"The demand for debt instruments has significantly gone up but currently the money will be routed through mutual fund players who have access to these instruments," says Sun F&C Asset Management (India) Pvt Ltd chief executive officer Nikhil Khattau. "Investors are looking for short-term securities but one constraint retail investors are facing is the minimum transaction size and lack of liquidity."
DSP Merrill Lynch fund manager for fixed income Dhawal Dalal says: "In the last two years or so, participation in debt schemes has improved a lot. If the interest rates continue to remain soft, performance of debt schemes will improve. Retail participation is improving and if net based trading is allowed in debt instruments, on lines similar to what we have in equities, volumes will definitely increase. Any tax incentives to MFs will also see a rise in volumes in this segment."
Dealers in debt markets do not see direct retail participation picking up speed in the immediate future as there is still lack of awareness of the products and the existence of tax efficient and high yielding small saving schemes.
Dealers point out that currently deals in debt are settled physically. The introduction of settlement through a clearing house, like the one for equities market, will increase retail participants as default risk is taken care of. Retail investors have been allowed to participate in the bond auction for the first time from January 14, 2002. This will attract the high networth individuals and semi-wholesale players. However, treasury bills have not yet been opened up for retail participation.
Retail investors can participate in bids for government security bonds through primary dealers (PDs) or banks. Primary dealers will be the likely option as banks are unlikely to entertain small players. Prior to the bidding process, PDs require an undertaking from a retail participant stating that if the non-competitive bid is accepted, the necessary payments will be made as and when the bond is transfered to the account of the PD.
Currently, market watchers point out that due to the availabilty of government supported high interest and tax efficient schemes like public provident fund, National Saving Certificate (NSC), etc, fixed return seekers are unwilling to try out the other lesser known debt instruments in the market. However Mr Khatau expects that the anomaly in the returns will be adjusted soon as it would be very difficult for the government to pay high interest under the existing soft interest rate regime.
The National Stock Exchange (NSE) plans to give a new thrust to debt products for the retail investors. It identifies the absence of a common exchange-like platform to buy and sell debt securities as the main drawback to retail participation. In such situations, players enter into non-transparent deals through the telephonic market. On the introduction of screen-based trading on a stock exchange, with an efficient and transparent price discovery mechanism and a complete audit trail of activities, a liquid and vibrant secondary market for debt could be a reality.
NSE has recommended the use of a platform, similar to that used for equities for trading, clearing and settlement in G-Secs which would allow for easier adaptation of the system. Market experts believe that in order to improve liquidity and efficiency in debt securities, the trading platform should mirror the trading framework of equity markets, ie, based on the principles - anonymity, price-time priority, nation-wide market and settlement guarantee.
According to the NSE official, "Dematerialisation of debt paper will encourage retail participation and even trading in fixed income derivatives."
Lastly, the market expects a major change in the trading mechanism for debt on the Negotiated Dealing System (NDS) becoming operational. The NDS would facilitate anonymous, screen-based trading in various instruments like call money, notice/term money, government securities including treasury bills, repos, certificate of deposits and commercial paper.
From January 15, the Reserve Bank of India has provided screens to banks, PDs, mutual funds, etc, to trade negotiated deals. This will facilitate a faster access as these players used to undertake oral trades with one another previously. RBI has also provided dealers with a ‘Settlement Path.’
This system helps to settle the trade at the end of the day as against physical confirmation being done earlier. The settlement path system is at a nascent stage. It could be a while before money market dealers are comfortable settling their trade positions using this system.
In developed markets, the size of the debt segment with institutional participation is more than three times the size of the equity market. The Indian debt markets are far away from this size and it remains to be seen whether the retail thrust will succeed in introducing the necessary volumes.