16 October 2023

Securitisation Comparative Guide

Securitisation Comparative Guide for the jurisdiction of India, check out our comparative guides section to compare across multiple countries
India Finance and Banking
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1 Legal and regulatory framework

1.1 Which laws typically govern securitisations in your jurisdiction?

Securitisation in India is primarily governed by:

  • the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which governs the securitisation of stressed assets;
  • directions issued by the Reserve Bank of India ('RBI'), India's central bank; and
  • regulations issued by the Securities and Exchange Board of India ('SEBI'), India's securities market regulator, for listed securitisation notes (eg, pass-through certificates ('PTCs') or security receipts).

In September 2021, the RBI:

  • consolidated and amended its various instructions on securitisation through the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 ('Securitisation Directions'); and
  • introduced the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 ('Transfer Directions') (together, 'the directions').

A distinction is made between:

  • securitisation transactions, which are governed by the Securitisation Directions; and
  • direct assignment transactions, which are governed by the Transfer Directions.

However, industry data uses the term 'securitisation transactions' to refer to both securitisation or PTC transactions and direct assignment transactions.

Other statutes – such as the Contract Act, 1872, the Stamp Act, 1899 and the Trusts Act, 1882 – also apply, but are not directly related to this questionnaire.

1.2 Which bodies are responsible for regulating securitisations in your jurisdiction? What powers do they have?

The RBI is the primary Indian regulator for securitisation. It regulates all originators – that is, banks and non-banking financial companies ('NBFCs') – and most investors engaged in the financial sector.

The RBI's powers include:

  • issuing guidelines and directions for securitisation transactions;
  • verifying whether transactions result in transfers of risk and quantifying the capital that originators and RBI-regulated investors must allocate for the securitised pool; and
  • conducting supervisory reviews of originators and RBI-regulated investors.

Additionally, if the securitisation notes are listed or to be listed, the Securities and Exchange Board of India (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 apply and SEBI will have jurisdiction to that extent.

1.3 What is the regulators' general approach in regulating securitisations?

The RBI encourages securitisation and views it as a facilitator of risk distribution and liquidity for banks and NBFCs. However, it prohibits complicated and opaque securitisation structures, and lending for securitisation. This is evidenced by:

  • the introduction of the 'simple, transparent and comparable' ('STC') securitisation framework. Securitisation transactions which meet prescribed criteria – such as the pool comprising homogenous loans – are classified as STC securitisations and RBI-regulated investors must allocate lower capital for STC securitisation exposure than for other securitisation exposure;
  • the prescription of the minimum retention requirement – the minimum exposure the originator must retain in the assets transferred by it – and the minimum hold period for which the originator must hold the loan; and
  • the proscription of complex securitisation transactions such as synthetic securitisation or re-securitisation.

The RBI also views securitisation as an important tool for resolving stressed assets. As financial creditors presently prefer the time-bound resolution process under the Insolvency and Bankruptcy Code, 2016, and are hesitant to engage with asset reconstruction companies ('ARCs') on account of recent frauds, the RBI is proposing to overhaul the framework for the resolution of stressed assets through ARCs.

1.4 What role, if any, does the central bank play in the securitisation market in your jurisdiction?

Please see question 1.2.

2 Market and motivations

2.1 How sophisticated is the securitisation market in your jurisdiction and how has it evolved thus far?

The Indian securitisation market continues to grow despite the implementation of the goods and services tax ('GST') and the challenges posed by the COVID-19 pandemic. However, the market is still developing, and the Reserve Bank of India ('RBI') has limited the avenues for securitisation by proscribing complex securitisation transactions such as synthetic securitisation and re-securitisation.

The first securitisation transaction in India was completed in 1990. However, legislation for the securitisation of stressed assets and the securitisation of standard assets was not promogulated until 2002 and 2006, respectively.

The regulatory framework was strengthened in 2012 through the introduction of the minimum retention requirement and the minimum hold period which sought to curb lending for securitisation.

Regulation in India continues to evolve and the RBI introduced a comprehensive securitisation framework through the Securitisation Directions and Transfer Directions in 2021 to align the Indian regulatory framework with the recommendations of the Basel Committee on Banking Supervision. Amendments to the framework for securitisation of stressed assets are also expected.

The covered bond market exists in a regulatory void. The Transfer Directions have had an adverse effect on covered bonds, albeit inadvertently (see question 2.5).

The manner in which market participants view securitisation is also evolving. Initially, banks used securitisation to meet their priority sector lending targets –that is, the allocation of a portion of their loans to priority sectors (eg, agriculture, education, housing, renewable energy) – by investing in pools comprising priority sector loans or purchasing such loans. Market participants are now increasingly using securitisation to raise finance and manage risk.

2.2 In which industry sectors, if any, is securitisation most common in your jurisdiction? What major securitisations have been effected thus far?

Securitisation transactions are popular in the retail loan sector. Although direct assignment transactions are undertaken in connection with corporate sector loans, data on such transactions is not available.

Retail loan securitisations are primarily undertaken for microfinance, auto loans, gold loans, and home loans.

According to ICRA, in FY2021-22:

  • microfinance loans accounted for around 13% of the market;
  • asset-backed securitisation (predominantly comprising auto and gold loans) accounted for 44% of the market; and
  • mortgage-backed securitisation (predominantly comprising home loans) accounted for 43% of the market.

