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 governments
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
 Conventional gilt is denoted by its coupon rate and maturity (e.g. 4%
Treasury Gilt 2016). The coupon rate usually reflects the market
interest rate at the time of the first issue of the gilt.

Conventional gilts also have a specific maturity date. In the case of

4% Treasury Gilt 2016 the principal is due to be repaid to investors on
7 September 2016. In recent years the Government has concentrated
issuance of conventional gilts around the 5-, 10-, 30-, 40- and 50- year
maturity areas.

These are the simplest form of UK government bond and make up the
largest share of UK government debt (30% as of March 2008). 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, at which point the holder receives his final coupon payment
and the return of the principal.

Index-linked gilts

These account for around a quarter of UK government debt within the gilt
market. The UK was one of the first developed economies to issue index-
linked bonds in 1981. Initially only tax-exempt pension funds were
allowed to hold these bonds. The UK has issued around 20 index-linked
bonds since then. Like conventional gilts, index-linked gilts pay coupons
which are initially set in line with market interest rates. (Recently, 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 +0.125
%.) However, their semi-annual coupons and principal payment are
adjusted in line with movements in the General Index of Retail Prices
(RPI).

In September 2005, the UK Government issued the longest ever index-

linked government bond, 1% Index-linked Treasury Gilt 2055, maturing
on 22 November 2055. Further ultra-long index-linked bonds, maturing in
2062 and 2068, were issued in October 2011 and September 2013
respectively.

Indexation lag

As with all index-linked bonds, there is a time lag between the collection
of prices data, the publication of the inflation index and the indexation of
the bond. From their introduction in 1981, 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). This was so that the amount of the
next coupon was known at the start of each six-month interest accrual
period. 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, and
the majority of index-linked gilts now in issue are structured on that basis.

Double-dated gilts

In the past, the UK government issued many double-dated gilts, which

had a range of maturity dates at the option of the government. 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, and this was redeemed on 12 December 2013.
Undated gilts

There exist eight undated gilts, which make up a very small proportion of
the UK government's debt. They have no fixed maturity date. These gilts
are very old: some, such as Consoles, date from the 18th century. The
largest, War Loan, was issued in the early 20th century. The redemption
of these bonds is at the discretion of the UK government, but because of
their age, they all have low coupons, and for a long time there has
therefore been little incentive for the government to redeem them.
However in early 2009, and again in late 2011, and at various times since
then, the yield on these gilts, and in some cases also the coupon, has been
higher than the redemption yield on long-dated redeemable gilts, which
implies that the market is pricing in the chance that the government might
redeem these gilts at some point. The question of the redemption of War
Loan has now been publicly raised. Because the outstanding amounts are
relatively very small, there is a very limited market in most of these gilts.
In May 2012 the Debt Management Office issued a consultation
document which raised the possibility of issuing new undated gilts, but
there was little support for this proposal.

Gilt strips

Certain gilts can be "stripped" into their individual cash flows, namely
Interest (the periodic coupon payments) and Principal (the ultimate
repayment of the investment) which can be traded separately as zero-
coupon gilts, or gilt strips. For example ten year gilt can be stripped to
make 21 separate securities: 20 strips based on the coupons, which are
entitled to just one of the half-yearly interest payments; and one strip
entitled to the redemption payment at the end of the ten years. The title
Separately Traded and Registered Interest and Principal Securities was
created as a 'reverse acronym' for strips.

The UK gilt strip market started in December 1997.

Gilts can be reconstituted from all of the individual strips. By the end of
2001, there were 11 strippable gilts in issue in the UK totalling 1,800
million.

Maturity of gilts

The maturity of gilts is defined by the DMO is as follows: short 07

years, medium 715 years and long 15 years+.

Gilts with a term to maturity of less than three years are also referred to as
Ultra short ", 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 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.
 Fill the category of 100% debt funds have been permitted from 30
January, 1997 to invest in central and state government securities
in both primary and secondary market.

