Company Registration in Madurai – Securitization Companies what we are going to discussed in this article.

Securitization Companies

The securitization and reconstruction of Financial Assets and Enforcement of security Interest Act, 2002 had come into effect from June 21, 2002. In exercise of the powers conferred therein, the bank has framed Guidelines and Directions to Securitization Companies and Reconstruction Companies relating to company registration and other matters like acquisition of financial assets, prudential norms relating to income recognition, classification of assets, provisioning, accounting standards, capital adequacy, measures for asset reconstruction and deployment of funds. The bank has evolved a set of instructions which are required to be complied with by all Securitization Companies or Reconstruction Companies so that the process of asset reconstruction proceeds on smooth and sound lines. In addition, the bank has evolved guidance note based on guidelines issued on various matters, gist of which is given below for the guidance of securitization companies or reconstruction Companies. The words and expression used in these notes shall have the same meaning as in the Act.

Acquisition of Financial Assets

• Every securitization company or reconstruction company is required to evolve Asset Acquisition Policy within 90 days of getting the certificate of company registration which shall provide that the transactions take place in a transparent manner and at a fair price in a well-informed market, and the transactions are executed at arm’s length basis by exercise of due diligence.
• The share of financial assets to be acquired from the Bank or FIs should be appropriately and objectively worked out keeping in view of the provision in the Act requiring consent of secured creditors holding not less than 60% of the amount outstanding to a borrower for the purpose of enforcement of security interest;
• For easy and faster reliability, all the financial assets due from a single debtor to various banks/FIs may be considered for acquisition. Similarly, financial assets having linkages to the same collateral may be considered for acquisition to ensure relatively faster and easy realization.
• Both fund and non-fund based financial assets may be included in the list of assets for acquisition. Assets classified as SMA 2 in the books of the originator may also be acquired;
• Acquisition for funded assets should not include takeover of outstanding commitments, if any, of any bank or FI to lend further. Terms of acquisition of security interest in fund transactions, should provide for the relative commitments to continue with bank or FI, till demand for funding arises.
• Loans not backed by proper documentation should be avoided;
• As far as possible, the valuation process should be uniform for assets of same profile and should ensure that the valuation of the financial assets is done in scientific and objective manner. Valuation may be done internally or by engaging an independent agency, depending upon the value of assets. Ideally valuation may be entrusted to the committee authorized to approve acquisition of assets, which may carry out the task in line with an Asset Acquisition Policy laid down by the Board of Directors of the company in this regard.
• The assets acquired by SC/RC should be transferred to the trusts set up by the Securitization Company or Reconstruction Company at the price at which these were acquired from the originator of the asset. However, there is no restriction on acquisition of assets from banks/FIs directly in the books of trusts set up by Securitization Company or Reconstruction Company.
• The assets acquired by the securitization company or reconstruction company are required to be resolved within a period which shall normally not exceed five years from the date of acquisition of such assets. However, if the assets remain unresolved at the end of five years from the date of acquisition, the Board of Securitization Company or Reconstruction Company may increase the period of realization up to 8 years from the original date of acquisition of asset subject to condition.

Issue of Security receipts

• Every Securitization company or Reconstruction Company shall issue the security receipts through the trust set up exclusively for the purpose. The internship of such trust shall vest with the Securitization Company or Reconstruction Company.
• The trust shall issue security receipts only to qualify institutional buyers and such security receipts shall be transferable or assignable only in favor of other qualified institutional buyers.
• Every securitization company or reconstruction company intending to issue security receipts shall make disclosures in the offer document as prescribed by the Bank from time to time.
• Every Securitization Company or Reconstruction Company shall continue to hold a minimum of 5% of the security receipts issued by the SC/RC under each scheme on an ongoing basis till the redemption of all the security receipts issued under each scheme.
• Qualified institutional buyers will be entitled to invoke the provisions of Section 7(3) of the SARFAESI Act at the end of 5 years or 8 years i.e., as at the end of period realization applicable for the particular asset.
• Every SC/RC shall obtain initial rating/grading of SRs from an approved credit rating agencies within a period of 6 months from the date of acquisition assets and declare forthwith, shall be got reviewed from an approval CRA as on June 30 and December 31 every year and declare the NAV of SRs forthwith to enable the qualified institutional CRA as on June 30 and December 31 every year and declare the NAV of SRs forthwith to enable the qualified institutional s to value their investment in SRs. For arriving at NAV, SC/RC shall get the SRs rated on recovery rating scale and require the rating agencies to disclose the rationale for rating.

