[This post elucidates what is a Government stock, who is all buyers of Government securities, why banks invest in Government securities beyond SLR requirement, advantages, and a brief on the issuance of Government Securities]
What is G-sec?
Government security (G-sec) is a form of security issued by the Government through a notification in the official Gazette.. These securities are created by the Government to raise loan from the public or for any other purposes. The following are the forms of Government security (G-sec).
- a Government Promissory Note (GPN) payable to or to the order of a certain person; or
- a bearer bond payable to a bearer; or a stock; or
- a bond held in a Bond Ledger Account (BLA)
What is a Government stock?
Government security (G-sec) and bonds are also called Government stock. The securities are tradable debt securities issued by the central or state government for a certain stated period. The Short-term securities, with original maturities of less than one year, are called treasury bills. The long-term (usually called Government bonds or dated securities with an original maturity of one year or more) are called bonds or dated securities. The tenor of dated securities can usually be up to 30 years or in some occasions, it may be even for the longer term. Each note has a stated interest rate which is paid semi-annually. Because the government stocks are deemed as having no risk of default, they are called risk-free gilt-edged instruments. The gilt-edged instruments are usually fully tradable and are therefore eligible to be SLR securities.
Who are the buyers of Government securities?
Commercial banks, Cooperative banks, Regional Rural Banks, Mutual Funds, Provident Funds, insurance companies, Primary Dealers, and other large investors are the buyers of Government securities. While banks and insurance companies need Government securities to maintain their growing SLR requirements, the primary dealers participate in the auction for market making and positioning the securities for further sale in the secondary market.
Why do banks invest in Government securities beyond the SLR requirement?
The surplus money held more than the day-to-day needs of the banks does not return to it. Hence, alongside to meet statutory requirements, banks use their surplus money in government securities which offer the maximum safety to the money invested and are available in a wide range of maturities from 91 days to as long as 30 years to suit the duration of a bank’s liabilities. Further, Banks can sell Government securities in the secondary market to meet their cash requirement. In addition to the above, banks use these securities as collateral to borrow funds in the repo market.
How are government securities issued?
The Government securities are issued by way of auctions conducted by the RBI on the electronic platform called the NDS – Auction platform. The banks, Insurance Companies, Mutual Funds, Provident Funds, and Primary Dealers who maintain funds accounts (current accounts) and securities accounts (SGL) with RBI can place their bids in the auction. The auctions may be yield-based or price-based. The yield-based auction is generally conducted when a new Government security is issued. Whereas a price-based auction is conducted by RBI when the Government of India re-issues securities issued earlier. The participants have to submit sealed bids specifying the price at which they are willing to a particular amount of debt security. An initial ceiling of 5 percent of issue size is reserved for eligible non-competitive bidders in dated securities auctions. The bidders eligible for non-competitive bids are allowed to submit bids up to Rs.2 Crore without specifying the amount. The allotment of securities to non-competitive bids is done based on the average price accepted in the auction. The number of securities allotted to non-competitive bidders is deducted from the total issue size and the rest of the issue is opened for competitive bidders.
Investing in G-Secs has the following advantages:
Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment to payment of interest and repayment of principal.
They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structures of various institutions.
G-Secs can be sold easily in the secondary market to meet cash requirements.
G-Secs can also be used as collateral to borrow funds in the repo market.
Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds, UDAY bonds, etc) provide attractive yields.
The settlement system for trading in G-Secs, which is based on Delivery versus Payment (DvP), is a very simple, safe, and efficient system of settlement. The DvP mechanism ensures the transfer of securities by the seller of securities simultaneously with the transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.
Besides banks, insurance companies, and other large investors, smaller investors like Cooperative banks, Regional Rural Banks, and Provident Funds are also required to statutory hold G-Secs.
To know more read: TRANSFORMATION OF GOVERNMENT SECURITIES MARKET; and
EXPLAINED: AUCTION OF GOVERNMENT SECURITIES
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