Government Securities Market in India

Government Securities Market in India

CHAPTER 1CHAPTER 1

GovernmentGovernment

SecuritiesSecurities

1


GOVERNMENT SECURITIESGOVERNMENT SECURITIES

The marketable debt issued by the Government and Semi-

Government bodies which represents a claim on the Government is called

Government Securities. It is also called as gilt-edged security.

Government Securities are issued for the purpose of refunding the

maturing securities for advance refunding of securities which have not yet

matured, and raising fresh cash resources. Treasury Bills and Bonds are

the examples of Government Securities. One of the important features of

the Government Securities is that they are considered to be totally

secured financial instruments. They ensure safety of both capital and

income.

Central Government Securities are the safest amongst all securities.

Thus Government Securities are unique and important financial

instruments in the financial market of any country. These securities are

normally issued in the denomination of Rs.100 or Rs.1000. the face

value, which was Rs.100 till the middle of 1980, was raised to Rs.1000 in

the recent years. These instruments are liquid and safe and hence the rate

of interest on these instruments is relatively lower.

There are three forms of Central and State Government Securities.

Stock certificate, Promissory note and bearer bond. Bearer bonds and

stock certificates are not very popular in India Government Securities

currently are in the form of Promissory notes.

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Government securities are issued by Central Government, State

Government, Semi-Government authorities like Municipal corporations,

Port Trusts, State Electricity Boards, Public Sector Enterprises and other

Government agencies like IFCI, ICICI, IDBI, NABARD,SIDCS and

Housing Boards. These agencies supply government securities and the

demand essentially comes from banks, financial institutions and other

investors. RBI plays an active role in the purchase and sale of these

securities as a part of its monetary management exercise. There is no

underwriting or guaranteeing required in the sale of Government

Securities, as Reserve Bank of India is Policy-bound to buy a substantial

portion of the loan unsubscribe by the public. Dealings in Government

Securities are made through the mechanism provided by the Reserve

Bank of India. The Brokers and Dealers are approved by the RBI who is

eligible to deal in these securities.

One of the important features of the Government Securities is that

they offer wide ranging tax incentives to the investors. Therefore, these

securities are popular in the market. Investors in these securities get tax

rebate under the Income Tax Act. The Central Government securities

have high profile of liquidity. However, state government and local

government securities have limited liquidity.

The government securities market in India has two segments,

namely, primary market and secondary market. The issue of securities by

Central and State Government constitute the primary market. The

secondary market comprises the exchange of these securities by the

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banks, financial institutions, insurance companies, provident funds trusts,

primary dealers, individuals and Reserve Bank of India. The Public Debt

Office (PDO) of the RBI undertakes to issue government securities. A

notification for the issue of securities is made a few days before the

public subscription is open. The opening of the subscription depends on

the response of the market and varies between two to three days. The

issue is made in a number of branches in order to avoid flooding of

securities in the market. It facilitates smooth subscription to securities and

helps to avoid sudden liquidity problems in the market. The offices of

RBI and SBI receive applications for the securities. Government reserves

the right to retain over-subscription up to a pre-specified percentage

which is normally 10 percent in excess of the notified amount of issue.

GOVERNMENT SECURITIES MARKET

A market where the Government Securities are bought and sold is

called Government Securities market. The securities are bonds, Treasury

bills, Special rupee securities in payment of India subscriptions to IMF,

IBRD, ADB, IDA etc. The special rupee securities are treated as a part of

internal floating debt of the Government. These securities are issued by

the Central Government, State Governments and Semi-Government

Authorities, which include local Government authorities like City

corporations and Municipalities, Port trusts, State electricity boards

Public sector corporations and other agencies like IDBI, IFCI, SFCs,

SIDCs, NABARD and Housing Boards. These agencies are suppliers of

Government Securities and banks, financial institutions and investors

demand these securities in the market.

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Government Securities offer a safe avenue of investment through

guaranteed payment of interest and repayment of Principal by the

government. They offer relatively a lower fixed rate of interest compared

to interest on other securities. These Securities are issued in the

denominations of Rs. 100 or Rs.1000. They have a fixed maturity period.

Interest is paid half-yearly RBI

Services loans as these are the liabilities of Government of India

and the State Governments. These securities are safe and risk free. These

securities are also eligible as SLR investments. As the date of maturity is

specified in the securities they are also called as ‘dated government

securities’.

RBI plays a special role in the purchase and sale of these Securities

as part of its monetary management exercise. There is no underwriting or

guaranteeing required in Sale of Government Securities. Dealing in

securities take place through the mechanism provided by the RBI. The

brokers and dealers are approved by the RBI. A striking feature of these

Securities is that they offer wide ranging tax incentives to the investors.

Therefore, these securities are more popular. Under the Income Tax Act,

rebates are allowed for the investment in these securities. Each sale and

purchase has to be negotiated separately; the gild-edged market is an

over-the-counter market. The Government Securities market has two

segments namely Primary market and Secondary market. The issuers are

Central and State Governments in the Primary market. The Secondary

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market comprises banks, Financial Institutions, Insurance Companies,

Provident funds, Trusts, Individuals, Primary dealers and the RBI.

The Securities of Central and State Government are issued in the

form of Stock Certificate, Promissory notes and Bearer bonds. These

Securities are mainly traded at Bombay Stock Exchange. In terms of Size,

the primary market for Governments Securities is much bigger than the

Industrial Securities Market. A notification for the issue of securities is

made a few days before the Public subscription is open. The opening of

the subscription depends on the response of the market and varies

between two to three days. The issue is made in number of branches in a

year. The offices of RBI and SBI receive the applications for the

Securities. The Government, reserves the right to retain over subscription

up to a pre-specified percentage which is generally 10 percent, of the

notified amount. The mechanism of trading in Government Securities

takes place through the Direct Sale, Securities General Ledger accounts

and Bank Receipts method.

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CHAPTER 2CHAPTER 2

Evolution ofEvolution of

Government SecuritiesGovernment Securities

MarketMarket

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Evolution of Government Securities Market

The genesis of the Government Securities market arises from the

requirement of the Government to fund its deficit, which is primarily met

out of borrowings. Thus, the level of deficit determines the amount of

market borrowings by the Government. In almost all the developed

countries, Government securities market is much wider and deeper than

equity market. India, however, till recently was an exception to this trend

and equity market still commanded a major share, as the Indian debt

market was in its nascent stage.

