How will the new scheme allow small investors to buy or sell government securities? Why were three different Lokpal schemes scrapped?
the story So Far: RBI had in February announced proposals for the Retail Direct Scheme and Integrated Ombudsman Scheme for investors in government securities. The plans were unveiled by the Prime Minister on November 12.
What is Retail Direct Scheme?
Under the Retail Direct scheme, small investors can now buy or sell government securities (G-Secs), or bonds directly, without going through an intermediary such as a mutual fund. It is similar to keeping money in debt instruments like fixed deposits in banks. However, the same tax rules apply to income from government securities. But, being the debtor of the government, there is a sovereign guarantee for the money and hence there is zero risk of default. Also, government securities may offer better interest rates than bank fixed deposits depending on the prevailing interest rate trends. For example, the latest yield on benchmark 10-year government securities is 6.366%. India’s largest lender, State Bank of India, offers 5.4% on deposits of less than ₹2 crore for a tenure of five to 10 years.
How can individuals access G-Sec’s offerings?
Investors desirous of opening a Retail Direct Gilt Account with RBI can do so through an online portal set up for the purpose of the scheme. Once the account is activated with the help of a password sent to the user’s mobile phone, investors will be allowed to buy securities either in the primary market or in the secondary market. The minimum amount to bid is ₹10,000 and in multiples of ₹10,000 thereafter. Payment can be done through net banking or UPI platform. The RBI, in a November 12 notification, said retail participants would bid for securities under the “non-competitive clause of primary auction of government securities and treasury bills”.
Why was there a need to start this scheme?
RBI said the scheme will help “broaden the investor base and provide retail investors access to the government securities market – both primary and secondary”. It said the plan was “a major structural reform placing India among the select few countries that have similar facilities”. The scheme would, among others, “facilitate smooth completion of the government borrowing program in 2021-22”.
The government intends to borrow up to ₹12 lakh crore this year ending March 31, 2022. The significant spike in lending – which is expected to boost infrastructure and social funding – has hit the economy sharply in the last fiscal year. Therefore, the central government wants to widen the base of investors who have signed up for bond purchases. The added benefit of the government’s access to retail investors could be freeing up space for companies to raise funds from institutional investors; Money which would otherwise have been usurped by the government to fund its expenses.
Why is RBI setting up a Unified Ombudsman?
Prior to the introduction of this scheme, RBI had three separate Ombudsman Schemes to assist in dispute resolution with respect to banks, NBFCs and non-bank prepaid payment issuers (PPIs). They were administered by the RBI through 22 Lokpal offices. With the introduction of the Integrated Scheme, the earlier ones have been repealed. When the regulator unveiled a proposal for a unified ombudsman in February, it said it wanted to make dispute resolution more “simple, efficient and responsive”. Hence the proposal to integrate the three Lokpal schemes and introduce centralized processing of complaints. It said, it aims to ease the process of grievance redressal “by enabling customers to register their complaints under an integrated scheme with a centralized reference point”. RBI will appoint an Ombudsman and a Deputy Ombudsman for a period of three years. Complaints can be made either physically at the Centralized Receipt and Processing Center or at the offices of RBI; or electronically through the Regulator’s Grievance Management System (https://cms.rbi.org.in/).
What about complaints pending judgment?
While the earlier three schemes have been repealed, the RBI clarified that the decision on pending complaints, appeals and execution of awards passed “will continue to be governed by the provisions of the respective Ombudsman Schemes and the directions of the Reserve Bank issued thereunder”. .
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