The basics of Retail Direct Gilt Account

Following up on the promise of making government securities more accessible to retail investors, the RBI announced the contours of the Retail Direct scheme last Monday. Through this scheme, retail investors will get to open direct gilt accounts with the RBI – called a Retail Direct Gilt Account (RDG Account), through which they can purchase primary issues of government securities, as well as trade them in the secondary market.

Investors can register themselves on the online portal by furnishing details of their PAN card, bank account, mobile number, email id and a valid proof of identity, and open a RDG account. A RDG account can also be opened jointly. Investors will be allowed to make purchases using net banking or UPI facility on the online portal. Besides, the portal can be used to generate account statements, creating nominations, pledge or lien, for gifting or other value free transactions of government securities, and for grievance redressal. Value free transactions (VFT) refer to transfer of government securities, without consideration. For instance, VFT would be required for distribution of securities to the beneficiary demat or gilt accounts on allotment, after participation in the non-competitive segment of the primary auction. While it is akin to the demat account , the RDG Account entails no fee for opening, maintenance charges or any other transaction charges. The definition of government securities for the purposes of this scheme also includes Sovereign Gold Bonds (SGBs), apart from G-secs (including T-bills) and State Development Loans (SDLs).

Easier G-Sec investing

About five percent of every primary issue of a government security or a State development loan, is reserved for retail investors in the non-competitive bidding. Under this form of bidding, retail investors cannot decide the price of the security that is up for auction (unlike the competitive bidding, which is open only for institutions), and have to specify the overall investment amount in the application. They are allotted the securities at the weighted average rate that emerges in the auction on the basis of competitive bidding by non-retail investors (such as banks and mutual funds).

Currently, retail investors seeking the online route can participate in the auctions of G-secs and SDLs in the primary market through a demat account only. ICICI Securities, HDFC Securities, Zerodha and NSE’s goBID are a few options through which retail investors can use their demat accounts to invest money in T-Bills or government bonds or SDLs.

Investors can participate for a minimum investment value of ₹10,000, and up to a maximum of ₹2 crore, per security, per auction. The brokers or facilitators may charge up to six paise per ₹100 as commission for rendering this service to their clients.

However, while the process of investing in the G-Sec seems simple, selling the security before maturity may not be easy, given the illiquidity in the exchanges. The RBI opened up the secondary market in G-Secs for individual investors, a few years back, but the liquidity in the market is a major issue. The proposed the RDG account, could address this concern with enhanced retail participation in government securities.

SGB trading advantage

Secondly, since the eligible government securities for the RDG account also includes SGBs, the RDG account, after commencement, might eliminate the need for maintaining the SGBs in a demat account. Currently, investors can purchase SGBs online through the websites of listed scheduled commercial banks when the issues are open for public subscription. The certificate of holding will be sent to the investor, on her/his registered email id.

However, to be able to trade in the stock exchanges, investors will have to hold the SGBs in dematerialised form. While SGBs have a holding period of eight years until maturity, they can be bought and sold in the secondary market from a date notified by the RBI, shortly after the primary issue.

The SGBs, if not bought in demat form, need to later be converted to demat subsequent to allotment.

Floating rate bonds?

Currently, investors need to apply for the RBI floating rate bonds in the designated branches of SBI, nationalised banks, IDBI Bank, Axis Bank, HDFC Bank and ICICI Bank. However, only a few of these banks have enabled the purchase of these floating rate bonds online through their netbanking facilities (HDFC Bank for instance).

Whether the proposed RDG Account will also permit purchases of RBI floating rate bonds, is unclear at this point. Unlike the other securities discussed above, these bonds are not transferable, except in the case of transfer to a nominee(s) or legal heir upon the death of the holder, and also cannot be traded. If included in the RDG account, it could help ease the investment process, even if is non-transferable.