Tyagi's bold idea to bridge govt fund gap: Offer G-sec in demat, tap new investors

The Economic Times , Jul 23, 2020

Sebi Chairman Ajay Tyagi on Wednesday dished out an innovative idea to the government to manage its finances: offer government securities in demat format and tap the new investors who have been crowding Dalal Street over the past few months.

Taking note of the latest influx of new equity investors, Tyagi said they should start their journey down Dalal Street by first investing in government securities before moving into riskier assets.

He called for issuing government securities in demat form so that these new investors can easily access this risk-free instrument. “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.

The government aims to borrow Rs 12 lakh crore this financial year, which would include Rs 8 lakh crore budgeted borrowing along with an additional Rs 4 lakh crore to deal with Covid-19 related contingencies.

Currently, G-Secs are issued through auctions conducted by the Reserve Bank of India. Retail investors cannot directly bid for this instrument but can do so through brokers.

Tyagi said India needs deepening of the bond market. "The problem with the corporate bond market is that most trading is restricted to top-rated papers. Today about 97 per cent of trading happens in AAA, AA+ and AA papers only. In comparison, only 5 per cent of trading happens in such papers in the US, while nearly 75 per cent of trading happens in A, BBB and BB-rated papers," he pointed out.

“Given this, only a limited number of issuers are able to raise money from the market. There is a dire need to move down the rating curve,” Tyagi said.

He said mutual funds are the only major active players in the secondary bond market. “About 40 per cent of trading volume is done by mutual funds. They constantly churn their portfolios on account of operational requirements. Naturally, illiquidity in bond market hits them the most, as we saw in recent months. The need to have more players, including institutional investors, there is apparent,” he said.

Unify G-Sec & Corp Bond mart

Tyagi highlighted lack of trading in G-Sec in various maturity buckets which, he said, affects pricing of corporate bonds. Hence, the capital markets regulator called for unification of the bond market. “The market infrastructure for corporate bonds and G-Sec should be integrated. The separate systems result in artificial segmentation of investors and divergent regulatory norms for institutions in the two markets performing similar functions,” he said.

Bond market in full flow

Despite nationwide lockdown and disruptions, activity resumed in the primary bond market mid-May onwards and during the quarter gone by fundraising was comparable to the last year’s numbers. The Sebi Chairman said total funds raised during the first quarter of FY21 stood at Rs 2.77 lakh crore, compared with Rs 2.94 lakh crore raised in the corresponding quarter a year ago. For equity, Rs 0.67 lakh crore were raised against Rs 1.28 lakh crore raised in the year-ago period.

“In debt, the amount raised (Rs 2.1 lakh crore) during the April-June period was more than what was mopped up in the same period last year (Rs 1.67 lakh crore). Thus the overall situation is not bad, especially considering the fact that fund raising this year started only from May onwards. So, there is no cause for despair," Tyagi said.

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