Securitisation Comparative Guide – – India

1 Legal and regulatory framework

1.1 Which laws typically govern securitisations in your
jurisdiction?

Securitisation in India is primarily governed by:

• the Securitisation and Asset Reconstruction of Financial Assets
  and Enforcement of Security Interest Act, 2002, which governs the
  securitisation of stressed assets;




• directions issued by the Reserve Bank of India (‘RBI’),
  India’s central bank; and




• regulations issued by the Securities and Exchange Board of
  India (‘SEBI’), India’s securities market regulator,
  for listed securitisation notes (eg, pass-through certificates
  (‘PTCs’) or security receipts).

In September 2021, the RBI:

• consolidated and amended its various instructions on
  securitisation through the Master Direction – Reserve Bank of
  India (Securitisation of Standard Assets) Directions, 2021
  (‘Securitisation Directions’); and




• introduced the Master Direction – Reserve Bank of India
  (Transfer of Loan Exposures) Directions, 2021 (‘Transfer
  Directions’) (together, ‘the directions’).

A distinction is made between:

• securitisation transactions, which are governed by the
  Securitisation Directions; and




• direct assignment transactions, which are governed by the
  Transfer Directions.

However, industry data uses the term ‘securitisation
transactions’ to refer to both securitisation or PTC
transactions and direct assignment transactions.

Other statutes – such as the Contract Act, 1872, the Stamp
Act, 1899 and the Trusts Act, 1882 – also apply, but are not
directly related to this questionnaire.

1.2 Which bodies are responsible for regulating securitisations
in your jurisdiction? What powers do they have?

The RBI is the primary Indian regulator for securitisation. It
regulates all originators – that is, banks and non-banking
financial companies (‘NBFCs’) – and most investors
engaged in the financial sector.

The RBI’s powers include:

• issuing guidelines and directions for securitisation
  transactions;




• verifying whether transactions result in transfers of risk and
  quantifying the capital that originators and RBI-regulated
  investors must allocate for the securitised pool; and




• conducting supervisory reviews of originators and RBI-regulated
  investors.

Additionally, if the securitisation notes are listed or to be
listed, the Securities and Exchange Board of India (Issue and
Listing of Securitised Debt Instruments and Security Receipts)
Regulations, 2008 apply and SEBI will have jurisdiction to that
extent.

1.3 What is the regulators’ general approach in regulating
securitisations?

The RBI encourages securitisation and views it as a facilitator
of risk distribution and liquidity for banks and NBFCs. However, it
prohibits complicated and opaque securitisation structures, and
lending for securitisation. This is evidenced by:

• the introduction of the ‘simple, transparent and
  comparable’ (‘STC’) securitisation framework.
  Securitisation transactions which meet prescribed criteria –
  such as the pool comprising homogenous loans – are classified
  as STC securitisations and RBI-regulated investors must allocate
  lower capital for STC securitisation exposure than for other
  securitisation exposure;




• the prescription of the minimum retention requirement –
  the minimum exposure the originator must retain in the assets
  transferred by it – and the minimum hold period for which the
  originator must hold the loan; and




• the proscription of complex securitisation transactions such as
  synthetic securitisation or re-securitisation.

The RBI also views securitisation as an important tool for
resolving stressed assets. As financial creditors presently prefer
the time-bound resolution process under the Insolvency and
Bankruptcy Code, 2016, and are hesitant to engage with asset
reconstruction companies (‘ARCs’) on account of recent
frauds, the RBI is proposing to overhaul the framework for the
resolution of stressed assets through ARCs.

1.4 What role, if any, does the central bank play in the
securitisation market in your jurisdiction?

Please see question 1.2.

2 Market and motivations

2.1 How sophisticated is the securitisation market in your
jurisdiction and how has it evolved thus far?

The Indian securitisation market continues to grow despite the
implementation of the goods and services tax (‘GST’) and
the challenges posed by the COVID-19 pandemic. However, the market
is still developing, and the Reserve Bank of India (‘RBI’)
has limited the avenues for securitisation by proscribing complex
securitisation transactions such as synthetic securitisation and
re-securitisation.

The first securitisation transaction in India was completed in
1990. However, legislation for the securitisation of stressed
assets and the securitisation of standard assets was not
promogulated until 2002 and 2006, respectively.

The regulatory framework was strengthened in 2012 through the
introduction of the minimum retention requirement and the minimum
hold period which sought to curb lending for securitisation.

Regulation in India continues to evolve and the RBI introduced a
comprehensive securitisation framework through the Securitisation
Directions and Transfer Directions in 2021 to align the Indian
regulatory framework with the recommendations of the Basel
Committee on Banking Supervision. Amendments to the framework for
securitisation of stressed assets are also expected.

The covered bond market exists in a regulatory void. The
Transfer Directions have had an adverse effect on covered bonds,
albeit inadvertently (see question 2.5).

The manner in which market participants view securitisation is
also evolving. Initially, banks used securitisation to meet their
priority sector lending targets –that is, the allocation of a
portion of their loans to priority sectors (eg, agriculture,
education, housing, renewable energy) – by investing in pools
comprising priority sector loans or purchasing such loans. Market
participants are now increasingly using securitisation to raise
finance and manage risk.

2.2 In which industry sectors, if any, is securitisation most
common in your jurisdiction? What major securitisations have been
effected thus far?

Securitisation transactions are popular in the retail loan
sector. Although direct assignment transactions are undertaken in
connection with corporate sector loans, data on such transactions
is not available.

Retail loan securitisations are primarily undertaken for
microfinance, auto loans, gold loans, and home loans.