Some marquee securitisation transactions that have been undertaken in India are:

  • the securitisation of new and used car receivables for INR 19.29 billion by ICICI Bank in 2007; and
  • the securitisation of trade receivables aggregating INR 11.25 billion by Barclays Bank Plc through three securitisation transactions in 2017.

2.3 What are the benefits of securitisation, for both originators and investors?

Originators may favour securitisation transactions for the following reasons:

  • Securitisation converts illiquid loan assets to cash and increases the originator's liquidity.
  • Securitisation notes have a better rating than the underlying assets and the originator as the notes:
    • are usually credit enhanced; and
    • are not affected by the originator's insolvency.
  • Therefore, originators can raise monies at attractive rates.
  • At times of crisis, securitisation may be the only route for non-banking financial companies ('NBFCs') to raise funds (as was the case following the insolvency of Infrastructure Leasing & Financial Services Limited ('IL&FS');
  • Unless they have provided credit enhancement, originators are not affected by the pool's performance as, after the securitisation, the pool belongs to the investors. Therefore, an originator is not required to provide capital for the pool except in respect of credit enhancement.
  • Securitisation enables the efficient management of stressed assets. After assignment, the stressed assets are managed by specialised agencies and originators can deploy their resources elsewhere.

Investors may favour securitisation transactions for the following reasons:

  • banks may use securitisation to meet their priority sector lending targets;
  • investors can invest in retail loans without establishing the requisite infrastructure (eg, branches and employees) to originate, and collect amounts payable on, such loans;
  • securitisation notes are better rated than the underlying loans and the originators.

2.4 What are the risks of securitisation, for both originators and investors?

Securitisation is subject to the following risks:

  • the underlying loans are subject to the credit risk of the underlying obligors. Investors should thus examine the originator's lending policy and its pools' performance, as the originator applies the same credit checks on its transferred loans as it does on retained loans;
  • securitisation transactions involve several counterparties, such as servicers and credit enhancement providers. The insolvency of a counterparty can impact the transactions and notes' rating. To mitigate this:
    • each facility provider is regulated by a financial sector regulator; and
    • the special purpose vehicle must, under the Securitisation Directions, have a contractual right to replace a counterparty;
  • the performance of the underlying loans (and, consequently the securitisation notes) is subject to market risks such as economic slowdowns;
  • NBFCs' borrowings are secured through fixed charges on specific loans or floating charges on their receivables. For fixed charges, investors should ensure that the pool comprises unencumbered loans. As regards floating charges, the company can deal with its assets freely until the charge crystallises. Therefore, investors should conduct due diligence and seek title-related representations;
  • a court may recharacterise a sale transaction as financing (see question 6.7).

2.5 Is there a developed covered bond market in your jurisdiction and how does it compare and compete with securitisation as means of disintermediation and recycling bank capital?

Indian law does not expressly address covered bonds. Nonetheless, NBFCs have been issuing covered bonds since 2019 – Indian banks do not issue covered bonds. According to ICRA, covered bond issuances totalled INR 22.2 billion in FY2020-21 – a fraction of the volume of the securitisation market.

However, certain factors weigh against the issuance of covered bonds:

  • the RBI has not provided any capital relief for covered bond transactions and NBFC issuing the covered bond must allocate capital for the cover pool;
  • the cover pool may not be bankruptcy remote as there is a risk that, at the time of the issuer's insolvency, the transfer of the cover pool may be set aside as a preferential or fraudulent transaction;
  • the Transfer Directions have adversely impacted covered bonds issuances. The Transfer Directions permit the transfer of economic interests in loans to RBI-regulated entities. As a trustee is not a regulated entity, the Transfer Directions, strictly construed, would bar the transfer of the cover pool. However, some have taken the view that the Transfer Directions apply to the transfer of economic interest and not to a transfer of legal title without economic interest. However, there is no judicial pronouncement or regulatory clarification supporting this.

2.6 To what extent does the government intervene as a state actor in securitisation (eg, by guaranteeing certain securitised assets, providing credit enhancement to impact transactions or sponsoring public bodies to act as originator of or investor in asset-backed securities issues)?

The government does not usually intervene in the securitisation market. However, after IL&FS's insolvency, NBFCs faced an unprecedented liquidity crisis as lenders were reluctant to lend to them. Therefore, on 11 December 2019, the government promulgated a scheme whereby it agreed to provide a first-loss guarantee to public sector banks for high-rated pooled assets purchased from eligible NBFCs until 31 March 2021. The scheme capped the aggregate amount of guarantees at the lower of 10% of the assets purchased or INR 100 trillion.

3 Structures

3.1 What securitisation structures are most commonly used in your jurisdiction?

Direct assignments are more common in India, despite the fact that:

  • simple, transparent and comparable ('STC') securitisations have preferential capital requirements; and
  • credit enhancement is not permitted for direct assignments.

This is because excess interest spread ('EIS') on a securitisation transaction – the amount by which the monies received by the special purpose vehicle ('SPV') from the underlying loans exceeds the amounts payable to the investors – may be subject to goods and services tax ('GST') in the hands of the originator (see question 10.1).

