Securitisation should not be fettered

WITHOUT CONTEMPT

A bill has been introduced in the Lok Sabha to amend the Securities Contracts (Regulation) Act, 1956 (SCRA) to provide for inclusion of securitisation instruments within the ambit of the term "securities".

However, if the bill becomes law, the Securities and Exchange Board of India (SEBI) will have to approve every securitisation transaction in the country.

While an amendment to the law to give greater legal clarity and recognition to securitised instruments is welcome, the manner in which the amendment law is drafted will create a host of unintended consequences.

To begin with, the current definition of the term "securities" in the SCRA covers the term "derivatives", and in turn, this definition pretty much brings within its fold instruments of the nature that get issued in securitisation transactions.

Securitisation involves pooling of financial assets in the hands of a special purpose vehicle, which is often a trust, and the issuance of securities by the special purpose vehicle. The securities evidence an interest in the underlying financial assets.

The purchase of the underlying assets by the special purpose vehicle would be financed by the proceeds of the issuance of the securities, and the securities so issued are serviced from the cash flows generated by the financial assets purchased.

India has a fast-developing securitisation market. Financial assets ranging from credit card receivables, home loan receivables, hire purchase receivables and corporate debt have often been securitised. Most of this market has been in the high-end sophisticated institutional segment.

While the depositories are open to dematerialising such securities (since they clearly are securities), stock exchanges have not been listing such instruments for trading even among institutional players since they are unsure if such instruments could be considered securities that can be listed.

The bill to amend SCRA is obviously a response to various demands from the financial system to enable a deeper market in securitised financial assets. While any clarificatory amendment that would bring securitised instruments within the ambit of "securities" is welcome, what the bill also proposes to insert a new Section 17A in the SCRA which would require SEBI to approve every securitised instrument.

The proposed Section 17A requires SEBI approval not just for listing of a securitisation instrument on a stock exchange but even for the very issuance of any such instrument. The proposed provision contains an express prohibition on issuance or listing of such instruments unless SEBI accords its approval.

SEBI would have to write regulations prescribing the contents of securities instruments and the manner of disclosure of information in the instruments.

Moreover, SEBI would have to deal with applications for approval of every transaction in the financial system. Perhaps, even SEBI would not want such a task on its hands.

Many of the underlying financial assets are governed by myriad other laws and contracts that SEBI, as a capital market regulator, would either not have been conversant with, or would not want to be concerned with. The more complex the private and public law governing the underlying financial asset, the more complicated the securitisation instrument would be.

Regulation anywhere in the world of such instruments is minimalist. The players in these transactions are sophisticated informed players. The very unit-size of such securities would place them beyond the reach of the household investor.

Even if these instruments are listed, the depth in the secondary market would be provided not by household investors but by institutional players such as mutual funds and financial institutions.

Against this backdrop, providing for a prior approval for every issuance would slow down securitisation transactions. Often such transactions take as little as a week, if not lesser from origination to closure. A hard re-look at the proposed amendment would very much be in order.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)