The Securities and Exchange Board of India (SEBI) has proposed doing away with concentration-risk norms for securitised assets where the originator of the securitised pool is an RBI-regulated entity. This is one of SEBI’s five suggestions to align its securitised assets norms with that of the Reserve Bank of India (RBI).
The originator constructs a debt pool before transferring the pool's cash flows (receivables) to a special purpose distinct entity (SPDE), which then issues securitised debt instruments.
In a consultation paper issued on May 4, SEBI cited Regulation 19A of its Issue and Listing of Securitised Debt Instruments and Security Receipts Regulations (SDI Regulations), which caps the share of a loan from a single entity at 25% of the total securitised pool.
"By ensuring that no single obligor has more than 25% in the asset pool at the time of issuance, the said regulation aims to prevent over-concentration of risk in the securitisation pool," the paper said.
The regulator had received feedback from industry representatives saying the condition restricts the listing of securitised debt instruments (SDIs) when the underlying is a single asset, which the RBI permits. This affects the development of the listed securitisation market, they said.
Consequently, SEBI has now suggested that pools originated by RBI-regulated entities be exempted from this cap.
Other suggestions
SEBI has also proposed allowing the originator and the SPDE to belong to the same group or be under common management control if the originator is an RBI-regulated entity.
Currently, SEBI does not allow this, but RBI’s regulations, which state that the originator should not have any direct or indirect control over the SPDE, do not prohibit transactions between the originator and SPDE of the same group.
While this proposal could lead to concerns over conflict of interest, a third proposal may reduce the RBI-regulated originator's influence over the SPDE's board. SEBI has proposed to allow no more than one representative of the originator on the SPDE's board, with no veto powers.
Currently, SEBI regulations only state that trustees associated with the originator should not constitute more than half of the SPDE's board.
Winding up and disclosures
The fourth proposal concerns the winding up of securitisation transactions. Under SEBI rules, if the registration of the trustee handling the SPDE is cancelled, the entity must be wound up, assets liquidated, and proceeds returned to investors. However, feedback indicated that this could imply the originator has to buy back the assets, which is not permitted except for limited purposes under RBI’s norms.
Therefore, SEBI has suggested allowing the appointment of a new trustee to replace the trustee whose registration has been cancelled or suspended.
The fifth proposal pertains to responsibility placed on the originator for making periodic disclosures to SPDE's trustees regarding the performance of underlying assets. Industry participants submitted that data collection and asset monitoring are done by a servicer who could be the originator or a third party. SEBI has proposed to shift the responsibility for making these periodic disclosures and getting them certified by an auditor to the servicer.
