India's securitisation market set to grow further: Moody's

India's introduction of three significant regulatory changes will have transformative implications for the structured finance market, Moody's Investors Service said on Monday.

"Specifically, the measure are a new tax regime that will lift post-tax investment returns from securitization 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," Vincent Tordo, an analyst with Moody's, said.

Moody's conclusions were contained in a just-released report on India's securitization market.

"Together, these three changes will help -- as indicated -- further develop India's structured finance market, and allow securitization to play a bigger role as a source of funding in the economy, an objective promoted by the government," Tordo added.

The new tax rule will increase post-tax returns from investments in pass through certificates (PTCs), whose issuance volumes have fallen because of lower demand from bank investors put off by current lower returns.

Moody's Investors Services said 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.

It noted 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.

The code will also provide greater clarity on the insolvency process, a key aspect of the risk analysis of securitization transactions, it added.

Under new rules effective June 1, investors can claim a tax deduction against income from investments in PTCs issued by securitization trusts, and to adjust for expenses incurred in relation to securitization income.

Changes in regard to foreign portfolio investors (FPIs) will encourage foreign investment and changes to deal structures, Moody's Investor Service said, adding that FPIs will be allowed to invest in Indian PTCs under a draft circular published by the Reserve Bank of India.