What are G-secs and what in the world is Non-competitive bidding? What and why is RBI proposing??
Government Securities (G-Secs)
- A G-Sec is a tradable instrument issued by the Central or State Governments. It acknowledges the Government’s debt obligation.
- G-Secs may have short-term maturity [called Treasury bills (T-bills) with maturity less than a year i.e. 91 day or 182 day or 364 day] or have long-term maturity [called Government bonds or dated securities].
- Government securities carry practically no risk of default and hence, are called risk-free gilt-edged instruments.
Retailing of Bonds
G-secs are bought through auctions by big banks, corporations, financial institutions etc. However, retail participation (small and medium investors and individuals) had been non-existent earlier.
Retail participation is necessary to ensure a stable demand for government securities, which, in times of volatility, can cushion the impact of sales from institutional and foreign investors. Advantage to the investor is that G-secs are risk free and thus a good investment option.
So, the government opened retail participation in G-secs through measures such as the Government Securities Act, 2006; Non-Competitive Bidding, Improvement in settlement mechanism, introduction of odd lot etc.
What is Non-Competitive Bidding?
Despite the measure taken by RBI to improve retail participation in dated securities, medium and small investors were shying away due to the price-risk involved in auctions. So, RBI came up with a new provision of Non-Competitive Bidding. Under this option, the RBI reserves 5% of the total number of Centre’s bonds and 10% in case of the State bonds for the retail investors.
So, if Maharashtra is offering 10,000 bonds for auction, 1000 bonds will be reserved only for retailers. Also, since retailers were shying away due to the risk involved in bidding, RBI made the bidding ‘non-competitive’ i.e. it’s called bidding just for the namesake. The participants won’t have to pay increasing prices to buy the bonds but just buy them at a certain rate (average price of the accepted competitive bids) as far as they meet certain conditions.
However, this facility was not available so far for t-bills but was available only for bonds or dated securities.
Coming to RBI’s recent proposal
- In its recent annual report, RBI had proposed that the non-competitive bidding option for retailers should now be opened for t-bills too.
- RBI is also carrying consultations with stakeholders to enable seamless movement of securities from the subsidiary general ledger (SGL) form to demat form to promote trading of government securities on stock exchanges.
Low Retail Participation
The participation of retail investors in non-competitive bidding of dated securities has been low so far due to low awareness about this facility and also the infrastructure to mobilise the trading has not developed fully yet.
The individual participation has been low as retail investors participate in these sovereign instruments mostly through the mutual fund route.