What are the types of Government Securities in India
Bonds are a popular means used by governments and corporates to raise debt. These are certificates promising the repayment of a face value at maturity and a certain interest amount at regular intervals during the tenure of the bond. The security of returns from these bonds comes from collateral and/or the creditworthiness of the issuer.
Bonds launched by new companies like start-ups are considered relatively less secure than those issued by well established, large multinational companies. Government bonds are considered the safest, as the government backs them. There are multiple types of government securities in India. Read on to learn more about the various types of government bonds in India.
What are Government Securities (G-Sec)?
Government securities are debt instruments issued by the government. When you buy a government security, you lend your money to the government in return for a periodic interest payment at a pre-decided coupon rate. The loan has a specified tenure and is redeemed at the maturity date.
Different types of government bonds with differing interest rates, tenure, and other features exist. Let’s learn about these types of government securities in India in detail.
Types of Government Bonds in India
Also called T-bills, these come with three different maturity periods:
- 91 days
- 182 days
- 364 days
Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India. 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, You can buy a T-bill with a face value of Rs. 100 at a discounted price of, let’s say, Rs. 98.2. At its maturity, your profit will be Rs. (100-98.2) = Rs.1.80.
The RBI issues 91-day T-bills every Friday and 182 and 364-day T-bills every alternate Wednesday.
Cash Management Bills
They are among the relatively newer types of government securities and were issued in India for the first time in 2010. The primary aim behind their issuance was to meet temporary mismatches in cash flow for the government. CMBs are similar to T-bills but with a tenure usually less than 91 days.
Dated Government Securities
Dated government securities are issued with a specific maturity date. They have a fixed or floating coupon rate, with maturity usually ranging from 5 to 40 years. Following are the ten types of Dated Government Securities:
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.
Floating Rate Bonds (FRBs)
The coupon rate on these bonds is linked to a market benchmark rate. Therefore, it keeps floating depending on the changes in linked rates. For example, RBI issued floating rate bonds in 2020, with an interest rate spread over the interest rate on the National Savings Certificate by 35 bps. If the NSC rate is 6.8%, the floating rate for the bond will be (6.8 + 0.35)% = 7.15%. The floating rate is reset at pre-announced intervals (say, every six months or one year).
These bonds do not offer coupon payments but are issued at a discount to their face value.
Capital Index Bonds
These are the bonds where the capital or principal amount is linked to a pre-decided index for inflation. Examples of such indexes include Consumer Price Index (CPI) or Wholesale Price Index (WPI). Hence, if the CPI goes from 100 to 102, the corresponding principal repaid would also increase by 2%. This protects the invested amount against inflation.
Inflation Indexed Bonds
In these bonds, the principal and the interest amount are linked to an inflation index, like WPI or CPI. Thus, it guarantees real returns to investors, protecting the portfolio against erosion due to inflation.
Bonds with Call or Put Option
Bonds with a Call Option: In these bonds, the issuer has the right but not the obligation to buy back the bond at a specific date and rate. For example, 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. This means that the government could buy back the bond at face value after five years.
Bonds with a Put option: Here the investor has the right but not the obligation to sell back the bond to the issuer at a specific date and rate. In the above example, the bonds issued by the government were putable after five years at face value.
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). Compared to dated securities, these have a slightly higher coupon rate and a longer tenure.
Separate Trading of Registered Interest and Principal of Securities (STRIPS) are securities created by separating the individual cash flows of various government securities. For example, a government bond with a face value of Rs. 100 and a coupon rate of 6.4% can be divided into Coupon STRIP of 3.2 and Principal STRIP of 100.
As you can see, STRIPS are created from existing securities and not issued through auctions.
Sovereign Gold Bonds
These are unique instruments, with their nominal price linked to the simple average closing price of gold of 999 purity published by the India Bullion and Jewellers Association in the last three working days of a week preceding the subscription.
The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals. The tenure of these bonds is eight years, and they can be prematurely redeemed after five years from the date of issue. The Bonds shall bear interest at the rate of 2.50 percent (fixed rate) per annum on the nominal value..The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.
7.75% Savings (Taxable) Bonds
As the name suggests, these are bonds with a fixed coupon rate of 7.75% per annum paid half-yearly for a maturity period of 7 years from the date of issue. You can choose the option of cumulative or non-cumulative interest payment. The interest on non-cumulative bonds is payable to the investors on a half-yearly basis from the date of issue. In the case of cumulative bonds, the half-yearly interest will be compounded and credited to the investor’s account and will be payable to the investor at the time of maturity of the bond.
State Development Loans
State Development Loans are bonds issued by different state governments to meet their need for funds. SDLs are Dated Securities with semi-annual interest payment and principal redemption at maturity.. SDL’s are traded electronically on the RBI managed NDS-OM (Negotiated Dealing System-Order Matching) and traded in the voice market (NDS)
Hope the above insights have helped you understand what types of government securities are available to investors. They offer the most risk-free returns, are highly liquid and can be sold conveniently in the secondary market. Due to this, these are excellent tools for portfolio diversification.
However, longer-term government securities may carry an interest rate risk, as is the case with any other bond. You must understand the pros and cons of investing in each and add them to your portfolio based on your financial goals.
What is the main difference between Dated Government Securities and State Development Loans?
The main difference between Dated Government Securities and State Development Loans is that while the central government issues the former, the latter are issued by the respective state governments. Also, the interest rate on State Development Loans is slightly higher than on Dated Government Securities.
What are Capital Gain Bonds?
Also called 54EC bonds, these are used to obtain tax exemption on capital gains from the sale of immovable property. If you invest the profit from selling property in these bonds within six months of the deal, you will be exempt from paying capital gains tax on this profit. Only an investment of up to Rs. 50 lakhs in Capital Gains Bonds is exempt.
How and in what form can G-Secs be held?
G-Secs can be held either in dematerialised or physical form.
Government bonds bought directly from the exchange using the NSE goBID platform or through the RBI Retail Direct platform are held in Demat form. Bonds bought through OTC before 2002 are in physical format.
Are Dated G-secs the same as Treasury Bills?
No. Dated G-Secs come with a fixed maturity date that is usually 5 – 40 years from the date of issue. On the other hand, T-bills have a maturity of 91, 182, or 364 days. Also, while T-bills are zero coupon bonds, dated G-secs could have various fixed or floating interest rates.
What are government securities in the Indian economy?
Government Securities are debt instruments that the central Government issues to meet the government’s financial obligations. The G-secs in India include Sovereign Gold Bonds, Treasury Bills, G-STRIPS, Floating Rate Bonds, etc.
What is the difference between government bonds and government securities?
Government Securities is a term used for all the debt instruments issued by the government. Government bonds are also a part of G-sec, the tenure of which is more than a year.
Why do banks buy government securities?
Banks invest in G-secs to invest their idle funds and earn returns on their investment. This acts as a hedge to the bad loans or debts issued by the banks.
Who buys government securities?
The investors investing in government securities include individuals, HUFs, Companies, Banks, HNIs, etc.