Issuance of repo directions welcome but barely noticed

The government has often voiced its desire to shift Indian borrowers to the capital markets from banks that are reeling from the burden of non-performing assets. Not only are capital markets better placed to price and absorb risk in varied sectors, but the inherent tradability of a debt instrument also makes it an attractive option for entities whose role in the capital markets is limited to temporary placement of treasury funds until they need to be used. This ensures greater availability of funds for borrowers.

The government, as well as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), have taken numerous incremental steps to stimulate interest in capital markets. Among these is the RBI’s issuance of the Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018, on 24 July.

A repo is defined as an instrument for borrowing funds by selling securities coupled with an agreement to repurchase such securities at a future date at an agreed price. Under the directions, a repo transaction can be entered into by entities regulated by a financial regulator (such as the RBI or SEBI), a listed body corporate, an unlisted entity that is using specified government securities as collateral, and certain specified government-owned financial institutions. Repo transactions can be entered into in relation to central and state government securities, non-convertible debentures that are listed, commercial paper and certificates of deposit.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.