Tuesday, September 29, 2009

Power projects face delay over profit sharing, location

Utpal Bhaskar


Three large power projects with generation
capacities of 4,000MW each face delays following
objections from state governments over issues such
as profit sharing and location.

The proposed plants in Orissa, Tamil Nadu and Chhattisgarh
are part of the Union government’s ambitious plans
to set up large power generation capacities through
its ultra mega power project (UMPP) scheme.

The government had aimed to issue requests for
qualification (RFQs) for these projects at Cheyyur
(Tamil Nadu), Bedabahal (Orissa) and Akaltara
(Chhattisgarh) in 2009-10.



Ambitious plans: Power secretary H.S. Brahma said
there were issues and added that state govts had to
cooperate to finish projects on time. PIB
“While the Tamil Nadu tourism ministry has objected
to the project site, the Orissa government wants a
sharing in the annual profits of the developers to
the tune of 5% per annum. How is this possible?”
said a senior government official.
“In the case of Akaltara, a new water reservoir
has to be built to provide water linkage to the project.
Given these problems, no UMPPs can be awarded this year.”

The official did not want to be identified.

Power secretary H.S. Brahma confirmed there were
some issues with these projects but said,
“These problems will be sorted out...
The state governments’ cooperation is
very necessary for the projects to go ahead
within a given time frame.”

UMPPs follow a competitive tariff-based bidding
in which a special purpose vehicle (SPV) is set up
to reduce risk perception and increase investor confidence.

This SPV takes care of regulatory requirements such
as land acquisition and environmental clearances
and transfers these to the winning bidder.
Each project requires an investment of Rs16,000-20,000 crore.

The UMPP scheme has had its share of problems;
projects at Girye in Maharashtra and Tadri in
Karnataka had to be abandoned due to local resistance.

Satnam Singh, chairman and managing director at
Power Finance Corp. Ltd, the nodal agency for
awarding the projects, maintained that the RFQs
would be issued in the current fiscal year.

“The RFQs will be issued in this financial year.
If some issues come up they will be resolved as
has happened in the past. There are so many
involved in the process and these issues are being
at the highest level,” Singh said.

UMPPs are critical to the Congress-led United
Progressive Alliance government’s efforts to enhance
the country’s power generation capacity to fuel the
needs of an expanding economy. Currently, India
has a power generation capacity of 150,000MW
and expects to add 78,577MW by 2012.

Of 14 such UMPPs planned, the government has
so far awarded four projects. Tata Power Co. Ltd
has won the Mundra UMPP in Gujarat and
Anil Ambani’s Reliance Power Ltd the projects
at Sasan in Madhya Pradesh, Krishnapatnam in
Andhra Pradesh and Tilaiya in Jharkhand.

“There is a struggle to move the concept beyond a
first few projects. The challenge, which is emerging
in these large projects, is that something will have
to be sacrificed to get these projects moving,” said
Gokul Chaudhri, partner at consultancy firm BMR Advisors.

“The country needs to take a decision about
what it is willing to sacrifice in its list of priorities
to get the much required power in the country.
The question is how to reach that balance?
An ideal situation that involves no environment
cost doesn’t exist,” he added.

Friday, September 25, 2009

Not Interested-Banks are flush with funds but why are they reluctant to give loans?

Shekhar Ghosh


LAST month, an Aurangabad-based engineering firm
received a query from a Thai export house about
a large consignment of alloy gaskets.

Some three years ago, a spate of similar orders
had forced the company to import brand
new machinery worth Rs 20 crore.

Almost the entire cost was borne
by bank borrowings.
Then came the slowdown in both
export orders and domestic demand:
the company has been unable to repay
even the interest on the loan every year
.


Banks need to lend the cash
out for a profit but memories
of bad loans are still fresh and
so they aren't lending
.



Instead, working capital loans have risen
further. So last month, when the owner
visited his bank for another Rs 10-crore
working capital loan for the Thai order
which would translate to a roughly Rs 30-crore profit,
the bankers refused. With the Thai economy itself
in doldrums, even the export order could not
be properly trusted. Last week, the promoter
finally informed the Thai company of his
inability to meet the order.

India's corporate backyard is currently
littered with such tales of woe.
"What's worse, you can neither blame
the bankers nor the corporates for
such cul-de-sacs,"
says the executive director
of a nationalised bank.

That there has been a slowdown
in certain sectors of the economy
is well-established. Many corporate
houses—big and small—are finding it
extremely difficult to service their debt.

At the same time, banks are flush with cash.
Deposits have been growing every month.
Over June 1997, deposits increased by
18 per cent in May this year, reaching
a whopping Rs 61,545 crore.

At the same time, bank credit to the
commercial sector is on a decline.
In May, it was only 68.5 per cent of
bank deposits. The 1997-98 bank results
are indeed a cause for worry.
While profits of 29 major banks
have jumped by over 40 per cent,
there isn't much to cheer.
The deposit growth for the banking
industry during 1997-98 was way ahead
of the growth in advances at 15.5 per cent,
according to figures released by the RBI.

Indeed, the pressure on spreads for the
banks—the difference between interest
earned on loans by banks and interest paid
on deposits—has been increasing.

