The early stirrings in the government securities market have already begun. What until now was limited to only large institutional players will henceforth be a viable investment option-and a lucrative one at that-for the retail investor in the coming months. The first big shot in the arm has come from the Reserve Bank of India (RBI), which has decided, in principle, in its mid-term review of the monetary and credit policy for the year 2000-2001 to move over to order-driven screen-based trading in gilts and treasury bills on the stock exchanges.Though the RBI is to specify the date for switch-over to order-driven screen-based system in consultation with SEBI, BSE president Mr Anand Rathi indicated last week that the move should come about by January-end, making trading in government securities as easy as buying or selling stocks. The implication: activating a retail debt market for the first time which will offer higher yields even for as short a period as 14 days.
The order-driven screen-based trading system can be compared with a similar system in use for the purchase of shares by individuals on the stock exchanges. The individuals place their order for buying or selling equities on the screens, specifying the quantum and price. The system matches the counter-offer and the deal is closed on the system. So why has the proposed move got everyone into a tizzy? Once stock exchanges initiate screen-based trading, most of the procedural headaches of the current paperwork-based trading would be done away with, explains Mr Arun Kaul, managing-director, PNB Gilts, one of the leading players in the industry. Also, it would give a fillip to the dematerialisation of securities.
Gilt-edged securities are sovereign securities that are issued by the RBI on behalf of the government of India's borrowing programme. The funds thus mopped up are utilised for financing the fiscal deficit of the central government.
The gilt securities market has so far been dominated by large institutional players like banks, financial institutions, primary dealers (PDs), insurance companies, mutual funds, and provident funds. At the moment, it is predominantly a telephone market where large quantums of government securities are traded. Any entity which is interested in buying or selling government securities either has to directly find another party or approach a broker, who must be a member of the Wholesale Debt segment of the National Stock Exchange of India Ltd (NSE WDM), points out Mr Kaul. Thereafter the transactions are settled between the two parties directly through accounts maintained with the RBI. These are what are commonly referred to as the SGL (Subordinate General Ledger) accounts. The idea behind maintaining SGL accounts is to facilitate active trade in government securities in the demat form.
The importance of investing in gilt securities can hardly be overemphasised, considering that they offer one of the safest investment options to individual investors. Mr Kaul lists the main benefits of investing funds in government securities:
Being sovereign papers, they have zero default risk.These securities are highly liquid; they can be sold to any of the primary dealers any time before maturity.The interest payment is guaranteed by the central government and paid half-yearly.There is no tax deduction at source.Individuals are entitled to an additional income tax benefit for Rs 3,000 under section 80L of the Income Tax Act.It is even possible to liquidate a government security partly. For example, a person holding a government security of Rs 1 lakh face-value can sell part of it, say Rs 25,000, and continue to hold the remaining amount.All trades in government securities settled through SGL accounts are made public the next day.But the biggest advantage of all is that securities offer better returns than the fixed deposits of banks (see table). The yield has become really competitive, especially since 1994-95 when they began to be market-determined, says PNB Gilts senior vice-president Ms Sunita Gupta. Analysts point out that yields have been to the tune of 15 per cent in government securities and 14 per cent in Treasury Bills. Another plus over the bank deposits is that while an investor can expect almost nothing for a deposit made for less than 15 days, Treasury Bills with residual maturity for even 10 days can give a return of up to 8 per cent.
Despite the high safety, liquidity and better returns associated with them, gilts have surprisingly failed to catch the fancy of individual investors unlike in the western countries, says Mr Kaul, due to several reasons:
Lack of awareness about government securities as a viable investment optionNon-availability of government securities earlier in small lots to suit requirements of individual investorsLong and cumbersome procedures involved in getting the securities transferred in the names of individuals with the RBINon-availability of exit options to small investorsHowever, that scenario is already becoming a thing of the past. A number of measures have been introduced to promote the retail G-Sec market. An important move has been the introduction in 1996 of a system of Primary Dealers, entities authorised by the RBI to actively trade in government securities and provide two-way quotes for buying and selling of government securities. Making the market broadbased was the obvious aim. PNB Gilts Ltd, for one, is retailing government securities in a big way to individuals in Mumbai, Calcutta, Chennai, Ahmedabad and Delhi.
The second factor, which has made the G-Sec market accessible to individuals, is the facility to hold government securities in the demat form. Earlier, these securities had to be purchased and held in the form of physical certificates. Besides, these had to be registered in the name of the individuals at the RBI's Public Debt office. This was a time-consuming procedure. However, the situation has since improved.
A more recent boost has been the move to allow individuals with a demat account for shares with any depository of NSDL to now hold government securities in the same demat account. This considerably reduces the hurdles associated with holding these securities in the physical certificate form.
The collection of interest income has also become simpler as it would now be paid through NSDL like dividend in the case of equity shares.
The clincher: the minimum deposit in G-Secs is only Rs 10,000, for demat account though it is higher at Rs 2,000. Looks like each one of us can do with a little glitter of the gilts.
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.