Only seven SPVs registered with SECP since promulgation of ‘The Companies (ABS) Rules’

ISLAMABAD: Only seven Special Purpose Vehicles (SPVs) have been registered with the Securities and Exchange Commission of Pakistan (SECP) since the promulgation of “The Companies (Asset Backed Securitization) Rules, 1999” (ABS Rules) to raise funds through the issuance of debt securities including Sukuk.

The SECP documents revealed that the SECP is facing this serious problem of less registration of the SPVs since the promulgation of The Companies (Asset Backed Securitization) Rules, 1999 (ABS Rules) on December 14, 1999.

This reflects that the applicable framework is not conducive. The committee on “Capital Market Instruments for housing and construction finance” identified certain limitation in the ABS Rules w.r.t issuance of mortgage backed securities (MBS) and covered bonds (CB). Therefore, in order to enable issuance of MBS and CBs especially for the promotion of housing and construction finance, amendments have been proposed in ABS Rules.

Therefore, the amendments in ABS Rules, 1999 were notified and operational and procedural requirements specified through Regulations are open for public comments.

Under the revised regulations, a special purpose vehicle may now raise funds through the issuance of debt securities or Shariah-compliant securities as specified by the Commission. They shall apply to offer of debt securities or Shariah-compliant securities by special purpose vehicles under securitization process. Special purpose vehicles owned or controlled by the federal government or provincial government may also adopt these rules to such extent in accordance with applicable law.

It is important to clarify to the general public that the term “Securitization” means a process whereby a SPV raises funds through the issuance of debt securities including Sukuk and uses such funds by making payment to the originator and through such process acquires the title, property or right in specified assets of the originator.

ABS-related laws of five jurisdictions (India, US, Malaysia, Singapore and Turkey) were analysed for the purpose of developing a comprehensive regulatory framework in line with the global practices. In this regard, following areas are commonly covered in the respective regulations of different jurisdictions, the SECP said.

The “securitization” means a process whereby a Special Purpose Vehicle (SPV) raises funds through the issuance of debt securities including Sukuk and uses such funds by making payment to the Originator and through such process acquires the title, property or right in specified assets of the originator.

The areas covered in the proposed regulations revealed that the paid-up capital requirements for SPV being enhanced from the previous limit of Rs 100,000 (as per ABS Rules, 1999) to one million rupees. The paid-up capital requirements also exist in other jurisdictions as well such as India, Malaysia, Turkey, and Singapore.

The Fit and Proper criteria, previously briefly covered under ABS Rules, 1999 is further reinforced for the promoters/sponsors, directors, chief executive, officer or employee of the SPV.

The conditions of operations, being procedural requirement are shifted from ABS Rules, 1999 to the regulations. However, the condition which limits SPV to apply any part of its assets to real estate is being omitted to facilitate the issuance of MBS. Requirements for assets that may be securitized: the asset requirements have been added as per practices prevailing in other jurisdictions. It includes all those assets which generate cash flows and where originator has valid and enforceable interests.

The originators are now allowed to establish 100 percent owned SPV. As per SBP’s criterion for banks, the banks are allowed to establish SPV as its subsidiary. The assets are required to be transferred on true sale basis as per the practices followed in other jurisdiction so as to ensure that SPV be remote from the risk of bankruptcy, insolvency and winding up of the originator.

The credit enhancement is being added as per international practice. Credit enhancement in Securitization transaction refers to an arrangement to decrease the likelihood of default on debt securities by the underlying borrowers. Credit enhancement can be in the form of cash collateral, profit retention, subordination, insurance, letter of credit, over-collateralization, undertakings and guarantees by third party including financial institution.

The role of servicer is being added in the regulations as per international practice. “Servicer” means an entity appointed by the special purpose vehicle for the collection or management of the asset pool and for making allocations or distributions to holders of the securitized instrument in accordance with the regulations, the SECP added.

Copyright Business Recorder, 2022