2011

A PROJECT REPORT ON

GOVERNMENTSECURITIES
Submitted in partial fulfillment of The requirement for Master of Management Studies (MMS)

STERLING INSTITUTE OF MANAGEMENT STUDIES, Plot No.93, Sector 19, Near SeaWoods Railway Station, Nerul 400706 [2010 2012]

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TABLE OF CONTENT

ChapterNo. 1

Particulars Executive Summary

Page no. 6-7

Research Methodology

Literature Survey

Company Profile

10-12

Overview Of Financial Market Introduction Of Money Market

13

Features of money market Money market instrument

14-16

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Call Money Market

17-19

Government Securities 8 9 Risk Involved In Government Securities Facts And Findings Conclusion 40-41 20-39

10

Bibliography

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LITERATURE SURVEY ECONOMIC TIMESTNN Nov 3, 2006, 12.54am IST Government securities' market gets a boost
Gilt edged The Reserve Bank of India (RBI) has done well to increase the ceiling for foreign institutional investor (FII) investment in government securities. The earlier limit of $2 billion was way out of line with ground realities and needed to be revised. Indeed where the bank can be faulted, perhaps, is in being unduly conservative while on the job. More so since past records show FIIs are unlikely to rush into gilts. Indeed their holding of gilts at $188.5 million is nowhere near the present limit of $2 billion. Nevertheless, to the extent that the higher limit does send a strong signal of the central bank's greater confidence in the country's macroeconomic fundamentals, it is bound to go down well with the international investor community. Clearly, the days when the RBI feared we'd go the Latin American way, with a large part of government borrowing up in the hands of overseas investors who, if they turn tail and run, could bring the country to its knees are over.

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Today, not only are government finances in better shape but we are also more comfortable on the forex reserves front. With approximately $166 billion in our forex reserves kitty, we don't have much to fear on the external front. And with the FM reiterating his commitment to the FRBM (Fiscal Responsibility and Budget Management) targets, government borrowing too is unlikely to go out of hand. This has, no doubt, emboldened the RBI to relax its guard on FII investment in gilts. While FIIs will no doubt benefit from the increased play now available to them, they will not be the only ones. The gilts' market, too, will benefit from the entry of more players. Add to this the relaxation permitted on short sales players will now be able to cover their short positions within an extended period of five trading days as against the intra-day shortselling permitted at present and the market for government securities will get more depth. A gilt-edged case, if ever there was one.

OVERVIEW OF FINANCIAL MARKET

Efficient transfer of resources from those having idle resources to others who have a pressing need for them is achieved through financial markets. Stated formally, financial markets provide channels for allocation of savings to investment. These provide a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment. The savers and investors are constrained not by their individual abilities, but by the economy's ability, to invest and save respectively. The financial markets, thus, contribute to economic development to the extent that the latter depends on the rates of savings and investment.

The financial markets have two major components: Money market Capital market

2011 The Money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability.

The Capital market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The Capital Market comprises the complex of institutions and mechanisms through which intermediate term funds and long-term funds are pooled and made available to business, government and individuals. The Capital Market also encompasses the process by which securities already outstanding are transferred.

INTRODUCTION OF MONEY MARKET

Money market refers to the market where money and highly liquid marketablesecurities are bought and sold having a maturity period of one or less than one year. It isnota place like the stock marketbutan activity conducted by telephone. The moneymarket constitutes a very important segment of the Indian financial system.The highly liquid marketable securities are also called as money marketinstrumentslike treasury bills, government securities, commercial paper, certificates of deposit, callmoney, repurchase agreements etc.

