Study Notes

Government Securities
Government Securities

Government securities (G-Sec)

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or

the State Government. It acknowledges the Government’s debt obligation.

a. Short term Securities (usually called treasury bills, with original maturities of less than
one year)
b. long term (usually called Government bonds or dated securities with original maturity of
one year or more)

Treasury Bills/Cash
Treasury Bonds (with maturity
Management Bills (Maturity
more than one year)
Less than one year)

In India, the Central Government issues both, treasury bills and bonds or dated
securities while the State Governments issue only bonds or dated securities, which are
called the State Development Loans (SDLs).

Types of Government Securities

1. Treasury Bills: Treasury bills or T-bills, which are money market instruments, are
short-term debt instruments issued by the Government of India and are presently issued
in three tenors,
 91 days, 182 days, and 364 days.
 T-bills are zero coupon securities and pay no interest. They are issued at a
discount and redeemed at the face value at maturity.
 For example, a 91-day Treasury bill of 100/- (face value) may be issued at 97.5,
that is, at a discount of 2.50, and would be redeemed at the face value of 100/-
The return to the investors is the difference between the maturity value or the
face value (100) and the issue price (97.50)
2. Cash Management Bills (CMB):
 Government of India, in consultation with RBI introduced new short-term security
called Cash Management bills in 2010.
 to meet the temporary mismatches in their revenue and expenditure.
 The CMBs have the generic character of T-bills but are issued for maturities less
than 91 days
3. Dated Government Securities:
 Dated G-Secs are securities that carry a fixed or floating coupon (interest rate)
which is paid on the face value, on a half-yearly basis.

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Government Securities

 The tenor of dated securities ranges from 5 years to 40 years.

 The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry/depository of G-Secs and deals with the issue, interest payment, and
repayment of principal at maturity. Most of the dated securities are fixed
coupon securities

For Example, the typical dated fixed coupon G-Sec contains the following features - coupon,
name of the issuer, and maturity year. For example, 8.27% GS 2027 would mean

Coupon: 8.27 % paid on face value

Name of Issuer: Government of India

Date of Issue: June 8, 2017

Maturity: June 8, 2027

Coupon Payment Dates: Half-yearly

Minimum Amount of issue/ sale: 10,000

Each security is assigned a unique number called ISIN (International Security Identification
Number) at the time of issuance itself to avoid any misunderstanding among the traders.

If the coupon payment date falls on a Sunday or any other holiday, the coupon payment
is made on the next working day. However, if the maturity date falls on a Sunday or a
holiday, the redemption proceeds are paid on the previous working day.

4. State Development Loans (SDLs):

 SDLs are dated securities issued through normal auction similar to the auctions
conducted for dated securities issued by the Central Government.
 SDLs issued by the State Governments
 They are eligible to meet SLR requirements
 Interest is serviced at half-yearly intervals and the principal is repaid on the
maturity date

Government Bonds

Who are the Bonds?

A bond is a debt instrument in which an investor loans money to an entity (typically

corporate or government) that borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states,
and sovereign governments to raise money to finance a variety of projects and
activities. Owners of bonds are debt holders, or creditors, of the issuer

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Government Securities

1. Fixed Rate Bonds:

 These are bonds on which the coupon rate is fixed for the entire life (i.e. till
maturity) of the bond.
 Most Government bonds in India are issued as fixed rate bonds
2. Floating Rate Bonds (FRBs):
 FRBs are securities that do not have a fixed coupon rate. It has a floating coupon
rate which is re-set at pre-determined intervals (say, every six months or one
year).
 FRBs were first issued in India in September 1995.
 The Floating Rate Bond can also carry the coupon, which will have a base rate
plus a fixed spread, to be decided by way of an auction mechanism. The spread
will be fixed throughout the tenure of the bond
 like T- Bills, they are issued at a discount and redeemed at face value. The
Government of India issued such securities in 1996. It has not issued zero-
coupon bonds after that.
3. Capital-Indexed Bonds:
 Issued at face value
 the principal is linked to an accepted index of inflation (CPI or WPI) with a view to
protecting the principal amount from the inflation
 A 5-year Capital Indexed Bond, was first issued in December 1997 which
matured in 2002
4. Inflation Indexed Bonds:
 These are the bonds wherein both coupon flows and Principal amounts are
protected against inflation.
 They were first issued in 1981 in UK. In India, the Government of India through
RBI issued these bonds (linked to WPI) in June 2013
5. Special Securities:
 The Government of India also issues, special securities to entities like Oil
Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc.
(popularly called oil bonds, fertilizer bonds, and food bonds respectively) as
compensation to these companies in lieu of cash subsidies
 These securities are usually long-dated securities and carry a marginally higher
coupon over the yield of the dated securities of comparable maturity.
 These securities are, not eligible as SLR (Statutory Liquidity Ratio) securities but
are eligible as collateral for market repo transactions.
6. STRIPS – Separate Trading of Registered Interest and Principal of Securities:
 STRIPS are the securities created by way of separating the cash flows
associated with a regular G-Sec each semi-annual coupon payment and the final
principal payment to be received from the issuer, into separate securities.
 They are like the Zero-Coupon Bonds (ZCBs)
 They are created out of existing securities only and unlike other securities, are
not issued through auctions

