The Rajya Sabha on Thursday approved the Securities Contracts ( Regulation) Amendment Bill which will enable banks and financial institutions to securitise their loans, reduce risks and enhance their business portfolios by trading debt instruments in stock exchances.
The Bill, introduced in 2005, seeks to amend the definition of "Securities" in the Securities Contracts (Regulation) Act, 1956 so as to provide a legal framework for trading of securitised debt, including mortgage backed debt.
The Securities Exchange Board of India (SEBI) has been provided with powers to regulate securities trading. SEBI will soon release the disclosure norms for the trading of such instruments.
Securitisation is a form of financing involving pooling of financial assets and the issuing of securities that are re-paid from the cash flows by the assets. This is generally accomplished by actual sale of the assets to a bankruptcy remote vehicle or a special purpose vehicle (SPV), which finances the purchase through the issuance of bonds. These bonds are backed by future cash flow of the asset pool.
Currently, securitisation of mortgages and bad loans of banks is allowed but such securities are not allowed to be traded on stock exchanges. The bill also provided for vesting powers of regulation to the Securities and Exchange Board of India (SEBI).
"This will create active market with participation of banks, financial institutions, foreign institutional investors and retail investors," Finance Minister P.Chidambaram said while replying to a debate on the Bill in the Rajya Sabha.
The Indian securities will also be listed abroad and foreign investors would be able to buy the same, thus minimising the risk of original lenders enabling them to increase their business, Chidambaram said.
The most common assets for securitisation are mortgages, credit cards, auto and consumer loans, students loans corporate debt, export receivables, off-shore remittances, etc.
Besides other advantages, securitisation allows banks and financial institutions alternative forms of funding risk transfer and creating a new investor base.
It will also facilitate funding at lower cost as a result of isolating the assets from potential bankruptcy risk of the originator; and has the advantage of converting non-liquid loans or assets which cannot, be easily sold to third party investors into liquid assets or marketable securities.
In India, the securitisation market has remained underdeveloped. Despite the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act), the market has not picked up because of the absence of the facility of trading on stock exchanges,
Capital market analysts said that the potential buyers get discouraged by the possibility of having to hold the certificate or instrument in respect of securitisation transactions till maturity. This, in turn, restricts the growth of business of housing finance companies and banks.
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