The process of Securitization involves the following steps:
Transfer of assets by the originator (person holding the assets) to an entity (company or a trust) specially created for the purpose called Special Purpose Vehicle (SPV). Special Purpose Vehicle is a separate entity formed exclusively for charting this deal and providing funds to the originator. The SPV may be formed as a company under the Companies Act or a trust under the Indian Trusts Act.
The assets transferred should preferably be homogenous in nature in terms of the risk attached to them and/or maturity such that the pooling of such assets would be convenient. SPV divides this pool of assets transferred by the originator into marketable securities called Pay or Pass-Through Certificates and resells them to various investors.
Investors may either be banks, mutual funds or state or the central government. The investor may even be the parent company or the financier of the originator.
The issue of securities is managed by a merchant banker, who may underwrite the whole issue, or a syndicate of merchant bankers. The originator continues to administer the loan portfolio for some fee and he passes the collections to the trust which services the securities.
Apart from the SPV, a trustee is normally appointed to oversee the process of securitization. An escrow account is created for the purpose of distributing the receivables to the investors in the deal. The trustee maintains such an escrow account.
In India, mutual funds are allowed to invest not more than 5% of their total corpus in the securitized instruments. Also, unlike in the West, insurance companies are not allowed to invest in securitization deals. This, however, is expected to be relaxed with the entry of private insurance players.
Theoretically, any resource with predictable cash flows can be securitized:
Future rentals of a fishing boat.
Remuneration that is paid to a movie star.
Bills that are made to a five-star hotel.
Tickets that are to be sold at a cinema hall.
Future billings for an airline.
Dues that have to be paid by the state electricity boards to the power generating companies.
Credit card receivables.
Loans that are to be paid to the housing finance company.
Mortgages in lieu of future payment.
Hire purchase receivables.
Non-performing assets of a financial entity.