SEBI’s New Securitisation Rules: Key Investor Safeguards

The Securities and Exchange Board of India (SEBI) has proposed significant changes to the securitisation framework to bolster investor protection and streamline regulatory requirements. The proposal includes a minimum investment threshold, limitations on investor participation, mandatory dematerialisation, and liquidity safeguards. Public feedback is invited until November 16, 2024, as SEBI aims to build on its 2008 framework and the Reserve Bank of India’s (RBI) 2021 securitisation guidelines.

Here’s a breakdown of SEBI’s proposals

Minimum Investment Requirement

SEBI suggests setting a minimum “ticket size” of Rs 1 crore for investments in securitised debt instruments (SDIs), aiming to attract high-net-worth individuals and institutional investors who are well-equipped to assess the associated risks.

Investor Limit for Private Placements

Private placements will have a cap of 200 investors. Any issuance seeking more investors must be reclassified as a public offer, ensuring that private offerings remain exclusive and compliant with public offer regulations.

Public Offer Regulations

For public offers, SEBI mandates an offer duration between three to ten days, along with aligned advertising guidelines to ensure transparent disclosures.

Dematerialisation of Instruments

All securitised debt instruments must be dematerialised, moving entirely to electronic transactions. This shift enhances transparency, reduces fraud risk, and simplifies ownership tracking.

Risk Retention and Minimum Holding Period

Originators are required to retain a minimum of 10% of the securitised asset pool to align their interests with investors; this is reduced to 5% for assets with shorter maturities. Additionally, a minimum holding period before securitisation ensures originators’ vested interest in the assets.

Clean-Up Call Option

The optional clean-up call feature allows originators to repurchase up to 10% of securitised assets, offering flexibility to maintain asset quality as underlying values evolve.

Liquidity Facilities

SEBI mandates liquidity facilities to address cash flow timing issues, ensuring steady investor payouts, either managed by the originator or a third party.

Redefining Underlying Assets

Eligible assets are limited to listed debt securities, accepted trade receivables, rental incomes, and equipment leases. Single-asset securitisation is excluded to encourage diversification and reduce risks.

Minimum Track Record

Originators must have a minimum of three years of operational experience to ensure market stability by permitting only established entities to engage in securitisation activities.