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Government Securities

 STRIPS are eligible for SLR

 All fixed coupon securities issued by the Government of India, irrespective of the
year of maturity, are eligible for Stripping/Reconstitution, provided that the
securities are reckoned as an eligible investment for the purpose of Statutory
Liquidity Ratio (SLR) and the securities are transferable
 For Example: when 100 of the 7.80% GS 2028 is stripped, each cash flow of
coupon (3.90 each half year) will become a coupon STRIP and the principal
payment (100 at maturity) will become a principal STRIP. These cash flows are
traded separately as independent securities in the secondary market.
 STRIPS have zero reinvestment risk, being zero coupon bonds, they are
attractive to retail/non-institutional investors
7. Sovereign Gold Bond (SGBs):
 SGBs are unique instruments, prices of which are linked to commodity price Gold
 SGBs are also budgeted for market borrowing. The calendar of issuance is
published indicating tranche description, date of subscription and date of
issuance
 Minimum investment in the Bonds is of one gram with a maximum limit of
subscription per fiscal year of 4 kg for individuals, 4 kg for Hindu Undivided
Family (HUF), and 20 kg for trusts and similar entities notified by the
Government, provided that (a) in case of joint holding, the above limits shall be
applicable to the first applicant only
 The Bonds shall be repayable on the expiration of eight years from the date of
issue of the Bonds. Pre-mature redemption of the Bond is permitted after the fifth
year of the date of issue of the Bonds and such repayments shall be made on the
next interest payment date
 The bonds under SGB Scheme be held by a person resident in India, being an
individual, or on behalf of minor child, or jointly with any other individual. The
bonds may also be held by a Trust, HUFs, Charitable Institution and University.

How are G-secs issued

 G-Secs are issued through auctions conducted by RBI

 Auctions are conducted on the electronic platform called the E-Kuber, the Core
Banking Solution (CBS) platform of RBI
 Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and
provident funds, who maintain funds accounts (current account) and securities accounts
(Subsidiary General Ledger (SGL) account) with RBI, are members of this electronic
platform
 All members of E-Kuber can place their bids in the auction through this electronic
platform.
 All non-E-Kuber members including non-scheduled UCBs (Urban Cooperative Banks)
can participate in the primary auction through scheduled commercial banks or PDs
(Primary Dealers).

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Government Securities

The Public Debt Office (PDO) of RBI, acts as the registry and central depository for GSecs.
They may be held by investors either as physical stock or in dematerialized (demat/electronic)
form. From May 20, 2002, it is mandatory for all the RBI regulated entities to hold and
transact in G-Secs only in dematerialized form. The holders can maintain their securities
in dematerialized form in either of the two ways

 SGL Account: SGL Account: Reserve Bank of India offers SGL Account facility to select
entities who can hold their securities in SGL accounts maintained with the Public Debt
Offices of the RBI. Only financially strong entities viz. Banks, PDs, select UCBs and
NBFCs which meet RBI guidelines are allowed to maintain SGL with RBI
 GILT Account: As the eligibility to open and maintain an SGL account with the RBI is
restricted, an investor has the option of opening a Gilt Account with a bank or a PD that
is eligible to open a CSGL account with the RBI.

Investors also have the option of holding G-Secs in a dematerialized account with a
depository (NSDL / CDSL, etc.). This facilitates trading of G-Secs on the stock exchanges

Different types of auctions used for the issue of securities

Prior to the introduction of auctions as the method of issuance, the interest rates were
administratively fixed by the Government. The auctions can be of the following types.

1) Yield-based auctions: The investors bid the yield in two decimal places (7.19%,
7.20%). The cut-off yield is decided and investors who bid below the cut-off yields get
the allotments.
2) Price-based auctions: A price-based auction is conducted when Government of India
re-issues securities that have already been issued earlier. Bidders quote in terms of
price per `100 of the face value of the security (e.g., 102.00, 101.00, 100.00, 99.00, etc.,
per 100/-). Bids are arranged in descending order of price offered and the successful
bidders are those who have bid at or above the cut-off price. Bids which are below the
cut-off price are rejected

An investor, depending upon his eligibility, may bid in an auction under either of the following
categories:

a) Competitive Bidding: In a competitive bidding, an investor bids at a specific price /

yield and is allotted securities if the price / yield quoted is within the cut-off price / yield.
Competitive bids are made by well-informed institutional investors such as banks,
financial institutions, PDs, mutual funds, and insurance companies
b) Non-Competitive Bidding: In order to encourage wider participation and retail holding
of Government securities, retail investors are allowed participation on a “non-
competitive” basis in select auctions dated Government of India (GoI) securities and
Treasury Bills. Participation on a non-competitive basis in the auctions will be open to a
retail investor who does not maintain current account (CA) or Subsidiary General Ledger
(SGL) account with the Reserve Bank of India

Major Players in the G-Sec Market

Major players in the G-Secs market include:

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Government Securities

 Commercial banks and PDs besides institutional investors like insurance companies.
PDs play an important role as market makers in the G-Secs market. A market maker
provides firm two-way quotes in the market i.e. both buy and sell executable quotes for
the concerned securities.
 Other participants include co-operative banks, regional rural banks, mutual funds,
provident, and pension funds.
 Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market within
the quantitative limits prescribed from time to time.
 Corporates also buy/ sell the GSecs to manage their overall portfolio.
 Retail investors can also participate in G-sec market through Retail Direct Scheme of
RBI.