According to ICRA, in FY2021-22:

• microfinance loans accounted for around 13% of the market;




• asset-backed securitisation (predominantly comprising auto and
  gold loans) accounted for 44% of the market; and




• mortgage-backed securitisation (predominantly comprising home
  loans) accounted for 43% of the market.

Some marquee securitisation transactions that have been
undertaken in India are:

• the securitisation of new and used car receivables for INR
  19.29 billion by ICICI Bank in 2007; and




• the securitisation of trade receivables aggregating INR 11.25
  billion by Barclays Bank Plc through three securitisation
  transactions in 2017.

2.3 What are the benefits of securitisation, for both
originators and investors?

Originators may favour securitisation transactions for the
following reasons:

• Securitisation converts illiquid loan assets to cash and
  increases the originator’s liquidity.




• Securitisation notes have a better rating than the underlying
  assets and the originator as the notes:




• • are usually credit enhanced; and

  
  

  • are not affected by the originator’s insolvency.




• Therefore, originators can raise monies
  at attractive rates.




• At times of crisis, securitisation may be the only route for
  non-banking financial companies (‘NBFCs’) to raise funds
  (as was the case following the insolvency of Infrastructure Leasing
  & Financial Services Limited (‘IL&FS’);




• Unless they have provided credit enhancement, originators are
  not affected by the pool’s performance as, after the
  securitisation, the pool belongs to the investors. Therefore, an
  originator is not required to provide capital for the pool except
  in respect of credit enhancement.




• Securitisation enables the efficient management of stressed
  assets. After assignment, the stressed assets are managed by
  specialised agencies and originators can deploy their resources
  elsewhere.

Investors may favour securitisation transactions for the
following reasons:

• banks may use securitisation to meet their priority sector
  lending targets;




• investors can invest in retail loans without establishing the
  requisite infrastructure (eg, branches and employees) to originate,
  and collect amounts payable on, such loans;




• securitisation notes are better rated than the underlying loans
  and the originators.

2.4 What are the risks of securitisation, for both originators
and investors?

Securitisation is subject to the following risks:

• the underlying loans are subject to the credit risk of the
  underlying obligors. Investors should thus examine the
  originator’s lending policy and its pools’ performance, as
  the originator applies the same credit checks on its transferred
  loans as it does on retained loans;




• securitisation transactions involve several counterparties,
  such as servicers and credit enhancement providers. The insolvency
  of a counterparty can impact the transactions and notes’
  rating. To mitigate this:




• • each facility provider is regulated by a financial sector
    regulator; and

  
  

  • the special purpose vehicle must, under the Securitisation
    Directions, have a contractual right to replace a
    counterparty;




• the performance of the underlying loans (and, consequently the
  securitisation notes) is subject to market risks such as economic
  slowdowns;




• NBFCs’ borrowings are secured through fixed charges on
  specific loans or floating charges on their receivables. For fixed
  charges, investors should ensure that the pool comprises
  unencumbered loans. As regards floating charges, the company can
  deal with its assets freely until the charge crystallises.
  Therefore, investors should conduct due diligence and seek
  title-related representations;




• a court may recharacterise a sale transaction as financing (see
  question 6.7).

2.5 Is there a developed covered bond market in your
jurisdiction and how does it compare and compete with
securitisation as means of disintermediation and recycling bank
capital?

Indian law does not expressly address covered bonds.
Nonetheless, NBFCs have been issuing covered bonds since 2019
– Indian banks do not issue covered bonds. According to ICRA,
covered bond issuances totalled INR 22.2 billion in FY2020-21
– a fraction of the volume of the securitisation market.

However, certain factors weigh against the issuance of covered
bonds:

• the RBI has not provided any capital relief for covered bond
  transactions and NBFC issuing the covered bond must allocate
  capital for the cover pool;




• the cover pool may not be bankruptcy remote as there is a risk
  that, at the time of the issuer’s insolvency, the transfer of
  the cover pool may be set aside as a preferential or fraudulent
  transaction;




• the Transfer Directions have adversely impacted covered bonds
  issuances. The Transfer Directions permit the transfer of economic
  interests in loans to RBI-regulated entities. As a trustee is not a
  regulated entity, the Transfer Directions, strictly construed,
  would bar the transfer of the cover pool. However, some have taken
  the view that the Transfer Directions apply to the transfer of
  economic interest and not to a transfer of legal title without
  economic interest. However, there is no judicial pronouncement or
  regulatory clarification supporting this.

2.6 To what extent does the government intervene as a state
actor in securitisation (eg, by guaranteeing certain securitised
assets, providing credit enhancement to impact transactions or
sponsoring public bodies to act as originator of or investor in
asset-backed securities issues)?

The government does not usually intervene in the securitisation
market. However, after IL&FS’s insolvency, NBFCs faced an
unprecedented liquidity crisis as lenders were reluctant to lend to
them. Therefore, on 11 December 2019, the government promulgated a
scheme whereby it agreed to provide a first-loss guarantee to
public sector banks for high-rated pooled assets purchased from
eligible NBFCs until 31 March 2021. The scheme capped the aggregate
amount of guarantees at the lower of 10% of the assets purchased or
INR 100 trillion.

3 Structures

3.1 What securitisation structures are most commonly used in
your jurisdiction?

Direct assignments are more common in India, despite the fact
that:

• simple, transparent and comparable (‘STC’)
  securitisations have preferential capital requirements; and




• credit enhancement is not permitted for direct
  assignments.

This is because excess interest spread (‘EIS’) on a
securitisation transaction – the amount by which the monies
received by the special purpose vehicle (‘SPV’) from the
underlying loans exceeds the amounts payable to the investors
– may be subject to goods and services tax (‘GST’) in
the hands of the originator (see question 10.1).

