Securitised Debt Instruments (SDIs)

Securitised Debt Instruments (SDIs) : A Comprehensive Overview

Introduction to Securitised Debt Instruments (SDIs)

Securitised Debt Instruments (SDIs) segment in India provides a significant tool for the transformation of illiquid assets (reduced due to the time and cost taken to trade them), such as loans and receivables, into marketable securities. These instruments are issued via Special Purpose Distinct Entities (SPDEs), usually established in the form of trusts and listed on recognised stock exchanges, subject to regulation by SEBI.

The SDIs are like fixed-income securities and are governed by the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 and are uniquely positioned for institutional investors looking for exposure in asset-backed fixed-income securities. These instruments help banks, NBFCs, housing finance companies and other originators to release capital and move risk off-balance sheet, at the same time providing investors an opportunity to receive structured returns from known cash flows.

What is a Securitised Debt Instrument?

A Securitised Debt Instrument (SDI) is a financial asset that has been created by a securitisation process that pools one or more types of underlying assets that produce stable cash flows (principally loan repayments). The underlying assets are then transferred to a legally independent SPDE, which issues the instruments to the investors.

This form of securitisation helps convert illiquid receivables into tradable securities and spreads risk across a diversified pool.

Structure of SDI Transactions

The SDI ecosystem involves multiple regulated participants:

Originator : Who is assigning debt or receivable to SPDE (eg, Bank, NBFC)
SPDE : A bankruptcy-remote trust established to issue SDIs.
Trustee : SEBI-registered, which is responsible for ensuring the SPDE's Compliance with investor protection and governing disclosure in the prospectus
Servicer : A Company that collects the receivables and perfroms the regular distributions.
Credit Enhancer: Guarantees or reserves to diminish risk.
Liquidity Provider: Ensures smooth cash flows if delays arise in receivable collections.

Characteristics of SDIs

Asset-backed : Based on loans or receivables that produce predictable cash flows
Bankruptcy Remote : SPDE serves to shield assets from the originator’s credit risk.
Structured Returns : Payments are made in defined tranches per the contract.
Rated Instruments : Should be rated at least two (2) credit rating agencies registered with SEBI.
Tradable : Publicly issued and listed SDIs are traded on recognised stock exchanges.

Categories of Underlying Assets

SDIs can be structured around various types of receivables, including:

1. Mortgage-backed loans (residential or commercial).
2. Vehicle or equipment finance loans.
3. Microfinance portfolios.
4. Trade receivables or corporate loans.
5. All monetary assets as defined in the SARFAESI Act, 2002.

These assets should be unencumbered, binding and generate cash flows to emphasise investor confidence.

Eligibility & Compliance Criteria

There are strict conditions to satisfy both the SPDE and the associated trustee to release SDIs:

It will be necessary for SPDE to be a trust with a constitution document sanctioning SDI creation.
Trustees must be:
- SEBI registered (or exempt, e.g., NHB, NABARD).
- Have a net worth of ₹2 crore.
- Hire securitisation professionals of quality.
The asset sale should be a "true sale" without recourse or set-off rights to the originator.

Purpose of SDI Issuance

Liquidity generation: Assists financial firms to decongest their balance sheets by vending loan books.
Risk transfer : Enables both originators and investors to diversify their risks.
Efficient capital management: Improves balance sheet ratios for lending institutions.
Investor access: Institutional investors can get access to high-yield, asset-backed securities.

Advantages of SDI Listing

1. Access to Capital Markets

Exchange listing allows SPDEs to reach more investors.

2. Risk Mitigation

Investors benefit from diversification, structured payouts and credit enhancement mechanisms.

3. Transparency

Regular disclosures and audited accounts build investor trust.

4. Regulated Framework

From start to finish, everything is managed by SEBI to guarantee legality and financial safety.

5. Improved Liquidity for Originators

Lenders can recycle capital for further lending operations.

Disadvantages & Risks

1. Complex Structuring

Legal and financial complexity in setting up SPDEs and executing the true sale of assets.

2. High Compliance Burden

Frequent reporting, audits, trustee coordination and rating reviews.

3. Cost-Intensive

Involves credit rating fees, trustee fees, legal documentation and listing expenses.

4. Asset Performance Risk

Investor returns are based on the performance of receivables underlying the ABS. A default or delay may affect payouts.

5. Limited Retail Participation

Primarily suited for Qualified Institutional Buyers (QIBs) due to complexity and risk profile.

Renewal & Ongoing Requirements

Trustees will also need to file quarterly performance reports, investor reports and audit certificates.
Ratings need to be reviewed once a year (or half-yearly in case of security receipts).
Books and records must be kept for at least 8 years after the redemption.
The trustee has to have a net worth of all time and it must name a compliance officer.

Comparison: SDIs vs Corporate Bonds

Parameter	Securitised Debt Instruments (SDIs)	Corporate Bonds
Backed By	Asset pool of receivables	Issuer’s balance sheet
Returns	Structured cash flow-based	Fixed coupon or floating rate
Investors	Institutions, QIBs, HNIs	Retail + Institutional
Credit Rating	Mandatory (2 CRAs for public issue)	Usually mandatory
Tradable	Yes, on recognised exchanges	Yes
Regulatory Authority	SEBI	SEBI
Listing Requirement	Mandatory for public issues	Mandatory (for listed bonds)