Down the years, the guile of these bond market intermediaries has bred in the bones of RBI officials a suspicion and distrust towards brokers who once ripped off institutions, helped banks mask their losses in G-Secs and corporate bonds, and had senior bankers and treasurers eat out of their hands. Though their influence has waned – with the regulator throwing new rules after every shock – RBI remains famously wary about brokers.
So much so that brokers are barred from directly dealing on the electronic, screen-based system owned by RBI for G-Sec secondary trades. Called NDS-OM (negotiated dealing system-order matching), orders are matched anonymously, as it happens in the stock market. Direct participants in the market are confined to regulated entities like banks, bond houses, asset managers, insurers and retirement funds – institutions that RBI is comfortable with. Brokers, though regulated by Sebi, remain a dodgy breed in RBI’s eyes.
A fortnight ago, Sebi felt it was time for things to change, with New Delhi keen on purchase and trade of G-Secs by retail investors and households. Broaching the idea in a draft circular, the regulator said that to facilitate retail participation in G-Secs and leverage infrastructure of brokerages, brokers should be allowed to access NDS-OM. Sebi proposed a framework for accessing NDS-OM – stock brokers may form separate business units and function on an arm’s-length basis to avoid commingling of funds and securities.
On Friday evening, RBI issued a circular to apparently bring in more players in NDS-OM. But there is no indication whether it would improve brokers’ access to NDS-OM. While the circular allows stock exchange clearing corporations to be NDS-OM members, it may only be for investing the settlement guarantee fund of the clearing house, and not for giving brokers a quicker access to RBI’s platform. So, RBI is yet to attach any importance to the Sebi proposal to let brokers access the gilt market to stoke retail investors’ interest in G-Secs.
Only brokers, irrespective of their blemishes, have the retail reach. In most markets, small and wealthy individuals don’t directly bet on G-Secs but invest in gilt funds. However, for several reasons, like over-dependence on institutions for government borrowing, the fall in small savings (with fewer people buying post-office certificates) and the need for a diversified gilt investor base, there have been talks to find ways to attract retail money in G-Secs (70% of which have no liquidity).Nudged by GoI, towards end-2021, RBI cobbled together a platform for retail investors to directly invest in G-Secs through NDS-OM. However, trade volumes never took off in a meaningful way, with many small investors stranded in the virtual queue, struggling to offload securities that could only be purchased in the primary market when a G-Sec is auctioned. It is a skewed marketplace where retail investors, putting in comparatively tiny orders in odd lots, can’t quote a price, or participate in the secondary market and trade like institutional members. The former simply accepts the cut- off price in an auction.While NDS-OM is a robust, seamless machine for institutions and asset managers, it hasn’t emerged as a vibrant trading centre for retail investors. Even with bold steps, it could take a long time before the level of retail investment reaches a material level. However, given the current set up, it would remain a non-starter.
It all stems from the control that RBI wants to have over the G-Sec market. Being GoI’s merchant banker who handles its borrowing, RBI’s protective hold over the G-Sec market has kept it different from other financial markets. Nowhere else does a central bank operate a securities exchange like NDS-OM. Running a partly-open exchange that permits limited entry, while expecting banks and bond houses – primary dealers (PDs) – to market G-Secs to retail investors hasn’t helped.
PDs have little connection with retail investors, while banks would rather sell their fixed deposits or earn a fee by pushing insurance products. Whether retail investors should directly punt on G-Secs is another debate.
But if one strives for it, the G-Sec market must be transformed and opened up like the equity market: brokers with right credentials and net worth should be given direct access to NDS-OM for reaching out to retail investors who should be allowed to freely buy and sell – and not just hold a paper till maturity as RBI expects from those visiting the retail platform – and G-Secs should permitted to be held in the form of stock demats instead of a separate account that’s like a book entry with RBI.
New technology, sturdy settlement systems and risk controls have dramatically changed the market. It’s time to exorcise the ghost of Harshad Mehta.
