Repo route to open up for corp bonds from Dec 1

MUMBAI: Investors in corporate bonds can finally raise funds through repurchase deals, better known as repos. The Reserve Bank of India on Tuesday gave the green light to such transactions which can take place from December 1 on the basis of detailed guidelines likely to be issued in the next few weeks.

Common in the government security market, a repo is the sale of bonds along with an agreement for the seller to buy them back at a later date. Here, the repurchase price is higher than the original sale price.

For more than a decade, bond market participants have been asking RBI to allow repos corporate bond. But while giving the go-ahead, the regulator has put in several conditions. For instance, repos will be allowed only on bonds with minimum double-A rating.

A draft paper issued by RBI also said commercial papers, certificate of deposit and negotiable certificate of deposit of less than 1 year will not be eligible for corporate bond repos.

The tenor will range from a day to a year, with a hair cut margin of 25%. In other words, if the bond has a face value of Rs 100, the party will receive a maximum Rs 75; when the money is returned after an agreed period, it also pays an interest amount. Since the corporate bond market is illiquid, a higher margin is aimed to lower risk.

But market players feel that the repo trade is unlikely to take off, with such high hair-cut margins. “This is a welcome move that is likely to boost volumes in the debt market. But in order to invite investors’ interest, the hair-cut margins must be lowered. As it is, repo will be difficult when there is liquidity tightness across the spectrum,” said Ajay Manglunia, senior VP of Edelweiss Securities.

Some think a differential rating based haircut margin for corporate bond repo. Ashish Ghiya, MD, Derivium Traditions, said, “Settlement on a T+0 basis is certainly an enabler in activating the role of repo in corporate bonds, but a meaningful freeing of hair-cut margin limits — possibly an issuer category wise, rating wise and tenor wise hair cut margins — in the review of the guideline should be a strong determinant in deciding the fate of corporate bond repo.”