The basics of Retail Direct Gilt Account

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Following on from the promise to make government securities more accessible to retail investors, the RBI last Monday announced the contours of the Retail Direct program. Through this program, retail investors will be able to open direct gilt accounts with the RBI, known as retail direct gilt accounts (RDG account), through which they can purchase primary issues of government securities, as well as trade in the secondary market.

Investors can register on the online portal by providing their PAN card details, bank account, cell phone number, email ID and valid ID, and open an RDG account. An RDG account can also be opened jointly. Investors will be allowed to make purchases using net banking or UPI on the online portal. In addition, the portal can be used to generate account statements, create appointments, pledges or privileges, for donations or other worthless transactions of public securities, and for the resolution of grievances. No value transactions (VFT) refer to the transfer of government securities without consideration. For example, VFT would be required for the distribution of securities to beneficiary demat or gilt accounts upon allocation, after participation in the non-competitive segment of the primary auction. Although it is similar to the demat account, the RDG account does not incur any opening, maintenance or other transaction fees. The definition of government securities for the purposes of this regime also includes sovereign gold bonds (SGBs), with the exception of G-secs (including treasury bills) and government development loans (SDL).

Easier G-Sec investment

About five percent of each primary issuance of a government bond or government development loan is reserved for retail investors through non-competitive bidding. In this form of auction, retail investors cannot decide on the price of the security to be auctioned (unlike the tender, which is only open to institutions), and must specify the aggregate amount of investment in the application. They are allocated the securities at the weighted average rate resulting from the auction on the basis of calls for bids from non-private investors (such as banks and mutual funds).

Currently, retail investors looking for the online route can participate in G-sec and SDL primary market auctions 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 treasury 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. Brokers or facilitators can charge up to six paise per 100 as a commission for providing this service to their clients.

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

SGB ​​Business Advantage

Second, since government securities eligible for the RDG account also include SGBs, the RDG account, after opening, could eliminate the need to keep SGBs in a demat account. Currently, investors can purchase SGBs online from the websites of publicly traded commercial banks when issues are open for public subscription. The certificate of detention will be sent to the investor, on his registered e-mail identifier.

However, in order to be able to trade on the stock exchange, investors will have to hold the SGBs in dematerialized form. While SGBs have an eight-year hold until maturity period, they can be bought and sold in the secondary market from a date notified by the RBI shortly after the primary issue.

SGBs, if not purchased as a demat, must then be converted to a demat after allocation.

Variable rate bonds?

Currently, investors should apply for the RBI Floating Rate Bonds at designated branches of SBI, Nationalized Banks, IDBI Bank, Axis Bank, HDFC Bank, and ICICI Bank. However, only a few of these banks have allowed the purchase of these variable rate bonds online through their netbanking services (HDFC Bank for example).

It is not yet clear whether the proposed RDG account will also allow the purchase of RBI floating rate bonds. Unlike the other securities mentioned above, these bonds are not transferable, except in the event of transfer to one or more representative (s) or to a legal heir on the death of the bearer, and neither are they negotiable. If it is included in the RDG account, it could help facilitate the investment process, although it is not transferable.


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