INTRODUCTION
Securitization is gaining momentum in India and it is an instrument that enhances the liquidity in the financial markets. In India, the market for Securitised Debt Instruments (“SDIs”) are regulated primarily by the Reserve Bank of India (“RBI”) and the Securities and Exchange Board of India (“SEBI”). Securitisation as a product is regulated by the RBI whereas the listing norms are prescribed by the SEBI. The SDI Regulations[1] underwent major changes in May 2025 to iron out the inconsistencies in the SDI Regulations framework and align with the updated Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (“RBI SSA Directions”)[2]. According to SEBI, the amendments to the SDI Regulations are to address the evolving landscape of listed securitization in India and to ensure (retail) investor protection.
This amendment primarily aims to align the SEBI norms for SDIs with that of the RBI SSA Directions which only applies in case of securitisation transaction undertaken by RBI regulated entities.
The process of securitization enables the monetization of illiquid assets by converting them into marketable securities, thereby providing an alternative source of funding for asset originators. SDIs provides access to these originators to the capital markets, facilitating broader investor participation. Recent market analysis reveals a growing trend among not only banks and financial institutions but a lot of corporates and businesses (including start-ups) have opted SDIs as a mode to procure financing. The evolution of the securitization market has moved beyond securitization of traditional loan receivables by non-banking finance companies (“NBFCs”) to encompass emerging asset classes such as trade and lease rental receivables, prompting a need to revamp the regulatory framework.
ANALYSIS
- Modification in the definitions of Debt / Receivables
SEBI has specifically and exclusively included mortgage debt, debt permitted pursuant to RBI SSA Directions, listed debt securities, trade / rental / equipment leasing receivables and financial asset as defined under SARFAESI Act[3] from the definition of debt. This definition seems to be quite restrictive in scope, while the intent is to align the SDI Regulations with the RBI’s SSA Directions and safeguard investor interests, the exclusion of certain asset classes and receivables from the ambit of listed securitisation may inadvertently withhold innovation and access to securitisation as a viable funding route.
While investor protection is critical, the exclusion of certain asset classes from securitization under the SDI Regulations may have an adverse effect of curbing market development and limiting access to the market as it hampers securitisation as an instrument, constrains innovation and undermines the development of a diversified securitization market.
Instead of excluding certain sectors and types of receivables from the scope of listed securitisation, SEBI may consider establishing higher thresholds for disclosures and due diligence, such as by introducing a minimum credit rating requirement for specific categories of transactions, mandating the involvement of SEBI-registered intermediaries, or prescribing minimum thresholds for anchor investor participation.
Ticket Size
SDIs to have a minimum ticket size of INR 1,00,00,000/- (Indian Rupees One Crore Only) only for RBI regulated entities at initial subscription, and for non-RBI regulated entities at both initial subscription and subsequent transfers. Minimum ticket size for SDIs backed by listed securities shall be the highest face value among such underlying listed securities. When an SDI is secured by non-convertible debentures with a face value of INR 1,00,000/- (Indian Rupees One Lakh Only), then the similar face value can be assigned to the SDIs as well.
The purpose of this amendment was to ensure that a complex instrument like SDI is accessible only to investors capable of understanding its complexity. Consequently, retail investor participation in the primary market may decline, limiting their access to the secondary market, provided the originator is regulated by the RBI.
Minimum Risk Retention (“MRR”)
SEBI has mandated to align the MRR requirement with that as provided in the RBI SSA Directions. SEBI has specifically stated that the originators must maintain MRR of 10% in case residual maturity is more than 24 months, however where receivables have a residual maturity of up to 24 months, the originator must maintain MRR of 5%.
In its recent efforts to align the MRR framework with that prescribed by the RBI, SEBI appears to have overlooked securitisation transactions undertaken by entities that do not fall under the regulatory purview of the RBI but are nonetheless involved in listed transactions. This oversight may inadvertently create regulatory inconsistencies and practical challenges for such entities.
It is imperative that SEBI considers recognising the distinct nature of securitisation transactions by non-RBI regulated originators, particularly with respect to the manner in which MRR is maintained. For instance, in asset lease rental securitisations, the underlying asset typically remains under the ownership of the originator throughout the tenure of the transaction. In certain cases, the asset may also be secured by the originator, thereby reinforcing the originator’s continuing economic interest in the transaction.
Therefore, SEBI could have taken a more nuanced approach to MRR compliance, one that recognises the economic interest retained by originators in various forms. Such an approach would have aligned regulatory expectations with prevailing market practices, while also promoting a more equitable and practical implementation of securitisation norms.
Minimum Holding Period (“MHP”)
SEBI has aligned the MHP conditions as prescribed under the RBI SSA Directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. The special purpose distinct entity shall ensure that the securitisation by the originator is done only after completion of a prescribed MHP. This is aimed at strengthening risk retention by requiring originators to hold loans for a minimum period before transferring them, thus aligning their interests with investors.
The minimum holding period requirement is of 3 months in case of loans with tenor of up to 2 years; and 6 months in case of loans with tenor of more than 2 years.
Track Record and Operational Experience Requirements
SEBI has mandated that the obligors and originators must necessarily have a track record of operations of 3 financial years which resulted in the creation of the type of debt or receivables that the originator is seeking to securitize.