The majorplayerin the money market are Reserve Bank of India (RBI), Discount andFinance House of India (DFHI), banks, financialinstitutions, mutualfunds, government,big corporate houses. The basic aim of dealing in money market instruments is to fill thegap of short-term liquidity problems or to deploy the short-term surplus to gain incomeon that. Definition of Money Market:

2011 According to the McGraw Hill Dictionary of Modern Economics, money market isthe term designed to include the financialinstitutions which handle the purchase, sale,and transfers of short term credit instruments. The money market includes the entiremachinery forthe channelizing of short-term funds. Concerned primarily with smallbusiness needs for working capital, individuals borrowings, and government short termobligations, it differs from the long term or capital market which devotes its attention todealings in bonds, corporate stock and mortgage credit According to the Reserve Bank of India, money marketis the centre fordealing,mainly of short term character, in money assets; it meets the short term requirementsof borrowings and provides liquidity orcash to the lenders. Itis the place where shortterm surplus investible funds at the disposal of financial and other institutions andindividuals are bid by borrowers agents comprising institutions and individuals andalso the government itself. So afteranalyzing the above definitions, we can easily conclude with the following

Features of money market:

Short-term funds are borrowed and lent.

No fixed place forconductof operations, the transactions being conducted evenoverthe phone and therefore, there is an essentialneed forthe presence of welldeveloped communications system.

Dealings may be conducted with or without the help the brokers.

The short-term financialassets thatare dealtin are close substitutes formoney,financial assets being converted into money with ease, speed, withoutloss andwith minimum transaction cost.

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Funds are traded for a maximum period of one year.

Presence of a large numberof submarkets such as inter-bank callmoney, bill

rediscounting, and treasury bills, etc.

Short term credit is involve

Institutions involved in channelizing short term credit

Concerned with operating needs of financial institutions

To fulfill short term obligations by government.

Providing an equilibrium mechanism forironing out short-term surplus and deficits.

Money Market Instruments:

Money market instruments are generally characterized by a high degree of safety ofprincipal and are most commonly issued in units of $1 million or more. Maturities rangefrom one day to one year; the mostcommon are three months orless. Active secondarymarkets formost of the instruments allow them to be sold priorto maturity. Unlikeorganized securities orcommodities exchanges, the money markethas no specificlocation.

Available from financialinstitutions, money markets give the smallerinvestortheopportunity to get in on treasury securities. The institution buys a variety of treasurysecurities with the money you invest. The rate of return changes daily, and services suchas check writing may be offered. The majorparticipants in the money marketarecommercialbanks, governments, corporations, governmentsponsored enterprises,money market mutual funds; futures market exchanges, brokers and dealers.Investment in money market is done through money market instruments. Moneymarket

2011 instrument meets short term requirements of the borrowers and providesliquidity to the lenders. Common Money Market Instruments are as follows:

1. Treasury Bills 2. Repurchase Agreements (Repo/Reverse Repo) 3. Call Money 4. Commercial paper 5. Certificate of Deposits 6. Bankers Acceptance

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CALL MONEY MARKET

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Introduction
Call money market is forvery short term funds, known as money on call. The rate atwhich funds are borrowed in this marketis called `Call Money rate'. The size of themarketforthese funds in India is between Rs 60,000 million to Rs 70,000 million, ofwhich public sector banks account for 80% of borrowings and foreign banks/privatesector banks account for the balance 20%. Non-bank financial institutions like IDBI, LIC,and GIC etc. participate only as lenders in this market. 80% of the requirementof callmoney funds is met by the nonbank participants and 20% from the banking system.

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. Call/Notice money is the money borrowed orlent on demand fora very short period.When money is borrowed or lent for a day, it is known as Call (Overnight) Money.Intervening holidays and/orSunday are excluded forthis purpose. Thus money,borrowed on a day and repaid on the nextworking day, (irrespective of the numberofintervening holidays) is "Call Money". When money is borrowed or lent for more than aday and up to 14 days, it is "Notice Money". No collateral security is required to coverthese transactions. Themost active segment of the money market has been the call money market, where theday to day imbalances in the funds position of scheduled commercial banks are easedout. The call notice money market has graduated into a broad and vibrant institution.

In pursuance of the announcement made in the Annual Policy Statement of April 2006,an electronic screen-based negotiated quote-driven system for all dealings in call/ noticeand term money market was operational zed with effect from September 18, 2006. Thissystem has been developed by Clearing Corporation of India Ltd. on behalf of theReserve Bank of India. The NDS-CALL system provides an electronic dealing platformwith features like Directone to one negotiation, realtime quote and tradeinformation,preferred counterparty setup, online exposure limit monitoring, online regulatory limitmonitoring, dealing in call, notice and term money, dealing facilitated forT+0settlement type for Call Money and dealing facilitated for T+0 and Banks and primary dealers are allowed to lend as well as borrow in the call markets, while a select list of participants, namely, financial

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2011 institutions, UTI, mutual funds, and a select number of corporate are allowed to participate as lenders in the call market. Call money transactions are essentially unsecured OTC transactions, with same day settlement, and are preferred by participants for their operational ease, over most other short-term instruments including repos.

