Aimed at boosting flow of overseas funds into domestic stock markets, the Securities and Exchange Board of India (Sebi) has allowed foreign institutional investors (FIIs) to offer government securities and corporate bonds as collaterals for their cash and derivative business on the bourses.
Till now, FIIs were permitted to offer cash and foreign sovereign securities with top-grade ‘AAA’ rating in derivative segment, while foreign sovereign securities with AAA rating and government securities were allowed in the cash segment.
In a circular issued, Sebi said, “FIIs are permitted to offer the following collaterals - government securities, corporate bonds, cash and foreign sovereign securities with AAA ratings, for their transactions in both cash and F&O segments.”
The Sebi directive was in response to an announcement by Finance Minister P Chidambaram in the Union Budget 2013-14, wherein he proposed allowing FIIs to use corporate bonds and government securities as collateral for investments in the stock markets.
As per the new norms, the regulator has asked clearing corporations to ensure certain parameters before accepting the corporate bonds as collateral for transactions.
These corporations would have to ensure that the bonds have a rating of AA or above (or with similar rating nomenclature) by recognised credit rating agencies. Also, the bonds have to be in dematerialised form and “shall be treated as part of the non-cash component of the liquid assets of the clearing member and shall not exceed 10 per cent of the total liquid assets of the clearing member”.
It may be noted that RBI had last week also allowed FIIs to offer government securities and corporate bonds as collateral to stock exchanges for derivative transactions. Besides, the apex bank had also permitted these overseas investors to use their investment in corporate bonds as collaterals in the cash segment.