1. A Housing Finance Company (HFC) is sponsored by a nationalised bank, with equity participation by another housing finance company, the National Housing Bank and the Unit Trust of India. The company is mainly engaged in the business of retail housing finance as it provides finance to individuals for a period extending upto 20 years. To meet the requirements of long term finance, the company has generated resources from sources such as the following:

Deposits: Accepted for a period up to 7 years.

Term loans from banks: Availed for a period up to 12 years. Refinance from National Housing Bank: Availed up to 15 years.

Non-convertible Debentures: Raised for a period of 7 years with put and call option after 5 years.

2. To augment the resources with cost effective funds, the company has securitised future housing loan receivables of principal and interest split into Class ‘A’ Pass Through Certificates (PTCs) for receivables up to, say, 7 years and the balance receivables after 7 years into Class ‘B’ PTCs.

3. The querist has informed that the Class ‘A’ PTCs, being the receivables for 7 years, are being sold to outsiders like banks, financial institutions, etc., and cash has been received. Class ‘B’ PTCs, being the receivables after 7 years, are held by the company as collateral to enhance the credibility of the securitisation. No cash has been received for Class ‘B’ PTCs held by the company.

4. The querist has further informed that the National Housing Bank is acting as the ‘Trustee’ for the above securitisation transaction. Loans in respect of Class ‘A’ PTCs, being sold, are removed from the balance sheet by debiting the Bank Account (for the amount received) and crediting the Housing Loan Account since the same are sold to the investors. The querist has stated that since there is no inflow/outflow of cash or any other consideration being received, Class ‘B’ PTCs are being disclosed in the balance sheet of the Originator (the company).

5. According to the querist, the Originator is still recovering the amount from its borrowers and servicing the Class ‘A’ PTC holders at a pre- determined rate of interest. The Class ‘A’ PTC holders will have the priority over the Class ‘B’ PTCs being held by the Originator. Any pre-payment of the principal will be proportionately shared between Class ‘A’ PTC holders (Investors) and Class ‘B’ PTC holders (Originator). Thus, the PTC holders will get the payment every month for the principal repayment as well as the interest on the amount outstanding. The querist has also stated that for the service rendered by the Originator for recovering the amount from the borrowers and making the payment to the PTC holders, the Originator will get fees as servicing and paying agent.

6. The querist has referred to the ‘Guidance Note on Accounting for Securitisation’, issued by the Council of the Institute of Chartered Accountants of India, which recommends the accounting for securitisation in the books of the Originator, Investors and the Trustees.

7. The querist is of the view that as per the Guidance Note, securitisation process normally involves the receipt of immediate cash and/or other consideration in the books of the Originator. The Guidance Note has not discussed accounting for the PTCs being held by the Originator itself. Further, once the Class ‘A’ PTCs (being sold to investors) are fully serviced, the Class ‘B’ PTCs being held by the company will not be relevant as the same are held by the Originator and, hence, will again become a Housing Loan. In view of this, the querist is of the view that the Class ‘B’ PTCs being held by the Originator (for which there was no physical inflow/outflow of cash and/or other consideration received) can be disclosed under ‘Housing Loan’ (not under ‘Investments’) with a suitable note regarding the securitisation transaction.

B . Query

8. The querist has sought the opinion of the Expert Advisory Committee as to whether the Class ‘B’ PTCs held by the Originator, should be disclosed as a housing loan or as an investment.

9. The Committee notes that the querist has raised, for its opinion, only the issue regarding disclosure of Class ‘B’ PTCs held by the Originator. The Committee has, therefore, restricted itself to examining this issue and has not examined other accounting aspects such as whether the loans which have been securitised should be derecognised from the balance sheet of the Originator, what should be the value of Class ‘B’ PTCs in the hands of the Originator, and the treatment of any profit or loss arising on the securitisation transaction. The Committee further notes that it appears from the facts of the case that the entire housing loans which have been securitised have been derecognised by the company. The Committee presumes that such derecognition is in consonance with the recommendations contained in the Guidance Note on Accounting for Securitisation, issued by the Institute of Chartered Accountants of India.

10. The Committee notes that paragraph 21 of the Guidance Note recommends as below:

"21. The Investor should account for the PTCs and/or debt securities acquired by it as an investment in accordance with Accounting Standard (AS) 13, ‘Accounting for Investments’. However, where in case of an Investor, AS 13 is not applicable because of the Investor being specifically exempted from the application of AS 13, the investments in PTCs and/or other securities should be valued and accounted for as per the relevant accounting principles applicable to the Investor."

11. The Committee further notes that AS 13 defines investments as "assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not ‘investments’."

12. On the basis of the above, the Committee is of the view that since the Originator does not hold Class ‘B’ PTCs as investments as defined above, the same can not be disclosed as investments.

13. With regard to whether the Class ‘B’ PTCs held by the Originator should be shown as loans, the Committee is of the view that since the Originator has derecognised the securitised housing loans from its balance sheet, it would not be appropriate to disclose the Class ‘B’ PTCs as loans. The Committee is, therefore, of the view that the Class ‘B’ PTCs held by the Originator in the present case should be shown with an appropriate nomenclature, such as, ‘Retained interest in securitised housing loans’, under the head ‘Loans and Advances’ with appropriate disclosure of the securitisation transaction in the notes to the accounts.

D. Opinion

14. On the basis of the above, the Committee is of the opinion that the Class ‘B’ PTCs held by the Originator in the present case should be shown with an appropriate nomenclature, such as, ‘Retained interest in securitised housing loans’, under the head ‘Loans and Advances’ with appropriate disclosure of the securitisation transaction in the notes to the accounts.

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1 Opinion finalised by the Committee on 27.1.2004.