The government generates revenue in the form of taxes and revenue from ownership of assets. Besides these, it borrows extensively from banks, financial institutions and the public to finance its expenses in surplus of its revenues.
One of the significant sources of borrowing funds is the government securities market (GSM). The government rises short term and long term funds by issuing securities, these securities do not carry risk and are as good as gold as the government promises the payment of interest and the repayment of principal. They are, so, referred to as gilt-edged securities. The government securities market is the major market in any economic system and therefore, is the benchmark for other markets.
Government security” means a security created and issued by the Government for the reason of raising a public loan or for any other reason as may be notified by the Government in the Official Gazette and having one of the forms mentioned in The Public Debt Act, 1944.A Government security may, subject to such terms and conditions as may be specified, be in such forms as may be approved or in one of the following forms, namely:
- A Government promissory note payable to or to the order of a certain persons
- A bearer, bond payable to bearer; or
- A stock; or
- A bond held in a bond ledger account.
The Central government increases resources in the debt markets, through market borrowings, predominantly to fund the fiscal deficit. The issuance process for G-securities has undergone major changes in the 1990s, with the introduction of the auction mechanism, and the broad basing of participation in the auctions through creation of the system of primary dealers and the introduction of non-competitive bids, RBI announces the auction of government securities through a press notification, and invites bids.
Generally Government Securities are interest bearing dated securities issued by RBI on behalf of the Government of India; Government uses these funds to meet its expenditure purpose. These securities are usually fixed maturity and fixed coupon securities carrying semi-annual coupon. Government securities are issued by the central government, state governments and semi-governments authorities which also consist of local government authorities such as city corporations and municipalities.
The main investors in this market, besides the Reserve bank, are the nationalized banks as they have to subscribe these securities to meet their requirements. The additional investors are insurance companies, state government, provident funds, individuals, corporate, non-banking finance companies, primary dealers, financial institutions and to a limited extent, foreign institutional investors and non-resident Indian (NRIs).
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 D-mat 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).
· Redeemed at face value on maturity
· Maturity ranges from of 2-30 years.
· Securities qualify as SLR investments (unless otherwise stated).
The dated Government securities market in India has two segments:
The Primary Market consists of the issuers of the securities, for example , 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.
The Secondary Market consists of Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India, even Corporate and Individuals can invest in Government Securities. The eligibility criteria are stated in the relative Government notification.
Auctions for government securities are usually multiple- price auctions either yield based or price based.
In this kind of auction, RBI announces the issue size or notified sum and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to purchase the security. If the Bid is in excess of the cut-off yield then its rejected otherwise it is accepted.
In this kind 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 offer bids in terms of the price. This way of auction is usually used in case of reissue of existing government securities. Bids at price lesser 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 invention then the Yield based auction. Rarely RBI holds uniform-price auctions also.
Underwriting in Auction:
One day earlier to the auction, bids are received from the Primary Dealers (PD) indicating the sum they are willing to underwrite and the fee expected. The auction committee of RBI then inspects the bid on the basis of the market condition and takes a decision on the sum 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 sum underwritten while deciding the sum of devolvement and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it.
G-Securities, State Development Loans & T-Bills are frequently sold by RBI through periodic public auctions. SBI DFHI Ltd. is a leading Primary Dealer in Government Securities, it gives to the investors an chance to buy G-Sec / SDLs / T-Bills at primary market auctions of RBI through its SBI DFHI Invest scheme .Investors may also invest in high yielding Government Securities through “SBI DFHI Trade” where “buy and sell price” and a purchase and sell ability for select liquid scrips in the secondary markets is offered.