Securitised Debt Instrument

Start with a stream of payments somebody owes somebody else — loan repayments, lease rentals, debenture coupons. On their own they are illiquid: you cannot sell half a loan on an exchange.

Securitisation pools those assets so they can be repackaged into investable securities with a pre-determined periodic income. The pool sits in a special purpose vehicle; the vehicle issues securities against it; investors buy the securities and receive the cash the pool throws off.

The result is a securitised debt instrument. In India it can be listed and traded on a stock exchange, which is the whole point — an illiquid receivable has been turned into something with a price.

The workbook describes an SDI as almost similar in structure to a special purpose vehicle created solely to pool funds and invest in assets that are then leased on to a target company, with the investors receiving lease rentals through the tenure and the scrap value when the assets are sold at the end.

That matters for who uses them. Capital-intensive businesses — the workbook names drone makers, electric vehicle companies, charging station operators, robotics firms — can avoid paying interest on loans and simply lease the assets they need from the SPV. Investors get a fixed, timely income and exposure to a high-growth sector without taking the operating risk of the sector.

Whose job is the diligence. The originator, or sponsor, of the SDI is responsible for the due diligence on the target company taking the assets on lease, to avoid a default that would hit investors' return and principal. That means reference checks on the management team, and red flags in the financial statements, key contracts, existing lenders, default history, compliance issues and pending litigation. SDIs are then credit-rated on the inherent risk, the target companies, the assets leased, the lease amounts, tenure and returns.

Regulatory home. SDIs were introduced by SEBI in 2008 under the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations — not under the AIF Regulations.

Where they appear in AIF rules, which is why this paper cares:

• An Infrastructure Fund (Category I) may invest in listed securitised debt instruments of infrastructure investee companies or SPVs, notwithstanding the restriction to unlisted securities.
• A Category II AIF must invest primarily in unlisted securities and/or listed debt securities including securitised debt instruments rated 'A' or below.
• A Debt Fund is defined as an AIF investing primarily in debt securities of listed or unlisted investee companies or in securitised debt instruments.

Investor cash flows = Σ periodic lease rentals + residual (scrap) value at tenure end

Pre-tax yield       = the rate r at which
                      Issue size = Σ rental_t ÷ (1 + r)^t  +  residual ÷ (1 + r)^n

An electric-vehicle fleet operator needs 1,200 electric cabs at Rs 12 lakh each — Rs 144 crore. Borrowing that at its own credit standing is expensive; it would rather not carry the assets at all.

So a special purpose vehicle is set up. It raises Rs 144 crore by issuing securitised debt instruments, buys the fleet, and leases it to the operator for five years.

Solving for the rate that equates the issue size to the discounted rentals and residual gives a pre-tax return of roughly 13.4% a year — at 13% the flows are worth Rs 145.6 crore, at 14% they are worth Rs 141.9 crore, so the yield sits just above 13.4%.

The rating agency then looks at the lessee's credit, the resale market for five-year-old electric cabs, and the lease tenure, and assigns the paper 'A'.

That rating is what makes the instrument interesting to a Category II AIF: listed and rated 'A' or below, so it counts toward the fund's "primarily" test under Regulation 17. Had the agency assigned AA+, the AIF could still hold it — but it would sit outside the primary-investment count, which is the counter-intuitive result of a rule written to admit the weaker credits.

Chapter 9 (Investment Strategies), which defines SDIs and carries a sample question asking which description fits one. The correct answer is "a debt instrument created through a pooling of receivables in a special purpose vehicle"; the distractors are "based on leased rentals", "fully secured" and "a claim on the cash flows of a bank or NBFC".

SDIs also appear in Chapter 3 inside the definitions of Infrastructure Fund and Debt Fund, and in Chapter 14 (Regulatory Framework), section 14.9.3, in the Category II investment conditions.

• The sample-question answer is the pooling-in-an-SPV description. "Based on leased rentals" is deliberately close — leases are one thing that gets pooled, but the pooling is the definition.
• An SDI is a security, not a loan. It can be listed and traded on an Indian stock exchange, which is what distinguishes it from the receivables inside it.
• The workbook's "almost similar to a Special Purpose Vehicle" means the structure resembles one. The SDI is the instrument the SPV issues; it is not itself the SPV.
• Diligence is the originator's or sponsor's obligation, not the investor's — which is precisely why the credit rating carries so much weight for the buyer.
• For a Category II AIF's primary-investment test, the SDI must be listed and rated 'A' or below. A listed AA+ SDI is permissible to hold but does not count toward "primarily".
• SDIs come from the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, not from the AIF Regulations.
• An Infrastructure Fund's permission to hold listed securitised debt is an express exception to its unlisted-securities requirement, not a loophole in the 75% test.