Direct assignment transactions are usually structured to ensure
that the originator retains 10% of the economic interest in the
pool. This is because investors are often unable to conduct due
diligence on each loan comprising the pool and the minimum
retention requirement (‘MRR’) of 10% is then
applicable.

Most pass-through certificate (‘PTC’) transactions are
credit enhanced. Credit enhancements are usually structured
using:

• overcollateralisation (that is, credit enhancement by virtue of
  the value of the pool exceeding that of the securitisation notes)
  and cash collateral; or




• overcollateralisation and investment in the subordinate tranche
  by the originator.

Originators meet their MRR by providing credit enhancement.
However, as the Reserve Bank of India (‘RBI’) does not
consider overcollateralisation when calculating the MRR,
originators usually provide additional credit enhancement.

3.2 What is the split between ‘term’ and asset-backed
commercial paper transactions?

Please see question 2.2.

3.3 What are the advantages and disadvantages of these
different types of structures?

Direct assignment transactions entail less documentation
(usually, an assignment agreement, service agreement and power of
attorney) than PTC transactions, as they do not require SPVs and
the issuance of securities.

However, investors in direct assignment transactions must
conduct due diligence on each loan in the pool. If this is not
possible, investors must conduct diligence on at least one-third of
the pool and the originator must retain 10% of the economic
interest. Additionally, credit enhancement is not available for a
direct assignment transaction.

Therefore, direct assignments are better suited for the
assignment of corporate loans or a pool comprising a few loans
(making due diligence more feasible), but are not ideal for pools
which require credit enhancement.

PTC transactions involve SPVs and the issuance of securities.
Further, originators must retain a portion of the assigned pool to
meet the MRR irrespective of investors’ due diligence.
Originators usually provide credit enhancement for PTC transactions
to meet the MRR.

Parties must follow the PTC route where investors wish to
allocate less capital through STC securitisations. PTC transactions
are ideal where the pool comprises a large number of loans.

3.4 What other factors should originators consider when
deciding on a structure?

Originators typically collect excess cash from the pool through
EIS. As the EIS may be subject to GST, originators should factor in
the potential tax implications before choosing the structure.

Additionally, to the extent that the investment is to be listed,
the transaction must be structured as a PTC transaction.

PTC structures are also mandatory where the target investors are
entities not regulated by the RBI (eg, mutual funds and foreign
portfolio investors) as such entities cannot participate in direct
assignment transactions.

4 Eligibility

4.1 What requirements and restrictions apply to prospective
originators in your jurisdiction?

Under the Securitisation Directions and Transfer Directions, the
following requirements and restrictions apply to originators in
India:

• the originator must comply with the minimum hold period
  (‘MHP’) requirements:




• • three months for loans with original tenures of less than two
    years; and

  
  

  • six months for all other loans.




• The MHP is calculated from the date on
  which the security is registered; or from the first repayment date
  if there is no security interest or its registration, is not
  required;




• the originator must comply with the minimum retention
  requirement (‘MRR’) The MRR for a PTC transaction is:




• • 5% of the book value of the loans securitised for loans having
    an original maturity of 24 months or less;

  
  

  • 10% for other loans or loans having bullet repayments; and

  
  

  • 5% for residential mortgage-backed securities, irrespective of
    the tenure.




• Direct assignment transactions have an
  MRR of 10% if investors are unable to conduct due diligence on each
  loan in the pool;




• the originator can only provide facilities such as credit
  enhancement, servicing, and custodian services on the basis
  arm’s-length written agreements;




• the originator’s exposure in a securitisation transaction
  cannot exceed 20% of the securitised pool;




• the originator must exercise the same credit checks on its
  assigned loans as it does on its other loans;




• the originator can make representations and warranties only
  regarding the assets;




• the originator cannot repurchase the transferred exposures
  except through a clean-up call option.

4.2 What requirements and restrictions apply to prospective
investors in your jurisdiction and how are retail and
wholesale/professional investors distinguished?

Banks, mutual funds, NBFCs, insurance companies, foreign
portfolio investors and high-net-worth individuals are the main
investors in securitisation transactions. Investors not regulated
by the Reserve Bank of India (‘RBI’)such as mutual funds
and foreign portfolio investors may only participate through PTC
structures.

The RBI does not distinguish between retail and wholesale
investors. However, where an investor is RBI regulated, it must
allocate capital for its securitisation exposures.

Due diligence by investors is recommended but not mandatory for
PTC transactions. To the extent that such diligence is conducted
(usually on a sample basis), originators must cooperate.

However, in the case of direct assignment transactions, the
Transfer Directions require that investors conduct due diligence of
all the loans in the pool or, where they are unable to do so, of at
least one-third of the pool.

If an RBI-regulated investor wishes to avail the preferential
regulatory capital treatment applicable to simple, transparent and
comparable (‘STC’) securitisations, it must assess whether
the transaction is STC compliant.

Investors must also understand the risks involved in the
transaction and seek adequate representations and warranties to
ensure that the originator has complied with the prescribed MRR and
MHP, and the applicable know-your-customer requirements for each
asset in the pool.

4.3 What requirements and restrictions apply to custodians and
servicers in your jurisdiction?

Only entities regulated by financial sector regulators can act
as servicers. It is customary for the originator to act as
servicer. The servicer:

• must collect receivables from the underlying obligors and
  transfer them to investors and administer the securitised
  assets;




• must keep the special purpose vehicle (‘SPV’) apprised
  of cash flow, including delays in payments by the underlying
  obligor; and




• cannot provide implicit support to investors.

The servicer’s role is governed by an arm’s-length
written agreement between the servicer and the SPV.

Where the servicer also acts as the custodian (as is often the
case), the servicer retains custody of the underlying documents
with an obligation to hand them over at the SPV’s request. Like
servicers, custodians must be regulated by financial sector
regulators and their roles must be stipulated in arm’s-length
agreements with the relevant SPV.

