Governments raise / borrow funds by issuing government securities to finance a variety of projects and activities.
What is Government Security (G-Sec)?
Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
What are the tenures of G-Secs?
G-Secs can be short-term securities (with original maturities of less than 1 year) or long-term securities (with original maturity of 1 year or more).
In India, the Central Government issues both short-term and long-term securities while the State Governments issue only long-term securities.
What are the types of G-Secs?
| Government security | Term | Issued by |
| Treasury Bills (T-bills) | Short-term | Central Government |
| Cash Management Bills (CMBs) | Short-term | Central Government |
| Bonds or Dated G-Secs | Long-term | Central Government |
| State Development Loans (SDLs) | Long-term | State Governments |
How are G-Secs issued?
- G-Secs are issued through auctions conducted by Reserve Bank of India (RBI).
- Auctions are conducted on the electronic platform called E-Kuber, the Core Banking Solution (CBS) platform of RBI.
- Commercial banks, scheduled Urban Co-operative Banks (UCBs), Primary Dealers (PDs), 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.
- All non-E-Kuber members including non-scheduled UCBs can participate in the primary auction through scheduled commercial banks / PDs (called as Primary Members-PMs). For this purpose, UCBs need to open a securities account with a bank / PD – such an account is called a Gilt Account.
- The proprietary transactions in G-Secs undertaken by PMs are settled through SGL account maintained by them with RBI at Public Debt Office (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 their constituents.
- RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar containing information about the amount of borrowing, the range of the tenor of securities and the period during which auctions will be held. A Notification and a Press Communique giving exact particulars of the securities, viz., name, amount, type of issue and procedure of auction are issued about a week prior to the actual date of auction.
| Government security | Primary auction usually held on |
| Treasury Bills (T-bills) | Wednesday |
| Cash Management Bills (CMBs) | As per requirement |
| Bonds or Dated G-Secs | Friday |
| State Development Loans (SDLs) | Tuesday |
What are the types of auctions used for issue of G-Sec?
The auctions can be of following types –
- Yield Based Auction
- Price Based Auction
Depending upon the method of allocation to successful bidders, the auctions can be –
- Uniform Price Auction
- Multiple Price Auction
What are the types of bidding for G-Sec?
An investor, depending upon his eligibility, may bid in an auction under either of the following categories –
- Competitive Bidding
- Non-Competitive Bidding (NCB)
How and in what form can G-Secs be held?
PDO of RBI, acts as the registry and central depository for G-Secs.
G-Sec may be held by investors in the following forms -
- Physical form
- Demat form – in SGL account or Gilt account (through CSGL / SGL II account)
Investors also have the option of holding G-Secs in a dematerialized account with depositories such as National Securities Depository Limited (NSDL), Central Depository Services Limited (CDSL), etc. This facilitates trading of G-Secs on the stock exchanges.
How does the trading in G-Secs take place?
There is an active secondary market in G-Secs. The securities can be bought / sold in the secondary market through –
- Negotiated Dealing System-Order Matching (NDS-OM) – Direct access to NDS-OM system is available only to select financial institutions like Commercial Banks, PDs, well managed and financially sound UCBs and NBFCs, etc.
- Over the Counter (OTC) / Telephone Market – All trades undertaken in OTC market are reported on the Reported segment of NDS-OM within 15 minutes.
- NDS-OM-Web – RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct participation of GAHs on NDS-OM through their PM.
- Stock exchanges – Stock exchanges like National Stock Exchange (NSE), Bombay Stock Exchange (BSE), etc. have dedicated debt segment in their trading platforms.
- Matching of transactions between a PM and its own GAH or between two GAHs of the same PM is permitted on both the anonymous Order Matching segment and the Request for Quote (RFQ) segment of NDS-OM. Transactions matched on NDS-OM shall be cleared and settled through CCIL.
- The facility of clearing and settlement through CCIL is extended to transactions between a PM and its own GAH or between two GAHs of the same PM which are bilaterally negotiated and reported to NDS-OM, on an optional basis.
- Any failure in the settlement of these transactions shall be treated as an instance of ‘SGL bouncing’ and will be subjected to the applicable penal provisions.
Primary Market – The auctions in primary market are settled on T+1 basis, i.e. funds and securities are settled on next working day from the conclusion of the trade. On the settlement date, the fund accounts of the participants are debited by their respective consideration amounts and their securities accounts (SGL accounts) are credited with the amount of securities allotted to them.
Secondary Market – The transactions are settled through the member’s securities / current accounts maintained with RBI. The securities and funds are settled on a net basis i.e. Delivery versus Payment System-III (DvP-III).
What is Delivery versus Payment (DvP) Settlement?
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions.
There are 3 types of DvP settlements –
- DvP I – securities and funds legs of the transactions are settled on a gross basis.
- DvP II – securities are settled on gross basis whereas the funds are settled on a net basis.
- DvP III – both the securities and the funds legs are settled on a net basis.
Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode.
What is Shut Period?
Shut period means the period for which the securities cannot be traded. This is to facilitate finalizing of the payment of maturity redemption proceeds and to avoid any change in ownership of securities during this process.
The shut period for the securities held in SGL accounts is 1 day.
What if coupon payment or maturity date falls on holiday?
- If the coupon payment date for G-Sec falls on Sunday / holiday, the coupon payment is made on the next working day.
- If the maturity date for G-Sec falls on Sunday / holiday, the redemption proceeds are paid on the previous working day.
What is Conversion (Switch) of Government of India Securities?
RBI has from April 22, 2019 started conducting the auction for conversion of Government of India (GoI) securities on third Monday of every month.
Bidding in the auction implies that the market participants agree to sell the source securities to GoI and simultaneously agree to buy the destination security from GoI at their respective quoted prices.
What are Open Market Operations (OMOs)?
Open Market Operations (OMOs) are the market operations conducted by 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 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.
What is ISIN?
Each security is assigned a unique number at the time of issuance called ISIN (International Security Identification Number).
What is the relationship between yield and price of a bond?
If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price.
The relationship between yield to maturity (YTM) and coupon rate of bond may be stated as follows –
- When the market price of the bond is less than the face value, i.e., the bond sells at a discount, YTM > coupon yield.
- When the market price of the bond is more than its face value, i.e., the bond sells at a premium, coupon yield > YTM.
- When the market price of the bond is equal to its face value, i.e., the bond sells at par, YTM = coupon yield.
References
Reserve Bank of India. (2020, April 01). 'Government Securities Market in India – A Primer'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79
Reserve Bank of India. (2025, February 17). 'Government securities transactions between a Primary Member (PM) of NDS-OM and its own Gilt Account Holder (GAH) or between two GAHs of the same PM'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12782&Mode=0
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