GOVERNMENT SECURITIES ACT,2006

The Government Securities Act, 2006

• is a legislation of the Parliament of India that aims to introduce various improvements in
the government securities market and the management of government securities by the Reserve
Bank of India (RBI).
• The Public Debt Act, 1944 was an act of the Parliament of India which provided a legal framework for
the issuance and servicing of government securities in India. The Government Securities Act, 2006
was established to replace it.
• Debt comprises of money borrowed by an outside party for a certain period of time to meet any
requirement. Obviously the person lending the money expects a return on the same, and this is paid
out in the form of interest.
• The debt market is the financial markets where investors trade in debt securities or debt
instruments. Debt instruments are assets that require a fixed payment to the holder, usually with
interest.
• A market that is involved in the trading of debt instruments such as government and corporate
bonds, as well as has an involvement with the trading of packaged loan products that are sold to
investors.
• In general debt markets are markets where issuance, trading and settlement of various types of fixed
income instruments occur.
• The debt markets in India consists of majorly two sets namely:
(i) The Government Securities market
(ii) The Corporate bond market
 INSTRUMENTS IN DEBT MARKET.

• A debt instrument is a fixed income asset that allows the lender (or giver) to earn a fixed interest on
it besides getting the principal back while the issuer (or taker) can use it to raise funds at a cost.
Debt acts as a legal obligation on the issuer (or taker) part to repay the borrowed sum along with
interest to the lender on a timely basis.
• The fixed income instrument can be securities, issued by Central and State Governments, Municipal
corporations, Govt. Bodies or by private entities like financial institutions, banks, corporats, etc.
• A debt instrument can be in paper or electronic form. Bonds, debentures, leases, certificates, bills
of exchange and promissory notes are examples of debt instruments.
• These instruments also give market participants the option to transfer the ownership of debt
obligation from one party to another. The lender receives a fixed amount of interest during the
lifetime of the instrument.
• Debt instruments provide fixed and higher returns, thus giving them an edge over bank fixed
deposits. The duration of debt instruments can either be long-term or short-term. Funds raised
through short-term debt instruments are to be repaid within a year.
• However, long-term debt instruments are the ones that are paid over a year or more. Credit card
bills and treasury notes are examples of short-term debt whereas long-term loans and mortgages
form part of long-term debt instruments.
Some of the common types of the debt instrument are:

• Debentures
• Bonds(PSU bonds, Private Sector Bonds)
• Mortgage
• Treasury Bills
• Coupon bearing bonds.
• Commercial paper
• Government securities
• Certificate of deposits (by banks and other financial institutions)
GOVERNMENT SECURITIES- (G-SECS)
• Government security is essentially a tradable instrument, which is issued by the Central or State
Governments to raise the public loan for the purpose of meeting their fiscal deficit/ short term financial
needs.
• The intention of raising government securities is to finance important projects and budget deficits.
• These securities are basically issued both for the short term (matures less than one year) and long-term
(matures in one year or more).
• The government securities are also known as the risk-free gilt-edged instruments because these
securities are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and hence
there is practically no risk of default.
• Most government securities issued by the Reserve Bank of India on behalf of the Indian Government
are interest-bearing dated instruments.
• These government securities have a fixed maturity period, and these fixed coupon securities carry a
half-yearly coupon interest. As these Government Securities have a specified maturity date, these are
also referred to as dated government securities.
• Furthermore, the rate of interest on securities issued by the Government carries a minimum amount of
interest rate, mainly because of their liquidity and safety.
• It is also imperative to note that the securities of the Government are generally issued in the
dematerialized form (SGL);
FEATURES OF GOVERNMENT SECURITIES
• Government Securities are issued at face value.
• Government Securities carry a sovereign guarantee and hence have zero risks of
default.
• Investors can sell these Government Securities in the secondary market.
• Payment of Interest on Government Securities are paid on its face value.
• The interest payment on these Government Securities does not attract TDS, or Tax
Deducted at Source.
• Government securities can be held in dematerialized form.
• The interest rate of Government Securities is fixed for the entire tenor of the
instrument and cannot be changed during its tenor.
• The rate of interest and maturity date is mentioned during the time of issuing the
securities.
• The Government Securities are redeemable at face value at the time of its maturity.
• The maturity period of Government Securities can range between 2 to 30 years.
• Most Government Securities qualify as SLR or Statutory Liquidity Ratio investments
ADVANTAGES/NEED OF INVESTING IN G-SEC/
• The price of government securities falls when the interest rates rise, and the
price of government securities rise when the interest rates fall. As a result of
this, buying government securities when the rate of interest is high at low rates
and selling them at a higher price when the rate of interest fall can help
investors make substantial gains.
• G secs have zero default risks.
• Government securities offer lower volatility and greater safety when compared
to corporate bonds.
• Government securities do not attract TDS deduction on interest payment.
• Government securities offer transparent transactions and simplified settlement
procedures
• Government investments offer higher diversification opportunities for investors.
• Investors are offered higher leverage while borrowing against government
securities.
• investors are guaranteed return of both interest and principal
• competitive returns as compared to fixed deposits.
• Tax exemptions are available for interest earned on G-Secs.
• Get periodic cash flows in Government of India bonds(six monthly)

