Mar 12, 2013, 12.15 PM IST | Source: PTI

Tax exemption for securitisation trusts to boost MFs

With the Budget provisions to exempt securitisation trusts from taxation, mutual fund houses are likely to enter into securitisation deals after staying away from it since last year, say industry experts.

With the Budget provisions to exempt securitisation trusts from taxation, mutual fund houses are likely to enter into securitisation deals after staying away from it since last year, say industry experts.

Mutual fund houses have kept off securitisation deals in the recent past after tax claims had been raised by the tax department on such deals last year.

"The Budget has brought clarity to the tax provisions relating to securitisation. This will help MFs to enter into securitisation deals. MFs were otherwise staying away from the space due to tax claims," IDBI MF Managing Director and Chief Executive Debasish Mallick told PTI today.

He also said with this clarity, securitisation deals are likely to come back to the pre-tax claims period. This year's Budget has provisions to exempt securitisation trusts from taxes.

"To facilitate financial institutions to securitise their assets through a special purpose vehicle, I propose to exempt the securitisation trusts from income tax," Finance Minister P Chidambaram had said in the Budget speech.

Securitisation is a process that pools various types of contractual debts like residential mortgages, commercial mortgages, among others, into consolidated debt, which is then sold as bonds, pass-through securities or collateralized mortgage obligations to various investors.

Usually banks, MFs and other financial institutions invest in such instruments, where the coupon (interest rate) is normally higher than the other instruments like commercial papers (CPs) or certificate of deposits (CDs).

On this, an analyst with India Ratings said the exemption from taxation will give a boost to the securitisation market. "This will give boost to the securitisation market as mutual fund houses are likely to participate in such deals," said Sandip Singh, Senior Director and Head of Structured deals at Finance at India Ratings.

According to India Ratings, the total size of this market was around Rs 35,000 crore in the past calendar year with major investment coming from the banks. Meanwhile, the National Housing Bank (NHB), which acts as a special purpose vehicle (SPV) for securitising housing loan receivables, has said the tax provisions in the Budget would create liquidity in the system.

"Taxation was a big impediment to the securitisation process and the announcement will surely help in increasing the volumes," NHB Chairman and Managing Director RV Verma had said recently.

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