Direct assignment transactions are usually structured to ensure that the originator retains 10% of the economic interest in the pool. This is because investors are often unable to conduct due diligence on each loan comprising the pool and the minimum retention requirement ('MRR') of 10% is then applicable.

Most pass-through certificate ('PTC') transactions are credit enhanced. Credit enhancements are usually structured using:

  • overcollateralisation (that is, credit enhancement by virtue of the value of the pool exceeding that of the securitisation notes) and cash collateral; or
  • overcollateralisation and investment in the subordinate tranche by the originator.

Originators meet their MRR by providing credit enhancement. However, as the Reserve Bank of India ('RBI') does not consider overcollateralisation when calculating the MRR, originators usually provide additional credit enhancement.

3.2 What is the split between 'term' and asset-backed commercial paper transactions?

Please see question 2.2.

3.3 What are the advantages and disadvantages of these different types of structures?

Direct assignment transactions entail less documentation (usually, an assignment agreement, service agreement and power of attorney) than PTC transactions, as they do not require SPVs and the issuance of securities.

However, investors in direct assignment transactions must conduct due diligence on each loan in the pool. If this is not possible, investors must conduct diligence on at least one-third of the pool and the originator must retain 10% of the economic interest. Additionally, credit enhancement is not available for a direct assignment transaction.

Therefore, direct assignments are better suited for the assignment of corporate loans or a pool comprising a few loans (making due diligence more feasible), but are not ideal for pools which require credit enhancement.

PTC transactions involve SPVs and the issuance of securities. Further, originators must retain a portion of the assigned pool to meet the MRR irrespective of investors' due diligence. Originators usually provide credit enhancement for PTC transactions to meet the MRR.

Parties must follow the PTC route where investors wish to allocate less capital through STC securitisations. PTC transactions are ideal where the pool comprises a large number of loans.

3.4 What other factors should originators consider when deciding on a structure?

Originators typically collect excess cash from the pool through EIS. As the EIS may be subject to GST, originators should factor in the potential tax implications before choosing the structure.

Additionally, to the extent that the investment is to be listed, the transaction must be structured as a PTC transaction.

PTC structures are also mandatory where the target investors are entities not regulated by the RBI (eg, mutual funds and foreign portfolio investors) as such entities cannot participate in direct assignment transactions.

4 Eligibility

4.1 What requirements and restrictions apply to prospective originators in your jurisdiction?

Under the Securitisation Directions and Transfer Directions, the following requirements and restrictions apply to originators in India:

  • the originator must comply with the minimum hold period ('MHP') requirements:
    • three months for loans with original tenures of less than two years; and
    • six months for all other loans.
  • The MHP is calculated from the date on which the security is registered; or from the first repayment date if there is no security interest or its registration, is not required;
  • the originator must comply with the minimum retention requirement ('MRR') The MRR for a PTC transaction is:
    • 5% of the book value of the loans securitised for loans having an original maturity of 24 months or less;
    • 10% for other loans or loans having bullet repayments; and
    • 5% for residential mortgage-backed securities, irrespective of the tenure.
  • Direct assignment transactions have an MRR of 10% if investors are unable to conduct due diligence on each loan in the pool;
  • the originator can only provide facilities such as credit enhancement, servicing, and custodian services on the basis arm's-length written agreements;
  • the originator's exposure in a securitisation transaction cannot exceed 20% of the securitised pool;
  • the originator must exercise the same credit checks on its assigned loans as it does on its other loans;
  • the originator can make representations and warranties only regarding the assets;
  • the originator cannot repurchase the transferred exposures except through a clean-up call option.

4.2 What requirements and restrictions apply to prospective investors in your jurisdiction and how are retail and wholesale/professional investors distinguished?

Banks, mutual funds, NBFCs, insurance companies, foreign portfolio investors and high-net-worth individuals are the main investors in securitisation transactions. Investors not regulated by the Reserve Bank of India ('RBI')such as mutual funds and foreign portfolio investors may only participate through PTC structures.

The RBI does not distinguish between retail and wholesale investors. However, where an investor is RBI regulated, it must allocate capital for its securitisation exposures.

Due diligence by investors is recommended but not mandatory for PTC transactions. To the extent that such diligence is conducted (usually on a sample basis), originators must cooperate.

However, in the case of direct assignment transactions, the Transfer Directions require that investors conduct due diligence of all the loans in the pool or, where they are unable to do so, of at least one-third of the pool.

If an RBI-regulated investor wishes to avail the preferential regulatory capital treatment applicable to simple, transparent and comparable ('STC') securitisations, it must assess whether the transaction is STC compliant.

Investors must also understand the risks involved in the transaction and seek adequate representations and warranties to ensure that the originator has complied with the prescribed MRR and MHP, and the applicable know-your-customer requirements for each asset in the pool.

4.3 What requirements and restrictions apply to custodians and servicers in your jurisdiction?

Only entities regulated by financial sector regulators can act as servicers. It is customary for the originator to act as servicer. The servicer:

  • must collect receivables from the underlying obligors and transfer them to investors and administer the securitised assets;
  • must keep the special purpose vehicle ('SPV') apprised of cash flow, including delays in payments by the underlying obligor; and
  • cannot provide implicit support to investors.

The servicer's role is governed by an arm's-length written agreement between the servicer and the SPV.

