BackHow will GIFT City promote securitization?
The govt wants to enhance the participation of FPIs in securitization transactions
PremiumIn India, asset securitization—a process where assets like home loans (mortgage-backed securities, or MBS), auto/microfinance loans and credit card debt (asset-backed securities, or ABS), etc., are pooled and repackaged as interest-bearing securities —is comparatively new. The pooled assets are sold to investors either in the form of pass-through certificates (PTCs), which are like bonds, for standard assets, or security receipts (SRs) for stressed assets. PTCs/SRs represent claims on incoming cash flows (principal repayments and interest) from such pooled assets.
The process helps the originator to free up its balance sheet creating liquidity and/or rebalances its loan exposure by receiving consideration from the investors much before the maturity of the underlying loans.
Low FPI participation
The Indian government aims to develop the market by providing a robust regulatory mechanism and also enhance participation by foreign portfolio investors (FPIs) in securitization transactions. The low participation of FPIs in the market directly via PTCs has been mainly due to three factors:
(i) The complexities involved in obtaining and submitting documents like PAN card due to data privacy and other concerns, including filing of income tax returns.
(ii) Prevailing higher levels of taxation (up to 20%) on income arising from such investments.
(iii) Absence of any fund focusing on securitization pools that could benefit from the inherent diversification of investing in multiple pools, and address the difficulty in hedging forex risk due to unpredictable cashflows of MBS/ABS by pooling cash flows and stabilizing investor payouts.
The growth in number of FPIs has also been inhibited by Indian asset managers’ reluctance to design products for offshore investors due to higher set-up costs in running pooling vehicles in offshore jurisdictions like Mauritius, tax litigations and poor access to regulators.
Solution from GIFT City
Thanks to recent government regulatory and tax reforms for Alternative Investments Funds (AIFs) in GIFT City, Category III AIFs based on securitization pools could solve many challenges for both the offshore investors and asset managers.
FPIs are encouraged to invest in securitization products based in GIFT City as PAN card is not required under the Income Tax Act for non-resident investors. There is exemption from tax on any income received from the Category III AIF since the returns are taxed at the fund level (at lower rates).
Category III AIFs could lower credit risk through better diversification, and remove difficulties in hedging forex risk. Asset managers also have benefits such as 100% corporate tax exemption for 10 consecutive years out of a block of 15 years.
These game-changing reforms are expected to put India’s securitization market on the fast track by tapping significant offshore capital through the GIFT City route.
Vineet Sukumar is founder & MD, Vivriti Asset Management.
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