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The government notification on the treatment of third-party assets during insolvency proceedings of Financial Services Providers (FSPs) will give a boost to the domestic securitisation market, which is expected to exceed ₹2-lakh crore in FY2020, an all-time high, according to credit rating agency ICRA.

As per the recent notification, for securitisation transaction or lending arrangement where a FSP is contractually obligated to act as a servicing or collection agent on behalf of third parties, the administrator shall continue to discharge these obligations of the FSP.

The administrator is required to ensure the receivables collected are deposited in a separate account and transfer the same in accordance with the terms of such contracts. Similarly, for third-party assets held by the FSP (such as a cash collateral maintained for a securitisation transaction), the administrator has to ensure that such assets are maintained in a distinct manner identifiable contract-wise, and transfer such assets entitled to receive it as per the terms of the contracts.

A welcome move

As per an ICRA note, the notification by the government is a welcome move as this clarifies the operational role of the administrator while dealing with third-party receivables, and would ensure that payments to investors are met in a timely manner as long as the collections remain adequate.

Through a notification dated January 30, the Ministry of Corporate Affairs (MCA) has detailed the manner of dealing with third-party assets by the administrators for FSPs that are undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), which had been left out in the earlier notification issued by the MCA in November 2019.

So far, the provisions related to dealing with third-party assets during the insolvency proceedings was pending for notification. The absence of any notification was a matter of concern for securitisation transactions, as it did not clarify that the collections being done by the FSP in its role as a servicer could be passed on to the investor, ICRA said.

Abhishek Dafria, Head – Structured Finance, and Vice-President, ICRA, observed that securitisation transactions are considered bankruptcy remote due to the terms of the transaction and the legally binding structure.

He explained that on default/ insolvency proceedings of any FSP, its securitisation transactions are expected to continue to be serviced, as the FSP in its role as a servicer is expected to continue to collect from the securitisation pool and transfer the same to the investors. This is because these receivables legally belong to the Trust(s) for the benefits of the investors and do not belong to the FSP.

“We have already seen one servicer that is currently undergoing insolvency proceedings fail to transfer the funds to the investors despite strong collections. The default on the securitisation transactions had also led to some cautiousness among the investors. The recent notification would give a boost to the domestic securitisation market, which is expected to exceed ₹2-lakh crore for FY2020, which would be an all-time high,” said Dafria.

Earlier notification

As per the earlier November 2019 MCA notification, the scope of the IBC was extended to FSPs with an asset size of ₹500 crore or more. Further, as per the IBC, an administrator is appointed to oversee the operation of the entity during the resolution process.

The administrator appointed has the same rights, duties, obligations and powers of the insolvency professional while dealing with the insolvency of FSPs. However, the provisions related to the dealing with third-party assets during the insolvency proceedings, was pending for notification.

ICRA said the absence of any notification was a matter of concern for securitisation transactions as it did not clarify that the collections being done by the FSP in its role as a servicer could be passed on to the investor.

“So far, only one FSP has been admitted for insolvency proceedings under the IBC. For the securitisation transactions originated by the FSP where it was acting as the servicer, too, similar challenges were faced in meeting the investor payouts in a timely manner,” it added.

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