India
Answer ... Under the Securitisation Directions and Transfer Directions, the following requirements and restrictions apply to originators in India:
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the originator must comply with the minimum hold period (‘MHP’) requirements:
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- 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;
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the originator must comply with the minimum retention requirement (‘MRR’) The MRR for a PTC transaction is:
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- 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;
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the originator cannot repurchase the transferred exposures except through a clean-up call option.
India
Answer ... 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.
India
Answer ... 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
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terminate the agreement and replace the servicer and/or custodian with a third party.
India
Answer ... 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
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the following underlying assets:
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- 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
India
Answer ... 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.