Banks borrow in this money market for the following purpose:

To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

Thus call money usually serves the role of equilibrating the short-term Liquidity position of banks

Types of Deal In Call Money Market

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GOVERNMENT SECURITIES

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INTRODUCTION
A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Governments 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). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertilizer bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities. Governments raise monetary resources by way of public borrowings to bridge the gap between budgetary receipts and payments, technically known as Gross Fiscal Deficit (GFD). In fact, GFD of the Central government is met broadly from three sources- public borrowings or internal debt, other liabilities and external borrowings. Reserve Bank of India has the statutory obligation to manage the internal debt (public debt) of the Central government while its obligation to manage the internal debt (public debt) of State Governments arises from bilateral agreements between the Bank and the respective State Governments. A Government security is a tradable instrument issued by the CentralGovernment or the State Governments. It acknowledges the Governmentsdebt obligation. Such securities are short term (usually called treasury bills,with original maturities of less than one year) or long term (usually calledGovernment 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). Government securitiescarry practically no risk of default and, hence, are called risk-free or gilt-edgedinstruments.

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WHAT IS GOVERNMENT SECURITIES?

A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Governments 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). Government securities carry practically no risk of default and, hence, are called risk-free or gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertilizer bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.

Government Securities:
Government securities (G-secs) are sovereign securities which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. The term Government Securities includes:

Central Government Securities State Government Securities Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit. The market borrowing of the Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans. In addition to the above, Treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the

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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 Rs.100/- (face value) may be issued at say Rs.98.20, that is, at a discount of Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills. Payments for the T-bills purchased are made on the following Friday. The 91 day T-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-bills are auctioned on the Wednesday prior to non-reporting Fridays. The Reserve Bank releases an annual calendar of T-Bill issuances for a financial year in the last week of March of the previous financial year. The Reserve Bank of India announces the issue details of T-bills through a press release every week.

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TYPES OF GOVERNMENT SECURITY

Dated Securities: are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon,

The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value.
The security is redeemed at par (face value) on its maturity date.

Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively.

The key features of these securities are: They are issued at a discount to the face value. The tenor of the security is fixed. The securities do not carry any coupon or interest rate. The difference between the issue price (discounted price) and face value is the return on this security.

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Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs.2000crore. Such stocks have been issued a few more times thereafter.

The key features of these securities are:

They are issued at face value, but this amount is paid in installments over a specified period Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The security is redeemed at par (face value) on its maturity date.

Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it. Floating rate bonds of four year maturity were first issued on September 29, 1995, followed by another issue on December 5, 1995. Recently RBI issued a floating rate bond, the coupon of which is benchmarked against average yield on 364 Days Treasury Bills for last six months. The coupon is reset every six months.

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The key features of these securities are: They are issued at face value. Coupon or interest rate is fixed as a percentage over a predefined benchmark rate at the time of issuance. The benchmark rate may be Treasury bill rate, bank rate. Though the benchmark does not change, the rate of interest may vary according to the change in the benchmark rate till redemption of the security. The tenor of the security is also fixed. Interest /Coupon payment is made on a half yearly basis on its face value.
The security is redeemed at par (face value) on its maturity date.

Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of 6.72%. However the bond has call and put option after five years i.e. in year 2007. In other words it means that holder of bond can sell back (put option) bond to Government in 2007 or Government can buy back (call option) bond from holder in 2007. This bond has been priced in line with 5 year bonds.

Special Securities: In addition to Treasury Bills and dated securities issued by the Government of India under the market borrowing programme, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc., as compensation to these companies in lieu of cash subsidies. These securities are usually long dated securities carrying coupon with a spread of about 20-25 basis points over the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities but are eligible as collateral for market repo transactions. The beneficiary oil marketing companies may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising cash.