NATURE AND ORGANISATION OF GOVERNMENT SECURITIES

MARKET

GOVERNMENT Securities-General Features

The supply of government securities stem from the issue of government
marketable debt. These securities are issue by the central government,
state government, and semi-government authorities which include local
government authorities like city corporations and municipalities,
autonomous institution like port trusts, improvement trust, state electricity
boards, metropolitan authorities, public sector corporations, and other
government agencies such as IDBI, IFCI, SFs, NABARD, LDBs, housing
boards, and the like. The central government issue bonds, treasury bills,
and special rupee securities in payment of Indias subscription to
IMF.IBRD, Asian Development Bank, international floating debt of the
government. They are non-negotiable and non-interest bearing claims.
The market for Treasury bill has already been discussed. The state
government and semi-government agencies issue bond and debenture.
Certain government agencies like IDBI are established to implement the
governments various lending operations, and they issue bonds to finance
their activities.

As a unique and important financial instrument:

Government securities are unique and important financial instrument in
financial market of any country. Unlike other instrument it is also held by
the central bank of the country, 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. Again, unlike other instruments, its issue is
helpful in implementing the fiscal policy of the government. Financial
instrument like commercial banks are required to maintain their
secondary reserve requirement in the form of these securities. It is also
easier for the holders to obtain loans against the collateral of these
securities from the RBI and other institution. As the RBI can issue
currency notes against the backing, apart from gold and foreign exchange,
of central government bonds, they constitute the ultimate source of
liquidity in the economy.as government security is a claim on the
government bonds, they constitute the ultimate source of liquidity in the
economy. As a government security is a claim on the government. It is an
absolutely secure financial instrument which guarantees the certainty of
both income and capital.

Denomination

The government securities are normally issue in the denomination of Rs

100 or Rs 1,000. The face value which used to be Rs 1000 till the middle
of the 1980s was raised to Rs 1,000 in the recent past. The rate of interest
on these securities is relatively lower because of there being liquid and
safe. In addition, till was deliberately maintained at a low level by the
government in order to minimize the cost of servicing public debt. Yet,
the market for this securities has expanded every because of the
regulation, statutory or otherwise, under which financial institution are
required to invest a certain proportion of their investable funds in these
securities. At the rate of interest that can be earn on 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.

Interest

The interest on government securities is payable half-yearly. Interest in

respect of central and state government securities, alone with the income
in the form of interest or dividend on other approved investment, is
exempt from income tax subject to a limit. In The value of investment in
these securities and other investment specified in the wealth tax act, 1957
is exempt from wealth tax up to a limit. As individual do not normally
invest in these securities, saving in tax liability does not seem to be an
important motivation behind investment in them. Unlike In the US,
interest on the securities of local authorities is not exempt from tax in
India.

Liquidity

Although it is true that government securities are liquid and safe,

securities and different authorities differ in respect of the extent to which
they possess these attributes. The marketability of security of state
government and semi-governments is relatively restricted; therefore, they
are less liquid than central government securities. There is no active
market, particularly in semi-government securities. There is no need for
underwriting or guaranteeing the sale of central government and semi-
government securities. The fact that the RBI is always ready to buy the
unsubscribed part of any loan issue amounts to underwriting of these
issues.

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. While these days, bearer bonds are not usually being issue in India,
stock certificates are not very popular with investor. Consequently, most
government securities are currently in the form of promissory notes.
Promissory notes of any converted into stock certificates of any other
loan vice versa.

Mode of issue

Government securities are issue through the PDO of the RBI. The method
of selling them differs from that of selling TBs. Instead of selling them
through auction, the issues are notified a few days before they become
open for subscription and they are kept open for subscription for 2/3 days,
but, they may be closed for subscription earlier if the subscriptions
approximate the amount of issue. As government securities are deemed to
be listed on stock exchanges, there are no separate listing requirements
for them. As primary issue are noticed to the public through the
government notification and the press communiqu, there is no issue of
prospectus or vetting of prospectuses their case; the SEBI normally
routinely grants no objection to the primary issue of these securities.
The budgeted amount of issues in a given year is raised in a number of
tranches in that year. This is obviously to avoid flooding of the market
with security at given time. However, as the issue is mostly bought by
institutional investor, there can be a small number of large issues. After
the announcement of new issue, the RBI suspends the sale of existing
loans till the closure of subscriptions to new loans. The government
reserves the right to retain subscription up to a specified percentage, say
10 per cent in excess of notified amounts.

