- Date : 24/04/2019
- Read: 6 mins
All about government securities or G-Secs and how to invest in them. Insight into the auction process, pricing and allocation.
Government bonds (also known as G-Secs) are a means of raising a public loan, particularly when the government is looking to finance its budget deficits. The government uses this fund to meet its expenditures, particularly capital expenditures. Normally, these are met by using the revenue that the government collects in the form of taxation and levies. However, when the expenses exceed the revenue, the government may have to resort to additional revenue sources – government bonds and securities, for instance.
G-Secs can be in the form of treasury bills or dated government securities. Government securities are generally issued by the Reserve Bank of India (RBI) on behalf of the Government of India, mostly as interest-bearing dated securities and are, therefore, fixed maturity and fixed coupon securities carrying semi-annual coupon interest.
Bidding, pricing, and allocation
Government bonds and securities are sold by the RBI through auctions. This auction is done on RBI’s core banking solution E-Kuber. Commercial banks, scheduled Urban Cooperative Banks (UCB), primary dealers, insurance companies, and provident funds can participate in these auctions by placing their bids through this electronic platform.
However, non-E-Kuber members – such as non-scheduled UCBs – can participate in this primary auction through scheduled commercial banks or other primary members. These auctions are of two types:
A yield-based auction is generally conducted when a new security is launched. Once the bids are received, they are arranged in order of yield value and the cut-off yield rate is arrived at. Bidders who bid at or below the cut-off yield are accepted while all bids higher than the cut-off yield are rejected.
A price-based auction, on the other hand, price based auction is carried out when the government plans to reissue securities that had been issued earlier. In this format, bids are quoted on the basis of the face value of the security, the face value being Rs 100. Bids are selected on the basis of this cut-off price.
Thereafter, the method of allocation of the G-Secs to successful bidders could be on a Uniform Price basis or Multiple Price basis. In a Uniform Price auction, successful bidders will have to pay for the allotted quantity of securities at the auction cut-off rate. Thus the rate quoted by them while bidding is not considered. In a Multiple Price auction, the successful bidders are required to pay at the price or yield they had bid for the number of securities allotted to them.
An investor can bid in an auction in one of the following two ways:
Competitive Bidding – This allows an investor bids at a particular price/yield and allocation of securities is made to the investor if the quoted price/yield is within the cut-off price/yield. Competitive bids are generally made by institutional investors like banks, financial institutions, primary dealers, mutual funds, and insurance companies.
Non-Competitive Bidding – This is used to encourage greater participation and retail holding of government securities. In this case, retail investors are also allowed to participate in a ‘non-competitive’ basis in selected auctions of dated securities and Treasury Bills. Retail investors are those who do not maintain a current account or Subsidiary General Ledger account with the RBI and, therefore, submit their bids indirectly through a specified aggregator/facilitator.
How the cost of G-Secs is impacted
The price of G-Secs experience ups and downs in the secondary market, just as with any other financial instrument. It is clear from the auction process that the price of G-Secs is determined by their demand and supply. The changes in interest rates in the economy influence the yield/price of G-Secs, apart from other macro-economic factors like expected rate of inflation, liquidity in the market, etc. which also influence the price movement.
Conversely, G-Secs are also used to influence liquidity. RBI policy measures that affect the price of G-Secs are around open market operations, Repo rates, and the cash reserve ratio. Market developments in the money market, foreign exchange, credit, commodity, capital markets and international bond price (particularly US Treasuries) also affect the price of G-Secs.
How to invest in G-Secs
The Public Debt Office (PDO) of the RBI is the registry and central depository for G-Secs. G-Secs held by investors can either be in physical stock or in dematerialised (demat/electronic) form. Investors can also hold G-Secs in a demat account with a depository like NSDL, CDSL etc. which facilitates the trading of G-Secs on stock exchanges.
G-Secs can be bought or sold in the secondary market through the following means:
1. Negotiated Dealing System-Order Matching (NDS-OM)
2. Over the Counter (OTC)/Telephone Market
- Negotiated Dealing System-Order Matching (NDS-OM) is an anonymous screen-based order matching module where the participants can trade anonymously by putting their orders on the screen or accepting orders already put by other participants. Anonymity ensures a level playing field and price transparency. Direct access to this system is currently available only to select entities such as commercial banks, primary dealers, well-managed and financially sound UCBs and NBFCs, etc. Gilt account holders can have indirect access to NDS-OM through these custodian institutions.
- Over the Counter (OTC)/ Telephone Market allows interested investors to directly contact a bank, primary dealer, or financial institution – or get in touch with a broker registered with SEBI.
- NDS-OM-Web was launched to facilitate direct participation of gilt account holders (GAH) on NDS-OM through their primary members. Through this platform, the GAH gets the same access to the order book of NDS-OM as the primary members.
- Stock Exchanges (NSE, BSE, MCX) have been instructed by the Securities and Exchange Board of India (SEBI) to create a dedicated debt segment in their trading platforms, which are aimed to cater to the needs of retail investors. NSE’s goBID allows small investors to buy government bonds in India.
As an investment option, G-Secs offer safety and insulation from volatility compared to the investment options offered by the private sector. It doesn’t offer a great yield, although in recent times it has been exceeding returns from fixed deposits. Therefore, G-Secs are a good investment option for anyone looking to diversify their investment portfolio and expect low-risk and steady returns.
With a view to making G-Secs more accessible to common man, the National Stock Exchange (NSE) recently launched an online platform that will make it easy for retail to invest across a spectrum of treasury products.