What is a Government Security (G-Sec)?

1.2 A Government Security (G-Sec) is a tradeable instrument issued by the

Central Government or the State Governments. It acknowledges the
Government’s 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). G-Secs carry practically no
risk of default and, hence, are called risk-free gilt-edged instruments.
a. Treasury Bills (T-bills)
1.3 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. Instead, they are issued at a discount and
redeemed at the face value at maturity. For example, a 91 day Treasury bill of
₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say,
₹1.80 and would be redeemed at the face value of ₹100/-. The return to the
investors is the difference between the maturity value or the face value (that is
₹100) and the issue price (for calculation of yield on Treasury Bills please see
answer to question no. 26).
b. Cash Management Bills (CMBs)
1.4 In 2010, Government of India, in consultation with RBI introduced a new short-
term instrument, known as Cash Management Bills (CMBs), to meet the temporary
mismatches in the cash flow of the Government of India. The CMBs have the
generic character of T-bills but are issued for maturities less than 91 days.
c. Dated G-Secs
1.5 Dated G-Secs are securities which carry a fixed or floating coupon (interest
rate) which is paid on the face value, on half-yearly basis. Generally, the tenor of
dated securities ranges from 5 years to 40 years.

The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry /
depository of G-Secs and deals with the issue, interest payment and repayment of
principal at maturity. Most of the dated securities are fixed coupon securities.
1.6 Instruments:
i) Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the
entire life (i.e. till maturity) of the bond. Most Government bonds in India are issued
as fixed rate bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years
maturing on April 22, 2018. Coupon on this security will be paid half-yearly at
4.12% (half yearly payment being half of the annual coupon of 8.24%) of the face
value on October 22 and April 22 of each year.
ii) Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed
coupon rate. Instead it has a variable coupon rate which is re-set at pre-
announced intervals (say, every six months or one year). FRBs were first issued in
September 1995 in India. For example, a FRB was issued on November 07, 2016
for a tenor of 8 years, thus maturing on November 07, 2024. The variable coupon
rate for payment of interest on this FRB 2024 was decided to be the average rate
rounded off up to two decimal places, of the implicit yields at the cut-off prices of
the last three auctions of 182 day T- Bills, held before the date of notification. The
coupon rate for payment of interest on subsequent semi-annual periods was
announced to be the average rate (rounded off up to two decimal places) of the
implicit yields at the cut-off prices of the last three auctions of 182 day T-Bills held
up to the commencement of the respective semi-annual coupon periods.
iii) The Floating Rate Bond can also carry the coupon, which will have a base rate
plus a fixed spread, to be decided by way of auction mechanism. The spread will
be fixed throughout the tenure of the bond. For example, FRB 2031 (auctioned on
May 4, 2018) carry the coupon with base rate equivalent to Weighted Average
Yield (WAY) of last 3 auctions (from the rate fixing day) of 182 Day T-Bills plus a
fixed spread decided by way of auction. Zero Coupon Bonds – Zero coupon bonds
are bonds with no coupon payments. However, like T- Bills, they are issued at a
discount and redeemed at face value. The Government of India had issued such
securities in 1996. It has not issued zero coupon bonds after that.
 v) Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both coupon flows and
Principal amounts are protected against inflation. The inflation index used in IIBs
may be Whole Sale Price Index (WPI) or Consumer Price Index (CPI). Globally,
IIBs were first issued in 1981 in UK. In India, Government of India through RBI
issued IIBs (linked to WPI) in June 2013. Since then, they were issued on monthly
basis (on last Tuesday of each month) till December 2013. Based on the success
of these IIBs, Government of India in consultation with RBI issued the IIBs (CPI
based) exclusively for the retail customers in December 2013. Further details on
IIBs are available on RBI website under FAQs.
vi) Bonds with Call/ Put Options – Bonds can also be issued with features of
optionality wherein the issuer can have the option to buy-back (call option) or the
investor can have the option to sell the bond (put option) to the issuer during the
currency of the bond. It may be noted that such bond may have put only or call
only or both options. The first G-Sec with both call and put option viz. 6.72% GS
2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18,
2012. The optionality on the bond could be exercised after completion of five years
tenure from the date of issuance on any coupon date falling thereafter. The
Government has the right to buy-back the bond (call option) at par value (equal to
the face value) while the investor had the right to sell the bond (put option) to the
Government at par value on any of the half-yearly coupon dates starting from July
18, 2007.
vii) Special Securities - Under the market borrowing program, 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. (popularly
called oil bonds, fertiliser bonds and food bonds respectively) as compensation to
these companies in lieu of cash subsidies These securities are usually long dated
securities and carry a marginally higher coupon over the yield of the dated
securities of comparable maturity. These securities are, however, not eligible as
SLR securities but are eligible as collateral for market repo transactions. The
beneficiary entities may divest these securities in the secondary market to banks,
insurance companies / Primary Dealers, etc., for raising funds.
Government of India has also issued Bank Recapitalisation Bonds to specific
Public Sector Banks in 2018. These securities are named as Special GoI security
and are non-transferable and are not eligible investment in pursuance of any
statutory provisions or directions applicable to investing banks. These securities
can be held under HTM portfolio without any limit.