Investors generally have contractual rights to:

• conduct audits (including discretionary audits by an auditor)
  on the servicer; and




• terminate the agreement and replace the servicer and/or
  custodian with a third party.

4.4 What classes of receivables and other assets may be
securitised in your jurisdiction? What requirements and
restrictions apply in this regard?

All standard assets can be securitised under the Securitisation
Directions except:

• re-securitisation exposures;




• structures in which short-term instruments are issued against
  long-term assets held by the SPV; and




• the following underlying assets:




• • revolving credit facilities;

  
  

  • restructured loans and advances within a specified period;

  
  

  • exposures to lending institutions;

  
  

  • refinance exposures of all India financial institutions;
    and

  
  

  • loans with bullet payments of principal as well as interest
    (other than agricultural loans).

Additionally, the originator may transfer or securitise its
stressed loans in terms of the Transfer Directions. The
Securitisation and Asset Reconstruction of Financial Assets and
Enforcement of Security Interest Act will also apply to the
securitisation of stressed assets (eg, loans and debentures)
through asset reconstruction companies

4.5 What measures, if any, have been taken in your jurisdiction
to promote investor involvement in securitisations?

Securitisation transactions usually attract more sophisticated
investors. These investors usually have contractual rights to:

• conduct audits on servicers;




• request information; or




• replace facility providers (please see questions 4.3 and
  4.4).

Therefore, the RBI has not taken any specific steps to promote
investor involvement.

Where securitisation notes are to be issued to more than 50
persons, the notes must be listed on a recognised stock exchange in
India. The issuance must therefore comply with the Securitised Debt
Listing Regulations which prescribe certain additional disclosures
that the SPV must make over and above those mandated by the
Securitisation Directions. Further, the Securitised Debt Listing
Regulations empower investors to call investors’ meetings and
replace the trustee, among other things.

5 Special purpose vehicles

5.1 What forms do special purpose vehicles (SPVs) typically
take in your jurisdiction and how are they established?

A special purpose vehicle (‘SPV’) can be set up as:

• a company;




• a trust as per the Trusts Act, 1882; or




• any other distinct entity like a limited liability partnership
  (LLP).

In India, SPVs are usually constituted as trusts. While parties
generally have the freedom to determine the nature of entity for
the SPV, the SPV must be constituted as a trust if the
securitisation notes are to be listed on a recognised stock
exchange in India. Companies specialising in providing trusteeship
services acquire the pool from the originator and then appoint
themselves as trustees and hold assets for the pass-through
certificate (‘PTC’) holders’ benefit.

5.2 Are SPVs typically established locally or offshore? What
are the benefits and risks of each?

SPVs are typically established locally. Unlike offshore SPVs,
local SPVs do not require Reserve Bank of India (‘RBI’)
approval to acquire assets from originators.

The transfer of loans to offshore SPVs must comply with Indian
foreign exchange law. The Master Direction – External
Commercial Borrowings, Trade Credits and Structured Obligations
dated 26 March 2019 (‘ECB Directions’) provide that an
Indian lender can assign loans to eligible foreign lenders if such
loans are:

• overdue for at least 60 days;




• availed of by persons eligible borrower to under the ECB
  Directions; and




• availed of for capital expenditure in manufacturing and
  infrastructure sectors.

Transfers of loans otherwise than in accordance with the ECB
Directions require RBI approval, which may not be forthcoming.

Rather than establishing foreign SPVs, foreign investors can
invest in Indian SPVs established as companies or LLPs. This
investment will require prior government approval if the foreign
investor is from a country that shares a land border with India.
Additionally, under the foreign portfolio investment route, foreign
portfolio investors registered with the Securities and Exchange
Board of India can invest in debentures issued by an Indian SPV or,
where the SPV is a trust, in the PTCs and security receipts issued
by the SPV.

5.3 How is the SPV typically owned?

A SPV constituted as a company or an LLP will typically be owned
by a company providing trusteeship services. The originator is
prohibited from owning the SPV.

Where the SPV is a trust, the trust is settled by a company
providing trusteeship services.

5.4 What requirements and restrictions apply to SPVs in your
jurisdiction?

The following requirements and restrictions apply to SPVs:

• the originator and the SPV may only enter into transactions on
  an arm’s-length basis;




• the SPV should be a specific purpose entity and bankruptcy
  remote;




• the name, trademarks, logos and so on of the SPV should not be
  identical or similar to those of the originator;




• the originator cannot have more than one nominee on the
  SPV’s board, provided that the board has at least four members
  and independent directors are in a majority. Further, the
  originator nominee should not have a veto right; and




• if the SPV is a trust, the trust must be
  non-discretionary.

5.5 What requirements and restrictions apply to the directors
of the SPV? What are their primary duties?

Other than the matters set out in question 5.4(d), the
Securitisation Directions do not specify any requirements or
restrictions on the SPV’s directors.

The Companies Act, 2013 imposes duties on directors which would
apply to the SPV’s directors (if the SPV is a company). The
Companies Act, 2013 requires that a director:

• act as per the articles of association of the SPV;




• act in good faith to promote the SPV’s objects;




• exercise their duties with reasonable care, skill and
  diligence; and




• avoid direct or indirect conflicts of interest with the
  SPV.

5.6 What measures can be implemented to ensure, as far as
possible, the insolvency remoteness of the SPV?

Where the SPV is a trust, the assets held by the trustee will
not form part of its liquidation estate and, therefore, this
structure is insolvency remote.

