Mumbai: The Securities and Exchange Board of India (Sebi) is considering allowing alternative investment funds (AIFs) and qualified institutional buyers (QIBs) to buy security receipts issued by asset reconstruction companies (ARCs), two people with direct knowledge of the matter said.

A security receipt is issued by an asset reconstruction company (ARC). In the Union budget for the current fiscal year, finance minister Arun Jaitley had proposed a plan to make security receipts tradable on stock exchanges to enhance capital flows into the securitisation industry and solve the bad loan problem plaguing the banking system.

Sebi is working with the Reserve Bank of India (RBI) to sort out issues around the budget proposal, one of the two people cited earlier said. The panel’s report will be released soon, the person said.

Spokespeople for Sebi and RBI did not respond to emails seeking comment.

In March, the markets regulator had formed a panel comprising representatives from RBI, issuers of security receipts, rating agencies, law firms and exchanges to form an enabling framework, the people cited above said. “Market participants wanted a large subscriber base comprising high networth individuals (HNIs) and corporates. But RBI had some reservations. So the draft report suggest using Sebi’s more inclusive definition of qualified institutional buyers as subscribers," said the second person.

The panel has proposed that the issuance be via a trust structure, that is security receipts would be transferred to a trust (like in the case of infrastructure investment trusts) and the trust vehicle will get listed on the exchanges.

“Primarily, it is a good idea to have more participants to have a vibrant securities market and more depth, liquidity in the market. However, considering that not many people know about the nature of security receipts outside the ARC space, Sebi and RBI could adopt a conservative stand," said Siby Antony, managing director and chief executive, Edelweiss ARC.

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) and RBI guidelines, security receipts can be subscribed by ‘qualified buyers’ and transferred to other institutions.

RBI has defined “qualified buyer" as financial institutions, banks, insurance companies, mutual funds, or any category of non-institutional investors as may be specified by the central bank.

“The Act allows non-institutional play too, so the operative guidelines will be amended with a clearer definition of qualified institutional buyers under RBI Act and Sebi Act," said the second person.

Sebi has written to RBI for amendment of the RBI Act for a clearer definition, he added.

“These are toxic, sticky and risky assets, these should be limited to institutional investors who understand the risks involved, else we might be faced with a situation that investors end up losing money and the product also loses legitimacy. Even allowing HNIs would be ill-advised as they have a risk appetite but may not be as well informed about the nature of the instrument," said Sai Venkateshwaran, partner and head, accounting advisory services, KPMG in India.

Close