Role of broker and dealers;

The government securities market in everywhere, including India, a

telephone market in essence, an over-the-counter (OTC) market. Where
there is a one-to-one correspondence between the buyer and seller. The
business in the market by any party is done as a principle and not an
agent, and without using the service of brokers. 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. The RBI does have its approved brokers and the
major part of turnover in the market takes place through these brokers.
But the scope for participation in the market by other broker has been
limited. The gilt edged market is an OTC market and each sale and
purchase has to be separately negotiated.

Purpose of securities issue

In any given year, both the central and state government needs to raise
funds through public borrowings. The normal practice has been to sell
their securities separately but in 1954-55 and 1963-64 only consolidated
loans were issue. The method of issuing consolidated loans has, it was
found, certain important disadvantages. (1) It is difficult to decide the
share of various states in a consolidated loan. (2) The centralized method
does not offer scope for tapping local resources.

The issue of securities may be undertaken for

a) Refunding, i.e., 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. 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. The objective of conversation and reissue of loans is to
lengthen the maturity structure of government debt, and to reduce
the volume of cash repayment loans. 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. They are
grooming to the market and switches in the market. 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- edged securities market,
switches are purchase of one security against the sale of another
security as distinct from outright purchase or sale of securities.

Role of RBI
The RBI occupies a pivotal opposition in the market. It is continuously in
the market selling government securities out of the surplus funds of IDBI,
EXIM, and NABARD under special arrangement. Switch operations are
useful to bank and financial institution to improve their yield on their
investment in government securities. Sometimes, there are triangular
switch transaction in which one investor sell and purchase in matched by
the purchase or sale transaction of another investment, the RBI being the
middle party. The RBI fixed and annual quota, based o0n the size of
bank, 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. It
maintains separate lists of securities for purchase and sale transaction.
Difference scrips are included in the two lists having regard to the stock
of securities and date of their maturities. One of the unique features of
trading in this market is voucher trading or voucher benefit. The
banks are financial institution whose earnings are taxed, purchased the
securities around the interest due date and unload them in the market after
availing themselves of the voucher for the full year.

Major securities market:

The government securities market is confined almost entirely to Mumbai,

which account for more than 90 per cent of secondary marke3t
transaction in these securities.

Repos market in government securities:

Apart from the usual market, there is what is known as repos market in
government securities. Repos are essentially collateralised loans, they
reduce counterparty risk, and, therefore, interest rate on them is usually
low, say, below the call rate. In repos, the purchaser of the repos acquires
title to securities for the term of the agreement, and hence, 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.

Repos are as short term as call money or overnight money. Of course,

maturity period method from repo to repo. The standard maturities are 1
to 14 days. One three weeks, or one to six months. Multi day repos are
called fixed- term repos. Repo transactions are arranged over the counter
by telephone either contact or through a group of market specialists. As
indicated earlier, they can used in respect of CPs, CDs, TBs, government
dated securities, and so on.

Primary and satellite dealers:

On line with the similar institutions in the US, UK, Canada, France and
Australia, the system of Primary Dealers (PDs) was created in India in
1994and it has become operational since then,

The objective of PDs are :

(a) To strengthen the infrastructure in the GSM in order to make it vibrant

liquid, and broad-based
(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, enhance liquidity and turnover and encourage
voluntary holding of government securities among the wider investor
base.
(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.
(f) To provide active secondary market by giving two-way quotes
(g) To provide signals to the central bank for market intervention.

Importance of GSM

The GSM has a three-fold importance.

1. 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. The
board, well functioning, well-functioning, well-developed GSM
provides flexibility to the authorities in their task of debt management
2. GSM helps pricing of various debt instruments through creation of a
benchmark, and enables a proper evaluation of risk.
3. It facilities the development of indirect instruments of monetary
policy.

