Public offer and listing of securitized debt instruments

By Sawant Singh, Ameya Khandge, Trilegal
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Pursuant to the amendment of the Securities Contract (Regulation) Act, 1956 (SCRA) to include pass through certificates (PTCs), the Securities Exchange Board of India (SEBI) has released a draft of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2007 for public comment.

Sawant Singh, Trilegal
Sawant Singh
Trilegal

The Regulations would be applicable to any “special purpose distinct entity” (SPE) which seeks to make a public offer of securitized debt instruments (SDIs) or which intends to apply to a recognized stock exchange for the listing of such instruments. The Regulations require that such activity only be undertaken by an SPE registered with SEBI, in accordance with the Regulations. Private placements of unlisted SDIs would continue to fall outside the purview of the Regulations.

Structural characteristics

The Regulations set out in detail the characteristics of an SPE – they essentially restrict such SPEs from raising debt (other than through SDIs, security receipts or availing liquidity facilities); regulate dissolution or voluntary winding up; prevent consolidation with the originator or sponsor; regulate the constitution of the board, require ring fencing of multiple schemes, etc. While the Regulations prohibit SPEs from undertaking any activity other than the activities regulated by the Regulations (subject to very limited exceptions), the SPE is specifically permitted to undertake private placements of SDIs that are not proposed to be listed on any recognized stock exchange.

Ameya Khandge Trilegal
Ameya Khandge
Trilegal

The Regulations set out conditions that must be fulfilled in connection with the acquisition of debt from any originator, for example, true and identifiable cash flow; valid enforcement interest; underlying security interest being created at least six months prior to assignment, absence of set-off rights, etc.

Multiple schemes

The Regulations envisage the co-existence of multiple schemes subject to safeguards being implemented to prevent co-mingling, suitable ring-fencing of schemes, winding up of schemes and ensuring that such schemes are close ended. Given the elaborate registration requirements applicable to SPEs, it is particularly important that SPEs are capable of supporting multiple schemes.

The role of credit enhancement, liquidity facilities and servicing are also recognized under (and to a limited extent regulated by) the Regulations. Originators are not permitted to hold in excess of 10% of the total SDIs issued by the SPE in a particular scheme. Until now, this requirement was only applicable to securitization by banks, financial institutions and non-banking financila company originators in light of the securitization guidelines issued by the Reserve Bank of India. This will now apply to corporate originators as well in view of the Regulations.

Public offer

The Regulations require a draft offer document to be filed with SEBI in connection with any public offering of SDIs. Public offerings mandatorily require listing with a recognized stock exchange and the SPE is required to make suitable arrangements for dematerialization of the SDIs and obtain credit rating from at least two registered credit rating agencies. Detailed provisions are also set out in relation to the contents of the offer documents, liabilities for misstatements, underwriting, minimum subscription, allotment timelines and post issue obligations, etc. SDIs issued to the public must be freely transferable. Notably, while the RBI guidelines on securitization also permit the originator to underwrite the issuance, the Regulations limit this function to underwriters registered with SEBI.

Investor rights

The Regulations require that the trust deed records the investors’ beneficial interest in the underlying debt or receivables. If the SPE fails to pay interest or redemption amounts as per the terms of the issue, investors have a right to call a meeting of investors and call for the winding up of the scheme and distribution of realizations, change the trustee, etc.

Secondary market at last

The government and the SEBI’s recent initiatives towards facilitating listing of securitized paper are laudable. We understand that SEBI has received feedback to the Regulations from industry participants and are working on releasing final regulations. The promulgation of the Regulations will pave the way for a secondary market for PTCs/SDIs and will mark a significant milestone in the development of this financial instrument in the Indian context.

Trilegal is a full service law firm that advises on corporate and commercial law in India and provides commercially-oriented legal advice and services in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 80 lawyers, some of whom have experience in law firms in the United States, United Kingdom and Japan.

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