Basel III requirements for Simple Transparent and Comparable (STC) Securitisation

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Vinod Kothari Consultants P Ltd

finserv@vinodkothari.com

Having a simple, transparent and comparable (STC) label for a securitisation transaction is a very important factor, particularly for investors’ acceptability of the transaction. Securitisation transactions are structured finance transactions –the structure may be fairly complicated. The transaction may be bespoke – created with a particular investor in mind; hence, the transaction may not be standard. Also, the transaction terms may not have requisite transparency.

Absence of simplicity, transparency and comparability limit the ability of investors to understand and interpret the transaction structure and evaluate the underlying risks.

Basel III Securitisation Standard has a complete annexure [Annex 2] dedicated to the STC requirements. We are itemising these requirements below in the form of a checklist, such that one may verify the adherence of a transaction to the STC norms.

Basel III Norms Notes
A.     Asset Risk –
A1. Nature of Asset –
1)      Assets underlying securitisation should be –  
·         Credit claims or receivables; AND In a standard transaction, the receivables typically arise from credit contracts.
·         These credit claims or receivables must be homogenous.  
2)      In assessing homogeneity, consideration should be given to – Homogeneity is assessed from the viewpoint of risk attributes. Each of the following indicate risk attributes. Therefore, it appears that these conditions are cumulative
·         Asset type;  
·         Jurisdiction;  
·         Legal system;  
·         Currency.  
3)      Homogeneity should be assessed taking into account the following principles –  
·         The nature of assets should be such that investors would not need to analyse and assess materially different legal and/or credit risk factors and risk profiles when carrying out risk analysis and due diligence checks. This means that the assets in the pool questions are covered by similar legal risks and credit risks, and the analysis can be done portfolio-wide.
·         Homogeneity should be assessed on the basis of common risk drivers, including similar risk factors and risk profiles. The major credit risk drivers – for example, the purpose of the loan, nature of the collateral, should be similar, so that the pool can be subjected to a pool-wide credit risk assessment
·         Credit claims or receivables included in the securitisation should have standard obligations, in terms of rights to payments and/or income from assets and that result in a periodic and well- defined stream of payments to investors. Credit card facilities should be deemed to result in a periodic and well-defined stream of payments to investors for the purposes of this criterion. The receivables should be consisting of periodic and well-defined contractual stream. That is, expected cashflows or future flows may not qualify this condition.
·         Repayment of noteholders should mainly rely on the principal and interest proceeds from the securitised assets. In standard transactions, the receivables should generally consist of rentals, principal, interest or principal plus interest.
·         Partial reliance on refinancing or re-sale of the asset securing the exposure may occur provided that re-financing is sufficiently distributed within the pool and the residual values on which the transaction relies are sufficiently low and that the reliance on refinancing is thus not substantial. Transaction structures sometimes rely on refinancing of the collateral to make the final repayment. This is mostly so in case of CMBS transactions. Managed CDOs also depend on liquidation of the underlying loans/bonds for repaying investors. In such cases, STC rules require that the refinancing risk is minimal. No specific percentage is laid down.
4)      As more exotic asset classes require more complex and deeper analysis, credit claims or receivables should have contractually identified periodic payment streams relating to –  
·         Rental; This includes both financial and operating leases.
·         Principal; For example, in a PO strip, the cashflows will consist of principal only
·         Interest, or; For example, in an IO strip, the cashflows consist of interest only
·         Principal and Interest payments.  
5)      Any referenced interest payments or discount rates should be based on -commonly encountered market interest rates but should not reference complex or complicated formulae or exotic derivatives. The meaning of referenced interest payments is – where interest is not an absolute rate, but a floating rate linked with a reference rate. LIBOR, Treasuries, etc are examples. Similarly, discounting rates may be linked with reference rates.
“Commonly encountered market interest rates” may include –  
·         Rates reflective of a lender’s cost of funds, to the extent that sufficient data are provided to investors to allow them to assess their relation to other market rates. In many cases, interest rates on loans are linked with lender’s cost of funds. For example, a commonplace practice in India is MCLR – marginal cost of fund-based lending rate. However, the question will be – is this rate, in turn, based on market rates? Typically, MCLR is itself based on the policy rates of the RBI. Therefore, if the interrelationship between the external rates the banks’ own cost of funds is visible, the same will qualify as “market interest rate”.
·         Sectoral rates reflective of a lender’s cost of funds, such as internal interest rates that directly reflect the market costs of a bank’s funding or that of a subset of institutions. See discussion above on MCLR, for example
·         Interest rate caps and/or floors would not automatically be considered exotic derivatives. While cashflows which are based on exotic derivatives do not qualify under the STC condition, the fact that there are interest rate floors or caps by itself does not imply a breach of the STC condition.
