Debt has equity as well

Arun Kaul

Retail investors are faced with the dilemma of investing their hard-earned monies. Time and again, market operators have taken small investors for a ride. The so-called lucrative fixed deposits offered by corporates, including NBFCs, often fail to repay even the principal.
Fixed deposits of banks as well as corporates, including FIs, do not offer competitive long-terms investments (10 years and above). The very successful deep discount bonds offered by FIs have also been largely called back on the back of falling interest rates, leaving investors high and dry. The much-touted mutual funds also do not guarantee fixed returns, much to the discomfort of the majority of investors who are risk-averse.

Under such paradoxical conditions, the esoteric government securities (GoI-Secs) answer most of the concerns of the general public. GoI-Secs are debt obligations of Government of India and are issued by RBI. So these are the safest option. There is no call/put option on these securities, so there is no danger of premature redemption. Investors can offload these securities before maturity in the secondary market. GoI-Secs also offer scope for capital appreciation for investors.

Interest received on these securities is exempt from tax up to Rs 3,000 per annum under section 80L: over and above the usual limit of Rs 9,000 per annum under section 80L. Thus for a small investor, who invests a small amount say upto Rs 30,000, the interest received would be tax free. There is also no tax deduction at source on interest. GoI-Secs can be held in dematerialised accounts.

Currently, there are a couple of primary dealers offering GoI-Secs to the general public. The lead was taken by PNB Gilts in January 2001. The company launched a scheme of offering two-way quotes in select GoI-Secs through the branches of Punjab National Bank.

Despite obvious advantages, awareness about GoI-Secs is very low. The Government of India, RBI and Primary Dealers Association of India should jointly take the onus of spreading awareness. Though investors are primarily looking for redemption, none-the-less liquidity is needed at the time of a cash crunch. PNB Gilts offers two-way quotes to investors for providing liquidity. Such efforts need to be undertaken by the other leading players also.

These securities are currently available only through select bank branches. The distribution network needs to be enlarged by including various other financial intermediaries for making this product an off the shelf product. The regulator should give a leeway to the players who are interested in developing this market for appointment of the intermediaries. RBI has shown interest in developing this segment of market by formulating a scheme for individuals to buy these securities in the primary market through primary dealers and banks. The exit route to the investors is still an unaddressed issue in this scheme. For the proper development of the scheme, RBI should also look at deepening of the secondary market in GoI-Secs for the general public.

(The author is managing director, PNB Gilts Ltd)