As per the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, exposures to securitisations that are STC (simple, transparent and comparable)-compliant can be subject to the alternative capital treatment.
Lenders can provide supporting facilities such as credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities supporting securitisation structures.
Securitisation involves transactions where credit risk in assets are redistributed by repackaging them into tradeable securities with different risk profiles, which may give investors of various classes access to exposures which they otherwise might be unable to access directly.
The RBI emphasised that the priorities of payments for all liabilities in all circumstances should be clearly defined at the time of securitisation and appropriate legal comfort regarding their enforceability should be provided.
This is aimed at preventing investors being subjected to unexpected repayment profiles during the life of a securitisation; listing of securitisation notes, especially in respect of certain product class, such as Residential Mortgage Backed Securities, and/ or generally above a certain threshold is recommended, though not mandatory, the RBI said.
In any case, any offer of securitisation notes to fifty or more persons in an issuance would be required to be listed in terms of Securities and Exchange Board of India (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008.
To help provide investors with full transparency, all triggers affecting the cash flow waterfall, payment profile or priority of payments of the securitisation should be clearly and fully disclosed in offer documents and in investor reports, per the Directions.
Investor reports should give information that clearly identifies the breach status in respect of expected cash flows to the note holders, the ability for the breach to be reversed and the consequences of the breach.
To ensure rights and interest of the securitisation note holders are protected, definitions, policies and remedies pertaining to the contours and caveats around the performance of the underlying loans must be suitably communicated.
Further, the rights and control of the securitisation note holders must be documented to account for all circumstances, including insolvency of all entities involved in securitisation, such as the originator Special Purpose Entity.