One of the constant criticisms of the Indian financial markets has been the lack of a liquid and vibrant market for debt securities on the one hand and that for securitised instruments on the other. In separate moves announced on the same day (June 19, 2008), SEBI has sought to alleviate both these concerns.
The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 sets up the regime for issuance of debt securities by companies, public sector undertakings as well as statutory corporations, both by way of a public issue as well as on a private placement basis. Unlike in the case of equity securities, there is no requirement to file an offer document with SEBI for debt securities. Appropriate disclosures are to be filed with the stock exchanges, and they shall be displayed on the websites of the stock exchanges. Although the disclosure requirements have been seemingly simplified, they still have to comply with requirements of Schedule II of the Companies Act, 1956 (since SEBI does not have the requisite powers to alter the requirements of the Companies Act).
The SEBI (Public Offer and Listing of Securitised Debt Instruments), Regulations 2008 provides for public issue and listing of instruments that are issued by a special purpose vehicle (SPV) that purchases receives through securitisation. Although securitisation transactions have witnessed a fair level of size and regularity in the Indian markets, these were confined in the past to private transactions. Securitised debt was incapable of being listed on stock exchanges as there was some doubt as to whether it was a “security” as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA). But, that doubt was put to rest last year when the SCRA was amended to include an additional element in the definition of a ‘security’ in Section ((h)(ie) as follows:
“any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging the beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;”
Since the SCRA paved the way for creating a market for securitized debt, the recent regulations represent a step towards implementation of this regulatory intent. The Regulations set out the details of the SPV, the manner in which it can acquire receivables as well as the form of instruments it can issue. Unlike the regulations on debt securities which are more focused towards disclosures, the regulations relating to securitized debt are overarching and even govern several substantive issues pertaining to the transactions. This is perhaps explainable by the fact that the past experience of regulators the world over with securitisation markets has not entirely been positive. Securitisation, by its very nature, enables risk-holders to spread that risk over a wide array of investors (especially in the case of public offering of securitised debt), and this can result in a rapid spread of that risk among a larger group of people. This is precisely what occurred during the sub-prime crisis whereby sub-prime mortgage debt that originated in the U.S. was spread using securitisation and CDO (collateralised debt obligation) instruments.
There is considerable detail in the regulations pertaining to securitized debt, which may even warrant a separate detailed post in due course.