A2. Asset Performance History  
1)      In order to provide investors with sufficient information on an asset class –  
·         To conduct appropriate due diligence, and;  
·         Access to a sufficiently rich data set to enable a more accurate calculation of expected loss in different stress scenarios, This clause is intended to provide data dump for similar assets as those in the final pool, with such parameters as to enable the investor to carry out stress testing and compute expected losses
verifiable loss performance data, such as delinquency and default data Delinquency data as well as default data matter- the former for the risk of missing payments, and the latter for bad assets
should be available for credit claims and receivables, with substantially similar risk characteristics to those being securitised, This is referring to the statistical pool, which has risk attributes similar to the assets to go into the final pool. Since the statistical pool will have past history for a sufficiently long period, this may actually be the assets that may have either been securitised, or stayed on the books in the past.
for a time period long enough to permit meaningful evaluation by investors. The data should be for a reasonably long time period. Once again, what is the time period in question is subjective, but it is with this data that the investor will be able to compute standard deviation and volatility of the parameters. Hence, the time period should be long enough to eliminate the impact of periodic spikes.
2)      Sources of and access to data and the basis for claiming similarity to credit claims or receivables being securitised should be clearly disclosed to all market participants.  
3)      Additional consideration (not forming part of STC criteria but may form part of investors’ due diligence):  
(i)                 In addition to the history of the asset class within a jurisdiction, investors should consider whether the – This criteria gets into the track record of the originator, original lender and other counterparties to the transaction. As the Basel document seeks to explain, the idea is not to discourage/restrict new entrants. However, investors should be able to track not only the performance of the asset, but also that of the parties.
–          Originator  
–          Sponsor Sponsor, being distinct from the originator, may be there in conduits, or CLOs/CDOs. Also, in many cases, the originator may not be the original lender but may be aggregator.
–          Servicer and  
–          Other parties with a fiduciary responsibility to the securitisation  
have an established performance history for substantially similar credit claims or receivables to those being securitised, and for an appropriately long period of time. As to what is this “long period of time”, the guidance given in the Basel document is (a) 7 years in case of non-retail exposures; (b) 5 years in case of retail exposures
A3. Payment Status  
1)      Non-performing credit claims and receivables are likely to require more complex and heightened analysis. In order to ensure that only performing credit claims and receivables are assigned to a securitisation, credit claims or receivables being transferred to the securitisation may not, at the time of inclusion in the pool, include obligations that are –  
–          in default;  
–          or delinquent;  
–          or obligations for which the transferor (e.g. Originator or sponsor); This and the next requirement is possibly a declaration from the originator and the servicer that the declarant is not aware of any material increase in expected losses or of enforcement actions.
2)      Additional requirement for capital purposes  
To prevent credit claims or receivables arising from credit-impaired borrowers from being transferred to the securitisation, the originator or sponsor should verify that the credit claims or receivables meet the following conditions : These conditions below are to be assessed as of a date not longer than 45 days before the closing date
(a)   the obligor has not been the subject of an insolvency or debt restructuring process due to financial difficulties within three years prior to the date of origination[1]; and,  
(b)   the obligor is not recorded on a public credit registry of persons with an adverse credit history; and,  
(c)    the obligor does not have a credit assessment by an ECAI or a credit score indicating a significant risk of default; and  
(d)   the credit claim or receivable is not subject to a dispute between the obligor and the original lender.  
3)      Additionally, at the time of this assessment, there should to the best knowledge of the originator or sponsor be no evidence indicating likely deterioration in the performance status of the credit claim or receivable.  
4)      Additionally, at the time of their inclusion in the pool, at least one payment should have been made on the underlying exposures, except in the case of revolving asset trust structures such as those for credit card receivables, trade receivables, and other exposures payable in a single instalment, at maturity.  
A4. Consistency of Underwriting
1)      Investor analysis is simple and straightforward where the securitisation is of credit claims or receivables that satisfy materially non-deteriorating origination standards. To ensure that the quality of the securitised credit claims and receivables is not affected by changes in underwriting standards, the originator should demonstrate to investors that any credit claims or receivables being transferred to the securitisation have been originated in the ordinary course of the originator’s business to materially non-deteriorating underwriting standards.  
2)      Where underwriting standards change, the originator should disclose the timing and purpose of such changes.  
   
