Securitisation in India: legal evolution and market outlook

Securitisation has become an increasingly important mechanism in India’s financial system, enabling lenders to manage balance sheets, optimise capital, and expand credit delivery. As Indian credit markets mature, securitisation has evolved from a niche funding tool used primarily by housing finance companies into a mainstream instrument employed by banks, NBFCs, and increasingly by fintech lenders.

The legal and regulatory framework governing securitisation in India is characterised by dual oversight with the Reserve Bank of India (RBI) regulating prudential, accounting, and risk-retention aspects, and the Securities and Exchange Board of India (SEBI) governing issuance, listing, disclosure, and investor protection for securitised instruments accessing the capital markets. This article examines the legal evolution of securitisation in India, with particular emphasis on SEBI’s regulatory framework, and analyses the current market landscape and future outlook.

Legal Concept and Structure of Securitisation

Securitisation involves the transfer of a pool of financial assets, typically loan receivables, from an originator to a bankruptcy remote special purpose vehicle (SPV). The SPV finances the acquisition by issuing securitised debt instruments, commonly in the form of pass-through certificates (PTCs) to investors. Cash flows from the underlying receivables are used to service these instruments.

In India, securitisation structures predominantly take the form of (i) PTC based securitisation, and (ii) direct assignment transactions, particularly in the bank- NBFC co-lending arrangements. Regardless of the form, the legal robustness of any securitisation structure depends on three foundational principles: (i) a demonstrable true sale of receivables, (ii) insulation of the transferred assets from the insolvency of the originator; and (iii) enforceability of underlying receivables and security interests under applicable law.

Statutory Recognition and Early Legal Evolution

The statutory recognition of securitisation in India commenced with the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Although SARFAESI Act primarily associated with enabling lenders to enforce security interests without court intervention, it also legitimised the assignment and securitisation of financial assets, particularly in the context of stressed assets. However, SARFAESI Act did not establish a comprehensive framework for market-based securitisation of standard assets. As a result, the early evolution of securitisation was largely driven by RBI circulars, contractual structuring, and common law principles of assignment.

RBI’s Prudential and Structural Framework

Over time, the RBI has put in place a progressively refined regulatory framework governing the securitisation of standard assets. RBI’s approach has been shaped by several core prudential concerns, including curbing unchecked “originate-to-distribute” models, ensuring that originators retain a meaningful economic stake in securitised exposures, and promoting transparency and consistency in transaction structures.

To address these objectives, the RBI introduced a consolidated securitisation regime prescribing detailed requirements relating to (i) Minimum Holding Period (MHP), (ii) Minimum Retention Requirement(MRR), (iii) capital adequacy and provisioning, (iv) credit enhancement and liquidity support, (v) accounting treatment and disclosures. These measures have had a material influence on how securitisation transactions are structured and priced in the India.

SEBI’s Central Role in Capital Market Securitisation

While RBI’s oversight is critical from a prudential and systemic risk perspective, SEBI plays a central and often under-appreciated role in the development of the securitisation market, particularly where securitised instruments are issued to investors through public issuances or listed on stock exchanges.

The cornerstone of SEBI’s securitisation framework is the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, as amended from time to time (“SEBI SDI Regulations”). These regulations govern public issuance and listing of securitised debt instruments (SDIs) such as PTCs, and listing of security receipts (SRs) issued by asset reconstruction companies. The SEBI SDI Regulations establish a capital markets architecture for securitisation, with strong emphasis on investor protection, disclosure, transparency, and ongoing compliance.

Structural Safeguards and Bankruptcy Remoteness under SEBI Regulations

A defining feature of the SEBI SDI Regulations is its insistence on robust transaction structures. SEBI mandates that securitised instruments must be issued through a Special Purpose Distinct Entity (‘SPDE’), most commonly constituted as a trust. SEBI regulations require that the SPDE be bankruptcy-remote, that its activities be restricted to acquiring receivables and issuing securitised instruments, and that there be a clear demarcation of roles among the originator, servicer, trustee, and providers of credit enhancement. These structural safeguards are designed to reinforce the ‘true sale’ doctrine and mitigate the risk of re-characterisation of securitisation transactions as secured loans.

Disclosure Centric Regulation and Investor Protection

SEBI’s approach to securitisation regulation is fundamentally disclosure-oriented. Offer documents for public issues of SDIs must contain extensive disclosures, including: (i) nature and performance history of underlying receivables, (ii) cash flow waterfall and priority of payments, (iii) credit enhancement mechanisms and triggers, (iv) servicing arrangements and replacement events, (v) asset-specific and structural risks. Post-listing, issuers are subject to continuous disclosure obligations, including periodic pool performance reporting and event-based disclosures under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This emphasis on transparency is critical in enabling informed investment decisions in complex structured finance products.

SEBI regulations also mandate credit rating of securitised debt instruments offered to the public or listed on exchanges. In recent years, SEBI has significantly tightened regulatory oversight of credit rating agencies, particularly in relation to structured finance products. Enhanced disclosure of rating assumptions, surveillance mechanisms, and governance standards have had a direct impact on securitisation structuring and transaction economics.

Interplay between RBI and SEBI: Dual Compliance Challenges

Indian securitisation transactions involving listed or publicly issued instruments are subject to a dual regulatory regime. While RBI guidelines govern prudential norms applicable to originators and investors, SEBI regulations apply to the issuance, listing, disclosures, and investor protection dimensions. Market participants must therefore ensure that securitisation structures comply with both regimes without creating regulatory arbitrage or legal uncertainty.

Securitisation, Insolvency, and Judicial Scrutiny

The interaction between securitisation and the Insolvency and Bankruptcy Code, 2016 (IBC) has become increasingly significant. Courts have consistently emphasised the importance of substance over form, particularly in determining whether securitised assets are insulated from the originator’s insolvency estate. This jurisprudence has reinforced the importance of genuine risk transfer, limited recourse structures and robust servicing and replacement mechanisms.

Market Trends and Outlook

Although public issuance and listing of securitised instruments remain limited in India, SEBI’s framework provides a scalable pathway for market deepening. Looking ahead, securitisation is expected to expand into infrastructure-linked cashflows, green and ESG-linked receivables, and loan portfolios originated through fintech platforms. While RBI has defined the prudential contours of securitisation, SEBI has enabled its integration with India’s capital markets through a robust disclosure-driven framework. As India seeks to deepen its bond markets and mobilise long-term capital for infrastructure and sustainable finance, securitisation supported by coordinated RBI and SEBI oversight is poised to assume a more prominent role in the financial system.