDO)
Represent diversified pool of assets.
15. Secuterisation Company
Company registered under Companies Act 1956 for the
purpose of securitisation. It also needs registration from RBI
as per SARFAESI Act. The Co. can set up separate trusts –
schemewise – and act as a trustee for such schemes as
provided in “Securitisation Companies (Reserve Bank)
Guidelines and Discretions 2003”. The investors in the
secuterisation Co. are the beneficieries of such trusts.
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Certain Imp. Definitions(Cont.)

Securitisation
Means acquisition of financial asset by securitisation or
reconstruction Co. from the originator – by raising funds by
such company from qualified institutional buyers by issue of
security receipts representing undivided interest in the
financial asset or otherwise.
Now SARFAESI Act has made the loans secured by
mortgage or other charges transferable. RBI is the regulatory
authority for all securitisation or reconstruction company.
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Securitisation (Cont.)
Securitisation is the process of converting existing
assets or future cash flows into tradable securities
through a special purpose vehicle (SPV)
Securities issued by SPV are referred to as (PTC) Pass
Through Certificates.
Investors are purchasers of Pass Through Certificates.
Servicer collects periodic installments due from
individual borrowers in pool, makes payout to
investors & follows up on delinquent A/cs. Furnishes
information to rating agencies & trustees on pool
performance. He gets service fees.

Securitisation (contd…)
As per guidelines of 29/03/2004, the minimum capital
requirement for secuterised company is -2- crores at the time
of registration – Capital Adequacy of 15% of total asset
acquires or Rs.100 crores whichever is less.
Secuterisation is the process of converting existing
assets or future cash flows into tradable securities through a
special purpose vehicle ( secuterised company) which may
then be sold in the market.
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Securitisation & Housing Finance
Mortgage based securities – long maturity & create asset –
liability gaps in lender’s books. Lenders securitise & sell to
Investors. In housing loans credit risk is low but for investor,
major risk is interest rate risk particularly on fixed rate in
falling interest rate – prepayment possibilities – alters cash
flows upsets investment decisions.
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The steps to a Securitisation Transaction
Step 1:- Origination :- Lender (FI, Banks, NBFC etc.) makes
a loan to a borrower for purpose of an asset ( car, property
etc.)
Step 2 :- Pooling :- Large no. of homogeneous loans are
aggregated or packaged into a pool. The maturities & int. rates
of pooled loans – generally same.
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The steps to a Securitisation Transaction (contd…)
Step 3:- Sale / Transfer :- of assets from originator to an
entity – SPV “ Special Purpose Vehicle” – SPV may be a trust,
a public sector entity.
Step 4:- Issue of ABS (Asset Based Securities) :- SPV
issues securities to investors and the proceeds from the
issuance are used to pay the originator for the pool of loans
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Advantages to Investor
1. Liquidity:- Instruments are freely tradable in market.
2. Safety:- Rated instruments & backed by assets.
3. Securities:- fetch 50 to 100 basis points above the yields
for similar rated debt paper.
4. Diversification:- Different types of instrument in diff. cash
flow requirements.
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Advantages to Seller (Originator)
1. Securitisation mitigates risk arising on account of liquidity
& interest rates.
2. Exposure norms i.e. Borrowerwise (single/group) &
industry can be taken care.
3. Diversification of funding services whenever seller wants
to fund new projects.
4. Capital adequacy requirement can be addressed. If CAR is
inadequate, by securitisation, CAR can be fixed as per
regulatory requirement.
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Advantages to Market
1. It creates more depth in the market by adding more
diversified instruments with different maturities.
2. More fee based income for financial institutions, since they
may act as administrators.
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Legal & Regulatory Issues In Securitisation
1. Stamp duty – Transfer of mortgaged debt – instrument in
writing – attracts ad valorem stamp duty – from 0.5% to 4
to 8% of the value of transaction – hence expensive.
2. Transfer requires compulsory registration – Additional cost.
3. T.P. Act – Assignment of debt should be in whole & not part
assignment.
4. T.P. Act & Sales of Goods Act – only a property currently in
existence is capable of being transfer – Impede
development of securitisation in future receivables as future
property does not fall under the definition of debt.
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Legal & Regulatory Issues In Securitisation
(contd…)
5. I.T. Act – Sec.60 contemplates transfer of income without
transfer of assets (which are source of income). The income
so transferred is chargeable to income tax as income of the
transferor & is included in his total income.
6. Foreclosure Laws – Sec. 67 of T.P.Act – on default by
mortgager – mortgagee has right to obtain a decree that
mortgager be deferred forever to get back the property. This
makes it difficult to transfer property in cases of default.
7. SPV structured as a Company under companies Act may come
under definition of NBFC – hence subject to prudential norms.
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Central Registry
Central Govt. – Set up Central Registry- Registration
of following transaction.
(i) Securitisation & Reconstruction of Fin. Assets.
(ii) Creation of security interest under SARFAESIA
Act.
Filing of details of transaction – within 30 days
Delay- For next 30 days- on payment of 10 times of
prescribed fees.

Modification & Satisfaction Of
Charge
Within 30 days- Modification-additional 30 days-
fees- 10 times of fees
Satisfaction- Notice to secured creditor- to show
cause within 14 days why satisfaction be not recorded
as initialled.
Penalties: (Sec.23)Rs. 5000 for each day of delay for
reg./mod./satisfaction.
Penalties: Non-compliance of RBI directives- Fine of
Rs. 5 lacs- then Rs. 10000 per day.

The New Draft Guidelines
(Issued in April 2010)
A minimum holding period (MHP) and a minimum retention
requirement (MRR) by the originator.
MHP – A) 9 months for loans with maturity of less than 24
months.
B) 12 months for loans with maturity of more than 24
months.
MRR – A) Loans with maturity of less than -24- months –
proposed as 5%.
B) Loans with maturity of more than -24- months –
proposed as 10%.
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The New Draft Guidelines (contd…)
Banks will not be permitted to hedge the credit risks in the
retained exposures (MRR). The total exposure of Banks to
SPV should not exceed 20%
Complex securitisation structures viz.re-securitisation
synthetic securitisation and securities with revolving structures
are specifically prohibited
Loan Restructuring
Not possible for borrower since the banker – customer
relationship is snapped when the loans are secuterised.
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