The sale of season: Holding period requirements for assignments and securitisation

– Team Finserv | finserv@vinodkothari.com

Any sale or assignment or transfer, including securitisation, of loans is subject to a minimum seasoning with the originator. Under the extant regulatory provisions, such requirement is referred to as ‘Minimum Holding Period’ (MHP), which means the minimum period for which the originator should have held the loan exposures before the same is transferred to the transferee or Special Purpose Entity (SPE), as the case may be. This serves several purposes: that the loan was not originated for sale, the originator has had some equity in the loans, and that there is a benefit of hindsight of performance.

MHP requirements have always been a part of the regulations in India. However, on December 5, 2022, the Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021^[1] (‘TLE Directions’) as well as the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021^[2] (‘SSA Directions’). Among the other changes, there was a change in the MHP provisions; this change may have a significant impact on future transactions. 

This write-up intends to clarify the position with respect to the computation of MHP for different types of loans under TLE Directions as well as SSA Directions.

Relevance of CERSAI registration for MHP requirement

The MHP requirements are prescribed under para 39 of the TLE Directions and the same is also applicable for securitisation transactions.

Para 39 of the TLE Directions prescribes the following MHP requirement:

• 3 months in case of loans with tenor of up to 2 years;
• 6 months in case of loans with tenor of more than 2 years.

However, the key question is the starting point of the MHP.

The TLE Directions, as amended, provide for MHP to start from the date of registration of the underlying security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Further, the proviso to para 39 states that in case of loans where security does not exist or security cannot be registered with CERSAI, the MHP shall be calculated from the date of first repayment of the loan. [Bold was added pursuant to the amendment dated December 5, 2022, and italicised part is for emphasis].

The requirement for CERSAI registration has been there in the SARFAESI Act over the years; and the RBI has, vide various circulars, been also adding force to the CERSAI registration requirement. However, the present amendment of the TLE and SSA Directions makes CERSAI registration almost compulsive. Except in case of those secured loans where CERSAI registration cannot be done, CERSAI registration becomes the starting point for MHP for most secured loans. As entities will not want to defer a potential opportunity for either an assignment or securitisation of the loans, originators will rush to have CERSAI registrations done upon origination^[3].

The amendment bestows an overwhelming significance to CERSAI registration. Security interest in India may be registered under various forums^[4]. However, no other security interest registration shall be considered for counting the MHP. The only exception in para 39 is where security interest cannot be registered with CERSAI, or where there is no security interest, or in case of project loans.

Hence, an important question comes up: what security interest is required to be registered under CERSAI.

MHP for securitisation of loans

But before we delve into such discussion, it is important to take note of the changes in the MHP requirements under the SSA Directions.

The computation of MHP under SSA Directions is provided as follows:

9. The originators of such exposures shall have satisfied the Minimum Holding period requirement as per Clause 39 of the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 including the proviso to the above Clause. Provided that for commercial or residential real estate mortgages, MHP shall be counted from the date of full disbursement of the loan, or registration of security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), whichever is later.

Usually, in case of real estate projects or construction finance, the disbursement is linked to the stages of construction. Now, in case of securitisation of such loans that are not fully disbursed, there could be concerns about the potential lender’s obligation to complete the disbursement, after the loans have been securitised. Though TLE Directions clearly recognise a partial transfer of loans, the same shall not be permitted under the SSA Directions.

Further in cases of loans where the property is under development, for the purpose of computing MHP, the date when full disbursement is completed would in any case be much after the first registration with CERSAI and hence, the same may be considered.

In a nutshell, the MHP computation under TLE Directions and SSA Directions would be as follows:

MHP under TLE

MHP under SSA

MHP is counted from the date of registration of the underlying security interest with CERSAI. In case of loans where security does not exist or security cannot be registered with CERSAI, the MHP shall be calculated from the date of first repayment of the loan. In case of transfer of project loans, the MHP shall be calculated from the date of commencement of commercial operations of the project being financed.