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Capital Indexed Bonds: Theseare bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997. These bonds matured in 2002. The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein payment of both, the coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale Price Index). These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. The principal redemption is linked to the Wholesale Price Index.The key features of these securities are:

They are issued at face value. Coupon or interest rate is fixed as a percentage over the wholesale price index at the time of issuance. Therefore the actual amount of interest paid varies according to the change in the Wholesale Price Index.

The tenor of the security is fixed. Interest /Coupon payment is made on a half yearly basis on its face value. The principal redemption is linked to the Wholesale Price Index.

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BENEFITS OF INVESTING IN GOVERNMENT SECURITIES

Holding of cash in excess of the day-to-day needs of a bank does not give anyreturn to it. Investment in gold has attendant problems in regard to appraisingits purity, valuation, safe custody, etc. Investing in Government securities hasthe following advantages:

Besides providing a return in the form of coupons (interest), Governmentsecurities offer the maximum safety as they carry the Sovereigns commitmentfor payment of interest and repayment of principal.

They can be held in book entry, i.e. dematerialized/ scrip less form, thus,obviating the need for safekeeping. Government securities are available in a wide range of maturities from 91days to as long as 30 years to suit the duration of a bank's liabilities. Government securities can be sold easily in the secondary market to meetcash requirements. Government securities can also be used as collateral to borrow funds in therepo market. Government security prices are readily available due to a liquid and activesecondary market and a transparent price dissemination mechanism.

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ISSUE OF GOVERNMENT SECURITIES

Government securities are issued through auctions conducted by the RBI.Auctions are conducted on the electronic platform called the NDS Auctionplatform. Commercial banks, scheduled urban co-operative banks, PrimaryDealers, insurance companies and provident funds, who maintain funds account(current account) and securities accounts (SGL account) with RBI, are membersof this electronic platform. All members of PDO-NDS can place their bids inthe auction through this electronic platform. All non-NDS members includingnon-scheduled urban cooperative banks can participate in the primary auctionthrough scheduled commercial banks or Primary Dealers. For this purpose,the urban co-operative banks need to open a securities account with a bank /Primary Dealer such an account is called a Gilt Account.

The RBI, in consultation with the Government of India, issues an indicativehalf-yearly auction calendar which contains information about the amount ofborrowing, the tenor of security and the likely period during which auctions willbe held. A Notification and a Press Communiqu giving exact particulars of thesecurities, viz., name, amount, type of issue and procedure of auction are issuedby the Government of India about a week prior to the actual date of auction. RBIplaces the notification and a Press Release on its website (www.rbi.org.in) and also issues an advertisement in leading English and Hindi newspapers.

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MAJOR PLAYERS INGOVERNMENT SECURITIES

Major players in the Government securities market include commercial banks and primary dealers besides institutional investors like insurance companies. Primary Dealers play an important role as market makers in Government securities market. Other participants include cooperative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Institutional Investors (FIIs) are allowed to participate in the Government securities market within thequantitative limits prescribed from time to time. Corporate also buy/ sell thegovernment securities to manage their overall portfolio risk.

PRICING OF GOVERNMENT SECURITIES

The price of a Government security, like other financial instruments, keepsfluctuating in the secondary market. The price is determined by demand andsupply of the securities. Specifically, the prices of Government securities areinfluenced by the level and changes in interest rates in the economy and othermacro-economic factors, such as, expected rate of inflation, liquidity in themarket, etc. Developments in other markets like money, foreign exchange,credit and capital markets also affect the price of the Government securities.Further, Policy actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo Rate, Cash Reserve Ratio, Open Market Operations, etc.) can also affect the prices of Government securities.

