Securities finance profile: India 2016

Securities finance profile: India 2016

  • Export:
SBL 

In May 2013, the Securities and Exchange Board of India (SEBI) reviewed the framework for securities borrowing and lending (SBL), increasing the number of stocks allowed to be used for borrowing and lending and thus relaxing short-selling rules. 

The move allowed stocks that met a number of criteria (including average monthly turnover of at least 100 crore or approximately $16m) to be used under the SBL programme. 

Previously, only a limited set of stocks that traded in the futures and options markets were allowed to be borrowed and lent. 

The SBL programme was launched by the SEBI in 2008 to improve its oversight of the short sale of stocks, but the mechanism was widely criticised by investors for being too stringent. 

In a bid to increase participation in the SBL market, National Stock Exchange (NSE) introduced a rollover facility last year, available for a three-month period (original contract plus two rollover contracts) under which lenders of securities were allowed to extend an existing position. The Bombay Stock Exchange (BSE) introduced a similar facility in September 2015. 

SEBI has set up three working groups to look into foreign portfolio investor activity and challenges to participation, explains Martin Corrall, regional product head for securities finance Citibank & chairman of Pan Asia Securities Lending Association. “This is a very positive step, in particular the third sub-group, which will review the existing framework relating to the SBL mechanism,” he says. 

India is restricted as it is a CCP model, where the exchange acts as a central counterparty. There is very little activity as a result since it is very difficult for offshore entities to participate, continues Corrall. 

“If you borrow in India, you have to give Indian cash as collateral, which has a high interest rate and there is no rebate on that cash,” he says. “A local entity can post other forms of collateral. There are other issues around the fact that, a few years ago, SEBI outlined some issues it had around offshore-driven instruments. 

Although it is not a clear regulation, different firms’ compliance departments tend to view or interpret the guidance differently – some are comfortable with it, some are not. 

That is something that we are trying to get clarified as part of the SEBI working group for foreign portfolio investors.” SBL is only available in India through approved intermediaries and permitted only in securities held in dematerialised form including securities on which derivatives contracts are available and scrips that fulfil a number of criteria. 

Approved intermediaries enter into an agreement with clearing members in order to facilitate SBL. Trades are settled on a T+1 basis. 

The lender and borrower are also provided with a facility for early recall or repayment of shares. In this case, the lending fee for the balance period shall be at a market-determined rate. 

Synthetics 

While no regulator would come out and say it approves of offshore derivatives and the creation of a synthetic market, Corrall suggests that market participants would benefit from clarity: “There is no timeframe on developments in this area although the working group to discuss foreign participation is a step in the right direction.” 

Repo 

Repos in government and corporate debt securities are permitted in India. However, there are restrictions as to the eligible debt securities and eligible participants – foreign institutional investors are not allowed to participate in repo transactions.

  • Export:

Related Articles