Sebi's new rules for Securitisation explained: What Investors need to know

Sebi has proposed several measures to strengthen the securitization framework in India.

Market regulator Securities and Exchange Board of India (Sebi) has proposed new regulations that include a minimum investment threshold of Rs 1 crore for participants engaged in securitisation activities. This initiative, targeting both RBI-regulated originators and unregulated entities, seeks to streamline investment processes and protect investor interests.

 

SDIs are financial products created by pooling together various types of debt -- such as loans, mortgages, or receivables -- and then selling them as securities to investors. This process, known as securitisation, allows the originator (such as a bank) to convert illiquid assets into liquid ones, providing an alternative source of funding.

 

 

Investors in these instruments receive returns based on the performance of the underlying debt pool, and the risk is spread across multiple assets, offering potentially attractive returns. The current framework is based on Sebi's 2008 regulations, with updates from the Reserve Bank of India's (RBI) 2021 directions on securitising standard assets.The Securities and Exchange Board of India (Sebi) is now considering updates to the regulatory framework for securitized debt instruments and sought public comments till November 16 on the proposals.

 

Minimum Ticket Size of Rs 1 Crore

Definition: A "ticket size" refers to the minimum investment amount that an investor must commit when purchasing a financial instrument. In this case, Sebi has proposed that the minimum investment in securitised products by both RBI-regulated originators (such as banks and financial institutions) and unregulated entities (like certain private companies) be set at Rs 1 crore.

 

Purpose: This threshold is likely intended to attract institutional investors and high-net-worth individuals, who can afford such minimum investments, thereby ensuring that the investors are relatively sophisticated and capable of understanding the risks associated with securitised products.

 

2. Limitations on the Number of Investors

Maximum Investors: The proposal limits the number of investors for privately placed SDIs to a maximum of 200. If an issuer intends to raise funds from more than 200 investors, the issuance must be reclassified as a public offer. 

Impact: This restriction is designed to ensure that private placements remain targeted and to prevent issuers from circumventing the regulatory framework associated with public offerings. It helps maintain a balance between flexibility for issuers and investor protection.

 

3. Public Offer Regulations

Offer Duration: The rules stipulated that public offers for SDIs must remain open for a minimum of three days and a maximum of ten days. 

Advertising: The advertising requirements for public offers will align with Sebi’s existing regulations concerning non-convertible securities, which mandates transparency and disclosure to potential investors. 

Rationale: These rules aim to ensure adequate time for investors to make informed decisions while keeping the issuance process efficient.

 

4. Dematerialization of Instruments

Demat Requirement: The proposal mandates that all securitised debt instruments must be issued and transferred exclusively in dematerialised (demat) form. This means that all transactions must be conducted electronically rather than through physical certificates. 

Benefits: This move is expected to enhance transparency, reduce the risk of fraud, streamline the settlement process, and improve overall market efficiency. Dematerialisation also facilitates better tracking of ownership and reduces administrative costs related to physical certificate handling.

 

5. Risk Retention Requirements

 Sebi has proposed that originators—those who create the securitised assets—must retain a minimum risk exposure of 10% of the securitised pool. For receivables with a maturity of up to 24 months, this retention requirement is lowered to 5%. 

Purpose: This rule is intended to align the interests of originators with those of investors. By retaining a portion of the risk, originators are incentivized to ensure the performance of the underlying assets, thereby mitigating moral hazard. This practice helps to protect investors from potential defaults.

 

6. Minimum Holding Period

Requirement: Sebi plans to implement a minimum holding period for the underlying receivables. This requirement ensures that originators maintain an interest in the assets they securitise for a specified duration.

 

7. Optional Clean-Up Call

Definition: The proposal includes an optional clean-up call feature that allows originators to repurchase up to 10% of the original value of the securitised assets. 

Objective: This mechanism provides flexibility for originators to manage the longevity of the asset pool without imposing additional obligations. It can help maintain the quality of the securitised pool and ensure that it remains robust as the underlying assets mature or change in value.

 

8 Liquidity Facilities

Requirement: To address timing mismatches in cash flows—which can occur when incoming payments from underlying assets do not align with outgoing payments to investors—Sebi has mandated that liquidity facilities be provided. These facilities can be established directly by the originator or through a designated third party. 

Significance: This provision is crucial for ensuring that investors receive timely payments, thereby reducing the risk of default and enhancing the overall stability of the securitisation market.

 

9. Updated Definition of Underlying Assets

Permissible Assets: The proposal revises the definition of "debt/receivables," limiting eligible underlying assets to:

Listed debt securities

Accepted trade receivables

Rental incomes

Equipment leases

Exclusion of Single-Asset Securitisation: Single-asset securitisation will not be permitted, likely due to the higher risk associated with relying on the performance of a single asset. This aims to promote diversification and stability within securitised pools.

 

10. Minimum Track Record Requirements

Originators: To qualify for securitisation, originators must demonstrate a minimum operating experience of three years. This requirement ensures that only established entities participate in the market. 

Obligors: For trade receivables, the proposal mandates that obligors (the parties responsible for repayment) have a track record of at least two cycles of successful, default-free payments.