In September 2018, Hangzhou All Venture Capital (HAVC), an investment arm of Alibaba, purchased 218 million shares of One97Communications (One97C) in a private placement, which represents 25% of the total shares issued at the time.

The One97C stock price was $0.68 per share. The stock was restricted and could not be resold publicly for 3 years even if One97C were to go public.

In March 2019, One97C issued shares publicly. Following the shares issues, One97C's stock price rose as high as $2.75 per share.

In May 2020, the One97C stock price was $8.30 per share, and HAVC had approximately $1,662 million in capital gains on the One97C stock, if not for the regulatory restrictions. If the shares had been sold on the open market, the tax liability (at a 25% capital gains tax rate) would be approximately $416 million.

Financial institutions acquire assets that are difficult to resell individually, examples are auto loans, credit card receivables, home equity loans, and mortgages.

Required:

Explain the process of securitisation which provides a mechanism for off-loading such on-balance-sheet underlying risky loans and debt through the credit tranching special purpose vehicles (SPVs).

Answer rating: 100% (QA)

Securitization is the process of pooling together various types of debt such as loans or receivables and converting them into securities that can be s... View the full answer