Pre-reform period

Prior to liberalization of 1990s, the Government securities market

was underdeveloped partly because of inefficient market practices and

partly because of limited institutional infrastructure. Further, in order to

keep the cost of Government borrowings low, the coupon rates offered on

Government securities remained negative in real terms (i.e. after factoring

in inflation) for several years till about mid-eighties. The Reserve Bank of

India also had little control over some of the essential facets of debt

management, like volume and maturity profile of debt and the interest

rate structure. This, coupled with automatic monetization of budget

deficit without any limits, prevented the development of a deep and

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vibrant Government securities market. A retail market for Government

securities simply did not exist. With a captive investor base through

Statutory Liquidity Ratio (SLR) prescription and interest below the

market rate, secondary market for Government bonds remained dormant.

Against the above backdrop and in the context of the overall

economic reforms, development of the Government securities markets

was initiated in the 1990s through carefully and cautiously sequenced

measures within a clear cut agenda for primary and secondary market

design.

Post-Reforms Developments

In the post reforms era, considering the significance of a vibrant

Government securities market for activating internal debt management

policy, a number of measures were introduced.

One major step in the reforms process was the elimination of the

automatic monetization of the Central’s fiscal deficit by gradually

phasing out ad hoc treasury bills, in 1997. A system of Ways and Means

Advances (WMA) to the Central Government, subject to mutually agreed

limits at market-related rates, was put in place instead, to meet

mismatches in the cash-flows. Such phasing was necessary to permit the

development of the money markets and for a credible benchmark rate to

emerge.

The RBI reserves the right to trigger floatation of fresh

Government loans as and when the actual utilization crosses 75% of the

limit, WMA does not acquire the cumulative character of ad hocs. This

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enables the RBI to accommodate the Government as its discretion and

helps impose market discipline.

Features of Government Securities

I. Governments of India Securities are sovereign debt obligations of

Government of India.

II. Government Securities, thus, is a constituent of national debt along

with State Government Securities, Treasury bills and Government

guaranteed bonds.

III. The tenors of Government securities range from two to thirty years.

IV. Coupons offered on Government Securities are either pre-

determined by RBI or arrived through competitive bidding or

auction process.

V. Issues have varied from fixed semi-annual coupons and bullet

redemption on maturity, to zero coupon bonds, floating rate bonds

and also securities which are partly paid up at the time of the issue.

VI. Coupons are fixed and paid out semi-annually to the holder of the

security (except zero coupons).

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VII. Nomenclature: The coupon rate and year of maturity identifies the

government security. Example: 12.25% GOI 2008 indicates the

following: 12.25% is the coupon rate, GOI denotes Government of

India, which is the borrower, and 2008 is the year of maturity.

VIII. Eligibility: All entities registered in India like banks, financial

institutions, Primary Dealers, firms, companies, corporate bodies,

partnership firms, institutions, mutual funds, Foreign Institutional

Investors, State Governments, Provident Funds, trusts, research

organizations, and even individuals are eligible to purchase

Government Securities.

IX. Availability: Government securities are highly liquid instruments

available both in the primary and secondary market. They can be

purchased from Primary Dealers.

X. Forms of Issuance of Government Securities: Banks, Primary

Dealers and Financial Institutions have been allowed to hold these

securities with the Public Debt Office of Reserve Bank of India in

dematerialized form in accounts known as Subsidiary General

Ledger (SGL) Accounts. Entities having a Gilt Account with

Banks or Primary Dealers can hold these securities with them in

dematerialized form.

XI. Minimum Amount: In terms of RBI regulations, government

dated securities can be purchased for a minimum amount of Rs.

10,000/-only. Treasury bills can be purchased for a minimum

amount of Rs 25000/- only and in multiples thereof. State

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Government Securities can be purchased for a minimum amount of

Rs 1,000/- only.

XII. Repayment: Government securities are repaid at par on the expiry

of their tenor. The different repayment methods are as follows:

1) For SGL account holders, the maturity proceeds would be

credited to their current accounts with the Reserve Bank of

India.

2) For Gilt Account Holders, the Bank/Primary Dealers would

receive the maturity proceeds and they would pay the Gilt

Account Holders.

3) For entities having a demat acount with NSDL, the maturity

proceeds would be collected by their DP's and they in turn

would pay the demat Account Holders.

XIII. Day Count: For government dated securities and state government

securities the day count is taken as 360 days for a year and 30 days

for every completed month. However for Treasury bills it is 365

days for a year.

EXAMPLE

A client purchases 7.40% GOI 2012 for face value of Rs. 10

lacs.@ Rs.101.80, i.e. the client pays Rs.101.80 for every unit of

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government security having a face value of Rs. 100/- The settlement is

due on October 3, 2002. What is the amount to be paid by the client?

The security is 7.40% GOI 2012 for which the interest payment dates are

3rd May, and 3rd November every year.

The last interest payment date for the current year is 3 rd May 2002. The

calculation would be made as follows:

Face value of Rs. 10 lacs. @ Rs.101.80%.

Therefore the principal amount payable is Rs.10 lacs X 101.80%

=10,18,000

Last interest payment date was May 3, 2002 and settlement date is

October 3, 2002. Therefore the interest has to be paid for 150 days

(including 3rd May, and excluding October 3, 2002)

(28 days of May, including 3rd May, up to 30th May + 30 days of June,

July, August and September + 2 days of October). Since the settlement is

on October 3, 2002, that date is excluded.

Interest payable = 10 lacs X 7.40% X 150 = Rs. 30833.33.

360 X 100

Total amount payable by client =10, 18,000+30833.33=Rs. 10, 48,833.33

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CHAPTER 3CHAPTER 3

Types ofTypes of



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Types of Government Securities

Government of India (GOI) Securities is sovereign debt

obligations/instruments. They are issued by Reserve Bank of India (RBI)

on behalf of the Government to finance deficit and public sector

development programs.

Main Types:

1) Government of India Securities issued by Government of India.

2) State Government Securities issued by the state Governments.

3) Agency Bonds issued by Government agencies or public sector

undertakings wherein the principal and interest are guaranteed

by the Central Government or one of the state Governments.

Government Securities are further classified in the

following types:

1) Dated Securities: are generally fixed maturity and fixed coupon

securities usually carrying semi-annual coupon. These are called dated

securities because these are identified by their date of maturity and the

coupon, e.g., 11.03% GOI 2012 is a Central Government security

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maturing in 2012, which carries a coupon of 11.03% payable half

yearly.

The key features of these securities are:

a. They are issued at face value.

b. Coupon or interest rate is fixed at the time of issuance, and

remains constant till redemption of the security.

c. The tenor of the security is also fixed.

d. Interest /Coupon payment is made on a half yearly basis on its

face value.

e. The security is redeemed at par (face value) on its maturity date.