Same as provisions for computation under TLE. However, for commercial or residential real estate mortgages, MHP shall be counted from the date of full disbursement of the loan, or registration of security interest with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), whichever is later

Registration of Security Interest with CERSAI

The primary requirement of registration of security interest with CERSAI by financial sector entities comes from section 23 of the SARFAESI Act:

23. Filing of transactions of securitisation, reconstruction and creation of security interest — (1) The particulars of every transaction of securitisation, asset reconstruction or creation of security interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be prescribed. Provided that the Central Government may, by notification, require registration of all transactions of securitisation, or asset reconstruction or creation of security interest which are subsisting on or before the date of establishment of the Central Registry under sub-section (7) of section 20 within such period and on payment of such fees as may be prescribed. (2) The Central Government may, by notification, require the registration of transaction relating to different types of security interest created on different kinds of property with the Central Registry. (3) The Central Government may, by rules, prescribe forms for registration for different types of security interest under this section and fee to be charged for such registration.

Further, section 26D provides for the repercussions of not registering the security interest with the CERSAI, which goes as follows:

26D.   Right of enforcement of securities — Notwithstanding anything contained in any other law for the time being in force, from the date of commencement of the provisions of this Chapter, no secured creditor shall be entitled to exercise the rights of enforcement of securities under Chapter III unless the security interest created in its favour by the borrower has been registered with the Central Registry.

Interesting to note that only “secured creditors” are required to ensure registration of security interest with the CERSAI.

The term “secured creditor” has been defined to mean the following entities:

1. any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l); [HFCs having assets of Rs. 100 crores and above are notified as financial institutions pursuant to MoF notification dated June 17, 2021. Further, NBFCs with asset of Rs. 100 crores and above are entitled for enforcement of security interest in secured debts of Rs. 50 lakhs and above, as financial institutions pursuant to MoF notification dated February 24, 2020]
2. debenture trustee appointed by any bank or financial institution; or
3. an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or
4. debenture trustee registered with SEBI appointed by any company for secured debt securities; or
5. any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.

Also, it must be noted that section 23 states that the registration of security interests should be done in accordance with the manner prescribed. In this regard, SARFAESI (Central registry) Rules, 2011 (‘CERSAI Rules’) [r.w. amendments dated May 15, 2013 and January 22, 2016] provide for the manner in which different forms of security interests can be registered with the CERSAI and the applicable fee. The relevant extracts of the rule 4 and rule 7 from the CERSAI Rules, have been provided below:

1. Particulars of creation, modification or satisfaction of security interest in immovable property by mortgage by deposit of title deeds or other than by deposit of title deeds.
2. Particulars of creation, modification or satisfaction of security interest in hypothecation of plant and machinery, stocks, debt including book debt or receivables, whether existing or future.
3. Particulars of creation, modification or satisfaction of security interest in intangible assets, being knowhow, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature.
4. Particulars of creation, modification or satisfaction of security interest in any under construction residential or commercial building or a part thereof by an agreement or instrument other than by mortgage.
5. Particulars of securitisation or reconstruction of financial assets or satisfaction thereof.

The aforesaid provisions clearly specify the registration of mortgages, assignment of receivables, hypothecation on plant and machinery, stocks and intangible assets. However, the hypothecation of motor vehicles, which is an important asset class in the Indian asset-backed finance industry, is not specifically captured thereunder. Also, there is no residuary clause in the table, under which hypothecation on motor vehicles could be registered with the CERSAI.

Further, based on the inputs received from the CERSAI helpdesk and upon perusal of the CERSAI website, it can be inferred that the security interest created in the form of hypothecation over vehicles are not registered on CERSAI portal; instead, the same is registered on the Vahan registration portal. 

Connecting the above discussion with the new requirements under the TLE Directions, while it is adequately clear that for security interests on assets like immovable properties, plant and machinery, stocks and intangible assets, CERSAI registration is mandatory, and such registration shall become a prerequisite for TLE and also the starting point for the MHP computation. But for security interests on motor vehicles, it is safe to conclude that the absence of machinery provisions in the CERSAI Rules makes the provisions of the SARFAESI Act inoperative.

