NSE (National Stock Exchange) introduced trading in Treasury bills (T-bills) and State Development Loans (SDLs) in its capital market segment. In line with equity trading, investors can now buy and sell T-bills and SDLs through NSE trading members.
Most importantly, the move comes within a week of SEBI chairman Ajay Tyagi urging financial market participants to handhold those who have recently opened Demat accounts. They need to begin with investing in less-risky government securities before moving on to equities and other risky instruments, he said.
In order to understand what are Treasury bills and SDLs, kindly go through our next segment.
Firstly, treasury bills are used for short term borrowing by the Central Government to fund projects like building roads, schools etc. Furthermore, they are issued at three maturity periods–91 days, 182 days and 364 days. There is no interest component in the case of treasury bill, which is the main difference between a government bond and a treasury bill.
In other words, the bill is issued at a discount to its true value (which is higher than the discounted price) and at maturity the investor is given the true value of the bill. This is a simple case of buying low and selling high. It can be further explained through an example.
Let’s say, a 91-day treasury bill with a face value (true value) of Rs. 120 can be bought at a discounted price of Rs. 118.40. Upon maturity, the investor is eligible to receive the entire true value of Rs. 120, which allows them to realise a profit of Rs. 1.60.
As per the regulations put forward by the RBI, a minimum of Rs. 25,000 has to be invested by individuals willing to invest in a short term treasury bill. Furthermore, any higher investment has to be made in multiples of Rs. 25,000.
From an investor’s point of view, a treasury bill is an extremely safe investment option as it is issued by RBI and backed by the Central Government. So even during an economic crisis, the true value has to be paid to the investor upon maturity. In addition, they are highly liquid that means the true value will be deposited into the investor’s account a day after the maturity.
The current 91-day treasury bill yield is 3.22 per cent, in other words if the treasury bill would have been a government bond then its yearly interest rate will be 3.22 per cent.
State Development Loan (SDL)
State Development Loans (SDLs) are dated securities issued by states for meeting their borrowings requirements. Purpose of issuing State Development Loans is to meet the needs of state governments.
Lets first understand what is a dated security.
Dated Government securities are long term bonds of the government that carries a fixed interest rate. These are issued to fund state projects for rural and urban development
The key difference between SDL and Treasury Bill is that SDLs are long term investments having maturity periods up to 30 years and treasury bill has a maximum maturity period of a year.
The average interest (coupon) rate of a state development loan is around 8 per cent.
From an investor’s point of view, SDL is very safe government security for long term investment.
“Availability of a secondary market for these securities would encourage participation in the primary markets. Now all the major government securities including G-sec, SDL and T-bills are offered at NSE in both primary and secondary market platforms,” NSE Managing Director and CEO Vikram Limaye, said.
In conclusion, the availability of these securities in the capital market segment for trading, coupled with NSE’s wide reach, is likely to improve the participation of retail investors in this asset class.