Introduction to G-Sec or Government Securities in India

In India, when we talk about investment most of the people don't know they have G-Sec as an option. When the word investment comes in mind we think of

• Fix Deposit
• Gold
• Real Estate
• Stock Market
• Mutual Funds & etc.

Most of us don't know what are G-Sec bonds and how to buy G-Sec in India. Many of us might be interested in knowing what is G Sec market. Lets understand in brief what is G Sec bond, what is G Sec rates in India and what is G-Sec investment exactly.

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities.
 

A 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.Types of G-Secs:

• 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. 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/-. The return to the investors is the difference between the maturity value or the face value (that is ₹100) and the issue price

• Cash Management Bills (CMBs): 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 are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.The nomenclature of a typical dated fixed coupon G-Sec contains the following features – coupon, name of the issuer, maturity year. For example, 7.49% GS 2017 would mean:
  Coupon : 7.49% paid on face value
  Name of Issuer : Government of India
  Date of Issue : April 16, 2007
  Maturity : April 16, 2017
  Coupon Payment Dates : Half-yearly (October 16 and April 16) every year
  Minimum Amount of issue/ sale : ₹10,000This is an example, how can you invest in these; as advised by SEBI, the stock exchanges (like NSE, BSE, MCX) have been asked to create dedicated debt segment in their trading platforms

• 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. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. 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). State Governments have also issued special securities under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for Operational and Financial Turnaround of Power Distribution Companies (DISCOMs)” notified by Ministry of Power vide Office Memorandum (No 06/02/2015-NEF/FRP) dated November 20, 2015.
  

Why should one invest in G-Secs?

• Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
• They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping.
• G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
• G-Secs can be sold easily in the secondary market to meet cash requirements.
• Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds, UDAY bonds etc) provide attractive yields.
• The settlement system for trading in G-Secs, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
• G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.
• Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to hold G-Secs

Where and Whom to buy from:

The securities can be bought / sold in the secondary market either through (i) Negotiated Dealing System-Order Matching (NDS-OM) (anonymous online trading) or through (ii) Over the Counter (OTC) and reported on NDS-OM or (iii) NDS-OM-Web. 

In terms of transparent pricing, the NDS-OM is the safest because it is a live and anonymous platform where the trades are disseminated as they are struck and where counter parties to the trades are not revealed. In case, the trades are conducted on the telephone market, it would be safe to trade directly with a bank or a PD. In case one uses a broker, care must be exercised to ensure that the broker is registered on NSE or BSE or OTC Exchange of India. Normally, the active debt market brokers may not be interested in deal sizes which are smaller than the market lot (usually ₹ 5 cr). So it is better to deal directly with bank / PD or on NDS-OM, which also has a screen for odd-lots (i.e. less than ₹ 5 cr). Wherever a broker is used, the settlement should not happen through the broker. Trades should not be directly executed with any counterparties other than a bank, PD or a financial institution, to minimize the risk of getting adverse prices.