SEBI Comes Up With Framework On Upfront Contribution By Issuers For LPCC's Settlement Guarantee Fund

Markets regulator SEBI on Thursday put in place a framework for upfront collection of funds from eligible issuers of debt securities to build the Settlement Guarantee Fund of the Limited Purpose Clearing Corporation (LPCC). The eligible issuers would be notified by the LPCC as per its risk management policy, the Securities and Exchange Board of India (SEBI) said in a circular.

LPCC is an entity established to undertake the activity of clearing and settlement of repurchase agreement transactions. Under the framework, SEBI said that an amount of 0.5 basis points of the issuance value of debt securities per annum based on the maturity of debt securities will be collected by the stock exchanges and placed in an escrow account before the allotment of the debt securities.

This amount is applicable on a public issue or private placement of debt securities. The stock exchanges would transfer the amounts so collected to the bank account of the LPCC within one working day of the receipt of the amount and inform the details of the same to the LPCC. Details of the amounts so collected would also be disclosed by the stock exchanges on their website. Further, LPCC would provide an illustration of the calculation of the amounts to be contributed by the eligible issuers.

The new framework will come into force from May 1, the regulator said. According to SEBI, a well-functioning repo market contributes to the development of the debt securities market by way of boosting the liquidity of the underlying debt securities and allowing market participants to monetize their debt holdings without selling the underlying, thus meeting their temporary need for funds.

"The development of an active repo market in debt securities may also be beneficial to the issuers as the enhanced liquidity may positively impact the yield, thereby resulting in reduced costs of raising funds to the issuers in the primary market", it added.

In its board meeting in September 2020, SEBI had approved a proposal to facilitate the setting up of an LPCC. The board had also decided that an amount of 0.5 basis points of the issuance value of debt securities per annum be collected upfront before the listing of such securities to build the Settlement Guarantee Fund of the LPCC. 

AMC Repo Clearing Limited (ARCL) has been granted recognition as LPCC by SEBI. The Reserve Bank of India (RBI) also gave necessary approvals to ARCL to function as a Clearing Corporation with a limited purpose and to offer central counterparty services for repo transactions in debt securities.