Sources of Corporate Funding

Securitization is the transformation of financial assets into securities. Securitization is used by financial entities to raise funding other than what is available via the traditional methods of on-balancesheet funding. Securitization is a technique used to convert illiquid assets/claims in to tradable securities.

In other words, Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. The process leads to the creation of financial instruments that represent ownership interest in, or are secured by a segregated income producing asset or pool of assets.

Parties involved in Securitisation

Primary Parties -

•The Originator (Banks/Fls who has lent loan against properties)

•SPVs (Securitisation Company or reconstruction Company)

•Investors (To whom securities are issued, which is a participative interest against the pool of receivables which is bought by the SPVs from the originator).

Besides above parties the following are involved in the Process of securitization.

•The obligator (i.e., original borrower of the loan)

•Rating agency

•Administrator

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 6A(ii) (Syllabus 2022).

Securitization is the transformation of financial assets into securities. Securitization is used by financial entities to raise funding other than what is available via the traditional methods of on-balancesheet funding.

Few examples of assets that can be securitized are as under:

1.Mortgage loans- Residential and Commercial

2.Bank loans to businesses

3.Commercial debt

4.Educational/Student loans (Generally in US)

5.Credit-card debt

6.Automobile loans etc.

PART - B

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(e) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Mandatory Conditions for listing Securitized Debt Instruments on a Stock Exchange

1.A person cannot make a public offer of securitized debt instruments or seek listing for such securitized debt instruments unless -

(a)it is constituted as a special purpose distinct entity;

(b)all its trustees are registered with the SEBI under the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008; and

(c)it complies with all the applicable provisions of these regulations and the SEBI Act.

2.Mr. X and Ms. Y seeking registration to act as a trustee shall:-

(a)have a net worth of not less than ₹ 2 crore.

(b)have in its employment, a minimum of two persons who, between them, have at least five years’ experience in activities related to securitization and at least one among them shall have a professional qualification in law from any university or institution recognized by the Central Government or any State Government or a foreign university.

3.The requirement of obtaining registration is not applicable for the following persons, who may act as trustees of Special Purpose Distinct Entities (SPDE) under SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

a.any person registered as a debenture trustee with SEBI,

b.any person registered as a securitization company or a reconstruction company with the RBI under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

c.the National Housing Bank established by the National Housing Bank Act, 1987;

d.the National Bank for Agriculture and Rural Development established by the National Bank for Agriculture and Rural Development Act, 1981;

e.any scheduled commercial bank other than a regional rural bank;

f.any public financial Institution as defined under clause (72) of section 2 of the Companies Act, 2013; and

g.any other person as may be specified by SEBI.

However, these persons and special purpose distinct entities of which they are trustees are required to comply with all the other provisions of the SEBI (Public Offer and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 6(b) (Syllabus 2022).

Parties involved in Securitisation primarily, are as under:

1.The Originator (Banks/Fls who has lent loan against properties)

2.SPVs (Securitisation Company or reconstruction Company)

3.Investors (To whom securities are issued, which is a participative interest against the pool of receivables which is bought by the SPVs from the originator

Besides above parties the following are involved in the process of securitizations.

1.The obligator (i.e original borrower of the loan)

2.Rating agency

3.Administrator etc.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 4(c) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Persons not required to register with SEBI for working as the trustee of Special Purpose Distinct Entity (SPDE) under SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

The requirement of obtaining registration is not applicable for the following persons, who may act as trustees of special purpose distinct entities:

(a)any person registered as a debenture trustee with SEBI;

(b)any person registered as a securitization company or a reconstruction company with the RBI under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(c)the National Housing Bank established by the National Housing Bank Act, 1987;

(d)the National Bank for Agriculture and Rural Development established by the National Bank for Agriculture and Rural Development Act, 1981;

Provided that the aforesaid persons and special purpose distinct entities in respect of which they are trustees shall comply with all other provisions of these regulations: Provided further that the provisions of these regulations shall not apply to the National Housing Bank and the National Bank for Agriculture and Rural Development to the extent of inconsistency with the provisions of their respective Acts.

(e)any scheduled commercial bank other than a regional rural bank;

(f)any public financial Institution as defined under clause (72) of section 2 of the Companies Act, 2013; and

(g)any other person as may be specified by SEBI.