2) Zero Coupon bonds: are bonds issued at discount to face value

and redeemed at par. These were issued first on January 19, 1994 and

were followed by two subsequent issues in 1994-95 and 1995-96

respectively. The key features of these securities are:

a. They are issued at a discount to the face value.

b. The tenor of the security is fixed.

c. The securities do not carry any coupon or interest rate. The

difference between the issue price (discounted price) and face

value is the return on this security.

d. The security is redeemed at par (face value) on its maturity date.

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3) Partly Paid Stock: is stock where payment of principal amount is

made in installments over a given time frame. It meets the needs of

investors with regular flow of funds and the need of Government

when it does not need funds immediately. The first issue of such stock

of eight year maturity was made on November 15, 1994 for Rs. 2000

crore. Such stocks have been issued a few more times thereafter. The

key features of these securities are:

a. They are issued at face value, but this amount is paid in

installments over a specified period.

b. Coupon or interest rate is fixed at the time of issuance, and

remains constant till redemption of the security.

c. The tenor of the security is also fixed.


face value.


4) Floating Rate Bonds: are bonds with variable interest rate with a

fixed percentage over a benchmark rate. There may be a cap and a

floor rate attached thereby fixing a maximum and minimum interest

rate payable on it. Floating rate bonds of four year maturity were first

issued on September 29, 1995, followed by another issue on

December 5, 1995. Recently RBI issued a floating rate bond, the

coupon of which is benchmarked against average yield on 364

Days Treasury Bills for last six months. The coupon is reset every

six months.

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b. Coupon or interest rate is fixed as a percentage over a

predefined benchmark rate at the time of issuance. The

benchmark rate may be Treasury bill rate, bank rate etc.

c. Though the benchmark does not change, the rate of interest may

vary according to the change in the benchmark rate till

redemption of the security. The tenor of the security is also

fixed.


face value.


5) Bonds with Call/Put Option: First time in the history of

Government Securities market RBI issued a bond with call and put

option this year. This bond is due for redemption in 2012 and carries a

coupon of 6.72%. However the bond has call and put option after five

years i.e. in year 2007. In other words it means that holder of bond can

sell back (put option) bond to Government in 2007 or Government can

buy back (call option) bond from holder in 2007. This bond has been

priced in line with 5 year bonds.

6) Capital indexed Bonds: are bonds where interest rate is a fixed

percentage over the wholesale price index. These provide investors

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with an effective hedge against inflation. These bonds were floated on

December 29, 1997 on tap basis. They were of five year maturity with

a coupon rate of 6 per cent over the wholesale price index. The

principal redemption is linked to the Wholesale Price Index.



b. Coupon or interest rate is fixed as a percentage over the

wholesale price index at the time of issuance. Therefore the

actual amount of interest paid varies according to the change in

the Wholesale Price Index.

c. The tenor of the security is fixed.


face value.

e. The principal redemption is linked to the Wholesale Price

Index.

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CHAPTER 4CHAPTER 4

Treasury bills,Treasury bills,

Participants AndParticipants And

AuctionAuction

20


TREASURY BILLS, PARTICIPANTS AND

AUCTION:

A Treasury bill is a particular kind of finance bill or a promissory

note put out by the Government of the country. These are two types of

bills i.e. 91 days Treasury bill and the 182 day Treasury bill. These

treasury bills are highly liquid. There is no risk of default in case of

Treasury bills. These bills are readily available and have assured yield.

The participants in the Treasury bill market are Reserve Bank of

India, State Bank of India, Commercial Banks, State Governments and

other approved bodies. Discount and Finance House of India is the

market maker in the Treasury bill market. The other participants in the

Treasury bill market are the Securities Trading Corporation of India, LIC,

UTI, GIC, NABARD, IDBI, IFCI and ICICI. Foreign Financial

Institutions, Corporate entities are also participating in the Treasury bill

market.RBI and commercial banks are the most popular players in the

Treasury bill market.

Auctioning is a method of trading whereby merchants bid against

one another and where the securities are sold to the highest bidder. This

system was introduced in 1992, for the sale of dated Government

Securities. A number of instruments of wide ranging period i.e. 14 day,

91day and 364day

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Treasury bills and dated Securities of Government of India are

sold. Bidders have to furnish written ad sealed quotations of auction such

as Multiple Price Auction and Uniform Price Auction. Under the Multiple

Price Auction, mechanism, every bidder gets allocation according to his

bid and the issuer collects a premium from all bidders by quoting a rate

lower than the cut-off yield. Under the uniform price mechanism

competitive bids are accepted on the basis of the minimum discounted

price known as the cut-off price. The price of the bill is determined at the

auction. This minimum price is independent of the bid-prices tendered

below or at the cut-off price.

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CHAPTER 5CHAPTER 5

Participants in theParticipants in the


Securities MarketSecurities Market

23


Participants in the Government Securities market

Government securities are approved securities for the purpose of

statutory liquidity requirements of banks. Banks, therefore, have been

traditionally the largest holders of Government securities. Though the

SLR has been progressively reduced to 25% (of the net demand and time

liabilities of bank), it is estimated that banks hold about 37% (of the net

demand and time liabilities of banks) in the form of Government

securities. Banks hold about 60% of outstanding Government Securities.

Apart from banks, provident funds and insurance companies are

large holders of Government bonds, buying them to comply with

prudential norms governing their portfolios. These institutions hold about

20% of outstanding Government Securities.

Primary Dealers hold Government securities either due to

development or underwriting commitments or to enable repo transactions

and market making. Other investors include mutual funds, individuals,

charitable trusts etc.

Primary Issuance Process:

The issue of Government securities is governed by the terms and

conditions specified in the general notification of the Government and

24


also the terms and conditions specified in the specific notification issued

in respect of issue of each security.

Who can apply:

Any person including firm, company, corporate body, institution,

state government, provident fund, trust, NRI, OCB predominantly owned

by NRIs and FII registered with SEBI and approved by RBI can submit

offers, including in electronic form, for purchase of Government

securities.

Denomination:

For Central Government securities, the minimum denomination is

Rs. 10000 and trading takes place in multiples of Rs. 5 crores. For state

Government securities, it is Rs. 1000 and trading takes place in multiples

of Rs. 1-5 crores. For agency bonds, it is Rs.5000 and in multiples

thereof.

Mode of payment:

Payments for the securities are made by the applicants on such

dates as mentioned in the specific notification, by means of cash or

cheque drawn on RBI or Banker’s pay order or by authority to debit their

current account with RBI or by Electronic Fund Transfer in a secured

environment.

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CHAPTER 6CHAPTER 6

Manner of Issue ofManner of Issue of



26


Manner of issue of Government Securities:

As a part of reform in the financial sector a policy decision was

taken to move towards market related interest rates for Government

borrowing. Accordingly, with effect from June 1992 Government of India

has started borrowing by issue of debt at market related rates determined

by conducting auctions. Market related rates are evolved in the auctions

for sale of dated securities or treasury bills.

