The success of the Bharat Bond issue where PSU bonds were sold through an exchange-traded fund (ETFs are mutual funds that mimic an index and list on the stock exchange) and the use of ETFs earlier for equity disinvestment of public sector firms has rung alarm bells in the plush offices of the life insurance industry. To see how they are connected, we will have to use a wide-angle lens and watch from 30,000 feet. The story is about who gets to be the pipe that connects savings to investments, and shaves off a few basis points to a few percentage points of costs, as it does so. Households and firms generate savings, which becomes the raw material for firms for their investments, that they use to start a new business or expand an existing one. Firms will either borrow or sell their equity to get the funds. Banks, insurance firms, mutual funds and pension funds are the pipes that connect savers to users (both borrowers and equity sellers).
Buying G-secs through your demat account: Next week, you should be able to directly buy a dated government security or a treasury bill using your demat account. The Reserve Bank of India (RBI), in a 28 July 2016 notification (http://bit.ly/2b2LAfZ ), allowed account holders with National Securities Depository Ltd (NSDL) or Central Depository Services (India) Ltd (CDSL), to buy and sell government bonds through their banks. Let’s de-jargon this before we decide whether to buy these or not. Governments spend more than they gather—from taxes and other revenue streams—by borrowing. The government’s borrowing is facilitated by its banker, the RBI. The central bank sells short-term papers called treasury bills (tenures of 91 days, 182 days and 364 days) and long-term government securities (G-Secs), with tenures of up to 30 years.
The middle-India push-back (http://bit.ly/1Udgm4P) on the government’s plan to tax the Employees’ Provident Fund and reduce rates on small savings products tells us that despite frothing at the mouth against the government during the day, finally, when the dust settles, we love the role of the government as an asset manager. What do we want? Ideally, government-guaranteed returns with no risk. So why don’t we buy government securities (G-Secs) directly? Because of the way the intermediation (link between savers and investors) market is constructed. Maybe it is time for this to change. We’re ready for G-Secs going direct to the public. But first, the background.