In all cases, spreads declined last fiscal
year or, at best, remained stagnant as banks
competed to attract short-term deposits.
By reducing the interest rates and the
cash reserve ratio, the RBI has put
further pressure on banks.

They had to slash lending rates
following an increase in liquidity,
but could not reduce deposit rates for
fear of losing customers.


Says Rajiv Verma, banking analyst
at W.I. Carr:
"The structure of Indian banking is such
that spreads come under pressure when
the rates drop. SBI has been the most
vulnerable in this matter because of
the large proportion of long-term deposits
which it has not been able to re-price,
despite falling lending rates."

It's a strange situation: top-rated companies
can easily borrow from banks, but they have
access to even cheaper alternatives like external
commercial borrowings (ECBs),

private placement and commercial paper,
while small and medium-sized corporates
which need funds most are starved of resources.

These corporates attribute stringent pre-disbursement
conditions set by the financial institutions to be
largely responsible for their inability to get funds
against even those loans that are already sanctioned.


Some banks and institutions also demand promoter's
contribution upto 75 per cent of the project cost.
"If we had that kind of money, we wouldn't
need any loans," says a victim promoter.

The bankers, in turn, blame the history of India's
smaller companies. Explains a consultant to a leading
private bank:
"Several companies had overstretched
their capacities expecting a higher rate of economic
growth.

More pertinently, they raised huge
amounts from stockmarkets and banks
to put up large projects.

Many smaller and midsize companies took
the investing public for a ride during the
primary market boom. Promoters are known to
have run away. It would be worse if the
banks did not ensure their commitment."

Today when the bottom has fallen out of
the stockmarket and over 3,000 companies
are trading below or at par, the investing
public is finding it safer to put their money
in banks and earn between 8 and 10 per cent rate
of interest. That's why deposits are growing so fast.

Banks need to lend this cash out to make
a profit, but memories of all those bad
loans are still fresh. And blue-chip companies
with high credit ratings cannot use all the
funds available with the banks either due to the
recessionary environment or because they are
already cash-rich.

Banks are now trying to find novel modes
of investment for their surplus cash.
For instance, overseas money markets,
where returns from short-term instruments
are at least 150-200 basis points (1.5 to 2 per cent)
higher than those on similar domestic instruments.

But as per RBI guidelines, banks can only deploy
funds to the extent of their nostro limits
(non-resident deposits plus the overseas investment
limits which is 15 per cent of the banks'
net worth or US $10 million, whichever is higher).


Says S. Gopalkrishnan, executive director of Bank of India
:
"To take advantage of the integration of money,
forex and gilt markets, we have started an
integrated treasury branch. We are also taking
steps to integrate the bank's dealing room worldwide
to have a global treasury in Mumbai."

The government is not unaware of the problems.
One way it is trying to tackle the situation
is by giving banks far greater freedom.


Says K. Kannan,
chairman-cum-managing director
of Bank of Baroda:


"To cut down on bad debts and for the recovery
of loans, the RBI has decided to offer banks a
broad set of directives within which they can
determine an approach for recovery of overdue
loans best suited for the bank."


The finance ministry
has already
clarified that there will be no end-use
restrictions on banks wishing to invest
in bonds floated by companies,
even if they are meant for takeover
of companies. Several mergers and
takeovers may now be initiated by banks
themselves.

For example, several mid-size cement
companies which are unable to pay off
their loans are almost expecting their
banks to find a white knight for them.

"Such need-based merger activities prompted
by Indian banks might yet become a trend,
" says Anand Vasudevan, banking analyst
at UTI Securities.


The SBI has also launched the
"general purpose corporate loan",
a normal banking procedure in developed
markets. It has cleared a Rs 200-crore
seven-year loan to ITC for which the end
use is not specified. The interest charged
on such loans will be higher than normal
term loans. However, analysts fear that
even if this becomes a trend, such loans
will only be given to bluest of the blue chips.

This won't solve the problems of the mid-cap
and smaller corporates. Having realised that
the small-scale sector was the worst hit by
the tightening of bank's credit, the RBI had
set up a one-man high-level committee headed
by S.L. Kapur, former secretary in the industry ministry,
to suggest steps for improving the delivery
system and simplification of procedures for
credit to SSIs. While the committee submitted
its report to the RBI on June 30, it was only
last week that the RBI accepted 35 of its
126 recommendations.

Bank branch managers will now have more
power to grant ad hoc limits, and banks
will now be free to decide their own norms
for assessment of credit requirements.


Loan limits have also been raised—application
forms prescribed for loans up to Rs 2 lakh
can now be used for Rs 10 lakh loans and
those for Rs 50 lakh and more can now be used
to ask a loan up to Rs 2 crore.

The central bank has also asked banks to
delegate powers to branch managers to grant
ad hoc facilities to the extent of 20 per cent
of the limits sanctioned.

The most important part of the
recommendations, however, is RBI's circular
to the banks that the flow of credit to SSIs
will now be assessed by using data on
disbursement rather than outstanding balances.

Banks have, therefore, been advised to shore
up their disbursement targets along with their
outstanding balances.

Will all this be enough?


Some are sceptical. For example,
M.S. Verma, chairman, SBI,
who says banking in India in the next
millennium will be very different
from what we have been used to till now:

"By changing procedures and interest rates,
we might get some incremental advantage.
To change the growth rate, we have to
look at strategic issues rather than
procedural ones."

