Company Registration in Bangalore – Policy on provision of undertaking facilities of the company is what we are going to discussed below.
An Originator or a third party service provider may act as an underwriter for the issue of securities by SPV and treat the facility as an underwriting facility for capital adequacy purposes subject to the following conditions. In case any of the conditions is not satisfied, the facility will be considered as a credit enhancement policy and treated as a first loss facility when provided by a third party and a second loss facility when provided by an originator. The undertaking is exercisable only when the SPV cannot issue securities into the market at a price equal to or above the benchmark pre-determined in the policy of undertaking agreement of the company. The bank has the ability to withhold payment and to terminate the facility, if necessary, upon the occurrence of specified events (e.g. material adverse changes or defaults on asses above a specified level); and There is a market for the type of securities undertaken.
Undertaken by an originator
A originator may under write only investment grade senior securities issued by the SPV. The holdings of securities devolved through undertaking should be sold to third parties within three month period following the acquisition. During the stipulated time period, the total outstanding amount of stipulated securities will be subjected to a risk weight of 100 percent. In case of failure to off-load within the stipulated time limit, any holding in exercise of 10 percent of the original amount of issue, including secondary market purchases, shall be deducted 50% from Tier 1 capital and 50% from Tier 2 capital.
Undertaking by third party service providers
A third party service provider may underwrite the securities issued by the SPV. The holdings of securities devolved through underwriting should be sold to third parties within three month period following the acquisition policy. During the stipulated time limit, the total outstanding amount of devolved securities will be subjected to a risk weight of 100 percent. In case of failure to off-load within the stipulated time period or limit, the total outstanding amount of devolved securities of the company which are at least investment grade policy will attract a 100% risk weight and those which are below investment grade will be deducted from capital at 50% from tier 1 and 50% from Tire 2.
Policy on Provision of services
A servicing bank administers or services the securitized assets. Hence, it should have any reputational obligation to support any losses incurred by the SPV of the company and should be able to demonstrate this to the investors. A bank performing the role of a service provider for a proprietary or a third party securitization transaction should ensure that the following conditions are fulfilled. Where the following conditions are fulfilled. Where the following conditions are not met, the service provider may deem as providing liquidity facility to the SPV or investors and treated accordingly for capital adequacy purpose. The service provider should be under no obligation to remit funds to the SPV of the company or investors until it has received funds generated from the underlying assets except, where it is the provider of an eligible liquidity facility. The service provider shall hold in trust, on behalf of the investors, the cash flows arising from the underlying assets except, where it is the provider of an eligible liquidity facility. The service provider shall hold in trust, on behalf of the investors, the cash flows arising from the underlying policy and should avoid co-mingling of these cash flows with their own cash flows.
Prudential Norms for Investment policy in the securities issued by SPV
As the Securities issued by SPVs would be in the nature of non-SLR securities, banks investment in these securities prescribed by RBI from time-to-time.
Exposure norms for investment in the PTCs
The counter party for the investor in the securities would not be the SPV of the company, but the underlying assets policy of concept of which the cash flows are expected from the obligors/borrowers. These should be taken into consideration when reckoning overall exposures to any particular borrower/borrower group, Industry or geographical area of the company for the purpose of managing concentration risks and compliance with extant prudential exposure norms, whenever the obligors in the pool constitute 5% or more of the receivables in the pool or Rs.5 crore, whichever is lower.
Income recognition and provisioning norms for investors in the PTCs
As the securities are expected to be limited tenor, interest bearing debt instruments, he income on the securities may normally be recognized on accrual basis. However, if the income (or even the redemption amount) on securities of the company remains in arrears for more than 90 days, any further income should be recognized only on realization and any unrealized income recognized on accrual basis should be reversed. In case of pendency of dues on the securities appropriate provisions for the diminution in value of the securities on account of such over dues should also be made, as already envisaged in the extant RBI norms for classification and valuation of investment by the banks.
