SEBI set to relax collateral norms for FIIs

| Updated on: Sep 06, 2012
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May allow submission of domestic instruments as security

In an effort to revive market sentiments, the Securities and Exchange Board of India is ready with another booster dose for foreign institutional investors (FIIs) in its next board meeting.

This will be the second set of initiatives for investors in a month. The meeting may take place as early as next week.

“The effort is to provide a level-playing field to FIIs in terms of collateral,” a highly placed source told Business Line . At present, FIIs are asked to give full collateral in cash for derivatives as well as the cash segment. Now, the SEBI may allow them to submit domestic instruments, such as approved securities, bank guarantees, fixed deposits, government bonds and mutual funds, as collateral.

Board meet next week

The board meeting can take place as early as next week, the source added.

The market regulator’s measures can be seen in the light of Finance Minister P. Chidambaram’s statement on August 17, a day after the SEBI’s last board meeting, when he requested its Chairman to schedule another meeting in early September to decide on the suggestions under examination.

FIIs are also allowed to place Government securities and foreign sovereign securities with high ratings such as AAA for derivative trading. But custodians, as part of their risk management, insist on cash, not foreign securities. “All cash collateral blocks the liquidity, which acts as an irritant in trading. This needs to be reduced to boost market sentiment,” the source added.

The present situation denies FIIs a level-playing field with domestic institutions, which have the freedom to place just a part of collateral in cash, while the rest can be in the form of shares, fixed deposits, corporate bonds and Government securities. This gives them an advantage in managing liquidity.

Market sources said that such a relaxation will be more of a help to hedge funds, which have a short-term view in the futures and options market. They said foreign investors with long-term view do not see much difficulty in placing all-cash collateral, as they think that the entire amount will come back.

Forex inflow

Such a move is also expected to help improve forex inflow. This is important as the current account deficit in 2011-12 touched a record 4.2 per cent. The Prime Minister’s Economic Advisory Council has estimated the deficit will be 3.6 per cent in 2012-13.

Market sources have also raised questions as to how the custodian would work around if cash collaterals are done away with. The extent of leeway the regulator gives to FIIs and its impact on forex inflows is something that the regulators, exchanges and the custodian will have to ascertain, they said.


Published on March 12, 2018

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