Government Securities

Government securities are investment instruments issued by the government of a country. These are usually issued in the form of treasury notes, bills, and bonds. Governments of some countries also offer debt securities to raise funds for their necessary and ongoing operations, military projects, and even infrastructural projects.

The major benefit of investing in government securities is that they assure full repayment of the principal investment amount upon maturity. Some securities also pay interest, called the periodic coupon, along with the principal. These securities are less risky as they are backed by the government itself and hence, are considered to be conservative securities.

Dated Government Securities

Dated Government Securities are government securities or bonds which are long-term, the tenor ranging from 5 years to 30 years. These have a fixed or floating coupon (or interest rate) associated with them which are paid on the face value at fixed intervals. The securities can be issued by both the centre and the state governments to mobilise funds. The government issues these funds to finance a fiscal deficit.

The PDO or the Public Debt Office of the Reserve Bank of India serves as the depository or registry of government securities. Also, it deals with the repayment of the principal amount on maturity, the coupon payments, and the issuance of these securities.

Dated securities are so named as the date of maturity is expressed explicitly in these securities. Also, the interest rate might be expressed as the coupon rate in these securities.

Mostly, commercial banks and other institutions invest in and hold these securities, the former in the form of Statutory Liquidity Ratio (SLR). These securities are also tradeable in the stock market. They can be stowed as collateral to borrow under market repo or even under the Liquid Adjustment Facility (LAF) of the RBI. These securities can be used as collateral for the  Securities Guarantee Fund (SGF) and also for Collateralized Borrowing and Lending Obligation (CBLO).

The secondary market for dated government securities is also quite liquid and vibrant. These securities can be traded on the RBI’s Negotiated Dealing System -Order Matching system, commonly known as the NDS-OM, NDS-OM Web and Stock exchanges, and Over-the-counter. Short selling is also allowed to an extent but under certain restrictions.

Types of Dated Government Securities

There are different types of dated government securities. Some of them are explained hereunder:

  • Zero-Coupon Bonds– These bonds are redeemed at par and issued at a discount to face value, hence, the difference between the issue price and the redemption price is the returns gained by the investor. Although these bonds are not susceptible to reinvestment risk but are susceptible to interest rate risks, thereby making their prices extremely volatile.
  • Tap StocksThese are gilt-edged securities that are released into the market slowly when the predetermined market price levels are reached and have not been completely subscribed. They are of two kinds- Short tap stocks are short-dated stocks, and Long tap stocks are lengthier dated stocks.
  • Partly Paid Stocks– These are the stocks wherein the principal amount is paid in installments over a fixed tenure. It meets the needs of both government and investors when the former does not need funds immediately, and the latter has a regular flow of funds.
  • Fixed-Rate Bonds– These are bonds with a fixed coupon rate. The rate does not vary for the entire tenor of the bond, that is, till it matures.
  • Floating Rate BondsThese are bonds without a fixed coupon rate. The rate is re-set at previously announced intervals, and a spread over the base rate is also added.
  • Bonds with Call or Put Option– These are bonds issued with an option wherein the issuer can ‘Call’ or buy back the bond, or the investor can ‘Put’ or sell the bond to the issuer within the currency period of the bond.
  • Capital Indexed Bonds– These are bonds with an interest rate that is a fixed percentage over an acceptable inflation index, providing an effective shield to the principal amount against inflation to the investors.
  • Inflation-Indexed Bonds– These are bonds with an interest rate that is a fixed percentage over the wholesale price index (WPI) or consumer price index (CPI), providing an effective shield to both the principal as well as the coupon amount against inflation to the investors.
  • Sovereign Gold Bonds– These are the securities wherein their prices are linked to the commodity prices viz gold.

The Reserve Bank of India and Government Dated Securities

The Reserve Bank of India (RBI) issues government securities on behalf of the Government of India. The PDO manages this role by issuing the securities, paying interests accrued along with the principal amount to the investors when they reach maturity.

The selling of the securities is implemented through auctions held through the Negotiated Dealing System (NDS), where they are bought by the primary dealers, like commercial banks, insurance companies, etc.

To incorporate retail participation in these auctions, the RBI introduced a separate Non-Competitive Bidding scheme in 2002. Under this scheme, a maximum of 5% of the notified amount at an auction will be reserved for non-competitive bids.

How does Dated Government Securities differ from Treasury Bills?

A significant difference between these two forms of government securities is their tenure. Treasury bills are short-term bills issued for a period ranging from 91 days to 364 days; that is not even an entire year. Dated Government Securities are long-term securities issued for a period ranging from 5 years to 30 years.

The other difference is that treasury bills do not pay interest on maturity, but the bill is obtained at a discount, whereas the dated securities pay interest on maturity.