vinod_kothari_logo

Vinod Kothari Consultants

Delhi | Kolkata | Mumbai

Login | Registration
 

Volume of Securitization Shrinks due to Adverse Tax Regime

 

The securitisation tax regime in India had recently undergone change. The Finance Minister in his budgetary speech last year had made a mention of the relevance of securitisation and had inserted a new chapter on securitisation taxation. Chapter XII EA of the Income Tax Act required special purpose vehicles to deduct tax on the income distributed by it.  Ofcourse there was a pretext to these provisions where mutual funds were finding it difficult to convince the tax authorities of absence of any tax leakages in these structures and the tax provisions did bring some relief to the funds as their income from securitisation was exempt from taxation. However, seemingly the rest of the industry clearly got unsettled with tax regime.

An ICRA report[1] has revealed adverse impact on the volume of securitization post the new tax regime. Volumes of securitization shrunk in FY 2013-14 whereas bilateral assignments grew considerably.  The rated securitisation deals showed a 5% decline after reporting Rs. 28,800 crores of volume. In spite of the decrease in the overall volumes, the residential mortgage backed securities showed a growth of 75% (albeit on a small base). The volumes of the asset backed securities seemed to follow the industry trend and reported a 14% decline in its volumes. The chart below shows the trend in securitisation issuances in last few years:

 

FY 2009-10

FY 2010-11

FY 2011-12

FY 2012-13

FY 2013-14

 

Amount

Share

Amount

Share

Amount

Share

Amount

Share

Amount

Share

ABS

21497

50%

21819

69%

27344

71%

27230

90%

23504

82%

RMBS

6254

14%

5029

16%

7680

21%

3025

10%

5296

18%

Total Retail Securitisation

27751

64%

26848

84%

35024

92%

30255

100%

28800

100%

LSO

14581

34%

4441

14%

2217

6%

-

-

-

-

Others

787

2%

536

2%

635

2%

-

-

-

-

Overall Total

43118

100%

31825

100%

37876

100%

30255

100%

28800

100%

Growth

(20%)

 

(26%)

 

19%

 

(20%)

 

(5%)

 

Average Deal Size

231

 

200

 

174

 

151

 

149

 

Source: http://www.indiainfoline.com/Markets/News/ICRA/5920451229 last visited on 2nd June 2014

Further, the ABS market continues to be dominated by commercial vehicle, construction equipment accounting 61% of the total volumes, the microfinance loans follows with 22% share and the SME and tractor loans together constitutes 6% of the total ABS market. The graphic below would show asset class wise ABS distribution. During the year somewhere around 30 RMBS transactions were carred out, but the average deal size came down to Rs. 177 crores from Rs. 303 crores.

Asset Class-wise distribution of ABS Pools for the years ending on 31st March 2013 and 31st March 2014 –

Source: http://www.indiainfoline.com/Markets/News/ICRA/5920451229 last visited on 2nd June 2014

Priority sector lending has been the key motivation for undertaking securitisation transactions.  Market Participants welcomed the much awaited guidelines on reset of credit enhancement in securitization transactions which would allow releasing the credit enhancements, however that has had no impact in converting the benefits into volumes as such. Clearly when the securitisation tax regime was introduced the market had a sense of the damage it could do which is now visible in numbers as well.

 


[1] http://www.icra.in/Files/ticker/SH-2014-1-ICRA-Structured%20Finance.pdf

 

-- Reported by Abhirup Ghosh

 
facebook_icon facebook_icon