Therefore, it is safe to conclude that CERSAI registration cannot be deemed a mandatory requirement for the transfer or assignment of loans secured by way of hypothecation on vehicles or security interest on such other assets that cannot be registered on CERSAI portal. The MHP would accordingly be calculated from the first repayment of the loan.

Further, in addition to the above, the SARFAESI Act (section 31) also specifically excludes the following security interests, which will also not require CERSAI registration:

1. a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force;
2. a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872;
3. creation of any security in any aircraft as defined in section 2(1) of the Aircraft Act, 1934;
4. creation of security interest in any vessel as defined in section 3(55) of the Merchant Shipping Act, 1958;
5. any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930);
6. any properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to section 60(1) of the Code of Civil Procedure, 1908;
7. any security interest for securing repayment of any financial asset not exceeding Rs. 1 lakh;
8. any security interest created in agricultural land;
9. any case in which the amount due is less than 20% of the principal amount and interest thereon.

The second piece of the law that talks about registration of security interest with the CERSAI is para 108 of the NBFC-NDSI Master Directions / para 94 of NBFC-NSI Master Directions, which requires registration of all mortgages with CERSAI. This requirement is applicable to all NBFCs, irrespective of their size.

Computation of MHP for different types of loans

Based on the above discussion, the table below summarises the date from which computation of MHP should start, for different types of loans:

Type of loan	MHP under TLE	MHP under SSA
Loan against property	LAP would be secured against an immovable property and hence, MHP is counted from the date of registration of the underlying security interest with CERSAI.	LAP would be secured against an immovable property and hence, MHP is counted from the date of registration of the underlying security interest with CERSAI.   However, if the secured property is commercial or residential real estate, the MHP would be counted from the date of full disbursement of the loan or registration with CERSAI, whichever is later.
Vehicle Loans, including tractor finance	Since CERSAI registration cannot be done, MHP would accordingly be calculated from the first repayment of the loan.	Same as TLE.
Microfinance Loan	Since these are unsecured, MHP would be calculated from the first repayment of the loan.	Same as TLE.
Gold Loan	Since the pledge on gold jewellery is not registered with CERSAI, MHP would be calculated from the first repayment of the loan.	Same as TLE
Personal Loan	In case secured against immovable property or receivables, MHP is counted from the date of registration of the underlying security interest with CERSAI.   In case secured against any other asset that is not registered with CERSAI or unsecured, MHP would be calculated from the first repayment of the loan.   However, personal loans are mostly unsecured; as such, the MHP shall be calculated from the date of first repayment of the loan, since the security does not exist.	Same as TLE
Construction Loan	MHP is counted from the date of registration of the underlying security interest with CERSAI.	In case the secured property is commercial or residential real estate, the MHP would be counted from the date of full disbursement of the loan or registration with CERSAI, whichever is later.
Loan against receivables	The assignment of receivables is registered with CERSAI, hence, MHP is counted from the date of registration of the underlying security interest with CERSAI.	Same as TLE.
Housing Loan	MHP is counted from the date of registration of the underlying security interest with CERSAI.	Since the secured property would be commercial or residential real estate, the MHP would be counted from the date of full disbursement of the loan or registration with CERSAI, whichever is later.
Loan against CRE	MHP is counted from the date of registration of the underlying security interest with CERSAI.	Since the secured property is commercial real estate, the MHP would be counted from the date of full disbursement of the loan or registration with CERSAI, whichever is later.
Loan against security on aircraft/ ships	Since the security interest is not registered with CERSAI, MHP would be calculated from the first repayment of the loan.	Same as TLE.

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^[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12166&Mode=0

^[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12165&Mode=0

^[3] There is no mandatory timeline for registration of security interest under CERSAI Rules. That is to say, the originator may register security interest even after time lag after origination. However, in that case, MHP will start running not from the date of the origination, but from the date of CERSAI registration.

^[4] Our article on Fragmented framework for perfection of security interest can be read here – https://vinodkothari.com/2021/03/fragmented-framework-for-perfection-of-security-interest/

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