SEBI allows Mutual Funds to engage in repo transactions involving Listed AA and above rated corporate debt securities, Commercial Papers (CPs), and Certificate of Deposits (CDs)

With immediate effect, the Securities Exchange Board of India (SEBI) has amended its previous circulars (CIR/IMD/DF/19/2011 dated November 11, 2011 and CIR/IMD/DF/23/2012 dated November 15, 2012) that permitted mutual funds to engage in repo transactions involving corporate debt securities.

Key Highlights:

1. Mutual Funds can now participate in repos on Listed AA and above rated corporate debt securities and Commercial Papers (CPs) and Certificate of Deposits (CDs).
2. The credit rating of exposure on repo transactions for various purposes including for Potential Risk Class (PRC) matrix, liquidity ratios, Risk-o-meter etc., will be on a look through basis.
3. The exposure for the purpose of determination of investment limits for single issuer, group issuer and sector level limits will not be considered for transactions where settlement is guaranteed by a Clearing Corporation.

 Background:

SEBI, through Circular No. CIR/IMD/DF/19/2011 dated November 11, 2011, permitted mutual funds to engage in repo transactions involving corporate debt securities. To further promote the growth of the corporate bond market, SEBI further expanded on this in November 2012 through Circular No. CIR/IMD/DF/23/2012. This circular expanded the eligible securities base for mutual funds participating in repo transactions on corporate debt securities. The previous requirement of investing only in AAA-rated corporate debt securities was modified, such that mutual funds can participate in repo transactions with corporate debt securities rated AA and above. As a result, paragraph 3 (c) of the circular had been updated to state that mutual funds are allowed to engage in repo transactions only with AA and above rated corporate debt securities.

Source: Securities Exchange Board of India