Govt May Lift Ban On Forward Contracts To Revive Repo

The Central government is examining a proposal to withdraw the June 27, 1969, notification prohibiting forward contracts in government securities and public sector bonds.

According to sources, the Reserve Bank of India (RBI) wants the government to withdraw this notification as it would pave the way for the revival of the repos market thereby providing a much needed fillip to the debt market.

On the other hand, the government is reportedly not too keen on withdrawing the notification completely. However, there is a demand that it should at least allow forward contracts in government securities and public sector bonds.

In the recent past, senior RBI officials have been hinting at the possibility of resumption of repos in a wide gamut of instruments. At a recent seminar, RBI governor C Rangarajan said that if a risk-free transfer and settlement system in non-government securities like public sector bonds and corporate debentures was put in place, it would help in resumption of repos in these instruments.

Legal experts point out that the principal stumbling block in the reintroduction of repos is the notification. Under Section 16 of the Securities Contracts (Regulation) Act (SCRA) 1956 the Central government prohibited forward contracts in securities. However under Section 28 of SCRA, a handful of entities like the government and RBI are exempted.

Referring to a recent Supreme Court judgement in the case between BOI Finance and the custodian, a legal expert said that there were certain issues which were not considered in detail. For instance, the judgement interprets a ready forward transaction as a securities transaction instead of as a funding transaction. Against the backdrop of the judgement the second leg of a repo transaction or the forward leg will not be valid unless the 1969 notification is withdrawn, he said.

In the previous credit policy, RBI had proposed extending repo and reverse repo transactions in respect of all dated central government securities and treasury bills while allowing non-bank SGL holders to enter into reverse repo transactions with banks and primary dealers. However, the necessary notifications are yet to be issued.

According to a banker, unless the government withdraws this notification or at the least grants exemption to debt instruments, in particular government securities, RBI cannot reintroduce repo transactions.

Reserve Bank wants government to allow forward contracts in gilts and public sector bonds