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MUMBAI, Dec. 26

RETAIL investors can buy and sell Government securities on the stock exchanges in the same way they do equity shares, once the draft scheme announced by Reserve Bank of India is actually implemented.

As per the scheme announced by RBI today, Government securities would be traded on BSE, NSE and OTC under the T+3 rolling settlement system. This would also mean that the RBI would permit intra-day short selling in gilts, currently prohibited.

Intra-day shorting (sale of Government securities without possessing it) will be permitted for all entities. In case of trade failure, stiff penalties would be applicable, said an RBI notification. According to dealers, this is a significant move to deepen the Government securities market by bringing in individual investors as well as institutional investors such as PFs, gratuity and pension funds.

To begin with, it is proposed that all outstanding and newly issued Central Government securities would be traded on the automated, anonymous, order-driven system of the stock exchanges.

Treasury bills, State Government and other securities (which are eligible as government securities) would be included in phases by RBI in consultation with the Securities and Exchange Board of India.

Clearing corporations and clearing houses would provide financial guarantee for settlement of obligations to their clearing members, as in the case of the equities market. The permitted exchanges would be required to set up a separate trade or settlement guarantee fund.

The existing Subsidiary General Ledger (SGL) account holders, (who trade in government securities) are free to continue to hold securities in SGL accounts or to transfer them to their own accounts with the depositories.

For the transfer, RBI will establish a "value-free transfer mechanism'' through which the SGL account holders would be able to transfer securities from other SGL accounts to their own accounts with the depositories on a T+1 or T+2 basis, said the RBI circular.

The draft scheme has suggested a mark-to-market margin along with exposure norms calculated conservatively on the basis of worst case volatility scenario on the zero coupon yield curve. Margins based on such volatility estimates work out to around 15 per cent in addition to mark-to-market margin.

In addition to this mechanism for risk management, the permitted exchanges would also have to design and build an intra-day risk containment system for Government securities.

Stockbrokers would be eligible to deal in G-secs provided they satisfy conditions of capital requirements. A broker will, however, not be allowed in the settlement process for any RBI-regulated entities such as banks, primary dealers, all India finance institutions and deposit taking non-banking finance companies. They would be instructed by RBI to use the custodian banks to settle trades.

The permitted stock exchanges would be required to send weekly reports to enable the central bank to monitor banks' exposure to the payment system. In addition, a mechanism for exception reporting, covering settlement failures, off-market trades etc, on a daily basis will also be put in place.

The RBI would also be enabled by the exchanges to view the market on a real time basis. SEBI will associate with RBI in inspecting the permitted exchanges and depositories so far as their operations in the G-sec market is concerned, the notification said.

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