The Securitisation Bill, expected to be passed by Parliament in the forthcoming monsoon session, may not turn out to be the panacea for all ills of the financial sector as there are a range of other issues - relating to taxation and law - that have to be addressed on a war footing.
Legal counsels have been working round the clock, scrutinising existing laws, many of which restrict the introduction of securitisation. Changes to the Income Tax Act 1962, the Transfer of Property Act 1882, Stamp Duty Act, the Companies Act 1956, and the Registration Act - all need to fall into place, said a source in Darashaw Broking & Investment Banking.
One of the key issues addressed by most lawyers is the need for the special purpose vehicle (SPV) "to be a tax neutral entity". In the absence of securitisation as defined in section 23(d) of the Income Tax Act, 1961, the entire income stream is taxed in the hands of the originator.
Legal counsels have suggested that the originator be taxed for the consideration received and the profits of the SPV be distributed to the investors, who would then be taxed on their income.
Sections 160, 161 and 164 of the Income Tax Act restrict securitisation to a large degree as these sections define that the SPV, which would essentially be a trust, would have to pay tax on behalf of the beneficiaries and would be taxed at the maximum marginal rate, thereby making the entire process uneconomical.
Further, under section 60, circumstances under which transfer of assets takes place has to be cleared, otherwise the transferor continues to pay taxes. With reference to section 10(23g) of the Income Tax Act, there is a need for a continued exemption from taxation in the case of income by way of dividend or interest from investments in infrastructure facility, even after securitisation.
Apart from the IT Act, the Transfer of Property Act, 1882, also needs modification to facilitate the introduction of securitisation. While section 5 of the Act allows for the future transfer of debt, this is subject to the matter being in existence in the present.
Amendment would be required whereby the transfer of assets in the present where the subject matter will be created in the future date, ought to be allowed for the development of future flow securitisation, said Sandeep Bhattacharya, a senior dealer with Darashaw Broking and Investment Banking Company. Similarly, speedier foreclosure laws are called for under section 67A of the Act.
Another major hurdle restricting securitisation is the fact that under Order II rule 2 of the Code of Civil Procedure, 1908, a single debt cannot face multiple suits as a debt cannot be assigned in parts. Necessary amendments need to fall in place to allow securitisation without stoppage.
Securitisation further calls for the need of uniformity of stamp duty, which presently is limited to five states - Maharashtra, Gujarat, Tamil Nadu, Karnataka and West Bengal.
The Reserve Bank of India is understood to have written to all the states asking them to reduce the stamp duty and bring it uniform at 0.1 per cent. Modifications are called for under article 23 schedule 1 of the Indian Stamp Act wherein the definition of securitisation deed and transferable receipts needs to be included.
Amendment in details also has to be completed in terms of the nitty gritty with regards to the securitisation deed that needs to be registered with the registrar under the Registration Act, and the forms that need be filled up in case of transfer of assets, for effecting the modification of charge under the Companies Act 1956.