Where the servicer also acts as the custodian (as is often the case), the servicer retains custody of the underlying documents with an obligation to hand them over at the SPV's request. Like servicers, custodians must be regulated by financial sector regulators and their roles must be stipulated in arm's-length agreements with the relevant SPV.

Investors generally have contractual rights to:

  • conduct audits (including discretionary audits by an auditor) on the servicer; and
  • terminate the agreement and replace the servicer and/or custodian with a third party.

4.4 What classes of receivables and other assets may be securitised in your jurisdiction? What requirements and restrictions apply in this regard?

All standard assets can be securitised under the Securitisation Directions except:

  • re-securitisation exposures;
  • structures in which short-term instruments are issued against long-term assets held by the SPV; and
  • the following underlying assets:
    • revolving credit facilities;
    • restructured loans and advances within a specified period;
    • exposures to lending institutions;
    • refinance exposures of all India financial institutions; and
    • loans with bullet payments of principal as well as interest (other than agricultural loans).

Additionally, the originator may transfer or securitise its stressed loans in terms of the Transfer Directions. The Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act will also apply to the securitisation of stressed assets (eg, loans and debentures) through asset reconstruction companies

4.5 What measures, if any, have been taken in your jurisdiction to promote investor involvement in securitisations?

Securitisation transactions usually attract more sophisticated investors. These investors usually have contractual rights to:

  • conduct audits on servicers;
  • request information; or
  • replace facility providers (please see questions 4.3 and 4.4).

Therefore, the RBI has not taken any specific steps to promote investor involvement.

Where securitisation notes are to be issued to more than 50 persons, the notes must be listed on a recognised stock exchange in India. The issuance must therefore comply with the Securitised Debt Listing Regulations which prescribe certain additional disclosures that the SPV must make over and above those mandated by the Securitisation Directions. Further, the Securitised Debt Listing Regulations empower investors to call investors' meetings and replace the trustee, among other things.

5 Special purpose vehicles

5.1 What forms do special purpose vehicles (SPVs) typically take in your jurisdiction and how are they established?

A special purpose vehicle ('SPV') can be set up as:

  • a company;
  • a trust as per the Trusts Act, 1882; or
  • any other distinct entity like a limited liability partnership (LLP).

In India, SPVs are usually constituted as trusts. While parties generally have the freedom to determine the nature of entity for the SPV, the SPV must be constituted as a trust if the securitisation notes are to be listed on a recognised stock exchange in India. Companies specialising in providing trusteeship services acquire the pool from the originator and then appoint themselves as trustees and hold assets for the pass-through certificate ('PTC') holders' benefit.

5.2 Are SPVs typically established locally or offshore? What are the benefits and risks of each?

SPVs are typically established locally. Unlike offshore SPVs, local SPVs do not require Reserve Bank of India ('RBI') approval to acquire assets from originators.

The transfer of loans to offshore SPVs must comply with Indian foreign exchange law. The Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated 26 March 2019 ('ECB Directions') provide that an Indian lender can assign loans to eligible foreign lenders if such loans are:

  • overdue for at least 60 days;
  • availed of by persons eligible borrower to under the ECB Directions; and
  • availed of for capital expenditure in manufacturing and infrastructure sectors.

Transfers of loans otherwise than in accordance with the ECB Directions require RBI approval, which may not be forthcoming.

Rather than establishing foreign SPVs, foreign investors can invest in Indian SPVs established as companies or LLPs. This investment will require prior government approval if the foreign investor is from a country that shares a land border with India. Additionally, under the foreign portfolio investment route, foreign portfolio investors registered with the Securities and Exchange Board of India can invest in debentures issued by an Indian SPV or, where the SPV is a trust, in the PTCs and security receipts issued by the SPV.

5.3 How is the SPV typically owned?

A SPV constituted as a company or an LLP will typically be owned by a company providing trusteeship services. The originator is prohibited from owning the SPV.

Where the SPV is a trust, the trust is settled by a company providing trusteeship services.

5.4 What requirements and restrictions apply to SPVs in your jurisdiction?

The following requirements and restrictions apply to SPVs:

  • the originator and the SPV may only enter into transactions on an arm's-length basis;
  • the SPV should be a specific purpose entity and bankruptcy remote;
  • the name, trademarks, logos and so on of the SPV should not be identical or similar to those of the originator;
  • the originator cannot have more than one nominee on the SPV's board, provided that the board has at least four members and independent directors are in a majority. Further, the originator nominee should not have a veto right; and
  • if the SPV is a trust, the trust must be non-discretionary.

5.5 What requirements and restrictions apply to the directors of the SPV? What are their primary duties?

Other than the matters set out in question 5.4(d), the Securitisation Directions do not specify any requirements or restrictions on the SPV's directors.

The Companies Act, 2013 imposes duties on directors which would apply to the SPV's directors (if the SPV is a company). The Companies Act, 2013 requires that a director:

  • act as per the articles of association of the SPV;
  • act in good faith to promote the SPV's objects;
  • exercise their duties with reasonable care, skill and diligence; and
  • avoid direct or indirect conflicts of interest with the SPV.

5.6 What measures can be implemented to ensure, as far as possible, the insolvency remoteness of the SPV?

Where the SPV is a trust, the assets held by the trustee will not form part of its liquidation estate and, therefore, this structure is insolvency remote.

