Development of rmbs market in India: Issues and Concerns

Download 0.67 Mb.
Date conversion05.11.2016
Size0.67 Mb.
1   ...   6   7   8   9   10   11   12   13   ...   16

7.6Legal infrastructure

By far, the most significant barrier to development of securitisation in India is the presence of certain antiquated laws that date back to the 19th century and are completely out of place with the present market reality. Unfortunately, these laws are stumbling blocks to the development of securitisation in the country. It is not that this paper brings those issues to the notice for the first time – this has been done by every single committee that went into the matter, starting from the Andhyrujina panel to the several consulting groups of the Asian Development Bank. However, no concrete measures have been taken by the government to resolve the issues.

7.6.1The Securitisation Act – a futile exercise:

To many, it might sound surprising that there is an enactment called the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI) enacted in 2002. The long title suggests that the Act does something about securitisation – in fact, the Act is focused on enforcement of security interests, and whatever skeletal provisions it had enacted about securitisation have been completely useless in practice. The whole scheme of the Act was flawed – it envisaged the concept of a ‘securitisation company’, supposedly a company in the business of securitisation, which will be licensed and regulated by the RBI. No such companies have come into existence, and therefore, the provisions of the Act on securitisations have been of no avail whatsoever. Perhaps in realization, the Finance Minister announced as a part of the Budget Speech presenting the Union Budget 2005 that the government will appoint a high-powered committee to examine all aspects of securitisation transactions.

7.6.2Problems of the existing legal system:

The existing legal system, as far as it relates to mortgage backed securitisation, suffers from two basic legal infirmities. It was easy to resolve both of these without involving any Centre-State issues, and it is only surprising as to why this has not been done.

Mortgage debt regarded as immovable property:

The first problem is that a mortgage backed security, being an interest in a mortgage, is treated by law as an immovable property. This may be resolved by providing, that a receivable which as the security of a mortgage will not be deemed to be an immovable property, thus taking mortgage receivables out of the domain of the Transfer of Property Act, a law with its foundations in the 19th century.

Stamp duty issue:

The other issue is the issue of stamp duty. The stamp duty also originates from an archaic concept of English law whereby a receivable (‘actionable claim’) is treated as a specific form of property, for the transfer of which a written instrument is required. This principle is enshrined in sec. 130 of the Transfer of Property Act. If this provision was deleted or amended, obviating the need for a written instrument, one would not need a conveyance to transfer a mortgage debt, and therefore, the whole issue of stamp duty could be resolved in one stroke.
Currently, the system works under an extremely inefficient structure of stamp duty concession notifications. Several states have issued such notifications, notably, Maharashtra, Gujarat, Tamil Nadu, West Bengal, etc. As could be expected, the language of the notifications is different, and interpretations are mind-boggling. It is easy to understand why securitisation pools have been restricted to those states where these notifications exist, thus, keeping the borrowers from the rest of the country outside the securitisation framework.
The stamp duty issue is being made to look like a Centre-State issue, but in fact it is not. None of the States would have projected huge revenues out of securitisation stamp duties – in States which have not made the stamp duties practical enough, there are not any securitisation transactions at all. So the options are clear – either make it practical, or the transactions do not happen at all.
Mortgage foreclosure laws:

Another difficulty commonly cited so far was the lack of mortgage foreclosure laws. Under traditional civil law (sec. 67 of the Transfer of Property Act), mortgage foreclosure necessarily required the decree of a civil court, which could take anywhere between years to ages.

This problem has substantially been addressed in terms of legal infrastructure - only requires institutional structure to handle foreclosures. The SARFAESI Act made it permissible for banks (and notified finance companies – some 23 housing finance companies have already been notified) to foreclose mortgages (and other security interests) without approaching a Court. While the legal provision therefore exists, all that is required is development of institutions that could carry out the law and logistics inherent.

Clarity on taxation:

Securitisation structures are going on without any clarity whatsoever on the tax treatment of special purpose vehicles. Securitisation SPVs are created as trusts, and it is believed, without any precedent or basis, that they will be tax transparent and that the tax will be imposed on the ultimate investors.
Given the fact that the pass-through rules in the US taxation are quite complicated and not every transaction qualifies for pass-through or see-through treatment, believing securitisation SPVs to be tax transparent may be quite dare-devilish. In fact, with the kind of recycling, reconfiguration of cashflows and stripping of inflows, it is quite likely that the transactions are not treated as pass-throughs.
Lack of tax clarity promotes malpractices - the smart ones overdo things, which can be fatal. In case of financial lease transactions, this was clear from history. A tax clarity is therefore a must.

7.7Development of primary mortgage markets

The following recommendations are not necessarily intended for the regulators – self regulatory bodies like the FIMDA can easily contribute.

To develop effective disclosure and reporting systems for securitisations, the following standards need to be developed. It is notable that the both the American Securitization Forum and the European Securitisation Forum have come out with reporting standards, which may be emulated with necessary modifications in India:

  • Standardization of documents and underwriting practices: The more standardized are the products, documents and underwriting practices, the lower the transactions cost of due diligence and credit enhancement costs in the case of securitization. So, proper standardization norms should be followed in the primary mortgages market.

  • Post-issue servicer reporting: Regular reporting by the servicers is quite important to allow the investors to know the state of the collateral.

1   ...   6   7   8   9   10   11   12   13   ...   16

The database is protected by copyright © 2017
send message

    Main page