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How Can Retail Investors Buy Government Securities in Primary Market?

BY: Vivek SHARMA | Category: Finance | Submitted: 2012-02-13 12:34:58
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Article Summary: "The article talks about the guidelines for buying government securities in India.."


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Government Securities are very popular investment option for institutional investors, but retail investors generally don't invest in these securities as they find that returns offered by G-Secs are not very attractive. Also many investors are not familiar with the process of how to invest in government securities. There are two types of government securities- 1) Coupon bearing and 2) Discounted. Coupon bearing securities offer returns in form of coupon at periodic intervals with an assurance to return principal amount on maturity. Treasury bills are short term instruments which are sold at a discount to the face value. T-Bills do not have any coupon and hence they do not pay periodic returns. Government securities are sols through a process of auction in India and those desirous of buying government securities need to participate in these auctions.

As per RBI website, the following process has been incorporated into auction of government securities ,' With a view to providing retail investors, who may lack skill and knowledge to participate in the auction directly, an opportunity to participate in the auction process, the scheme of non-competitive bidding in dated securities was introduced in January 2002. Non-competitive bidding is open to individuals, HUFs, RRBs, co-operative banks, firms, companies, corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible investors apply for a certain amount of securities in an auction without mentioning a specific price / yield. Such bidders are allotted securities at the weighted average price / yield of the auction. In the illustration given under 4.1 (ii) above, the notified amount being Rs.1000 crore, the amount reserved for non-competitive bidding will be Rs.50 crore (5 per cent of the notified amount as indicated below). Non-competitive bidders will be allotted at the weighted average price which is Rs.100.26 in the given illustration. The participants in non-competitive bidding are, however, required to hold a gilt account with a bank or PD. Regional Rural Banks and co-operative banks which hold SGL and Current Account with the RBI can also participate under the scheme of non-competitive bidding without holding a gilt account'. (Source: RBI website)

The RBI guidelines further says ,'In every auction of dated securities, a maximum of 5 per cent of the notified amount is reserved for such non-competitive bids. In the case of auction for Treasury Bills, the amount accepted for non-competitive bids is over and above the notified amount and there is no limit placed. However, non-competitive bidding in Treasury Bills is available only to State Governments and other select entities and is not available to the co-operative banks. Only one bid is allowed to be submitted by an investor either through a bank or Primary Dealer. For bidding under the scheme, an investor has to fill in an undertaking and send it along with the application for allotment of securities through a bank or a Primary Dealer. The minimum amount and the maximum amount for a single bid is Rs.10,000 and Rs.2 crore respectively in the case of an auction of dated securities. A bank or a Primary Dealer can charge an investor up to maximum of 6 paise per Rs.100 of application money as commission for rendering their services. In case the total applications received for non-competitive bids exceed the ceiling of 5 per cent of the notified amount of the auction for dated securities, the bidders are allotted securities on a pro-rata basis'. (Source : RBI website)

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