In other words,
response of a totally different order.

by: DRT-India
bankfinance555@gmail.com

Fitch Rates Series C PTCs to be issued by CLSS XXXVII Trust 2006

Fitch Ratings has assigned an expected rating of
'F1+(ind)(SO)' to Series C Pass Through Certificates
(PTCs), to be issued by an SPV called Corporate
Loan Securitisation Series XXXVII Trust 2006.
The transaction is a securitisation of receivables
from a term loan maturing on 22 September 2010.


The PTCs' expected rating reflects the credit quality
of the underlying obligor, Shriram Transport Finance Co. Ltd.
(STFCL or "the obligor"), the payment structure of the PTCs
and the legal and financial structure of the transaction.

The expected rating addresses the timely payments of
interest and of principal by the final maturity date
of 23 September 2010, in accordance with the transaction documentation.

The SPV purchased the receivables from Kotak Mahindra
Prime Limited (KMPL or "the originator" or "the seller")
in trust for the benefit of the PTC investors.

The SPV proposes to issue Series C PTCs for a
total consideration equivalent to the value of
the discounted cash flows from the loan, which
will be utilised for the repayment of Series
B PTCs issued earlier.

The loan aggregates to INR750m and is extended by
KMPL to STFCL. The rating of the PTCs is directly
linked to the rating of the underlying obligor,
STFCL, for which Fitch maintains a Short-term
rating of 'F1+(ind)'.

The final rating is contingent upon receipt of
final documents conforming to information already received.

A presale report for this transaction will be
available shortly on Fitch's website, www.fitchindia.com.

Note to editors: Fitch's National ratings provide
a relative measure of creditworthiness for rated
entities in countries with relatively low international
sovereign ratings and where there is demand for such
ratings. The best risk within a country is rated 'AAA'
and other credits are rated only relative to this risk.

National ratings are designed for use mainly by local
investors in local markets and are signified by the
addition of an identifier for the country concerned,
such as 'AAA(ind)' for National ratings in India.

Specific letter grades are not therefore
internationally comparable.

Fitch Ratings currently maintains coverage
of approximately 6,000 financial institutions,
including over 3,200 banks and 2,200 insurance
companies. Finance & leasing companies,
broker-dealers, asset managers, managed funds,
and covered bonds make up the remainder of Fitch Ratings’
financial institution coverage universe.

Fitch India has Five rating offices located at Mumbai,
Delhi, Chennai, Kolkata and Bangalore. Fitch is recognised
by Reserve Bank of India, Securities Exchange Board of India
(SEBI) and National Housing Bank.

Chapter 7 of Securitization Act

Date: 29 Dec 1999

Chapter 7 - Special Purpose Vehicle

7.1 Concept

Securitisation offers higher quality assets to investors by virtue of the fact that the structures insulate investors from the bankruptcy risk of the Originator. In order to ensure that the assets actually achieve the bankruptcy remoteness, it is essential to move them out of the balance sheet of the Originator and park them with another independent entity. Typically an SPV is employed to purchase the assets from the Originator and issue securities against these assets. Such a structure provides a comfort to the investors that they are investing in a pool of assets which is held on their behalf only by the SPV and which is not subject to any subsequent deterioration in the credit quality of the Originator. The SPV is usually a thinly capitalised vehicle whose ownership and management are independent of the Originator. The main objective of SPV is to distinguish the instrument from the Originator.


7.2 SPVs in other Countries


7.2.1 U.S.A.

The US market, which is home to 75% or more of the global securitisation volumes, shows clear

division between the MBS & ABS issuance. The MBS market has been subject to successive

transformations and presently the three institutions (Fannie Mae, Freddie Mac and Ginnie Mae) act as the principal intermediaries in the market inas much as they perform the activity of purchasing mortgages from home loan Originators and selling MBS. Based upon the same, their role could be likened to those of SPVs. However, over a period of time, these institutions have matured and assumed a greater role in the secondary mortgage market. Both Freddie Mac and Fannie Mae deal overwhelmingly in pools of conventional (i.e. not Federally insured) mortgages. In sharp contrast, Ginnie Mae deals only in Federally insured mortgages. However, all three agencies guarantee their issues against default losses. Government sponsorship of Fannie Mae and Freddie Mac contributed significantly to enlarge these institutions role beyond mere conduits and helped them to become dominant institutions in the residential mortgage market. It was felt that investors would prefer to receive regular payments of principal and interest whether or not the same is collected from the Obligors even though a 100% guaranteed paper would imply lower interest yield. It thus became important for Fannie Mae and others to take on the additional role of guaranteeing the issuance being routed through them. In short, the secondary market scenario even in the most developed markets like the US is characterised by Governmental / regulatory patronage and guarantees. Consequently the securitisation SPV in this segment of the market also displays characteristics which are typical of State facilitation and encouragement. More details of these institutions are given in Chapter 6.


