@ Government Security

A government security is a bond or other type of debt obligation that is issued by a government with a
promise of repayment upon the security's maturity date. Government securities are usually considered
low-risk investments because they are backed by the taxing power of a government. In fact, investment
in U.S. treasury securities is probably the safest investment that can be made.

@GOVERNMENT MARKET SECURITIES

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Government Securities market

IndianMoney.com Research Team | Saturday, April 18,2009, 06:47 PM

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 :Primary MarketThe 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.Secondary MarketThe 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.AuctionsAuctions for government securities are usually multiple- price auctions either yield
based or price based.

Yield 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.

Price Based

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.