ix) Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are linked to

commodity price viz Gold. SGBs are also budgeted in lieu of market borrowing. The

calendar of issuance is published indicating tranche description, date of subscription and

date of issuance. The Bonds shall be

olding of cash in excess of the day-to-day needs (idle funds) does not give any
return. Investment in gold has attendant problems in regard to appraising its purity,
valuation, warehousing and safe custody, etc. In comparison, investing in G-Secs
has the following advantages: ADVANTANGES
• Besides providing a return in the form of coupons (interest), G-Secs offer
the maximum safety as they carry the Sovereign’s commitment for payment
of interest and repayment of principal.
• They can be held in book entry, i.e., dematerialized/ scripless form, thus,
obviating the need for safekeeping. They can also be held in physical form.
• G-Secs are available in a wide range of maturities from 91 days to as long
as 40 years to suit the duration of varied liability structure of various
institutions.
• G-Secs can be sold easily in the secondary market to meet cash
requirements.
• G-Secs can also be used as collateral to borrow funds in the repo market.
• Securities such as State Development Loans (SDLs) and Special Securities
(Oil bonds, UDAY bonds etc) provide attractive yields.
• The settlement system for trading in G-Secs, 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.
• G-Sec prices are readily available due to a liquid and active secondary
market and a transparent price dissemination mechanism.
. What are Open Market Operations (OMOs)?
OMOs are the market operations conducted by the RBI by way of sale/ purchase
of G-Secs to/ from the market with an objective to adjust the rupee liquidity
conditions in the market on a durable basis. When the RBI feels that there is
excess liquidity in the market, it resorts to sale of securities thereby sucking out
the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI may buy
securities from the market, thereby releasing liquidity into the market.
LAF is a facility extended by RBI to the scheduled commercial banks (excluding
RRBs) and PDs to avail of liquidity in case of requirement or park excess funds
with RBI in case of excess liquidity on an overnight basis against the collateral of
G-Secs including SDLs. Basically, LAF enables liquidity management on a day to
day basis. The operations of LAF are conducted by way of repurchase
agreements (repos and reverse repos – please refer to paragraph numbers 30.4 to
30.8 under question no. 30 for more details) with RBI being the counter-party to all
the transactions. The interest rate in LAF is fixed by RBI from time to time. LAF is
an important tool of monetary policy and liquidity management.
 • The securities are issued at the face value.
• The liquidity is quite excellent as an investor can sell the
securities in the secondary market.
• There is no Tax Deducted at Source (TDS).
• The securities can be held in the Demat form.
• The rate of interest and maturity date is mentioned
during the time of issuing the securities.
• The securities can be redeemed at face value on the
date of maturity.
• The date of maturity of the securities generally ranges
from 2 to 30 years.

