'Allow banks to pledge corp bonds as collaterals with RBI'

 In a move aimed at creating demand for corporate bonds, a high-level committee has recommended pledging of corporate bonds as collateral with the Reserve Bank of India (RBI).

“Internationally, many central banks accept corporate bonds as collateral for their liquidity operation. It is not uncommon for central banks to take a lead with a view to developing the financial market,” the committee, which has members from the Finance Ministry, RBI, Sebi, IRDAI and PFRDA, stated. However, it is desirable that such a step is taken after the market repos gain some traction on their own.

Depending upon the development of the repo market in some form, the Reserve Bank may explore the possibility of accepting corporate bonds as collateral subject to a suitable risk management framework in terms of rating and haircut, the committee added.

Central banks in Australia, Canada, Eurosystem, Japan, Mexico, Sweden, Switzerland, the UK and the US accept corporate debt as collateral currently.

The Financial Stability and Development Council Sub-Committee (FSDC-SC), in its meeting held on September 10, 2015, decided to constitute a Working Group on Corporate Bonds, with representation from the Ministry of Finance and all the regulators with the remit to guide the implementation of the recommendations made by all the earlier committees and suggest further measures that may be taken to develop the corporate debt market in the light of evolving macroeconomic and financial market conditions within a specific time span.

The committee has also recommended easing norms for foreign portfolio investors (FPIs) in the bond market. "Necessary amendments may be made in FEMA regulations to allow investment by FPIs in unlisted debt securities and pass through securities issued by securitisations SPVs / special purpose distinct entity (SPDE) as announced in the Union Budget 2016-17. Necessary notification, in this regard, may be issued by RBI by end August 2016," the committee has said in the report.
 
Amendments may also be carried out in both FEMA notification and SEBI guidelines to facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognized stock exchange, subject to certain safeguards, without involving brokers, the committee added in the report.