Application of prudential norms

• Every securitization company or reconstruction company is required to maintain, on an ongoing basis a capital adequacy ratio which shall not be less than15% of its total risk weighted assets.
• Every Securitization company or reconstruction company is required to classify the assets as standard assets or non-performing assets after taking into account the period of delinquency and other weakness having bearing on the reliability of the asset. Such companies are also required to make provisions against the non-performing assets as specified by the Bank from time to time. The classification or provisioning norms will apply only to those assets which are held on the books of Securitization Company or reconstructing company. “Loss assets” will include financial assets including security receipts continued to be held by the securitization company or reconstructing company which has not been realized within the total time frame of 5 years or 8 years, as the case may be.
• The Securitization Company or Reconstructing company may invest in equity of another securitization company or reconstructing company or may deploy its surplus funds only in Government securities or as deposits with scheduled commercial banks or SIDBI or NABARD or other such entity as may be specified by RBI from time to time.
• No Securitization Company or Reconstruction Company shall invest in land and building except for its own use up to 10% of the owned fund of the company. However, if any land and building is acquired by SC/RC in ordinary course of its business of reconstruction while enforcing the security interest, such land and building shall be disposed of within a period of 5 years from the date of its acquisition or such extended time as permitted by the Bank. The income recognition shall be based on recognized accounting principles and all the accounting standards and guidance notes issued by ICAI shall be followed by Securitization Company or Reconstruction Company in so far as they are not inconsistent with guidelines and direction issued by the bank.

Approval of Policy Documents by the Board of Directors

Every Securitization company or Reconstruction Company shall frame Policy guidelines with the approval of their Board of Directors on issues relating to asset acquisition, rescheduling of debt due from borrowers, settlement of debt payable by the borrowers, issue of security receipts and policy regarding deployment of surplus funds. The policy relating to acquisition of financial assets is required to evolve within 90 days of grant of certificate of company registration to Securitization Company or Reconstructing Company. Every Securitization Company or Reconstructing Company shall maintain a record indicating there in the details of deviations made from the prescriptions of the Board of Directors in the matter of asset acquisition, pricing, etc., and the reasons therefor should be maintained.

Regulatory Reporting

• Every Securitization Company or Reconstructing Company is required to submit quarterly statement viz., SCRC1 and SCRC2 to the Bank within 15 days of close of the quarter to which it pertains indicating therein, owned funds position, value of assets acquired, security receipts issued, investment in security receipts by various QIBs, list of Banks/FIs from whom the assets were acquired by Securitization Company or Reconstructing Company etc.
• Every Securitization Company or Reconstructing Company is required to furnish to the Bank a copy of the audited balance sheet along with directors or auditors report within one month from the date of AGM in which the audited accounts of Securitization Company or Reconstructing Company are adopted.

Internal Audit

To ensure functioning of Securitization Companies or Reconstructing Companies on healthy lines, the operations and activities of such companies may be subjected to periodic audit and checks by internal or external agencies.

Accounting year or Disclosures in the balance sheet

Every Securitization Company or Reconstructing Company shall prepare its balance sheet and profit and loss account as on March 31 every year. In addition to complying with requirements of Schedule 6 of the Companies Act, 1956, the securitization company or reconstructing company shall make additional disclosures on various issues as listed in paragraph 15 of the Notification No.2 dated April 23, 2003 as amended from time to time.

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