Is this a good idea?
RBI Retail Direct Scheme: is it a good idea?
Nine months after the suggestion was first notified, India’s $ 1.1 trillion sovereign bond market has finally been debunked to individual investors. This year, on November 12, Prime Minister Narendra Modi introduced the Reserve Bank of India (RBI) Retail Direct Program, which grants retail investors direct permission to buy and sell government securities (G-Sec ).
G-Secs are government bonds that present a very low risk of default and therefore little yield. When an investor purchases G-Secs, that investor is a creditor lending funds to the government. Basically, the program allows individuals to lend directly to the government, unlike in the past where mediators like banks, insurance companies or mutual fund companies contributed to G-Secs on behalf of clients. Every Friday the government debt manager, RBI, auctions G-Secs and registered users can buy these bonds risk-free at no additional cost.
At the launch of the program, the Prime Minister said that Indian small investors now have a secure mode of investing in government securities and that the program will expand the scope of investments in the country and restore access to markets for simpler and more secure capital for investors. RBI Governor Shaktikanta Das in his February 2021 monetary policy recommended the Direct Retail Program allowing retail investors direct access to G-Secs.
Introduction to the RBI Program: The program is a gateway that allows individual investors to invest in government securities. The program allows retail investors to buy and sell G-Sec online, both in the primary and secondary markets. According to information provided by the RBI, these small investors can now invest in G-Secs by opening a golden securities account with the RBI at www.rbiretaildirect.org.in The account opened will be called Retail Direct Gilt (RDG) Account. According to the RBI notification, to open RDG account a retail investor must have a PAN card, savings bank account held in Indian currency, any legal documents approved for know your client purposes. (KYC). In addition, a retail investor must have a valid electronic identity and a registered mobile phone number.
The participation and the attribution of the titles will be done according to the non-competitive scheme. Only one offer per security is authorized and the total amount to be paid will be indicated when the offer is submitted. Payment to the collector or receiving office can be made through net banking or UPI from the connected bank account, with funds debited at the time of bid submission on the portal. The secondary market transaction link is accessible on the online portal by registered investors to buy or sell G-Sec through Negotiated Dealing System – Order Matching System (NDS-OM) which is an RBI trading system. Investors will receive interest or income at maturity on their savings bank accounts connected to the RDG account.
To buy government bonds, before the start of the trading session or during the trading session, the investor must transfer funds to the selected account of Clearing Corporation of India NDS-OM. The purchase limit (funding limit) will be given to place âbuyâ orders based on the actual transfer or success message. Any excess funds to the credit of the investor will be refunded at the end of the trading session.
Two nuances of the scheme: While retail investors can now easily invest in G-Secs, allocating funds without considering the pros and cons can be pointless. G-Secs carry a minor risk compared to other types of assets such as stocks, as the returns are guaranteed by the government. By keeping G-Secs to maturity, the market risks associated with them can be negated. The government gives a fixed interest rate on G-Secs.
However, investing in G-Secs has many drawbacks. Theoretically, G-Secs provide sufficient liquidity as demand from large financial organizations is high. But these financial organizations buy in high volume and it is not possible for a retail investor to cede his assets to banks and insurance entities. In addition, the secondary market for G-Secs is not fully developed, which decreases the liquidity of G-Secs. The yield or income received on G-Secs is much lower than that of other asset classes. Importantly, G-Secs are long term investment instruments and they could lose value over the period.
Finally, although the program is a step on the right track to attract the share of household savings to G-Secs, the government should face many challenges with caution. The government should organize an awareness campaign on G-Sec to educate investors about interest rate risk as well as their benefit as long-term savings. One way to get the attention of investors would be to provide tax deductions for these instruments or to make the tax treatment of direct investment of gilts similar to the taxation of debt mutual funds. Nevertheless, some important issues such as consideration of investment avenues, namely insurance products, FPs, NPS, etc. Why is the RBI generating this retail investor armor against the SEBI-controlled G-Sec retail business? remain unanswered. So the government and the RBI should work hard to remove the regime’s bottlenecks. Otherwise, the scheme will not be a masterstroke.
(The writer is a Goa-based tax specialist, financial advisor, visiting professor and lecturer)