If the SPV is a company or LLP, the following steps can achieve
insolvency remoteness:

• the SPV’s constitution documents should specify that it is
  a specific purpose vehicle incorporated for the securitisation
  transaction and cannot take any other business; and




• the originator should not own the SPV. The SPV should be an
  independent entity owned and managed by a company that provides
  trusteeship services. This will avoid consolidation and
  related-party risks.

5.7 If the originator becomes insolvent, is there a risk that
the assets of the SPV may be consolidated with its own by the
courts? If so, how can this be mitigated?

The insolvency of originators is governed by special legislation
and overseen by the RBI. It is unlikely that the RBI or an
RBI-appointed administrator will set aside a transfer of assets to
a SPV.

The RBI can apply to the National Company Law Tribunal to have
the Insolvency and Bankruptcy Code, 2016 (‘Insolvency
Code’) govern the insolvency of a particular non-banking
financial company. Under the Insolvency Code, the transfer of
assets to the SPV may be set aside as a preferential transfer or an
undervalued transaction if executed during the look-back period
(that is, two years before the admission of insolvency proceedings
for related-party transactions and one year for other
transactions).

However, this risk is nominal as the originator must, when
transferring the loans, satisfy conditions prescribed under the
Securitisation Directions and Transfer Directions for the capital
relief for the transferred loans, which include demonstrating that
the assigned pool is legally isolated from the originator so as to
put it beyond the reach of the originator or its creditors even in
the event of bankruptcy or administration. Compliance with the
directions must be confirmed by a legal opinion.

Where the originator acts as the servicer, its creditors may
allege that the originator continues to own the assets,
particularly if there is a delay between collection and payment, as
the cash flow may be comingled with the originator’s assets.
However, this risk is nominal as the directions require that the
servicer agreement provide that the servicer holds monies as a
trustee of the SPV.

6 Transfer of receivables

6.1 Can the transfer of receivables to the SPV be governed by
laws other than your local law? If so, what laws are typically
chosen?

Parties may elect to have the transfer of receivables governed
by foreign law, provided that there is a foreign element –
for example:

• the SPV is an offshore entity; or




• foreign investors own the majority of the securitisation notes
  (please see question 5.2).

Whether there is a foreign element will be decided by the
courts.

Since India is a common law jurisdiction, most Indian parties
choose English law as the governing law when they do not want the
transaction documents to be governed by Indian law.

6.2 What local law requirements (documentary and procedural)
are required to ensure that foreign law documents are recognised
and enforceable locally?

To be enforceable in India, foreign law-governed documents
should be stamped at the applicable rate of stamp duty when brought
into India. Please see question 10.1 for a discussion on the stamp
duty payable on a securitisation transaction.

Where a document is governed by foreign law, at the time of
enforcement, the foreign law must be proved in the relevant Indian
court through expert testimony.

6.3 How does the transfer of receivables from the originator to
the SPV typically take place? What are the formal, documentary and
procedural requirements for perfecting the transfer?

SPVs are usually established as trusts and receivables are
transferred to those trusts as follows:

• the pass-through certificate (‘PTC’) holders remit
  subscription monies for the PTCs to the trustee company;




• the originator transfers the receivables to the SPV acting
  through the trustee company. The transfer becomes effective upon
  the payment of consideration by the trustee company (on behalf of
  the SPV);




• the trustee company holds the assigned assets for the PTC
  holders’ benefits; and




• PTCs are issued to the PTC holders.

Typically, the following documents are executed for a PTC
transaction:

• a deed of assignment between the originator and the trustee
  company under which the pool is assigned to the trustee company.
  This instrument records the terms of the transfer and credit
  enhancement;




• an information memorandum prepared by the originator, the
  trustee and the investment banker making statutory disclosures (see
  question 8.1);




• a trust deed by the trustee company;




• an accounts agreement between the servicer and SPV which
  records how the monies will be collected and paid to the SPV;




• a power of attorney from the originator appointing the trustee
  as its attorney to perfect the trustee’s title on the pool and
  take action against obligors;




• a servicing agreement between the servicer and the SPV;
  and




• PTCs, usually in dematerialised form, issued by the trustee to
  PTC holders.

6.4 What other requirements and restrictions apply to the
transfer of receivables?

Transfers of receivables are also subject to the following
requirements:

• the originator should comply with the minimum hold period and
  minimum retention requirements;




• the underlying documents should not require obligors’
  consent for the assignment and the transfer should not affect
  obligors’ rights;




• the assets in the pool must be unencumbered;




• the parties should take necessary corporate actions for the
  transfer of receivables; and




• the originator should comply with the conditions prescribed
  under the Securitisation Directions for capital relief.
  Illustratively, the originator should not have control over the
  assigned assets and it should not have a right to purchase the
  pool, other than through the invocation of the clean-up call
  option.

6.5 Is there a doctrine under which a transaction describing
itself as a sale can be recharacterised by the courts as a
financing secured by assets which are the subject of the purported
transfer? How can the application of this doctrine be
overcome?

Indian courts can recharacterise a sale transaction as a loan in
certain circumstances – for example, if:

• the originator must make payments to the SPV or the investors,
  including to meet any shortfall; or




• the originator has the right to repurchase the assets otherwise
  than through a clean-up call option.

Whether a transaction is a sale or loan will be determined on a
case-by-case basis. However, the recharacterisation risk is remote
as, under the Securitisation Directions, originators must take
steps to achieve capital relief. For example:

• the originator should not have control over the assigned
  assets;




• it should not provide implicit support;




• it should not have a right to purchase the pool, other than
  through the clean-up call option; and




• transferred exposures should be isolated from the originator to
  put them beyond the reach of the originator’s creditors.

The satisfaction of these conditions must be confirmed by a
legal opinion.

