INTRODUCTION

Gilt-edged securities are bonds issued by certain national governments.
The term is of British origin, and originally referred to the debt
securities issued by the Bank of England, which had a gilt (or gilded)
edge. Hence, they are known as gilt-edged securities, or gilts for short.
Today the term is used in the United Kingdom as well as
some Commonwealth nations, such as South Africa and India. However,
when reference is made to "gilts", what is generally meant is "UK gilts,"
unless otherwise specified.

Colloquially, the term "gilt-edged" is sometimes used to denote high-
grade securities, consequently carrying low yields, as opposed to
relatively riskier, below investment-grade securities.

The data collected by the British Office for National Statistics reveal that
about two-thirds of all UK gilts are held by insurance companies
and pension funds.[1] Since 2009 large quantities of gilts have been
created and repurchased by the Bank of England under its policy
of quantitative easing.

The term "gilt account" is also a term used by the Reserve Bank of
India to refer to a constituent account maintained by custodian for
maintenance and servicing of dematerialized government securities
owned by a retail customer.

Meaning

A government security is a tradable instrument issued by the central
Government or the state Government. It acknowledges the government’s
debt obligation. Such securities are short term(less the one year) or long
term (one year or more)

Government securities called gilt-edged securities because it provided
claim on the government and is secured financial instrument which
guarantees certainty of both capital and interest. These securities do nao
carry risk and are as good as gold as the government guarantees the
payment of interest and the repayment of the principal. Government
securities carry practically no risk of default and hence, are called risk –
free or gilt-edged instruments.

DEFINIATION:

“High-grade bonds that are issued by a or firm government. This type of
security originally boasted gilded edges, thus the name. In the case of a
firm, a gilt-edged security is a stock or bond issued by a company that has
a strong record of consistent earnings and can be relied on to cover
dividends and interest”.

History

This form of government The first fund raising that could be
considered a gilt issue was in 1694 when King William borrowed
£1.2m to fund a war with France via the newly created Bank of
England. The term "gilt" however would not be used until the late
19th century for these types of debt securities.

Borrowing proved successful and became a common way to fund
wars and later infrastructure projects when tax revenue was not
sufficient to cover their costs. Many of the early issues
were perpetual, having no fixed maturity date. These were issued
under various names but were later generally referred to as Consoles.

Types of gilt-edged securities market

The gilt market predominantly comprises two different types of securities
with different features.
 Conventional gilts
 Index-linked gilts

 Conventional gilts

The UK has issued around 20 index-linked bonds since then.  Index-linked gilts These account for around a quarter of UK government debt within the gilt market.125 %. Like conventional gilts. 30-.) However.and 50. at which point the holder receives his final coupon payment and the return of the principal. Initially only tax-exempt pension funds were allowed to hold these bonds. Conventional gilt is denoted by its coupon rate and maturity (e. their semi-annual coupons and principal payment are . real market interest yields for many index-linked gilts have been negative but the coupons for new issues have been constrained to be at least +0. 10-. In the case of 4% Treasury Gilt 2016 the principal is due to be repaid to investors on 7 September 2016.g. (Recently. The UK was one of the first developed economies to issue index- linked bonds in 1981. The coupon rate usually reflects the market interest rate at the time of the first issue of the gilt. A conventional gilt is a bond issued by the UK government which pays the holder a fixed cash payment (or coupon) every six months until maturity. 40. index-linked gilts pay coupons which are initially set in line with market interest rates.year maturity areas. Conventional gilts also have a specific maturity date. These are the simplest form of UK government bond and make up the largest share of UK government debt (30% as of March 2008). 4% Treasury Gilt 2016). In recent years the Government has concentrated issuance of conventional gilts around the 5-.

1¼% Index-linked Treasury Gilt 2055. maturing in 2062 and 2068. Further ultra-long index-linked bonds. the UK government issued many double-dated gilts. there is a time lag between the collection of prices data. This was so that the amount of the next coupon was known at the start of each six-month interest accrual period. which had a range of maturity dates at the option of the government. . However in 2005 the UK Debt Management Office announced that all new issues of index-linked gilts would use a three-month indexation lag. first used in the Canadian Real Return Bond market. In September 2005. maturing on 22 November 2055. the UK Government issued the longest ever index- linked government bond. the publication of the inflation index and the indexation of the bond. were issued in October 2011 and September 2013 respectively. Double-dated gilts In the past. and this was redeemed on 12 December 2013. and the majority of index-linked gilts now in issue are structured on that basis. index-linked gilts had an eight- month indexation lag (between the month of collection of prices data and the month of indexation of the bond). The last remaining such stock was the 12% Exchequer Stock 2013-2017. a "rump gilt" with a relatively small amount outstanding and a very limited market. From their introduction in 1981.  Indexation lag As with all index-linked bonds.adjusted in line with movements in the General Index of Retail Prices (RPI).

