Securitization – Corporate Funding and Listings in Stock Exchanges Important Questions
Question 1.
What do you mean by “securitization”? Explain the “securitization structure”?
Answer:
Meaning of “Securitization”:
- Securitization is the transformation of financial assets into securities.
- Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors.
- Securitization is used by financial entities to raise funds other than what is available via the traditional methods of on-balance- sheet funding
“Securitization – Process”:
There are four steps in a securitization:
- Special Purpose Distinct Entity (SPDE) is created to hold title to assets underlying securities.
- Originator or holder of assets sells the assets (existing or future) to the SPDE.
- SPDE with the help of an investment banker, issues securities which are distributed to investors.
- SPDE pays the originator for the assets with the proceeds from the sale of securities.
Securitization structure as presented below:
Question 2.
As per SEBI Regulations, explain the eligibility criteria for the public offer of Securitized Debt Instruments.
Answer:
Eligibility Criteria:
Following are the eligibility criteria for the Public Offer of Securitized Debt Instrument as per SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008: A person cannot make a public offer of securitized debt instruments or seek listing for such securitized debt instruments unless:
- it is constituted as a special purpose distinct entity.
- all its trustees are registered with the SEBI under the SEBI (Is-sue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.
- it complies with all the applicable provisions of these regulations and the SEBI Act.
Non-applicability for requirement of Obtaining Registration:
The requirement of obtaining registration is not applicable for the following persons who may act as trustees of special purpose distinct entities:
- Any person registered as a debenture trustee with SEBI.
- Any person registered as a securitization company or a reconstruction company with the RBI under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- National Housing Bank established by the National Housing Bank Act, 1987.
- National Bank for Agriculture and Rural Development established by the National Bank for Agriculture and Rural Development Act, 1981.
- Any scheduled commercial bank other than a regional rural bank
- Any public financial Institution as defined under clause (72) of section 2 of the Companies Act, 2013.
- Any other person as may be specified by SEBI.
However, these persons and special purpose distinct entities of which they are trustees are required to comply with all the other provisions of the SEBI (Public Offer and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.
Question 3.
Discuss the conditions for Listing of Security Receipts?
Answer:
“Conditions for Listing of Security Receipts”: An issuer may list its security receipts on a recognized stock exchange subject to the following conditions:
Issue on Private Placement Basis: The security receipts have been issued on a private placement basis.
Issue Security Receipts in compliance to applicable laws: The issuer has issued such security receipts in compliance with the applicable laws.
Offer/invitation to subscribe to Security Receipts: The offer or invitation to subscribe to security receipts shall be made to such number of persons not exceeding two hundred or such other number in a financial year as may be prescribed from time to time.
Security Receipts in Demat Form: The security receipts proposed to be listed are in dematerialized form.
Disclosures: The disclosures as provided in Regulation 38E of SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008 have been made in the offer document.
Minimum Allotment: The minimum allotment made to the qualified buyers is ₹ 10 lakhs.
Valuation of Security Receipts: Such security receipts have been valued prior to listing. However, such valuation shall not be more than three months old from the date of listing and shall be done by an independent valuer.
Credit Rating: The security receipts have been rated by a credit rating agency registered with SEBI. However, such rating shall not be more than three months old from the date of listing.
Question 4.
Write Short Note on: “Obligations to Redeem Securitized Debt Instruments”.
Answer:
“Obligations to Redeem Securitized Debt Instruments”:
Timely payment of Interest and redemption: The trustee and the special purpose distinct entity shall ensure timely payment of interest and redemption amounts to the investors in terms of the offer document or other terms of issue of the securitized debt instruments out of the realisations from the asset pool, credit enhancer or liquidity provider.
Recovery of dues from the Obligators: The trustee shall ensure that the servicer adopts such prudent measures as may be expected under the origination documents to recover the dues from the obligators in the event of any default in any portion thereof.
Expected Period of Maturity: The expected period of maturity of each scheme and the possibility of extension or shortening of such period shall be disclosed in the offer document together with the likely circumstances in which such extension or shortening may take place.
Question 5.
Briefly discuss the various provisions as laid down for “Trading of Security Receipts”?
Answer:
Following are the provisions for “Trading of Security Receipts”:
Trading Lot of Security Receipts: The trading lot of the security receipts shall not be less than ₹ 10 lakh.
Security receipts issued on Private Placement Basis: The security receipts issued on a private placement basis which are listed on recognised stock exchanges shall be traded and such trades shall be cleared and settled in recognised stock exchanges subject to conditions specified by SEBI.
Reporting on recognized Stock Exchange: Trades of security receipts which have been made over the counter shall be reported on a recognized stock exchange having a nationwide trading terminal or such other platform as may be specified by SEBI.
Specific Conditions for Reporting: SEBI may specify conditions for reporting of trades on the recognized stock exchange or other platform.
Question 6.
Write Short Note on: “Launching of schemes under SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008”.
Answer:
“Launching of schemes under SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008”:
→ A special purpose distinct entity may raise funds by making an offer of securitized debt instruments through formulating schemes in accordance with these regulations.
→ A special purpose distinct entity and trustees thereof shall ensure that realisations of debts and receivables are held and correctly applied towards redemption of securitized debt instruments issued under the respective schemes or towards payment of returns on such instruments or towards other permissible expenditure of the scheme.
→ In case of multiple schemes, the special purpose distinct entity shall maintain separate and distinct accounts in respect of each such scheme and shall not combine asset pools or realisations of a scheme with those of other schemes.
→ The terms of issue of the securitized debt instruments may provide for exercise of a cleanup call option by the special purpose distinct entity subject to adequate disclosures.
→ No expenses shall be charged to the scheme in excess of the allowable expenses as may be specified in the scheme and any such expenditure, if incurred shall be borne by the trustees.
Question 7.
Discuss in brief the provisions regarding “sale of security receipts by the existing holders”?
Answer:
A sale of security receipts by any existing holder of such security receipts under provisions of Chapter VILA of SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008 shall be subject to the issuer compulsorily listing the security receipts before complying with the provisions of this chapter.
Any existing holder of security receipts who proposes to sell (whole or part of) its holding of security receipts to the qualified buyers on private placement basis where such security receipts are proposed to be listed may do so in accordance with the provisions of Chapter VIIA of SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.
In spite of above discussed provisions, if such sale by any holder of security receipts shall be permitted only if the holding is not less than fifty per cent of the outstanding security receipts.