SEBI is seeking public feedback on proposed changes to regulations for SDIs
The Securities and Exchange Board of India (SEBI) is revisiting its regulations on securitised debt instruments (SDIs) to align with new guidelines from the Reserve Bank of India (RBI) and current market practices. SEBI recently released a consultation paper inviting public comments on proposed updates to the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008. Key changes include adjustments in issuance and transfer requirements, minimum investment thresholds, risk retention mandates, and investor limits.
Understanding Securitised Debt Instruments (SDIs)
Securitised Debt Instruments (SDIs) are financial products created by pooling various assets, such as loans or receivables. These assets are then packaged into securities and sold to investors. The value of SDIs derives from the cash flows generated by the underlying assets, providing a structured investment vehicle. Investors earn returns based on these cash flows, making SDIs an attractive option in the fixed-income market.
The SDI market has grown in India, with the structured finance segment showing notable increases in demand. According to a report by CRISIL, the issuance of securitised debt in India reached over ₹1.5 trillion in the fiscal year 2023, reflecting strong growth driven by asset-backed securities.
Key Changes Proposed in SEBI’s Consultation Paper
The new SEBI proposal introduces several adjustments aimed at enhancing transparency, stability, and investor protection in the SDI market. Here’s a breakdown of the major proposed updates:
1. Form of Issuance and Mode of Transfer
SEBI proposes that all issuances and transfers of SDIs occur solely in demat (dematerialized) form. This shift to electronic trading aims to streamline processes, reduce the risk of fraud, and increase transparency for investors and regulators alike. SEBI expects this change to foster more secure transactions, given the centralized oversight possible through demat accounts.
The dematerialized form also aligns with SEBI’s broader digitalization efforts across financial products. In the Indian securities market, 99% of securities are already in demat form, and expanding this model to SDIs reflects SEBI’s intent to modernize and secure the debt market.
2. Minimum Investment Threshold
The proposed regulations introduce a revised minimum investment threshold, dependent on the originator type and the nature of the underlying assets. For RBI-regulated entities—such as scheduled commercial banks (excluding regional rural banks), small finance banks, non-banking financial companies (NBFCs), housing finance companies (HFCs), and All-India Term Financial Institutions—the minimum ticket size will be set by the RBI. As of 2024, the RBI requires a minimum investment of ₹1 crore for these entities.
This threshold is designed to target institutional and high-net-worth individual investors, ensuring that SDI investments remain within a financially sophisticated investor base. This limitation aims to protect smaller investors who may not fully understand the risks associated with SDI products.
3. Investor Limit for Private Placements
SEBI’s consultation paper proposes limiting the offer of SDIs to a maximum of 200 investors when issued via private placement. Any issuance above this threshold would require a public offer.
This limit aligns with regulations for other securities to prevent private placements from circumventing the rigorous requirements of public issues. SEBI has proposed that public offers can remain open for a minimum of three days and a maximum of ten days, providing a standardized timeframe for potential investors.
4. Risk Retention by Originators
The consultation paper also includes a significant update to the risk retention requirements. Originators of SDIs—those who initiate the creation of these instruments—must retain at least 10% of the risk associated with the assets. For assets with maturities shorter than 24 months, this retention rate reduces to 5%.
This mandate ensures that originators have a vested interest in the performance of the SDIs they issue, discouraging the creation of overly risky products. Such a risk retention requirement reflects practices seen in global markets, where regulators encourage alignment between the interests of originators and investors.
Rationale Behind SEBI’s Revised Regulations
SEBI’s proposed changes stem from evolving market dynamics and recent regulatory shifts by the RBI. The RBI’s updates on securitisation guidelines have introduced stricter risk retention, due diligence, and investor protection measures, which SEBI aims to integrate into its regulations. The proposed revisions also respond to increased market participation and the need for greater transparency in structured finance instruments.
Market Growth and Investor Protection
The Indian SDI market has experienced robust growth, with securitisation volumes growing by 27% year-on-year in 2023. The increased interest has raised concerns about investor protection, particularly for retail investors. The structured finance segment’s growth has been fueled by NBFCs and HFCs, which use securitisation to diversify funding sources and manage liquidity.
With structured products growing in complexity, SEBI’s focus on dematerialized issuance, higher ticket sizes, and risk retention requirements aims to safeguard investor interests and ensure that the products maintain a stable, transparent market.
Alignment with International Practices
SEBI’s proposals reflect a growing trend among global regulators to implement higher transparency and risk retention in structured finance products. Markets in the United States and the European Union have implemented similar regulations, particularly following the 2008 financial crisis, which exposed the risks associated with unregulated SDIs. By aligning with these global standards, SEBI aims to increase investor confidence and attract foreign institutional investors who prioritize regulated markets.
The Public Consultation Process
SEBI has set November 16, 2024, as the deadline for public comments on the consultation paper. The regulator encourages feedback from stakeholders, including financial institutions, investors, and industry experts. SEBI’s consultation process is an essential step in finalizing the revised regulations, as it allows market participants to provide input on potential impacts and operational concerns.
The public consultation process reflects SEBI’s commitment to collaborative policymaking. It underscores the regulator’s intent to create balanced rules that protect investors while fostering market growth. The final regulations, expected to roll out in 2025, could significantly impact how SDIs are structured, issued, and traded in the Indian market.
Expected Impact of SEBI’s Proposed Changes
The proposed changes are likely to have a notable impact on various stakeholders in the Indian SDI market:
For Investors: The minimum ticket size, risk retention requirement, and dematerialized format enhance transparency and protect investors by reducing potential risk exposures. Institutional and high-net-worth investors are expected to benefit the most from these structured protections.
For Originators: RBI-regulated entities, including banks and NBFCs, will need to comply with the updated risk retention rules, which may affect their securitisation structures. Originators are likely to face stricter scrutiny in how they structure SDIs, especially concerning asset quality and long-term viability.
For the Market as a Whole: SEBI’s proposed changes align with RBI’s securitisation guidelines, fostering a more cohesive regulatory environment. These reforms are likely to enhance investor confidence and attract both domestic and international institutional investments. The move towards standardized issuance and transparency could drive further growth in the securitised debt market.
SEBI’s proposed changes to securitised debt instrument regulations mark a significant shift in India’s structured finance landscape. By mandating dematerialized issuance, adjusting minimum ticket sizes, implementing risk retention standards, and limiting investor numbers in private placements, SEBI aims to build a more secure and transparent market. These updates, combined with the evolving market and regulatory landscape, will shape the future of securitised debt in India.
The upcoming public consultation period offers a chance for stakeholders to weigh in on these proposed updates. SEBI’s revisions represent a proactive approach to adapting to market demands, aligning with international standards, and reinforcing investor protections. As the final regulations take shape, they could set a new benchmark for securitised debt in India, balancing growth with robust investor safeguards.
