In this week's edition of the "Matrix Accounting" we look at whether securitisation rules of the Reserve Bank of India should be applied to sale/assignment of receivables.
Our analysis.
Para 2 of the RBI - Securitisation is a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The cash flow from the underlying pool of assets is used to service the securities issued by the SPV. Securitisation thus follows a two-stage process. In the first stage there is sale of single asset or pooling and sale of pool of assets to a 'bankruptcy remote' special purpose vehicle (SPV) in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities.
By virtue of this definition, RBI does not intend to rope in pure sale of financial receivables between two parties at arms length price. I view this guidelines a measure to regulate SPV' and more importantly protect investors interests who subscribe to PTC's issued on the security of the pool of receivables to third party investors.
Guidelines on regulating SPV's, the Securitisation Act are all in the mode of continuous evolution as can be seen by the frequent changes/notifications on the Acts relating to SPV's. As the process also involves issuing of PTC's to third parties, there is a fiduciary responsibility of the RBI to closely protect the investors interests. A reading through Para 7 and Para 8 of the guidelines throws light on the RBI's fiduciary responsibility on insulating and minimizing financial risks to parties involved to complete a securitisation transaction.
These stiffer guidelines are akin to the differentiation which RBI maintains for NBFC's accepting public deposits and those that do not. NBFC's accepting public deposits are closely monitored and have stringent regulations than those who do not as public money is involved and it is RBI's responsibility to ensure there is no financial loss to public depositors.
A similarity in the nature of the transactions between securitisation and assignment should not be driving the accounting and measurement principles. The true sale criteria is to be viewed as a brightline to test the rights and obligation assertion while drawing up the financial statements.
True sale is also more of a substance over form issue and should not be restricted to guidelines laid by the RBI (in para 7) as these maynot be exhaustive. For eg. RBI's guidelines have no reference to synthetic securitizations or Tier II level securitizations, but intrue sense these will be need to be covered. Securitisation transactions are in the nascent stage in India and are not as maturedas US markets. We can definitely see more circulars over the next fewyears, when markets become more and more innovative and matured.
Differentiation between assignment and securitisation as per RBI is clearly laid GAAP practice in India also has a differentiation in the accounting treatment. Also refer ICICI's accounting policies Draft Accounting standard AS 30 of ICAI (issued after RBI's circular)clearly lays down profits to be recognized upfront upon sale of financial assets and there is no reference to securitisation (as there is a guidance note to that effect) already issued.Assuming Company X were to sell its entire balance sheet (which comprises 99% of loans), in an outright buy over, would the position be the same that you will require Company X to defer its profits as per securitisation norms.
Open thoughts:
This is a para to which we have been grappling with and are unclear on the purpose of the para of the Reserve Bank of India.
Para 11.11 Any utilization / draw down of the credit enhancement should be immediately written-off by debit to the profit and loss account.Should it be construed that for transactions in the nature of securitisations, we should not be providing for collections losses upfront at the time of securitisation as laid down by ICAI's guidance note and should record the loss on an "actual" basis. Go ahead and crack this question on the Catch 22 phrase
The opinions expressed above are solely ours and are not to be construed to be thrust upon others. Views and feedback are invited.
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