6.6 If the originator becomes insolvent, is there a risk that
the transfer of receivables may be unwound? If so, how can this be
mitigated?

Please see question 5.7.

7 Security

7.1 What types of security interests can be taken over the
assets of the SPV in your jurisdiction? Which are most commonly
used?

If a special purpose vehicle (‘SPV’) is a trust, it
holds the pooled assets for the pass-through certificate
(‘PTC’) holders’ benefit and each PTC represents its
holder’s beneficial ownership in respect of the pooled assets.
Therefore, no security interest is required to protect PTC
holders’ interests.

If the SPV is a company or limited liability partnership (LLP),
the SPV raises monies from the investors as loans or through
debenture issuance to purchase the pool from the originator. In a
loan, the SPV will create the security in favour of the security
trustee acting for investors; and in a debenture issuance, the SPV
will create the security in favour of the debenture trustee acting
for investors. Since the pool of loans comprises movable assets,
the SPV may create a security interest by way of a charge, a
mortgage or hypothecation. The most common security interest on
movable assets that are not capable of delivery (eg, future
receivables) is hypothecation.

7.2 What are the formal, documentary and procedural
requirements for perfecting a security interest?

The following filings are required to perfect security interest
by the SPV:

• if the SPV is an Indian company, it must file the particulars
  of charge with the relevant Registrar of Companies within 30 days
  of its creation;




• creditors which have access to speedy enforcement under the
  Securitisation and Asset Reconstruction of Financial Assets and
  Enforcement of Security Interest Act must register the charge
  created in their favour with the Central Registry of Securitisation
  Asset Reconstruction and Security Interest of India
  (‘CERSAI’). Under the Securitisation and Asset
  Reconstruction of Financial Assets and Enforcement of Security
  Interest Act, ‘secured creditors’ include:




• • banks;

  
  

  • debenture trustees appointed by banks or financial
    institutions;

  
  

  • debenture trustees registered with the Securities and Exchange
    Board of India and appointed for secured debt securities;

  
  

  • asset reconstruction companies; and

  
  

  • any other trustees holding securities on behalf of such
    creditors.




• the financial creditors or their agent must submit information
  regarding the indebtedness of a corporate debtor (that is, a
  company or an LLP) with the Information Utility as per the
  Insolvency and Bankruptcy Code, 2016 (‘Insolvency
  Code’).

7.3 What charges, fees or taxes arise from the perfection of a
security interest?

The fees and charges payable for the perfection of hypothecation
on the movable assets are:

• the fee payable to the registrar of companies for filing the
  form with respect to creation or modification of charges, which
  ranges from INR 200 to INR 600;




• the CERSAI filing fee of INR 50 for loans of up to INR 500,000
  and INR 100 for other loans; and




• a fee of INR 300 for submitting information to the Information
  Utility.

7.4 What other considerations should be borne in mind when
perfecting a security interest in your jurisdiction?

Certain other considerations should be borne in mind while
perfecting a security interest:

• investors should conduct due diligence to ensure that the SPV
  has clear title to the loans acquired, and that the loans are
  isolated from the originator’s book. Please see question 2.4.
  They should also ensure that each underlying loan document is
  adequately stamped;




• for assignment of loans secured by immovable property, the
  registration of the assignment agreement with the sub-registrar of
  assurances may not be possible for a number of reasons – for
  example:




• • high stamp duty in the relevant jurisdiction; or

  
  

  • a sub-registrar’s reluctance to inform other
    sub-registrars, where there are properties in multiple
    jurisdictions.




• in such a scenario, the SPV should ensure that it has power to
  act on the originator’s behalf to exercise the originator’s
  right under the underlying mortgage document or require the
  originator to take action under such documents; and




• if the SPV issues securitisation notes in different tranches,
  the security documents and the forms should specify the ranking of
  the charge created for each series of the notes issued.
  Additionally, the transaction documents, including the information
  memorandum, should clearly set out the junior noteholders’
  rights and explain how these rights are inferior to those of the
  senior noteholders.

7.5 What are the respective obligations and liabilities of the
parties under the security interest?

Security providers must:

• perfect the security;




• upon an event of default, hand over the secured assets to the
  secured creditor or its receiver; and




• unless there is a contract to the contrary, pay the shortfall
  between the debt due and the amount realised from the enforcement
  of security.

Secured creditors:

• should, while enforcing the security interest on movable
  assets, realise a reasonable price. Secured creditors usually sell
  the secured assets through auctions to help demonstrate that they
  took steps to realise reasonable value; and




• must hand over surplus (the amount by which the realised value
  of the secured assets exceeds the debt due), if any, to the
  security provider.

7.6 In the event of default, what options are available to
enforce the security interest? Is self-help available in your
jurisdiction or must enforcement action go through the courts? Are
there insolvency regimes such as conservatorship or examinership
that impose an automatic stay on the exercise of self-help
remedies?

The security documents usually provide for the handover of
secured properties to the secured party or its receiver on an event
of default. The security provider usually appoints the secured
party as its attorney through an irrevocable power of attorney
(please see question 7.8) to enforce the security interest upon
default.

Where the security provider breaches the security documents and
refuses to hand over the secured properties, court intervention
will be required.

Secured creditors which have access to a speedy remedy under the
Securitisation and Asset Reconstruction of Financial Assets and
Enforcement of Security Interest Act (please see question 7.2) can
enforce security interests without the court’s
intervention.

However, the enforcement of security will not be possible if the
corporate insolvency resolution process (‘CIRP’) of the SPV
(being a company or an LLP) commences. Under the Insolvency Code,
upon admission of an application for CIRP, the National Company Law
Tribunal will declare a moratorium barring all legal proceedings
and actions to recover or enforce any security interest created by
the SPV (including out-of-court actions under the Securitisation
and Asset Reconstruction of Financial Assets and Enforcement of
Security Interest Act). This moratorium will remain in place for
the duration of the CIRP.

