Government Security (G-Sec)

Why in news?

• The yield on the benchmark 10-year government security (G-sec) in India has witnessed a decline, posing a question to retail investors about their investment strategy.
• The Reserve Bank of India (RBI) have opened up the government securities market to retail investors, but their participation has been relatively low.

About G-secs:

• Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
• It acknowledges the Government’s debt obligation.
• Such securities are short term -usually called treasury bills, with original maturities of less than one year or long term-usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity.
• Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold G-Secs.

Types:

• Treasury Bills (T-bills)
  • Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely– 91 day, 182 day and 364 day.
  • Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
    • For example, a 91 day Treasury bill of ?100/- (face value) may be issued at say ? 98.20, that is, at a discount of say, ?1.80 and would be redeemed at the face value of ?100.
• Cash Management Bills (CMBs)
  • In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India.
  • The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
• Dated G-Secs
  • Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis.
  • Generally, the tenor of dated securities ranges from 5 years to 40 years.
  • Most of the dated securities are fixed coupon securities.
• State Development Loans (SDLs)
  • State Governments also raise loans from the market which are called SDLs.
  • SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government.
  • Like dated securities issued by the Central Government, SDLs issued by the State Governments also qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by CCIL.
  • State Governments have also issued special securities under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for Operational and Financial Turnaround of Power Distribution Companies (DISCOMs).

PRACTICE QUESTION:

Consider the following statements:

1.     The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.

2.    Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.

3.    Treasury bills offer are issued at a discount from the par value.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 3. Only

(c) 2 and 3 only

(d) 1, 2 and 3

Answer