The International Financial Services Centres Authority (IFSCA) has introduced a circular on trading and settlement of Sovereign Green Bonds (SGrBs) within the International Financial Services Centre (IFSC). This circular provides an overarching framework for the trading of SGrBs and outlines the various eligible participants, market infrastructures, and procedures involved in the trading and settlement of these securities.
Eligible Securities and Market Infrastructure Institutions (MIIs)
The circular specifies that eligible securities include those outlined in Clause 5 of the Reserve Bank of India (RBI) Scheme, which may be updated periodically. Eligible Market Infrastructure Institutions (MIIs) include all recognized stock exchanges, clearing corporations, and depositories in the IFSC. These institutions are authorized to facilitate transactions under the guidelines of the circular.
Eligible Participants and IBUs
Eligible participants include Broker-Dealers, Clearing Members, Custodians, and Depository Participants registered with IFSCA. Additionally, International Banking Units (IBUs) of Indian and foreign banks that hold the necessary licenses to conduct banking business in India are eligible to participate in this scheme. These IBUs will facilitate transactions for their clients, thus expanding the access to SGrBs in the IFSC.
Eligible Investors
The circular delineates specific categories of eligible investors who can participate in the RBI scheme as follows:
Persons resident outside India, as defined under the Foreign Exchange Management Act (FEMA), 1999, provided they are not incorporated in high-risk jurisdictions identified by the Financial Action Task Force (FATF).
IBUs of foreign banks that do not have a licensed branch in India.
Funds regulated by IFSCA, including those set up by Indian entities under the IFSCA (Fund Management) Regulations, 2022, are also considered eligible investors.
Primary Market Participation
For primary market transactions, recognized stock exchanges in the IFSC will provide an electronic platform for eligible investors to place bids during the RBI auction process. The Clearing Corporations (CCs) will act as aggregators of bids and submit them to the RBI’s Core Banking Solution (E-Kuber). Investors must open demat accounts with depository participants of authorized depositories to handle coupon payments and redemptions.
Investors submit competitive bids through a registered broker-dealer, clearing member, custodian, or eligible IBU. Once funds are validated by the authorized clearing corporation, the securities are credited to the demat accounts of successful investors. Unallocated funds are returned the same day in USD, ensuring a streamlined and efficient process.
Secondary Market Trading
In the secondary market, eligible participants can trade SGrBs through Over-The-Counter (OTC) transactions at the IFSC. The circular stipulates that transactions must be delivery-based, with settlement occurring in USD. The clearing corporations and depositories must ensure efficient settlement processes, with the securities and funds transferred on a delivery versus payment (DVP-1) basis.
Notably, the circular specifies that the clearing corporation will not act as a central counterparty for OTC transactions. Furthermore, in cases of delays in securities or funds transfers, trades will be annulled, and the relevant assets will be returned to the participants.
Coupon Payments, Redemption, and Taxation
For coupon payments and redemptions, the depository will receive proceeds in INR from the RBI and convert them to USD for the investors. However, in exceptional circumstances, such as compliance issues or delays due to holidays, payments may be delayed. The depository is also responsible for withholding taxes on coupon payments as required by Indian tax regulations.
Compliance and Reporting
The circular mandates strict compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines. Eligible participants must ensure proper client due diligence and adhere to the reporting requirements outlined by IFSCA. Furthermore, secondary market transactions must be reported to the Clearing Corporation of India Ltd. (CCIL) within three hours of the market’s close.
