RBI Governor, in the recent Monetary Policy Committee meeting, announced that retail investors will be allowed online access to the government securities (G-Sec) market – both primary and secondary – directly through the Reserve Bank of India. According to the Central Bank Governor, India will probably be the first country in Asia to introduce this facility.
Investing in the G-Sec market by retail investors is still at a nascent stage in India. If you are wondering how the current system of retail investing in G-Secs works and how the RBI’s proposed initiative will enhance your experience, here are some details.
While the fineprint of the scheme is still awaited, we attempt to answer some questions that may commonly arise.
The Government issues securities called G-Secs to borrow money from the market.. Such securities can either be short term or long term. Short-term instruments with a maturity of less than a year are usually called treasury bills. Long-term securities with a maturity of one year or more are called government bonds. The government pays a specified coupon or interest rate on these bonds, which is usually paid annually or semi-annually.
Can retail investors invest in G-Secs?
Yes. Generally, RBI conducts auctions when the Government wants to borrow, and issues securities for this purpose. To allow retail investors participate in the primary issues of G-Sec, the RBI in 2001, introduced non-competitive bidding.
Till then, the auctions were conducted only on competitive-basis, in which the investors need to bid either in terms of the rate of interest (coupon) or price of the security. Since this process is technical, only large and informed investors, such as, banks, primary dealers, financial institutions, mutual funds, insurance companies generally participated.
Under the non-competitive bidding, about five per cent of the borrowing amount is reserved for retail investors.
The allotment under this segment is at the weighted average rate that emerges in the auction on the basis of competitive bidding by large investors. Thus, retail investors don’t have the option to decide the price of the security that is being bought. They have to bid the investment amount along with the application.
If the aggregate amount bid from all participants is more than the reserved amount for non-competitive bidding (about 5 per cent), allotment would be made on a pro rata basis.
But if the aggregate amount bid is less than the reserved amount, all the applicants will be allotted in full.
What is the route to investing in G-Secs for retail investors currently?
Over the years, the entire process of buying G-Secs by retail investors in the primary market has become a lot simpler.
Earlier, the RBI required individual investors to maintain a ‘constituent subsidiary general ledger’ (CSGL) account or Gilt account with the banks or primary dealers (PDs). Now, one can participate in the G-Sec auction in the primary market through a demat account.
ICICI Securities, HDFC Securities, Zerodha and NSE’s goBID are a few options through which retail investors can use their demat accounts to invest money in T-Bills or government bonds.
The minimum and the maximum investment is Rs 10,000 and Rs 2 crore per security per auction. The brokers or facilitators may charge up to six paise per Rs.100 as commission for rendering this service to their clients.
Note, while investing in the G-Sec seems simple, selling the security before maturity may not be easy. The RBI opened up the secondary market in G-Secs for individual investors, a few years back, but the liquidity in the market is a major issue.
Are there any risks in investing directly in G-Secs?
Backed by the Government, G-Secs do not carry credit risk, but are vulnerable to interest rate risk.
That is, while there is no risk of payment default by the government, any change in interest rates in the economy can impact the value of the G-Secs you hold.
But this risk arises only if you decide to sell the instrument before maturity, in the secondary market, which also suffers from the lack of adequate liquidity.
Also note that your returns on direct investment in G-secs will depend on the price at which the securities are allotted to you.
So, it may be difficult for a retail investor to grasp the nuances of the return that G-Secs will fetch and compare them with other fixed income instruments in the market.
What has changed with the RBI Governor’s new announcement?
Clearly, providing access to the G-Sec market to the retail investors is not something new.
The RBI’s recent announcement is about opening a gilt securities account directly with the RBI and providing online access to the G-Sec market (both primary and secondary) without the intervention of any intermediary. Through ‘Retail Direct’, the RBI aims to increase retail participation in G-Secs.
In terms of direct access to G-Secs, we hope it will be user-friendly. To give some perspective, the current mechanism to buy corporate bonds or stocks is more investor-friendly than the procedure of buying Floating Rate Savings Bond from the RBI.
Will this move be a game changer?
Well, to say that, we need to wait for the fineprint.
Deepak Jasani, Head of Retail Research, HDFC Securities says, “The current option of retail investing in G-Secs has not taken off well. The liquidity issue in the secondary market if one wants to exit and the less-attractive tax incidence on direct investing in G-Sec compared to investing in gilt funds (that attracts capital gains tax) could be few reasons for the weak participation. RBI’s new initiative will help if these issues could be sorted.”
