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Central Government Securities & State Government Bonds

Central Government Securities & State Government Bonds

MADE BY : AKSHAY VIRKARMADE BY : AKSHAY VIRKAR

Agenda

IntroductionThe Government needs large amount of carry

on its welfare activities

Government raises revenue by way of taxes and income from ownership of assets

The most important sources for government’s borrowing is the Government Securities Market

Government raises short-term and long-term funds by issuing these securities

These are risk-free securities These securities also called as Gilt-edged

Securities

This market in India is the most dominant part of Debt Market

Features of government securities

Government securities are sovereign debt obligations of government of India either central or any other authority of government

Government securities include central government & state government securities, Treasury bill and government guaranteed bonds

The terms of government securities range from 2 to 30 years

Coupon or Interest offered on government securities are either pre-determined by RBI or arrived through competitive bidding or auction process

Coupons which are fixed, paid out semi-annually to the holder of the security

Participants in government securities

Commercial banks

Provident funds & insurance companies

Primary dealers

Issuers of government securities

Central government

State government

Semi-Government authorities, like municipalities

IDBI, IFCI, NABARD, Housing Boards

Primary issuance processApplicant for the issue Firms, company, corporate body,

institutions, state government, commercial banks, provident fund, FIIs registered with SEBI and approved by RBI can submit offers, including in electronic form, for purchase of government securities

Denomination of government securities

Central government securities – the minimum is Rs.10,000 and trading takes place in multiple of Rs.5 crores

State government securities – the minimum is Rs.1,000 and trading takes place in multiple of Rs.1-5 crores

Government bonds - the minimum is Rs.5,000 and trading takes place in its multiples

Process of issueThe government securities has been issued in

auctions

Two types of auctions are held - Uniform price auctions (Dutch auctions) - Discriminatory price auctions (French

Auction)

Primary dealers

Primary dealers are important intermediaries in the g-sec market

Guidelines for primary dealers issued by the RBI in March 1995

Act as underwriters in the primary debt market

Act as Market Makers in the secondary debt market

The objectives behind setting up the system of primary dealers are

To strengthen the infrastructure in the government securities market in order to make it vibrant, liquid and broad-based

To develop underwriting and market making capabilities for government securities outside the reserve bank

To improve secondary market trading system that would contribute to price discovery , enhances liquidity and turnover

for conducting open market open market operations

To make primary dealers an effective for conducting open market operations

Secondary market for government securitiesGovernment securities get listed in secondary market

after it get issued

Participants have to report their trades to the PDO and effect settlement through the SGL

SGL holders are expected to report their trades within 24 hours

The “last traded price “ is not observed in the secondary markets

The trade should be completed on the same and if the order is placed by the broker then T + 2 mechanism has been followed

Settlement process

All trades in government securities are reported to RBI-SGL for settlement

The trades are settled on DvP basis

In the settlement is security is transferred to customer's D-mate a\c

Transfer of funds is affected by crediting/debiting the current account of the seller/buyer, maintained with the RBI

Clearing Corporation of India Limited (CCIL) it is the clearing house of government securities market

Introduction to state government bonds

Meaning State government and local bodies like

municipalities etc. play a crucial role in providing social and economic services like public health, education, housing and urban Development. It also helps in the development of infrastructure i.e. power supply, irrigation facilities and transport. They are responsible for executing Central Government policies and program.

Recourses for state governmentTax

Non-tax revenue

Grants and loans from the central government

State government bonds