They have no fixed maturity date.Undated gilts There exist eight undated gilts. but because of their age. For example ten year gilt can be stripped to make 21 separate securities: 20 strips based on the coupons. such as Consoles. Because the outstanding amounts are relatively very small. These gilts are very old: some. they all have low coupons. date from the 18th century. was issued in the early 20th century. or gilt strips. and in some cases also the coupon. and at various times since then. which make up a very small proportion of the UK government's debt. namely Interest (the periodic coupon payments) and Principal (the ultimate repayment of the investment) which can be traded separately as zero- coupon gilts. and for a long time there has therefore been little incentive for the government to redeem them. In May 2012 the Debt Management Office issued a consultation document which raised the possibility of issuing new undated gilts. the yield on these gilts. which are entitled to just one of the half-yearly interest payments. and again in late 2011. War Loan. The largest. and one strip . Gilt strips Certain gilts can be "stripped" into their individual cash flows. The question of the redemption of War Loan has now been publicly raised. has been higher than the redemption yield on long-dated redeemable gilts. However in early 2009. which implies that the market is pricing in the chance that the government might redeem these gilts at some point. The redemption of these bonds is at the discretion of the UK government. there is a very limited market in most of these gilts. but there was little support for this proposal.

 The transition is government security markets which are recorded by the RBI in Special General Leader Account are being published now to attain transparency in the working of the market. there were 11 strippable gilts in issue in the UK totalling £1. Gilts can be reconstituted from all of the individual strips. By the end of 2001.800 million. medium 7–15 years and long 15 years+. while the new gilts issued since 2005 with a term to maturity of 50 years or more have been referred to as "Ultra long RECENT DEVELOPMENT IN GOVERNMENT SECURITY MARKET  The NSC has begun trading in government bonds. The title Separately Traded and Registered Interest and Principal Securities was created as a 'reverse acronym' for strips. .entitled to the redemption payment at the end of the ten years. Gilts with a term to maturity of less than three years are also referred to as “Ultra short ". Maturity of gilts The maturity of gilts is defined by the DMO is as follows: short 0–7 years. The UK gilt strip market started in December 1997.

They are non-negotiable and non-interest bearing claims. and they issue bonds to finance their activities.  Fill the category of 100% debt funds have been permitted from 30 January. These securities are issue by the central government. metropolitan authorities. public sector corporations. The state government and semi-government agencies issue bond and debenture. international floating debt of the government. improvement trust. The market for Treasury bill has already been discussed. state government. NABARD.IBRD. Certain government agencies like IDBI are established to implement the government’s various lending operations. treasury bills. LDBs. As a unique and important financial instrument: . and other government agencies such as IDBI. state electricity boards. and special rupee securities in payment of India’s subscription to IMF. and semi-government authorities which include local government authorities like city corporations and municipalities. and the like. The central government issue bonds. housing boards. 1997 to invest in central and state government securities in both primary and secondary market. IFCI. autonomous institution like port trusts. NATURE AND ORGANISATION OF GOVERNMENT SECURITIES MARKET GOVERNMENT Securities-General Features The supply of government securities stem from the issue of government marketable debt. SFs. Asian Development Bank.

It is an absolutely secure financial instrument which guarantees the certainty of both income and capital.000. As the RBI can issue currency notes against the backing. In addition. Again. Financial instrument like commercial banks are required to maintain their secondary reserve requirement in the form of these securities. The face value which used to be Rs 1000 till the middle of the 1980s was raised to Rs 1. its issue is helpful in implementing the fiscal policy of the government. apart from gold and foreign exchange. of central government bonds.as government security is a claim on the government bonds. As a government security is a claim on the government. Yet. It is also easier for the holders to obtain loans against the collateral of these securities from the RBI and other institution. and the working of two of the major techniques of monetary control of the central bank open market operation and statutory liquidity ratio are closely connected with the dynamic of the market for this instrument. they constitute the ultimate source of liquidity in the economy. Unlike other instrument it is also held by the central bank of the country. till was deliberately maintained at a low level by the government in order to minimize the cost of servicing public debt. they constitute the ultimate source of liquidity in the economy.000 in the recent past. Denomination The government securities are normally issue in the denomination of Rs 100 or Rs 1. the market for this securities has expanded every because of the . The rate of interest on these securities is relatively lower because of there being liquid and safe.Government securities are unique and important financial instrument in financial market of any country. unlike other instruments.

