Global credit rating agency Moody’s Investors Service on Monday said the three recent regulatory changes made by India will have transformative implications for its structured finance market.
“The changes will improve returns to investors, promote foreign investment, and improve the resolution process in the event of default, thereby strengthening creditor rights,” Vincent Tordo, an analyst with Moody’s, was quoted as saying in a statement.
“Specifically, the measureas are a new tax regime that will lift post-tax investment returns from securitisation trusts; changes in regard to foreign portfolio investors (FPIs) that will encourage foreign investment and changes to deal structures; and a new bankruptcy code that will reinforce creditors’ rights,” Tordo said.
Moody’s conclusions were contained in a just-released report on India’s securitisation market, “New Regulations Pave Way for Market’s Transformation; Improved Creditor Rights”.
“Together, these three changes will help — as indicated — further develop India’s structured finance market, and allow securitisation to play a bigger role as a source of funding in the economy, an objective promoted by the government,” said Tordo.
According to Moody’s, the new tax rule will increase post-tax returns from investments in pass through certificates (PTCs). The issue volume of PTCs have fallen due to lower demand from bank investors put off by current lower returns.
The participation of foreign investors through the new FPI rules will help the Indian market evolve so that it becomes more in line with global practices; for example, encouraging it to evolve away from structures with single tranches and single investors into those with multiple tranches and multiple investors.
The bankruptcy code, once implemented, will over time strengthen the legal framework of India’s credit markets by significantly increasing the bargaining power of creditors against debtors in the resolution of distressed assets, Moody’s said.
The code will also provide greater clarity on the insolvency process, a key aspect of the risk analysis of securitization transactions, Moody’s said.