7.2.2 Argentina

a. SPVs generally take legal forms of Mutual Funds (MFs), trusts or corporations etc. According to the Trust law in Argentina, a trust (similar to SPV) is established when a person (the trustor)

transfers the ownership in trust of certain assets to another person (the trustee) who must

'manage' the assets for the benefit of the party specified in the trust agreement (the beneficiary),

and transfer the trust property upon termination of the trust to the trustor or the beneficiary. The

Trust law states that the property transferred in trust constitutes a separate estate from that of

either the trustor or the trustee. Further, the trust property is exempt from any claims of the

trustee’s creditors and, except in the case of fraud, the trustor’s creditors. The obligations of the

trust may only be satisfied from the trust property.


b. The trustee is a financial institution or an entity authorised by the CNV (similar to SEBI in India) to act as financial trustee and the beneficiaries are the holders of certificates of participation in the trust property (‘certificates') or the debt instruments guaranteed by the trust property (‘debt instruments').


c. Financial trustees may be financial entities authorised under Argentine law, entities registered in the Register of Financial trustees held by CNV and the financial institutions chartered by the

Central Bank of the Argentine Republic. In order to be included in the Register of Financial

Trustees, an entity must be a corporation or, in the case of foreign company, must have a

branch or other form of representation in Argentina; its legal purpose must include serving as a

trustee; it must have a net worth of at least 100,000 pesos; and it must have an adequate

administrative organisation to perform its duties as financial trustees, although administrative

services may be contracted out.


d. Further:

_ The trust agreement may not release the trustee or its employees from its responsibility for acts

of negligence and wilful misconduct nor from the prohibition on its acquiring assets held by the

trust. Upon or after signing the trust agreement, and in accordance with its terms, the trustee will

be the transferee of the assets or rights which are the subject of securitisation and as of that

moment, the trustee will be endowed with title, in trust, to the rights to such principal, interest

fees, collateral security etc., which title and rights may not be challenged by third parties if the

transfer and the registration are carried out in accordance with the formalities required by the

applicable law.

_ The portfolio of loans that may be transferred and held by a trustee will at no time be considered

part of the trustee’s assets for bankruptcy or other purposes.

More details are given in Chapter 6.


7.2.3 Morocco

(a) In Morocco, the SPVs can be (i) institutional investors in debt or (ii) other entities which are

governed by the legislative or regulatory systems of either Morocco or other foreign countries.

The SPV is a separate and autonomous body and has the capacity of a natural person. All its

functions are administered by its management depository institution, akin to asset management

company (AMC) in India. It has been considered advisable that for each securitisation operation

by an Originator, a separate SPV is created exclusively for that operation, although an AMC

may be founder and manager of more than one SPV provided that appropriate, precautionary

measures are put in place and described in the relevant administrative rules to prevent conflicts

of interest and the mixing of funds.


(b) Rules of formation of SPV

The minimum framework of rules within which the SPV is founded has been specified in

the Act covering the duration of the SPV, particulars of its AMC and the financial

intermediary, a description of the planned securitisation operation, nature of assets to be

transferred to it, minimum and maximum amounts of intended issue, frequency and

nature of mandatory information to be provided to its investors, procedures for meetings

with its investors, dissolution of the SPV, etc. As a result of its exclusive purpose for

securitisation operation, an SPV cannot undertake any activity or assume any

responsibilities other than those prescribed in the rules of its formation.


(c) Minimum disclosure norms

The Act specifies that the rules of formation of the SPV must include the frequency and

the nature of mandatory information to be provided to the investors. Any Originator

holding or acquiring direct or indirect interest in the AMC must disclose the fact in the

rules of the SPV and the information to be furnished to the investors. The AMCs are

required to furnish a copy of the annual report on the SPV and if required by the rules at a

greater frequency, duly certified by an auditor.


(d) Separation from the assets of its Originator and AMC

The transfer of the receivables is absolute and cannot be cancelled for any reason even if

the Originator becomes insolvent or enters liquidation. The receivables once transferred

to the SPV are to be removed from the balance sheet of the Originator. Further, there is

no guarantee from the Originator about the solvency of the debtors. All its assets are

separate from those of the Originator, its management depository institution and its

share/bonds holders.


(e) The SPV is required to follow the accounting rules approved by Government in consultation

with National Accounting Council or failing this, those, which are in conformity with the

accounting rules generally accepted in Morocco. The auditor has been assigned a permanent

role in the auditing of the books of the SPV, verification of the consistency and the authenticity of its accounts as also the information related to its financial position prior to its being released.


7.3 SPV in the Indian context


7.3.1 In India too, Originator should have the same flexibility in choosing an appropriate legal structure for the SPV based on its individual requirements whether in form of a company, trust (with or without a company as a trustee), MF, a statutory corporation, a society, firm, etc., in short all possible forms of a business entity that is capable of being formed. Consequently, the provisions of the parent law for incorporation of such entity, i.e., the Companies Act, Trust Act, the Partnership Act, etc. will apply to the formation of such SPVs.