securities and different authorities differ in respect of the extent to which they possess these attributes. particularly in semi-government securities.regulation. The marketability of security of state government and semi-governments is relatively restricted. There is no active market. alone with the income in the form of interest or dividend on other approved investment. In The value of investment in these securities and other investment specified in the wealth tax act. therefore. is exempt from income tax subject to a limit. Liquidity Although it is true that government securities are liquid and safe. 1957 is exempt from wealth tax up to a limit. As individual do not normally invest in these securities. any other borrower but government or government-backed organization would have been unable to raise funds on any significant scale. late alone on increasing scale. under which financial institution are required to invest a certain proportion of their investable funds in these securities. Unlike In the US. saving in tax liability does not seem to be an important motivation behind investment in them. Interest The interest on government securities is payable half-yearly. statutory or otherwise. interest on the securities of local authorities is not exempt from tax in India. At the rate of interest that can be earn on these securities. they are less liquid than central government securities. Interest in respect of central and state government securities. There is no need for underwriting or guaranteeing the sale of central government and semi- .

Forms of government securities: There are three forms of central and state government securities: (a) inscribed stock or stock certificate (b) promissory note and (c) bearer bond. The fact that the RBI is always ready to buy the unsubscribed part of any loan issue amounts to underwriting of these issues. most government securities are currently in the form of promissory notes. Consequently. Mode of issue Government securities are issue through the PDO of the RBI. As primary issue are noticed to the public through the government notification and the press communiqué. The budgeted amount of issues in a given year is raised in a number of tranches in that year. but. the issues are notified a few days before they become open for subscription and they are kept open for subscription for 2/3 days. stock certificates are not very popular with investor. Promissory notes of any converted into stock certificates of any other loan vice versa.government securities. there is no issue of prospectus or vetting of prospectuses their case. Instead of selling them through auction. As government securities are deemed to be listed on stock exchanges. the SEBI normally routinely grants “no objection” to the primary issue of these securities. This is obviously to avoid flooding of the market . there are no separate listing requirements for them. bearer bonds are not usually being issue in India. they may be closed for subscription earlier if the subscriptions approximate the amount of issue. While these days. The method of selling them differs from that of selling TBs.

the RBI suspends the sale of existing loans till the closure of subscriptions to new loans. But the scope for participation in the market by other broker has been limited. certain important disadvantages. a telephone market in essence. say 10 per cent in excess of notified amounts. After the opening of the NSE banks are permitted to undertake and dealer in the process of marketing of government securities in India has been much more limited than is other countries. and without using the service of brokers. an over-the-counter (OTC) market. The RBI does have its approved brokers and the major part of turnover in the market takes place through these brokers. there can be a small number of large issues. as the issue is mostly bought by institutional investor. (1) It is difficult to decide the . it was found. The method of issuing consolidated loans has. The government securities market in everywhere. The gilt edged market is an OTC market and each sale and purchase has to be separately negotiated. However. The business in the market by any party is done as a principle and not an agent. Where there is a one-to-one correspondence between the buyer and seller. both the central and state government needs to raise funds through public borrowings. including India. Purpose of securities issue In any given year. Role of broker and dealers. The government reserves the right to retain subscription up to a specified percentage. The normal practice has been to sell their securities separately but in 1954-55 and 1963-64 only consolidated loans were issue. After the announcement of new issue.with security at given time.

The objective of conversation and reissue of loans is to lengthen the maturity structure of government debt. Role of RBI . They are “grooming” to the market and “switches” in the market.share of various states in a consolidated loan. Refunding itself can be carried out either by selling new securities for cash settlement and using the proceeds to retire post issues. or by offering holders of the maturing securities the right to exchange (covert) old securities for new issues.e. (2) The centralized method does not offer scope for tapping local resources. The issue of securities may be undertaken for a) Refunding. i.. It may be relevant here to mention to other operations usually carried out by the RBI in the government securities market to achieve the objective just mentioned and to facilitate the new issue of securities. While “grooming may be defined as “acquiring securities nearing maturity to facilitate redemption and making available on tap a variety of loans to broaden the gilt. conversation of refinancing of maturing securities b) Advance refunding of securities that have not yet matured (in India this is known as reissue of loans) and c) Cash financing.edged securities market”. switches are “ purchase of one security against the sale of another security as distinct from outright purchase or sale of securities. and to reduce the volume of cash repayment loans.

