Ashish Pattni Started The Discussion:
The Government Securities (G-secs) market is the largest segment of the long-term debt market in India, accounting for nearly two-thirds of the issues in the primary market and more than four-fifths of the turnover in the secondary market. The Government Securities Market can be broadly classified into Central Government Securities, Treasury Bills, State Government Securities, Government Guaranteed Bonds and PSU Bonds. To understand the government securities market as a whole, each of these are explained below.
Central Government Securities (GoISecs) are medium to long-term rupee denominated obligations issued by RBI on behalf of the Govt. of India to finance the Central Government's fiscal deficit. The maturity period of GoISecs ranges from 2 to 10 years. There are various types of GoISecs such as fixed-rate bonds, flaring rate bonds, floating rate bonds, zero coupon bonds, etc. Coupon payments on fixed rate and flaring rate bonds are made semi-annually. Interest is calculated on the basis of a 360-day year, consisting of 12 months of 30 days each. GoISecs are not rated. There is currently no withholding tax on coupon payments of GoiSecs. Banks have been allowed to retail GoISecs, subject to the stipulation that the banks shall not buy the security from the person to whom it is sold within a period of 30 days. GoISecs are reasonably liquid. Primary dealers provide two-way quotes for these securities. Commercial banks are dominant investors in GoISecs due to the RBI's requirement of SLR. The investor base also includes insurance companies, NBFCs, provident funds, pension funds and cash rich corporations. RBI also buys GoISecs for open market operations.
Treasury Bills (T-Bills) are short-term rupee denominated obligations issued by RBI on behalf of the Government of India, and are in the form of a discounted government promissory note or by credit to the Securities General Ledger account. The RBI is currently slated to issue T-bills of four maturity periods: 14, 91, 182 and 364 days. T-Bills can be grouped into 3 categories – ad-hoc, on-tap and auctioned T-bills. Ad-hoc T-bills are issued by the Govt. only to RBI. On-tap T-bills are issued by RBI to investors on every working day. The auction for T-bills is held every Friday for an amount notified in advance by the RBI. T-bills, too are reasonably liquid. Primary dealers act as market makers and provide two-way quotes on a daily basis. Only RBI can hold ad-hoc T-bills. After the adoption of market determined pricing, the investors in T-bills widened to include finance companies, NBFCs, cash rich corporations, PSUs and Mutual Funds and Insurance companies. FIIs are currently not permitted to invest in T-bills.
State Government Securities (SGSecs) pay fixed-rate coupon on a semi-annual basis. All the state government securities offered during a particular financial carry identical coupon rates and maturity. Coupon rates on SGSecs are usually higher than those on GoISecs to make up for lower liquidity and credit quality. Interest payments on SGSecs, like those on GoISecs are not subject to withholding tax; and SGSecs are exempt from stamp duty for the registration of ownership. The investor profile for SGSecs is almost the same as that for GoISecs.
Government-guaranteed Bonds are medium to long-term debt securities issued by Government agencies and PSUs and guaranteed by the Central Government or a State Government in respect of principal and interest payments. Typical issuers include infrastructure related PSUs, state-owned utility, transport and housing finance companies. Their issue sizes range from Rs. 50 million to Rs. 4 billion and their maturity period is 5-10 years. They have bullet redemption and fixed semi-annual coupon payments. Government guaranteed bonds have rather low liquidity in the secondary market. Trades of Government guaranteed bonds settle on a DVP basis. Most of the bonds are available in a registered form.
Public Sector Undertaking (PSU) bonds are medium term obligations issued by the public sector companies such as ones in which the central or state government has more than 51% stake. All PSU bonds have a bullet redemption and some of them are embedded with put or call options. Their coupon rates and maturity periods are determined by the Government. The current guidelines for the issue of PSU bonds stipulate that the minimum maturities of taxable and tax-free PSU bonds are 5 and 7 years respectively, that they are allowed to green-shoe oversubscriptions upto 25%; that they are allowed to issue floating rate bonds and deep discount bonds and all new issues have to be listed on a stock exchange. Interest is calculated on the basis of a 365-day year, consisting of 12 months of the actual number of days each. Interest payments are subject to 20% withholding tax and stamp duty is payable on a transfer deed. Investors include banks, insurance companies, NBFCs, provident funds, mutual funds, financial institutions and individuals.
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