UPSC Prelims 2021 Q13: G-Secs, NDS-OM and CDSL — Explained
With reference to India, consider the following statements:
1. Retail investors through demat account can invest in 'Treasury Bills' and 'Government of India Debt Bonds' in primary market.
2. The 'Negotiated Dealing System-Order Matching' is a government securities trading platform of the Reserve Bank of India.
3. The 'Central Depository Services Ltd.' is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
- 1 only
- 1 and 2
- 3 only
- 2 and 3
Answer: (b) 1 and 2
Statement-wise explanation
- 1: correct — Under RBI's non-competitive bidding scheme, retail investors can bid in the primary auctions of both dated government securities and Treasury Bills. RBI allows SEBI-recognised stock exchanges to act as aggregators: each exchange collects its clients' bids and puts in one consolidated non-competitive bid. The securities allotted are then credited to the investors' demat accounts. In February 2021 RBI went a step further and announced 'Retail Direct', which gives individuals a gilt account held directly with RBI.
- 2: correct — NDS-OM (Negotiated Dealing System–Order Matching) is an anonymous, screen-based order-matching system for secondary-market trading in government securities. RBI introduced it in August 2005. RBI's FAQ says it is operated by the Clearing Corporation of India Ltd (CCIL) on behalf of RBI. That makes it RBI's platform, even though CCIL runs it day to day.
- 3: incorrect — CDSL was promoted by the Bombay Stock Exchange together with banks, mainly State Bank of India, HDFC Bank, Bank of Baroda, Bank of India, Union Bank of India and Standard Chartered. RBI was never a promoter. The country's other depository, NSDL, was promoted by IDBI, UTI and the National Stock Exchange. Depositories are regulated by SEBI, not RBI.
How to eliminate
Start with Statement 3. RBI regulates banks and the government debt market, and it does not promote stock-market companies. Depositories like CDSL and NSDL come under SEBI. An RBI–BSE joint promoter should look wrong at once. If you rule out Statement 3, the options that contain it go too, which leaves '1 only' and '1 and 2'. Statement 1 is in both of these, so you can treat it as true. The question then turns on Statement 2. The phrase 'government securities trading platform of the Reserve Bank of India' matches the well-known NDS-OM, which RBI introduced in 2005. If you have never heard of NDS-OM, you have to know that fact to pick between the two. Facts to remember: CDSL = BSE + banks; NSDL = IDBI + UTI + NSE; NDS-OM = RBI's G-sec trading platform, operated by CCIL.
Know more
Government securities (G-secs) are debt papers the Centre or a state sells to borrow money. RBI manages these borrowings as the government's debt manager.
| Instrument | Issuer | Tenor |
|---|---|---|
| Treasury Bills | Centre only | 91, 182, 364 days |
| Cash Management Bills | Centre | under 91 days |
| Dated securities | Centre | long term (bonds) |
| State Development Loans | States | long term |
How retail investors get in
- Primary market: under the non-competitive bidding scheme (started 2001-02), retail investors get allotment at the weighted-average price of the accepted competitive bids. Up to 5% of the notified amount is set aside for them. Specified stock exchanges, banks and primary dealers can aggregate these bids.
- RBI Retail Direct: announced 5 February 2021 and launched by the Prime Minister on 12 November 2021. Individuals can open a free Retail Direct Gilt (RDG) account with RBI online. From it they can bid in auctions of T-bills, dated G-secs, SDLs and Sovereign Gold Bonds.
- Secondary market: NDS-OM is RBI's anonymous electronic order-matching platform (2005), run by CCIL for RBI. RDG account holders trade on its 'Odd Lot' and 'Request for Quotes' segments.
Market infrastructure: who owns what
| Body | Promoted by | Regulator |
|---|---|---|
| NSDL | IDBI, UTI, NSE | SEBI |
| CDSL | BSE + banks (SBI, HDFC Bank, BoB, etc.) | SEBI |
| CCIL | Major banks and financial institutions | RBI |
Why retail access matters: a wider investor base gives the government a steady source of borrowing and can bring its borrowing costs down.
In the news
On 5 February 2021, RBI's Statement on Developmental and Regulatory Policies announced that retail investors would get online access to the G-sec market, both primary and secondary, through a gilt account held directly with RBI ('Retail Direct'). That made retail entry into G-secs, and the NDS-OM platform, a current topic just before the October 2021 Prelims.
NCERT Concepts to Revise
- Treasury bills: Statement 1 names Treasury Bills, the Centre's short-term borrowing instrument sold at RBI auctions.
- Government securities: The whole question is about government securities: who can buy them, and where they trade.
- Dated securities: Statement 1's 'Government of India Debt Bonds' are dated securities, the long-term part of the G-sec market.
- Money market: Treasury Bills are money-market instruments, so this helps place Statement 1's instrument in the right market.