3)      Underwriting standards should not be less stringent than those applied to credit claims and receivables retained on the balance sheet.  
4)      These should be credit claims or receivables which have satisfied the following: In case where the originator has acquired the assets from third parties, the assessment of non-deterioration of underwriting standards and whether assessment of volition and ability of obligors has been done by the third party, must be done by the originator.
(i)                 materially non-deteriorating underwriting criteria  
(ii)               for which the obligors have been assessed as having the ability and volition to make timely payments on obligations or  
(iii)             on granular pools of obligors  
(iv)              originated in the ordinary course of the originator’s business  
(v)                where expected cash flows have been modelled to meet stated obligations of the securitisation under prudently stressed loan loss scenarios.  
A5. Asset selection and transfer  
1)      Whilst recognising that credit claims or receivables transferred to a securitisation will be subject to defined criteria, e.g. the size of the obligation, the age of the borrower or the LTV (loan-to-value) of the property, DTI (debt-to-income) and/or DSC (debt service coverage) ratios, the performance of the securitisation should not rely upon the ongoing selection of assets through active management on a discretionary basis of the securitisation’s underlying portfolio. The condition lays down the rule against cherry picking. Assets may be selected by laying down criteria and not by active selection. Addition of assets in case of revolving transactions, and substitution of assets on account of some of the loans not meeting the representations and warranties is not regarded as a breach of this condition.
2)      Credit claims or receivables transferred to a securitisation should satisfy clearly defined eligibility criteria.  
3)      Credit claims or receivables transferred to a securitisation after the closing date may not be –  
–          Actively selected  
–          Actively managed  
–          Or otherwise cherry-picked  
4)      Investors should be able to assess the credit risk of the asset pool prior to their investment decisions.  
5)      In order to meet the principle of true sale, the securitisation should effect true sale such that the underlying credit claims or receivables:  
(a)   are enforceable against the obligor and their enforceability is included in the representations and warranties of the securitisation;  
(b)   are beyond the reach of the seller, its creditors or liquidators and are not subject to material re-characterisation or clawback risks;  
(c)    are not effected through credit default swaps, derivatives or guarantees, but by a transfer of the credit claims or the receivables to the securitisation; and  
(d)   demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a securitisation of other securitisations.  
Additional requirement for capital purposes – An independent third-party legal opinion must support the claim that the true sale and the transfer of assets under the applicable laws comply with points (a) through (d).  
To avoid conflicts of interest, the legal opinion should be provided by an independent third party. That is say, the transaction counsel should not generally be the counsel giving the true sale opinion.
6)      In applicable jurisdictions, securitisations employing transfers of credit claims or receivables by other means should demonstrate the existence of material obstacles preventing true sale at issuance (E.g. the immediate realisation of transfer tax or the requirement to notify all obligors of the transfer.) and; That is, if clear true sale structure is not used, but say a loan or similar structures are used, it should be possible to see that a true sale would have been impractical
should clearly demonstrate the method of recourse to ultimate obligors (E.g. equitable assignment, perfected contingent transfer.) In that case, the ability of being able to enforce the collection from the obligors, independent of the originator, should be demonstrated.
7)      In such jurisdictions, any conditions where the transfer of the credit claims or receivable is –  
–          Delayed, or;  
–          Contingent upon specific events  
And any factors affecting timely perfection of claims by the securitisation should be clearly disclosed.  
8)      The originator should provide representations and warranties that the credit claims or receivables being transferred to the securitisation are not subject to any condition or encumbrance that can be foreseen to adversely affect enforceability in respect of collections due.  
A6. Initial and ongoing Data
1)      To assist investors in conducting appropriate due diligence prior to investing in a new offering,  
sufficient loan-level data in accordance with applicable laws, or  
in the case of granular pools, summary stratification data on the relevant risk characteristics of the underlying pool  
should be available to potential investors before pricing of a securitisation.  
2)      To assist investors in conducting appropriate and ongoing monitoring of their investments’ performance and so that investors that wish to purchase a securitisation in the secondary market have sufficient information to conduct appropriate due diligence,  
–          timely loan-level data in accordance with applicable laws, or  
–          or granular pool stratification data on the risk characteristics of the underlying pool and standardised investor reports  
should be readily available to  
–          current and potential investors  
at least quarterly throughout the life of the securitisation.  
3)      Cut-off dates of the loan-level or granular pool stratification data should be aligned with those used for investor reporting.  
4)      To provide a level of assurance that the reporting of the underlying credit claims or receivables is accurate and that the underlying credit claims or receivables meet the eligibility requirements, the initial portfolio should be reviewed for conformity with the eligibility requirements by an appropriate legally accountable and independent third party The examples of such independent third party given in the Basel framework are independent accounting practitioners, calculation agent, or management company for securitisation
–          The review should confirm that the credit claims or receivables transferred to the securitisation meet the portfolio eligibility requirements.  
–          The review could, for example, be undertaken on a representative sample of the initial portfolio, with the application of a minimum confidence level.  
–          The verification report need not be provided but its results, including any material exceptions, should be disclosed in the initial offering documentation.  
B.      Structural Risk  
B7. Redemption cash flows  
1)      Liabilities subject to the refinancing risk of the underlying credit claims or receivables are likely to require more complex and heightened analysis. To help ensure that the underlying credit claims or receivables do not need to be refinanced over a short period of time, there should not be a reliance on the sale or refinancing of the underlying credit claims or receivables in order to repay the liabilities, unless the underlying pool of credit claims or receivables is sufficiently granular and has sufficiently distributed repayment profiles. Except in case of granular pools (say RMBS pools), the reliance on refinancing should not be substantial.
