Government security is essentially a tradable instrument, which is issued by the Central or State Governments to meet their fiscal deficit. These securities are basically issued both for the short term (matures less than one year) and long-term (matures in one year or more). The government securities are also known as the risk-free gilt-edged instruments because these securities are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and hence there is practically no risk of default. Furthermore, the rate of interest on securities issued by the Government carries a minimum amount of interest rate, mainly because of their liquidity and safety.
The maturity date is mentioned on the securities, which are also known by the name dated government securities. It is also imperative to note that the securities of the Government are generally issued in the dematerialized form (SGL); however, it can also be issued in the physical form, only on the prior request. In the physical form, the securities are issued in the multiples of Rs. 10,000.
Important Point to Remember: Treasury bills, bonds or dated securities, national savings certificate are issued by the Central Government in India, on the other hand, bonds or dated securities, also known as the State Development Loans (SDLs) are issued by the State Governments.
Features of Government Securities in India
Some of the prominent features of the securities of Indian Government are as follows:
- 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.
Types of Government Securities in India
Here are various forms of government securities in India:
Treasury Bills (T-bills)
These are basically short-term government securities issued by the Government of India and available for three tenors, i.e. 91 days, 182 days and 364 days. Treasury bills pay no interest. The T-bills are generally issued at a discount and can be redeemed at the face value during the time of the maturity. The profit of the investors is the difference between the discounted issue price and the face value. A weekly auction is carried out by the RBI for the purpose of issuing the treasury bills.
Cash Management Bills (CMBs)
CMBs were issued by the Government of India in the year 2010 in consultation with the RBI. It is essentially a short-term instrument, issued for the period of fewer than 91 days. It is issued to meet the mismatches in the cash flow of the Indian government. They are only issued when required. Similar to the treasury bills, they are issued at the discounts on the face value through the RBI auction.
Dated Government Securities
These are basically long-term government securities that come up with the fixed or floating interest rate, which is paid on the face value of the securities on the half-yearly basis. The dated government securities are generally issued for the period between 5 years and 30 years. These are issued by the RBI through auction. Commercial banks and insurance companies invest in these kinds of securities. Fixed rate bonds, floating rate bonds, zero coupon bonds, capital indexed bonds, Separate Trading of Registered Interest and Principal of Securities (STRIPS), etc are some of the examples of dated government securities.
State Development Loans (SDLs)
These are also one of the kinds of the dated securities, which are issued by the government in order to raise a loan from the market through an auction. The interest on these kinds of securities is paid on the half-yearly basis and the principal amount is paid on the date of maturity. The rate of interest on the state development loans is determined during the time of an auction.
How Government Securities are issued?
The government securities are issued by the RBI on behalf of the government through an auction carried out through the electronic platform known as E-Kuber and the Core Banking Solution (CBS) platform of the RBI. Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and provident funds, who maintain funds account and securities accounts with RBI, are members of this electronic platform. The members of the E-Kuber can place their bids on the auction carried out by the RBI through this electronic platform.
The Clearing Corporation of India Limited (CCIL) is the clearing agency of the government securities. The information on the traded prices of the securities can be accessed on the RBI website. Furthermore, the trade information can be seen on the CCIL website.
The government securities are no doubt considered as an excellent investment option because they are risk-free and it is ideal for those investors who are always on the lookout for the risk-free investment. These securities are also the good long-term returns as they are available for the longer duration. Moreover, the securities can be perfect for the portfolio diversification as they are risk-free.