Whalesbook
SEBI Moves to Revitalize Securitisation Market
The Securities and Exchange Board of India (SEBI) is proposing regulatory changes to boost the listed securitised debt instrument (SDI) market. These updates aim to align SEBI's rules with the Reserve Bank of India's (RBI) 2021 framework for securitising standard assets. The goal is to increase market liquidity and investor interest. SEBI plans to allow single-asset securitisation for RBI-regulated entities, removing a barrier that has limited listings. It also intends to permit securitisation transactions within the same group for these entities, matching the RBI's more flexible approach. These measures are expected to create easier ways to raise capital, making India's securitisation market deeper and more efficient.
Market Growth and Regulatory Alignment
India's securitisation market has grown significantly, with volumes reaching over INR 1.15 trillion in the first nine months of 2023, a 42% rise from the previous year. Securitisation helps turn illiquid assets into tradable securities, improving liquidity and freeing up capital for new lending. SEBI's proposed changes address past differences between its rules and RBI guidelines, which had caused issues for RBI-regulated lenders. The 2021 RBI Master Directions already allowed single-asset securitisation and set minimum retention rates. SEBI's current proposals further ease rules on concentration risk (removing the 25% single obligor limit for RBI-regulated entities) and inter-group transactions, which were stricter under SEBI. Changes to the governance of special purpose entities (SPDEs) and winding-up procedures are also included to simplify operations and align with market practices.
Potential Challenges and Risks
While SEBI's proposed harmonisation aims to boost the market, potential challenges remain. A recent development, the minimum ticket size of INR 1 crore for SDIs, indicates a possible shift favouring institutional investors over retail participants. This could limit broader market development. Shifting disclosure duties from originators to servicers might create new transparency needs. Historical issues with market liquidity, regulatory complexities, and potential for opaque structures also require careful monitoring. The exclusion of certain asset types from securitisation under SDI rules limits innovation. Credit quality, counterparty risk, and market volatility are ongoing concerns for investors, even with regulatory alignment.
Looking Ahead
SEBI's proposed regulatory changes show a commitment to modernising India's securitisation market. By removing structural hurdles and aligning with RBI's framework, SEBI is creating a better environment for financial institutions to use securitisation for liquidity and capital management. This is expected to draw more originators and possibly a wider range of investors, provided asset quality and risk management stay strong. The ongoing focus on harmonising regulations suggests efforts to build a more dynamic capital market.