If the SPV is a company or LLP, the following steps can achieve insolvency remoteness:

  • the SPV's constitution documents should specify that it is a specific purpose vehicle incorporated for the securitisation transaction and cannot take any other business; and
  • the originator should not own the SPV. The SPV should be an independent entity owned and managed by a company that provides trusteeship services. This will avoid consolidation and related-party risks.

5.7 If the originator becomes insolvent, is there a risk that the assets of the SPV may be consolidated with its own by the courts? If so, how can this be mitigated?

The insolvency of originators is governed by special legislation and overseen by the RBI. It is unlikely that the RBI or an RBI-appointed administrator will set aside a transfer of assets to a SPV.

The RBI can apply to the National Company Law Tribunal to have the Insolvency and Bankruptcy Code, 2016 ('Insolvency Code') govern the insolvency of a particular non-banking financial company. Under the Insolvency Code, the transfer of assets to the SPV may be set aside as a preferential transfer or an undervalued transaction if executed during the look-back period (that is, two years before the admission of insolvency proceedings for related-party transactions and one year for other transactions).

However, this risk is nominal as the originator must, when transferring the loans, satisfy conditions prescribed under the Securitisation Directions and Transfer Directions for the capital relief for the transferred loans, which include demonstrating that the assigned pool is legally isolated from the originator so as to put it beyond the reach of the originator or its creditors even in the event of bankruptcy or administration. Compliance with the directions must be confirmed by a legal opinion.

Where the originator acts as the servicer, its creditors may allege that the originator continues to own the assets, particularly if there is a delay between collection and payment, as the cash flow may be comingled with the originator's assets. However, this risk is nominal as the directions require that the servicer agreement provide that the servicer holds monies as a trustee of the SPV.

6 Transfer of receivables

6.1 Can the transfer of receivables to the SPV be governed by laws other than your local law? If so, what laws are typically chosen?

Parties may elect to have the transfer of receivables governed by foreign law, provided that there is a foreign element – for example:

  • the SPV is an offshore entity; or
  • foreign investors own the majority of the securitisation notes (please see question 5.2).

Whether there is a foreign element will be decided by the courts.

Since India is a common law jurisdiction, most Indian parties choose English law as the governing law when they do not want the transaction documents to be governed by Indian law.

6.2 What local law requirements (documentary and procedural) are required to ensure that foreign law documents are recognised and enforceable locally?

To be enforceable in India, foreign law-governed documents should be stamped at the applicable rate of stamp duty when brought into India. Please see question 10.1 for a discussion on the stamp duty payable on a securitisation transaction.

Where a document is governed by foreign law, at the time of enforcement, the foreign law must be proved in the relevant Indian court through expert testimony.

6.3 How does the transfer of receivables from the originator to the SPV typically take place? What are the formal, documentary and procedural requirements for perfecting the transfer?

SPVs are usually established as trusts and receivables are transferred to those trusts as follows:

  • the pass-through certificate ('PTC') holders remit subscription monies for the PTCs to the trustee company;
  • the originator transfers the receivables to the SPV acting through the trustee company. The transfer becomes effective upon the payment of consideration by the trustee company (on behalf of the SPV);
  • the trustee company holds the assigned assets for the PTC holders' benefits; and
  • PTCs are issued to the PTC holders.

Typically, the following documents are executed for a PTC transaction:

  • a deed of assignment between the originator and the trustee company under which the pool is assigned to the trustee company. This instrument records the terms of the transfer and credit enhancement;
  • an information memorandum prepared by the originator, the trustee and the investment banker making statutory disclosures (see question 8.1);
  • a trust deed by the trustee company;
  • an accounts agreement between the servicer and SPV which records how the monies will be collected and paid to the SPV;
  • a power of attorney from the originator appointing the trustee as its attorney to perfect the trustee's title on the pool and take action against obligors;
  • a servicing agreement between the servicer and the SPV; and
  • PTCs, usually in dematerialised form, issued by the trustee to PTC holders.

6.4 What other requirements and restrictions apply to the transfer of receivables?

Transfers of receivables are also subject to the following requirements:

  • the originator should comply with the minimum hold period and minimum retention requirements;
  • the underlying documents should not require obligors' consent for the assignment and the transfer should not affect obligors' rights;
  • the assets in the pool must be unencumbered;
  • the parties should take necessary corporate actions for the transfer of receivables; and
  • the originator should comply with the conditions prescribed under the Securitisation Directions for capital relief. Illustratively, the originator should not have control over the assigned assets and it should not have a right to purchase the pool, other than through the invocation of the clean-up call option.

6.5 Is there a doctrine under which a transaction describing itself as a sale can be recharacterised by the courts as a financing secured by assets which are the subject of the purported transfer? How can the application of this doctrine be overcome?

Indian courts can recharacterise a sale transaction as a loan in certain circumstances – for example, if:

  • the originator must make payments to the SPV or the investors, including to meet any shortfall; or
  • the originator has the right to repurchase the assets otherwise than through a clean-up call option.

Whether a transaction is a sale or loan will be determined on a case-by-case basis. However, the recharacterisation risk is remote as, under the Securitisation Directions, originators must take steps to achieve capital relief. For example:

  • the originator should not have control over the assigned assets;
  • it should not provide implicit support;
  • it should not have a right to purchase the pool, other than through the clean-up call option; and
  • transferred exposures should be isolated from the originator to put them beyond the reach of the originator's creditors.