7.7 Will local courts recognise a foreign court judgment in
favour of an investor?

Under the Code of Civil Procedure, 1908, Indian courts will
recognise a foreign judgment if the judgment:

• has been pronounced by a court of competent jurisdiction;




• has been given on the merits;




• is not against international law and, if Indian law is
  applicable between the parties, the foreign court must not have
  refused to recognise it;




• is not opposed to principles of natural justice;




• has not been obtained by fraud;




• has not been found on a breach of any Indian law; and




• is conclusive.

While India is not a party to any international convention on
the enforcement of judgments, the Code of Civil Procedure permits
the central government to specify foreign territories as
reciprocating territories. A foreign judgment from the superior
court of a reciprocating territory satisfying the abovementioned
conditions is considered a foreign decree, which can be executed in
an Indian court as if the decree had been passed by an Indian
court. Currently, there are 11 reciprocating territories, including
the United Kingdom, Singapore, New Zealand, Hong Kong, Bangladesh
and the United Arab Emirates.

If the foreign judgment is from a non-reciprocating territory, a
fresh suit based on the foreign judgment must be filed in the
appropriate Indian court. That judgment must satisfy the
abovementioned conditions to be considered a foreign judgment under
the Code of Civil Procedure.

7.8 If the servicer becomes insolvent, will an enduring power
of attorney/mandate granted by the servicer in favour of the
secured parties be recognised and enforceable post-insolvency of
the servicer?

Indian law does not define or use the term ‘enduring power
of attorney’. In India, powers of attorney may be revocable or
irrevocable. A revocable power of attorney terminates when the
principal is adjudicated insolvent. However, where the attorney in
an irrevocable power of attorney has an interest in the property
which is the subject of the power of attorney, the irrevocable
power of attorney may only be terminated if specifically agreed by
the parties. Such a power of attorney survives the servicer’s
insolvency.

7.9 Do limited recourse, non-petition and subordination
provisions bind creditors of SPVs in your jurisdiction and what are
the applicable qualifications?

Non-petition: Under Indian law, a non-petition
provision being a contract restraining a party from enforcing its
legal rights is void.

Limited recourse: A limited recourse provision
– such as a provision which states that the debt will be
discharged upon the transfer of secured assets, despite the
realisable value of the assets being lower than the amounts due
– is likely to be enforced.

Subordination: The Supreme Court, in
interpreting a provision of the erstwhile Companies Act, 1956, has
upheld the enforceability of subordination arrangements between the
lenders. The provision in question stated that the liquidator would
distribute liquidation proceeds between workmen’s dues and
secured debt on a pari passu basis. The Supreme Court held
this provision legislates ranking between secured debts and
workmen’s dues and not among secured lenders.

The Insolvency Code contains a similar provision and the
Insolvency Law Committee, which was constituted to recommend
amendments to the Insolvency Code, was of the view that the Supreme
Court’s rationale would also apply to the Insolvency Code;
therefore, subordination agreements between secured creditors would
stand and the provision did not require amendment. However, the
National Company Law Appellate Tribunal (NCLAT) has subsequently
held that since the Insolvency Code does not distinguish between
secured creditors, it will not recognise a subordination
arrangement among them.

The Supreme Court has not issued any judgment on this issue
after the NCLAT’s judgment. Therefore, although creditors
continue to enter into subordination arrangements, the
enforceability of such arrangements is uncertain.

8 Registration and disclosure

8.1 What public disclosure and reporting requirements apply to
securitisations in your jurisdiction?

The following reporting and disclosure requirements apply to a
securitisation transaction in India:

• the originator must disclose:




• • the weighted average holding period of assets;

  
  

  • data on credit quality, the performance of underlying
    exposures, information required to conduct comprehensive stress
    tests and so on to prospective investors;

  
  

  • compliance with the minimum hold period and the minimum
    retention requirement; and

  
  

  • compliance with the applicable know-your-customer guidelines by
    underlying obligors and changes in the pool, particularly on
    account of prepayment or default. Further, the rating and the
    rating rationale are to be publicly available;




• if the securitisation transaction is a simple, transparent and
  comparable securitisation, the originator must demonstrate that it
  satisfies the applicable criteria;




• the notes to the originator’s annual accounts should
  disclose the outstanding amount of securitised assets in the
  special purpose vehicle’s books and the total exposures
  retained by the originator; and




• each originator must report:




• • its securitisation transactions to the Reserve Bank of India
    (‘RBI’) quarterly; and

  
  

  • the assets replaced and damages paid due to breach of
    representations.

The Securitisation Directions also prescribe the format for such
disclosures.

8.2 What registration requirements, if any, apply to
securitisations in your jurisdiction?

Please see question 6.3.

8.3 Is there any requirement to notify obligors of a
securitisation? If so, how is this effected?

Originators need not notify obligors of the transfer unless the
underlying loan documents so require.

9 Credit rating agencies

9.1 What requirements and restrictions apply to credit ratings
agencies in your jurisdiction? Are there specific provisions that
regulate their relationship with issuers?

Indian credit rating agencies must be registered with the
Securities and Exchange Board of India (‘SEBI’) and are
regulated in accordance with the SEBI (Credit Rating Agencies)
Regulations, 1999 (‘CRA Regulations’). The CRA Regulations,
among other things, prescribe:

• the procedure for registration of credit rating agencies;




• eligibility criteria; and




• the procedure for reviewing and monitoring ratings.

A credit rating agency that intends to rate securitisation notes
should demonstrate (through strong market acceptance) that it
understands the securitisation market.