Affect or impact of government securities

1. it may adversely affect private investment by directly competing
for the limited resources. An increased in the supply of government
securities in the face of high budget deficit would drive down their
prices, lending to a substitution of private bonds with government
securities, particularly, by investors whose demand is driven by
trading and portfolio management securities requirements. This
phenomenon is often described as crowding out.
2. 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, including
laws , institution, products, service, repo and derivatives
markets.
(b) By paying a role as an information benchmark.
(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.
(d) It acts as a integration of various segment of the financial
market.
(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
The government securities market which is often the
predominant segment of the overall debt market in many
economic, plays a crucial role in the monetary policy
transmission mechanism. Thus, irrespective of the whether the
central bank act as manager of public debt or not, 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 absolute size of government
borrowings, especially when the financial market are under
development, 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,
as the public debt/GDP ratio declines and government securities
market developed with introduction of new instruments(like
index gilts), new issuing techniques (such as auctions) and
improve ,market infrastructure, practical concerns about debt
management impinging on monetary control get reduced.
Summary
In terms of size, the GSM is much bigger than the
industrial securities market. Due to the going
requirement of fund by the government for
development and non-development needs, this
market has been rapidly expanding.
The ownership pattern of government securities also
differs from that of industrial securities. Although
 indirect ownership as increase with regard to both ,
the participation by individuals is much greater in
the industrial securities market on the other hand,
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, but the
gap between rates in this market has been
significantly narrowed during the 1980s and 1990s.
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.
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.

Issuers of government securities

Government securities are issued by the following agencies

I. Central government
II. State government
III. Semi-government authorities (local government authorities such
as city corporation and municipalities)
IV. Public sector undertaking.]

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.

Usually any person is eligibility to invest in government securities

are commercial banks, with more than two third of the total. The
investment norms for insurance companies make them big
participant\s in government securities market. The other investors
are co-operative banks, regional rural banks, corporates, non-
banking financing companies, provident funds, mutual funds,
foreign institutional investor, primary dealers and non-resident
Indian (NRIs) and even individuals.

Features of government securities

1. Government securities are issue at face value.
2. Redeemed at face value on maturity.
3. Interest payment on a half-yearly basis on face value.

4. No tax deduction at sourced.

5. Security can be held in demat form.
6. Rate of interest and tenor of the security is fixed at the time
of insurance and is not subject to change.
7. Maturity ranges from 91 days to 30 years.
8. Government securities qualified as statutory liquidity
requirement investment, unless otherwise stated.

Regulators in government securities

i. Reserve bank of India: the reserve bank of India(RBI)

regulators the government securities market, while the
securities of exchange board of India(SEBI) regulates the
corporate debt instruments traded on exchanges. RBI as
regulators to the government securities market acts in
two categories.
1. As monetary authority.
2. Debt manager.
A. Monetary authority: The RBI operates as monetary
authority to the government. In its role as a monetary, the
RBI participants in the market through open-market
operations as well as through liquidity adjustment facility
(LAF) to regulate the money supply. RBI also regulate the
bank rate and repo rate, and these as direct tools for its
monetary policy.
B. Debt manager: the RBI as the debt manager issues the
securities at the cheapest possible rate. Hence, in the debt
market, the RBI plays a dual role of influencing debt
 securities. Further, the RBI also supervises banks and
development financial institutions.
ii. Securities and exchange board of director: the
SEBI regulates the debt instruments listed on the stock
exchange. It issues guidelines for its issuance and also
for their listing on stock exchanges. The secondary
market trading is conducted as per the rules set by the
SEBI.
Segments of government securities market:
The investor is government securities market can be classified
into three segments.
1) Wholesale market segment: wholesale segment
include institutional players such as banks, financial
institutions, insurance companies, primary dealers and
mutual funds.
2) Middle market segment: middle segment comprises
corporates, provident funds, trusts, non-banking finance
companies and small co-operative banks with as average
liquidity ranging from Rs 7 crore to Rs 25 crore.
3) Retail market segment: retail segment in government
securities market consists of less active investors such as
individual and not institutional investors. 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, which is a kind of
 depository held by the reserve bank. Individual cannot
open subsidiary general ledger accounts. 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.
Advantages of government securities:
Following re the advantages of investing in government
securities
1. Lower volatility as compared to corporate bond.
2. Government securities offer maximum safety. No default
risk as the government securities carry sovereign
guarantee for the payment of interest and repayment of
principal.
3. 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.
4. They can be held in book entry, i.e. dematerialized / scrip
less from, thus, obviating the need for safekeeping.
5. Government securities provided return in the form of
coupons (interest).
6. Government securities can also be used as collateral ti
borrow funds in the repo market.
7. Government securities provided ample liquidity to the
investors. It can be sold easily in the secondary market to
meet cash requirement.
 8. Government security price are readily available due to a
liquid and active secondary market and a transparent
price dissemination mechanism.
9. The settlement system for government securities, which
is based on delivery versus payment, is a very simple,
safe and efficient system of settlement. The delivery
versus ensure transfer of securities by the seller of
securities simultaneously with transfer of fund from the
buyer of the securities, thereby mitigation the settlement
risk.
10.Greater diversification opportunity.

