The Indian government issues government securities or G-sec in the government securities market (GSM) for meeting its short-term and long-term borrowing needs. It is an important component of the Indian debt market as along with extending resources to the Indian government for its borrowing needs, it also acts as a benchmark for corporate papers.
The Indian G-sec market has undergone various developments in recent times owing to the introduction of Demat holding, an electronic trading system, the establishment of the CCIL (Clearing Corporation of India), and many legal changes. Historically, institutional investors have been the major participants in the market. However, the RBI has taken measures to foster participation by smaller such as co-operative banks and even retail investors. 2021 witnessed the launch of the ‘RBI Retail Direct Scheme’ which allows retail investors to invest directly in G-secs by opening an account with the RBI.
What are G-secs and who issues them?
G-secs are securities issued by the central or state governments of India (known as state development loans). They are either short-term (also known as T-Bills with a maturity of less than 1 year) or long-term (also known as government bonds or dated securities with a maturity of more than 1 year).
How do they work in India?
The G-secs are first issued and sold by the RBI in the primary market through an auction mechanism. Following this, the securities are traded in the secondary market through-
i) NDS – OM – Negotiated dealing system
ii) OTC – Over the counter
iii) NDS-OM Web
iv) stock exchanges
NDS-OM is an electronic screen-based order matching system where investors can anonymously place or accept orders. Subsequently, the trade is cleared and settled on CCIL.
Over-the-counter, trading refers to trading done over the telephone through SEBI registered brokers. NDS-OM Web is in place to facilitate direct participation from gilt account holders. Stock exchanges have dedicated debt segments on their platforms that facilitate retail participation.
There are multiple channels of investing in G-secs.
1. Stock exchanges
To encourage retail investors in government securities, the “non-competitive bidding’ route has been introduced. Demat account holders can directly invest in G-secs through dedicated debt segments of various stock exchanges which act as intermediaries. NSE Gobid is one such platform where retail investors can place their bids. The stock exchange places the bids on the E-Kuber system of the RBI. Transactions are settled on the SGL (Subsidiary general ledger) account of the stock exchange and provided to the retail investor in his/her Demat account.
2. Commercial banks
G-sec auctions are conducted electronically on RBI’s E-Kuber system. Retail investors can participate in these auctions by opening a securities account (gilt account) with commercial banks or primary members (PMs) or primary dealers (PDs). All transactions by such account holders are settled through Constituent Subsidiary General Ledger accounts maintained by PMs with the RBI.
3. Mutual funds
Investors can indirectly invest in G-secs through gilt mutual funds like ICICI Prudential gilt fund or IDBI gilt fund.
4. RBI Retail Direct Scheme
Under this scheme, a Retail Direct Gilt (RDG) account with RBI can be opened by retail investors. With this, investors can trade g-secs on the retail direct online portal. The portal serves as a one-stop solution for buying and selling G-secs in both the primary and secondary market, account monitoring, grievance redressal, and nomination facility.
What are the benefits of G-Sec investments?
1. The sovereign’s commitment to payment of interest and repayment of principal is attached to government securities. Thus, G-secs are secure and negligible risk instruments.
2. G-sec settlement is based on a ‘delivery-versus-payment’ system which ensures a simultaneous transfer of securities from the seller and payment of funds from the buyer. Thus, the settlement system renders utmost safety and efficiency.
3. G-secs are available in different maturities (from 91 days to 40 years) to suit the different liability structures of different investors.
4. Highly secure investments as G-secs are held in the Demat form, thus rendering the act of safekeeping assets useless.
5. Funds can be raised in the repo market with G-sec as collateral.
6. Due to an active and liquid secondary market and a transparent mechanism of price dissemination, price discovery of G-secs is efficient and readily available.
Along with being important sources of revenue for the government, G-secs are lucrative investment options for an investor. The security of G-secs and avenues available today with which an investor can invest in the instrument, make G-secs a lucrative addition to any portfolio.