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Government NBFCs are now eligible participants for repo transactions in corporate debt securities

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With the objective of developing the corporate debt market, RBI replaced the existing norms governing forward contracts in corporate debt securities with the new Repo in Corporate Debt Securities (Amendment) Directions, 2015 on February 03, 2015. Under a repo transaction or a ready forward transaction, a holder of securities sells them to an investor with an agreement to repurchase them at a predetermined date and rate. A repo is a means of funding by selling a security held on a spot/ready basis and repurchasing the same on a forward basis. Under the new directions, RBI has introduced several changes, including mandatory settlement through the clearing houses of NSE, BSE and MCX-SX; which was hitherto OTC. In addition, it has expanded the list of eligible underlying collateral in repo transactions and replaced the minimum haircut standard with a rating-linked haircut for determining the percentage value to be deducted from an asset while being used as collateral.

Recently, on May 14, 2015, RBI has expanded the list of eligible participants who are eligible to undertake repo transactions in corporate debt securities. Previously, government companies, as defined in Section 2(45) of the Companies Act, 2013, registered as NBFCs were not permitted to undertake repo transactions in corporate debt securities. The notification has now permitted such NBFCs to undertake repo transactions, subject to compliance with prudential norms for NBFCs prescribed by the Department of Non-Banking Regulation.

Since the 1990s, the Government and RBI have been excessively cautious about freeing of repos because of numerous instances of misuse of repos. Since then, every step has been taken as an exception to the general overarching ban on forward contracts. Although the current developments are welcome, there is further scope for expanding the list of eligible participants as well as eligible underlying securities in order to provide the necessary depth and liquidity to repos in the corporate debt market.