The Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) are very close to clearing all legal glitches in setting up a clearing corporation for repo transactions in corporate bonds. SEBI chairperson Madhabi Buch said at her marathon press conference on Wednesday. Ensuring a smooth market for repo in corporate bonds is a vital step towards creating more demand for corporate bonds because it allows investors in these bonds to generate liquidity by collateralizing their bond investments.

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While the slew of board decisions on ESG rating companies and investor protection directives to MF trustees and AMC management dominated the press conference, there were important nuggets for the corporate debt market. Key among these was Buch's statement that of the 3-4 approvals pending with the RBI for the setting up of a clearing corporation for corporate bond repos, all but one have been cleared by the RBI and only one approval is pending.

It may be recalled that in February 2021 SEBI had issued instructions for the setting up of a Limited Purpose Clearing Corporation, with equity capital of Rs 150 crore contributed by debt mutual funds. The clearing corp company named AMC Repo Clearing Ltd was set up in 2022 and earlier this year SEBI renewed its recognition of the company by one more year up to January 2024.

Chairperson Buch said the last of RBI'sapproval is expected soon and thereafter the clearing corp company could begin its activities in 3 to 6 months.

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Besides the clearing corp, the SEBI board on Wednesday also approved the setting up of a "Corporate Debt market Development Fund" which would be a backstop facility that will be a buyer of the last resort of corporate bonds, if the market faces severe systemic stress as it did in March 2020 when the COVID-19 pandemic broke out.

While both these steps – the clearing corp and the backstop fund – are solid steps that will help corporate bond markets, won’t the ending of the lower capital gains regime for debt funds by Budget 2023, hurt the corporate bond market? Buch disagreed, arguing that the powers that be had thought through the issue and decided that a lower LTCG was not merited since debt mutual fund products have progressively become less risky.

One will know in the days to come if the loss of the tax advantage dries up investor interest in debt MFs and hurts the corporate bond market, or whether the incremental steps to bolster corporate bond issuance and trading compensate for this tax setback.

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