To accelerate the flow of funds from foreign institutional investors (FII), the Securities and Exchange Board of India on Wednesday gave a green signal to them to offer government securities and corporate bonds as collaterals for trading on the country’s stock exchanges.

According to a circular issued by the securities regulator, “FIIs are permitted to offer the following collaterals - government securities, corporate bonds, cash and foreign sovereign securities with AAA ratings, for their transactions in both cash and F&O (futures and options) segments.”

Experts have welcomed the regulator’s move saying that it would make the Indian market more attractive. “This move by SEBI will facilitate more depth and liquidity in the Indian capital market as earlier FII’s had to block these funds into these margin deposits which did not fetch them any revenue or interest. Now, they can use these funds to buy corporate bonds or government securities which will give them returns in the form of interest and also capital appreciation and the same can also be used by them as collateral against their margin deposit in capital markets,” D K Aggarwal, chairman & managing director, SMC Investments and Advisors Ltd) told Governance Now.

Aggarwal, however, added that easing of these norms alone was not enough and that the government and other bodies needed to take other measures and ensure their effective implementation to make Indian markets more lucrative. “This move is not enough and to improve investor sentiments, KYC simplification and more tax friendly measures related to FII & QFI instruments into India should be done. Apart from this, the reforms process adopted by government has to be continued and various bottlenecks which arise in the implementation process should be removed.”

Till last month, FIIs have invested over Rs 39,000 crore in the Indian stocks markets. The union finance minister P Chidambaram in his Budget 2013-2014 speech had emphasized on the need to make the economic environment more investor-friendly. He had proposed to permit FIIs to offer their investments in corporate bonds and government securities as collateral for trading in the Indian stock markets.  

Initially, FIIs were allowed to offer, as collateral, cash and foreign sovereign securities with 'AAA' rating in the derivatives market, while foreign sovereign securities with ‘AAA’ rating and government securities were permitted in the cash segment.

However, according to the new norms, Sebi has directed clearing corporations to provide acceptance to only those corporate bonds as collateral that “have a rating of AA or above (or with similar rating nomenclature) by recognised credit rating agencies.”

In addition, these bonds have to be in dematerialised form. “The bonds shall be treated as part of the non-cash component of the liquid assets of the clearing member and shall not exceed 10 percent of the total liquid assets of the clearing member,” the circular further read.