However, these persons and special purpose distinct entities of which they are trustees are required to comply with all the other provisions of the SEBI (Public Offer and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 4(d) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. It is the transformation of financial assets into securities. The process leads to the creation of financial instruments that represent ownership interest in, or are secured by a segregated income producing asset or pool of assets. The pool of assets collateralizes securities. These assets are generally secured by personal or real property (e.g., automobiles, real estate, or equipment loans), but in some cases are unsecured (e.g., credit card debt, consumer loans).

There are four steps in the process of securitization:

(i)Special Purpose Distinct Entity (SPDE) is created to hold title to assets underlying securities;

(ii)the originator or holder of assets sells the assets (existing or future) to the SPDE:

(iii)the SPDE with the help of an investment banker, issues securities which are distributed to investors, and

(iv)the SPDE pays the originator for the assets with the proceeds from the sale of securities.

Securitization is used by financial entities to raise funding other than what is available via the traditional methods of on-balance -sheet funding.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 4(b) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Regulation 38A of the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 provides that an issuer may list its security receipts on a recognized stock exchange subject to the following conditions:

(a)the security receipts have been issued on a private placement basis;

(b)the issuer has issued such security receipts in compliance with the applicable laws;

(c)the offer or invitation to subscribe to security receipts shall be made to such number of persons not exceeding 200 or such other number, in a financial year, as may be prescribed from time to time.

(d)the security receipts proposed to be listed are in dematerialized form;

(e)the disclosures as provided in Regulation 38E of SEBI (issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008 have been made in the offer document;

(f)the minimum allotment made to the qualified buyers is Rs. 10 lakhs;

(g)such security receipts have been valued prior to listing;

However, such valuation shall not be more than three months old from the date of listing and shall be done by an independent valuer;

(h)the security receipts have been rated by a credit rating agency registered with SEBI.

However, such rating shall not be more than three months old from the date of listing.

Further, the issuer shall comply with the conditions of listing of such security receipts as specified in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 4(d) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Following are the eligibility criteria for the Public Offer of Securitized Debt Instrument as per SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008:

A person cannot make a public offer of securitized debt instruments or seek listing for such securitized debt instruments unless:

(a)it is constituted as a special purpose distinct entity

(b)all its trustees are registered with the SEBI under the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008; and

(c)it complies with all the applicable provisions of these regulations and the SEBI Act.

The requirement of obtaining registration is not applicable for the following persons, who may act as trustees of special purpose distinct entities:

(a)any person registered as a debenture trustee with SEBI;

(b)any person registered as a securitization company or a reconstruction company with the RBI under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(c)the National Housing Bank established by the National Housing Bank Act, 1987

(d)the National Bank for Agriculture and Rural Development established by the National Bank for Agriculture and Rural Development Act, 1981.

(e)any scheduled commercial bank other than a regional rural bank

(f)any public financial Institution as defined under clause (72) of section 2 of the Companies Act, 2013 and

(g)any other person as may be specified by SEBI.

However, these persons and special purpose distinct entities of which they are trustees are required to comply with all the other provisions of the SEBI (Public Offer and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(b) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Securitization is the transformation of financial assets into securities. Securitization is used by financial entities to raise funds other than what is available via the traditional methods of on-balance-sheet funding.

There are four steps in a securitization:

(i)Special Purpose Distinct Entity (SPDE) is created to hold title to assets underlying securities;

(ii)The originator or holder of assets sells the assets (existing or future) to the SPDE;

(iii)The SPDE with the help of an investment banker, issues securities which are distributed to investors; and

(iv)The SPDE pays the originator for the assets with the proceeds from the sale of securities

A Securitization structure typically is as under :

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(c) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Answer: (B) Fixed assets, permanent part of working capital and expansion of business

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers (answer key), December 2021, Q. 23 (Financial and Strategic Management paper, Syllabus 2017).

Answer: (C) A conservative current asset financing policy relies more on short term bank financing and less on long term sources.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers (answer key), December 2021, Q. 42 (Financial and Strategic Management paper, Syllabus 2017).

Merits of Customer Advance

i.Interest free : Amount offered as advance is interest free. Hence funds are available without involving financial burden.

ii.No tangible security : The seller is not required to deposit any tangible security while seeking advance from the customer. Thus assets remain free of charge.

iii.No repayment obligation : Money received as advance is not to be refunded. Hence there are no repayment obligations.

Demerits of Customer Advance

i.Limited amount : The amount advanced by the customer is subject to the value of the order. Borrowers’ need may be more than the amount of advance.

ii.Limited period : The period of customers’ advance is only upto the delivery goods. It cannot be reviewed or renewed.

iii.Penalty in case of non-delivery of goods : Generally advances are subject to the condition that in case goods are not delivered on time, the order would be cancelled and the advance would have to be refunded along with interest.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 4(d) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Masala Bonds are rupee denominated borrowings by Indian companies in the overseas markets. This is different from other overseas borrowings, in the sense that in the other borrowings, the currency is normally dollar, euro, yen etc., whereas Masala Bonds are Rupee denominated.

