Brief Overview:
Significant changes are proposed to the SEBI SDI Regulations in the recent consultation paper. A preliminary assessment suggests that the changes are more stringent and restrictive vis-à-vis the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (“RBI SSA Directions”). Unlike the previous consultation papers issued by SEBI, this consultation paper lacks in providing the rationale for the proposed amendments.
Technical Details:
Key points to make a note of for the propositions made by the working group of the Securities and Exchange Board of India (“SEBI”) for amendment to the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (“SDI Regulations”) are as follows:
1) Eligibility criteria:
(a) Single asset securitisation must be restricted and “no obligor shall have more than 25% in pool”.
This is not in line with the provisions of RBI SSA Directions which permits otherwise; that makes this proposal quite radical.
(b) The obligors and originators are required to have a track record of operations for 3 financial years for securitising such debt / receivables.
This requirement removes the possibility of having new market participants access the SDI market. While on one hand SEBI in the non-convertible debenture space is allowing new entities to access the listed markets, this proposal is not aligned with SEBI’s rationale for deepening the debt market in India.
(c) Originators and obligors must have business relations for at least 3 years to enable such debt / receivables to be securitised. In case of trade receivables, 2 cycles of payments should have lapsed and the receivables to be securitised must have same payment cycle.
While personal loans and quick loans contribute a large part of private debt, the securitisation of pools with such debt as the underlying portfolio becomes challenging. Similarly, a business usually does not have an identical payment cycle for its customer base and grouping them together for securitisation can be complex.
2) Ticket Size: The minimum ticket size of an SDI issue shall be INR 1 crore (whether regulated by RBI or not). However, if the SDIs have listed security as underlying, then the minimum ticket size should at least be the face value of such securities.
(a) Number of Investors: The offer of privately placed SDIs can be made to only 200 investors at max (in primary or secondary market). While computing 200 investors qualified institutional buyers shall be excluded.
(b) Offer Period: Public offer of SDIs to be open for a minimum of 3 days and maximum of 10 days.
(c) Minimum Risk Retention (“MRR”) and Minimum Holding Period (“MHP”): In line with the RBI SSA Directions, the originator must maintain MRR of 10% and in cases where the schedule maturity of the underlying receivables is up to 24 months, the originator must maintain MRR of 5%. MHP norms to be set out separately.
(d) Clean up call: Clean up call to be optionally available to the originator at a maximum of 10% of the original value of the underlying (in lines with the RBI SSA Directions), such that they do not serve as a mechanism to provide credit enhancement.
(e) Scope of debt/receivables: The definition of receivables / debt is proposed to be amended. Specifically and exclusively proposed to include listed debt securities and trade / rental / leasing receivables only. It also proposes to set out detailed eligibility criteria for undertaking the securitisation in addition to what is covered in point (i) above.
(f) Dematerialisation: The issue and transfer of SDIs shall be in dematerialised form only.
(g) Rights of Investors: The rights of the investors of SDI should not be varied without their consent, whether such changes adversely affect the rights of investors or not.
(h) Other Proposals: The consultation paper also proposes various other measures, such as disclosure requirements, the role of credit rating agencies, and registration on SCORES.
The consultation paper was issued by SEBI on 01st November 2024 and the same is open to accept comments until November 16, 2024.
Key Takeaway:
While the consultation paper has identified the gaps and grey areas in the SDI market faced by the market participants, some of the proposals fail to resolve the issues and make SDI more restrictive than the PTCs.
We welcome your views on the same to enable us to make our submissions more comprehensive.
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