The RBI occupies a pivotal opposition in the market. Difference scrip’s are included in the two lists having regard to the stock of securities and date of their maturities. based o0n the size of bank. there are triangular switch transaction in which one investor sell and purchase in matched by the purchase or sale transaction of another investment. EXIM. It maintains separate lists of securities for purchase and sale transaction. The RBI fixed and annual quota. Major securities market: The government securities market is confined almost entirely to Mumbai. Repos market in government securities: . for switch transaction of each bank from time to time with a view to prevent banks from exclusive sales of low yielding securities to RBI. The banks are financial institution whose earnings are taxed. the RBI being the middle party. Switch operations are useful to bank and financial institution to improve their yield on their investment in government securities. One of the unique features of trading in this market is “voucher trading” or” voucher benefit”. which account for more than 90 per cent of secondary marke3t transaction in these securities. and NABARD under special arrangement. It is continuously in the market selling government securities out of the surplus funds of IDBI. purchased the securities around the interest due date and unload them in the market after availing themselves of the voucher for the full year. Sometimes.

Primary and satellite dealers: On line with the similar institutions in the US. government dated securities. France and Australia. they can used in respect of CPs. Repos are essentially collateralised loans. The standard maturities are 1 to 14 days. therefore. they reduce counterparty risk. and so on. and hence.term repos. Multi day repos are called fixed. maturity period method from repo to repo. Of course. CDs. may use them to arrange another repo or may sell them outright or may deliver them to another party to fulfill a delivery commitment in respect of a forward or future contract or a short sale or a maturing reserve repo. UK. say. there is what is known as repos market in government securities. below the call rate. the system of Primary Dealers (PDs) was created in India in 1994and it has become operational since then. In repos. or one to six months. The objective of PDs are : (a) To strengthen the infrastructure in the GSM in order to make it vibrant liquid. and broad-based . interest rate on them is usually low. the purchaser of the repos acquires title to securities for the term of the agreement. Repo transactions are arranged over the counter by telephone either contact or through a group of market specialists. Repos are as short term as call money or overnight money. and. TBs.Apart from the usual market. As indicated earlier. One three weeks. Canada.

3. 1. Importance of GSM The GSM has a three-fold importance. Affect or impact of government securities . It facilities the development of indirect instruments of monetary policy. enhance liquidity and turnover and encourage voluntary holding of government securities among the wider investor base. (f) To provide active secondary market by giving two-way quotes (g) To provide signals to the central bank for market intervention. From the viewpoint of the government. the development of deep and liquid GSM facilitates public borrowing at reasonable cost and the avoidance of automatic monetization of government deficit.(b) To ensure development of underwriting and market making capabilities for government securities outside the RBI so that the latter is able to shed these function gradually (c) To improve secondary market trading system which would contribute to price discovery. well-functioning. and enables a proper evaluation of risk. well-developed GSM provides flexibility to the authorities in their task of debt management 2. The board. (d) To make PDs an effective conduit for conducting OMOs (e) To help placement of government securities in primary issued by committed participation in auctions. well –functioning. GSM helps pricing of various debt instruments through creation of a benchmark.

The government securities market can also have a positive influence on private investment by enabling the development of privet bond market in two ways (a) By putting in place a basic financial infrastructure. (b) By paying a role as an information benchmark. by investors whose demand is driven by trading and portfolio management securities requirements. products. institution. including laws . (c) A single private issuer of securities would never be of sufficient size to generate a complete yield curve and his securities would not be riskless because only the government has the power to print domestic currency. service. lending to a substitution of private bonds with government securities. An increased in the supply of government securities in the face of high budget deficit would drive down their prices. This phenomenon is often described as ‘crowding out’. (d) It acts as a integration of various segment of the financial market.1. it may adversely affect private investment by directly competing for the limited resources. particularly. repo and derivatives markets. (e) A greater ability of the government to raised resources from the market at market determine rate of interest allowed it to refrain from montisation of the deficit through central bank funding Role of GSM . 2.

plays a crucial role in the monetary policy transmission mechanism. often raised concerns about public debt management as there could be recourse to short-terms financing from the central bank lending to monetary expansion however. Summary  In terms of size. Thus. as the public debt/GDP ratio declines and government securities market developed with introduction of new instruments(like index gilts). irrespective of the whether the central bank act as manager of public debt or not. especially when the financial market are under development. there are three main channels through which government debt structure might influence monetary conditions. Quantity of debt composition of debt and ownership of debt. the GSM is much bigger than the industrial securities market. new issuing techniques (such as auctions) and improve . Although . this market has been rapidly expanding. The absolute size of government borrowings. practical concerns about debt management impinging on monetary control get reduced.market infrastructure.The government securities market which is often the predominant segment of the overall debt market in many economic. Due to the going requirement of fund by the government for development and non-development needs.  The ownership pattern of government securities also differs from that of industrial securities.

