GOVERNMENT SECURITIES/ GILTS
Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities.
Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly.
Features of Government Securities
- Issued at face value
- No default risk as the securities carry sovereign guarantee.
- Ample liquidity as the investor can sell the security in the secondary market
- Interest payment on a half yearly basis on face value
- No tax deducted at source
- Can be held in Demat form.
- Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs – Floating Rate Bonds).
- Redeemed at face value on maturity
- Maturity ranges from of 2-30 years.
- Securities qualify as SLR (Statutory Liquidity Ratio) investments (unless otherwise stated).
The dated Government securities market in India has two segments:
- Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors (see SBI DFHI Invest on our website for further details).
- Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification.
Auctions: Auctions for government securities are either multiple- price auctions or uniform price auction - either yield based or price based.
Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted
Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction.
Underwriting in Auction: One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. In case of devolvement, the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it.