2)      Rights to receive income from the assets specified to support redemption payments should be considered as eligible credit claims or receivables in this regard. Sometimes, temporary reinvestment of cashflows may be done. The Basel document gives an example of associated savings plans designed to repay principal at maturity. This does not breach the preceding condition.
B8. Currency and interest  
1)      To reduce the payment risk arising from the interest rate or currency mismatches, and to improve investors’ ability to model cash flows, interest rate and foreign currency risks should be appropriately mitigated at all times, “Appropriate mitigation” of the interest rate and currency risk has been explained further. This is not requiring a perfect hedge. The appropriateness of the mitigation of interest rate and foreign currency through the life of the transaction must be demonstrated by making available to potential investors, in a timely and regular manner, quantitative information including the fraction of notional amounts that are hedged, as well as sensitivity analysis that illustrates the effectiveness of the hedge under extreme but plausible scenarios.
and if any hedging transaction is executed the transaction should be documented according to industry-standard master agreements.  
2)      Only derivatives used for genuine hedging of asset and liability mismatches of interest rate and / or currency should be allowed.  
If hedges are not performed through derivatives, then those risk-mitigating measures are only permitted if they are specifically created and used for the purpose of hedging an individual and specific risk, and not multiple risks at the same time (such as credit and interest rate risks).  
Non-derivative risk mitigation measures must be fully funded and available at all times.  
B9. Payment Priorities and observability  
1)      To prevent investors being subjected to unexpected repayment profiles during the life of a securitisation, the priorities of payments for all liabilities in all circumstances should be clearly defined at the time of securitisation  
and appropriate legal comfort regarding their enforceability should be provided.  
2)      To ensure that junior noteholders do not have inappropriate payment preference over senior noteholders that are due and payable, throughout the life of a securitisation, or,  
–          where there are multiple securitisations backed by the same pool of credit claims or receivables, throughout the life of the securitisation programme,  
junior liabilities should not have payment preference over senior liabilities which are due and payable.  
3)      The securitisation should not be structured as a “reverse” cash flow waterfall such that junior liabilities are paid where due and payable senior liabilities have not been paid.  
4)      To help provide investors with full transparency over any changes to the cash flow waterfall, payment profile or priority of payments that might affect a securitisation,  
all triggers affecting the cash flow waterfall, payment profile or priority of payments of the securitisation should be clearly and fully disclosed both in  
–          offering documents  
–          and in investor reports,  
with information in the investor report that clearly identifies the breach status,  
the ability for the breach to be reversed and  
the consequences of the breach.  
5)      Investor reports should contain information that allows investors to monitor the evolution over time of the indicators that are subject to triggers.  
6)      Any triggers breached between payment dates should be  disclosed to investors on a timely basis in accordance with the terms and conditions of all underlying transaction documents.  
7)      Securitisations featuring a revolving period should include provisions for  
–          appropriate early amortisation events and/or  
–          triggers of termination of the revolving period, This requires proper disclosure of all early amortisation triggers
–          including notably:  
(i)   deterioration in the credit quality of the underlying exposures;  
(ii) a failure to acquire sufficient new underlying exposures of similar credit quality; and  
(iii)    the occurrence of an insolvency-related event with regard to the originator or the servicer.  
8)      Following the occurrence of  
–          a performance-related trigger,  
–          an event of default or  
–          an acceleration event,  
the securitisation positions should be repaid in accordance with a sequential amortisation priority of payments, in order of tranche seniority, and  
there should not be provisions requiring immediate liquidation of the underlying assets at market value.  
9)      To assist investors in their ability to appropriately model the cash flow waterfall of the securitisation, the originator or the sponsor should make available to investors, both  
–          Before pricing of the securitisation and  
–          On an ongoing basis,  
o   a liability cash flow model, or  
o   information on the cash flow provisions allowing appropriate modelling of the securitisation cash flow waterfall.  
10)  To ensure that the following can be clearly identified: The objective of the following is to enable investors to identify debt forgiveness, forbearance, payment holidays, restructuring and other asset performance remedies on an ongoing basis.
–          debt forgiveness,  
–          forbearance  
–          payment holidays and  
–          other asset performance remedies  
To ensure that there are clear and consistent terms for the following:  
–          policies and procedures,  
–          definitions,  
–          remedies  
–          and actions relating to delinquency,  
–          default  
–          or restructuring of underlying debtors  
B10. Voting and Enforcement Rights  
1)      To help ensure clarity for securitisation note holders of their rights and ability to control and enforce on the underlying credit claims or receivables, upon insolvency of the originator or sponsor, all voting and enforcement rights related to the credit claims or receivables should be transferred to the securitisation.  
2)      Investors’ rights in the securitisation should be clearly defined in all circumstances, including the rights of senior versus junior note holders.  
B11. Documentation Disclosure and legal review  
1)      The documentation for initial offering (E.g. draft offering circular, draft offering memorandum, draft offering document or draft prospectus, such as a “red herring”.) should help investors to fully understand the  
–          Terms and conditions  
–          Legal and  
–          Commercial information  
Ensure that this information is set out in a clear and effective manner for all programmes and offerings,  
2)      Each of the following legal documentation (as may be relevant) should be provided to investors: If these are not available immediately, they should be made available within a reasonably sufficient period of time prior to pricing, or when legally permissible.
