Securitization in India: Opportunities and Obstacles

Topics: Securitization, Asset-backed security, Collateralized debt obligation Pages: 11 (2629 words) Published: May 11, 2013
Securitization in India – Opportunities & Obstacles
A Discussion paper

V. Sridhar

PGP 2002, IIM Calcutta

Securitization in India – Opportunities & Obstacles

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Acknowledgement
I would like to thank Mr. Manoj Dengla from ICICI Structured Products Group whose valuable insights have made this paper possible. I am also thankful to Mr. Pranay Agrawal and Mr. V. Srikanth of Fractal Technologies Ltd. for narrating their securitization experience.

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Securitization in India – Opportunities & Obstacles

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Abstract
Securitization has emerged globally as an important technique for bundling assets and segregating risks into marketable securities. This paper discusses the present nascent state of the securitization market in India, its potential and attempts to identify what needs to be done by various stakeholders in this market for securitization to grow to its full potential in India.

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Securitization in India – Opportunities & Obstacles

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Table of Contents
ACKNOWLEDGEMENT................................................................................. 2 ABSTRACT................................................................................................. 3 INTRODUCTION ........................................................................................ 5 SECURITIZATION IN INDIA ....................................................................... 6 NEED FOR SECURITIZATION IN INDIA ....................................................... 6 CURRENT SECURITIZATION ACTIVITY IN INDIA......................................... 7 ASSET BACKED SECURITIES (ABS)..................................................................... 7 MORTGAGE BACKED SECURITIES (MBS, RMBS, CMBS)............................................ 8 COLLATERALIZED DEBT OBLIGATIONS (CDO, CLO, CBO) .......................................... 8 ASSET BACKED COMMERCIAL PAPER (ABCP) .......................................................... 8 THE OBSTACLES & POLICY RECOMMENDATIONS......................................... 9 LACK OF APPROPRIATE LEGISLATION .................................................................... 9 a) b) c) d) e) True Sale (Isolation from bankruptcy of the Originator).......................... 9 Tax neutral bankruptcy remote SPE .................................................... 9 Stamp Duties ................................................................................. 9 Taxation & Accounting...................................................................... 9 Eligibility.......................................................................................10

DEBT MARKET ............................................................................................10 LACK OF INVESTOR APPETITE ...........................................................................10 CONCLUSIONS ........................................................................................ 10 REFERENCES ........................................................................................... 11

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Securitization in India – Opportunities & Obstacles

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Introduction
Securitization is the process of pooling and packaging Financial Assets, usually relatively illiquid, into liquid marketable securities. Securitization allows an entity to assign (i.e. sell) its interest in a pool of financial assets (and the underlying security) to other entities. Figure 1 below presents the structure of a Collateralized Loan Obligation (CLO) 1 , a typical securitization transaction. Figure 1: Sample CLO structure. Seller/ Originator/ Servicer Obligors

(Assigns a portfolio of loans to the issuer)

Portfolio of loans Payment in case of late payments and defaults

Purchase Consideration

Debt Service payments

Collection Account

Issuer (SPV) Trust

(Purchase loan receivables from the Seller and issues securities using the loans as collateral)

Debt Service payments...

References: [1] What SEBs Owe - Out standing dues to central utilities, http://www.indiapoweronline.com/Scripts/GNT006C1.ASP?ArtID=450&CatID =1&SecID=14 [2] P.P. Vora (2001), “NHB - Promoting A Sound, Healthy, Viable And Efficient Housing Finance System”, http://www.shilpabichitra.com/v039.htm [3] Modak, Anand, (2001), “Securitization - A boon for Investors and Borrowers, Investime, September 2001”, http://www.valuemoney.com/new/sec.pdf [4] Ghosh, T P, “Innovations in asset-backed securities”, http://www.financialexpress.com/fe/daily/19990331/fex31002.html [5] Standard and Poor, “Global CBO/CLO Criteria”, http://www.standardandpoors.com/ResourceCenter/RatingsCriteria/Structure dFinance/articles/pdf/globalcboclo99.pdf [6] Notes from http://www.vinodkothari.com
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