but the gap between rates in this market has been significantly narrowed during the 1980s and 1990s.  The authorities have initiated a large number of measures in the recent past to activity he GSM and to make it an important vehicle to effectively transmit the impact financial system. Central government II. indirect ownership as increase with regard to both . Semi-government authorities (local government authorities such as city corporation and municipalities) . government securities play a special role in the asset management of many financial institution  Interest rate is the GSM were not aligned well with rate in other financial market for many years. Issuers of government securities Government securities are issued by the following agencies I. State government III. the participation by individuals is much greater in the industrial securities market on the other hand.  The intervention of authorities in the GSM in India so far has been mainly for the supporting the market and for minimizing the cost of servicing public debt.

corporates. No tax deduction at sourced. primary dealers and non-resident Indian (NRIs) and even individuals. Redeemed at face value on maturity. regional rural banks. 3. foreign institutional investor. 4. with more than two third of the total.] Investors in government securities The government securities act of 2006 and the government securities regulation of 2007 do not specify the eligibility for investment. The eligibility criteria are specified in the relative government notification. The investment norms for insurance companies make them big participant\s in government securities market. 2. provident funds. Interest payment on a half-yearly basis on face value. Usually any person is eligibility to invest in government securities are commercial banks. . Government securities are issue at face value.IV. Features of government securities 1. The other investors are co-operative banks. 5. non- banking financing companies. Security can be held in demat form. Public sector undertaking. mutual funds.

and these as direct tools for its monetary policy. RBI also regulate the bank rate and repo rate. Rate of interest and tenor of the security is fixed at the time of insurance and is not subject to change. As monetary authority. 8. B. Maturity ranges from 91 days to 30 years.6. A. the RBI participants in the market through open-market operations as well as through liquidity adjustment facility (LAF) to regulate the money supply. In its role as a monetary. 1. Reserve bank of India: the reserve bank of India(RBI) regulators the government securities market. Monetary authority: The RBI operates as monetary authority to the government. RBI as regulators to the government securities market acts in two categories. Debt manager: the RBI as the debt manager issues the securities at the cheapest possible rate. unless otherwise stated. Government securities qualified as statutory liquidity requirement investment. while the securities of exchange board of India(SEBI) regulates the corporate debt instruments traded on exchanges. 7. 2. Hence. in the debt market. Debt manager. Regulators in government securities i. the RBI plays a dual role of influencing debt .

insurance companies. The government securities market is mostly an institutional investor market as standard lots of trade are around RS 1 core and 99 percent of all trades are alone through the subsidiary general leader (SLG) account. the RBI also supervises banks and development financial institutions. The secondary market trading is conducted as per the rules set by the SEBI. 1) Wholesale market segment: wholesale segment include institutional players such as banks. primary dealers and mutual funds. provident funds. ii. financial institutions. which is a kind of . 2) Middle market segment: middle segment comprises corporates. Further. 3) Retail market segment: retail segment in government securities market consists of less active investors such as individual and not institutional investors. Securities and exchange board of director: the SEBI regulates the debt instruments listed on the stock exchange.  Segments of government securities market: The investor is government securities market can be classified into three segments. non-banking finance companies and small co-operative banks with as average liquidity ranging from Rs 7 crore to Rs 25 crore. trusts. It issues guidelines for its issuance and also for their listing on stock exchanges. securities.

They can be held in book entry. Government securities are available in a wide range of maturities from maturities from 91 days to as long as 30 years to suit the requirement of investors.e. No default risk as the government securities carry sovereign guarantee for the payment of interest and repayment of principal. They have to open SGL-II accounts with a bank or a primary dealer provident they have a huge balance agree to trade on an ongoing basis. 6. Government securities provided return in the form of coupons (interest). Advantages of government securities: Following re the advantages of investing in government securities 1. 5. i. 4. depository held by the reserve bank. dematerialized / scrip less from. thus. Individual cannot open subsidiary general ledger accounts. 2. 3. Government securities offer maximum safety. Government securities can also be used as collateral ti borrow funds in the repo market. . obviating the need for safekeeping. Lower volatility as compared to corporate bond. 7. Government securities provided ample liquidity to the investors. It can be sold easily in the secondary market to meet cash requirement.