–          Asset sale agreement, assignment, novation or transfer agreement; servicing, backup servicing, administration and cash management agreements; trust/management deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement as applicable; any relevant inter-creditor agreements, swap or derivative documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements; and any other relevant underlying documentation, including legal opinions  
3)      Final offering documents should be available from the closing date and all final underlying transaction documents shortly thereafter. These should be composed such that readers can readily find, understand and use relevant information.
4)      To ensure that all the securitisation’s underlying documentation has been subject to appropriate review prior to publication, the terms and documentation of the securitisation should be reviewed by an appropriately experienced third party legal practice, such as a legal counsel already instructed by one of the transaction parties, eg by the arranger or the trustee.  
5)      Investors should be notified in a timely fashion of any changes in such documents that have an impact on the structural risks in the securitisation.  
B12. Alignment of Interest  
1)      In order to align the interests of those responsible for the underwriting of the credit claims or receivables with those of investors, the originator or sponsor of the credit claims or receivables  
should retain a material net economic exposure, and  
demonstrate a financial incentive in the performance of these assets following their securitisation.  
C.      Fiduciary and servicer risk  
C13. Fiduciary and Contractual Responsibilities  
1)      Servicer should be able to demonstrate expertise in the servicing of the underlying credit claims or receivables, by the following:  
extensive workout expertise,  
thorough legal and collateral knowledge, and  
a proven track record in loss mitigation,  
supported by a management team with extensive industry experience.  
2)      The servicer should at all times act in accordance with reasonable and prudent standards.  
3)      Policies, procedures and risk management controls should be well documented and adhere to good market practices and relevant regulatory regimes.  
4)      There should be strong systems and reporting capabilities in place.  
5)      The party or parties with fiduciary responsibility should act on a timely basis in the best interests of the securitisation note holders, and both the initial offering and all underlying documentation should contain provisions facilitating the timely resolution of conflicts between different classes of note holders by the trustees, to the extent permitted by applicable law.  
6)      The party or parties with fiduciary responsibility to the securitisation and to investors should be able to demonstrate –  
–          Sufficient skills and  
–          Resources to comply with their duties of care in the administration of the securitisation vehicle.  
7)      To increase the likelihood that those identified as having a fiduciary responsibility towards investors as well as the servicer execute their duties in full on a timely basis,  
remuneration should be such that these parties are incentivised and able to meet their responsibilities in full and on a timely basis. This is an important requirement about adequacy of the servicer remuneration. The same must be arms’ length.
8)      Additional Guidance for capital purposes  
In assessing whether “strong systems and reporting capabilities are in place”, well documented policies, procedures and risk management controls, as well as strong systems and reporting capabilities, may be substantiated by a third-party review for non-banking entities.  
C14. Transparency to investors  
1)      To help provide full transparency to investors, assist investors in the conduct of their due diligence and to prevent investors being subject to unexpected disruptions in cash flow collections and servicing,  
the contractual obligations, duties and responsibilities of all key parties to the securitisation, both those with  
–          a fiduciary responsibility  
–          and of the ancillary service providers,  
should be defined clearly both in the initial offering and all underlying documentation.  
2)      Provisions should be documented for the replacement of  
–          Servicers,  
–          Bank account providers,  
–          derivatives counterparties and  
–          liquidity providers  
in the event of  
–          Failure or  
–          non-performance or  
–          insolvency or  
–          other deterioration of creditworthiness of any such counterparty to the securitisation.  
3)      To enhance transparency and visibility over all receipts, payments and ledger entries at all times, the performance reports to investors should distinguish and report the securitisation’s income and disbursements, such as  
–  
o   scheduled principal,  
o   redemption principal,  
o   scheduled interest,  
o   prepaid principal,  
o   past due interest and fees and charges,  
o   delinquent,  
o   defaulted and restructured amounts under debt forgiveness and payment holidays,  
o   including accurate accounting for amounts attributable to principal and interest deficiency ledgers.  
D.     Additional Criteria for capital purposes  
D15. Credit risk of underlying exposures  
1)      At the portfolio cut-off date the underlying exposures have to meet the conditions under the Standardised Approach for credit risk, and after taking into account any eligible credit risk mitigation, for being assigned a risk weight equal to or smaller than: The Basel document provides that the criterion based on regulatory risk weights under the Standardised Approach has the merit of using globally consistent regulatory risk measures. Hence, if, after considering any credit risk mitigations, the risk weights are coming lower than tabulated below, the conditions under the Standardised Approach have to be satisfied. It also provides the benefit of applying a filter to ensure higher-risk underlying exposures are not granted an alternative capital treatment as STC-compliant transactions.
·         [40%] on a value-weighted average exposure basis for the portfolio where the exposures are loans secured by residential mortgages or fully guaranteed residential loans;  
·         [50%] on an individual exposure basis where the exposure is a loan secured by a commercial mortgage;  
·         [75%] on an individual exposure basis where the exposure is a retail exposure; or  
·         [100%] on an individual exposure basis for any other exposure.  
A  
D16. Granularity of the pool  
1)      At the portfolio cut-off date, the aggregated value of all exposures to a single obligor shall not exceed 1% of the aggregated outstanding exposure value of all exposures in the portfolio.  
In jurisdictions with structurally concentrated corporate loan markets available for securitisation subject to ex ante supervisory approval and only for corporate exposures, the applicable maximum concentration threshold could be increased to 2% if the originator or sponsor retains subordinated tranche(s) that form loss absorbing credit enhancement, as defined in paragraph 55 of the December 2014 framework, and which cover at least the first 10% of losses. These tranche(s) retained by the originator or sponsor shall not be eligible for the STC capital treatment.  