Under the CRA Regulations, every credit rating agency must adopt
a code of conduct in the format prescribed, which regulates the
credit ratings agency’s relationship with issuers. To maintain
independence, the code of conduct prohibits the credit rating
agency from providing any fee-based services to the rated entities
other than the credit ratings and research.

9.2 What are the main factors that rating agencies consider
when rating the securities of the issuer?

A rating agency considers several factors for rating the
securities, including:

• the seniority of the securitisation note;




• the legal risks, if any, arising from the chosen
  structure;




• past performance of the pool securitised, such as default
  rate;




• credit scores of obligors;




• the conditions of the economy in general, and of the sectors of
  underlying obligors and the sectors of credit enhancement
  provider(s), in particular; and




• the credit enhancement and the rating of its provider.

10 Taxation

10.1 What tax considerations should be borne in mind from the
perspective of the originator? What strategies, if any, are
available to mitigate them?

The sale of unsecured loans by an originator to an special
purpose vehicle (‘SPV’) will not result in the levy of
goods and services tax (‘GST’), as sales in ‘actionable
claims’ that are not lottery, betting or gambling transactions
do not fall under the purview of supply of goods or services under
Schedule III of the Central Goods and Services Tax Act, 2017
regime.

The GST Council views the assignment of the secured debt as a
derivative transaction and, therefore, outside the purview of GST.
However, there is still uncertainty regarding the taxation of
payments of excess interest spread to originators.

Servicing fees are subject to GST of 18%.

Stamp duty: In order to be admissible as
evidence, Indian law requires that all instruments be stamped at
the applicable rate of duty. The rates across states vary
significantly. Therefore, the parties should choose the place of
execution and storage of documents carefully. The locations must
have a nexus with the transaction. The parties may have to bring
documents to a state with higher stamp duty – for instance,
when enforcing the right or registering the underlying documents.
Please see question 7.4.

Loans are considered movable assets and parties stamp assignment
agreements accordingly. However, the Allahabad High Court has held
that the transfer of a loan with underlying security constituted a
transfer of the security interest. The duty on the transfer of
security interests is lower. However, out of abundant caution,
parties continue to pay the higher rate of stamp duty.

10.2 What tax considerations should be borne in mind from the
perspective of the issuer? What strategies, if any, are available
to mitigate them?

Since 2016, the income derived from a SPV’s assets has been
subject to tax in the hands of the investors (and not in the hands
of the SPV).

The income distributed by the SPV to its investors is subject
only to a deduction of tax at the source. The rate of the tax
deducted at source is approximately:

• 25% for individuals resident in India or Hindu undivided
  families; and




• 30% for other residents.

For non-resident investors, the rate of tax will be as per the
applicable rates in force.

If the SPV pays dividends to the investors, the payouts are
taxable as ordinary income in the investors’ hands. The
investors, on the other hand, may seek a credit for the taxes
withheld at source by the SPV, which can be utilised against their
dividend tax due.

10.3 What tax considerations should be borne in mind from the
perspective of investors? What strategies, if any, are available to
mitigate them?

Please see question 10.2.

11 Trends and predictions

11.1 How would you describe the current securitisation
landscape and prevailing trends in your jurisdiction? Are any new
developments anticipated in the next 12 months, including any
proposed legislative reforms?

We anticipate that the securitisation market will continue to
grow and will soon reach pre-pandemic levels as credit volumes are
poised to rise due to the economic recovery. Low-rated non-banking
financial companies continue to have limited avenues for
fundraising, which will likely boost securitisation further.
However, the Russia-Ukraine war and the possible resurgence of
COVID-19 may adversely impact economic growth and households’
borrowing decisions, and thus curtail retail loan growth and limit
the assets available for securitisation.

We anticipate that the share of pass-through certificates
transactions in the securitisation market will increase due to the
preferential capital treatment of simple, transparent and
comparable securitisations and the mandatory due diligence
requirement for direct assignment transactions. However, this will
also depend on whether the government clarifies its position
concerning the levy of goods and services tax on excess interest
spread

Therefore, we are cautiously optimistic about the growth of the
securitisation market.

We do not anticipate any major legislative changes for the
securitisation of standard assets in the near future; but we hope
that the Reserve Bank of India (‘RBI’) will clarify the
position with respect to covered bonds (please see question 2.5).
We also await the changes that may be implemented as part of the
proposed overhaul of the regulatory framework for the resolution of
stressed assets through asset reconstruction companies.

12 Tips and traps

12.1 What are your top tips for the smooth conclusion of
securitisations and what potential sticking points would you
highlight?

To ensure the smooth conclusion of securitisations and to ensure
recoveries for investors:

• investors should conduct thorough due diligence to verify the
  assets in the pool and determine timelines and logistics for such
  diligence, among other things; and




• the parties should also agree on commercial terms, particularly
  credit enhancement, upfront.

Some potential sticking points for securitisations are as
follows:

• the Securitisation Directions and Transfer Directions require
  transaction documents to be executed on an arm’s-length basis.
  Therefore, investors should not impose onerous obligations on the
  originator or facility providers;




• under the directions, originators can give limited
  representations and warranties for a transaction and cannot make
  representations concerning the pool’s performance. Therefore,
  investors will largely have to rely on the results of their own due
  diligence;




• the stamp duty payable in states which have a nexus to the
  transaction may be higher than what the originator is willing to
  bear. Please see question 10.1; and




• the law is still evolving in relation to certain issues, such
  as stamp duty and subordination (please see questions 10.1 and 7.9,
  respectively). Parties should enter into robust contracts which
  address all relevant aspects of Indian law. Parties should also
  ensure that they are seized of which aspects of Indian law are yet
  to be settled.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.