To encourage retail participation in India’s bond market and make it more liquid, SEBI chairman Ajay Tyagi wants issuance of Government Securities (G-Secs) to follow the stock market model, where companies directly issue shares in the demat account of small investors. Speaking at a virtually arranged FICCI conference on Wednesday, Tyagi pitched an idea wherein he said G-Secs should be dished out in demat format to tap new investors.

“I would suggest that in order to facilitate this, G-Sec be issued in demat form. It would help the government meet its borrowing target (by way of a larger participation),” Tyagi said.

RBI in control

Market experts told Business Line that Tyagi’s statement is aimed at making issuance of G-Secs simpler. As of now, RBI is the monitoring monitoring agency for all the debt programs of the government. G-Secs are issued by RBI and the process of its settlement too is fully controlled by the central bank. G-Secs can be held in normal demat accounts of retail investors but the process of buying and selling them is complex, experts said.

RBI is the issuing agency for G-Secs. Even when bids are received on an exchange platform, the RBI issues securities only in a Constituent Subsidiary General Ledger Account (CSGL) of a clearing corporation, which in turn credits the securities to the demat account of the retail investors.

All big banks and primary dealers have a SGL account with RBI at Mumbai. Individual traders can open CSGL account with RBI and get G-Secs in that account. CSGL is a form of demat account exclusively monitored by the RBI like the share trading accounts monitored by the SEBI. Individuals who do not have a CSGL account with RBI can ask their brokers or banks to transfer G-Secs from their SGL accounts to demat account. Banks accept G-Secs from retail investors only in its SGL accounts tokeep RBI in the loop.

“So what Tyagi meant is to take away this SGL accounts and issue G-Secs directly like the companies do in IPOs. It would simply mean making the complex G-sec issuance and trading process simpler,” said a MD of Mumbai based bond trading house.

Procedural issues

Currently, there is no interoperability between clearing houses in the G-Sec market, which gives rise to procedural issues, experts say.

But Tyagi’s proposal could spark a turf war if securities are not issued via SGL accounts but directly on an exchange platform and as demat into retail accounts as it takes out RBI’s role to the extent of settlement of G-Secs in SGL accounts. SEBI will monitor G-Sec issues by the government like it does for companies in the primary markets, experts said.

The FSLRC (Financial Sector Legislative Reforms Commission) led by Justice Shri Krishna had suggested separating the Public Debt Office (PDO) from RBI and making it an independent entity. The PDO is the registering agency for G-Secs and works under RBI. Of late, SEBI has yet again made nearly similar suggestions to the government for development of bond markets, sources close to the regulator said.

FSLRC had also recommended giving authority to SAT to hear RBI related cases, which too is now being debated in the government, the sources said.

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