 

[1] This condition would not apply to borrowers that previously had credit incidents but were subsequently removed from credit registries as a result of the borrower cleaning their records. This is the case in jurisdictions in which borrowers have the “right to be forgotten”.

Securitisation- Should India be moving to the next stage of development?

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Rajiya Ra Duha: Couplets of Kriparam Charan

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Among a wonderful piece of pre-modern Rajasthani poetry is the couplets, written in Soratha chhand, by poet Kriparam Barahath, aka Kriparam Charan. Kriparamji’s poetry is renowned as Rajiya ra duha, as all of his couplets are addressed to his Man Friday, who possibly had the name Rajkumar, pejoratively called Rajiya. These couplets would have been written approx. year 1800 CE or thereabout. It is possible to get some 130 of these couplets [see here – https://www.charans.org/kraparambarhat/]

Kriparam’s poetry contains crisp sayings, in extremely subtle and deeply touching Rajasthani language. The best part of the poetry is that the language is not very different from present-day colloquial Rajasthani language, and therefore, one may easily use these couplets as sayings.

Kriparamji makes excellent use of Vayansagai or Bayansagai, a very famous alliteration style used in Dingal poetry. In Vayansagai, the first and last word of every part  of the couplet start with the same sound, thereby creating intensive impact in recitation. Additionally, each of the Rajiya couplets end with the word Rajiya – being addressed to the Man Friday.

The poet, therefore, worked under tremendous limitations. Since the last word of each couplet had to be Rajiya, the first word of the last part had to start with sound R, leaving him with limited word combinations. Within this constraint, Kriparam still makes perfect carnation of words and conveys crisply what he wants to convey.

I have translated some selected couplets of Rajiya ra Duha – in no particular order.

 

मूसा नै मंजार, हित कर बैठा हेकठा।

सह जाणै संसार, रह्यो न रह्सी राजिया।

The cat and the mouse are sitting together, as if affectionately. The whole world knows that this has never been so, nor will ever be.

 

मतलब री मनवार, नूँत जिमावै चूरमा।

बिन मतलब मनवार, राब न पावै राजिया।

So much of warm hospitality that one is being invited and served Choorma. This is all for purpose. Once purpose is served, they will not even serve raab. [Choorma is a sort of homemade delicacy. Raab is layman’s food made of flour soaked in curd. ]

 

सुधहीणा सिरदार, मतहीणा राखे  मिनख।

अस आंघौ असवार, रांम रुखाळौ राजिया।

Senseless leaders engage brainless servants. The horse is blind. So is the horse rider. Only god save them!

 

पाटा पीड उपाव, तन लागां तरवारियां।

घले जीभ रा घाव, रती न ओखद राजिया।

If the body is hurt by swords, bandage and medication may help ease the pain. However when it tongue (spoken words) that inflict injury, there is not even a molecule of medication.

 

ऊँचे गिरवर आग, जलती सह देखै जगत।

पर जलती निज पाग, रती न दिसै राजिया।

Everyone sees the fire burning on the high hill.  However the one burning at one’s own feet – no one seems to see that.

 

हियै मूढ़ जो होय. की संगत ज्यांरी करै।

काला ऊपर कोय, रंग न लागै राजिया।

मलियागिर मंझार, हर को तर चन्दण हुवै।

संगत लियै सुधार, रूंखाँ ही नै राजिया।

These two couplets demonstrate the impact of company- working in one case and not working in the other:

If one is absolutely stupid, how can company help? No other colour can be mixes with black.

On the hills of Malayagiri, every tree is that of sandal. See, company can impact even trees.

 

भाड़ जोख झक भेक, वारज में भेळा वसै।

इसकी भंवरो एक, रस की जांणे राजिया।

The frog, leech and fish – all stay in the same pond. However it only the amour black bee (bhramar, bhanwara) who knows the love of lotus.

 

कारण कटक न कीध, सखरा चाहिजई सुपह।

लंक विकट गढ़ लीध, रींछ बांदरा राजिया।

It is the able leader that matters, not the strength of the army.  See, Ram conquered Lanka with an army of moneys and bears.

 

रोटी चरखो राम, इतरौ मुतलब आपरौ।

की डोकरियां कांम, राजकथा सूं राजिया।

Their concern is limited to food, spinning wheel and the name of god. What do old ladies have to do with talk of the king or politics. (That is, keep your concerns limited to what matters for you.)

 

गुणी सपत सुर गाय, कियौ किसब मूरख कनै।

जांणै रुनौ जाय, रणरोही में राजिया।

The deft singer sang seven Sur’s (Swars of music); you showed artful skills in front of a fool. It is lying crying in wilderness.

 

उपजावे अनुराग, कोयल मन हरकत करै।

कड़वो लागे काग, रसना रा गुण राजिया।

They look similar- the crow and the cuckoo. However cuckoo begets happiness in mind, and crow disdain. All attributes of the tongue (speech).

 

एक जतन सत एह, कूकर कुगंध कुमांणसां।

छेड़ न लीजे छेह, रैवण दीजे राजिया।

These three have same nature: stray dogs, bad odorous substance, and a bad person. It is best that you don’t disturb them. Let them be.

 

पहली कियां उपाव, दव दुस्मण आमय दटे।

प्रचंड हुआ विस वाव, रोभा घालै राजिया।

These five things – fire, enemy, disease, poison and wind – the best is to to take preventive measures beforehand. Once they become strong (after occurrence) they cause lot of pain.

 

दुष्ट सहज समुदाय, गुण छोडे अवगुण गहै।

जोख चढी कुच जाय, रातौ पीवै राजिया।

Evil people, due to their instinctive features, leave out virtues for vices. The leech climbs on breasts and sucks blood instead of milk.

