FIIs can give foreign securities as collateral

The Reserve Bank of India (RBI) has allowed clearing corporations of exchanges to keep collateral securities of foreign institutional investors (FIIs) in demat accounts of overseas depositories and dispose it when needed.

FIIs can offer foreign sovereign securities with AAA rating as collateral to recognised stock exchanges in India for their transactions in the derivatives segment.

A circular issued by RBI said that with a view to further liberalise the procedure, it has been decided in consultation with the central government and Securities and Exchange Board of India (Sebi) to permit Sebi-approved clearing corporations of stock exchanges and their clearing members to open and maintain demat accounts with foreign depositories, and:

acquire, hold, pledge and transfer the foreign sovereign securities offered as collateral by FIIs;

clearing corporations can also remit the proceeds arising from corporate action, if any, on such foreign sovereign securities; and

liquidate such foreign sovereign securities if the need arises.

"Clearing corporations shall report, on a monthly basis, the balances of foreign sovereign securities held by them as non-cash collaterals of their clearing members to the Reserve Bank of India," the notification said.

According to a report by Reuters, analysts said it appeared to be a move to ease some upward pressure on the rupee that would also make it easier for foreign investors as they can now use foreign bonds rather than cash as collateral.

"If the margining requirement goes up or more collateral was needed, foreigners had to bring in more dollars, which, in turn, leads to more appreciation pressure," an analyst said.