The satisfaction of these conditions must be confirmed by a legal opinion.

6.6 If the originator becomes insolvent, is there a risk that the transfer of receivables may be unwound? If so, how can this be mitigated?

Please see question 5.7.

7 Security

7.1 What types of security interests can be taken over the assets of the SPV in your jurisdiction? Which are most commonly used?

If a special purpose vehicle ('SPV') is a trust, it holds the pooled assets for the pass-through certificate ('PTC') holders' benefit and each PTC represents its holder's beneficial ownership in respect of the pooled assets. Therefore, no security interest is required to protect PTC holders' interests.

If the SPV is a company or limited liability partnership (LLP), the SPV raises monies from the investors as loans or through debenture issuance to purchase the pool from the originator. In a loan, the SPV will create the security in favour of the security trustee acting for investors; and in a debenture issuance, the SPV will create the security in favour of the debenture trustee acting for investors. Since the pool of loans comprises movable assets, the SPV may create a security interest by way of a charge, a mortgage or hypothecation. The most common security interest on movable assets that are not capable of delivery (eg, future receivables) is hypothecation.

7.2 What are the formal, documentary and procedural requirements for perfecting a security interest?

The following filings are required to perfect security interest by the SPV:

  • if the SPV is an Indian company, it must file the particulars of charge with the relevant Registrar of Companies within 30 days of its creation;
  • creditors which have access to speedy enforcement under the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act must register the charge created in their favour with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India ('CERSAI'). Under the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act, 'secured creditors' include:
    • banks;
    • debenture trustees appointed by banks or financial institutions;
    • debenture trustees registered with the Securities and Exchange Board of India and appointed for secured debt securities;
    • asset reconstruction companies; and
    • any other trustees holding securities on behalf of such creditors.
  • the financial creditors or their agent must submit information regarding the indebtedness of a corporate debtor (that is, a company or an LLP) with the Information Utility as per the Insolvency and Bankruptcy Code, 2016 ('Insolvency Code').

7.3 What charges, fees or taxes arise from the perfection of a security interest?

The fees and charges payable for the perfection of hypothecation on the movable assets are:

  • the fee payable to the registrar of companies for filing the form with respect to creation or modification of charges, which ranges from INR 200 to INR 600;
  • the CERSAI filing fee of INR 50 for loans of up to INR 500,000 and INR 100 for other loans; and
  • a fee of INR 300 for submitting information to the Information Utility.

7.4 What other considerations should be borne in mind when perfecting a security interest in your jurisdiction?

Certain other considerations should be borne in mind while perfecting a security interest:

  • investors should conduct due diligence to ensure that the SPV has clear title to the loans acquired, and that the loans are isolated from the originator's book. Please see question 2.4. They should also ensure that each underlying loan document is adequately stamped;
  • for assignment of loans secured by immovable property, the registration of the assignment agreement with the sub-registrar of assurances may not be possible for a number of reasons – for example:
    • high stamp duty in the relevant jurisdiction; or
    • a sub-registrar's reluctance to inform other sub-registrars, where there are properties in multiple jurisdictions.
  • in such a scenario, the SPV should ensure that it has power to act on the originator's behalf to exercise the originator's right under the underlying mortgage document or require the originator to take action under such documents; and
  • if the SPV issues securitisation notes in different tranches, the security documents and the forms should specify the ranking of the charge created for each series of the notes issued. Additionally, the transaction documents, including the information memorandum, should clearly set out the junior noteholders' rights and explain how these rights are inferior to those of the senior noteholders.

7.5 What are the respective obligations and liabilities of the parties under the security interest?

Security providers must:

  • perfect the security;
  • upon an event of default, hand over the secured assets to the secured creditor or its receiver; and
  • unless there is a contract to the contrary, pay the shortfall between the debt due and the amount realised from the enforcement of security.

Secured creditors:

  • should, while enforcing the security interest on movable assets, realise a reasonable price. Secured creditors usually sell the secured assets through auctions to help demonstrate that they took steps to realise reasonable value; and
  • must hand over surplus (the amount by which the realised value of the secured assets exceeds the debt due), if any, to the security provider.

7.6 In the event of default, what options are available to enforce the security interest? Is self-help available in your jurisdiction or must enforcement action go through the courts? Are there insolvency regimes such as conservatorship or examinership that impose an automatic stay on the exercise of self-help remedies?

The security documents usually provide for the handover of secured properties to the secured party or its receiver on an event of default. The security provider usually appoints the secured party as its attorney through an irrevocable power of attorney (please see question 7.8) to enforce the security interest upon default.

Where the security provider breaches the security documents and refuses to hand over the secured properties, court intervention will be required.

Secured creditors which have access to a speedy remedy under the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act (please see question 7.2) can enforce security interests without the court's intervention.

However, the enforcement of security will not be possible if the corporate insolvency resolution process ('CIRP') of the SPV (being a company or an LLP) commences. Under the Insolvency Code, upon admission of an application for CIRP, the National Company Law Tribunal will declare a moratorium barring all legal proceedings and actions to recover or enforce any security interest created by the SPV (including out-of-court actions under the Securitisation and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act). This moratorium will remain in place for the duration of the CIRP.