Accounting Treatment policy of the Securitization Transactions
As the securities are expected to be limited-tenor, interest bearing debt instruments, the income on the securities of the company may normally be recognized on accrual basis. However, if the income (or even the redemption amount) on securities remains in arrears for more than 90 days, any future income should be recognized only on realization and any unrealized income recognized on accrual basis should be reversed. In case of prudency of dues on the securities appropriate provisions for the diminution in value of the securities on account of such over dues should also be made, as already envisaged in the extant RBI policy norms for classification and valuation of investment by the banks.
Accounting in the books of the originator
In terms of these guidelines banks can sell assets to SPV only on cash basis and the sale consideration should be received not later than the transfer of the asset to the SPV of the company. Hence, any loss arising on account of the sale should be accounted accordingly and reflected in the Profit & loss account for the period during which the sale is affected and any profit/premium arising on account of sale should be amortized over the life of the securities issued or to be issued by the SPV.
- In case the securitized assets qualify for de-recognition from the books of the originator, the entire expenses incurred on the transaction, say, legal fees, etc., should be expensed at the time of the transaction and should not be deferred.
- Where the securities assets do not qualify for de-recognition the sale consideration received shall be treated as a borrowing.
Booking policy of Profit Upfront
Any profit/premium arising on account of securitization of loans should be amortized over the life of the securities issued or to be issued by the SPV of the company. These instructions were intended to discourage originate to distribute model. Now that these concerns are sought to be addressed to some extent by MRR, MHP and other measures being proposed being proposed in these guidelines, it has been decided to allow higher recognition of cash profits during a year based on amortization of principal and losses incurred as well as specific provision requirements on the securitization exposures as explained below.
The amount of profit received in cash may be held under an accounting head styled as “Cash profit on loan transfer transactions pending recognition” maintained on individual transactions basis. The amortization of cash profit arising out of securitization transaction will be done at the end of every financial year and calculated as under:
Profit to be amortized = Max (L,[(X*(Y/Z))],[(x/n)])
X = amount of unamortized cash profit lying in the account ‘Cash profit on loan Transfer Transactions pending recognition’ at the beginning of the year.
Y = amount of principal amortized during the year
Z = amount of unamortized principal at the beginning of the year
L = Loss (market to market losses incurred on the portfolio + Specific provisions, if any, made against the exposures to the particular securitization transaction + direct write-off) excluding loss incurred on credit enhancing interest only strip.
N = residual maturity of the securitization transaction.
The accounting treatment of the securitization transactions of the company in the books of the originators, SPV and investors in securities will be as per the guidance note issued by the ICAI with reference to those aspects not specifically covered in these guidelines.
Disclosures to be made by the SPV/Trustee
- The SPV/Trustee should make available or provide to RBI or other regulators, as and when required, a copy of the trust deed, the financial accounts and statement of affairs, its constitution, ownership, capital structure, size of issue, terms of offer including interest payments/yield on instruments, details of underlying asset pool and its performance history, information about originator, transaction structure, service arrangement, credit enhancement details, risks, factors etc., of the company.
- Investor should be informed in writing that: their investments do not represent deposits or other liabilities of the originator, services and/or performance of the securities issued, or collectability of receivable pools; and their investments can be subject to investment risk, including pre-payment risk, interest rate risk, possible delays in repayment and loss of income and principal invested.
- The SPV/trustee should publish a periodical report on any re-schedulement, restricting or re-negotiation of the terms of the agreement, effected after the transfer of assets to the SPV, as a part of disclosures to all the participants at quarterly/Half yearly intervals of the company. The authorization of investors to this effect may be obtained at the time of issuance of securitized paper.
- SPV should obtain signed acknowledgement from investors indicating that they have read and understood the required disclosures.
Disclosures to be made by the originator
The originator should make the following disclosures at the time of company registration, as notes to accounts, presenting a comparative position for two years:
- Total number of book value of loan assets securitized;
- Sale consideration received for the securitized assets and gain/loss on sale on account of Securitization; and
- Form and quantum (outstanding value) of services provided by way of credit enhancement, liquidity support, post securitization asset servicing, etc.,
In addition to the above balance sheet disclosures, originating banks of the securitization transactions should provide disclosures to the Audit sub-Committee of their Board, on quarterly policy basis, as per the format prescribed in the attachment.
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