ISSUANCE OF G-SEC:
Auction
• Government securities are also sold through the process of auction, though
they can also be sold on the OMO or Open Market Operations. The process of
auction involves calling of bids to arrive at a market price. The auction of
government securities is generally on the basis of price or yield.
• In price-based auctions, the Reserve Bank of India makes an announcement regarding
the size of the issue, the notified amount, tenor of the instrument, coupon rate of the
paper, etc.
• A price based auction is conducted by RBI when Government of India re-issues
securities issued earlier.
• The bidders are required to submit their bids, i.e., their price. Bids which are lower
than the cut-off price are rejected, and bids higher than the cut-off price are
accepted.
• A price based auction is intended to derive a price discovery for the instrument.
• In Yield-based auctions, the Reserve Bank of India makes an announcement regarding
the notified amount or issue size of the government security, and the tenor of the
instrument to be auctioned.
• The rate of interest (coupon rate) on securities being fixed through a market based
price discovery process. Generally a yield based auction is conducted when a new
Government security is issued.
• The bidders are required to submit bids in term of the yield. Bids which are lower than
the cut-off yield are rejected, and bids higher than the cut-off yield are accepted
Generally a yield based auction is conducted when a new Government security is issued.
A price based auction is conducted by RBI when Government of India re-issues securities
issued earlier. In Price based auction, since the coupon rate and maturity of the security
are decided earlier, the bids are only for price
Kinds of Auction:
Competitive bidding:
• The auction takes place usually in the form of competitive bidding.. In the competitive
bidding, only institutional investors are eligible to participate.
• Investors have to mention specific price/yield and securities allotted if the price/yield
quoted is within the cutoff price/yield.
Non-Competitive bidding
• It is a facility started by RBI to encourage retail investors.
• Retail investors can apply without mentioning price/yield
• investors are allotted securities at the weighted average price/yield of the auction.
• Retail investors can submit bids to RBI only through aggregator or facilitator.
• NSE acts as a facilitator to aggregate all retail investors’ bid and submit a single bid to
the RBI
 Types of government securities
The underlying securities in which the fund would be invested are issued either by the government or by
companies. The risk of default is obviously lower in government securities, though their returns would also be a
bit lower.
The Reserve Bank of India (RBI) defines government securities as “tradable instruments issued by the Central
Government or State Governments.” These securities carry a minimum risk of default and are sometimes called
“risk-free gilt-edged instruments.” The following are some securities offered by the RBI:
Debt instruments typically have maturities of more than one year. The main types are government securities
called G-secs or Gilts. Like T-bills, Gilts are issued by RBI on behalf of the Government. These instruments form a
part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically,
they have a maturity ranging from 1 year to 20 years.
Like T-Bills, Gilts are issued through auctions but RBI can sell/buy securities in its Open Market Operations
(OMO). OMOs cover repos as well and are used by RBI to manipulate short-term liquidity and thereby the
interest rates to desired levels.
Treasury Bills
• Treasury Bills are short-term bonds which have a maturity period of less than one year. Treasury Bills or
bonds are issued in three different categories, i.e., having a maturity date of 91-days, 182 days and 364 days.
• The T-bills are generally issued at a discount and can be redeemed at the face value during the time of the
maturity
• This instrument does not pay the instrument holder any form of interest. Instead, the difference between the
face value of the instrument and its discounted issue price serves as the profit or gains for the investor.
• The RBI performs weekly auctions to issue the treasury bills.
• Treasury bills are the lowest risk category instruments.
Cash Management Bills
• These are short-term securities that are highly flexible since they can be issued when needed. Their tenure and
date of issue are based on the temporary cash needs of the government; however, the chosen tenure must still
be less than 91 days.
• Like Treasury Bills, they are given at discounts on the face value via RBI auctions.
• Cash management bills are similar to treasury bills and do not pay the instrument holder any form of interest.
• Instead, the difference between the face value of the instrument and its discounted issue price serves as the
profit or gains for the investor.
Dated Government Securities
• Dated government securities are securities and bonds issued by the Reserve Bank of India on behalf of the
Government, and these bonds have a predetermined or fixed maturity date.
• These are long-term securities that have either a fixed or floating rate of interest. The investor benefits from the
interest paid (coupon) on each bond.
• The dated government securities are generally issued for the period between 5 years and 30 years.
• These are issued by the RBI through auction. Commercial banks and insurance companies invest in these kinds
of securities.
• These securities are termed “dated” because of the explicitly stated date of maturity; for instance, a January 1st,
2019 security will mature on January 1st of 2019. The RBI sells these securities via auctions.
• The main investors in dated securities are primary dealers such as commercial banks and insurance companies.
• Examples of dated securities are fixed and floating rate bonds, zero coupon bonds, capital indexed bonds
State Development Loans
• These are dated securities that are issued by state governments for purposes of
meeting their budgetary requirements.
• The RBI facilitates the issuance of these security types via auctions through the
Negotiated Dealing System.
• These auctions are usually done once every two weeks.
• The rates of interest for these securities are determined at the time of auction,
though their rates are often slightly higher than for the Dated Government Securities.
Coupon Bearing Bonds:
• Coupon bearing bonds pay interest periodically at the pre specifies rate of interest
• The annual rate at which the rate of interest is paid is known as coupon rate or simply
the coupon.
• Interest is usually paid half yearly though in some cases it may be monthly, quarterly,
annually and at some other periodicity.
• The dates on which the interest rates are paid are known as coupon due dates.
• Zero Coupon Bonds is one form of securities which is issued at deep discount,
rendering profit at maturity when the bond is redeemed for its face value. As the
name suggests, zero coupon bonds pay no periodic interest.