7.7 Will local courts recognise a foreign court judgment in favour of an investor?

Under the Code of Civil Procedure, 1908, Indian courts will recognise a foreign judgment if the judgment:

  • has been pronounced by a court of competent jurisdiction;
  • has been given on the merits;
  • is not against international law and, if Indian law is applicable between the parties, the foreign court must not have refused to recognise it;
  • is not opposed to principles of natural justice;
  • has not been obtained by fraud;
  • has not been found on a breach of any Indian law; and
  • is conclusive.

While India is not a party to any international convention on the enforcement of judgments, the Code of Civil Procedure permits the central government to specify foreign territories as reciprocating territories. A foreign judgment from the superior court of a reciprocating territory satisfying the abovementioned conditions is considered a foreign decree, which can be executed in an Indian court as if the decree had been passed by an Indian court. Currently, there are 11 reciprocating territories, including the United Kingdom, Singapore, New Zealand, Hong Kong, Bangladesh and the United Arab Emirates.

If the foreign judgment is from a non-reciprocating territory, a fresh suit based on the foreign judgment must be filed in the appropriate Indian court. That judgment must satisfy the abovementioned conditions to be considered a foreign judgment under the Code of Civil Procedure.

7.8 If the servicer becomes insolvent, will an enduring power of attorney/mandate granted by the servicer in favour of the secured parties be recognised and enforceable post-insolvency of the servicer?

Indian law does not define or use the term 'enduring power of attorney'. In India, powers of attorney may be revocable or irrevocable. A revocable power of attorney terminates when the principal is adjudicated insolvent. However, where the attorney in an irrevocable power of attorney has an interest in the property which is the subject of the power of attorney, the irrevocable power of attorney may only be terminated if specifically agreed by the parties. Such a power of attorney survives the servicer's insolvency.

7.9 Do limited recourse, non-petition and subordination provisions bind creditors of SPVs in your jurisdiction and what are the applicable qualifications?

Non-petition: Under Indian law, a non-petition provision being a contract restraining a party from enforcing its legal rights is void.

Limited recourse: A limited recourse provision – such as a provision which states that the debt will be discharged upon the transfer of secured assets, despite the realisable value of the assets being lower than the amounts due – is likely to be enforced.

Subordination: The Supreme Court, in interpreting a provision of the erstwhile Companies Act, 1956, has upheld the enforceability of subordination arrangements between the lenders. The provision in question stated that the liquidator would distribute liquidation proceeds between workmen's dues and secured debt on a pari passu basis. The Supreme Court held this provision legislates ranking between secured debts and workmen's dues and not among secured lenders.

The Insolvency Code contains a similar provision and the Insolvency Law Committee, which was constituted to recommend amendments to the Insolvency Code, was of the view that the Supreme Court's rationale would also apply to the Insolvency Code; therefore, subordination agreements between secured creditors would stand and the provision did not require amendment. However, the National Company Law Appellate Tribunal (NCLAT) has subsequently held that since the Insolvency Code does not distinguish between secured creditors, it will not recognise a subordination arrangement among them.

The Supreme Court has not issued any judgment on this issue after the NCLAT's judgment. Therefore, although creditors continue to enter into subordination arrangements, the enforceability of such arrangements is uncertain.

8 Registration and disclosure

8.1 What public disclosure and reporting requirements apply to securitisations in your jurisdiction?

The following reporting and disclosure requirements apply to a securitisation transaction in India:

  • the originator must disclose:
    • the weighted average holding period of assets;
    • data on credit quality, the performance of underlying exposures, information required to conduct comprehensive stress tests and so on to prospective investors;
    • compliance with the minimum hold period and the minimum retention requirement; and
    • compliance with the applicable know-your-customer guidelines by underlying obligors and changes in the pool, particularly on account of prepayment or default. Further, the rating and the rating rationale are to be publicly available;
  • if the securitisation transaction is a simple, transparent and comparable securitisation, the originator must demonstrate that it satisfies the applicable criteria;
  • the notes to the originator's annual accounts should disclose the outstanding amount of securitised assets in the special purpose vehicle's books and the total exposures retained by the originator; and
  • each originator must report:
    • its securitisation transactions to the Reserve Bank of India ('RBI') quarterly; and
    • the assets replaced and damages paid due to breach of representations.

The Securitisation Directions also prescribe the format for such disclosures.

8.2 What registration requirements, if any, apply to securitisations in your jurisdiction?

Please see question 6.3.

8.3 Is there any requirement to notify obligors of a securitisation? If so, how is this effected?

Originators need not notify obligors of the transfer unless the underlying loan documents so require.

9 Credit rating agencies

9.1 What requirements and restrictions apply to credit ratings agencies in your jurisdiction? Are there specific provisions that regulate their relationship with issuers?

Indian credit rating agencies must be registered with the Securities and Exchange Board of India ('SEBI') and are regulated in accordance with the SEBI (Credit Rating Agencies) Regulations, 1999 ('CRA Regulations'). The CRA Regulations, among other things, prescribe:

  • the procedure for registration of credit rating agencies;
  • eligibility criteria; and
  • the procedure for reviewing and monitoring ratings.

A credit rating agency that intends to rate securitisation notes should demonstrate (through strong market acceptance) that it understands the securitisation market.

