In a move aimed at developing the secondary market for securitised debt instruments, SEBI has released a Listing Agreement for such instruments and directed the exchanges to do the needful to enable listing of securitised debt instruments. IFMR Capital summarises the Listing Agreement in the following note.
The agreement requires disclosure of information at the pool, tranche and loan level. Increase in information and tradability on the exchange, it is hoped, will lead to greater trading in the secondary market for micro-loan backed securitised debt instruments. Other possible implications for micro-loan backed securitisations:
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Trustees will need to gear up for heightened scrutiny, improved MIS and reporting, as well as potential audit requirements. This will put greater strain on resources given the greater frequency of cash flows in micro-loan backed securitisations.
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The role of the arranger of a securitisation transaction will now be of greater relevance as a facilitator of secondary market transactions, as information asymmetry in a micro-loan backed securitisation transaction is greater than in vanilla bonds or other listed instruments.
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SPDEs could now be used for multiple transactions or for enabling a series of transactions with similar characteristics by filing a shelf prospectus.
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Better and more transparent pricing of securitised debt instruments.
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Improved investor confidence in investing in primary issuances, especially relevant for longer tenor revolving structures.
This note highlights the information that needs to be provided for the Listing Agreement. A section detailing additional requirements in case of public listing has also been included.
Section A. Requirements common to public subscription and private placement
1) Documents
i) Memorandum of Agreement between Special Purpose Distinct Entity (SPDE) and Originator from whom the SPDE is purchasing the receivables. This is distinct from the Deed of Assignment. A Memorandum of Agreement is a master agreement detailing the representations, undertakings and warranties of the Originator and expressing the Originator’s willingness to assign his assets.
ii) Deed of assignment whereby the assets are transferred from the Originator to the SPDE.
iii) Offer document issued by SPDE whereby it proposed to securitise the said receivables and issue Pass Through Certificates. The offer document will be more detailed than those currently used and must contain objects of the offer, description of the instruments, the underlying asset pool and the risks involved. It must also contain disclosures regarding the parties in the issuance and the transaction structure.
For further details refer Schedule V of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.
iv) Servicing Agreement between the SPDE and the ‘Servicer’ (an entity that agrees to undertake coordination with the obligors, management and collection of the asset pool and making allocations and distributions to holders of the securitised debt instruments and reinvestment)
v) An application filed with the Exchange by the SPDE for listing its Securitised Debt Instruments (Section 1(b))
vi) Prior approval of Exchange for material modification of the structure of the securitised debt instrument (Section 1(d))
vii) SPDE must furnish statements on a monthly basis (Section 15). The format used is different from those currently used.
2) Compliance
i) Designate a Compliance Officer. This will also require the establishment of a grievance redresssal mechanism (Section 4).
ii) Undertaking to the Exchange (Section 13).
iii) Compliance with SEBI Guidelines, SCRA (1956), SCRR (1957) and other guidelines laid down by the Exchange (Section 1(e))
3) Others
i) Credit to demat accounts of the allottees shall be made within two working days from the date of allotment (Section 5). At present, this is usually done in seven days.
ii) Responsibilities with respect to listing of securitised debt instruments issued to public (Section 6)
iii) Payment of Exchange Fees (Section 8 )
iv) SPDE agrees to close transfers or fix a record date for purposes of payment (Section 10)
v) SPDE must notify the exchange upon occurrence of certain events including: attachment or prohibitory orders restraining transfer of instruments, any change in the form or nature of instruments, any default in the payment of interest or principal amount (for a more detailed list of events, refer to Section 13).
vi) Extensive MIS and reporting to the exchange on a monthly basis, or as frequent as the payouts of the transaction
Section B. Additional Requirements in case of public offer
1. Allotment of securities to be made within 30 days of the public issue. (Sec 6)
2. Interest @ 15% per annum to be paid allotment/ despatch of refund orders has not been made within 30 days. (Sec 6)
3. An amount equal to 1% (one per cent) of the amount of securitised debt instruments offered for subscription to the public must be deposited with the Exchange before the opening of subscription list.
Issues that need to be examined:
1. Listing fees, appointment of a Compliance Officer and other costs related to greater reporting and documentation are likely to increase the fixed costs of a transaction in case of a listed securitisation transaction.