The Government issues securities through the following modes:

i. Issue of securities through auction.

ii. Issue of securities with pre-announced coupon rates.

iii. Issue of securities through tap sale.

iv. Issue of securities through conversion.

The Securities can be issued through auction either on price basis

or yield basis. The coupons on such securities are announced before the

date of floation and the securities are issued at par. No aggregate amount

is indicated in the notification in respect of the securities sold on tap. The

holders of Treasury bills of certain specified maturities and holder of

specified dated securities are provided an option to convert the respective

27


Treasury bills or dated securities at specified prices into new securities

offered for sale.

1) Issue of securities through auction.

Securities are issued through auction either on price basis or on

yield basis. Where the issue is on price basis, the coupon is predetermined

and the bidders quote price per Rs. 100 face value of the security, at

which they desire to purchase the security. Where the issue is on yield

basis, the coupon of the security is decided in an auction and the security

carries the same coupon till maturity. On the basis of the bids received,

RBI determines the maximum rate of yield or the minimum offer price as

the case may be at which offers for purchase of securities would be

accepted at the auction. The RBI has moved from yield based auction to

price based auction in 1998, though it retains the flexibility to resort to

yield based auctions and notify the same in the auction notification.

The auctions for issue of securities (on either yield basis or price

basis) are held either on “Uniform price” (also known as Dutch auction)

method or on “Multiple price” (also known as French auction) method.

Where an auction is held on a “Uniform price” method,

competitive bids offered with rates up to and including the maximum rate

of yield or the prices up to and including the minimum offer price, as

determined by RBI, are accepted at the maximum rate of yield or

28


minimum offer price so determined. Bids quoted higher than the

maximum rate of yield or lower than the minimum price are rejected.

Where an auction is held on “Multiple prices” method, competitive bids

offered at the maximum rate of yield or the minimum offer price, as

determined by RBI, are accepted. Other bids tendered at lower than the

maximum rate of yield or higher than the minimum offer price are

accepted at the rate of yield or price as quoted in the respective bid. Bids

quoted higher than the maximum rate of yield or lower than the minimum

price are rejected.

Individuals and specified institutions (retail investor) can

participate in the auctions on “non-competitive” basis. Allocation of the

securities to non-competitive bidders is made at the discretion of RBI and

at a price not higher than the weighted average price arrived at on the

basis of the competitive bids accepted at the auction or any other price

announced in the specific notification. The nominal amount of securities

that would be allocated to retail investors on non-competitive basis is

restricted to a maximum percentage of the aggregate nominal amount of

the issue, within or outside the nominal amount.

Sale of Government securities (except 91 days treasury bills) is

held under Multiple Price Auctions; Uniform Price Auctions are held for

sale of 91 days Treasury Bills. RBI has announced that it may conduct

uniform price auctions for sale of dated securities on a selective and

experimental basis. The notification for the respective auctions will

specify the format to be used, viz., uniform price or multiple prices.

2) Issue of securities with pre-announced coupon rates.

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The coupon on such securities is announced before the date of

flotation and the securities are issued at par. In case the total subscription

exceeds the aggregate amount offered for sale, RBI may make partial

allotment to all the applicants. State Governments continue to issue

securities at pre-announced coupon rates and prices. However, from

1998-99 onwards an option was given to the State Government to raise a

small portion of their borrowing by conducting competitive auctions.

Several State Governments have availed of this facility.

3) Issue of securities through tap sale.

No aggregate amount is indicated in the notification in respect of

the securities sold on tap. Sale of such securities may be extended to more

than one day and the sale may be closed at any time on any day.

4) Issue of securities on conversion of maturing treasury

bills/dated securities.

The holders of treasury bills of certain specified maturities and

holders of specified dated securities are provided with an option to

convert their holding at specified prices into new securities offered for

sale. The new securities could be issued on an auction/pre-announced

coupon basis.

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CHAPTER 7CHAPTER 7

Statutory Provisions forStatutory Provisions for

Regulation ofRegulation of

Government SecuritiesGovernment Securities

MarketMarket

31


Statutory provisions for regulation of government

securities market

1) Primary Market

The Reserve Bank of India manages the public debt and issues new

loans on behalf of central government in terms of Sections 20 and 21 of

the Reserve Bank of India Act, 1934. The Bank manages the public debt

of State Government as per agreements entered into with the state

government concerned (Sec.21A of the Act). Bank has entered into

agreement with 28 state governments for management of their public

debt. Further, in terms of Public Debt Act, 1944, the administration of

public debt devolves on the Bank.

Consequently the Reserve Bank has been taking all initiatives for

development of a market for government securities, which would

facilitate price discovery and provide liquidity to government securities.

In brief, these initiatives mainly involved the promotion of institutional

infrastructure and legal reforms relating to the manner of issue and

custody of government debt instruments and their transfer and settlement.

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The public debt management covers the issue, interest payment and

repayment of rupee loan, and all matters pertaining to government debt

certificates including registration, custody, transfer, conversion, sub-

division etc. of government debt holdings. The 15 public debt offices of

the Reserve Bank functioning at various centers attend to these functions.

In addition, as manager of public debt, Bank has to advise the

Government regarding the size of borrowing, timing of issue of new loans

etc.

Mode of holding & transfer of Government Securities:

Government securities can be issued basically in three forms, viz.,

Government Promissory Notes, Stock or any other form as may be

notified by the Central government. Promissory notes are in the physical

form where as stock can be either in the physical form called "Stock

Certificate" or "Book Debt Certificate" or in a book entry form called

"Subsidiary General Ledger Account (SGL Account)".

SGL Account which provides a secure and convenient form of

holding is permitted to be opened at public Debt Offices only by

institutions which maintain current account with RBI. Others can also

enjoy the benefit of SGL Account form of holding by availing of the

custodial services extended by banks and Primary Dealers maintaining

SGL Account with PDOs. In order to segregate the custodial holdings

from their own investments, SGL Account holders are allowed to

maintain one more SGL Account with PDOs called "Constituents' SGL

Account". While maintaining and operating such constituents' account,

33


SGL Account holders are required to abide by the "Guidelines for

Maintaining Constituents SGL Account" which have been issued by RBI.

The holder of the security can affect transfer of Government

securities by completing the prescribed transfer form. The transfer will be

complete only when the ownership of the security is changed in the name

of the transferee in the books of the Public Debt Office. The transferee of

securities should tender the SGL transfer form latest by the day following

the deal to facilitate T+1 basis for settlement. In respect of securities held

in the form of SGL Account transfer takes place in the books of Public

Debt Offices on Delivery Versus payment (DVP) basis. DVP system is

introduced to reduce the counter party risk in securities transactions.