The advantage of issuing masala bonds is that the company does not have to worry about the depreciation in the rupee in comparison to the other bonds/ instruments that are denominated in foreign currencies. This is normally a big worry for corporates while raising money in the overseas markets. If the rupee weakens at the time of the redemption of the bonds, the company will have to pay more rupees to repay the dollars. Many companies which had raised funds via the Foreign Currency Convertible Bonds in 2007 found themselves in a great difficulty, as the rupee had depreciated very sharply during the global financial crisis. In order to compensate the risk of currency depreciation, the buyer of the Masala Bond will get a higher coupon rate and therefore earns a higher yield.

The masala bonds were reckoned under both corporate debt and external commercial borrowings for Foreign Portfolio investment. The Reserve Bank of India recently amended the Regulations and currently treats Masala Bonds under the ECB category only, where a borrower just needs to seek the RBI’s approval to sell those securities.

Normal Bonds vis-s-vis Masala Bonds:

As against Normal Bonds, Masala Bonds are considered a safer way of raising funds from international investors by Indian Corporates as they are rupee denominated bonds. Whereas the investor gets the benefit of a slightly high rate of interest as against normal bonds, issuer enjoys safety in terms of decrement in the rupee value against foreign currencies.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 3(c) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Masala Bonds are rupee denominated borrowings by Indian companies in the overseas markets. This is different from the other overseas borrowings in the sense that the in the other borrowings, the currency is normally dollar, euro, yen etc.

The masala bonds were reckoned under both corporate debt and external commercial borrowings for Foreign Portfolio investment.

The Reserve Bank of India recently amended the Regulations and currently treats Masala Bonds under the ECB category only, where a borrower just needs to seek the RBI’s approval to sell those securities. The main advantage of issuing masala bonds is that the company does not have to worry about the depreciation in the rupee in comparison to the other currencies. This is normally a big worry for corporates while raising money in the overseas markets. If the rupee weakens at the time of the redemption of the bonds, the company will have to pay more rupees to repay the dollars. This is a big advantage, as many companies which had raised via the Foreign Currency Convertible Bonds in 2007 found themselves in a great difficulty as the rupee had depreciated very sharply during the global financial crisis. In order to compensate the risk of currency depreciation, the buyer of the Masala Bond will get a higher coupon rate and therefore earns a higher yield. Many public and private companies are in the fray to issue masala bonds as the companies can have access to more funds at a marginally higher cost of financing.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(b) (Corporate Funding and Listings in Stock Exchanges paper, Syllabus 2017).

Condition to issue redeemable preference shares in India,

•the Articles of Association authorizes the issue.

•a special resolution passed by shareholders.

•Redeemable preference share has a maturity date on which date the company will repay the capital amount to the preference shareholders.

•The paying back of capital is called redemp tion dividend.

•Preferences share shall be redeemed within a period not exceeding 20 years.

However, infrastructure a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redempt ion of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proport ionate basis, at the opt ion of the preference shareholders.

NBFC has to comply with the RBI guidelines / directions in addition to the Companies Act, 2013.

Further, the following companies are permitted to issue redeemable preference shares:

a)Private Company

b)Public Company

c)Banks

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 4(b) (Syllabus 2022).

Swadha Ltd. is required to comply with the following conditions for issuing shares with differential rights [Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014]

No company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise. Such company has to comply with the following conditions, namely:

a)Authorization in Articles of Association: The articles of association of the company authorizes the issue of shares with differential rights.

b)Passing of Ordinary Resolution at General Meeting: The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. Where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot.

c)Limit for voting power not exceeding 74%: The voting power in respect of shares with differential rights of the company shall not exceed seventy four percent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.

d)No defaults: The company has not defaulted in the following:

•the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;

•the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;

•the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of five years from the end financial year in which such default was made good.

e)The company has not been penalized by Court or Tribunal during the last three years of any offence under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act,1999 or any other Special Act, under which such companies being regulated by sectoral regulators.

f)The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.

g)The Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details .

h)The holders of the equity shares with differential rights enjoys all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.

In case Swadha Ltd. is a listed entity, additional requirements as per SEBI will also apply.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 4(a) (Syllabus 2022).