SEBI Proposes Key Changes To Securitised Debt Instrument Rules To Boost Market Growth

Markets regulator Securities and Exchange Board of India (SEBI) has put out a consultation paper proposing several amendments to the rules governing securitised debt instruments (SDIs).

The changes are largely aimed at bringing SEBI's framework in line with the Reserve Bank of India's (RBI) 2021 directions on securitisation, and to remove hurdles that have held back the growth of India's listed securitisation market.

Public comments on the proposals have been invited till May 25.

What Is Securitisation?

In simple terms, securitisation is the process where a lender, say, a bank or a financial institution, bundles together a group of loans or receivables and sells them to investors as a financial instrument.

The entity that originally creates these loans is called the originator, and the vehicle used to hold and transfer these assets is called a Special Purpose Distinct Entity (SPDE).

What SEBI Is Proposing

One of the key proposals is allowing single-asset securitisation for entities regulated by the RBI. Currently, SEBI's rules say no single borrower can account for more than 25% of the asset pool, a rule designed to prevent concentration risk. But this has effectively blocked the listing of instruments backed by a single asset, even though the RBI permits such structures. SEBI has now proposed exempting RBI-regulated entities from this restriction.

SEBI has also proposed removing the bar on securitisation transactions between an originator and an SPDE from the same group, again only where the originator is regulated by the RBI. The RBI's own framework does not prohibit this, as long as the originator does not exercise control over the SPDE or its trustee.

Changes To Trustee Rules

Under the current framework, if a trustee's registration is suspended or cancelled, the securitisation scheme has to be wound up entirely. SEBI has proposed replacing this with a simpler solution to just appoint a new trustee instead. This change removes a rule that sat awkwardly alongside RBI regulations, which do not allow such transactions to be unwound.

On governance, SEBI has suggested that where the originator is an RBI-regulated entity, it should have no more than one representative on the SPDE's board, and that person should not hold veto powers.

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Who Handles Disclosures?

Currently, the originator is responsible for periodic disclosures on how the underlying asset pool is performing. SEBI has proposed shifting this responsibility to the servicer, the entity that actually handles the collection and monitoring of repayments.

The logic is straightforward: the servicer is closer to the data and better placed to keep investors informed on time.

Sources:

Economic Times

Business Standard