Recent developments in India’s financial landscape have seen the Securities and Exchange Board of India (Sebi) propose reforms to the regulations governing securitised debt instruments (SDIs). These changes, aimed at enhancing investor protection and streamlining processes, include a minimum investment threshold of Rs 1 crore. The proposals, open for public comment until November 16, 2024, seek to attract institutional investors and high-net-worth individuals while ensuring that the securitisation framework remains robust and transparent.
About Securitisation
Securitisation is a financial practice where various types of debt, such as loans or mortgages, are pooled together and transformed into marketable securities. This process allows banks and financial institutions to convert illiquid assets into liquid ones, thus providing an alternative funding source. Investors receive returns based on the performance of the underlying debt pool, which helps spread risk across multiple assets, making it an attractive investment option.
Minimum Investment Threshold
Sebi’s proposal introduces a minimum investment requirement of Rs 1 crore for participants in securitisation activities. This threshold is designed to attract sophisticated investors who can better understand the risks associated with these financial products. Interestingly, this aligns with global trends, as many developed markets have similarly high minimums for complex financial instruments.
Investor Limitations and Public Offer Regulations
To maintain regulatory integrity, the number of investors in privately placed SDIs is capped at 200. If an issuer seeks to engage more than this number, the offering must be classified as a public offer, which comes with stricter regulations. Public offers must remain open for a minimum of three days, ensuring that investors have adequate time to evaluate their options.
Dematerialisation of Instruments
A aspect of the proposed regulations is the mandatory dematerialisation of securitised debt instruments. This shift to electronic transactions aims to enhance market efficiency, reduce fraud, and lower administrative costs associated with physical certificates. Dematerialisation is a growing trend worldwide, with many markets transitioning to digital platforms for improved security and transparency.
Risk Retention and Holding Period Requirements
Sebi has introduced risk retention requirements, mandating that originators retain at least 10% of the securitised pool’s risk, which decreases to 5% for receivables with a maturity of up to 24 months. This aligns the interests of originators with those of investors, as they are incentivised to ensure the underlying assets perform well. Additionally, a minimum holding period for underlying receivables is proposed to ensure that originators remain invested in the assets they securitise.
Liquidity Facilities and Asset Eligibility
To address potential cash flow mismatches, Sebi has mandated the establishment of liquidity facilities, either by the originator or a third party. This provision is essential for ensuring timely payments to investors and enhancing market stability. Furthermore, the definition of permissible underlying assets has been updated, excluding single-asset securitisation to promote diversification and reduce risk.
Experience and Track Record Requirements
To qualify for participation in securitisation, originators must demonstrate a minimum operating experience of three years. This requirement aims to ensure that only established entities engage in the market. Additionally, obligors must have a track record of at least two successful, default-free payment cycles, further safeguarding investor interests.
Questions for UPSC:
- What are the implications of the proposed minimum investment threshold in the securitisation market?
- How does the concept of securitisation enhance liquidity in financial markets?
- Discuss the importance of risk retention requirements for originators in securitised debt instruments.
- What role does dematerialisation play in modern financial transactions?
- Explain the rationale behind limiting the number of investors in privately placed SDIs.