Instrument in government security market:

Central government raised funds for both short and long-term requirements.
Government issues a variety of instruments with different tenors. They consist of
government promissory notes, bonds, stocks, treasury bills and dated government
securities. Central government raised money mainly through the issue of the
following two instruments.

1. Treasury bills.
2. Dated securities.
1) Treasury bills: treasury bills to T-bills are short term money market instrument
issued by the government of India. Treasury bills are the short term money
market instrument that mature in a year than that and are presently issued in
three tenors, namely, 91 days, 182 days and 364 days. Treasury bills are issued
by government as means of financing their cash requirements.it is an IOU of
the government. It is a promise by the government to pay a stated sum after
expiry of the stated period from the date of issue. Treasury bills are
government papers having no risk. These are good papers for commercial
banks to invest their short-term funds. 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.

In well-developed money markets, treasury bills are an integral part of money

market operations and an instrument of short-term borrowing by 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. T- Bills play an important role in local money market because
most banks are required to hold them as part of their reserve requirements.
For banks, they are an eligible assets for computing Statutory Liquidity Ratio
(SLR) which is to be maintained by banks under the banking regulation act.

The issue price of treasury bills is less than the face value. Treasury bills are
issued at a discount and redeemed at the face value of maturity. Reserve
Bank of India, as the agent of the government, issue Treasury bills. They are
auctioned by reserve bank of India at regular intervals and issue at a discount
through an auction process. RBI issue a calendar of T-bill auctions showing
in advance the dates of auction, amount to be auctioned and payment dates.
Commercial banks and primary dealers are the bidders in the T-Bills market.
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. Payments for the purchased are made on the following Friday.
The 91 days treasury bills are auctioned on every Wednesday. The T-bills of
 182 days and 364 days tenure are auctioned on alternate Wednesdays. 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. The Reserve bank releases an annual of T-bools issuances
for a financial week in a last week of March of the previous year. The
Reserve Bank of India announces the issue of T-bills through a press release
every week.

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, payable at fixed
time periods (usually half yearly). The tenor of dated securities can be from
one year to 30 years. At present dated government securities with a maturity of
30 years are available in the market. These are sovereign instruments generally
bearing a fixed interest rate with interest payable semi-annually and principle
as per schedule. Mostly government securities are interest bearing dated
securities issues by RBI on behalf of the government of India. Since the dated
of maturity is specified in the securities, these securities are known as Dated
Securities.
Just as in the case of treasury bills, dated securities of both, government of
India and State Government, are issued by the reserve bank through
advertisements in major dailies. The investors are, thus, given adequate time to
plan for the purchase of government securities through such auctions.