thereby mitigation the settlement risk. bonds. is a very simple. 8. They consist of government promissory notes. 182 days and 364 days. 2. The delivery versus ensure transfer of securities by the seller of securities simultaneously with transfer of fund from the buyer of the securities. namely. 1) Treasury bills: treasury bills to T-bills are short term money market instrument issued by the government of India. Government security price are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism. safe and efficient system of settlement. It is a promise by the government to pay a stated sum after .it is an IOU of the government. 9. Central government raised money mainly through the issue of the following two instruments. treasury bills and dated government securities. 91 days. Treasury bills are the short term money market instrument that mature in a year than that and are presently issued in three tenors. Treasury bills. stocks. Treasury bills are issued by government as means of financing their cash requirements. Instrument in government security market: Central government raised funds for both short and long-term requirements. 1. The settlement system for government securities. Government issues a variety of instruments with different tenors. which is based on delivery versus payment.Greater diversification opportunity. 10. Dated securities.

RBI issue a calendar of T-bill auctions showing in advance the dates of auction. treasury bills are an integral part of money market operations and an instrument of short-term borrowing by the government.Bills play an important role in local money market because most banks are required to hold them as part of their reserve requirements. Treasury bills are highly secured and liquid because of guarantee of repayment assured by the RBI which is always willing to purchase or discount them. Payments for the purchased are made on the following Friday. as the agent of the government. This is an important tool in the hands of the central bank for influencing the level of liquidity in the money markets through open market operations. The T-bills of . Treasury bills are government papers having no risk. The issue price of treasury bills is less than the face value. Reserve Bank of India. amount to be auctioned and payment dates. issue Treasury bills. Recently T-bills are also being issue frequently under the Market Stabilization Scheme (MSS) The reserve bank of India conducts auctions usually every Wednesday to issue T-bills. The 91 days treasury bills are auctioned on every Wednesday. In well-developed money markets. they are an eligible assets for computing Statutory Liquidity Ratio (SLR) which is to be maintained by banks under the banking regulation act. Commercial banks and primary dealers are the bidders in the T-Bills market. They are auctioned by reserve bank of India at regular intervals and issue at a discount through an auction process. T. These are good papers for commercial banks to invest their short-term funds. For banks.expiry of the stated period from the date of issue. Treasury bills are issued at a discount and redeemed at the face value of maturity.

thus. payable at fixed time periods (usually half yearly). These are sovereign instruments generally bearing a fixed interest rate with interest payable semi-annually and principle as per schedule. Types of auctions in government securities Prior to introduction of auctions as the method of issuance. dated securities of both. The Reserve bank releases an annual of T-bools issuances for a financial week in a last week of March of the previous year. these securities are known as Dated Securities. government of India and State Government. Just as in the case of treasury bills. the interest rates were administratively fixed by the government. are issued by the reserve bank through advertisements in major dailies. The tenor of dated securities can be from one year to 30 years. The Reserve Bank of India announces the issue of T-bills through a press release every week. The investors are. At present dated government securities with a maturity of 30 years are available in the market. 2) Dated securities or government bonds: Dated government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value. T-bills of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 day T-bolls are auctioned on the Wednesday prior to non- reporting Fridays. With . 182 days and 364 days tenure are auctioned on alternate Wednesdays. Mostly government securities are interest bearing dated securities issues by RBI on behalf of the government of India. given adequate time to plan for the purchase of government securities through such auctions. Since the dated of maturity is specified in the securities.

g. Bid which are below the cut-off price are rejected. rs 101 rs 100 rs 99. auction could be classified in to two: . 2. Both multiple and uniform price auction methods are used in the issuance of T-bills. Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. etc. 8. Successful bidders are those who have bid at or below the cut-off yield. Bidders quote in term of price per RS. Auction is a process of calling of bids with an objective of arriving at the market price. 1. Yield based auction: yield based auction is generally conducted when a new government securities is issue investor bid in yield terms up to two decimal places (for example. . Price based auction: A Price based auction is conducted when government of India re-issues securities issued earlier.per 100). 100 of face value of the securities (e. It is basically a price discovery mechanism. Depending Upon the method of allocation to successful bidders.the introduction of the auctions the rate of interest (coupon rate) gets fixed through a market based price discovery process.20 percent.) bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction.19 percent. There are two types of auction for government securities. Bids which higher than the cut- off yield are rejected. 98.rs 102. There are several variants of auctions. etc. The cut-off l yield is taken as the coupon rate for the security.

