Retail investors may soon trade in G-secs directly

Mumbai: Retail and corporate investors are likely to have direct access to the government bond market.The Reserve Bank of India (RBI) and Clearing Corporation of India (CCIL) are working to put in place a system that would pave the way for seamless trading of government securities (G-secs) by non-institutional traders and investors.The plan, expected to be rolled out in the next few months, has been discussed at recent meetings between senior RBI and CCIL officials, two persons familiar with the matter told ET. CCIL is the central counterparty in clearing and settlement for trades in government securities, foreign exchange and the money market.A few large private and state-owned banks, which would run demat accounts and handle funds from customers buying and selling gilt, have been sounded out.“Banks are offering low returns on deposit and given the condition of some banks, it’s possible some savers may choose to diversify and invest in G-secs,” said a senior person in the financial market. ‘Capital Gains Tax’“But to attract HNIs (high net worth individuals) and corporates in adequate numbers, the government and regulators will have to first ensure smooth movement of securities between demat accounts and SGL accounts. Second, gains from G-sec trades should not be taxed at the higher marginal income tax rate — instead it should attract capital gains tax,” said a senior person in the financial market.(Banks and primary dealers have subsidiary general ledger, or SGL, accounts with RBI to maintain their government securities).He added, “An investor holding debt mutual funds (MFs) for three years can avail inflation indexation benefit and pay a lower tax on long term capital gains. However, gain from direct investment in G-secs will be taxed as income, and HNIs would be in the highest income tax slab. This needs to be corrected if the government considers attracting retail money in G-secs as one of its priorities.” Secondary trading in government securities happens on a screen-based electronic and anonymous order matching platform called NDS-OM, which is owned by RBI. Besides banks and PDs, MFs and insurance companies can be members of NDS-OM. While technically, general investors can approach banks to place orders on their behalf, the current proposal envisages a straight-through processing (STP) mechanism, which would be an automatic process involving electronic transfers with no manual intervention.“In very few countries can retail investors take direct positions in government securities,” said a banker. “In India, only a few large companies invest in G-secs today. The technology, however, exists to invite non-institutional players; there can be separate portal for these investors and traders to register, and trade for as low ₹10,000. But the cost of entry and exit must be low.” The banker added, “Authorities have tried to sell government bonds by opening counters in banks and post offices. It didn’t work due to tax issues, lack of interest among most banks and comparatively low returns on G-secs. With bank rates falling, one has to see to whether it would take off this time.” The RBI spokesperson did not comment on the subject.

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