- Bond Guru
Settlement of a Bond Trade
Whose grandmother hasn’t talking longingly about the “Good old days”? Everything about the good old days was marvelous. Prices of food and clothing were low, while the quality was great. Any asset was of fantastic quality and lasted several lifetimes, is an inescapable gripe from the family seniors.
Without getting into a discussion on the much wider range of products and services, seldom a shortage or queue, superior consumerism, shorter life of products due to built-in redundancy giving way to newer and superior models, and income to be able to afford it all through steeply higher earnings, we will find missing from the elder’s litany a mention of investments.
The few investment products available to our seniors a little over 5 decades ago and beyond were land and jewelry. Financial products available were bank deposits and life insurance. Even deposits were risky, without safety of the money deposited. India is the only the second country in the world to provide deposit guarantee, that only in 1962. The first country with bank deposit guarantee/ insurance was the US of A, in 1934.
Tradeable investment products were available to a few among the educated, and these were limited to equity shares. The investors were either from business families, mostly located in Mumbai or Gujarat. Lack of transparency in corporate financials was complicated by difficult access to brokers. Trade details were whatever the broker decided to convey to the client.
A lot changed with regulation. The creation of SEBI, the Securities and Exchange Board of India, combined with the National Stock Exchange (NSE) offering transparent trading and guaranteed settlements we had a completely new, inviting and exciting way to trade securities. The BSE followed on the heels of the NSE, in offering online trading, taking the markets to the most remote parts of the country. Soon, the resident of a Madurai or Mehsana suburb was equal in market access to the Mumbaikar.
One of the most wonderful and bold steps in the development of the markets has been dematerialization (demat). Mr Chandrashekar Bhave resigned his IAS commission and created the National Securities Depository Limited (NSDL) that put an end to physical share certificates, signature mismatches, fake and stolen shares. Acceptance of digital securities was a struggle and Bhave had to rigorously promote the system.
The combination of the clearing corporation and demat have been magical in making our bond transactions smooth and safe. A look at the timeline of the purchase of a bond is an interesting illustration of the comfort.
Discuss your menu of desired features such as credit rating and risk, time to maturity and returns desired with your advisor
Check out the list of shortlisted securities and their indicative yields. Pick your security and ask for a final quote (there will be almost no variation from the indicative yield).
On the ‘value date’, that is date agreed for settlement of the transaction, which is normally the very next day of the agreement to buy, transfer the amount by RTGS to the bank account of the clearing corporation at the Reserve Bank of India. You make no payment directly to the broker and are therefore spared any risk of the broker defaulting, or delivering the wrong security!
The amount to be paid, mentioned in the ‘Deal Sheet’ of the broker carries the name and important features of the bond, and numbers, quoting the price per bond, interest accumulated and amount of stamp duty (for a transaction of Rs. 5 lakhs to 15 lakhs – a typical retail transaction will be for about Rs. 10 lakhs the stamp duty is just Re. 1, and multiples subsequently). We pay the precise amount, to the last paisa.
If the payment of money, or deposit of security is not done on schedule, the clearing corporation reverses the payment. Note that you get your money back if the security is not delivered in time!
The security is transferred to your demat account the same evening by the clearing corporation.
The bond purchase has never been so safe, clean and comforting, thanks to the smart use of technology, backed by strong regulations.
Buy some bonds and check out the ease and security of investing in securities!