Why buying sovereign gold bonds in secondary market is a herculean task

Dhuraivel Gunasekaran | Updated on November 18, 2018 Published on November 18, 2018

Operational issues in inter-depository transfer and settlement mechanism



While your broker’s terminal may show a mouth-watering deal on Sovereign Gold Bonds (SGBs) in the secondary market, your attempt to buy such bonds may come a cropper. SGBs are government securities denominated in grams of gold.

The SGB scheme was launched by the government in November 2015, and has been opened in tranches by the RBI over the past three years. While these bonds are traded on the BSE and NSE, most brokers do not allow buying of these bonds owing to operational challenges in the inter-depository settlement mechanism. This is despite the RBI giving a go-ahead for inter-depository transfer in SGBs two year back.

SGBs issued in the last three years are currently ₹100-250 cheaper in the secondary market than the current gold spot price, and lower than the initial price in the primary issuance. But many stock brokers do not allow buying or selling of SGBs in the secondary market, leaving investors in the lurch.

What gives?

While dealing with shares, once the customer buys stocks in the secondary market, the exchange credits the shares in his/her broker’s pool account, which may be kept with either of the two depositories – NSDL or CDSL.

Major brokers have accounts with both depositories. The broker then transfers the shares to the demat account of the customer held with either the NSDL or CDSL, as there is no restriction on transferring the shares between the two depositories.

In the case of SGBs, too, units are credited by the exchange to the broker’s NSDL/CDSL pool account. If the units get credited to the broker’s NSDL pool account, the broker can transfer these units to investor’s NSDL account. But if the units get credited to the broker’s CDSL pool account, they cannot be transferred to an investor’s NSDL demat account. This is because SGBs are treated as government securities. Hence, as no inter-depository transfer is allowed in government securities, buying and selling of SGBs has been an issue.

But according to an RBI official (who did not wish to be named), the regulator has already removed this ambiguity by permitting inter-depository transfer in SGBs in 2016. It is the delay at the end of both the depositories in sorting out technical issues that is preventing a smooth transfer of SGBs in the secondary market.

Selective trading

While most brokers disallow any secondary market transactions in SGBs, some permit their customers to sell only the units of SGBs.

In response to a query, an ICICI Securities spokesperson said: “While ICICI Direct can support both buying and selling of SGBs on its platform, currently only selling is permitted due to operational challenges in inter-depository transfer and settlement mechanism.

“This is not unique to us but common to all brokers. When this issue gets sorted out between the depositories, we will be able to allow buying of SGBs.”

Brokers such as HDFC securities have worked around the issue to offer a seamless service to their clients. Deepak Jasani, Head of Retail Research, HDFC Securities, says: “HDFC Securities allows both buying and selling in SGBs through the secondary market. If the SGBs are received in a depository that is different from that of the investor, we re-mat SGB units into physical certificates and then demat with the depository in which our client holds his demat account and then credit the SGBs in his account. This takes up to 15 working days, and also involves some costs that are currently not recovered from clients.”

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