Types of auctions in government securities

Prior to introduction of auctions as the method of issuance, the
interest rates were administratively fixed by the government. With
the introduction of the auctions the rate of interest (coupon rate)
gets fixed through a market based price discovery process.
Auction is a process of calling of bids with an objective of
arriving at the market price. It is basically a price discovery
mechanism. There are several variants of auctions. There are two
types of auction for government securities.
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, 98.19 percent, 8.20 percent, etc.) bids are
arranged in ascending order and the cut-off yield is arrived
at the yield corresponding to the notified amount of the
auction. The cut-off l yield is taken as the coupon rate for
the security. Successful bidders are those who have bid at
or below the cut-off yield. Bids which higher than the cut-
off yield are rejected. Both multiple and uniform price
auction methods are used in the issuance of T-bills.
2. Price based auction: A Price based auction is conducted
when government of India re-issues securities issued
earlier. Bidders quote in term of price per RS. 100 of face
value of the securities (e.g.rs 102, rs 101 rs 100 rs 99, etc.
,per 100). Bids are arranged in descending order and the
successful bidders are those who have bid at or above the
cut-off price. Bid which are below the cut-off price are
rejected. Depending Upon the method of allocation to
successful bidders, auction could be classified in to two:
 3. Multiple price based or French auction:
Under this method, all bids equal to or above the cut-off price are
accepted. However, the successful bidders are required to [ay for
the allotted quantity of securities at the respective price/yield at
which they have bid. This method is followed in the case of 364
days treasury bills and is valid only for competitive bidders.

4. Uniform price based or Dutch auction: Under this system, all the
successful bidders are required to pay for the allotted of securities at the same rate,
i.e., at the auction cut-off rete, irrespective of the rate quoted by them. However,
unlike the multiple price based method, the bidder obtains the treasury bills at the
cut-off price and not the price and not the price quoted by him. This method is
applicable in the case of 91 days treasury bills only. An investor may bid in an
auction under either of the following categories:

Competitive bidding:In a competitive bidding, an

investor bids at a specific price/yield and is allowed
securities if the price/yield quoted is within the cut-off
price/yield. Competitive bids are made by well informed
investors such as banks, financial institution, primary
dealers, funds, and insurance companies. The minimum
bid amount is Rs 10,000 and in multiples of Rs 10,000
thereafter. Multiple bidding is also allowed, i.e. an
investor may put in several bids at various price/ yield
levels.
Non-competitive bidding:
With a view to providing retail investor, who may lack skill and knowledge to
participant in the auction directly, an opportunity to participate in the auction
process, the sachem of non-competitive bidding in dated securities was
introduced in January 202. Non- competitive bidding is open to individual,
HUFs, RRBs, co-operative banks firms, companies, corporate bodies,
institutions, provident funds and trusts. Under the scheme, eligible investors
apply for a certain amount of securities in an auction without mentioning a
specific price/yield. Such bidders are allotted securities at the weighted average
price? Yield of the auction.
In every auction of dated securities, a maximum, a maximum of
5 percent of the notified amount is reserved for such non-
competitive bids. In the case of auction for treasury bills, the
amount accepted for non-competitive bids. In the case of auction
for the treasury bills, the amount accepted for non-competitive
bids is over and above the noticed amount and three is no limit
placed. However, non- 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 10,000 and 2 crore
respectively in the case of an auction of dates securities.

Private Placement of government securities: under

special circumstance the government / reserve bank of India
may decide to issue new securities, or to further issue an
existing security to expand the outstanding quantum, the
government can privately place the security with RBI. The
RBI in turn may sell these securities at a later through their
 open market operation. Private placement helps to maintain
a stable interest rate environment.
On-tap issue: under this scheme of arrangement after the
initial primary placement of a security, the issue remains
open to further subscriptions. The period for which the
issue remains open may be sometimes times specific or
volume specific. Sale of such securities may be extended to
more than one day and sale may be closed at any time on
any day.

Important intermarries in the government securities market:

1. Primary dealers: primary dealers (PDs) and satellite dealers
(SDs) are
Important intermediaries in the government securities markets
appointed by RBI. Primary dealers issue securities to meet their
financial needs. They also investor in the debt market. They act as
underwriters in the primary market for government securities.
Primary dealers underwrite a portion of the issue of government
securities that is floated for a pre-determined amount. 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, its holding strength, and the committed amount
of bids and the volume of turnover in securities.
 Several facilities are extended to primary dealers reckoning
their special role in the government Debt market. The PDs are
allowed access to call money as well as repos/reverse repo
markets and to trade in all money instruments. Primary dealers are
also given favored access to the RBIs open market operations.
RBI provided liquidity support to the primary dealers through
liquidity adjustment facility (LAF) against collateral or
government securities and through repo Operations. Primary
dealers are permitted to borrow and lend money in the money
market, including call money market. Primary dealers can also
raise funds through commercial papers and have access to finance
from commercial banks as any other corporate borrower. 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 number of
PDS in operation has increased to 21 as on July 6, 2011. 0f these,
8 were non-bank entities (stand-alone PDs). In July, 2006, PDs
were prohibited from setting up step-down subsidiaries. PDs,
who already had step-down subsidiaries (in India and abroad),
were required to restructure the ownership pattern of those
subsidiaries.
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. Primary dealers are
exempted from margin requirement.
AS a consequence, they can undertake transaction only on the
basis of giving and taken delivery of securities. PDs who intend to
 offer clearing /custodial services should take specific approval
from SEBI in this regard. Similarly PDs who intend to take
trading membership of the stock exchange should satisfy the
criteria laid down by SEBI and the stock exchange.