7.3.2 While different forms of SPVs have evolved in various markets, Indian mortgage sector has taken cues from the US market. The securitisation SPV assumes a character different from a mere conduit in US. NHB has now taken upon itself the role similar to that being performed by Fannie Mae and Freddie Mac in the US. NHB is presently engaged in bringing to the market its pilot issue of MBS backed by mortgage pool of four Housing Finance Companies. The pilot issue has been under discussion for two years now and currently the structure and the modalities are being finalised by NHB. Based upon the experience of the issue, NHB is likely to take a longer view of what role it needs to play to give a fillip to the secondary mortgage market in India. Other players in the housing market like commercial banks, HUDCO, State housing boards etc. may also desire to participate in the secondary mortgages market as Originator or SPV or ancillary service providers. For this segment of the market, as well as the segment relating to issuance of ABSs, certain other kinds of SPVs would develop over a period of time.


7.4 Key features desired in an ideal SPV


7.4.1 Based upon the international practices as discussed in para 7.2 above, the WG came to the

conclusion that an SPV should, therefore, satisfy the following key characteristics:


a. An SPV must be capable of acquiring, holding and disposing of assets.

b. It would be an entity, which would undertake only the activity of asset securitisation and no

other activity.

c. An SPV must be bankruptcy remote i.e. the bankruptcy of Originator should not affect the

interests of holders of instruments issued by SPV.

d. An SPV must be bankruptcy proof. i.e. it should not be capable of being taken into bankruptcy

in the event of any inability to service the securitised paper issued by it.

e. An SPV must have an identity totally distinct from that of its promoters/ sponsors/ constituents/

shareholders. Its creditors cannot obtain satisfaction from them.

f. The investors must have undivided interest in the underlying asset (as distinguished from an

interest in the SPV which is a mere conduit).

g. A SPV must be tax neutral i.e. there should be no additional tax liability or double taxation on

the transaction on account of the SPV acting as a conduit.

h. A SPV must have the capability of housing multiple securitisation. However, SPV must take

precaution to avoid co-mingling of assets of multiple securitisation. In case of transactions

involving various kinds of assets, they should restrict the rights of investors to the specific pool.

i. The SPV agreement may not release its employees or trustees from their responsibility for acts

of negligence and a wilful misconduct.


7.4.2 Instrument issued by the an SPV should have the following characteristics:

a. Be capable of being offered to the public or private placement.

b. Permit free or restricted transferability.

c. Permit issuance of pass through or pay through Securities.

d. Represent the amounts invested and the undivided interest or share in the assets (and should

not constitute debt of SPV or the Originator).

e. Be capable of being classified as senior / subordinate by differentiation in ranking of security or in receiving payments.

f. May be issued in bearer form or registered in the holder’s name, may or may not be endorsable

and may be issued in definitive form or book entry form.


7.4.3 Bankruptcy-remoteness and insolvency laws

Standard and Poor's has developed the following the 'Special Purpose Entity' criteria which a SPV should satisfy to be deemed as bankruptcy-remote.:

_ Restrictions on objects and powers : The purpose of this restriction is to reduce the SPV's

internal risk of insolvency due to claims created by activities unrelated to the securitised assets

and issuance of rated securities.

_ Debt limitations: An SPV should be restricted from issuing other debt except in circumstances

those are consistent with the rated issuance.

_ Independent director: Interlocking directorates between the Directors of the SPV and that of its

parent present a potential conflict of interest. If the parent becomes insolvent in a situation

where the SPV is performing adequately, there may be an incentive for the parent entity to

voluntarily file the SPV into bankruptcy and consolidate its assets with those of the parent. If the

SPV has at least one director who is independent from the parent and this director's vote is

required in any board action seeking bankruptcy protection for the SPV, the SPV is unlikely to

voluntarily file an insolvency petition.

_ No merger or reorganisation: This requirement ensures that, while the rated securities are

outstanding, the bankruptcy-remoteness of the SPV will not be undermined by nay merger or

consolidation with a non-SPV or any reorganisation, dissolution, liquidation, or asset sale.

_ Separateness: Separateness covenants are designed to ensure that the SPV holds itself out to

the world as an independent entity, on the theory that if an entity does not act as if it had an

independent existence, a court may use principles of piercing the corporate veil, alter ego, or

substantive consolidation to bring the SPV and its assets into the parent's bankruptcy

proceedings.

_ Security interests over assets: A debt security interest opinion is generally required that the

issuing SPV can grant a security interest over its assets to the holders of the rated securities.

This element helps in reaching the analytic conclusion that an issuer is in fact an SPV by

reducing the incentives of the parent to involuntarily file the entity. By reducing the practical

benefit of insolvency filing, the likelihood of voluntary insolvency is decreased.

Each of these characteristics is important to the overall concept of bankruptcy remoteness and

regardless of the specific organizational structure of the SPV, these elements should, generally, be treated in the relevant organisational documents. Such an SPV is regarded as being sufficiently protected against both voluntary and involuntary insolvency risks.


7.5 Company, Trust or MF

Reforms may be necessary in essence to establish that an SPV irrespective of its form meets the

desired objectives and has the desired characteristics. While three forms of enterprise namely,

company, trust and MF have been examined in the following table, the examination is not by any

means conclusive of all of the difficulties that may be encountered in the event one is desirous of

utilising such business enterprise as an SPV.


7.6 Company as a SPV


Structuring the SPV as a Company under the Companies Act, 1956, has certain legal and regulatory issues as well as entity level taxation issues.


