Government Securities Market in India banks, financial institutions, insurance companies,

provident funds trusts, primary dealers, individuals and Reserve Bank of India. The Public
DebtOffice (PDO) of the RBI undertakes to issue government securities.
Ano t i fi ca t i o n fo r t h e i ss ue o f se c ur i t i es i s m a d e a f ew d a ys be fo r e
t he public subscription is open. The opening of the subscription depends on t h e
r es p ons e o f t h e m a r ket and v a ri es b et w e en t w o t o t h re e d a ys. Th e i s s u e i s
m a d e i n a n u m b e r o f b r a n c h e s i n o r d e r t o a v o i d f l o o d i n g o f securities
in the market. It facilitates smooth subscription to securities andhelps to avoid sudden
liquidity problems in the market. The offices of RBI and SBI receive applications for
the securities. Government reservest h e ri ght t o r et ai n o v er -
s ub s c ri pt i o n up t o a p re -s p ec i f i e d pe r c e nt a ge which is normally 10 percent in
excess of the notified amount of issue.
GOVERNMENT SECURITIES MARKET
A market where the Government Securities are bought and sold iscalled Government
Securities market. The securities are bonds, Treasury bills, Special rupee securities in
payment of India subscriptions to IMF,IBRD, ADB, IDA etc. The special rupee
securities are treated as a part of internal floating debt of the Government. These
securities are issued
byt h e C ent r al Go v er nm e nt , S t at e Go v er n m en t s a nd S e m i -
Gov e rn m e nt A u t h o r i t i e s , w h i c h i n c l u d e l o c a l G o v e r n m e n t a u t h o r i t i e s
l i k e C i t y c o rpo r at i ons a nd Mu ni ci p al i t i es , P or t t ru st s , S t at e el e ct ri ci t y b o
a rds P ubl i c s e ct o r c o rp or at i on s an d ot h e r a ge n ci es l i k e ID B I, IF C I,
S FC s , SIDCs, NABARD and Housing Boards. These agencies are suppliers
of G ov e rnm en t S e cu ri t i es an d b a nks , fi n an ci al i n st i t ut i o ns a nd i nv es t o rs de
mand these securities in the market.
4

Government SecuritiesMarket in IndiaGovernment Securities offer a safe avenue of

investment
throughg u a r a n t e e d p a y m e n t o f i n t e r e s t a n d r e p a y m e n t o f P r i n c i p a l b
y t h e government. They offer relatively a lower fixed rate of interest
comparedt o i n t e r e s t o n o t h e r s e c u r i t i e s . T h e s e S e c u r i t i e s a r e i s s
u e d i n t h e denominations of Rs. 100 or Rs.1000. They have a fixed maturity
period.Interest is paid half-yearly RBI Services loans as these are the liabilities of
Government of Indiaand the State Governments. These securities are safe and risk free.
Thesesecurities are also eligible as SLR investments. As the date of maturity
iss pe ci fi ed i n t he s e cu ri t i e s t h e y a r e al s o ca l l ed a s ‘d at ed gov er nm ent securit
ies’.RBI plays a special role in the purchase and sale of these Securitiesas part of its monetary
management exercise. There is no underwriting
or gu a ra nt e ei n g r eq u i r ed i n S a l e o f G ov e rnm e nt S e cu ri t i e s. De al i n g i n secur
ities take place through the mechanism provided by the RBI. The brokers and
dealers are approved by the RBI. A striking feature of theseSecurities is that they
offer wide ranging tax incentives to the investors. Therefore, these securities are more
popular. Under the Income Tax Act,rebates are allowed for the investment in these
securities. Each sale and pu r ch as e h as t o b e ne got i at ed se p ar at el y; t he gi l d -
edged m arket i s anover -t he -
co unt e r m a rk et . Th e Go v er nm ent S e cu ri t i e s m a rk et h as t w o segments namely
Primary market and Secondary market. The issuers areCentral and State Governments in
the Primary market. The Secondary
5

