ISLAMABAD: Only seven Special Purpose Vehicles (SPVs) have been registered with the Securities and Exchange Commission of Pakistan (SECP) since the promulgation of the “Company (Asset-Backed Securing) Rules, 1999” (ABS Rules) for raise funds through the issuance of debt securities, including Sukuk.

The SECP documents revealed that the SECP has been facing this serious problem of less registration of SPVs since the promulgation of the Companies (Asset-Backed Securing) Rules 1999 (ABS Rules) on December 14, 1999.

This reflects that the applicable framework is not conducive. The Committee on “Capital Market Instruments for Housing and Construction Finance” has identified certain limitations in the ABS rules regarding the issuance of mortgage-backed securities (MBS) and covered bonds (CB) . Therefore, in order to allow the issuance of MBS and OCs, in particular for the promotion of housing and construction finance, changes have been proposed in the ABS Rules.

Accordingly, the changes to the ABS Rules 1999 have been notified and the operational and procedural requirements specified in the rules are open for public comment.

Under the revised regulations, a special purpose entity can now raise funds through the issuance of debt securities or Sharia-compliant securities as specified by the Commission. They apply to the offering of debt securities or sharia-compliant securities by securitization vehicles as part of a securitization process. Special purpose vehicles owned or controlled by the federal or provincial government may also adopt these rules as long as they comply with applicable laws.

It is important to clarify to the general public that the term “securitization” refers to a process by which an SPV raises funds through the issuance of debt securities, including sukuk, and uses those funds by making a payment to the originator. and, through this process, acquires title, ownership or an interest in specified assets of the Offeror.

The ABS laws of five jurisdictions (India, USA, Malaysia, Singapore and Turkey) were analyzed with the aim of developing a comprehensive regulatory framework in line with global practices. In this regard, the following areas are generally covered by the respective regulations of different jurisdictions, said the SECP.

“Securitization” means a process by which a special purpose vehicle (SPV) raises funds through the issuance of debt securities, including Sukuk and uses those funds by making a payment to the originator and, through of this process, acquires title, ownership or right to specified assets of the offeror.

The areas covered by the proposed regulations revealed that the paid-up capital requirements for SPVs had increased from the previous limit of Rs 100,000 (under ABS Rules, 1999) to Rs 1 million. Paid-up capital requirements also exist in other jurisdictions such as India, Malaysia, Turkey and Singapore.

The Fit and Proper criteria, previously briefly covered by the 1999 ABS Rules, are further strengthened for promoters/sponsors, directors, managing director, officer or employee of the SPV.

Operating conditions, being procedural requirements, are moved from the 1999 APA rules to the regulations. However, the condition that limits SPV to allocate part of its assets to real estate is omitted to facilitate the issuance of MBS. Requirements relating to assets that can be securitized: requirements relating to assets have been added in line with practices in other jurisdictions. It includes all assets that generate cash flows and where the originator has valid and enforceable interests.

Offerors are now permitted to establish a 100% owned SPV. According to the criterion of SBP for banks, banks are allowed to establish SPV as a subsidiary. The assets should be transferred on the basis of a genuine sale in accordance with the practices followed in other jurisdictions in order to ensure that SPV is removed from the risk of bankruptcy, insolvency and liquidation of the offeror.

Credit enhancement is added in accordance with international practice. Credit enhancement in a securitization transaction refers to an arrangement to reduce the likelihood of default on debt securities by underlying borrowers. Credit enhancement can take the form of cash collateral, profit retention, subordination, insurance, letter of credit, overcollateralisation, covenants and guarantees by a third party, including a financial institution.

The role of repairer is added to the regulations in accordance with international practice. “Servicer” means an entity appointed by the securitization vehicle to collect or manage the pool of assets and to make allocations or distributions to holders of the securitized instrument in accordance with regulations, the SECP added.

Copyright Business Recorder, 2022