G-Sec option for retail investors

The market capitalisation of G-Secs (Central as well as States) listed on the National Stock Exchange’s wholesale market was estimated at around Rs 756,794 crore as on March 31, 2002. This is 20 per cent higher than the market capitalisation of the equity market which amounted to Rs 628,000 crore as on December 31, 2002. Now the biggest question mark is: will retail investors go for G-secs on the stock exchanges?

Experts say that even in developed countries, the stock of G-Secs held by individuals is relatively very small. “In view of this, we should note that it will be difficult to popularise G-Secs holding among real retail investors. Most of such investors would prefer to invest in mutual funds, equities or deposits, and in India, the National Savings Scheme or bank accounts. That is why when we are planning to develop a retail market for G-Secs, we should be conscious about the fact that real potentially large market for G-Secs is among the corporates, NBFCs, PF and pension funds etc,” said former National Stock Exchange managing director R. H. Patil.

The Reserve Bank of India in association with the Sebi has drafted rules which propose that initial retail participation be restricted to outstanding G-Secs on the stock exchanges—BSE, NSE and Over the Counter Exchange of India (OTCEI). A major attraction is intra-day short-selling in G-secs. “This was one of the suggestions of many primary dealers and other players in the money market for increasing the volumes. Without some sops like this, retail investors will not go for G-Secs,” said a dealer.

Sebi-registered brokers, who meet the minimum capital adequacy norms, would be permitted to trade in G-Secs, RBI said in its draft scheme for retail participation in G-Secs. Treasury Bills, State government and other securities, which were eligible as G-Secs, would also be included in phases in consultation with Sebi. Currently, over 150 central and 539 State government securities are listed on the wholesale debt market (WDM) segment of the NSE.

‘The equity model would be suitable for trading in G-Secs on the permitted exchanges as market players were familiar with secondary market trading in shares. The securities would be traded in T+3 rolling settlement mode, which would be shortened when the duration of such cycle for equity market is reduced in the future,’ RBI said. The clearing corporation and clearing house would provide a guarantee for settlements and bourses would have to set up a separate trade and settlement guarantee fund for G-Secs.

The arrival of G-Sec trading will remove barriers which kept investors away from this instrument. “Earlier the G-Sec market did not have any liquidity. The parties have to search for counter-parties and negotiate the best price. Besides, the market was not transparent at all. Only the parties to trade have information about the trade,” said a banking source.

The market was highly fragmented. A buyer from Chennai can not trade in the Mumbai market since the securities held in his account with RBI books cannot be easily transferred to Mumbai and vice-versa. All these problems will be solved once stock exchanges start trading in G-Secs. It’s to be seen whether investors will come in droves.