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.

2. Satellite dealers:
Satellite dealers (SDs) are formed with object of retailing
government securities. SDs are the second level of dealers system
for trading and distribution of government securities, they were
expected to further strengthen the infrastructure of distribution,
enhance liquidity, provide a retail outlet and encourage holding
among the wider investor base. They were given the facility of
SGL, CSGL, current accounts, liquidity support through reserve
repo, issue of CPs etc. However, the satellite scheme was
discounted since December 2002. Some of these satellite dealers
have graduated to primary dealers.
Subsidiary general account:
Subsidiary general account (SGL) is a facility provided by RBI to
large banks and financial institutions. This facility maintains
records of investment in government securities and Y-bills in
 electronic book entry form. These institutions can settle their trade
for securities Held in SGL through a delivery versus payment
mechanism, which ensures movement of funds and securities
simultaneously. All investors in government securities are not
permitted to have access to the SGL accounting system. 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. These clients
are referred to as constituent SGL accounts or SGL II accounts.
Through a constituent SGL account, an entity can participant in
the primary and secondary markets for government securities. It
also avails of the dematerialized holding and delivery versus
payment settlement facilities. RBI has permitted NSCCL, NSDL,
CDSL, SHCIL, banks and primary dealers to offer constituent
subsidiary General Ledger Account facility.

Constituent subsidiary general ledger account:

Constituent subsidiary ledger account (CSGL) is a demat from of
holding government securities with RBI. 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. In this account, only
constitute transaction can take place and under no circumstanced,
the intermediary will use this account for propriety transitions.
When the investor hold government securities through an agent
like PD or bank, the agent another Subsidiary General Ledger
 Account (SGL) maintained in the books of RBI for keeping the
government securities owned by its customers. This second
account is called the constituent Subsidiary General Ledger
Account (CSGL).

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. In order to widen the
investor base, several institutional and operational reforms were introduced in the
government securities market. Several measures were also taken for strengthening
and modernizing the legislative framework. Changes have been incorporated both
in the primary and secondary market. The reforms in the secondary market include
delivery versus payment system for settling scrip less SGL, transactions to reduced
settlement risks, 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.

Development of new debt instruments such a floating

rat4e bonds, capital index bonds, zero coupon bonds etc.
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.
Establishment of primary auction market for government
securities and other securities which are issued through
the action system at market linked rates.
 A new system of keeping the record of ownership of
government securities by RBI, which maintains the
subsidiary General Ledger in its Public Debt office.
Setting up of primary dealers for government securities.
Corporation of India was set up as agency for central
clearing.
Introduction of 182-days treasury bills on auction basis.
Retail investors are permitted to submit non-competitive
bids at primary auction through any bank or primary
dealers, which widens the customer base.
Abolition of tax deduction at source on government
securities.
Increase in information dissemination on market
borrowings and secondary market transactions.
Negotiated dealing system (NDS) have been set up and
become operational it facilitates screen based negotiated
dealing for secondary market transactions in government
securities.
The government securities act, 2006 has provide
enhanced powers to the reserve Bank in the matter of
consolidation and management of government securities.
These reforms have resulted in a marked change in the
nature of instruments offer, a wider investor base and a
progressive movement towards market determined interest rates.
While the primary market for government securities witnessed
heavy activity due to increased borrowing needs of the
government, only a smaller part of the outstanding stock finds its
way into the secondary market.