The RBI has issued guidelines allowing access to NDS-OM (Negotiated Dealing System-Order Matching) platform to retail investors to buy government securities.
At present, if any retail investor wants to invest in government bond securities there are couple of options: Bid under the non-competitive facility directly in the weekly auctions held by RBI. Here the securities that the investor can buy would be restricted to four to five securities typically offered in auction for the week and at a cutoff yield determined by RBI based on the bids received under the competitive segment (comprising institutional investors like banks and insurance companies).
Retail investors can also approach primary dealers (PD) or their custodian banks with whom they have demat account to buy/sell government securities. They are dependent on the price offered by the bank/PD which may be higher/lower than the fair market price prevalent at the time.
A retail investor who has a demat account can give instructions to his DP bank to buy/sell government securities at the prevailing market prices on NDS-OM. The DP bank would execute the trade and transfer securities seamlessly from the bank’s SGL account to the investor’s retail account. NDS-GILTS OM is the electronic platform owned by RBI and operated by CCIL (Clearing Corporation of India) where more than 95% of all gilt turnover happens.
Daily trading volumes in recent times have even crossed R1 lakh crore on some days. Within this facility, there are three ways to trade directly: (1) NDS-OM Web: The retail investor can approach his DP Bank to give access to this module to trade directly on NDS OM (2) NDS-OM Main: here the retail investor cannot trade directly but can place orders through their DP bank for the desired price/quantity/security. (3) Bilateral trades in Voice Market: The NDS OM also has a module called Reported Deal Segment for trades which are concluded outside the electronic platform. So a retail investor can buy/sell with a preferred known market participant, report the trade to his DP Bank who would be a member with NDS-OM and settle the trade on NDS-OM.
So does this make it easier for retail investors to trade directly in government securities? The answer is yes it does, to some extent. It gives the retail investors access to fair market prices and a large number of securities which get traded on the platform and a level playing field. Operationally the process becomes a bit less tedious as one can expect a seamless transfer from the DP bank’s SGL account to the investor’s demat account.
A retail investor needs to ask himself the following questions: Does he have the expertise/knowledge to understand the complex nature of fixed income securities which involves concepts like yield, price, modified duration, impact of macroeconomic events like RBI policy etc and carry interest rate risk? Secondly the process still involves considerable time and effort on the part of the investor. Thirdly, interest income earned on government securities is taxed at the marginal rate of income tax. Keeping these factors in mind, in my view, it would still make sense for a retail investor to take exposure to gilt schemes of professionally managed mutual funds.
By Bekxy Kuriakose
The writer is head, Fixed Income, Principal PNB Asset Management
