What changed
Previously, SC/RCs only needed to invest a minimum 5% in SRs at issuance, with a six-month window to comply. Many redeemed their senior SRs early, leaving other investors exposed. The new rule mandates that SC/RCs hold a minimum 5% stake in each class of SRs on an ongoing basis until all SRs under that scheme are fully redeemed.
What it means for you
SC/RCs can no longer exit their investment in SRs before other Qualified Institutional Buyers are paid out. This aligns the interests of SC/RCs with other investors and ensures they retain skin in the game throughout the life of the scheme. Banks and lenders investing in SRs gain additional comfort that the originator remains committed.
What you must do
- Review all existing SR schemes to ensure SC/RCs hold at least 5% in each class of outstanding SRs.
- Update internal compliance checklists to monitor ongoing 5% holding requirement for SC/RCs.
- Advise SC/RC clients to adjust their investment portfolios to comply with the new continuous holding rule.
- Incorporate this requirement into new securitisation agreements and trust deeds.
Who it affects
Securitisation Companies (SCs), Reconstruction Companies (RCs), Qualified Institutional Buyers investing in SRs, Banks and lenders dealing with SC/RCs
Does this rule apply to existing SR schemes issued before April 21, 2010?
Yes, the notification applies with immediate effect. SC/RCs must ensure they hold the minimum 5% stake in each class of outstanding SRs under all existing schemes until full redemption.
What happens if an SC/RC fails to maintain the 5% holding continuously?
Non-compliance could lead to regulatory action by RBI, including penalties or restrictions on operations. The rule is designed to enforce ongoing skin-in-the-game.
Does the 5% requirement apply to each class of SRs separately?
Yes, the SC/RC must hold at least 5% of each class of SRs issued under a scheme, not just the overall scheme amount.