000 thereafter. Uniform price based or Dutch auction: Under this system.e. 3. an investor bids at a specific price/yield and is allowed securities if the price/yield quoted is within the cut-off price/yield. all bids equal to or above the cut-off price are accepted. This method is followed in the case of 364 days treasury bills and is valid only for competitive bidders. i. the bidder obtains the treasury bills at the cut-off price and not the price and not the price quoted by him. funds.e.000 and in multiples of Rs 10. Multiple bidding is also allowed. An investor may bid in an auction under either of the following categories:  Competitive bidding:In a competitive bidding. This method is applicable in the case of 91 days treasury bills only. unlike the multiple price based method. at the auction cut-off rete. Competitive bids are made by well informed investors such as banks. financial institution. However. i. Multiple price based or French auction: Under this method. an investor may put in several bids at various price/ yield levels. the successful bidders are required to [ay for the allotted quantity of securities at the respective price/yield at which they have bid. However. The minimum bid amount is Rs 10. primary dealers. all the successful bidders are required to pay for the allotted of securities at the same rate. 4. irrespective of the rate quoted by them. and insurance companies..  Non-competitive bidding: .

who may lack skill and knowledge to participant in the auction directly.  Private Placement of government securities: under special circumstance the government / reserve bank of India may decide to issue new securities. HUFs. provident funds and trusts. the amount accepted for non-competitive bids is over and above the noticed amount and three is no limit placed.competitive bidding in treasury bills is available only to state government and other select entities and is not available to the co-operative banks. The minimum amount and the maximum amount for a single bid is Rs 10.With a view to providing retail investor. In every auction of dated securities. eligible investors apply for a certain amount of securities in an auction without mentioning a specific price/yield. The RBI in turn may sell these securities at a later through their . the sachem of non-competitive bidding in dated securities was introduced in January 202. or to further issue an existing security to expand the outstanding quantum. RRBs.competitive bidding is open to individual. the amount accepted for non-competitive bids. Such bidders are allotted securities at the weighted average price? Yield of the auction. Under the scheme. a maximum of 5 percent of the notified amount is reserved for such non- competitive bids. In the case of auction for the treasury bills. a maximum. non. an opportunity to participate in the auction process. Non. However. companies.000 and 2 crore respectively in the case of an auction of dates securities. co-operative banks firms. In the case of auction for treasury bills. the government can privately place the security with RBI. corporate bodies. institutions.

its holding strength. They also investor in the debt market. Primary dealers underwrite a portion of the issue of government securities that is floated for a pre-determined amount. and the committed amount of bids and the volume of turnover in securities. They act as underwriters in the primary market for government securities. . Primary dealers: primary dealers (PDs) and satellite dealers (SDs) are Important intermediaries in the government securities markets appointed by RBI. Normally primary dealers are collectively offered to underwrite up to 100 percent of the notified amount in respect of all issue the amounts of which are notified. The underwriting commitment of each primary dealer is broadly decided on the basis of its size in terms of net owed funds. open market operation.  On-tap issue: under this scheme of arrangement after the initial primary placement of a security. Important intermarries in the government securities market: 1. The period for which the issue remains open may be sometimes time’s specific or volume specific. the issue remains open to further subscriptions. Sale of such securities may be extended to more than one day and sale may be closed at any time on any day. Private placement helps to maintain a stable interest rate environment. Primary dealers issue securities to meet their financial needs.

Several facilities are extended to primary dealers reckoning their special role in the government Debt market. Primary dealers can also raise funds through commercial papers and have access to finance from commercial banks as any other corporate borrower. they can undertake transaction only on the basis of giving and taken delivery of securities. including call money market. RBI provided liquidity support to the primary dealers through liquidity adjustment facility (LAF) against collateral or government securities and through repo Operations. 2011. 2006. the number of PDS in operation has increased to 21 as on July 6. Primary dealers are exempted from margin requirement. PDs were prohibited from setting up step-down subsidiaries. Primary dealers are also given favored access to the RBI’s open market operations. AS a consequence. PDs. PDs who intend to . were required to restructure the ownership pattern of those subsidiaries. Primary dealers are permitted to borrow and lend money in the money market. 8 were non-bank entities (stand-alone PDs). 0f these. In July. Hey have access to Subsidiary General Ledger (SGL) and current account facility with reserve bank of India. Since the inception of primary dealers in 1995. The PDs are allowed access to call money as well as repos/reverse repo markets and to trade in all money instruments. who already had step-down subsidiaries (in India and abroad). Primary dealers are actively involved in the distribution of government securities to all categories of investors by placing and picking –up orders on the exchanges.