SEBI has specifically stated that the condition for maintenance of track record of 3 years for originators and obligors will not be applicable in case of transactions where the originator is an RBI regulated entity. This move by SEBI is in accordance with the RBI SSA Directions, where there is no such requirement of 3 years track record of operations or a lending relationship.
For non-RBI regulated entities, the interpretation of debt or receivables differs significantly. Such entities typically engage in the securitization of lease rental receivables, trade receivables, and warehousing receivables, rather than traditional loans and advances. In these cases, the obligors are generally businesses or corporates, in contrast to RBI-regulated entities. In such circumstances, there are greater complexity for both obligors and originators, particularly when considering the associated costs, compliance requirements, and liabilities related to the issuance of SDIs. Furthermore, factors such as the operational track record cannot reliably serve as an indicator for assessing or predicting the performance of the pool of assets.
This move by SEBI might lead to market participants rather opt for other financing options like direct assignment, securitization by issue of unlisted instruments, traditional methods of fund raising etc.
Limitation on exposure of Obligor
SEBI has mandated that no single obligor i.e., the party responsible for repaying the debt shall contribute more than 25% (twenty-five percent) to the overall asset pool, however this provision is not in line with the RBI SSA Directions which expressly permits single asset securitization.
Additionally, the essence of securitisation lies in redistribution of risks. In cases of huge and concentrated asset pools, securitisation will serve as a tool to redistribute risk. Depriving the market of single asset securitisation or highly concentrated asset securitisation will lack in serving the purpose of redistribution of risk.
Mandatory Periodic Disclosure Requirement
The originator must mandatorily furnish performance reports of the underlying asset pool to the trustee at least on a quarterly basis. In addition, the originator must submit a certificate from its auditor certifying the accuracy of the disclosures made about the assigned asset pool, on a quarterly basis. This provision enhances transparency and ongoing oversight of securitised assets, thereby strengthening investor confidence.
Dematerialization
One of the crucial amendments is the mandate to issue SDIs in dematerialized form only. This amendment comes in response to the growing need for greater transparency and reduction in the operational risks associated with physical securities.
This will eventually help in better monitoring and tracking of SDI ownership. As the entire process becomes electronic, it would be easier for regulators to track ownership changes and prevent fraudulent activities. This amendment directly supports the mandatory dematerialisation requirement of the government and the notification issued by the ministry of corporate affairs[4] that is encouraging dematerialisation of securities.
Clean up Call Option
The provisions for the exercise of the clean up call option has been aligned with those prescribed under the RBI SSA Directions. These provisions have been introduced under the chapter applicable in case of public offer of SDIs.
Although the provisions for the exercise of clean up call options has been made a part of chapter applicable in case of public offers, it should however be noted that these provisions are also a part of the RBI SSA Directions. Accordingly, financial sector originators are bound by such conditions even if they go for private placement of SDIs.
KEY TAKEAWAYS
The recent regulatory changes introduced by SEBI to govern SDIs represent a comprehensive shift toward increasing transparency, improving risk management, and aligning the SDI Regulations with the RBI SSA Directions. These amendments build upon the proposals set forth in the consultation paper released by SEBI in November 2024.
The amendment reflects a measured and balanced regulatory approach as it neither promotes nor restricts securitisation in a disproportionately favourable or unfavourable manner, rather it adopts a neutral stance seeking to bridge regulatory gaps without undermining the market’s capacity for innovation and growth, except in certain instances that we discussed above.
By incorporating certain feedback from stakeholders and aligning with the RBI SSA Directions, SEBI has strengthened the regulatory framework for SDIs. However, the attractiveness of SDIs as an investment vehicle can be boosted in case the issues highlighted above are also addressed by the regulators.
The most impactful and potentially controversial amendment is the imposition of a minimum ticket size of INR 1,00,00,000/- (Indian Rupees One Crore Only), aimed at restricting participation in SDIs to institutional and sophisticated investors. While this enhances the regulatory oversight and potentially reduces the risk exposure of uninformed retail investors, it also sidelines a segment that has historically contributed to market depth and liquidity. It also dilutes the essence of listed space if retail investors are not welcomed. Retail investors, though more vulnerable, have played a role in expanding the base of capital in securitised products.
The track record and operational experience requirements aim to ensure that only well-established entities with proven expertise are allowed to securitise their receivables. While this can reduce credit and operational risks, it may also restrict innovation and access to securitisation as a viable funding route for newer firms.
SEBI is responsible to make India’s securitisation market more robust, transparent, and institutionally driven. While these reforms enhance regulatory integrity, we hope SEBI does not inadvertently withhold participation, innovation, or access to the securitization market.
Authors:
Apurva Kanvinde
Partner, Juris Corp
Email: [email protected]
Smit Parekh
Senior Associate, Juris Corp
Email: [email protected]
Harshit Khandelwal
Associate, Juris Corp
Email: [email protected]
Disclaimer:
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.
[1] SDI Regulations - SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 - Link
[2] SSA Directions - RBI Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 - Link
[3] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Link
[4] MCA Notification dated 27th October 2023 - https://www.mca.gov.in/bin/dms/getdocument?mds=Zv