Sebi allows mutual funds to invest in repo transactions on commercial papers, certificate of deposits

In a bid to boost growth of the corporate bond market, regulator Sebi on Thursday allowed mutual funds to invest in repo transactions in securities such as Commercial Papers and Certificate of Deposits.

In addition, the capital markets regulator said that mutual funds can participate in repo transactions only in “AA” and above rated corporate debt securities, according to a circular.

In repo transactions, also known as a repo or sale repurchase agreement, securities are sold with the seller agreeing to buy them back at a later date. The instrument is used for raising short-term capital.

For the purpose of consideration of credit rating of exposure on repo transactions for various purposes, including for potential risk class matrix, liquidity ratios and risk-o-meter, Sebi said the same will be as that of the underlying securities on a look-through basis.

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With regards to transactions where settlement is guaranteed by a clearing corporation, the exposure will not be considered for the purpose of determination of investment limits for single issuer, group issuer and sector level limits.

The new provision would come into force with immediate effect, the Securities and Exchange Board of India (Sebi) said.

Last month, Sebi came out with a proposal for enabling direct participation by NBFCs, insurance companies and mutual funds in the tri-party repo segment for corporate bonds to boost liquidity in the secondary market for corporate bonds.