2) Secondary Market

Transactions in securities are governed by the Securities Contracts

(Regulation) Act, 1956 as government securities are "Securities" as

defined in the Act. Hence the provisions of the Act are applicable for the

transactions in Government securities. Under the Act the Reserve Bank

has been delegated powers by the Government of India to regulate

contracts in government securities, money market securities, gold related

securities and derivatives based on these securities, as also ready forward

contracts in all debt instruments. Transactions on the stock exchanges

will be in addition subject to the regulations prescribed by the Securities

& Exchange Board of India (SEBI).

Reserve Bank of India has permitted Repos and Reverse Repos

subject to the terms and conditions and among the participants as

specified hereunder:

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1) Ready forward contracts are undertaken only in Treasury Bills and

transferable dated securities of all maturities issued by the

Government of India and State Governments.

2) Ready forward contracts in the securities specified at (a) above

may be entered into by a banking company, a cooperative bank or

any person, maintaining a Subsidiary Ledger Account and a

Current Account with Reserve Bank of India, Mumbai, only among

themselves.

3) Such ready forward contracts shall be settled through the

Subsidiary General Ledger Accounts of the participants with

Reserve Bank of India at Mumbai only, and

4) No sale transaction should be put through without actually holding

the securities in the portfolio.

While RBIs policy supports the establishment of a deep and liquid

repo market, enlargement of the types of securities and eligible

participants for the repo market will depend upon the establishment of the

secure infrastructure for the securities market including establishment of

a Securities Clearing Corporation to facilitate tri-partite repos.

Short selling in securities is prohibited. Presently, Over- the -

Counter outright transactions in government securities can be freely

concluded providing for spot delivery (payment on the same day of the

contract or next day) as per the Act.

In order to develop the securities market on healthy lines and to

facilitate price discovery in the market, RBI daily makes available to the

market the prices in respect of secondary market transactions in

35


government securities, which are settled through SGL Account. This has

helped in the establishment of sovereign yield curve, promoted market

transparency and improved price discovery for government securities in

the Indian Market.

Effective management of public debt by the Reserve Bank is

closely linked to the development of a deep and liquid secondary market

and RBI has been taking various initiatives in this direction.

CHAPTER 8CHAPTER 8


Securities- MarketSecurities- Market

StructureStructure

36


Government Securities- Market Structure

From a narrow ownership base, Government securities market has

been increasingly becoming broad-based over the recent years. The main

holders of government securities are banks, Primary/Satellite Dealers,

LIC, All India Financial Institutions, Provident Fund Trusts, Gilt Funds

and lastly corporate entities and retail holders, mainly through Mutual

Funds. Although Foreign Institutional Investors are allowed to invest in

government securities such investments have not picked up. A large part

of outstanding government securities are held by the Reserve Bank

mainly as back up for its currency issue liabilities and for conducting

Open Market Operations. Introduction of the system of Primary Dealers

have ensured that underwriting of the primary issues is shouldered mainly

by Primary Dealers and automatic devolvement on RBI does not happen.

The main participants in the Government Securities market such as

banks, Primary Dealers, Financial Institutions enter into transactions in

government securities market mainly as a part of their investment and

trading functions. RBI has issued detailed instructions to banks about the

37


categorization and valuation of government securities. Further banks,

which maintain "Trading Book", can do so, only subject to compliance

with certain preconditions specified by the RBI from risk management

angle.

In order to develop the market on sound lines, RBI has initiated

various reforms. Thus the prices at which different securities are

bought/sold are made available to the market participants on a daily basis.

National Stock Exchange also publishes the security prices in respect of

transactions reported to them. As mentioned earlier system of DVP has

been introduced to reduce counterparty risk in security transfers.

In order to protect the interest of retail holders of government

securities using the system of Constituents SGL Accounts, RBI have

issued guidelines regarding maintenance of such accounts. A system of

retail holding through Bond Ledger Form has also been introduced in

respect of certain securities. Bond Ledger Accounts can be opened with

branches of specified banks and this is expected to make it convenient for

retail holders, although at present only Relief Bonds can be so held.

RBI extends liquidity support to Mutual Funds Dedicated to

Investments in Government Securities (GILT FUNDS) to encourage such

Mutual Funds, which is a convenient way of indirect investments in

government securities by individuals and other market participants.

Primary Dealers play an important role in the government

securities market. A brief account of their role is provided in the

following paragraphs:

38


Primary Dealers

The Guidelines for Primary Dealers (PDs) in Government Securities were

announced by the Bank in March 1995. The objectives of setting up the

system of Primary Dealers are:

i. To strengthen the infrastructure in the government securities

market in order to make it vibrant, liquid and broad based.

ii. To ensure development of underwriting and market making

capabilities for government securities outside the RBI so that the

latter will gradually shed these functions.

iii. To improve secondary market trading system, which would

contribute to price discovery, enhance liquidity and turnover and

encourage voluntary holding of government securities amongst a

wider investor base.

iv. To make PDs an effective conduit for conducting open market

operations.

Eligibility for being considered for Primary Dealership

The following are the eligibility standards:

i. The entity should be a subsidiary of a scheduled commercial

bank/an All India Financial Institution dedicated predominantly to

the securities business and in particular to the government

securities market, or a company incorporated under the Companies

Act, 1956 and engaged predominantly in the securities business

and in particular the government securities market, and

ii. The applicant should have Net owned funds of a minimum of

Rs.50 crore.

39


Three basic parameters would have to be necessarily fulfilled by an

applicant for PD-ship, i.e., the company should have (a) net owned funds

of Rs.50 crore (b) sizeable business in government securities and (c)

should not be a loss making company.

The relationship between the Bank and the entities in their capacity

as PDs is not statutory, but contractual in nature. Primary Dealership is

renewed every year on the basis of agreement to be entered into between

the Bank and these entities. Legally they are non-banking financial

companies and are subject to the registration requirements for NBFCs.

However, if a PD does not accept public deposits it is exempt from the

related regulations. On account of the special responsibilities assigned to

them in the Government Securities Market, RBI has been monitoring

their activities by undertaking off as well as on site surveillance through

scrutiny of prescribed returns and also by on-site inspections to check

compliance with the Guidelines and other terms of appointment. RBI has

prescribed capital adequacy standards to be observed by Primary Dealers.

The Primary Dealers' responsibilities are:

i. A Primary Dealer will be required to commit to aggregative bid for

Government of India dated securities and auction Treasury Bills on

an annual basis of not less than a specified amount. The agreed

minimum amount of bids would be separately indicated for dated

securities and Treasury Bills.

ii. The Primary Dealer would have to achieve a minimum success

ratio of 40 per cent for both dated securities and Treasury Bills

(vis-à-vis bidding commitment).

iii. To maintain risk based capital adequacy as per RBI instructions

40


iv. The PD has to quote two-way at least in a few securities

v. PDs have to underwrite primary auction of government securities.

