To develop the corporate bond market from the perspective of mutual funds, the Securities and Exchange Board of India (Sebi) has allowed asset management companies to participate in repos on Commercial Papers (CPs) and Certificate of Deposits (CDs).
Repo is borrowing or lending on collateral of a security such as a bond. So, when a security is being bought or sold today, it will be reversed tomorrow or as per the contract, and the rate is decided today.
Further, CP is an unsecured, short-period debt tool issued by a company, usually for the finance and inventories and temporary liabilities, while the CD is a fixed-income financial instrument governed under the Reserve Bank and India (RBI) issued in a dematerialized form.
Also read | American credit card users owe nearly $1 trillion: Here’s how to avoid their mistakes
As per the SEBI circular date June 8, 2023, for the purpose of consideration of credit rating of exposure on repo transactions for various purposes including for Potential Risk Class (PRC) matrix, liquidity ratios, Risk-o-meter etc., the same shall be as that of the underlying securities, i.e., on a look through basis.
In mutual fund portfolios, the extra cash component or overnight fund portfolio's deployment is via Clearing Corporation of India’s Tri-party Repos (TREPs), and there the collateral is government securities and treasury bills. Now, another window has been opened for corporate bonds, which is Limited Purpose Clearing Corporation (LPCC).
According to Joydeep Sen, a corporate trainer (debt markets) and author, the circular won't have much impact on investors. "Rather, mutual funds can compare the rates between CCIL Treps and Limited Purpose Clearing Corporation (LPCC) and take benefit depending on the liquidity in this system," he said.
Also read | RBI MPC: Deposit and lending rates remain on a steady path; life goes on as usual, for now
“Regulators at times try out various steps for the development of the market. This is another step in developing the corporate bond market,” Sen added.
SEBI had first allowed the participation of mutual funds in repo in corporate debt securities in 2011. The fund houses were then allowed to participate in repo transactions only in AAA-rated corporate debt securities.
Then in 2012, to encourage the growth of the corporate bond market, it was decided that the base of eligible securities should be expanded. Mutual funds was then allowed to participate in repo in corporate debt securities, from AAA rated to AA and above-rated corporate debt securities.
Also read | e-RUPI vouchers get a boost from RBI monetary policy
Again in 2020, SEBI had set up a LPCC for clearing and settling repo transactions in corporate debt securities.
The latest circular on the participation of mutual funds in repo transactions on corporate debt securities will come into force with immediate effect.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
