International settlement of G-Secs faces delay

Differences arise between Euroclear and RBI on cross-border settlement of govt bonds

India’s plans to join Euroclear, the world’s largest securities settlement platform, might be delayed. There are differences between Euroclear and the Reserve Bank of India (RBI) on a few aspects of cross-border settlement of government bonds issued here.

India’s membership of the Brussels-based financial services company will make it easier for foreign investors to invest in the debt market here, by doing away with the need to register in India.

However, the issue of who should be allowed to invest and settle debt through this route is being debated. “What RBI is proposing is not acceptable to Euroclear and what the company is suggesting is not agreeable to the central bank. We are trying to arrive at a solution,” a finance ministry official told Business Standard.

INTERNATIONAL TRADING PLATFORM

• Euroclear is the world’s largest securities settlement system based in Brussels
   
• It will make it easier for foreign investors to invest in the debt market in India
   
• Investors registered with Euroclear don’t have to register separately with Sebi
   
• RBI not in favour of allowing short-term investors, but finmin and Euroclear differ
   
• It is also against raising the current debt limits for foreign investors

The finance ministry, too, differs with the central bank. In his Budget 2014-15 speech, Finance Minister Arun Jaitley had announced plans to allow international settlement of Indian debt. It is learnt RBI is against allowing short-term investors such as foreign institutional investors (FIIs) to invest in government securities through Euroclear, as it could put India at risk in case of a sudden outflow.

But the finance ministry doesn’t favour making such a distinction. “Euroclear is a step towards fuller capital account convertibility. Currently, there are restrictions on who can invest in India. If we become a member of Euroclear, anybody registered can come. You don't have to register in India. There will be no issues on KYC (Know Your Customer) because Euroclear has more stringent norms compared to India,” said another official, requesting anonymity.

Recently, RBI Deputy Governor H R Khan denied plans to raise the debt limit for foreign investors. Following these limits being tweaked in July, foreign investors are allowed to invest up to $30 billion in government securities. While the ceiling for FIIs, qualified foreign investors and foreign portfolio investors is $25 billion, that for long-term investors such as sovereign wealth funds and multilateral agencies is $5 billion.

“While institutions can invest directly in the Indian market, it is also true while investing, financial institutions have a home country bias. For instance, they prefer being able to buy the same security in a Euroclear format. There is much comfort when the payment and settlement happens in foreign a currency, in their market,” said Samir Gupta, partner, EY.

He, however, didn’t agree Euroclear was a step towards full capital account convertibility, saying this was a whole different ball game, as it gave greater flexibility to Indian companies, too, to raise money abroad. “Our markets are not that deep yet; if a lot of money leaves India, it puts pressure on the currency.”

If the finance ministry and RBI stick to their guns, the central bank might have the last laugh, thanks to the Foreign Exchange Management Act, according to which the final decision in matters of capital account rests with RBI. The Act mandates the central bank to specify, in consultation with the central government, regulations relating to capital account transactions — capital investment flowing in and out of the country.

In case of the current account — the difference between the country’s savings and investment —, the government takes decisions, in consultation with RBI.

Officials said to begin with, shares wouldn’t be settled on the Euroclear platform, as the government wouldn’t know the identities of investors.

“In debt, we don’t need to know who is investing,” said an official.

Euroclear verifies information supplied by brokers in transactions. While its assets are valued at euro 25.2 trillion, the overall value of securities transactions settled is about euro 570 trillion a year.