Issues of Treasury Bills are not underwritten. Instead, PDs have to

commit to submit minimum bids at each auction covering the entire issue

amounts.

The percentage of minimum bidding commitment so determined

by the Reserve Bank will remain unchanged for the entire financial year.

In determining the minimum bidding commitment, RBI will take into

account the offer made by the PD, its net owned funds and its track

record.

Facilities extended to the PDs

The following facilities have been extended to PDs:

i. Entitlement to open one Current Account and two Subsidiary

General Ledger (SGL) Accounts for government securities (one for

own operations and the second for operations on behalf of

constituents), at all offices of the RBI.

ii. Permission to borrow and lend in the money market including call

money market and to trade in all money market instruments.

iii. Liquidity Support through Repos operations/demand loans with

RBI collateralised by Central Government dated securities and

Auction Treasury Bills up to the limit fixed by RBI.

iv. Favoured access to Open Market Operations.

41


v. Permission to raise Commercial Paper as per the provisions

contained in the "Primary Dealers (Acceptance of Deposits through

Commercial Paper) Directions, 1996" issued in terms of Section 45

K and 45 L of the RBI Act, 1934.

vi. Facility of transfer of funds from one centre to another centre under

RBIs Remittance Facility Scheme and also of clearing of cheques

arising out of Government securities transactions, tendered at RBI

counters.

Other Obligations of PDs

The following important obligations are cast on them under the PD

Guidelines:

i. Obligation to offer a firm two-way quotes for government

securities and take principal positions

ii. Achieving prescribed turn over ratios in government securities.

iii. Maintenance of physical infrastructure in terms of office,

computing equipment, communication facilities like Telex/Fax,

Telephone, etc., and skilled manpower for efficient participation in

primary issues, trading in the secondary market, and to provide

advice and education to investors.

iv. Putting in place efficient internal control system.

v. Obligation to provide to RBI access to all records, books,

information and documents as may be required.

vi. Adherence to all prudential and regulatory guidelines prescribed by

RBI from time to time.

42


vii. Formation of self regulatory organisation (SRO).

viii. Maintenance of a separate desk for government securities business

and separate accounts and has an external audit of annual accounts.

ix. Maintenance separate accounts in respect of its own position and

customer transactions.

x. Responsibility to bring to RBIs attention any major complaint

against him or action initiated/taken against him by authorities such

as the Stock Exchanges, SEBI, CBI, Enforcement Directorate,

Income Tax, etc.

xi. Setting up prudential ceilings, with the prior approval of the Board

of Directors of the company, on borrowings from the money

market including repos, as a multiple of net owned funds, subject

to the guidelines, if any, issued by the Reserve Bank in this regard.

43


CHAPTER 9CHAPTER 9

Role of Market inRole of Market in GovernmentGovernment

FinanceFinance

44


ROLE OF MARKET IN GOVERNMENT

FINANCE:

Government Securities are unique and important financial

instruments in the financial market. Except, Treasury bills all other

instruments are held by the Reserve Bank of India. The techniques of

open market operations and statutory liquidity ratio are closely connected

with the dynamics of the market for these instruments. The issues of

Government Securities are helpful in implementing the fiscal policy of

the Government. Financial Institutions like commercial banks are

required to maintain their secondary reserve requirements in the form of

government securities. They can obtain accommodation from the RBI

against the collateral of these securities. As Government Securities are

claims on the Government, They are absolutely secured financial

instruments, which guarantee the certainty of income as well as capital.

Therefore, they are called gilt-edged securities. Interest on

Government Securities is payable half-yearly. Interest on Government

45


Securities along with income in the form of interest or dividends on other

approved investments is exempt from income-tax subject to a certain

limit. Individuals normally do not invest in these securities, saving in tax

liability does not seem to be an important motivation behind investment

in these securities. Government Securities are safe and liquid. But

different authorities issue the Government Securities, hence the extent to

which they possess these attributes, the safety and liquidity differ from

authority to authority. The marketability of Government securities is

relatively restricted. There is no active market for Government Securities,

particularly in semi-government securities.

There are three forms of Central and State Government Securities:

i. Stock Certificates.

ii. Promissory Notes.

iii. Bearer Bonds.

Bearer bonds are not usually issued and Stock Certificates are not

popular in India. Most of the government securities currently are in the

form of Promissory notes. Promissory notes of any loan can be converted

into stock Certificates of any other loan and vice versa.

Government Securities are issued through the Public Debt office of

the Reserve Bank of India. The issues of Government Securities are

notified a few days before they become open for subscription and they are

kept open for subscription for 2 to 3 days. These issues may be closed for

subscription earlier if the subscriptions approximate the amount of issue.

46


The budgeted amount of the issues in a given year is raised in a

number of branches in the year. This is done for the purpose of avoiding

the flooding of the market with securities at a given time. There are small

member of large issues, because the issues are mostly bought by the

institutional investors. After the announcement of the new issue, the RBI

suspends the sale of existing loans till the closure of subscription for the

new issues. The Government reserves the right to retain subscriptions up

to a specified percentage i.e. up to 10 percent in excess of notified

amounts. Applications for loans are collected by the offices of the RBI

and SBI. In case of issues of State Government Securities, over-

subscription to loans of one Government is transferable to the other

government, whose loan is still open for subscription, at the option of the

subscriber. These are mostly concentrated in the slack seasons.

Types of Trading:

The RBI practices the dealing in Government Securities in the

following manner:

a) Grooming: Grooming is the gradual acquisition of securities by the

RBI, which are nearing maturity through the Stock Exchanges. It is

done in order to facilitate redemption. The object is to keep the

process of issue and redemption of Government Securities contineous

and thereby facilitate availability of the securities on ‘tap’

b) Switching: The Purchases of one security and Sale of another

securities carried out by the RBI in the secondary market as part of its

open market operations is known as ‘Switching’. It helps the banks

and financial institutions to improve the yield on their investments in

securities. The

47


RBI also fixes an annual quota for the Switch Transactions of each

institution.

c) Auctioning: Auctioning is a method of trading whereby merchants

bid against one another and the securities are sold to the highest

bidder. This system was introduced in 1992. Under this mechanism a

number of instruments of wide trading period are sold. The period

ranges from 14 days to 364 days. The Bidders give written and sealed

quotations which are restricted to notified amounts. There are two

types of auction, multiple price auctions and uniform price auction.

Under the multiple price auction every bidder gets allocation

according to his bid and the issuer collect the premium from all the

bidders by quoting a rate lower than the cut-off yield. Under the

uniform price auction, competitive bids are accepted on the basis of

the minimum discounted price known as cut-off-price.

