Non-Marketable Security

Non-Marketable Security — Meaning, Definition & Full Explanation

A non-marketable security is a financial asset that cannot be easily bought or sold on a secondary market, such as a stock exchange. These securities typically lack liquidity and are often held until maturity or sold through private, negotiated transactions. Their value is usually based on their original issue price or intrinsic worth rather than fluctuating market demand.

What is Non-Marketable Security?

A non-marketable security refers to an investment instrument that does not have a readily available or active secondary market for trading. Unlike marketable securities, which can be quickly converted into cash on exchanges like the BSE or NSE, non-marketable securities require private transactions for transfer or redemption, making them less liquid. These assets are often designed for long-term holding and may carry restrictions on resale. Examples commonly include certain types of government savings bonds, unlisted shares of private companies, fixed deposits, and specific private equity or debt instruments. The primary characteristic of a non-marketable security is the absence of an organized marketplace for its continuous valuation and exchange, meaning its price is not determined by real-time supply and demand.

How Non-Marketable Security Works

The fundamental principle behind a non-marketable security is its illiquidity and the absence of a public trading platform. Here's how they generally function:

1. Issuance: These securities are typically issued directly by a government, corporation, or financial institution to investors, often through private placements or specific schemes.
2. Holding Period: Investors usually purchase non-marketable securities with the intention of holding them for a defined period, often until maturity. This is common for instruments like National Savings Certificates (NSC) or Public Provident Fund (PPF) accounts.
3. Redemption/Transfer Limitations: When an investor wishes to exit the investment before maturity, they usually cannot sell it to another investor on an open market. Instead, they must either redeem it directly with the issuer (often subject to penalties or specific terms) or find a private buyer. The process of finding a buyer can be complex and time-consuming, as there is no central platform for discovery or price discovery.
4. Valuation: The value of a non-marketable security is not determined by market forces but rather by its face value, accrued interest, or the terms of the private agreement. This contrasts sharply with marketable securities whose prices fluctuate daily based on market sentiment and trading activity.

Non-Marketable Security in Indian Banking

In the context of Indian banking, several financial instruments qualify as non-marketable securities, playing a significant role in both retail savings and institutional finance. Key examples include small savings schemes like the Public Provident Fund (PPF), National Savings Certificates (NSC), and Kisan Vikas Patra (KVP), which are government-backed instruments regulated by the Ministry of Finance. These are designed for long-term savings and provide fixed returns, but they cannot be traded on stock exchanges; premature withdrawal or transfer is subject to specific rules. Unlisted shares of private limited companies also represent non-marketable securities, as they are not traded on the BSE or NSE. Their transfer requires private negotiation and adherence to company Articles of Association and SEBI (Issue of Capital and Disclosure Requirements) Regulations for unlisted entities, if applicable. Furthermore, certain forms of private debt or equity investments made by financial institutions or high-net-worth individuals, often through private placements, are also non-marketable securities. These instruments are crucial for financial inclusion and long-term capital formation in India, and their characteristics are often discussed in banking exams like JAIIB and CAIIB as part of investment products and financial market structures.

Practical Example

Consider Ramesh, a salaried employee in Pune, who decides to invest ₹1,50,000 annually in a Public Provident Fund (PPF) account. A PPF account is a classic example of a non-marketable security in India. Ramesh opens the account with SBI and makes his annual contributions. The PPF has a lock-in period of 15 years, and the interest rate is declared by the government quarterly. Ramesh cannot sell his PPF account to another investor on the stock market if he needs cash urgently. If he requires funds before maturity, he can only make partial withdrawals after a certain period, subject to specific rules and limits set by the government. He cannot transfer the ownership of his PPF account to a third party for a price determined by market demand. His investment's value is determined solely by his contributions and the accrued interest, not by market fluctuations, illustrating the core nature of a non-marketable security.

Non-Marketable Security vs Marketable Security

Feature	Non-Marketable Security	Marketable Security
Liquidity	Low; difficult to sell quickly	High; easily bought and sold on exchanges
Trading Venue	Private transactions, direct redemption with issuer	Stock exchanges (e.g., BSE, NSE), OTC markets
Price Discovery	Based on face value, original terms, or private negotiation	Determined by real-time market supply and demand
Risk Profile	Lower market risk (no price fluctuation), higher liquidity risk	Higher market risk (price volatility), lower liquidity risk

Non-marketable securities are generally chosen by investors seeking stable, long-term returns without the volatility of public markets, often accepting lower liquidity. Marketable securities, on the other hand, are preferred by those who prioritize liquidity and potential for capital appreciation, accepting the associated market price fluctuations.

Key Takeaways

• A non-marketable security cannot be easily traded on a secondary market due to a lack of liquidity.
• These securities are typically held until maturity or transferred via private, negotiated transactions.
• Examples in India include Public Provident Fund (PPF), National Savings Certificates (NSC), and unlisted shares.
• Their value is usually based on original terms or intrinsic worth, not fluctuating market demand.
• Non-marketable securities generally carry lower market risk but higher liquidity risk compared to marketable securities.
• Issuance often occurs through direct placements by governments or companies to investors.
• RBI and SEBI guidelines indirectly influence certain non-marketable instruments, especially regarding private placements and unlisted share transfers.
• Understanding non-marketable securities is crucial for banking professionals and candidates for exams like JAIIB/CAIIB.

Frequently Asked Questions

Q: Are fixed deposits considered non-marketable securities? A: While not strictly "securities" in the same vein as bonds or shares, fixed deposits share the core characteristic of being non-marketable. You cannot sell your fixed deposit certificate to another investor on an exchange; you must redeem it with the issuing bank, often with penalties for premature withdrawal.

Q: How does a non-marketable security affect an investor's portfolio? A: Including non-marketable securities in a portfolio typically increases its overall illiquidity. While they can offer stable returns and diversification from market volatility, investors must be prepared for a longer holding period and potential difficulty in accessing funds quickly if needed.

Q: Can unlisted shares be made marketable? A: Yes, unlisted shares can become marketable if the issuing company decides to go public through an Initial Public Offering (IPO). Once listed on a stock exchange like the BSE or NSE, these shares can then be freely traded on the secondary market.