Under the CRA Regulations, every credit rating agency must adopt a code of conduct in the format prescribed, which regulates the credit ratings agency's relationship with issuers. To maintain independence, the code of conduct prohibits the credit rating agency from providing any fee-based services to the rated entities other than the credit ratings and research.

9.2 What are the main factors that rating agencies consider when rating the securities of the issuer?

A rating agency considers several factors for rating the securities, including:

  • the seniority of the securitisation note;
  • the legal risks, if any, arising from the chosen structure;
  • past performance of the pool securitised, such as default rate;
  • credit scores of obligors;
  • the conditions of the economy in general, and of the sectors of underlying obligors and the sectors of credit enhancement provider(s), in particular; and
  • the credit enhancement and the rating of its provider.

10 Taxation

10.1 What tax considerations should be borne in mind from the perspective of the originator? What strategies, if any, are available to mitigate them?

The sale of unsecured loans by an originator to an special purpose vehicle ('SPV') will not result in the levy of goods and services tax ('GST'), as sales in 'actionable claims' that are not lottery, betting or gambling transactions do not fall under the purview of supply of goods or services under Schedule III of the Central Goods and Services Tax Act, 2017 regime.

The GST Council views the assignment of the secured debt as a derivative transaction and, therefore, outside the purview of GST. However, there is still uncertainty regarding the taxation of payments of excess interest spread to originators.

Servicing fees are subject to GST of 18%.

Stamp duty: In order to be admissible as evidence, Indian law requires that all instruments be stamped at the applicable rate of duty. The rates across states vary significantly. Therefore, the parties should choose the place of execution and storage of documents carefully. The locations must have a nexus with the transaction. The parties may have to bring documents to a state with higher stamp duty – for instance, when enforcing the right or registering the underlying documents. Please see question 7.4.

Loans are considered movable assets and parties stamp assignment agreements accordingly. However, the Allahabad High Court has held that the transfer of a loan with underlying security constituted a transfer of the security interest. The duty on the transfer of security interests is lower. However, out of abundant caution, parties continue to pay the higher rate of stamp duty.

10.2 What tax considerations should be borne in mind from the perspective of the issuer? What strategies, if any, are available to mitigate them?

Since 2016, the income derived from a SPV's assets has been subject to tax in the hands of the investors (and not in the hands of the SPV).

The income distributed by the SPV to its investors is subject only to a deduction of tax at the source. The rate of the tax deducted at source is approximately:

  • 25% for individuals resident in India or Hindu undivided families; and
  • 30% for other residents.

For non-resident investors, the rate of tax will be as per the applicable rates in force.

If the SPV pays dividends to the investors, the payouts are taxable as ordinary income in the investors' hands. The investors, on the other hand, may seek a credit for the taxes withheld at source by the SPV, which can be utilised against their dividend tax due.

10.3 What tax considerations should be borne in mind from the perspective of investors? What strategies, if any, are available to mitigate them?

Please see question 10.2.

11 Trends and predictions

11.1 How would you describe the current securitisation landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

We anticipate that the securitisation market will continue to grow and will soon reach pre-pandemic levels as credit volumes are poised to rise due to the economic recovery. Low-rated non-banking financial companies continue to have limited avenues for fundraising, which will likely boost securitisation further. However, the Russia-Ukraine war and the possible resurgence of COVID-19 may adversely impact economic growth and households' borrowing decisions, and thus curtail retail loan growth and limit the assets available for securitisation.

We anticipate that the share of pass-through certificates transactions in the securitisation market will increase due to the preferential capital treatment of simple, transparent and comparable securitisations and the mandatory due diligence requirement for direct assignment transactions. However, this will also depend on whether the government clarifies its position concerning the levy of goods and services tax on excess interest spread

Therefore, we are cautiously optimistic about the growth of the securitisation market.

We do not anticipate any major legislative changes for the securitisation of standard assets in the near future; but we hope that the Reserve Bank of India ('RBI') will clarify the position with respect to covered bonds (please see question 2.5). We also await the changes that may be implemented as part of the proposed overhaul of the regulatory framework for the resolution of stressed assets through asset reconstruction companies.

12 Tips and traps

12.1 What are your top tips for the smooth conclusion of securitisations and what potential sticking points would you highlight?

To ensure the smooth conclusion of securitisations and to ensure recoveries for investors:

  • investors should conduct thorough due diligence to verify the assets in the pool and determine timelines and logistics for such diligence, among other things; and
  • the parties should also agree on commercial terms, particularly credit enhancement, upfront.

Some potential sticking points for securitisations are as follows:

  • the Securitisation Directions and Transfer Directions require transaction documents to be executed on an arm's-length basis. Therefore, investors should not impose onerous obligations on the originator or facility providers;
  • under the directions, originators can give limited representations and warranties for a transaction and cannot make representations concerning the pool's performance. Therefore, investors will largely have to rely on the results of their own due diligence;
  • the stamp duty payable in states which have a nexus to the transaction may be higher than what the originator is willing to bear. Please see question 10.1; and
  • the law is still evolving in relation to certain issues, such as stamp duty and subordination (please see questions 10.1 and 7.9, respectively). Parties should enter into robust contracts which address all relevant aspects of Indian law. Parties should also ensure that they are seized of which aspects of Indian law are yet to be settled.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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