Further, participation in the repo market should be allowed provided the debt instruments are held in dematerialised form and the transactions are undertaken through approved stock exchanges with well capitalised clearing corporation functioning as legal counter party, the sub-group of the Technical Advisory Committee on Government Securities Market said in its report circulated for obtaining market views.

The RBI panel's proposal has come eight years after the surfacing of thesecurities scandal which rocked the Indian financial system. ``Brokers who were hand-in-glove with public institutions had misused the repo system in 1991-92 period. The RBI should be careful in allowing corporates in repos. Otherwise another scam will be repeated,'' said a banker.

The panel said repo transactions involving tri-party could also be permitted where the tri-party agent is a well capitalised clearing corporation licensed to function as a legal counter party in all such transactions and where such agency would define acceptable securities from within the specified broad categories.

The RBI has to take up with the government to issue necessary notification granting exemption to such entities as deemed necessary by the central bank. Justice S N Variava, hearing the 1992 securities scam, immediately after the irregularities in government securities (Gilts) surfaced, had ruled that all repo transactions undertaken by banks and other institutions were illegal and void as they were prohibited underSecurities Contract Regulation Act, 1956 and vide Government's notification dated June 27, 1969.

The sub-group has argued in favour of the government delegating regulatory powers to the RBI for trading in government securities and other debt instruments and for replacement of the Public Debt Act by the proposed Government Securities Act for enabling electronic transfer of gilt securities.

It said keeping the needs of the market participants in view, a system of `over the counter' and `exchange traded' repos with adequate checks and controls could be introduced under which all entities who have SGL Account and Current Account with RBI may be allowed to undertake such transactions.

The sub-group, however, felt that in spite of there being a strong case for some amount of expansion of the repo market, there is always the lingering fear that reintroduction of repos could still result in temptation on the part of institutions to exploit any systemic weakness to their advantage which would severely impairfurther freeing of the debt market.

It, therefore, advised that it is imperative on the part of both the government and RBI to tread carefully as far as expansion of the repo market is concerned.

The sub-group felt that there is a need for development of the repo market in India in a phased manner enhancing participation and variety of eligible instruments with provisions for appropriate dealing and settlement system and standardised accounting and documentation. As regards settlement, it said, the existing system of end of the day delivery versus payment (DVP) cannot be considered risk free due to bottlenecks in movement of securities and cash. A system of provision of `day-light' overdraft to the current account holders by RBI may be thought of to avoid such eventuality.

In the context of gradual deepening of gilts market and the policy to promote the retail segment, the sub-group felt expedient to frame a set of guidelines governing the maintenance of the constituents' SGL accounts by participatingentities.