India's powerful Andhyarujina Committee, which has been given the job of examining possible legal and regulatory changes to India's banking system, has recommended that the government should introduce umbrella securitization legislation to deal with many of the problems impeding the growth of Indian structured finance.
The committee, which is headed by T. R. Andhyarujina, a former solicitor general, and whose members include officials from the central bank, the finance ministry, the law ministry and investment banks, has submitted a draft securitization bill to the finance minister Yashwant Sinha.
Sinha told reporters that the report would be gone through "in all seriousness" but declined to say whether, or when, it would be implemented.
The draft bill includes a new definition of securitization and attempts to clearly define the process needed to assign assets to a trust or SPV.
Other key points include:
* Calls for the central government to specify the maximum stamp duty that state administrations can levy on property sales. At present, only four states levy stamp duty at 0.1%, with most other states charging a considerably higher rate, making mortgage-backed deals outside those four states impossibly expensive;
* Proposals to change tax laws to ensure that securitization deals are tax-neutral and do not incur extra tax in the process of being transferred into a special purpose vehicle or in any of the other steps involved in a securitization. Indian securitization experts said that this is one factor that is making life difficult for the upcoming mortgage-backed deal from the National Housing Bank, which is hoping to become the country's first MBS issuer (ASRI 1/17/2000. p. 2, 9/6/1999 p. 1 and 6/15/1998 p. 1). The arrangers, SBI Capital Markets and ICICI, are finding it difficult to build a structure which would pass-through underlying revenues without incurring excessive tax;
* Recommendations that credit ratings should be compulsory for any publicly offered securitization, though privately placed transactions should be allowed to do without a rating for deals worth up to Rs500 million ($11 million);
* Improved powers for banks and financial institutions to deal with defaulted borrowers, while avoiding time-consuming court proceedings. The draft bill provides for statutory notice of default, followed by public auctions of assets. It would be a criminal offense to refuse to hand over the assets. According to experts this would clear up a major hurdle impeding the growth of the market: the delays inevitable if attempted repossessions end up in India's cumbersome legal system.
Indian securitization pros welcomed the draft bill and praised the work of the committee, though cautioned that it is wise to wait and see what the government would do, particularly as it was possible that there would be some resistance to the proposed tax changes at both state and national level. However, most agreed that it was only a matter of time before India introduced some embracing legislation to make securitization easier, as the government and civil service seem to be sold on the benefits that securitization would bring.
The draft bill comes after the Securities Exchange Board of India allowed mutual funds to invest in MBS for the first time and after other regulatory changes were introduced to allow for easier foreclosure on defaulted mortgages (ASRI 4/24/2000 p.3).
It also comes after a January 2000 report from the central bank, the Reserve Bank of India, which called for many of the changes endorsed in the draft bill. "The RBI report called for an umbrella law, and now here is draft bill which is exactly that," said a banker in New Delhi. "There is no question that these changes are needed and things are moving in the right direction."
