Financial sector regulators are set to permit insurance companies to participate in repos in government and corporate bonds, which will not only help deepen the debt market but also boost liquidity, sources said. Companies will also benefit from the move as it will increase the appetite of long-term investors to invest more in the debt papers offering higher returns than government securities.
Repos or repurchase agreements enable bond holders to raise short-term borrowings by offering corporate paper as collateral. This would give insures an extra cushion in meeting their liquidity needs in case of sudden surrender of policies.
The sources said the Insurance Regulatory and Development Authority (Irda) would soon issue a notification in this regard. The relaxation is being done in consultation with the RBI. The Securities and Exchange Board of India (Sebi) has already allowed mutual funds to trade in this market.
Industry sources said this would be a major reform and would kickstart the moribund repo market in corporate bonds. RBI permitted repo transactions in corporate bonds in March 2010, but the market has not gathered pace, and there are a handful of trades in this segment, sources said.
In August, Irda issued a draft guideline for allowing life and non-life insurers to widen their investment horizon in the money market, including repo and reverse repo of G-secs and corporate bonds, credit default swaps (CDS) and securities lending and borrowing (SLB) schemes.
At present, Irda allows insurers to invest in government securities and AAA-rated and AA-rated corporate debt papers. At least half of the exposure has to be in government securities, 15% in infrastructure bonds and the rest in equity, mutual funds, corporate bonds, debentures and money-market instruments.
Entry of large institutional players like insurance companies and mutual funds would definitely perk up volumes in corporate repos. “We have had detailed discussions with the Irda on the subject. Irda would allow insurance companies to trade in repos in corporate bonds,” a senior official familiar with the matter said.
Sources said insurers can be allowed to stay invested in a corporate repo for up to 180 days. However, reverse repo transactions shall be permitted only in AAA-rated corporate debt securities.
The regulator has also underlined that repo and reverse repo transactions shall not be permitted between the insurer and its promoter group entities. The insurer also cannot enter into bilateral repo or reverse repo agreement as per the documentation issued by FIMDA.