INVESTORS
• Besides banks, insurance companies and other large investors, smaller
investors like Co-operative banks, Regional Rural Banks, Provident Funds are
also required to statutory hold G-Secs as indicated below: (primary market)
A. Primary (Urban) Co-operative Banks (UCBs)
2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-
operative societies) provides that every primary (urban) cooperative bank shall
maintain liquid assets, the value of which shall not be less than such percentage
as may be specified by Reserve Bank in the Official Gazette from time to time and
not exceeding 40% of its DTL in India as on the last Friday of the second
preceding fortnight (in addition to the minimum cash reserve ratio (CRR)
requirement). Such liquid assets shall be in the form of cash, gold or
unencumbered investment in approved securities. This is referred to as the
Statutory Liquidity Ratio (SLR) requirement. It may be noted that balances kept
with State Co-operative Banks / District Central Co-operative Banks as also term
deposits with public sector banks are now not eligible for being reckoned for SLR
purpose w.e.f April 1, 2015.
B. Rural Co-operative Banks
2.3 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative
Banks (SCBs) and the District Central Co-operative Banks (DCCBs) are required
to maintain assets as part of the SLR requirement in cash, gold or unencumbered
investment in approved securities the value of which shall not, at the close of
business on any day, be less than such per cent, as prescribed by RBI, of its total
net demand and time liabilities. DCCBs are allowed to meet their SLR requirement
by maintaining cash balances with their respective State Co-operative Bank.
C. Regional Rural Banks (RRBs)
2.4 Since April 2002, all the RRBs are required to maintain their entire Statutory
Liquidity Ratio (SLR) holdings in Government and other approved securities.
D. Provident funds and other entities
2.5 The non- Government provident funds, superannuation funds and gratuity
funds are required by the Central Government, effective from January 24, 2005, to
invest 40% of their incremental accretions in Central and State G-Secs, and/or
units of gilt funds regulated by the Securities and Exchange Board of India (SEBI)
and any other negotiable security fully and unconditionally guaranteed by the
Central/State Governments. The exposure of a trust to any individual gilt fund,
however, should not exceed five per cent of its total portfolio at any point of time.
The investment guidelines for non- Government PFs have been recently revised in
terms of which minimum 45% and up to 50% of investments are permitted in a
basket of instruments consisting of (a) G-Secs, (b) Other securities (not in excess
of 10% of total portfolio) the principal whereof and interest whereon is fully and
unconditionally guaranteed by the Central Government or any State Government
SDLs and (c) units of mutual funds set up as dedicated funds for investment in G-
Secs (not more than 5% of the total portfolio at any point of time and fresh
investments made in them shall not exceed 5% of the fresh accretions in the year),
effective from April 2015.

Secondary market- RBI, commercial banks, insurance companies, mutual funds,

financial institutions, provident funds, trusts, corporates, individuals

How are the G-Secs issued?

