The government is looking for donor assistance to give the local asset securitisation market some legal teeth.
Securitisation allows firms to borrow against future cash flows, which are channelled into a separate legal entity or a special purpose vehicle (SPV). Though asset securitisation has been around since the mid-1990s, local laws do not recognise such transactions.rn
rnFor the purpose of securitisation, receivables cannot be legally assigned by an originator under the present legislation to achieve a lquote true sale (under no circumstances can the receivables be used to offset debts of the originator). rn
rnIn the absence of any specific legislations, issuers of securitisation paper, rely on the Trust Ordinance, the Registration of Document Ordinance and the Mortgage Act. rn
rnBut this has not stopped local firms from raising over Rs. 10 bn in the last two-years by securitising their future cash flows. rn
rnldblquote What goes on now is not a true form of securitisation. Without proper guidelines, its risky from an investors point. So we have asked the World Bank to step in with some technical assistance to draw up a Securitisation Act, dblquote says Palitha Silva Gunawardene, Chairman of the taskforce on Exchange Traded Corporate Bond Market.rn
rnThe Finance Ministry has taken up the job of drafting the Securitisation Act by June this year, to facilitate the set up of securitisation vehicles and neutral fiscal treatment of securitisation vehicles, he said.rn
rnThe Act is expected to see the light sometime next year. rn
rnThe Finance Ministry also plans to amend the Finance Leasing Act, to allow proper auto lease receivable securitisation.rn
rnSecuritisation vehicles attract withholding and income tax. These discourage proper securitisation, depriving economic benefits to borrowers by way of lower housing mortgage costs and vehicle leasing costs.rn
rnLeasing companies who are the bulk issuers of securitised papers, dont actually sell or transfer their assets to a SPV, presently. rn
rnldblquote These assets remain in the books of the company that issues securitised paper, leaving the trustee to be like a facilitator. In true form of securitisation, assets are fully transferred like a sale to an SPV. The SPV in turn, sells the value certificates, dblquote says Gunawardena.rn
rnIn the absence of a law, the bankruptcy procedures become complicated under the present structure. rn
rnIn theory, monies can still be recovered by the Trustee and transferred to the investor. rn
rnOfficials are also trying to get parate execution powers extended to trustees or the SPVs in mortgage backed securitisation. rn
rnMeanwhile, Gunawardene who is also the Director General of the Securities & Exchange Commission (SEC) says the SEC is expected to publish interim guidelines in March to give some legal muscle to issuers. rn
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-LBO Newsdesk: LBOEmail@vanguardlanka.comrn