SECURITIZATION AND

HIRE PURCHASE

By: Raman Deep Kaur

 SECURITIZATION
Pooling and Repackaging of Homogeneous
liquid Financial Assets into Marketable
Securities that can be sold to Investors, is
known as Securitization.
Parties in Securitization
Generally 3 parties, namely-
1. Originator: any financial institution or
other entity, which has decided to adopt
securitization and sell its assets.
2. Special Purpose Vehicle: usually a trust
which converts receivables into securities.
3. The Investor: MF, pension fund,
insurance company, PF, etc buying
securities from SPV.
 Other Parties:
4.The Obligor: original borrower on whose
integrity success of securitization depends.
5. Credit Rating Agency: rates originator and
underlying assets of securities.
6. Administrator: receiving and paying agent
who receives payments from obligor and gives
to SPV.
7. Trustee: ensure that all parties meet their
obligations
8. Structurer: works with originator to comply
with all legal, taxation, procedural
requirements and structuring whole deal.
 Process of Securitization
Mainly includes transfer of assets, issue of
securities, servicing of securities.
1. Transfer of Assets: to SPV thru any of the
following methods-
 Assignment (statutory with legal & beneficial rights or
equitable with beneficial rights)
 Sub-participation- (not a transfer of loan, payments
received from borrower are transferred to buyer by the
lender or originator)
 Documentation: rights and obligations of all parties are
defined.
2. Issue of Securities: maturity of securities is
matched with securitized loans, rated or
guaranteed or underwritten by some agency.
3. Servicing of Securities: repayment of
securitized loan passed on to SPV, which then
pays to investors on maturity.
Structure of Securities
1. Pass through certificates: issued to investors,
against pooled assets and undivided interest and
cash flows received from underlying assets are
‘passed through’ to investors. Tenure of PTCs is
matched with life of securitized assets. Investors
have no charge against underlying assets.
2. Pay through certificates: SPV issues secured
debt instruments of different maturity in
response to investors’ demand. Offered at a
discount to face value. Like deep discount
bonds.
3. Preferred stock certificates: issued by subsidiary
company against trade debts/ consumer receivables of
parent company. Subsidiary company issues S.T.
securities against them with guarantee from merchant
banker.
4.Stripped structures: structured as ‘interest only’ or
principal only securities. Borrowers make early payment
if market interest falls. Investors in ‘principle only’ gain
by getting early payment, but ‘interest only’ investors
lose interest.
5. Asset based commercial paper: SPV purchases portfolio
of mortgages from lending institutions, combine into
single group on the basis of interest rate, maturity and
underlying collateral. Then transfers them to trust which,
in turn, issues mortgaged backed papers (CPs) of S.T.
duration. Investors participate in cash flows from
underlying mortgages to the extent of investment in
certificates.
 Benefits of Securitization
1. Additional source of fund/liquidity for originator.
2. Greater profitability due to high liquidity and fees when
originator acts as receiving and paying agent.
3.Enhancement in capital adequacy ratio by removal of
assets from balance sheet.
4.Spreading of credit risk by sharing responsibility with
several parties.
5. Lower cost of funding due to higher credit
rating of asset backed securities than the rating
of company as a whole.
6. Provision of Multiple instruments for
investors.
7. Safer investment and higher return to
investors.
8. Capital formation by preventing idle capital.
Causes of Unpopularity in
India
1. New concept, benefits not much known
2. Heavy stamp duty and registration fees on
assignment of illiquid& non performing assets
to SPVs.
3. Cumbersome transfer procedure to SPVs.
Difficulty in assignment of debt to third party.
Transfer of Property Act needs amendment.
4. Lack of standardised loan document creates
pooling difficult for SPVs.
5. Inadequate credit rating facilities.
6. Absence of proper accounting procedure for
securitized assets.
7. Absence of proper guidelines for securitization.
 HIRE PURCHASE
Hire purchase means a transaction where
goods are purchased and sold on the terms
that:
(1) payment will be made in installments,
(2) the possession of the goods is given to the buyer
immediately,
(3) the property in the goods remains with the vendor
till the last installment is paid,
(4) the seller can repossess the goods in case of default
in payment of any installment, and
(5) each installment is treated as hire charges till the
last installment is paid.
 Characteristics of Hire Purchase
Agreement
1. Payment is made by hirer (buyer) to the hiree, usually vendor, in
installments over a specified period of time.
2. The possession of the goods is transferred to buyer immediately.
3. The property in goods remains with vendor (hiree) till last
installment is paid. The ownership passes to buyer (hirer) when he
pays all installments.
4. Hiree or vendor can repossess the goods in case of default and treat
the amount received by way of installments as hire charged for that
period.
5. The installments in hire purchase include interest as well as
repayments of principal.
6. Usually, hiree charges interest on flat rate.
Legal Position of Hire
Purchase
A. Possession of goods is delivered by owner
there of to a person on a condition that such
person pays the agreed amount in periodic
payments, and
B. The property in the goods is to pass to such
person on the payment of the last of such
installments, and
C. Such person has a right to terminate the
agreement at any time before the property
so passes.
ANY QUERY???

THANKS!!!