RBI Retail Direct Scheme : What to consider before investing directly in govt securities

The Reserve Bank of India (RBI) has launched ‘the RBI Retail Direct’ scheme for retail investors, through which they can directly buy and sell government securities (G-Secs), both primary and secondary.  The bond-buying window was opened to increase retail participation in G-Secs and democratize ownership of G-Secs beyond the managers of pooled resources such as banks and mutual funds

RBI Retail Direct’ scheme : Important Details

Under the scheme, retail investors (individuals) will have the facility to open and maintain the ‘Retail Direct Gilt Account’ (RDG Account) with the RBI.

• Retail Investor is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and Exchange Traded Funds (ETFs).
• A Gilt Account can be compared with a bank account, except that the account is debited or credited with treasury bills or government securities instead of money.

RDG accounts can be opened through an online portal provided for the purpose of the scheme.

The online portal will give registered users access to primary issuance of G-secs and access to Negotiated Dealing System-Order Matching system (NDS-OM).

• The RBI introduced the NDS-OM in August 2005. It is an electronic, screen based, anonymous, order driven trading system for dealing in G-secs.

It is a one-stop solution to facilitate investment in G-secs by individual investors.

• RBI seeks to democratize the ownership of government debt securities beyond banks and managers of pooled resources such as mutual funds.

RBI Retail Direct’ scheme : What is Government Security (G-Sec)

A G-Sec is a tradable instrument issued by the Central Government or the State Governments.

It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91 day, 182 day and 364 day) or long term (usually called Government bonds or dated securities with original maturity of one year or more).

In India, the Central Government issues both treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).

G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

• Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

RBI Retail Direct scheme :  How will the RBI scheme work?

To register online, investors need to have a rupee savings bank account in India, PAN and a valid document for KYC. Non-resident retail investors are eligible to invest in government securities under Foreign Exchange Management Act, 1999. An RDG Account can be opened singly or jointly.

Investors fill up an online form. Once their RDG Account is opened, details for accessing the portal will be conveyed through SMS/email. No fee will be charged for opening/maintaining the account or placing bids.

For primary market participation, only one bid per security is allowed. Payment can be made through net-banking/UPI. If UPI is used, funds in the linked bank account can be blocked at the time of submission of bids; the amount will be debited on allotment in the auction. A similar facility through banks will be made available in due course.

Allotted securities will be issued by credit to the investor’s RDG Account on the day of settlement. Refunds, if any, will be credited to the investor’s bank account.

For secondary market trades, registered investors can access a transaction link on the portal to buy or sell gilts. Securities bought will be credited to the RDG Account on the day of settlement. The RBI will announce the date of commencement of the scheme.

RBI Retail Direct scheme :  Current G-Sec Market

The G-sec market is dominated by institutional investors which are large market actors such as banks, mutual funds and insurance companies.

• These entities trade in lot sizes of Rs 5 crore or more.

So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.

• The primary market is where securities are created, while the secondary market is where those securities are traded by investors.

There is no easy way for them to exit their investments. Thus, currently, direct G-secs trading is not popular among retail investors.

RBI Retail Direct scheme :  What are the risks in investing directly?

Since G-Secs are highly volatile, investment experts say investors who really understand these instruments or are willing to hold till maturity should look at them. 

Many argue that although these are safe-asset class, it is better to invest through mutual fund schemes that invest in G-Secs. 

For investors who are willing to hold till maturity and are not bothered by volatility, one of the advantages of going direct is that they will save on the expense ratio charged by mutual funds.

G-Sec attracts tax on both interest income and capital gains if the papers are traded in the market before maturity. 

Interest income attracts tax at the marginal tax rate, and capital gains at 10%. G-Secs don’t attract capital gains tax if the papers are held till maturity.

RBI Retail Direct scheme : Frequently Asked Questions

What is the commencement date of RBI’s Retail Direct scheme?

• As of now, all the required information is made available by the RBI, but the date of commencement of the scheme is not out yet and it’s expected to be out soon as said by RBI on 12 July.
• Any retail investor in his own name or in combined format can open the account with the RBI to get the benefits of the Retail direct gilt scheme.

How much minimum to maximum amount is allowed for investment through this scheme?

• Presently, The amount allowed for the investment is not made available by the RBI and it will be made public once the scheme is commented in the public domain.

Which all securities are allowed for trading in the securities market by RBI under the Retail Direct scheme?

• The securities to be traded include treasury bills issued by the Government of India, Government of India dated securities, sovereign gold bonds meaning SGBs, and the state development loans also called SDLs.

How does the actual transaction happen under the RBI’s Retail Direct scheme from buyers to sellers? 

• Just as an equity investor can hold shares with a depository participant in Demat form, he can also hold government securities in an account with a bank which is opened by the retail investor as a part of the required documents for RDG scheme or primary dealer. Securities kept on behalf of customers by banks or primary dealers are kept in a separate constituent subsidiary general ledger account also called an SGL account with the RBI. Thus, if the bank or the primary dealer buys security for his client, it gets credited to the constituent subsidiary general ledger (CSGL)account of the bank or primary dealers with the RBI. 

How will the trades happen in the primary securities market for the RDG scheme ??

• In the primary market, only a single bid for each security will be allowed. Payment can be made with the help of UPI or other ways of net banking. Funds will be blocked once the submission of the bid is done successfully, and will amount will be debited depending upon the allotment. This will be done by the payment aggregators or banks.

How will the trades happen in the secondary securities market for the RDG scheme  ??

• In the secondary market case, the retail investors should transfer funds before the start of the trading hours or during the day, to that particular account of CCIL called as Clearing Corporation of NDS-OM  with the net-banking or the UPI from the bank account associated with the RBI’s RDG scheme. Based on the final transfer or the success confirmation, a funding limit means the Buying Limit will be given for making ‘Buy’ orders. At the end of the trading hours, any excess amount remaining in the credit balance of the investor will be refunded to the retail investor

Image Source - Business Standard

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