3.1 G-Secs are issued through auctions conducted by RBI. Auctions are
conducted on the electronic platform called the E-Kuber, the Core Banking
Solution (CBS) platform of RBI. Commercial banks, scheduled UCBs, Primary
Dealers (a list of Primary Dealers with their contact details is given in Annex 2),
insurance companies and provident funds, who maintain funds account (current
account) and securities accounts (Subsidiary General Ledger (SGL) account) with
RBI, are members of this electronic platform. All members of E-Kuber can place
their bids in the auction through this electronic platform. The results of the auction
are published by RBI at stipulated time (For Treasury bills at 1:30 PM and for GoI
dated securities at 2:00 PM or at half hourly intervals thereafter in case of delay).
All non-E-Kuber members including non-scheduled UCBs can participate in the
primary auction through scheduled commercial banks or PDs (called as Primary
Members-PMs). For this purpose, the UCBs need to open a securities account
with a bank / PD – such an account is called a Gilt Account. A Gilt Account is a
dematerialized account maintained with a scheduled commercial bank or PD. The
proprietary transactions in G-Secs undertaken by PMs are settled through SGL
account maintained by them with RBI at PDO. The transactions in G-Secs
undertaken by Gilt Account Holders (GAHs) through their PMs are settled through
Constituent Subsidiary General Ledger (CSGL) account maintained by PMs with
RBI at PDO for its constituent (e.g., a non-scheduled UCB).
8. How does the trading in G-Secs take place and what regulations are
applicable to prevent abuse? Whether value free transfer of G-Secs is
allowed?
8.1 There is an active secondary market in G-Secs. The securities can be bought /
sold in the secondary market either through (i) Negotiated Dealing System-Order
Matching (NDS-OM) (anonymous online trading) or through (ii) Over the Counter
(OTC) and reported on NDS-OM or (iii) NDS-OM-Web (para 8.5) and (iv) Stock
exchanges (para 8.6)
i. NDS-OM
In August 2005, RBI introduced an anonymous screen-based order matching
module 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. Anonymity ensures a
level playing field for various categories of participants. NDS-OM is operated by
the CCIL on behalf of the RBI (Please see answer to the question no.19 about
CCIL). Direct access to the NDS-OM system is currently available only to select
financial institutions like Commercial Banks, Primary Dealers, well managed and
financially sound UCBs and NBFCs, etc. Other participants can access this
system through their custodians i.e. with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers. The advantages of NDS-
OM are price transparency and better price discovery.
ii. Over the Counter (OTC)/ Telephone Market
8.4 In the G-Sec market, a participant, who wants to buy or sell a G-Sec, may
contact a bank / PD/financial institution either directly or through a broker
registered with SEBI and negotiate price and quantity of security. Such
negotiations are usually done on telephone and a deal may be struck if both
counterparties agree on the amount and rate. In the case of a buyer, like an UCB
wishing to buy a security, the bank's dealer (who is authorized by the bank to
undertake transactions in G-Secs) may get in touch with other market participants
over telephone and obtain quotes. Should a deal be struck, the bank should record
the details of the trade in a deal slip (specimen given at Annex 5). The dealer must
exercise due diligence with regard to the price quoted by verifying with available
sources (See question number 14 for information on ascertaining the price of G-
Secs). All trades undertaken in OTC market are reported on the Reported
segment of NDS-OM within 15 minutes, the details of which are given under the
question number 15.
iii. NDS-OM-Web
8.5 RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct
participation of gilt account holders (GAH) on NDS-OM through their primary
members (PM) (as risk controller only and not having any role in pricing of trade).
The GAH have access to the same order book of NDS-OM as the PM. GAH are in
a better position to control their orders (place/modify/cancel/hold/release) and
have access to real time live quotes in the market. Since notifications of orders
executed as well as various queries are available online to the GAH, they are
better placed to manage their positions. Web based interface that leverages on the
gilt accounts already maintained with the custodian Banks/PDs provides an
operationally efficient system to retail participants. NDS OM Web is provided at no
additional cost to its users. PMs, however, may recover the actual charges paid by
them to CCIL for settlement of trades or any other charges like transaction cost,
annual maintenance charges (AMC) etc. It has been made obligatory for the
Primary Members to offer the NDS-OM-Web module to their constituent GAHs
(excluding individual) for online trading in G-sec in the secondary market.
Constituents not desirous of availing this facility may do so by opting out in writing.
On the other hand, individual GAHs desirous of the NDS-OM-Web facility may be
provided the web access only on specific request.
iv. Stock Exchanges
8.6 As advised by SEBI, the stock exchanges (like NSE, BSE, MCX) have been
asked to create dedicated debt segment in their trading platforms. In compliance
to this, stock exchanges have launched debt trading (G-Secs as also corporate
bonds) segment which generally cater to the needs of retail investors.