Government Securities are issued by the Central Government. Treasury Bills and Cash Management Bills are issued typically for a shorter tenure and Dated Government Securities are issued for a longer tenure. Government Securities do not carry risk of default hence are called risk free securities. Typically these instruments do not carry risk of default which make them safe investment options and they also offer returns in the form of coupon payments. However, government securities carry interest rate risk, where rise or fall in interest rates affect the price of government securities. If held to maturity, interest rate risk too is taken out of government securities.
Government Securities unless otherwise specified are taxable. Coupons are taxed at the marginal rate of tax and capital gains are taxed as long term or short term capital gains.
The secondary market in Government Securities is mainly an institutional market and comprises of Banks, Primary Dealers, Insurance Companies, Mutual Funds, Financial Institutions and other Institutional investors. The trades in this market are carried out on Negotiated Dealing System-Order Matching (NDS-OM) which is an anonymous order matching system, operated by the Clearing Corporation of India Limited (CCIL) on behalf of the RBI. The system matches all bids and offers on price/time priority or yield/time priority that is, within the orders of the same price or yield (as applicable), it matches the oldest order first and executes them.
Traditionally, a retail individual investor who wished to invest in government securities had to approach a primary dealer, with whom the investor had to open an account called the gilt account to store the securities. Primary dealers (PDs) are intermediaries in the government securities market that are authorized by the Reserve Bank of India. The PD acts as a custodian and places orders for buying or selling on the NDS-OM platform. The primary dealer will also levy a nominal commission and maintenance charge. However, the investor would be dependent upon the price offered by the PD which can be higher or lower than the market price.
So far, access for trading in secondary market on NDS-OM was limited to only those maintaining Subsidiary General Ledger/Constituent Subsidiary General Ledger (SGL/CSGL) accounts.
Recently RBI has facilitated access to individual retail investors holding demat accounts to secondary market in Government Securities through the NDS-OM system, w.e.f. 16th August 2016. Under this facility, any individual investor who maintains a demat account with NSDL or CSDL will have access to the NDS-OM without having to open another demat account with the Primary Dealer. These new guidelines have facilitated efficient access for retail investors holding demat accounts to the government securities market and encourage retail participation.
If any retail investor wants to invest in government bond securities there are two options.
Either invest in the Primary auction held by the RBI or buy in the secondary market.
In the primary auction route, the investor has to bid under the non-competitive facility directly in the weekly auctions held by RBI. Normally there are a limited number securities available for bidding offered in the auction for retail investors and there is a quota reserved for the non-competitive facility.
The retail investors can put their bids via their authorized banks/PD and if the bid is successful, the investor would get the securities at the cutoff yield determined by RBI based on the bids received under the competitive segment. The bank/Pd may charge a commission for the trade executed on his behalf.
If they wish to buy in the secondary market, they can buy/sell government securities in the following way as long as they have demat accounts.
1.NDS-OM Web:Primary members of NDS-OM who are also Depository Participants can grant retail investors access to the NDS-OM Web Module for placing buy / sell orders directly on NDS-OM.
In this respect, NSDL has integrated NDS-OM web module with its e-services facility. It allows the Bank DPs to make available web trading facility to retail investors, with this investors can directly trade online in government securities using the web module of NDS-OM and their existing NSDL demat account.
2.NDS-OM Main:Retail investors holding demat accounts can instruct their Depository Participants, who are also primary members of NDS-OM, to place orders on their behalf on the NDS-OM trading platform, similar to the facility available to Gilt Account Holders.
3.Bilateral trades in Voice Market:The retail investors can place orders over telephone to their brokers i.e. bilateral voice market who are authorized to participate in the Debt market Segment.
The responsibility of reporting such trades on the Reported Deal Segment of NDS-OM will rest with the concerned Broker -Primary Member.
Apart from the above in 2012, IDBI Bank launched a web-based portal, called the IDBI Samriddhi G-Sec Portal through which individual investors can invest in Government securities at market driven prices. The only pre-requisite is possession of PAN card and a demat account with the Bank or any Depository Participant (National Securities Depository Limited and/or Central Depository Services Limited).
To begin using this portal, the investor must register in the portal, upon which a registration ID is issued for all future transactions. Using this registration ID one can log on to the website to purchase or sell Government securities. This ID ensures that the investor need not re-enter the Know-your-Customer (KYC) details and will protect the identity of the customer.
As an extension to IDBI Samriddhi G-Sec Portal, the Bank has facilitated investment in G-Sec through the ATMs of the Bank. The pre-requisite is having a Savings or Current account with IDBI Bank in addition to having demat account with the Bank and online registration.
The investor has to activate the G-Sec on ATM option on the online portal to avail the facility. Under the “Other Transactions” section of the ATM screen, the investor should go to Buy Government Securities section and on the basis of the deal details, can Accept/Reject the deal.
The Security will be credited to customer’s demat account on the settlement date i.e. on Transaction date + one business day (T+1) basis, while transactions done after 5 p.m. will be settled on Transaction date + two business day (T+2) basis. Currently, three securities are available under this scheme.
Currently retail investors participation in Government Securities market is low but eventually as small savings rate align with the Gsec rate and awareness and comfort with trading in this segment increases volume will rise.