Beyond Stocks. Retail investors can access G-Secs

With the BSE and the NSE launching online platforms that facilitate non-competitive bidding in Government of India dated Securities (G-Sec) and Treasury Bills (T-Bills), retail investors can now invest in government bonds and hold them in their demat accounts.

High degree of safety, fixed and healthy returns and a wide range of maturities, make government securities an attractive investment option for retail investors. But until now, retail investors could lay their hands on government bonds only through authorised banks/primary dealers by opening a gilt account. Or buy in the secondary market, through a demat account, accessing the negotiated dealing system-order matching (NDS-OM). But the direct web access to transact on the NDS platform is offered only by a few banks and primary dealers (PDs).

Now, retail investors can participate in the primary market through stock exchanges. Essentially, access is simplified through demat accounts.

Good option

There are various reasons why there is always a ready market for government securities. Besides providing a fixed return, government securities offer the maximum safety. They are also available in a wide range of maturities from 91 days to as long as 40 years. Government securities, unlike other bonds, have ample liquidity and can, thus, be sold easily in the secondary market.

These securities are issued to finance the fiscal deficit and manage temporary cash mismatches of the government. Banks, financial institutions, PDs, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, foreign institutional investors, State governments, provident funds, and even individuals are eligible to purchase government bonds.

The recent launch of the bourses’ platform provided investors an opportunity to participate in the G-Sec auction of April 26, 2018. If you missed the chance, you can participate in subsequent weekly auctions of G-Secs and T-Bills.

Price discovery

Government securities are available both in the primary and secondary market. In the primary market, the securities are issued through auctions conducted by the RBI.

There are two types of auctions — competitive and non-competitive. In a competitive bidding, an investor bids at a specific price or coupon rate. Competitive bids are made by well-informed investors such as banks, financial institutions, PDs, mutual funds and insurance companies. Non-competitive bidding was introduced to provide an opportunity for retail investors who lack skill and knowledge to participate in the auction directly. The RBI conducts auction for G-Secs and T-Bills on a weekly basis where 5 per cent of the notified amount is allotted to investors under the scheme for non-competitive bidding facility.

Price discovery happens in the competitive bidding process (95 per cent of the issuance amount) where banks and other financial institutions place their bids. Based on the cut-off yield or price decided here, retail investors will be issued bonds.

For instance, if a 7.1 per cent government bond with a maturity period of 10 years is auctioned and the cut off price is determined as ₹96 as per the competitive bidding process, retail investors will be issued bonds based on this cut-off price. On purchase, the security will be credited to the customer’s demat account on a T+1 basis. Investors can buy G-Secs for a minimum of ₹10,000 and in multiples thereof.

Remember that interest earned from these bonds is taxable at the marginal rate; long-term capital gains is applicable if the holding period exceeds one year — 10 per cent without indexation (there are no indexation benefits applicable).

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