7.6.1 Bankruptcy Proof

A company formed under the Companies Act, 1956 cannot be bankruptcy proof since the Court under Section 433 of the Companies Act can wind it up. Under Section 434 of the Companies Act, a company shall be deemed to have been unable to pay its debts if a creditor to whom the company is indebted to the extent of Rs 500 has served a notice for payment of the sum and the company does not pay the sum payable within 3 weeks from receipt of such notice or secure the debt or compound the same to the satisfaction of the creditor.


7.6.2 The SPV will leave itself open to a winding up for nonpayment of a sum as little as Rs 500.

Keeping in mind that one of the essential factors of an SPV established for the purpose of

securitisation is that the SPV should be bankruptcy proof; a Company may not fulfil the requirement. Upon the company issuing a debt instrument or raising any money in the form of debt, the company leaves itself open to bankruptcy suits.


7.6.3 However, a Company as SPV can remain bankruptcy remote if there is true sale from Originator of SPV.


7.6.4 Instruments that can be issued by the SPV

Characteristics of instruments that can be issued by a Company are set out below:


i. Shares :

Shares may be equity or preference shares.

Equity Shares:

A public company set up for securitisation purposes issuing equity shares will be a single transaction vehicle. Other conditions such as transferability, stamping etc are the same as for preference shares.

Preference Shares:

Allows for the SPV to be a multiple transaction SPV. However, linking returns (i.e. dividends) to a particular asset pool might present practical problems. Also, while the Companies Act allows (by implication) differential dividends on different classes of preference shares, it is not clear whether this encompasses linking dividends on each class to different sources of profits.

Transferability and Tradability

The shares are marketable if listed. Hence, the transfer and marketability would be dependent on whether the shares are listed or unlisted. Shares can also be traded privately.

Stamp Duty on Issue

This is a State subject.

Stamp Duty on Transfer

This is a Central Subject and is charged at 0.75%.


ii. Debentures :

Transferability and Tradability

The debentures are marketable if listed. Hence, the transfer and marketability would be dependent on whether the debentures are listed or unlisted. Debentures can also be traded privately.

Stamp Duty on Issue

Stamp duty is as specified by the Central Government. It is an ad valorem levy and the duties vary depending on the mode of transfer (whether by endorsement/ separate instrument of transfer or by delivery).

Stamp Duty on Transfer

It is a state subject.


(iii) Other Instruments:

To ensure that the Company is bankruptcy proof, the instrument issued by it should not impose an unconditional liability on it to repay the debt irrespective of the realisations from the underlying assets.

Tax efficiency

A Company is subject to entity level taxation and the income generated by a company is subject to tax. This would increase the cost of securitisation and the transaction would not be cost effective. The nature of the SPV is such that it merely houses the receivables and issues papers for investors. In order to achieve this and to make the paper/ instrument attractive to the ultimate investor it is important that there is no tax burden on the SPV.


7.6.5 Recommended Reforms for an SPV in form of a Company

_ An SPV as a Company should be able to issue a new class of instrument viz. the PTC that is

repaid only from the performance of the identified assets held by it for the benefit of the

investors in the PTC – this would prevent structural bankruptcy.

_ This new class of instrument should not be treated as debt obligation of the SPV, but one

representing an undivided interest of the investor in the underlying asset.

_ The instruments are to be issued against a specified pool of assets. Thus multiple securitisation

transactions can be handled since instruments can be issued against separate sets of assets.

_ The Company should not be subject to the NBFC registration norms as specified by the RBI.

Instead, RBI may consider some other form of regulation of the SPVs.

_ In the long run, such SPV companies should be declared to be exempt from entity level

taxation.


7.7 Trust of which a Company is a Trustee (Trustee Company as SPV)

7.7.1 The Trustee Company is similar to a Trust with only the role of the Trustee being undertaken by a Company. With individuals becoming increasingly averse from acting as Trustees (as is happening in the case of MFs), a Company may act as the Trustee and issue the PTCs to the investors.


7.7.2 Characteristics of the Trustee Company

_ A Company under the Companies Act, 1956 which would act as the SPV.

_ It would acquire the receivables by assignment from the Originator and hold them in its capacity as Trustee.

_ The Trust Deed should ensure that the Company can act as the Trustee and also hold in Trust

separate tranches of receivables pertaining to different transactions

_ The SPV/Trustee are not liable for the good performance of the assets.

_ The administration of the SPV's assets for any transaction may be subcontracted back to the

Originator or to any other servicer through an Administration Agreement describing the different

tasks to be performed by the Originator (in it's capacity as Administrator).


7.7.3 The framework of the Trustee Company would be as in the case of a MF Trustee Company. The security issued by the SPV i.e. the PTC would not be a debt obligation of the Trustee Company. The PTCs would constitute certificates notifying ownership on the pool of the assets/receivables being securitised.


7.7.4 A PTC ideally represents a declaration of interest in a pool of assets transferable when a

beneficiary changes. The Trust through the Trustees will recognise the change in the beneficiary by endorsing the PTCs. There is no transfer of ownership interest from the Trust, as it would continue to hold the securities in trust for the changing beneficiaries represented as a class.


7.7.5 The PTC would not be treated as a re-assignment of receivables as there is no transfer of

property interest from the Trustee to the PTC holder. The Trustee always holds the property for the beneficiaries from inception of the Trust and never sells or reassigns the interest, as the Trust never dissolves. As there is no assignment of interest at the stage of issuance of PTC, there is no reassignment when the PTC holder changes.