 

बंध बंध्या छुडवाय, कारज मनचिंत्या करै।

कहौ चीज है काय, रुपियो सरखी राजिया।९०।

It releases from shackles; attains whatever one wishes. Tell me what can match the might of money?

 

आछा है उमराव, हियाफ़ूट ठाकुर हुवै।

जड़िया लोह जड़ाव, रतन न फ़ाबै राजिया।१०८।

The king is good enough, but has employed senseless ministers/subordinates. It almost like precious stones studded in iron.

 

काळी घणी करुप, कस्तूरी काँटाँ तुले

शक्कर घणी सरूप, रोड़ां तुलिये राजिया

Kasturi (deer’s musk) is black in colour and ugly in looks. Yet it is weighted on small measuring scale (used for gold/precious materials). Shakkar (ground form of jagery) is offwhite, looks beautiful. Yet it is weighted with stones (before standard measuring scales came, stones were commonly used for weighting heavy things). In essence, what matters is merits, and not looks.

STAMP DUTY IMPLICATIONS ON E-AGREEMENTS

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– Ishika Agrawal (corplaw@vinodkothari.com)

I.        Introduction

The way businesses are done, has evolved with the evolution of technology. Now-a-days, business transactions and business contracts are mostly executed electronically in order to save time and expenses. However, this also raises concerns on enforceability of e-agreements in courts and the stamp duty implications on such agreements. In this article, we have tried to broadly discuss the acceptance of e- agreements as evidence in courts and the stamp duty implications on such agreements.

II.     Whether E-agreement is to be stamped?

In India, stamp duty is levied under Indian Stamp Act, 1899 [1](“Stamp Act”) as well as various legislation enacted by different States in India for the levy of stamp duty[2]. Every instrument under which rights are created or transferred needs to be stamped under the specific stamp duty legislation. There is no specific provision in the Stamp Act that specifically deals with electronic records and/or the stamp duty payable on execution thereof.

Section 3 of Stamp Act is the charging section which provides for the levy of stamp duty on specified instruments upon their execution. Relevant provision of section 3 is reproduced below:

3. Instruments chargeable with duty- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—

(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;

(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and

(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India.

As per the above provision, broadly, two things are required for chargeability of stamp duty:

  • There must be an instrument as mentioned in the schedule I of Stamp Act.
  • The instrument must be executed.

What is Instrument?

The word ‘instrument’ is defined in section 2(14) of Stamp Act. There has been certain ambiguousness in the interpretation of definition of Instrument. Recent amendments have been made in the Stamp Act by Finance Act, 2019 which will come in force from 1st April, 2020.

Prior to the amendment, section 2(14) read as:

2(14) “Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded”.

However, after the amendment, the scope of the definition given in section 2(14) has been widened by the inclusion of clause (b) and clause (c) which states that:

(14) “instrument” includes—

(a) every document, by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;

(b) a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded; and

(c) any other document mentioned in Schedule I,

but does not include such instruments as may be specified by the Government, by notification in the Official Gazette;

The aforesaid amendment is only with respect to the electronic document created for a transaction in a stock exchange or depository, but (a) of the aforesaid section is unaltered. Therefore, it may appear that the term “document” in clause (a) does not include electronic documents – however, such interpretation will not be in spirit of law. The Information Technology Act has already accorded legal recognition to electronic records. Therefore, the word “document” shall be read so as to include electronic documents as well.

Apart from the Indian Stamp Act, many states have their own legislation w.r.t. stamp duty. Majority of state specific stamp duty laws also do not specifically include electronic records within their ambit, however, some state stamp duty laws do refer to electronic records. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958 [3] defining instrument, specifically refers to electronic records. It states that:

“instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;

Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.”

This makes clear that, Maharashtra Stamp Act imposes stamp duty on electronic agreements as well. This justifies that even electronic agreements come under the scope of Stamp Act, thus need to be stamped.

What is execution?

Section 2(12) of Stamp Act defines the terms “executed” and “execution”, which is also widened by the recent amendment[4] to take into account, attribution of electronic records. It states that:

“2(12). “Executed and execution”- executed and execution used with reference to instruments, mean signed and signature” and includes attribution of electronic record within the meaning of section 11 of the Information Technology Act, 2000.”

Thus the execution means putting signature on the instrument by the party to the agreement. Attribution[5] of electronic record will also be treated as execution. It can be concluded from the above definition that, the specific instrument would attract payment of stamp duty upon their execution i.e. when it is signed or bears a signature, even if the execution takes place electronically.

III.   Time and Manner of Stamping

As discussed, an e-agreement is required to be stamped according to State specific stamp laws. Section 3 of the Indian Stamp Act and the stamp legislation of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”.

Section 17 of Stamp Act stipulates when an instrument has to be stamped. It states that:

17. Instruments executed in India- All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.

Thus, the stamp duty is to be paid before or at the time of executing the e- agreement and cannot be paid after execution.

However, one may also refer to section 17 of the Maharashtra Stamp Act which allow payment of stamp duty on the next working day following the day of execution.