TRADING IN GOVERNMENT SECURITIES

There is an active secondary market in Government securities. The securities can be bought / sold in the secondary market either (i) Over the Counter (OTC) or (ii) through Negotiated Dealing System (NDS) or (iii) Negotiated Dealing.

i. Over the Counter (OTC)/ Telephone Market:

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2011 In this market, a participant, who wants to buy or sell a government security,may contact a bank / Primary Dealer / financial institution either directly orthrough a broker registered with SEBI and negotiate for a certain amount of aparticular security at a certain price. Such negotiations are usually done ontelephone and a deal may be struck if both counterparties agree on the amountand rate. In the case of a buyer, like an urban co-operative bank wishing tobuy a security, the bank's dealer (who is authorized by the bank to undertaketransactions in Government Securities) may get in touch with other marketparticipants over telephone and obtain quotes. Should a deal be struck, the bankshould record the details of the trade in a deal slip and send a trade confirmation to the counterparty.

ii. Negotiated Dealing System:

The Negotiated Dealing System (NDS) for electronic dealing and reportingof transactions in government securities was introduced in February 2002. Itfacilitates the members to submit electronically, bids or applications for primaryissuance of Government Securities when auctions are conducted. NDS alsoprovides an interface to the Securities Settlement System (SSS) of the PublicDebt Office, RBI, Mumbai thereby facilitating settlement of transactions inGovernment Securities (both outright and repos) conducted in the secondaryMarket. Membership to the NDS is restricted to members holding SGL and/orCurrent Account with the RBI, Mumbai.

In August, 2005, RBI introduced an anonymous screen based order matching module on NDS, called NDS-OM. This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI Direct access to the NDS-OM system is currently available only to select financial institutions like Commercial Banks,

iii. Stock Exchanges:

Facilities are also available for trading in Government securities on stock

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2011 Exchanges (NSE, BSE) which cater to the needs of retail investors. NSEs Wholesale Debt Market (WDM) segment offers a fully automated screen based trading platform through the NEAT (National Exchange for Automated Trading) system. The WDM segment, as the name suggests, permits only high value transactions in debt securities. The trades on the WDM segment can be executed in the Continuous or Negotiated market. In the continuous market, orders entered by the trading members are matched by the trading system.

HOW AND IN WHAT FORM CAN GOVERNMENT SECURITIES BE HELD?

The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and central depository for the Government securities. Government securities may be held by investors either as physical stock or in dematerialized form. From May 20, 2002, it is mandatory for all the RBI regulated entities to hold and transact in Government securities only in dematerialized (SGL) form. Accordingly, UCBs are required to hold all Government securities in demat form.

a. Physical form: Government securities may be held in the form of stock certificates. A stock certificate is registered in the books of PDO. Ownership in stock certificates cannot be transferred by way of endorsement and delivery. They are transferred by executing a transfer form as the ownership and transfer details are recorded in the books of PDO. The transfer of a stock certificate is final and valid only when the same is registered in the books of PDO.

b. Demat form:

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2011 Holding government securities in the dematerialized or scrip less form is the safest and the most convenient alternative as it eliminates the problems relating to custody, viz., loss of security. Besides, transfers and servicing are electronic and hassle free. The holders can maintain their securities in dematerialized form in either of the two ways:

SGL Account Gilt Account

i.

SGL Account:

Reserve Bank of India offers Subsidiary General Ledger Account (SGL) facility to select entities who can maintain their securities in SGL accounts maintained with the Public Debt Offices of the Reserve Bank of India.

ii.

Gilt Account:

As the eligibility to open and maintain an SGL account with the RBI is restricted, an investor has the option of opening a Gilt Account with a bank or a Primary Dealer which is eligible to open a Constituents' Subsidiary General Ledger Account (CSGL) with the RBI. Under this arrangement, the bank or the Primary Dealer, as a custodian of the Gilt Account holders, would maintain the holdings of its constituents in a CSGL account (which is also known as SGL II account) with the RBI. The servicing of securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and maintenance of the securities. Receipt of maturity proceeds and periodic interest is also faster as the proceeds are credited to the current account of the custodian bank / PD with the RBI and the custodian (CSGL account holder) immediately passes on the credit to the Gilt Account Holders (GAH).

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Investors also have the option of holding Government securities in a dematerialized account with a depository (NSDL / CDSL, etc.). This facilitates trading of Government securities on the stock exchanges.