The price is determined at the auction. The minimum price is

independent of the bid prices tendered below or at the cut-off-price.

Trading Mechanism:

Trading mechanism in Government Securities carried out under the

following methods.

i. Direct Sales: Under this method, Public Debt effect direct sale of

securities. The loan amounts are pre-specified and the dates of

opening of subscription for Government loans are also specified.

ii. SGL Account Method: Under this method RBI records the

transactions as book entries only in the Securities General Ledger

(SGL). The date and value of transaction are recorded. The purchasing

48


banker maintains a separate SGL account for each dealing with the

RBI in respect of its purchases of securities. The selling banker also

effects his transactions by filling out the prescribed SGL form, which

is then lodged with the RBI. It helps to the banks to know their day to

day balances.

iii. Banker’s Receipt: Under this method, the bank selling Government

Securities issues a Bank Receipt. There are facilities for SGL where

physical transfer can be avoided. This is done in case of ‘repo’ or

ready forward transactions. It is a sale transaction, which buys back

the securities at a stipulated future date at a price determined on the

date of sale transaction. Under the ‘repo’ short operations are

conducted by banks which Sell government securities without owning

them with a view to neutralizing the transaction by buying them at a

later date.

SECONDARY MARKET TRANSACTIONS:

In order to encourage wider participation of all classes of investors

across the country in Government Securities, the Government RBI and

SEBI have introduced trading in Government Securities thorough a

nationwide, anonymous order drives screen based trading system of Stock

Exchanges. This facility is in addition to the Present system of dealing in

Government Securities through the Negotiated Dealing System of the

RBI. This measure can help in reducing time and cost in trade execution

by matching orders on a strict price-time priority. It will also expand the

investor base and provide country-wide access to the Government

Securities market.

49


It is also expected to enhance the operational and informational

efficiency of the market as well as the transparency depth and liquidity.

The Participation in the Secondary market in Government

Securities is restricted to banks, financial institutions, Mutual funds,

Foreign Institutional Investors and Trusts. There is no country-wide

access for retail participation. The trades are done through negotiations,

with the knowledge of counter parties and usually over the phone rather

than the trades being matched on an anonymous automated price time

priority mechanism.

At present most of the Secondary market trades in Government

Securities take place thorough bilateral negotiations. It is essentially a

telephone market where the deals are negotiated directly by counter

parties who are usually banks and other financial institutions or brokers.

Since February, 2002, the RBI is providing an electric platform called

Negotiated Dealing System (NDS) for facilitated negotiated dealings in

Government Securities. The NDS also provides an interface to the

Securities Settlement System of the Public Debt office of the RBI. All

outright trades in Government Securities done or reported on the NDS

have the facility of guaranteed settlement extended by the Clearing

Corporation of India Limited (CCIL) through the process of novation.

Only the NDS members can route their deals done among themselves for

settlement through the CCIL. Outright transactions in Government

Securities for Cut-off amount of Rs. 20 crores and below (face value) and

all ‘repo’ trades are settled through the CCIL. For outright transactions of

face value above Rs. 20 crores option is available to members to settle

either directly through the RBI-SGL or through the CCIL. For outright

50


transactions of face value above Rs. 20 crores option is available to

members to settle either directly through the RBI-SGL or through the

CCIL. The objective of the NDS is to provide online price information of

transactions in Government Securities.RBI has also permitted the banks

and financial institutions to transact in debt instruments among

themselves or with non-bank clients through the member of the NSE,

BSE, and OTCEI. The NSE provides a separate wholesale Debt Market

Segment.

CHAPTER 10CHAPTER 10

Implications forImplications for

Monetary PolicyMonetary Policy

51


IMPLICATIONS FOR MONETARY POLICY

An important part of monetary management is the management of

Government Securities market. The Reserve Bank of India can execute its

interest rate policy through changes in the Bank Rate, by fixing interest

rates on government borrowing and lending and by influencing the

behavior of price and yields in the gilt-edged market. The management of

gilt-edged market has also a considerable bearing on the advances and

liquidity of commercial bank so as to help the monetary policy. Another

objective is to ensure that suitable and inexpensive finance for the

exchequer is available and will continue to be available in future. The

prices of Government Securities have been maintained at a remarkable

stable level during the past. The rates of interest on Government

Securities have been raised much less than those another claims in the

economy. The open market operations have not been used much for

influencing the cost and availability of credit. They have been employed

by the RBI primarily to assist the Government in their borrowing

operations and to maintain orderly conditions in the market.

52


The size of debt is a function of macro-economic policy and there

is on ongoing dialogue between RBI and the Government on the issue.

The size of market borrow in has an impact on the interest rates, as large-

scale pre-emption of resources by the government puts pressure on

liquidity in the market and as a result interest rates tend to go up. RBI’s

exclusive role becomes important in the matter of short-term liquidity

management in the financial system. World over Central banks operate in

the Short-term market to influence liquidity conditions so that short-term

interest rates, do not unduly impact the medium and long-term interest

rated in the economy.

In the USA and UK, open market operations in government

securities for the purpose of monetary management have become limited

with the growth of government debt. A combination of policies of trading

in treasury bills for monetary management and in the Government

Securities for debt management is adopted by them. In India, treading in

treasury bills is also used for the purpose of government financing. It has

not been used actively for affecting bank reserves. Favorable conditions

in the Government Securities market cannot be maintained merely by not

varying interest rates on Government Securities. It also requires the

rejection of the traditional monetary policy, which relies on Bank rate

variations to influence economic activity. In the free, market, variations

in the Bank rate ought to cause variations in interest rates on government

Securities and their prices.

The RBI has been holding in its portfolio only Central government

securities, as a matter of policy. The Government Securities held by it are

partly held in the form of assets of the issue department and partly in the

53


banking department. The Securities held in Banking Department are

available for sale by the RBI under its open Market Operations. The open

market operations are conducted by way of purchase and sale of Central

Government Securities by the RBI on outright basis or on repo basis. The

repo operations of the RBI address the system liquidity is basically short

term in nature and purchase and sale of securities on outright basis is

long-term in nature because it causes long-term changes in the bank

reserves.


RecentRecent

DevelopmentsDevelopments

54


RECENT DEVELOPMENTS

The RBI has undertaken reforms in the Government Securities

Market. The RBI has started providing liquidity support with regard to

mutual funds that are dedicated exclusively to investment in Government

Securities. The purpose is to create an enhanced and wider investor base

for such securities. The support is made available to mutual funds to the

extent of 20 percent of outstanding investment in Government Securities,

either by way of outright purchase or reverses repos, Banks and selected

entities are permitted to carry out Ready Forward (REPO) transactions in

government Securities.

