UPSC Prelims 2024 Q43: Who Can Trade Corporate Bonds and G-Secs
In India, which of the following can trade in Corporate Bonds and Government Securities?
1. Insurance Companies
2. Pension Funds
3. Retail Investors
Select the correct answer using the code given below:
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Answer: (d) 1, 2 and 3
Statement-wise explanation
- 1: correct — Insurance companies are among the largest investors in Indian government securities. The RBI's G-Sec primer notes that life insurers must keep at least 25% of their controlled funds in Central Government securities, and general insurers must also hold a set share in government and guaranteed securities. They hold an SGL account with RBI and take part in G-Sec auctions. They also buy and trade rated corporate bonds within IRDAI investment limits.
- 2: correct — RBI lists provident and pension funds as participants in the G-Sec market. Their large, long-term liabilities match long-dated bonds. Pension money under EPFO and NPS is invested in central and state government securities and in corporate debt. NPS offers separate asset classes for government securities and corporate debt.
- 3: correct — Under the RBI Retail Direct Scheme, launched by the Prime Minister on 12 November 2021, an individual can open a free Retail Direct Gilt account with RBI. With it they can bid in primary auctions of G-Secs, T-Bills and SDLs through the non-competitive segment, and buy and sell on NDS-OM in the secondary market. Retail investors can also buy and sell listed corporate bonds through stock exchanges and SEBI-registered online bond platforms.
How to eliminate
No absolute words or traps to work with here. The question only asks whether each group is allowed to trade in both markets. Statements 1 and 2 are certain from basic knowledge: insurers and pension funds are the classic long-term institutional investors in bonds, and insurers are required by regulation to hold G-Secs. That leaves Statement 3. A well-read candidate will know that RBI Retail Direct (2021) was designed to let ordinary individuals hold G-Secs directly, and that listed corporate bonds can be bought from a demat account. Since no option offers '1 and 2 only' together with any other combination you could rule out, the question turns on one fact: since 2021, retail investors have had direct access to G-Secs through RBI Retail Direct. Policy since then has aimed to widen retail participation, not limit it.
Know more
Who participates in India's debt markets
India has two main bond markets. The G-Sec market is for debt issued by the Centre (dated securities and T-Bills) and by states (State Development Loans). RBI regulates it. The corporate bond market is for debt issued by companies. SEBI regulates it.
| Participant | G-Secs | Corporate bonds | Why they hold bonds |
|---|---|---|---|
| Commercial banks | Yes (SLR requirement) | Yes | Statutory liquidity, treasury income |
| Primary Dealers | Yes (market makers, underwrite auctions) | Limited | Market making |
| Insurance companies | Yes (regulatory minimums) | Yes | Long-dated liabilities |
| Provident & pension funds | Yes | Yes | Long-term, predictable returns |
| Mutual funds | Yes | Yes | Debt and gilt schemes |
| FPIs | Yes (incl. Fully Accessible Route, 2020) | Yes | Yield, index inclusion |
| Retail individuals | Yes (RBI Retail Direct, non-competitive bidding) | Yes (exchanges, online bond platforms) | Safe or fixed income |
Retail access to G-Secs:
- Non-competitive bidding lets small investors get allotment at the auction's weighted average price.
- The RBI Retail Direct Scheme (Nov 2021) gives an individual a free Retail Direct Gilt account with RBI. It covers primary auctions of dated G-Secs, T-Bills, SDLs and Sovereign Gold Bonds, plus secondary trading on NDS-OM. A mobile app followed on 28 May 2024.
Retail access to corporate bonds:
- SEBI cut the minimum face value of privately placed debt securities from ₹10 lakh to ₹1 lakh (October 2022), then to ₹10,000 (July 2024).
- SEBI regulates Online Bond Platform Providers.
- Bond ETFs and products linked to bond indices are the next step.
Exam tip: UPSC tests whether 'retail' is excluded. Since 2021 the policy direction has been to bring retail investors into both bond markets.
In the news
Retail access to bonds was in the news before the 2024 exam. RBI launched the Retail Direct mobile app for G-Secs on 28 May 2024. SEBI was also cutting bond face values (₹1 lakh in 2022, with a further cut to ₹10,000 under way in 2024) to bring individuals into the corporate bond market.
NCERT Concepts to Revise
- Government securities: Defines the government securities that the question asks each group can trade.
- Corporate bond: Defines corporate bonds, the second market the question covers.
- Dated securities: Dated securities are the long-term G-Secs that long-horizon institutions and retail investors buy.
- State Development Loans: State Development Loans are G-Secs too, sold through the same RBI auctions.