RBI draft norms for repo deals in corporate bonds

Taking forward the agenda for developing the corporate bond market, the Reserve Bank of India said it initially intends to allow repo transactions in only listed securities like non-convertible debt, debentures and bonds rated AA+ and above.

Commercial Papers (CPs), Certificates of Deposit (CDs) and other instruments including non-convertible debentures with less than a year of residual/original maturity, will not be eligible for repo deals, RBI said in its draft guidelines.

A repo is a contract in which the seller of securities agrees to repurchase at a specified time and price. It may only be done with securities already in the security account of the repo seller.

RBI said commercial banks, registered non-banking finance companies, Exim Bank, Nabard, Sidbi, mutual funds, housing finance companies and insurance companies would be eligible to enter into repo transactions.

Dealers said this will be one tool to provide liquidity. Mutual funds may not be face a tight liquidity situation like the one they had to go through in September-October 2008 after the US collapse of Lehman Brothers.

RBI proposed that repos in corporate debt securities will be permitted for a minimum period of a day and a maximum period of a year. The trading would be on an over-the-counter basis.