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Part - VI

The Obstacles & Policy recommendations

Lack of appropriate legislation

As we discussed earlier, there are no laws specially governing securitization transactions in India. The Government of India constituted a Working Group on Asset Securitization in July 2000. This Working Group submitted a comprehensive draft Securitization Bill to the Government. However, the bill has not been tabled in the parliament yet. A comprehensive securitization Act can give a much-needed thrust to securitization activity in India. The following are the key areas where legislation is required: -

a) True Sale (Isolation from bankruptcy of the Originator)

The central idea of a securitization transaction is to isolate the assets of the Originator from Originator’s balance sheet and seek a higher credit rating than the Originator’s own rating. A key requirement for that is to achieve a "true sale" of the assets to the Special Purpose Entity.

b) Tax neutral bankruptcy remote SPE

The special purpose entity that buys assets from the Originator should be a bankruptcy remote conduit for distributing the income from the assets to the investors. While banks have experimented with company revocable trust and mutual fund structures, no clear vehicle has emerged for performing securitization. This should be addressed by the Securitization act.

c) Stamp Duties

Stamp Duty is a state subject in India. Stamp Duties on transfer of assets in securitization can often make a transaction unviable. While five Indian states have recognized the special nature of securitization transactions and have reduced the stamp duties for them, other states still operate at stamp duties as high as 10% for transfer of secured receivables. The Working Group of RBI has recommended a uniform rate of 0.1% duty on all transactions. The acceptance of these recommendations by other states can boost the securitization activity in India especially in the MBS area.

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Written by V. Sridhar, PGP 2002, IIM Calcutta.
Contributed by Varun Goenka, Diploma in Business Finance Economics, ICFAI.