Retailing of Government Securities - Security Analysis and Investment Management

The existence of strong retail segment is a prerequisite for the development of the government securities market. Individuals can buy government securities from the Reserve Bank’s public debt office during auctions. However, most investors are not familiar with the functioning of the government securities market and most of them perceive government securities as an instrument meant for institutional investors. Owning to this, the retail market of government securities did not develop. The Reserve Bank has made efforts to promote retailing off government securities.

Banks are allowed to freely buy and sell government securities on an outright basis at prevailing market prices. They retail government securities to non-bank clients without any restriction on the period between sale and purchase. Further, the interest income on government securities was exempted from the provision of tax deduction at source with effect from June 1997 to facilitate genuine trading in the secondary market. With no TDS, government securities become an attractive investment for those interested in avoiding TDS such as senior citizens. One of major objectives of setting the primary dealer system and satellite dealer system was to increase the distribution channels and encourage voluntary holding of government securities among a wider investor base. The Reserve Bank has extended to them a scheme for availing liquidity support and the facility for repos (as lenders) for increasing the retail network.

A few banks and primary dealers have taken useful initiatives to promote retail investment in government securities by offering these securities for sale at retail outlets. However, not much has been achieved by these efforts. Banks have been reluctant to market government securities to retail investors apprehending the creation of an adverse pact on their own deposits. Moreover, not much headway has been made in retailing government stock by NSE, NSDL and so on which were given the facility of a second SGL account.

It is the primary dealers who can effectively build awareness regarding the advantages of holding government securities. They should be given all infrastructure support to create a retail market for government securities. PDs and banks may also provide both sale and purchase facility to ensure that retail investors are assured of liquidity of such investments. Besides these, the stock exchange network can be used to expand the retail segment of the government securities market.

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