7.7.6 For each securitisation transaction routed through the Trustee company there would be a

Declaration of Trust made separately for each pool of receivables. An information memorandum would be drawn up in each instance. It is similar to a MF scheme where the terms of the scheme and the benefits of the unit holders are specifically described and assigned for each scheme.


7.7.7 Recommended reforms for the SPV in the form of a Trustee Company

_ There is lack of clarity as to whether securities issued by a trust are capable of being listed on a

stock exchange. At present, MFs are the only trusts, which have been specifically empowered to issue such securities. SEBI could be requested to recognise such trustee companies and permit them to issue marketable securities as has been done for MF units.

_ Trustee owned assets would be normally treated, as distinct from company owned assets.

However, a clarification from tax authorities that such SPV trustee companies would enjoy a tax

shield may be necessary.


7.8 MF AS SPV


7.8.1 A MF is legally and factually a trust, being administered by a Trustee Company or a Board of Trustees, and whose assets for each scheme are managed by a separate Asset Management

Company (AMC). As discussed above, while examining the trustee company concept, a MF is an existing and established legal structure, which conforms, in general, to the requirements of a

securitisation SPV.


7.8.2 The schemes established by a MF are independent of one another. Separate maintenance of

accounts of each scheme is required. Further, the unitholders of each scheme are owners of undivided beneficial interest in the assets of the Scheme.


7.8.3 Unless it is an assured return scheme, the Unit holders are only entitled to receive such

dividends as may be declared by the AMC or the trustees. Further, in case of loss of initial investment (unit capital), the loss devolves on the investors.


7.8.4 A MF possesses most of the characteristics desirable for a securitisation SPV, namely:

_ MFs are structured as trusts under the Indian Trusts Act, 1882. This gives them the flexibility to issue units under different schemes, and keep the funds raised under schemes (and

consequently the rights of investors in different schemes) distinct from each other.

_ MFs are permitted to issue marketable securities. While normal trusts (i.e., those that are not

registered with SEBI as MFs) can borrow funds, it is unclear whether they can raise money by

issuing marketable securities i.e. it has not been experimented so far.

_ The income earned by MFs is exempt from tax under sec 10(23D) of the Income Tax Act, 1961.


9. Further recommendations for different forms of SPV


7.9.1 Company as SPV:

Applicability of NBFC Directions

If the SPV for asset securitisation is set up as a joint stock company under Companies Act, the

activities undertaken by the SPV would appear similar to those of an investment or loan company and the following issues would arise. However, as explained later, the SPV in effect would only be undertaking an activity akin to trading in debt.


i. It would require registration with RBI under Section 45-IA of the RBI Act and it should have the statutorily prescribed minimum capital funds and the present requirement is Rs. 200 lakh for a new company and this may not be possible. However, in view of the fact that it would be a

company which would undertake only the activity of asset securitisation and no other activity, all the companies incorporated for the purpose could be treated as a class of companies and would be regulated by one or the other Regulatory Authority viz. RBI or SEBI. The Reserve Bank of India in exercise of its powers under section 45NC of the RBI Act could exempt all such companies from the applicability of core provisions of RBI Act as has been done in case of the Stock Broking Companies.


ii. The SPV raises funds through issue of Pass Through Certificates or Pay Through Certificates

(PTCs) and such monies may or may not be treated as public deposits. If so, the SPV would be

governed by the comprehensive regulatory framework like capital adequacy requirement,

credit/investment concentration norms. However, the FIs proposing to securitise their asset

portfolio may transfer beneficial interest on assets in favour of the SPV, which in turn issues

PTC against the backing of assets / future cash flows from these assets. Therefore, PTCs could

be treated as a secured instrument and the NBFC Directions should not be applicable. The

debentures/bonds, which are fully secured by the assets of the company in respect of which a

charge has been created in favour of the trustees for such debenture holders/bond holders, are

exempted from the description of public deposits. On the other hand, if the PTCs were treated

as near to equity, the NBFC Directions would not cover them because raising of money by

contribution to capital is exempt from the definition of deposit.


iii. If the SPV company is floated by an NBFC as the Originator, it could be reckoned as a

company in the same group or its subsidiary and the Net Owned Fund of the Originator NBFC

would be severely affected because of the exposure to the group companies. The SPVs

promoted for infrastructure development are presently facing the same difficulties. This is a

larger issue and the Originators should have an arm length relationship with the SPVs promoted

by them and should not have more than the substantial interest. Alternatively, in order to give

encouragement to the NBFCs to promote SPVs for the purpose of asset securitisation, RBI

would also need to clarify that such SPVs will not be treated as the companies/entities in the

same group/subsidiaries of the Originator NBFC because it would have no beneficial interest in

the SPV except to the extent of its shareholding or the investments made in the instruments

issued by the SPV. It would encourage the NBFCs to promote the SPVs without an adverse

impact on their Net Owned Fund.


iv. If the SPV company were promoted by a bank, it would require prior approval of RBI under the B. R. Act, 1949 for investing more than 30 percent of the paid up capital of the bank or the

investee company. The banks could, however, own less than 30 per cent of the equity of the

SPV and float the company in association with other financial institutions.


