Changes needed at state level to develop Indian MBS market

By Ameya Khandge and Vardaan Ahluwalia, Trilegal
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The securitization market in India has come a long way since the first issuances that can be traced from the early 1990s, when originators and arrangers such as ICICI and Citigroup took the lead in developing the market at an institutional level. The market saw its boom phase followed by a prominent lull in issuances with changes to the regulatory environment. The growth overall however has been more than moderate and issuances have settled at respectable levels over time. While mortgage backed securities (MBS) form quite a substantial chunk of the overall securitization market in certain developed jurisdictions such as the US, MBS in India enjoy much less prominence in the overall securitization market. Although the National Housing Board together with certain other prominent institutions have initiated mortgage backed securitization issuances, MBS issuances have failed to gain a meaningful share of the overall market for securitized paper in India over the years.

OPPORTUNITIES IN MBS MARKET

Ameya Khandge Partner Trilegal
Ameya Khandge
Partner
Trilegal

The opportunity available is obvious given that India has a relatively well developed residential housing and commercial finance market. The Indian financial sector indeed has a healthy exposure to such mortgage backed debt and residential mortgages that appear prominently on the balance sheet of many large Indian financial institutions. The resultant benefits of a robust securitization market in the housing sector are evident and don’t need to be elucidated in detail. The benefits would not only extend to agencies such as housing finance companies, seeking easier access to capital, but also banks and financial institutions looking to realign their overall balance sheet exposure. What is it then, that holds back the growth of the MBS market in India? Product and market information compiled internationally over a period of years is available to study from, so commercial and fiscal aspects of such products can be understood. The concept of such an issuance working in the Indian context is also well in place to back further growth of the market. From a legal and regulatory standpoint, the answer is simple – stamp duty and registration laws in India. It is primarily the prohibitive transaction cost applicable in many parts of the country on this account that prevents the development of MBS in India.

Stamp duty and registration fees are the subject matter of state level legislation where each state has varying fees for the assignment of mortgage backed securities. Some states – Maharashtra, Delhi and Rajasthan to cite some examples – have passed notifications providing suitable caps on the assignment of debts and securitization of loans, which aid such assignments in being commercially viable. However, such examples form the exception rather than the rule.

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Ameya Khandge is a partner at Trilegal in Mumbai where Vardaan Ahluwalia is an associate. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.

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