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RISK INVOLVED IN GOVERNMENT SECURITIES

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Market risk
Market risk arises out of adverse movement of prices of thesecurities that are held by an investor due to changes in interest rates. This willresult in booking losses on marking to market or realizing a loss if the securitiesare sold at the adverse prices. Small investors, to some extent, can mitigatemarket risk by holding the bonds till maturity so that they can realize the yieldat which the securities were actually bought.

Reinvestment risk
Cash flows on a Government security includes fixedcoupon every half year and repayment of principal at maturity. These cashflows need to be reinvested whenever they are paid. Hence there is a risk thatthe investor may not be able to reinvest these proceeds at profitable rates dueto changes in interest rate scenario.

Liquidity risk
Liquidity risk refers to the inability of an investor toliquidate (sell) his holdings due to nonavailability of buyers for the security, i.e.no trading activity in that particular security. Usually, when a liquid bond offixed maturity is bought, its tenor gets reduced due to time decay. For example, a 10 year security will become 8 year security after 2 years due to which it maybecome illiquid. Due to illiquidity, the investor may need to sell at adverse pricesin case of urgent funds requirement. However, in such cases, eligible investorscan participate in market repo and borrow the money against the collateral ofthe securities.

RISK MITIGATION

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2011 Holding securities till maturity could be a strategy through which onecould avoid market risk. Rebalancing the portfolio wherein the securities aresold once they become short term and new securities of longer tenor are boughtcould be followed to manage the portfolio risk. However, rebalancing involvestransaction and other costs and hence needs to be used judiciously. Market riskand reinvestment risk could also be managed through Asset Liability Management (ALM) by matching the cash flows with liabilities. ALM could also be undertaken by matching the duration of the cash flows. Advanced risk management techniques involve use of derivatives like Interest Rate.

Swaps (IRS) through which the nature of cash flows could be altered. However,these are complex instruments requiring advanced level of expertise for properunderstanding. Adequate caution, therefore, need to be observed for undertakingthe derivatives transactions and such transactions should be undertaken onlyafter having complete understanding of the associated risks and complexities.

Specimen of a Government security:

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FACTS AND FINDINGS

The concentration in the borrowing and lending side of the call markets impacts liquidity in the call markets. The presence or absence of important players is a significant influence on quantity as well as price. This leads to a lack of depth and high levels of volatility in call rates, when the participant structure on the lending or borrowing side alters.

In India, banks have to keep 4.5 percent (it fluctuates with changing economicconditions) of all their borrowings from the public (in the form of savings and termdeposits)and otherbanks with RBI.

The RBI has now permitted non-SGL holders to also enter into repos contracts, subject to their holding a gilt account with any bank/PD, which operates a Constituent SGL (CSGL) with the RBI on their behalf. These include registered non-banking financial companies, housing finance companies, mutual funds, insurance companies and "any other person specifically permitted by the RBI holding a gilt account with any person or entity permitted by the RBI to maintain CSGL account with PDO of the RBI''.

Currently, average daily lending in the call market is about Rs 11,000 crore, with banks accounting for Rs 6,000 crore and non-banks the remaining Rs 5,000 crore. In contrast, the daily value of repo transactions (other than with RBI) works out to almost Rs 3,000 crore.

Government security prices are readily available due to a liquid and activesecondary market and a transparent price dissemination mechanism.

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CONCLUSION
The above project report indicate that how government securities are safe and individual investors should go for government securities but there should be proper disclosure of schemes by government to bring awareness and from business perspective. Government securities possess huge potential for a developing economy like India. Holding of cash in excess of the day-to-day needs of a bank does not give any return to it. Investment in these securities has attendant qualities in regard to appraising its value, high returns, safe custody, etc. Investing in Government securities has the following advantages: Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety as they carry the Sovereigns commitment for payment of interest and repayment of principal

Because of electronic transfer of securities there is no scope for fraudulent practices.

Government securities can be sold easily in the secondary market to meet cash requirements

Government securities can also be used as collateral to borrow funds in the repo market.

The settlement system for trading in Government securities, 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.

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2011

BIBLIOGRAPHY

Pricing Money J.D. A. Wiseman

Debt Management and Government Securities Markets in the 21st Century- by organization for economic co-operation and development

WEBLIOGRAPHY

www.mumbaidistrictbank.com www.rbi.org.in www.nseindia.com

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