Securitisation as a financial instrument has been in the practiced in India since the early 1990s – essentially as a device of bilateral acquisitions of portfolios of finance companies.  As would be the case elsewhere too, securitisation finds its way of loan sales. There were quasi-securitisations for quite a while where creation of any form of security was rare and the portfolios simply ended from balance sheet of one originator over to that of another.

Form of security:

In the later part of 1990s, creation of transferable securities in the form of pass-through certificates (PTCs) became common. The word PTC has almost become synonymous with securitisation in India and most market practitioners do not envisage issuance of notes or bonds as a securitised product. A typical Indian PTC does not abide by any specific structural features – there are PTCs which have a specific coupon rate, there are structured PTCs and PTCs have different payback periods. In other words, many such PTCs are essentially debt instruments – it is only that they are not called as such.

The issuance of PTC has so intensely been associated with the market that even for completely bilateral deals which are really speaking loan sales, people have used trusts and PTCs.

Asset classes:

Over time, the market has spread into several asset classes – while auto loans and residential housing loans are still the mainstay, there are corporate loans, commercial mortgage receivables, future flow, project receivables, toll revenues, etc that have been securitised. CMBS transactions that are characteristic of the Western world – where the commercial real estate itself is the real collateral, are not still not common. CLO/CDO transactions have also not surfaced as yet – one solitary attempt by ICICI to float a CDO did not succeed, though single corporate loans have been securitised.

Revolving structures are still not there. ABCP conduits also do not exist.

Transactions are both rated and unrated. Transactions are both listed and unlisted.

Motive for securitisation:

Synthetic transactions have also not emerged as yet. In fact, even for most cash transactions, capital relief does not sound like a very significant motive since the volumes are too small to have any tangible impact on the regulatory capital of the securitisers. The larger part of the country’s banking sector is still an investor rather than originator for securitisations.

Thus the primary motive for most securitisers would be the skimming of excess spreads; for some, liquidity needs are obvious.

Nature and form of credit enhancements:

Subordination is a commonly used form of credit enhancement. Since asset backed securities are still new, investors have a preference for AAA or AA rated instruments. Most transactions in the market, therefore, end up with a couple of senior classes. Multi-class issuances with several rated tranches are uncommon.

Apart from subordination, over-collaterlisation, guarantees, recourse, cash reserves are used as other forms of enhancement. The extent of enhancements is relatively very high – and not very painful, as there are no capital consequences of providing such enhancement – see below.

Legal structure:

In 2002, India enacted a law that reads Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI). Though masquerading as a securitisation-related law, this law does very little for securitisation transactions and has been viewed as a law relating to enforcement of security interests, as a very narrow avatar of personal property security laws of North America. In commercial practice, the SARFAESI has been very irrelevant for real life securitisations.

Most securitisations in India adopt a trust structure – with the underlying assets being transferred by way of a sale to a trustee, who holds it in trust for the investors. A trust is not a legal entity is law – but a trustee is entitled to hold property which is distinct from the property of the trustee or other trust properties held by him. Thus, there is an isolation, both from the property of the seller, as also from the property of the trustee. The trust law has its foundations in UK trust law and is practically the same.

Therefore, the trust is the special purpose vehicle. Most transactions to date use discrete SPVs – master trusts are still not seen.

The trustee typically issues PTCs. A PTC is a certificate of proportional beneficial interest. Beneficial property and legal property is distinct in law – the issuance of the PTCs does not imply transfer of property by the SPV but certification of beneficial interest.

Regulatory compliances:

The Reserve Bank of India has a set of guidelines for banks relating to their transactions under the SARFAESI law but that contains only an opaque reference to capital relief. There are no clear guidelines on capital relief. However, it is generally felt that if a transaction attains off balance sheet treatment, it will result into capital relief.

There are no specific capital implications on account of retention of subordinated tranches, though in practice, there are substantial junior stakes or over-collateralisations present in every transaction (see under Credit enhancements above).

Among the regulatory costs, stamp duty is a major hurdle. The instrument of transfer of financial assets is, by law, a conveyance, which is a stampable instrument. Many states do not distinguish between conveyances of real estate and that of receivables, and levy the same rate of stamp duty on the two. The rates would therefore be weird – going up to 10% of the value of the receivables. Some 5 states have announced concessional rates of stamp duty on actionable claims, limiting the burden to 0.1%, but there is an unclarity as to whether this concession can be availed for assets situated in multiple locations.

The stamp duty unclarity and illogicality has in a way shaped the market – players have limited transactions to such receivables as may be transferred without unbearable stamp duty costs. The SARFAESI law intended to resolve the stamp duty problem, but owing to its flawed language, did not succeed.


The tax laws have no specific provision dealing with securitisation. Hence, the market practice is entirely based on generic tax principles, and since these were never crafted for securitisations, experts’ opinions differ.

The generic tax rule is that a trustee is liable to tax in a representative capacity on behalf of the beneficiaries – therefore, there is a prima facie taxation of the SPV as a representative of all end investors. However, the representative tax is not applicable in case of non-discretionary trusts where the share of the beneficiaries is ascertainable. The share of the beneficiaries is ascertainable in all securitisations – through the amount of PTCs held by the investors. Though the PTCs might be multi-class, and a large part might be residual income certificates in effect, the market believes, though with no reliable precedent, that there will be no tax at the SPV level and the investors will be taxed on their share of income.

The scenario is, however, far from clear and the current thinking may be short lived.

Accounting rules:

The Institute of Chartered Accountants of India has come out with a guidance note on accounting for securitisation. Guidance notes are issued by the Research Committee of the Institute and are recommendatory rather than mandatory. But where a method is recommended, it is expected to be followed, unless there are reasons not to.

The guidance note is a mix of FAS 140 and FRS 5 approach. Generally, off balance sheet treatment is allowed, if risks and rewards are transferred. Gain on sales is computed based on the components approach underlying the US accounting standard. Originators are required to estimate the fair value of retained interests, and retained liabilities and apportion the carrying value of the asset in proportion of such retained and transferred interests.

The guidance note also makes a reference to accounting for SPVs – without caring for whether the issuance of securities by the SPV leads to a transfer of beneficial interest. Literally interpreted, assets transferred to SPVs should stay on the balance sheet of the SPV in all cases.