Tri-party repo directions: A boost for corporate bonds

In the recent past, the corporate bond market has had a dream run due to the quinella of the government and the Reserve Bank of India (RBI) promoting borrowing by Indian companies through the corporate bond market together with the banks’ current fugue state rendering them wary of lending. While borrowing through the bond markets in India was a relatively niche practice for Indian borrowers until a few years ago, this practice has now come into the mainstream. The RBI’s recent issuance of directions on tri-party repos continues the trend of regulatory moves to deepen corporate bond markets.

Following the issuance of draft directions in April, and based on the public feedback received, the RBI issued the Tri-Party Repo (Reserve Bank) Directions, 2017, on 10 August. While other measures have been taken to encourage Indian borrowers to tap the corporate bond market, the issuance of the 2017 directions is important as it has the effect of creating a framework for a tertiary market for corporate bonds, thus enhancing liquidity.

Briefly, a repo is an instrument for borrowing funds by selling securities with an agreement to resell such securities on a specified date and at an agreed price; a reverse repo is an instrument for lending funds by purchasing securities with an agreement to repurchase such securities on a specified date and at an agreed price; and a tri-party repo is a repo contract where a third party (the tri-party agent) acts as an intermediary to facilitate matters such as collateral selection, payment and settlement, custody and management for the repo transaction.

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