7.9.2 Trust as SPV:

An option that could be examined is the exercise of inherent powers of the Government of India under the Constitution of India and the Government of India Act, 1935, to notify a requisite scheme (akin to the SEBI (MF) Regulations, 1996, under which securitised paper can be issued by a trust established for the purposes of securitisation. Similar steps have been taken in the past by the Government of India, e.g., the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts Mechanism) Scheme, 1993. The Government of India could under such scheme/regulations (for issue of securitised debt receipts through the securitisation fund) designate an appropriate authority for administration of the scheme/regulations.


7.9.3 MF as SPV

The MF in its current form, however, cannot be used to perform the role of a securitisation SPV due to the following reasons:


_ A MF cannot buy into assets and actionable claims. The entire SEBI (MF) Regulations mention only ‘security’ – whether it is in the context of the role of the AMC or in the accounting and valuations aspects.

_ The existing set of regulations includes, to a large extent, directives that are vital to normal MFs but redundant as far as securitisation SPVs are concerned. The amendment of every clause of the existing regulations to encompass all the activities of the SPV would be a laborious task

since the entire spirit and focus of the MF regulations is on regulating activities very different in

nature from that of a securitisation SPV. Re-writing a fresh set of regulations for securitisation

might prove to be less cumbersome and easier to understand.


7.9.4 Unincorporated bodies (Partnership firm/ society, etc. as SPV - applicability of NBFC guidelines


a. In view of the fact that securitisation is a financial activity, the unincorporated body (i.e.,

individual, firm, HUF, association of persons) undertaking such activity would be deemed to be

engaged in financial business and the provisions of Chapter III C of the Reserve Bank of India

Act, 1934 would be attracted to such activities. The unincorporated entity is, inter alia, not

allowed to raise deposits from other than the relatives and institutions specified in the Reserve

Bank of India Act, 1934.


b. The bonds, debentures or any other instruments near to equity can be raised only by joint stock

companies. The unincorporated entities can, therefore, issue only the PTCs. In so far as they

issue PTCs to the specified institutions, viz., FIs, statutory corporations, cooperative societies,

companies incorporated under the Companies Act 1956 etc., these borrowings or moneys

received through issue of PTCs would be exempt from the purview of ‘deposits’ and to that

extent these entities could act, unhindered, as SPV for issuing securitised papers. In the usual

course, initially, the investors are the institutions or corporates only, and the provisions of

Chapter III C of the Reserve Bank of India Act, 1934 would not be attracted. There could,

however, be instances of unincorporated entities acquiring the PTCs by their purchase in the

secondary market. The situation emanating therefrom could be unintended by the issuers and

could be an aberration. These should therefore be ignored for the purpose of compliance with

the Reserve Bank of India Act, 1934.


c. There are no regulations on the unincorporated bodies investing in the securitised papers. They

can acquire hold, transfer, purchase, repurchase etc., in the usual course of their business and

subject to the compliance to the other applicable statutes.

The observations will also apply to SPV as a Trust or MF.


7.9.5 Further, the Working Group discussed whether SPV should be one time entity (transaction

specific) or an on-going entity. It was also suggested that a few SPVs might cater to the needs of

particular industry and thus acquire specialisation in securitising assets pertaining to a given sector of economy. Another view was that the co-mingling of asset pools from various Originators might not be an appropriate strategy till the system stabilises. The day to day functions of SPV may be performed by an administrator / servicer for a fee.


7.10 Conclusion


7.10.1 The fact remains that the MF is the closest available existing and regulated entity, which carries out an activity similar to securitisation. While it may not be feasible to accommodate the spirit of securitisation in its entirety within the MF Regulations, SEBI could be prevailed upon to frame a suitable set of guidelines for regulating the securitisation activity on the lines of the MF Regulations. A point to note is the recent issuance of Guidelines for collective investment schemes, which again have many aspects in common with securitisation schemes. SEBI’s experience in handling similar legal structures involving aggregation of investments (public or private) would help the activity arrive in market in a regulated form.


7.10.2 While the SPV would be incorporated & registered as an entity under its parent legislation, for e.g., a company would be registered with the Registrar o companies; for such a Company to engage in the activity of public issuance of securities, it may be desirable for the entity to be registered with the capital market regulator also. This may be kept in view by SEBI while framing the guidelines for regulating the securitisation activity.


7.10.3 For securitisation to realise its true potential in the infrastructure / housing and other capital deficient sectors, widespread participation in securitisation schemes is highly desirable and should be encouraged. SPV should therefore be capable of issuance of securities to a large variety of investors. The concerns relating to investor protection will be adequately taken care of by the capital market regulator.


7.10.4 Since investor participation in securitised paper will be from both the private placement markets as well as by public issuance, it is desirable that both the activities are regulated from a common point. This is particularly so in view of:

_ Common set of guidelines which will rule out duplicity of regulations.

_ The informed investor i.e. FIs/mutual funds, etc. will help the activity take off initially by

subscribing to the scheme. Other investors like pension funds, insurance companies, etc can

gain confidence and participate through the secondary market.

_ Likely widening of the potential investor base right from inception in view of the above.


by: bankfinance555@gmail.com