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February 18, 2013:
Tax measures, RBI guidelines and pressure on capital adequacy to push higher growth
Securitisation, the bundling of financial assets of banks, NBFCs and financial institutions into transferable securities, is likely to pick up substantially in coming financial year 2013-14. The higher push in numbers may come from a variety of factors. The factors that will mandate larger securitisation drive will be the increasing pressure on capital of non-banking financial companies, and the need to go for non-traditional financial options. At the same time, a healthy tax environment will provide a big motivation for entities.
The RBI guidelines announced in 2012 (May for banks and August in case of NBFCs) made a substantial distinction between "direct assignments" and securitisations. Direct assignment is essentially a loan sale where there is no special purpose vehicle, and hence, no "securitisation", that is, creation of capital market instruments. The RBI mandated out credit enhancements in case of direct assignments. Bereft of credit enhancements, a direct assignment would not achieve any rating upliftment, and hence, the buyer would essentially be taking the pro-rata risk of the pool of assets transferred by the seller.
This might have been a strong re-start of the securitisation markets, which went virtually dead since the RBI guidelines of 2006. However, the tax uncertainty in case of securitisation transactions was proving to be the biggest stumbling block.
The tax uncertainty arose from several notices that the Income-tax department served on trustees, seeking to deny the tax pass through status of securitisation SPVs. In a pass through tax treatment, tax is imposed on the ultimate recipients of the income. However, if pass through status is denied, the tax will be imposed not on the recipients, but in a representative capacity on the SPV, which would create considerable problems for mutual funds investing in such deals. Mutual funds are otherwise tax exempt and have to pay only dividend distribution tax.
The tax issues on securitisation came to fore during the Securitisation Summit in May 2012 organized by Vinod Kothari Consultants.
We at Vinod Kothari Consultants quickly realized the seriousness of the problem, and organized an informal group to make representation to the CBDT. The representation was drafted along with KPMG, and was submitted soonest to the CBDT. We also made strong case through the National Housing Bank and key officials of the Ministry of Finance.
At this point, there is a strong hope that tax pass through will be granted to securitisation trusts satisfying either of the following 3 conditions:
a) a trust created for the purpose of securitisation of residential mortgage loans, in terms of of such guidelines as the National Housing Bank may frame from time to time;
b) a trust created for the purpose of securitisation of standard assets, in terms of the guidelines of the Reserve Bank of India, as applicable from time to time;
c) a trust created for the purpose of securitisation, where the securities issued out of such securitisation are listed in terms of Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008.
If the pass-through status, in case of securitisation transactions is conferred, the beneficiaries will be NBFCs, banks, housing finance companies, and infrastructure operators.
In FY 2012-13, securitisation by banks and NBFCs is expected to end up at about Rs 20000 crores. In addition, there are securitisation transactions done by Indian Railway Finance Corporation, and by several infrastructure companies. With the tax clarity, the volumes may at least be doubled.
[Reported by: Vinod Kothari]