2. Whether such listed instruments are eligible for investments by FIIs.
3. Tax implications for different classes of investors.
4. Currently, investment in securitised portfolios comprising of priority sector assets qualify as priority sector for banks. Will this continue to hold true for secondary market purchases?
5. Whether the SPDE would need to be audited in the event of a private placement.
Annexure I
This Annexure details the requirement under the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.
Audit (Section 17)
The accounts of the schemes formulated by a special purpose distinct entity shall be audited by a chartered accountant in practice.
Accounts (Section 16)
A special purpose distinct entity shall intimate to the Board the places where the records and documents and records of the accounts are kept.
The special purpose distinct entity shall maintain its books of account, records and other documents in respect of its schemes for a minimum period of eight years from the redemption of all instruments issued under the scheme.
Public Listing
a. Enter into an arrangement with a registered depository for dematerialisation of the securitised debt instruments that are proposed to be issued to the public (Section 23).
b. File a draft offer document with the Board at least fifteen working days before the proposed opening of the issue. Offer document shall contain all material information which is true, fair and adequate for an investor to make informed investment decision (Section 22).
c. Incorporate any changes that the Board suggests in such offer document (Section 22).
d. The final offer document shall be filed with the Board and with every recognised stock exchange to which an application for listing of the securitised debt instruments is proposed to be made prior to its issuance to public (Section 22).
e. Make an application for listing to one or more recognized stock exchanges (Section 24).
f. Credit rating to be obtained from not less than two registered credit rating agencies. All credit ratings obtained by a special purpose distinct entity on the securitised debt instruments shall be disclosed in the offer document, including unaccepted credit rating (Section 25).
Listing Agrement
SPDE shall enter into listing agreement with the recognised stock exchanges where the securitised debt instruments are proposed to be listed. In case of a private placement of securitised debt instruments, the special purpose distinct entity shall file listing particulars with the recognised stock exchange along with the application made, containing such information as may be necessary for any investor in the secondary market to make an informed investment decision in respect of its securitised debt instruments. All credit ratings, including unaccepted ones, must be filed with the listing particulars.
Offer Period (Section 29)
No public offer of securitised debt instruments shall remain open for more than thirty days.
Minimum Subscription
Offer document must disclose Minimum Subscription that is sought to be raised (Section 30).
Allotment (Section 31)
1. The securitised debt instruments shall be allotted to the investors within:
(a) in case of dematerialized securitised debt instruments – within five days of closure of the offer;
(b) in case of securitised debt instruments in the physical form – the certificates shall be dispatched within eight days of closure of the offer
2. Refunds must be dispatched within eight days of closure of offer.
Post Allotment (Section 32)
The special purpose distinct entity shall file such reports and furnish such information to the Board or to the investors, as directed by the Board.
Transferability (Section 33)
All listed securitised debt instruments are freely transferable.
Documents required for Listing application (Section 35)
a. Trust deed or other constitutional document: The Trust Deed cannot have clauses to the following effect –
i) Limiting or extinguishing the obligations and liabilities of the trustees or the special purpose distinct entity in relation to any scheme or the rights or interests of investors;
ii) Limiting or restricting or waiving the provisions of the Act, these regulations and circulars or guidelines issued by the Board;
iii) Indemnifying the trustees or the special purpose distinct entity for loss or damage caused to the investors by their act of negligence or commission or omission;
Trustees who are nominees of the sponsor or the originator or who are associated in any manner with the sponsor or the originator or with a company in the same management as the sponsor or originator shall not constitute more than one half of the Board of Trustees.
Further details regarding the Trust Deed can be found in Schedule IV of the Regulations.
b. Copies of all offer documents and advertisements in connection with offer of securitised debt instruments by the special purpose distinct entity or its trustee at any time;
c. Certified copy of every material document or proposed document which is referred to in any such offer document;
d. Certified copies of agreements or memoranda of understanding relating to acquisition or proposed acquisition of debt or receivables from a financial institution or other person;
e. Certified copy of certificate of registration granted by the Board to the trustee under these regulations;
f. Specimen of any other securitised debt instrument issued by the special purpose distinct entity which are listed or proposed to be listed;
g. Any other document or particular as may be required by the stock exchange.
