SECURITIZATION PROBLEM AND SARFAESI ACT.

THIS IS A PRESENTATION ABOUT THE PROBLEMS OF SECURITIZATION.

1. Securitization Problems This presentation will discuss the challenges and issues associated with securitization. PRESENTED BY THEERTHA PV M COM FINANCE AND ACCOUNTING ROLL NO 25.

2. Introduction What is securitization Problems of securitization SARFAESI ACT 2002

3. SECURITIZATION Securitization is the process of converting long- term illiquid assets in the balance sheet of financial institution into liquid cash by issuing securities against them

4. PROBLEMS OF SECURITIZATION LACK OF AWARENESS STAMP DUTY TAXATION ACCOUNTING LACK OF STANDARDIZATION INADEQUATE DEBT MARKET INEFFECTIVE FORECLOSURE LAWS

5. LACK OF AWARENESS Despite the potential benefits of securitization, there is a significant lack of awareness and understanding among market participants, including originators, investors, and regulators. Example: Many small and medium-sized enterprises (SMEs) in India are unaware of how securitization can help them improve their liquidity and access to capital markets. This results in underutilization of this financial tool.

6. Every originator follows his own format for documentation and administration and hence lack of standardization is another obstacle in the growth of securitization. There is a lack of standardization in the structuring of securitized products, which can lead to complexity and confusion among investors. LACK OF STANDARDIZATION

7. Stamp duty is one of the obstacle in india. Stamp duty on securitization refers to the tax that is imposed on the transfer of financial securities or assets in the process of securitization. The amount of stamp duty can vary depending on the jurisdiction and the type of securities being transferred. It is important for financial institutions and investors involved in securitization transactions to be aware of the stamp duty implications in order to comply with regulatory requirements and avoid any potential penalties. STAMP DUTY

8. Taxation is another area of concern in India. In the absence of any specific provision relating to securitized instruments in Income Tax Act, experts’ opinion differ a lot. Some are of the opinion that SPV as a trustee is liable to be taxed in a representative capacity whereas others are of view that instead of SPV, investors will be taxed on their share of income. Clarity is also required on the issues of capital gain implications on passing payments to the investors. TAXATION

9. Recognition and Measurement: Difficulty in determining fair value of securitized assets and appropriate recognition and measurement of income from securitization transactions. Off-balance Sheet Treatment: Challenges in appropriately reflecting securitized assets and related liabilities on the balance sheet, potentially distorting the financial position of the entity. Accounting and reporting of securitized assets in the books of originator is another area of concern. Although securitization is slated to be an off-balance sheet instrument but in true sense receivables are removed from originator’s balance sheet. Problem arises especially when assets are transferred without recourse. ACCOUNTING

10. Lack of existence of a well-developed debt market in India is another obstacle that hinders the growth of secondary market of securitized or asset backed securities. The securitization market in India is relatively shallow with limited liquidity. This makes it difficult for originators to find buyers for securitized assets and for investors to trade these securities. INADEQUATE DEBT MARKET

11. For many years efforts are on for effective foreclosure but still foreclosure laws are not supportive to lending institutions and this makes securitized instruments especially mortgaged backed securities less attractive as lenders face difficulty in transfer of property in event of default by the borrower. INEFFECTIVE FORECLOSURE LAWS

12. Transparency Issues Limited transparency in underlying assets Credit Risks Complexity of securitized products High transaction costs

13. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) This act provides a legal framework for securitization and reconstruction of financial assets. SARFAESI ACT 2002

14. To overcome the problems of bad loans govt of india started the DEBT RECOVERY TRIBUNAL in 1993. This give temporary reliefs to banks. BACKGROUND

15. But no of cases increases DRT turned into failure. Thus in 2002 Govt of india came up with SARFAESI ACT 2002 as solution to the issues . OBJECTIVES Specifies the legal framework for scanning activities in india. The ACT details the procedures of NPA’s transfer to the asset reconstruction companies for the purpose of asset reconstruction. Impose the security interest without any intervention from the court. It allows banks and other financial institutions to auction residential or commercial properties of defaulters to recover loans without court intervention.

16. https://boslive.icai.org/ https://youtu.be/TU3XTU1sdqg?si=NcSHIzm6FvQVnwIF https://www.indialawjournal.org/archives/volume3/issue_2/article_by_vrinda.html#:~:text=Lack%20of%20effective%20foreclosure%20laws,laws%20lacks%20on%20this%20aspect . Reference

17. Thank you. Please feel free to ask any questions. 😄