Government Securities II

MERGERS & ACQUISITIONS

08 SEPTEMBER 2015

Government Securities Act, 1996

Overarching legislation permitting issue of government

securities
Government security

A security created and issued by the Government for the purpose of

raising a public loan or for any other purpose as may be notified by the
Government in the Official Gazette

Bond ledger account

An account with the Bank or an agent in which the Government

securities are held in dematerialised form at the credit of the holder

Subsidiary general ledger account

The account in which Government securities required to be held by

banks are parked. Excess securities held may be traded out of this
account. This account is held with the RBI

Government Securities Act, 1996

Constituent subsidiary general ledger account

A segregated subsidiary general ledger account in which

Government securities are held by banks, primary dealers etc.
on behalf of their customers (who are referred to as gilt
account holders)
Interest and maturity proceeds are collected by the primary
dealer and paid out to the gilt account holder
Reduces administrative burdens for the gilt account holder
Government securities are held in the CSGL account in demat
form, and only converted into physical form at the request of
the gilt account holder

Government Securities Act, 1996

Limitation of liability

Where no shorter period of limitation is fixed by any law for

the time being in force, the liability of the Government in
respect of any interest payment due on a Government security
shall terminate on the expiry of six years from the date on
which the amount due by way of interest became payable
Provided that the Government may allow a bona fide claim for
payment of interest after the expiry of the period of six years in
those cases where the holders of securities could not prefer
their claims within the said period of six years

Government Securities Act, 1996

With respect to Government securities, permits:

Transfer
Nomination
Issue of duplicate securities
the RBI to determine title to a Government security in case of
dispute
Creation of pledge over Government securities

Shut period
Shut period means the period for which the securities

can not be delivered. During the period under shut, no

settlements/ delivery of the security concerned will be
allowed.
The main purpose of having a shut period is to facilitate
servicing of the securities viz., finalizing the payment of
coupon and redemption proceeds and to avoid any
change in ownership of securities during this process.
Currently the shut period for the securities held in SGL
accounts is one day.

Whats the Risk?

Government securities are generally referred to as risk

free instruments as sovereigns are not expected to

default on their payments.
However, there are still a few risks involved.
Market risk

Market risk arises out of adverse movement of prices of the

securities that are held by an investor due to changes in interest
rates. This will result in realizing a loss if the securities are sold
at the adverse prices. Small investors, to some extent, can
mitigate market risk by holding the bonds till maturity so that
they can realize the yield at which the securities were actually
bought.

Whats the Risk?

Liquidity risk

Liquidity risk refers to the inability of an investor to liquidate

(sell) his holdings due to non availability of buyers for the
security, i.e., no trading activity in that particular security.
Due to illiquidity, the investor may need to sell at adverse
prices in case of urgent funds requirement. However, in such
cases, eligible investors can participate in market repo and
borrow the money against the collateral of the securities.

Whats the Risk?

Countries have at times escaped the real burden of

some of their debt through inflation. This is not

"default" in the usual sense because the debt is
honored, albeit with currency of lesser real value.
Sometimes governments devalue their currency. This
can be done by printing more money to apply toward
their own debts.
Harder to quantify than an interest or capital default,
this often is defined as an extraneous or procedural
default (breach) of terms of the contracts or other
instruments.

Whats the Risk?

Today a government which defaults may be widely

excluded from further credit, some of its overseas

assets may be seized, and it may face political pressure
from its own domestic bondholders to pay back its
debt.
Therefore, governments rarely default on the entire
value of their debt.
Instead, they often enter into negotiations with their
bondholders to agree on a delay (debt restructuring) or
partial reduction of their debt (a haircut or write-off).

Partial list of defaulting countries

Greece
In 2012 investors lost 100 billion euros ($112 billion) in a

huge debt restructuring

Investors typically accept higher yields on bonds maturing
further into the future, judging the risk of owning them to be
greater. In Greece right now, that relationship is inverted. 2year bonds are yielding 2.3% more than 10-year bonds.
Since Greeces debt crisis began in 2010, most international
banks and foreign investors have sold their Greek bonds and
other holdings, so they are no longer vulnerable to what
happens in Greece. Some private investors who subsequently
plowed back into Greek bonds, betting on a comeback, regret
that decision.

Greece

Greece
Almost two-thirds of Greeces debt, about 200 billion euros, is owed to the

eurozone bailout fund or other eurozone countries. Greece does not have to
make any payments on that debt until 2023. The International Monetary
Fund has proposed extending the grace period until mid-century.
So while Greeces total debt is bigas much as double the countrys annual
economic outputit might not matter much if the government did not need
to make payments for decades to come. By the time the money came due,
the Greek economy could have grown enough that the sum no longer
seemed daunting.
In the short term, though, Greece has a problem making payments due on
loans from the International Monetary Fund and on bonds held by the
European Central Bank. Those obligations amount to more than 24 billion
euros through the middle of 2018, and it is unlikely that either institution
would agree to long delays in repayment.

Impact on Economic Sovereignty

Before buying a government's sovereign debt, investors determine

the risk of the investment. The debt of some countries, such as the
United States, is generally considered risk free, while the debt of
emerging or developing countries carries greater risk.
Investors have to consider the government's stability, how the
government plans to repay the debt, and the possibility of the
country going into default. In some ways, this risk analysis is similar
to that performed with corporate debt, though with sovereign debt
investors can sometimes be left significantly more exposed.
Because the economic and political risks for sovereign debt
outweigh debt from developed countries, the debt is often be given a
rating below the safe AAA and AA status, and may be considered
below investment grade.

Impact on Economic Sovereignty

India is currently the lowest investment grade, rubbing shoulders

with Turkey and Iceland

India: BBBAnything lower is considered not investment grade or a junk bond

Foreign investment in Government securities is considered by

some to promote economic growth, yet destabilises economic

sovereignty
Bailouts from international finance institutions impose huge
restrictions on governments

The IMFs bailout of Greece in 2010 has been conditional on acts such as
reducing corruption, imposing austerity measures such as reducing nonprofitable public sector services, raising tax revenue
Restrictions could also include suggesting other forms of revenue raising such as
nationalization of inept or corrupt but lucrative economic sectors.