ICRA welcomes clarification

 

ICRA Ltd.

The Government notification on the treatment of third-party assets during insolvency proceedings of Financial Services Providers is to give a boost to securitisation transactions, according to ICRA Ltd.

Through a notification dated 30 January 2020, the Ministry of Corporate Affairs (MCA) has detailed the manner of dealing with third-party assets by the Administrators for Financial Service Providers (FSPs) that are undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

These had been left out in the earlier notification issued by the MCA in November 2019.

As per the recent notification, for securitisation transaction or lending arrangement, where a Financial Service Provider (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 shall ensure that such assets are maintained in a distinct manner identifiable contract-wise and transfer such assets entitled to receive it as per terms of the contracts.

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

Abhishek Dafria, Head for Structured Finance and Vice President of ICRA Ltd, pointed out that securitisation transactions are considered bankruptcy remote due to the terms of the transaction and the legally binding structure.

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,” he explained.

“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 Rs 2 lakh crore for FY2020, which would be an all-time high,” said Dafria.

As per the earlier November 2019 MCA notification, the scope of the IBC had been extended to FSPs with asset size of Rs.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 so appointed have same rights, duties, obligations and powers of Insolvency Professional, while dealing with insolvency of FSPs. However, the provisions related to the 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.

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. fiinews.com

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