Government SecuritiesMarket in Indiamarket comprises banks, Financial

Institutions, Insurance Companies,Provident funds, Trusts, Individuals, Primary dealers
and the RBI.The Securities of Central and State Government are issued in thef or m
of S t o ck C e rt i fi ca t e , P rom i ss or y n ot es a nd B e a r er b ond s. Th es e Securities are
mainly traded at Bombay Stock Exchange. In terms of Size,the primary market for
Governments Securities is much bigger than theIndustrial Securities Ma rket. A
notification for the issue of securities ismade a few days before the Public
subscription is open. The opening
of t h e s u b s c r i p t i o n d e p e n d s o n t h e r e s p o n s e o f t h e m a r k e t a n d v a r i e
s between two to three days. The issue is made in number of branches
in ay e a r . T h e o f f i c e s o f R B I a n d S B I r e c e i v e t h e a p p l i c a t i o n s f
o r t h e Securities. The Government, reserves the right to retain over subscriptionup t o a
pr e -s p e ci fi ed p e r ce n t a ge w hi ch i s gen e r al l y 1 0 p er c ent , of t he not i fi e d
am o unt . Th e m e c h a ni sm o f t r ad i n g i n G ov er nm ent S ec u ri t i e s takes place
through the Direct Sale, Securities General Ledger accounts and Bank Receipts
method.
6

Government SecuritiesMarket in India

CHAPTER 2CHAPTER 2
Evolution of Evolution of

Government Government Securities Market Securities Market

7

Government SecuritiesMarket in India

Evolution of Government Securities Market
The genesis of the Government Securities market arises from the requirement of the
Government to fund its deficit, which is primarily metout o f b o rr ow i n gs. Th us, t h e
l ev el o f d ef i c i t de t e rm i ne s t h e am o unt
of m a r k e t b o r r o w i n g s b y t h e G o v e r n m e n t . I n a l m o s t a l l t h e d e v e l o p
e d countries, Government securities market is much wider and deeper than equity
market. India, however, till recently was an exception to this trendand e qu i t y m a rk et
s t i l l c om m an d ed a m aj or s ha r e, as t h e In d i an d ebt market was in its nascent stage.
Pre-reform period
Prior to liberalization of 1990s, the Government securities marketwas
underdeveloped partly because of inefficient mar ket practices and partly because
of limited institutional infrastructure. Further, in order to keep the cost of Government
borrowings low, the coupon rates offered onGovernment securities remained negative in real
terms (i.e. after factoringin inflation) for several years till about mid-eighties. The
Reserve Bank of India also had little control over some of the essential facets of
debtmanagement, like volume and maturity profile of debt and the
interestr at e st ru ct ur e . T hi s , co upl e d wi t h a ut om at i c m on et i z a t i on o f bud ge t
de fi ci t w i t h out an y l i m i t s , pr e ve nt ed t h e de v el o pm ent o f a de ep an d
8

Government SecuritiesMarket in Indiavibrant Government securities market. A retail

market for Governments e cu ri t i es si m pl y
di d no t ex i st . W i t h a c apt i v e i nv es t o r b as e t h ro u ghS t a t ut or y Li qu i di t y R at i
o (S LR ) p re sc ri pt i o n and i nt er es t b el o w t h emarket rate, secondary market for
Government bonds remained
dormant.A g a i n s t t h e a b o v e b a c k d r o p a n d i n t h e c o n t e x t o f t h e o v e r a l l
economic reforms, development of the Government securities markets w as
i ni t i at ed i n t he 1 990 s t h r ou gh c a re fu l l y an d c aut i ou sl y s eq u en c edm e as u re s
wi t h i n a cl ea r c ut a ge nd a fo r p ri m a r y a nd se c ond a r y m a rk e t design.
Post-Reforms Developments
In the post reforms era, considering the significance of a vibrantGovernment
securities market for activating internal debt management policy, a number of
measures were introduced.One major step in the reforms process was the elimination
of
thea u t o m a t i c m o n e t i z a t i o n o f t h e C e n t r a l ’ s f i s c a l d e f i c i t b y g r a d u a l
l y phasing out ad hoc treasury bills, in 1997. A system of Ways and
MeansAdvances (WMA) to the Central Government, subject to mutually
agreedl i m i t s a t m a r k e t -
r e l a t e d r a t e s , w a s p u t i n p l a c e i n s t e a d , t o m e e t mismatches in the
cash-flows. Such phasing was necessary to permit thedevelopment of the money
markets and for a credible benchmark rate
toemerge.T h e R B I r e s e r v e s t h e r i g h t t o t r i g g e r f l o a t a t i o
n o f f r e s h Government loans as and when the actual utilization crosses 75%
of thelimit, WMA does not acquire the cumulative character of ad hocs. This
9

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