There are some of the e-agreements such as click wrap agreements where execution does not takes place by the customer. Click-wrap agreements are the agreements where the customer accepts the terms and conditions of the contract by clicking on “OK” or “I agree” or such other similar terms. In case of such e-agreements, while the agreement can be said to be executed by the originator (by way of attribution), there is no signature of the customer which means such agreement does not get executed. Since, execution does not takes place, such agreements need not be stamped. However, another view can be derived that in such click wrap agreements there is acknowledgement of receipt of the electronic record by the customer. Such “acknowledgment” of receipt of electronic record u/s 12 of IT Act may be treated as deemed “execution” [6] by the customer. However, there are no clear provisions in the Stamp Act dealing with eligibility of stamp duty to click-wrap agreements.

As regards the manner of stamping, same can be done in three ways:-

  1. E-stamping: Some states like Maharashtra provides specific provisions for e-stamping. In such case, both the party can digitally sign the document and get it stamped electronically on the same day. For instance, Maharashtra E-Registration and E-Filing Rules, 2013[7] facilitates online payment of stamp duty and registration fees. Rule 10 of the said rules states that:

Rule 10. For online registration, Stamp duty and registration fees shall be paid online to Government of Maharashtra through Government Receipt Accounting System (GRAS) (Virtual Treasury) by electronic transfer of funds or any other mode of payment prescribed by the Government.

Further, as per Rule 3 of The Maharashtra ePayment of Stamp Duty and Refund Rules 2014[8], the stamp duty required to be paid under the act, may be paid online into the Virtual Treasury through Government Revenue and Accounting System (GRAS).

  1. Franking: There is also the concept of franking in some of the states, in which case, document may be printed and stamped by the way of franking before the parties have affixed their signature. For instance, in case of Maharashtra Stamp Act, 1958, section 2(k) which defines “Impressed stamp” also includes impression by franking machine.
  2. Physical Stamping: Where the facility of e-stamping or franking is not available, a print of the e-agreement may be taken and the same may then be adequately stamped with adhesive stamps or impressed stamps before or on the date of execution by the parties as per section 10 of Indian Stamp Act.

However, the liability to pay stamp duty will be upon either of the party to contract as per the agreement entered between them. In the absence of any such agreement, liability to pay stamp duty shall be upon such person as may be determined under section 29 of the Indian Stamp Act.

IV.   Consequences of Non- stamping

Non-payment of stamp duty in respect of documents would attract similar consequences for both physical instruments as well as electronic instruments, unless specific consequences have been prescribed for electronically executed instruments under the respective stamp duty laws.

Inadmissibility as an evidence:

In terms of the Indian Stamp Act and most State stamp duty laws, instruments which are chargeable with stamp duty are inadmissible as evidence in case appropriate stamp duty has not been paid. Section 35 of Indian Stamp Act deals with the consequences of non-stamping of documents. It states that:

  1. Instruments not duly stamped inadmissible in evidence, etc.-No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.

However, the inappropriately stamped instruments may be admissible as evidence upon payment of applicable duty, along with prescribed penalty.

Other Liability:

Every person who executes or signs, otherwise than as a witness, any instruments which is not duly stamped but the same was chargeable with stamp duty, can be held liable for monetary fines. In case of an intentional evasion of stamp duty, criminal liability can also be imposed.

V.      Conclusion

When all the applicable laws are taken and interpreted in conjunction with one another, it can be understood that, e-agreements being a valid agreements are also liable for stamp duty on execution. However, the same levy will be as per the respective State laws. Where the State legislation provides for the facility of e-stamping, the same shall be availed in order to move towards the goal of paperless economy. Whereas, some States are yet to recognize the importance and validity of e-agreements and e-stamping. It is looked forward on the part of state as well as central government to make specific provisions for e-agreements and e-stamping in order to save time and money and to provide an ease for doing business.

Our write-up on the legal validity of e-agreements can be viewed here.

[1] https://indiacode.nic.in/bitstream/123456789/2331/1/a1899____2.pdf

[2] The Central Government and the State Government (s) have been empowered under the Union List and the State list (respectively) to levy stamp duty on instruments specified therein.

[3] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/acts/THE_MAHARASHTRA_STAMP_ACT-2016-revised_sections.pdf

[4] The amendment was brought by the Finance Act, 2019, which by Notification of Ministry of Finance dated 8th January, 2020 are to be effective from the 1st day of April, 2020”

[5] Section 11 of the IT Act provides for attribution of electronic record as follows –

“11. Attribution of electronic records.–An electronic record shall be attributed to the originator–

(a) if it was sent by the originator himself;

(b) by a person who had the authority to act on behalf of the originator in respect of that electronic record; or

(c) by an information system programmed by or on behalf of the originator to operate automatically.”

[6] For instance, Article 7 of the UNCITRAL Model Law on E-Commerce states that where the law requires a signature of a person, that requirement is met in relation to a data message if a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and that method is as reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all the circumstances, including any relevant agreement. This way of putting “signature” is not explicitly recognized in relevant Acts, however, the Courts may take a liberal view in this regard.

Read more – http://vinodkothari.com/wp-content/uploads/2020/11/All-about-Electronic-contracts.pdf

[7] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/Registration/Maharashtra%20%20e-Registration%20&e-Filing%20Rules,%202013%20.pdf

[8] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/STAMPS/4_e-Payment_Rules.pdf

KYC goes live!

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