As regards to ‘Market to Market’ valuation of Government

Securities, the ratio of investment classified in current category for public

sector banks has been raised from 40 percent to 50 percent and for the

new private sector banks it has been fixed at 100 percent of their

investments. The RBI has extended the Delivery v/s payment system with

regard to auctioning of treasury bills with effect from February 14, 1996

to the banks. With effect from October 21, 1997 all categories of foreign

55


Institutional investors were allowed by the RBI to make Investment in

Government Securities that are registered with and approved by the SEBI

for making investments in gilt-edged securities has been permitted up to a

ceiling of 30 percent in debt instruments. As per amended guidelines of

June, 1998 equity funds were permitted to invest in dated Government

Securities and Treasury bills, both in Primary and Secondary Markets

within their 30 percent debt ceiling. Uniform price auction was

introduced on November 6, 1998 regarding the auction of 91 days

Treasury bills on an experimental basis.

With effect from June, 23, 1998. Satellite Dealers were permitted

to issue commercial paper with maturity ranging from 15 days to one

year. There were some conditions. The issue should be made within a

period of 2 months of obtaining credit rating and every renewal is treated

as a fresh issue. The issue should be made in the multiple of Rs. 5 lakhs

with a minimum of investment by a single investor being Rs. 25 lakhs.

The aggregate limit is raised within two weeks from the date of RBI

approval and the issue is not underwritten or co-accepted in any manner.

The RBI and the Government have made arrangement for the setting up

of a clearing corporation to provide for the opening of the repo market to

PSU bonds and bonds of financial institutions held in demat form in

depositories and traded in recognized Stock Exchanges with essential

safeguards.

56



Ready ForwardReady Forward

Contracts (REPOS)Contracts (REPOS)

57


READY FORWARD CONTRACTS (REPOS):

A transaction in which two parties agree to sell and repurchase the

same security is called ‘ready forward contract’ or ‘Repos’. It is also

known as buyback deal. This arrangement provides for the seller to sell

specified securities with an agreement to repurchase the same at a

mutually pre-determined future date and price and the buyer to purchase

the securities with an agreement to resell the same at a predetermined

future date and the price.

Commercial Banks, Securities Dealers, DFHI, STCI, RBI,

Cooperative Banks are allowed to participate in the repos market. Non-

bank finance companies LIC, GIC, UTI and companies are also allowed

to participate in this market from March, 2003. Repo transactions are

arranged over the counter by telephone either by direct contact or through

a group of market specialists. Repo transactions can be used in respect of

CPs, CDs, Treasury Bills and Government dated securities. National

Stock Exchange can also be used for currying out repo transactions. The

Repo contract provides the seller-bank to get money by parting with its

security and the buyer-bank in turn to get the security by parting with its

58


money. The prices of sale and repurchase of securities are determined

before entering into the deal.

Repos, being collateralized loans, help to reduce counter party risk

and fetch a low interest rate. It is possible to use repos as an effective

hedge tool to arrange another repo or to sell them outright or to deliver

them to another party to fulfill a delivery commitment in respect of a

forward or future contract on a short sale. Repo is an almost risk-free

instrument used to even out liquidity changes in the system. It offers safe

short-term outlet for temporary excess cash at close to market interest

rates. Repos are used to finance securities held in trading and investment

accounts of security dealers to establish short positions, to implement

arbitrage activities and meeting specific customer needs because of low-

risk and flexible short-term instruments. They also offer low-cost

investment opportunities with combinations of yields and liquidity. It is

possible to enhance the safety of repo transaction by making the security

price to the market and by providing a margin on the security value. The

Repo arrangement serves as a short-term cash management tool. The RBI

uses repos as a tool of liquidity control for absorbing surplus-liquidity

from the banking system in a flexible way and thereby preventing interest

rate arbitraging.

A Reverse Repo is the opposite of a repo transaction. It is a reverse

purchase agreement. The counter party enters into a reverse repurchase

agreement and makes a short-term collateralized loan to the bank, the

primary dealer or the seller of securities. This is done by providing funds

in return for holding securities on the maturity of the reverse repurchase

transaction, the counter party returns the same security to the same bank

and the primary dealer receives back the funds from the buyer. The

59


amount received by the buyer is the principal plus interest. The interest is

termed as the repo rate. This arrangement allows banks to make efficient

use of their funds.


ConclusionConclusion

60


CONCLUSION:

The Market in Government Securities is significant part of the

Stock market in India. The marketable debt issued by Government and

Semi-Government bodies which represents a claim on the Government is

called Government Securities. A market where the Government

Securities are bought and sold is called Government Securities market.

The securities of Central and State Government are issued in the form of

Stock Certificates, promissory notes and Bearer bonds. A Treasury bill is

a particular kind of finance bill or a promissory note put out by the

Government of the country, Auctioning is a method of trading whereby

merchants bid against one another and where the securities are sold to the

highest bidder. Government Securities are unique and important financial

instruments in the financial market.

The size of annual floatation’s of securities has gone up from 75

crores in 1960-61 to Rs. 7015 crores in 1988-89 in case of Central

Government Securities and from Rs. 67 crores to Rs. 2074 crores in case

of State Government Securities in the same period. The preparation of

Government Securities in the same period. The preparation of

61


Government Securities owned by the RBI has gone down, In order to

encourage wider participation of all classes of investors across the

country in Government Securities, the government, RBI and SEBI have

introduced trading in Government Securities through a nation-wide,

anonymous, order-driven screen based trading system of Stock

Exchanges. The participants in Government Securities are Central and

State Government, banking sector Insurance, Companies, Provident funds

and Special financial institutions. Joint Stock Companies, Local

authorities, Trust and individuals as well as non-residents also participate

in this market. The face value of the Government Securities is Rs. 100 or

Rs. 1000 and there is a practice of issuing these Securities at a discount.

The gross redemption and running yields in Government Securities have

been increasing and it is in the range of 8 to 10%. The management of

gilt-edged market has a considerable bearing on the advances and

liquidity of commercial bank so as to help the monetary policy. The RBI

has undertaken various reforms in the Government Securities market in

India.

62


BIBLIOGRAPHY

SR.NO NAME OF THE SOURCE AUTHOR

1 FINANCIAL MARKETS Dr. P.K. BANDGAR

2 SECURITIES MARKETS AND PRODUCTS

TAXMANN

3 INVESTMENT AND SECURITIES MARKETS IN INDIA

V.A. AVADHANI

WEBLIOGRAPHYwww.rbi.org.inwww.treasurydirect.gov

63

http://www.treasurydirect.gov/

http://www.rbi.org.in/


64

Documents

Government Securities Market in India