However. enhance liquidity. Subsidiary general account: Subsidiary general account (SGL) is a facility provided by RBI to large banks and financial institutions. liquidity support through reserve repo. Similarly PDs who intend to take trading membership of the stock exchange should satisfy the criteria laid down by SEBI and the stock exchange. CSGL. current accounts. they were expected to further strengthen the infrastructure of distribution. Satellite dealers: Satellite dealers (SDs) are formed with object of retailing government securities. This facility maintains records of investment in government securities and Y-bills in . offer clearing /custodial services should take specific approval from SEBI in this regard. the satellite scheme was discounted since December 2002. The facilities extended by the primary dealers to the investor are primary dealers may open demat account with a Depository Participant of NSDL/CDSL in addition to their accounts with RBI and value free transfer of securities between SGL /CSGL and demat accounts would be allowed by PDO-Mumbai subject to operational guidelines issued by the Department of government and bank account separately. Some of these satellite dealers have graduated to primary dealers. 2. SDs are the second level of dealers system for trading and distribution of government securities. issue of CPs etc. They were given the facility of SGL. provide a retail outlet and encourage holding among the wider investor base.

These clients are referred to as constituent SGL accounts or SGL II accounts. In this account. Constituent subsidiary general ledger account: Constituent subsidiary ledger account (CSGL) is a demat from of holding government securities with RBI. SHCIL. which ensures movement of funds and securities simultaneously. When the investor hold government securities through an agent like PD or bank. These institutions can settle their trade for securities Held in SGL through a delivery versus payment mechanism. an entity can participant in the primary and secondary markets for government securities. RBI has permitted NSCCL. Therefore RBI has permuted such investor to hold their securities in physical from they are also permitted to open a constituent SGL account with any entity authorized by RBI for this purpose. NSDL. All investors in government securities are not permitted to have access to the SGL accounting system. the intermediary will use this account for propriety transitions. banks and primary dealers to offer constituent subsidiary General Ledger Account facility. only constitute transaction can take place and under no circumstanced. Through a constituent SGL account. CDSL. It also avails of the dematerialized holding and delivery versus payment settlement facilities. It is an account held by an intermediary in reserve bank of India on behalf of its constituents who have empowered the said intermediary to carry out various transactions on their behalf. the agent another Subsidiary General Ledger . electronic book entry form.

This second account is called the constituent Subsidiary General Ledger Account (CSGL). settlement period of t+0 or T+1 for all transitions undertaken directly between SGL participants and unto T+2days for transactions routed through NSE brokers. OCTEI and BSC brokers. The most significant developments in the government securities market are given below. Account (SGL) maintained in the books of RBI for keeping the government securities owned by its customers. Several measures were also taken for strengthening and modernizing the legislative framework. transactions to reduced settlement risks.  Development of new debt instruments such a floating rat4e bonds. Recent development in the government securities market: The government securities market witnessed significant transformation in the 90s only when government started borrowing at market rates. . The reforms in the secondary market include delivery versus payment system for settling scrip less SGL. zero coupon bonds etc. In order to widen the investor base. capital index bonds. several institutional and operational reforms were introduced in the government securities market.  Development of new market participant by permitting fo institutional investors to invest the government securities and allowing them to hedge their foreign currency risk in the forward market. Changes have been incorporated both in the primary and secondary market.  Establishment of primary auction market for government securities and other securities which are issued through the action system at market linked rates.

These reforms have resulted in a marked change in the nature of instruments offer. While the primary market for government securities witnessed heavy activity due to increased borrowing needs of the .  Abolition of tax deduction at source on government securities. which maintains the subsidiary General Ledger in its Public Debt office.  Introduction of 182-days treasury bills on auction basis.  Corporation of India was set up as agency for central clearing.  Retail investors are permitted to submit non-competitive bids at primary auction through any bank or primary dealers.  The government securities act.  Increase in information dissemination on market borrowings and secondary market transactions.  A new system of keeping the record of ownership of government securities by RBI.  Setting up of primary dealers for government securities. 2006 has provide enhanced powers to the reserve Bank in the matter of consolidation and management of government securities.  Negotiated dealing system (NDS) have been set up and become operational it facilitates screen based negotiated dealing for secondary market transactions in government securities. a wider investor base and a progressive movement towards market determined interest rates. which widens the customer base.

government. only a smaller part of the outstanding stock finds its way into the secondary market. .