The Hindu : FM kicks off retail trading in G-Secs

Online edition of India's National Newspaper
Friday, Jan 17, 2003

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Business

FM kicks off retail trading in G-Secs

By Our Special Correspondent

NEW DELHI JAN. 16. The Government today provided another window to small investors to trade in government securities, something that was out of reach of the common man because the amount involved was in crores. Now, trading in government debt papers can be undertaken for as little as Rs. 1,000.

Flagged of by the Union Finance Minister, Jaswant Singh, the retail trading of government securities on stock exchanges will enable retail and other investors to trade in government securities in an anonymous, order driven, screen based trading system of the stock exchanges. As terminals of the designated stock exchanges are available in over 350 cities, many small investors would now be able to participate in the trading of government securities.

Keeping in view the retail investors, the minimum order size has been fixed at 10 units of face value Rs.100 each and in multiples thereof. In fact, while launching the new facility, Mr. Singh bought ten units of securities bearing an interest rate of 11.10 per cent maturing in April, with a face value of only Rs. 100 each. "This has opened a new investment opportunity for retail and small investors,'' he said.

To begin with, all outstanding and newly issued Central government securities would be eligible for trading under the system. Treasury bills, State Government and other securities, which are eligible government securities, would be included in phases by the Reserve Bank of India (RBI) in consultation with the Securities and Exchange Board of India (SEBI). The RBI will provide the exchanges and the depositories a list of outstanding government securities that can be traded on the permitted exchanges.

This new facility would enable different entities, such as rural and cooperative banks, provident and pension funds across the country, to participate in the transactions in government securities with ease, transparency and safety. This would also allow investors to enjoy the freedom of holding a security for a short term and thus would provide an alternative to the existing saving instruments, such as, bank deposits of corresponding tenure.

This facility will be in addition to the present system of dealing in government securities through the Negotiated Dealing System of the RBI. Besides expanding the investor base and providing countrywide access to the government securities market, this measure will also help reduce time and cost in trade execution by matching orders on a strict price time priority. It is also expected to enhance the operational and informational efficiency of the market as well as its transparency, depth and liquidity and is expected to reduce the cost of borrowings.

The equity trading model would be adopted for trading of government securities on the permitted exchanges, so that there would be no requirement for a fresh membership on the exchanges or on the clearing corporation or clearing houses to trade in government securities. Like equities, the government securities would be traded on the permitted exchanges by T + 3 rolling settlement, that is, transaction date plus three days. The settlement cycle would be further shortened along with the shortening of the settlement cycle for equity trading. The clearing corporation and the clearing house would provide the financial guarantee for settlement of obligations to its clearing members, as they do for equity market.

Later, the Finance Secretary, S. Narayan, told presspersons that the next major step the Government would be taking was to introduce interest rate derivatives, the modalities of which were being worked out by a committee under the RBI and assisted by SEBI. "This step is being taken to check long term volatility in interest rate, which will be contained by the interest rate derivatives. This will probably be in place soon,'' he added. The RBI Deputy Governor, Rakesh Mohan, pointed out that trading in government securities was not totally risk free. Prices would vary depending on the interest rate movements. But it would be secured till maturity. Being sovereign papers, these securities were the safest, he added.

Referring to the Rs. 650,000 crore government securities market, the SEBI Chairman, G. N. Bajpai, said the entry of retail investors would ensure higher liquidity and result in price discovery of the government papers. There were more than 150 Central government securities in the market and all the dated securities would be available for retail trade, but no State government papers were being allowed for retail trade now. These and other securities would be introduced for retail trade in phases, he said.

To cover the risks in government securities trading, SEBI has also asked the bourses to set up separate trade guarantee funds that would be related to the volume of transactions, Mr. Bajpai added.

The Chairman of the Industrial Development Bank of India (IDBI), P. P. Vora, said returns from government securities would be better than banks' fixed deposits. Also, there would be no tax deduction at source on interest payments. The tax exemptions up to Rs. 3,000 for individuals would continue for investors.

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